UNITED STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549




Form
10-K/A


(Amendment
#1)


(Mark one)


R
            ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the fiscal year ended March 31, 2009OR£
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the transition period from _________ to
  ___________





Commission
file number 000-24968





THE SINGING MACHINE COMPANY,
INC.


(Exact
name of registrant as specified in its charter)





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





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


(Address
of principal executive offices)





(954)
596-1000


(Registrant’s
telephone number, including area code)




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





NYSE
Amex Equities


(Name
of each exchange on which registered)





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





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





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





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





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





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





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company See
the definitions of “large accelerated filer,” “accelerated filer,” and “smaller
reporting company,” in Rule 12b-2 of the Exchange Act).:





Large
accelerated filer £               Accelerated
filer £             Non-accelerated
filer 0         Smaller
reporting company R





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





As of
September 30, 2008, the aggregate market value of the issued and outstanding
common stock held by non-affiliates of the registrant, based upon the closing
price of the common stock as quoted on the NYSE Amex Equities of $0.19 was
approximately $2,588,653.86 (based on 13,624,494 shares outstanding to
non-affiliates). For purposes of the above statement only, all directors,
executive officers and 10% shareholders are assumed to be
affiliates.  This determination of affiliate status is not necessarily
a conclusive determination for any other purpose.





Number of
shares of common stock outstanding as of June 15, 2009 was
37,449,432.




DOCUMENTS INCORPORATED BY
REFERENCE–
None




1




TABLE
OF CONTENTS




Part
      IIItem
      8.
              Financial
      Statements and Supplementary Data
              3Part
      IIIItem
      12.
              Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
              3PART
      IVItem
      15.
              Exhibits,
      Financial Statement Schedules
              5


2





EXPLANATORY
NOTE





The
Singing Machine Company, Inc. (“Company,” “Singing Machine,” “we,” “us,” or,
“our”) is filing this Amendment No. 1 (the “Form 10-K/A”) to its annual report
previously filed on Form 10-K with the SEC on June 29, 2009: (i) to revise Item
12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters to revise the percentage owned by koncepts International
Limited; (ii) to amend erroneous dates caused by clerical error contained within
the “Report of Independent Registered Public Accounting Firm” in Item 8.
Financial Statements and Supplementary Data; and (iii) to include two omitted
exhibits in the Exhibit Index within Item 15. Exhibits and Financial Statement
Schedules.  Pursuant to
Rule 12b-15 under the Securities Exchange Act of 1934, as a result of this
amended report, the certifications pursuant to Section 302 and Section 906 of
the Sarbanes-Oxley Act of 2002, filed and furnished, respectively, as exhibits
to the Form 10-K have been re-executed and re-filed as of the date of
this Form 10-K/A and are included as exhibits
hereto.





PART
II





ITEM
8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA





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




PART
III




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





The
following table sets forth as of June 15, 2009, certain information concerning
beneficial ownership of our common stock by:





·
            all
      directors of the Singing Machine,


·
            all
      named executive officers of the Singing Machine;
  and


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





Security
ownership is based on 37,449,432 shares of our common stock issued and
outstanding.  In computing the number and percentage of shares
beneficially owned by a person, shares of common stock subject to convertible
securities and options currently convertible or exercisable, or convertible or
exercisable within 60 days of June 15, 2009, are counted as outstanding, but
these shares are not counted as outstanding for computing the percentage
ownership of any other person.





As used
herein, the term beneficial ownership with respect to a security is defined by
Rule 13d-3 under the Securities Exchange Act of 1934 as consisting of sole or
shared voting power (including the power to vote or direct the vote) and/or sole
or shared investment power (including the power to dispose or direct the
disposition of) with respect to the security through any contract, arrangement,
understanding, relationship or otherwise, including a right to acquire such
power(s) during the next 60 days.  Unless otherwise noted below, and
subject to applicable property laws, to our knowledge each person has sole
investment and sole voting power over the shares shown as beneficially owned by
them.   Unless otherwise noted, the principal address of each of
the directors and officers listed below is c/o The Singing Machine Company,
Inc., 6601 Lyons Road, Building A-7, Coconut Creek, FL 33073.




3





Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters as of June 15, 2009





Name
      and Address of Beneficial Owner
            
            Amount and
              Nature of
              Beneficial
              Ownership of
              Common Stock
            
            
            Percent of
              Outstanding
              Shares
      of
              Common
      StockSecurity Ownership of
      Management:Anton
      Handal (1)
            
            
            750,000
            
            
            
            2.0
            %Lionel
      Marquis
            
            
            -
            
            
            
            *Bernardo
      Melo (2)
            
            
            60,500
            
            
            
            *Bernard
      Appel (3)
            
            
            119,578
            
            
            
            *Harvey
      Judkowitz (3)
            
            
            129,578
            
            
            
            *Carol
      Lau (3)
            
            
            26,130
            
            
            
            *Yat
      Tung Lau (3)
            
            
            26,130
            
            
            
            *Peter
      Hon (3)
            
            
            26,130
            
            
            
            *Stewart
      Merkin (3)
            
            
            97,231
            
            
            
            *Officers
      & Directors as a Group (9 persons)
            
            
            1,235,277
            
            
            
            3.3
            %Security Ownership of
      Certain Beneficial Owners:koncepts
      International Limited (4)
            
            
            19,932,679
            
            
            
            51.5
            %Arts
      Electronics Ltd. (5)
            
            
            3,745,917
            
            
            
            10.0
            %Gentle
      Boss Investments Ltd (6)
            
            
            2,100,000
            
            
            
            5.6
            %





* Less
than 1%





(1)
Includes an option granted to Mr. Handal from koncepts International Limited to
purchase 750,000 stock warrants of the Singing Machine held by koncepts
International Limited, with an exercise price of $0.35 per share and is
exercisable within 60 days of June 15, 2009. Excludes options to purchase
300,000 shares of common stock, which are not exercisable within 60 days of June
15, 2009.





(2)
Includes stock options to purchase 60,500 shares of common stock, which is
exercisable within 60 days of June 15, 2009.





(3)
Includes as to the person indicated, the following outstanding stock options to
purchase shares of the Company’s Common Stock issued under the 1994 and 2001
Stock Option Plans, which will be vested and exercisable within 60 days of June
15, 2009:  100,000 options held by Bernard Appel; 100,000 options
held by Harvey Judkowitz, 80,000 options held by Stewart Merkin, and 20,000
options held by each of Carol Lau, Peter Hon, and Yat-Tung Lau.





(4)
Includes a common stock purchase warrant to purchase 1,250,000 shares of common
stock, which is exercisable within 60 days of June 15, 2009.  The
address for koncepts International Limited is 5/F Shing Dao Industrial Bldg, 232
Aberdeen Main Road, Aberdeen China.





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





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





EQUITY
COMPENSATION PLANS AND 401(K) PLAN





We have
two stock option plans: our Amended and Restated 1994 Management 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, 2009, we had 5,550 options issued and
outstanding under our 1994 Plan and 1,127,665 options were issued and
outstanding under our Year 2001 Plan.




4





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





PLAN
      CATEGORY
                
                NUMBER
      OF SECURITIES TO BE ISSUED UPON EXERCISE OF OUTSTANDING OPTIONS, WARRANTS
      AND RIGHTS
                
                
                WEIGHTED-AVERAGE
      EXERCISE PRICE OF OUTSTANDING OPTIONS, WARRANTS AND RIGHTS
                
                
                NUMBER
      OF SECURITIES REMAINING AVAILABLE FOR FUTURE ISSUANCE UNDER EQUITY
      COMPENSATION PLANS (EXCLUDING SECURITIES IN COLUMN (A))Equity
      Compensation Plans approved by Security Holders
                
                
                1,133,215
                
                
                $
                .58
                
                
                
                727,320Equity
      Compensation Plans Not approved by Security Holders
                
                
                0
                
                
                $
                0
                
                
                
                0


PART
IV





ITEM 15. EXHIBITS, FINANCIAL STATEMENT
SCHEDULES





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




Consolidated
Balance Sheets— March 31, 2009 and 2008




Consolidated
Statements of Operations—Years ended March 31, 2009, 2008 and 2007.




Consolidated
Statements of Shareholders' (deficit) Equity—Years ended March 31, 2009, 2008
and 2007.




Consolidated
Statements of Cash Flows—Years ended March 31, 2009, 2008 and 2007.




2.
Notes to Consolidated Financial Statements




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





(b)
Exhibits.





Exhibit
      No.
            Description





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





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





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





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





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





10.1
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).




5





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





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





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





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





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





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





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





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





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





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





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





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





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).




6





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





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





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





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





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





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





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





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





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





10.31
Securities Purchase Agreement
dated February 21, 2007, by and betweenThe Singing Machine Company,
Inc. and koncepts International
Limited. (incorporated by reference to the Singing Machine’s Current Report on
Form 8-K filed with the SEC on February 27, 2007)





10.32
Registration Rights Agreement
dated February 21, 2007, by and betweenThe Singing Machine Company,
Inc. and koncepts International
Limited.(incorporated by reference to the
Singing Machine’s Current Report on Form 8-K filed with the SEC on February 27,
2007)





10.33
One Year Stock Purchase Warrant ofThe Singing Machine Company, Inc. dated February 21, 2007. (incorporated
by reference to the Singing Machine’s Current Report on Form 8-K filed with the
SEC on February 27, 2007)





10.34
Three Year Stock Purchase Warrant
ofThe Singing Machine Company, Inc. dated February 21, 2007. (incorporated
by reference to the Singing Machine’s Current Report on Form 8-K filed with the
SEC on February 27, 2007)





10.35
Four Year Stock Purchase Warrant
ofThe Singing Machine Company, Inc. dated February 21, 2007. (incorporated
by reference to the Singing Machine’s Current Report on Form 8-K filed with the
SEC on February 27, 2007)





10.36
Bridge Loan Agreement dated March
8, 2007, by and betweenThe Singing Machine Company, Inc. and Ever Solid Limited. (incorporated
by reference to the Singing Machine’s Current Report on Form 8-K filed with the
SEC on March 14, 2007)





10.37
Collateral Security Agreement
dated March 8, 2007, by and betweenThe Singing Machine Company, Inc. and Ever Solid Limited. (incorporated
by reference to the Singing Machine’s Current Report on Form 8-K filed with the
SEC on March 14, 2007)





10.38
Bridge Note ofThe Singing
Machine Company, Inc. dated March
8, 2007. (incorporated by reference to the Singing Machine’s Current Report on
Form 8-K filed with the SEC on March 14, 2007)





10.39 Settlement Agreement and Release
dated as of March 5, 2007 by and amongThe Singing Machine Company,
Inc. and the holders of the
Company’s $4,000,000 principal amount 8% Convertible Debentures. (incorporated
by reference to the Singing Machine’s Current Report on Form 8-K filed with the
SEC on March 14, 2007)




7





10.40
Settlement Agreement dated April 27, 2007, by and between The Singing Machine
Company, Inc. and Abacus Advisors Group LLC. (incorporated by reference to the
Singing Machine’s Current Report on Form 8-K filed with the SEC on May 3,
2007)





10.41
Amendment to lease for executive offices dated April 3, 2008 by and between The
Singing Machine Company, Inc. and Lyons Corporate Park, LLLP. (incorporated by
reference to the Singing Machine’s Annual Report on Form 10-K filed with the SEC
on June 29, 2009)





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





10.43
Cosmo employee management agreement dated May 23, 2008 by and among The Singing
Machine Company, Inc. and Cosmo Communications Corporation. (incorporated by
reference to the Singing Machine’s Annual Report on Form 10-K filed with the SEC
on June 29, 2009)





10.44
Logistics Agreement dated May 23, 2008 by and among The Singing Machine Company,
Inc. and Starlite Consumer Electronics (USA), Inc., Cosmo Communications Corp.
(incorporated by reference to the Singing Machine’s Annual Report on Form 10-K
filed with the SEC on June 29, 2009)





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





10.46
BB&T Factoring and Security Agreement dated September 19, 2008 by and among
The Singing Machine Company, Inc. and Branch Banking and Trust Company.
(incorporated by reference to the Singing Machine’s Annual Report on Form 10-K
filed with the SEC on June 29, 2009)





10.47
Assignment of Factoring Proceeds and Intercreditor Agreement dated September 19,
2008 by and among The Singing Machine Company, Inc., SMC (Comercial Offshore De
Macau) Limitada, Branch Banking and Trust Company, and DBS Bank (Hong Kong)
Limited. (incorporated by reference to the Singing Machine’s Annual Report on
Form 10-K filed with the SEC on June 29, 2009)





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





10.49
Licensing Agreement dated May 10, 2006 by and among The Singing Machine Company,
Inc. and MGA Entertainment, Inc. *





10.50
Licensing Agreement dated November 21, 2006 by and among The Singing Machine
Company, Inc. and MGA Entertainment, Inc. *





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





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





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





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





* Filed
herewith


+
Compensatory plan or arrangement.




8




SIGNATURES





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





THE
SINGING MACHINE COMPANY, INC.


Date: 
      July 7, 2009
            By:
            /s/ Anton H. HandalAnton
      H. HandalChief
      Executive Officer





9


THE
SINGING MACHINE COMPANY, INC. AND SUBSIDIARIES





FINANCIAL
STATEMENTS








INDEX
TO FINANCIAL STATEMENTS








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










REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To the
Board of Directors and Shareholders of


The
Singing Machine Company, Inc. and Subsidiaries







We have
audited the accompanying consolidated balance sheets of The Singing Machine
Company, Inc. and Subsidiaries (the “Company”) as of March 31, 2009 and 2008,
and the related consolidated statements of operations, shareholders’ equity, and
cash flows for each of the years in the three year period ended March 31, 2009.
These financial statements are the responsibility of the Company’s management.
Our responsibility is to express an opinion on these consolidated financial
statements based on our audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.




In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of March 31,
2009 and 2008, and the results of its operations and its cash flows for each of
the years in the three year period ended March 31, 2009, in conformity with
accounting principles generally accepted in the United States of
America.




We have
also audited Schedule II of the Company for the years ended March 31, 2009,
2008, 2007. In our opinion, this schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly, in
all material respects, the information therein.









/s/
Berkovits & Company, LLP.




Fort
Lauderdale, Florida


June 26,
2009









THE
SINGING MACHINE COMPANY, INC. AND SUBSIDIARIES
 CONSOLIDATED
BALANCE SHEETS
 
 March 31, 2009
                      
                      
                      March 31, 2008AssetsCurrent
      AssetsCash
                      
                      $
                      957,163
                      
                      
                      $
                      447,816Accounts
      receivable, net of allowances of $261,980 and $120,899,
      respectively
                      
                      
                      972,345
                      
                      
                      
                      1,961,721Due
      from factor
                      
                      
                      73,854
                      
                      
                      
                      131,451Inventories,net
                      
                      
                      4,729,667
                      
                      
                      
                      3,514,984Prepaid
      expenses and other current assets
                      
                      
                      526,563
                      
                      
                      
                      412,552Total
      Current Assets
                      
                      
                      7,259,592
                      
                      
                      
                      6,468,524Property and
      Equipment,net
                      
                      
                      886,770
                      
                      
                      
                      598,280Other
      Non-Current Assets
                      
                      
                      179,362
                      
                      
                      
                      169,362Total
      Assets
                      
                      $
                      8,325,724
                      
                      
                      $
                      7,236,166Liabilities and Shareholders'
      EquityCurrent
      LiabilitiesAccounts
      payable
                      
                      $
                      2,588,769
                      
                      
                      $
                      1,145,150Due
      to related parties - net
                      
                      
                      1,498,391
                      
                      
                      
                      616,732Accrued
      expenses
                      
                      
                      422,260
                      
                      
                      
                      409,415Current
      portion of long-term financing obligation
                      
                      
                      18,186
                      
                      
                      
                      -Customer
      credits on account
                      
                      
                      908,449
                      
                      
                      
                      778,993Deferred
      gross profit on estimated returns
                      
                      
                      288,039
                      
                      
                      
                      217,812Total
      Current Liabilities
                      
                      
                      5,724,094
                      
                      
                      
                      3,168,102Long-term
      financing obligation, less current portion
                      
                      
                      22,733
                      
                      
                      
                      -Total
      Liabilities
                      
                      
                      5,746,827
                      
                      
                      
                      3,168,102Shareholders'  EquityPreferred
      stock, $1.00 par value; 1,000,000 shares authorized, no shares issued and
      outstanding
                      
                      
                      -
                      
                      
                      
                      -Common
      stock, Class A, $.01 par value;  100,000 shares authorized; no
      shares issued and outstanding
                      
                      
                      -
                      
                      
                      
                      -Common
      stock, $0.01 par value;  100,000,000 shares authorized;
      37,449,432 and 31,758,400 shares issued and outstanding
                      
                      
                      374,494
                      
                      
                      
                      317,584Additional
      paid-in capital
                      
                      
                      19,075,750
                      
                      
                      
                      18,430,612Accumulated
      deficit
                      
                      
                      (16,871,347
                      )
                      
                      
                      (14,680,132
                      )Total
      Shareholders' Equity
                      
                      
                      2,578,897
                      
                      
                      
                      4,068,064Total
      Liabilities and Shareholders' Equity
                      
                      $
                      8,325,724
                      
                      
                      $
                      7,236,166
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  F-3
 
 THE
SINGING MACHINE COMPANY, INC. AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF OPERATIONS
 
 For the Years EndedMarch 31, 2009
                    
                    
                    March 31, 2008
                    
                    
                    March 31, 2007Net
      Sales
                    
                    $
                    31,780,709
                    
                    
                    $
                    34,067,871
                    
                    
                    $
                    26,732,144Cost
      of Goods Sold
                    
                    
                    25,836,586
                    
                    
                    
                    26,389,070
                    
                    
                    
                    20,616,541Gross
      Profit
                    
                    
                    5,944,123
                    
                    
                    
                    7,678,801
                    
                    
                    
                    6,115,603Operating
      ExpensesSelling
      expenses
                    
                    
                    3,160,950
                    
                    
                    
                    2,931,416
                    
                    
                    
                    2,308,959General
      and administrative expenses
                    
                    
                    4,346,627
                    
                    
                    
                    4,279,728
                    
                    
                    
                    4,952,254Depreciation
      and amortization
                    
                    
                    459,354
                    
                    
                    
                    311,273
                    
                    
                    
                    556,051Total
      Operating Expenses
                    
                    
                    7,966,931
                    
                    
                    
                    7,522,417
                    
                    
                    
                    7,817,264(Loss)
      Income from Operations
                    
                    
                    (2,022,808
                    )
                    
                    
                    156,384
                    
                    
                    
                    (1,701,661
                    )Other
      Expenses(Loss)
      Gain on sale of subsidiary and other assets
                    
                    
                    -
                    
                    
                    
                    (27,654
                    )
                    
                    
                    29,028Interest
      expense
                    
                    
                    (131,755
                    )
                    
                    
                    (127,018
                    )
                    
                    
                    (42,355
                    )-Net
      Other Expenses
                    
                    
                    (131,755
                    )
                    
                    
                    (154,672
                    )
                    
                    
                    (13,327
                    )(Loss)
      Income before provision for income taxes
                    
                    
                    (2,154,563
                    )
                    
                    
                    1,712
                    
                    
                    
                    (1,714,988
                    )(Provision)
      reversal of provision for  income taxes
                    
                    
                    (36,652
                    )
                    
                    
                    -
                    
                    
                    
                    2,453,576Net
      (Loss) Income
                    
                    $
                    (2,191,215
                    )
                    
                    $
                    1,712
                    
                    
                    $
                    738,588(Loss)
      Income per Common ShareBasic
                    
                    $
                    (0.067
                    )
                    
                    $
                    0.000
                    
                    
                    $
                    0.035Diluted
                    
                    $
                    (0.067
                    )
                    
                    $
                    0.000
                    
                    
                    $
                    0.030Weighted
      Average Common and CommonEquivalent
      Shares:Basic
                    
                    
                    32,712,191
                    
                    
                    
                    29,925,952
                    
                    
                    
                    21,145,003Diluted
                    
                    
                    32,712,191
                    
                    
                    
                    30,910,424
                    
                    
                    
                    24,753,864
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  F-4
 
 THE
SINGING MACHINE COMPANY, INC. AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 For
      the Years EndedMarch
      31, 2009
                                                                                    
                                                                                    
                                                                                    March
      31, 2008
                                                                                    
                                                                                    
                                                                                    March
      31, 2007Cash
      flows from operating activitiesNet
      (Loss) Income
                                                                                    
                                                                                    $
                                                                                    (2,191,215
                                                                                    )
                                                                                    
                                                                                    $
                                                                                    1,712
                                                                                    
                                                                                    
                                                                                    $
                                                                                    738,588Adjustments
      to reconcile (net loss) net income to net cash and cash equivalents used
      in operating activities:Reversal
      of provision for income taxes
                                                                                    
                                                                                    
                                                                                    -
                                                                                    
                                                                                    
                                                                                    
                                                                                    -
                                                                                    
                                                                                    
                                                                                    
                                                                                    (2,453,576
                                                                                    )Gain
      on sale of subsidiary and other assets
                                                                                    
                                                                                    
                                                                                    -
                                                                                    
                                                                                    
                                                                                    
                                                                                    -
                                                                                    
                                                                                    
                                                                                    
                                                                                    (29,028
                                                                                    )Loss
      on disposal of property and equipment
                                                                                    
                                                                                    
                                                                                    -
                                                                                    
                                                                                    
                                                                                    
                                                                                    27,654
                                                                                    
                                                                                    
                                                                                    
                                                                                    -Depreciation
      and amortization
                                                                                    
                                                                                    
                                                                                    459,354
                                                                                    
                                                                                    
                                                                                    
                                                                                    311,273
                                                                                    
                                                                                    
                                                                                    
                                                                                    556,051Change
      in inventory reserve
                                                                                    
                                                                                    
                                                                                    247,404
                                                                                    
                                                                                    
                                                                                    
                                                                                    131,154
                                                                                    
                                                                                    
                                                                                    
                                                                                    (902,071
                                                                                    )Change
      in allowance for bad debts
                                                                                    
                                                                                    
                                                                                    141,081
                                                                                    
                                                                                    
                                                                                    
                                                                                    17,284
                                                                                    
                                                                                    
                                                                                    
                                                                                    (41,790
                                                                                    )Stock
      compensation
                                                                                    
                                                                                    
                                                                                    32,826
                                                                                    
                                                                                    
                                                                                    
                                                                                    38,112
                                                                                    
                                                                                    
                                                                                    
                                                                                    194,870Deferred
      gross profit on estimated sales returns
                                                                                    
                                                                                    
                                                                                    70,227
                                                                                    
                                                                                    
                                                                                    
                                                                                    4,094
                                                                                    
                                                                                    
                                                                                    
                                                                                    27,436Changes
      in assets and liabilities:(Increase)
      Decrease in:Accounts
      receivable
                                                                                    
                                                                                    
                                                                                    49,182
                                                                                    
                                                                                    
                                                                                    
                                                                                    (924,634
                                                                                    )
                                                                                    
                                                                                    
                                                                                    156,690Inventories
                                                                                    
                                                                                    
                                                                                    (1,462,087
                                                                                    )
                                                                                    
                                                                                    
                                                                                    (1,366,055
                                                                                    )
                                                                                    
                                                                                    
                                                                                    310,046Prepaid
      expenses and other current assets
                                                                                    
                                                                                    
                                                                                    (114,011
                                                                                    )
                                                                                    
                                                                                    
                                                                                    109,339
                                                                                    
                                                                                    
                                                                                    
                                                                                    (293,489
                                                                                    )Other
      non-current assets
                                                                                    
                                                                                    
                                                                                    (10,000
                                                                                    )
                                                                                    
                                                                                    
                                                                                    (113,308
                                                                                    )
                                                                                    
                                                                                    
                                                                                    42,633Increase
      (Decrease) in:Accounts
      payable
                                                                                    
                                                                                    
                                                                                    1,670,341
                                                                                    
                                                                                    
                                                                                    
                                                                                    441,906
                                                                                    
                                                                                    
                                                                                    
                                                                                    (160,565
                                                                                    )Accounts
      payable - related party
                                                                                    
                                                                                    
                                                                                    1,992,407
                                                                                    
                                                                                    
                                                                                    
                                                                                    -
                                                                                    
                                                                                    
                                                                                    
                                                                                    -Accrued
      expenses
                                                                                    
                                                                                    
                                                                                    12,845
                                                                                    
                                                                                    
                                                                                    
                                                                                    (215,579
                                                                                    )
                                                                                    
                                                                                    
                                                                                    (23,190
                                                                                    )Customer
      credits on account
                                                                                    
                                                                                    
                                                                                    129,456
                                                                                    
                                                                                    
                                                                                    
                                                                                    184,824
                                                                                    
                                                                                    
                                                                                    
                                                                                    (440,046
                                                                                    )Net
      cash from (used in) operating activities
                                                                                    
                                                                                    
                                                                                    1,027,810
                                                                                    
                                                                                    
                                                                                    
                                                                                    (1,352,224
                                                                                    )
                                                                                    
                                                                                    
                                                                                    (2,317,441
                                                                                    )Cash
      flows from investing activitiesPurchase
      of property and equipment
                                                                                    
                                                                                    
                                                                                    (747,844
                                                                                    )
                                                                                    
                                                                                    
                                                                                    (490,697
                                                                                    )
                                                                                    
                                                                                    
                                                                                    (488,946
                                                                                    )Receipt
      of restricted cash
                                                                                    
                                                                                    
                                                                                    -
                                                                                    
                                                                                    
                                                                                    
                                                                                    -
                                                                                    
                                                                                    
                                                                                    
                                                                                    268,405Proceeds
      from sales of assets
                                                                                    
                                                                                    
                                                                                    -
                                                                                    
                                                                                    
                                                                                    
                                                                                    -
                                                                                    
                                                                                    
                                                                                    
                                                                                    29,028Net
      cash used in investing activities
                                                                                    
                                                                                    
                                                                                    (747,844
                                                                                    )
                                                                                    
                                                                                    
                                                                                    (490,697
                                                                                    )
                                                                                    
                                                                                    
                                                                                    (191,513
                                                                                    )Cash
      flows from financing activitiesBorrowings
      from (retention by) factor, net
                                                                                    
                                                                                    
                                                                                    57,597
                                                                                    
                                                                                    
                                                                                    
                                                                                    (21,460
                                                                                    )
                                                                                    
                                                                                    
                                                                                    24,290Proceeds
      from issuance of stock
                                                                                    
                                                                                    
                                                                                    -
                                                                                    
                                                                                    
                                                                                    
                                                                                    630,881
                                                                                    
                                                                                    
                                                                                    
                                                                                    3,125,700Proceeds
      persuant to factoring facility
                                                                                    
                                                                                    
                                                                                    799,113
                                                                                    
                                                                                    
                                                                                    
                                                                                    -
                                                                                    
                                                                                    
                                                                                    
                                                                                    -Net
      proceeds from long-term financing obligation
                                                                                    
                                                                                    
                                                                                    40,919
                                                                                    
                                                                                    
                                                                                    
                                                                                    -
                                                                                    
                                                                                    
                                                                                    
                                                                                    -Net
      loan (payments to) proceeds from related parties
                                                                                    
                                                                                    
                                                                                    (668,248
                                                                                    )
                                                                                    
                                                                                    
                                                                                    492,416
                                                                                    
                                                                                    
                                                                                    
                                                                                    124,316Net
      cash provided by financing activities
                                                                                    
                                                                                    
                                                                                    229,381
                                                                                    
                                                                                    
                                                                                    
                                                                                    1,101,837
                                                                                    
                                                                                    
                                                                                    
                                                                                    3,274,306Change
      in cash and cash equivalents
                                                                                    
                                                                                    
                                                                                    509,347
                                                                                    
                                                                                    
                                                                                    
                                                                                    (741,084
                                                                                    )
                                                                                    
                                                                                    
                                                                                    765,352Cash
      and cash equivalents at beginning of period
                                                                                    
                                                                                    
                                                                                    447,816
                                                                                    
                                                                                    
                                                                                    
                                                                                    1,188,900
                                                                                    
                                                                                    
                                                                                    
                                                                                    423,548Cash
      and cash equivalents at end of period
                                                                                    
                                                                                    $
                                                                                    957,163
                                                                                    
                                                                                    
                                                                                    $
                                                                                    447,816
                                                                                    
                                                                                    
                                                                                    $
                                                                                    1,188,900Supplemental
      Disclosures of Cash Flow Information:Cash
      paid for Interest
                                                                                    
                                                                                    $
                                                                                    136,826
                                                                                    
                                                                                    
                                                                                    $
                                                                                    78,898
                                                                                    
                                                                                    
                                                                                    $
                                                                                    57,769Cash
      paid for Income Taxes
                                                                                    
                                                                                    $
                                                                                    60,322
                                                                                    
                                                                                    
                                                                                    $
                                                                                    -
                                                                                    
                                                                                    
                                                                                    $
                                                                                    -Non-Cash
      Financing Activities:Conversion
      of loan payable to equity
                                                                                    
                                                                                    $
                                                                                    -
                                                                                    
                                                                                    
                                                                                    $
                                                                                    -
                                                                                    
                                                                                    
                                                                                    $
                                                                                    2,000,000Conversion
      of trade payable to equity
                                                                                    
                                                                                    $
                                                                                    669,222
                                                                                    
                                                                                    
                                                                                    $
                                                                                    500,000
                                                                                    
                                                                                    
                                                                                    $
                                                                                    500,000
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  F-5
  THE
SINGING MACHINE COMPANY, INC. AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT)
 
 Preferred
      Stock
                                                    
                                                    
                                                    Common
      Stock
                                                    
                                                    
                                                    Additional
      Paid
                                                    
                                                    
                                                    AccumulatedShares
                                                    
                                                    
                                                    Amount
                                                    
                                                    
                                                    Shares
                                                    
                                                    
                                                    Amount
                                                    
                                                    
                                                    in
      Capital
                                                    
                                                    
                                                    Deficit
                                                    
                                                    
                                                    TotalBalance
      at March 31, 2006
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    10,060,282
                                                    
                                                    
                                                    $
                                                    100,603
                                                    
                                                    
                                                    $
                                                    11,658,031
                                                    
                                                    
                                                    $
                                                    (15,420,432
                                                    )
                                                    
                                                    $
                                                    (3,661,798
                                                    )Net
      Income
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    738,588
                                                    
                                                    
                                                    
                                                    738,588Employee
      compensation-stock option
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    182,369
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    182,369Exercise
      of employee stock options
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    285,000
                                                    
                                                    
                                                    
                                                    2,850
                                                    
                                                    
                                                    
                                                    122,350
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    125,200Director
      Fees
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    39,065
                                                    
                                                    
                                                    
                                                    391
                                                    
                                                    
                                                    
                                                    12,110
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    12,501Issuances
      of common stock
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    16,901,852
                                                    
                                                    
                                                    
                                                    169,018
                                                    
                                                    
                                                    
                                                    5,331,482
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    5,500,500Balance
      at March 31, 2007
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    27,286,199
                                                    
                                                    
                                                    
                                                    272,862
                                                    
                                                    
                                                    
                                                    17,306,342
                                                    
                                                    
                                                    
                                                    (14,681,844
                                                    )
                                                    
                                                    
                                                    2,897,360Net
      Income
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    1,712
                                                    
                                                    
                                                    
                                                    1,712Employee
      compensation-stock option
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    24,010
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    24,010Exercise
      of employee stock options
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    147,515
                                                    
                                                    
                                                    
                                                    1,475
                                                    
                                                    
                                                    
                                                    46,905
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    48,380Director
      Fees
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    15,162
                                                    
                                                    
                                                    
                                                    152
                                                    
                                                    
                                                    
                                                    13,950
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    14,102Issuances
      of common stock
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    4,309,524
                                                    
                                                    
                                                    
                                                    43,095
                                                    
                                                    
                                                    
                                                    1,039,405
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    1,082,500Balance
      at March 31, 2008
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    31,758,400
                                                    
                                                    
                                                    
                                                    317,584
                                                    
                                                    
                                                    
                                                    18,430,612
                                                    
                                                    
                                                    
                                                    (14,680,132
                                                    )
                                                    
                                                    
                                                    4,068,064Net
      Loss
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    (2,191,215
                                                    )
                                                    
                                                    
                                                    (2,191,215
                                                    )Employee
      compensation-stock option
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    17,825
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    17,825Director
      Fees
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    33,336
                                                    
                                                    
                                                    
                                                    333
                                                    
                                                    
                                                    
                                                    14,668
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    15,001Issuances
      of common stock
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    5,657,696
                                                    
                                                    
                                                    
                                                    56,577
                                                    
                                                    
                                                    
                                                    612,645
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    669,222Balance
      at March 31, 2009
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    37,449,432
                                                    
                                                    
                                                    $
                                                    374,494
                                                    
                                                    
                                                    $
                                                    19,075,750
                                                    
                                                    
                                                    $
                                                    (16,871,347
                                                    )
                                                    
                                                    $
                                                    2,578,897
 
 F-6
 
 THE
SINGING MACHINE COMPANY, INC AND SUBSIDIARIES
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 NOTE
1 - BASIS OF PRESENTATION
 
 OVERVIEW
 
 The
Singing Machine Company, Inc., a Delaware corporation (the "Company," “SMC”,
"The Singing Machine", “we” or “us”), and wholly-owned subsidiaries SMC
(Comercial Offshore De Macau) Limitada (“Macau Subsidiary”), SMC Logistics, Inc.
(“SMC-L”), SMC-Music, Inc.(“SMC-M”), and Singing Machine Holdings Ltd. (a B.V.I.
company) are primarily engaged in the development, marketing, and sale of
consumer karaoke audio equipment, accessories, musical instruments and musical
recordings. The products are sold directly to distributors and retail
customers.
 
 The
preparation of The Singing Machine's financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements and
revenues and expenses during the period. Future events and their effects cannot
be determined with absolute certainty; therefore, the determination of estimates
requires the exercise of judgment. Actual results inevitably will differ from
those estimates, and such differences may be material to the Company's financial
statements. Management evaluates its estimates and assumptions continually.
These estimates and assumptions are based on historical experience and other
factors that are believed to be reasonable under the circumstances.
 
 NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 PRINCIPLES OF CONSOLIDATIONThe accompanying consolidated financial statements include the accounts
of the Company, Macau Subsidiary, SMC-L, SMC-M and The Singing Machine Holdings
Ltd.  (a B.V.I. company). All inter-company accounts and transactions
have been eliminated in consolidation for all periods presented.
 
 USE OF ESTIMATES The Singing
Machine makes estimates and assumptions in the ordinary course of business
relating to sales returns and allowances, warranty reserves, inventory reserves
and reserves for promotional incentives that affect the reported amounts of
assets and liabilities and of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Historically, past changes to these
estimates have not had a material impact on the Company's financial condition.
However, circumstances could change which may alter future
expectations.
 
 COLLECTIBILITY OF ACCOUNTS
RECEIVABLE The Singing Machine's allowance for doubtful accounts is based
on management's estimates of the creditworthiness of its customers, current
economic conditions and historical information, and, in the opinion of
management, is believed to be an amount sufficient to respond to normal business
conditions. Management sets 100% allowance for customers in bankruptcy and other
allowances based upon historical collection experience. Should business
conditions deteriorate or any major customer default on its obligations to the
Company, this allowance may need to be significantly increased, which would have
a negative impact on operations.
 
 ACCOUNTS RECEIVABLE
FACTORING.The Company’s factoring facility only finances
non-recourse accounts receivable.  Such receivables are considered to
have been sold in accordance with FASB 140 Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of
Liabilities.  Accordingly, advances received pursuant to the factoring
facility have been netted against the accounts receivable on the accompanying
Balance Sheet.
 
 FOREIGN
CURRENCY TRANSLATION
 
 The
functional currency of the Macau Subsidiary is the Hong Kong dollar. The
financial statements of the subsidiaries are translated to U.S. dollars using
year-end rates of exchange for assets and liabilities, and average rates of
exchange for the year for revenues, costs, and expenses. Net gains and losses
resulting from foreign exchange transactions and translations were not material
during the periods presented.
 
 CONCENTRATION
OF CREDIT RISK
 
 The
Company maintains cash balances in foreign financial institutions. The insured
amounts at foreign financial institutions at March 31, 2009 and March 31, 2008
are $666,643 and $407,376, respectively.  At times the Company
maintains cash in United States bank accounts that are in excess of the Federal
Deposit Insurance Corporation (“FDIC”) insured amounts of up to
$250,000.  As of March 31, 2009 and March 31, 2008 the amounts
uninsured in United States banks was an additional $1,438 and $0
respectively.
  F-7
  INVENTORY
 
 Inventories
are comprised of electronic karaoke equipment, accessories, electronic musical
instruments, electronic toys and compact discs and are stated at the lower of
cost or market, as determined using the first in, first out method. The Singing
Machine reduces inventory on hand to its net realizable value on an item-by-item
basis when it is apparent that the expected realizable value of an inventory
item falls below its original cost. A charge to cost of sales results when the
estimated net realizable value of specific inventory items declines below cost.
Management regularly reviews the Company's investment in inventories for such
declines in value.
 
 REVENUE
RECOGNITION
 
 Revenue
from the sale of equipment, accessories, and musical recordings are recognized
upon the later of: (a) the time of shipment or (b) when title passes to the
customers and all significant contractual obligations have been satisfied and
collection of the resulting receivable is reasonably assured. Revenues from
sales of consigned inventory are recognized upon sale of the product by the
consignee. Net sales are comprised of gross sales net of actual and estimated
future returns, discounts and volume rebates. The total returns represent 9.4%,
8.6%, and 13.4% of the gross sales for the twelve months ended March 31, 2009,
2008, and 2007, respectively.
 
 STOCK
BASED COMPENSATION
 
 The
Company began to apply the provisions of SFAS No. 123 (revised 2004),
Share-Based Payments ("SFAS 123 (R)"), starting on January 1,
2006.  SFAS 123 (R) which became effective after June 15, 2005,
replaces SFAS No. 123, Accounting for Stock-Based Compensation, and supersedes
Accounting Principles Board Opinion ("APB") No. 25, Accounting for Stock Issued
to Employees. SFAS 123 (R) requires all share-based payments to employees
including grants of employee stock options, be measured at fair value and
expensed in the consolidated statement of operations over the service period
(generally the vesting period). Upon adoption, the Company transitioned to SFAS
123 (R) using the modified prospective application, whereby compensation cost is
only recognized in the consolidated statements of operations beginning with the
first period that SFAS 123 (R) is effective and thereafter, with prior periods'
stock-based compensation still presented on a pro forma basis. Under the
modified prospective approach, the provisions of SFAS 123 (R) are to be applied
to new employee awards and to employee awards modified, repurchased, or
cancelled after the required effective date. Additionally, compensation cost for
the portion of employee awards for which the requisite service has not been
rendered that are outstanding as of the required effective date shall be
recognized as the requisite service is rendered on or after the required
effective date. The compensation cost for that portion of employee awards shall
be based on the grant-date fair value of those awards as calculated for either
recognition or pro-forma disclosures under SFAS 123. The Company continues to
use the Black-Scholes option valuation model to value stock options. As a result
of the adoption of SFAS 123 (R), for the years ended March 31, 2009, 2008 and
2007, , the stock option expense was $17,825, $24,010 and $182,369,
respectively.  Employee stock option compensation expense in fiscal
years 2009, 2008 and 2007 includes the estimated fair value of options granted,
amortized on a straight-line basis over the requisite service period for the
entire portion of the award.
 
 The fair
value of each option grant was estimated on the date of the grant using the
Black-Scholes option-pricing model with the assumptions outlined below. The
expected volatility is based upon historical volatility of our stock and other
contributing factors. The expected term is based upon observation of actual time
elapsed between date of grant and exercise of options for all employees.
Previously such assumptions were determined based on historical
data.
 
 ·
              For
      the year ended March 31, 2009: expected dividend yield 0%, risk-free
      interest rate of 0.57% to 1.41%, volatility 70.22% and 80.07% and expected
      term of three years.
 
 ·
              For
      the year ended March 31, 2008: expected dividend yield 0%, risk-free
      interest rate of 3.3%, volatility of 67.41% and expected term of three
      years.
 
 ·
              For
      the year ended March 31, 2007: expected dividend yield 0%, risk-free
      interest rate of 4.65% to 5.1%, volatility 90.77% and 91.6% and expected
      term of three years.
 
 ADVERTISING
 
 Costs
incurred for producing and publishing advertising of the Company, are charged to
operations as incurred. The Company has entered into cooperative advertising
agreements with its major customers that specifically indicated that the
customer has to spend the cooperative advertising fund upon the occurrence of
mutually agreed events. The percentage of the cooperative advertising allowance
ranges from 2% to 8% of the purchase. The customers have to advertise the
Company's products in the customer's catalog, local newspaper and other
advertising media. The customer must submit the proof of the performance (such
as a copy of the advertising showing the Company’s products) to the Company to
request for the allowance. The customer does not have the ability to spend the
allowance at their discretion. The Company believes that the identifiable
benefit from the cooperative advertising program and the fair value of the
advertising benefit is equal or greater than the cooperative advertising
expense. Advertising expense for the years ended March 31, 2009, 2008 and 2007
was $475,167, $470,671 and $212,362, respectively.
 
 RESEARCH
AND DEVELOPMENT COSTS
 
 All
research and development costs are charged to results of operations as incurred.
These expenses are shown as a component of selling, general and administrative
expenses in the consolidated statements of operations. For the years ended March
31, 2009, 2008 and 2007, these amounts totaled $51,634, $22,491 and $104,218,
respectively.
  F-8
  FAIR
VALUE OF FINANCIAL INSTRUMENTS, FINANCIAL ASSETS AND LIABILITIES AND
MEASUREMENTS
 
 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, due from factors, accounts payable, loan-related party,
customer credits on account, subordinated debt-related parties and accrued
expenses approximates fair value due to the relatively short period to maturity
for these instruments.
 
 SFAS
No. 157, “Fair Value Measurements” defines fair value, establishes a
framework for measuring fair value in accounting principles generally accepted
in the United States, and expands disclosures about fair value measurements. It
does not require any new fair value measurements.This
Statement clarifies that the exchange price is the price in an orderly
transaction between market participants to sell the asset or transfer the
liability in the market in which the reporting entity would transact for the
asset or liability, that is, the principal or most advantageous market for the
asset or liability.  We adopted the provisions of SFAS 157 for
financial assets and liabilities in the fourth quarter of fiscal 2009. The
adoption of SFAS 157 did not have a material impact on our consolidated
financial statements.
 
 SFAS No.
159, “The Fair Value Option for Financial Assets and Financial Liabilities”
  permits entities to choose to measure many financial instruments and
certain other items at fair value.  This statement allows companies
the opportunity to reduce volatility in reported earnings by measuring assets
and liabilities differently without requiring the application of complex hedging
accounting provisions. We adopted the provisions of SFAS 159 for financial
assets and liabilities in the fourth quarter of fiscal 2009. The adoption of
SFAS 159 did not have an impact on our consolidated financial
statements.
 
 RECLASSIFICATIONS
 
 Certain
prior period amounts have been reclassified to conform to the current period
presentation.
 
 INCOME TAXES  The
Company follows Statement of Financial Accounting Standards No. 109 "Accounting
for Income Taxes" ("SFAS No. 109"). Under the asset and liability method of SFAS
No. 109, deferred tax assets and liabilities are recognized for the future tax
consequences attributed to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax base.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Under SFAS No. 109, the
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date. If it is
more likely than not that some portion of a deferred tax asset will not be
realized, a valuation allowance is recognized.
 
 Significant
management judgment is required in developing The Singing Machine's provision
for income taxes, including the determination of foreign tax liabilities,
deferred tax assets and liabilities and any valuation allowances that might be
required against the deferred tax assets. Management evaluates its ability to
realize its deferred tax assets on a quarterly basis and adjusts its valuation
allowance when it believes that it is more likely that the asset will not be
realized.
 
 As of
March 31, 2009 and March 31, 2008, The Singing Machine had gross deferred tax
assets of approximately $3.1 million and $2.5 million, respectively, against
which the Company recorded valuation allowances totaling approximately $3.1
million+ and $2.5 million, respectively.
 
 On April
1, 2007 we adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes (“FIN 48”).   FIN 48 clarifies the requirements of
SFAS No. 109, Accounting for
Income Taxes, relating to the recognition of income tax benefits. FIN 48
provides a two-step approach to recognizing and measuring tax benefits when the
benefits’ realization is uncertain. The first step is to determine whether the
benefit is to be recognized; the second step is to determine the amount to be
recognized:
 ·
              Income
      tax benefits should be recognized when, based on the technical merits of a
      tax position, the company believes that if a dispute arose with the taxing
      authority and were taken to a court of last resort, it is more likely than
      not (i.e., a probability of greater than 50 percent) that the tax position
      would be sustained as filed; and
 ·
              If
      a position is determined to be more likely than not of being sustained,
      the reporting company should recognize the largest amount of tax benefit
      that is greater than 50 percent likely of being realized upon ultimate
      settlement with the taxing
authority.
 The
adoption of FIN 48 had no impact on these consolidated financial
statements.
 
 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."
  F-9
  PROPERTY
AND EQUIPMENT
 
 Property
and equipment are stated at cost, less accumulated depreciation and
amortization. Expenditures for repairs and maintenance are charged to expense as
incurred. Depreciation is provided for in amounts sufficient to relate the cost
of depreciable assets to their estimated useful lives using accelerated and
straight-line methods.
 
 CASH
AND CASH EQUIVALENTS
 
 The
Company considers all highly liquid investments with maturities of three months
or less at the time of purchase to be cash equivalents.   Cash
and cash equivalent balances at March 31, 2009 and March 31, 2008 were $957,163
and $447,816, respectively.
 
 SHIPPING
AND HANDLING COSTS
 
 Shipping
and handling costs are classified as a component of selling expenses and those
billed to customers are recorded as a reduction of expense in the statement of
operations.
 
 RECENT
ACCOUNTING PRONOUNCEMENTS
  SFAS
165
  In May
2009, the FASB issued SFAS No. 165, Subsequent Events (“FSAB 165”).The
purpose of SFAS 165 is to establish a general standard of accounting for the
disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued.  The
statement outlines the following:
  ·
              The
      period after the balance sheet date during which management of a reporting
      entity should evaluate events or transactions that may occur for potential
      recognition or disclosure in the financial
  statements
  ·
              The
      circumstances under which an entity should recognize events or
      transactions occurring after the balance sheet date in its financial
      statements
  ·
              The
      disclosures that an entity should make about events or transactions that
      occurred after the balance sheet
date.
 
 FSAB
165 is effective for interim and annual periods ending after June 15, 2009. FSAB
165 is not expected to have a material impact on our consolidated financial
statements.
  SFAS
160
  In
December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS
No. 160, “Noncontrolling Interests in Consolidated Financial Statements”.
SFAS 160 establishes accounting and reporting standards for ownership interests
in subsidiaries held by parties other than the parent, the amount of
consolidated net income attributable to the parent and to the noncontrolling
interest, changes in a parent’s ownership interest and the valuation of retained
noncontrolling equity investments when a subsidiary is deconsolidated. SFAS 160
also establishes disclosure requirements to identify and distinguish between the
interests of the parent and the interests of the noncontrolling owners. SFAS
No. 160 is effective for fiscal years beginning on or after
December 15, 2008. We do not expect the implementation of this standard to
have a material impact on our consolidated financial statements.
 
 NOTE
3 - INVENTORIES
 
 Inventories
are comprised of the following components:
 
 March
      31,
                      
                      
                      March
      31,2009
                      
                      
                      2008Finished
      Goods
                      
                      $
                      5,475,056
                      
                      
                      $
                      4,012,969Less:
      Inventory Reserve
                      
                      
                      (745,389
                      )
                      
                      
                      (497,985
                      )Total
      Inventories
                      
                      $
                      4,729,667
                      
                      
                      $
                      3,514,984
 
 Inventory
consigned to a distribution center at March 31, 2009 and March 31, 2008 were
$352,214 and $372,012, respectively.
  F-10
  NOTE
4 - ACCOUNTS RECEIVABLE FACTORING AGREEMENT
 
 On August
28, 2008, the Company executed a three-party Banking Facility agreement between
the Company’s wholly owned subsidiary SMC (Commercial Offshore De Macau)
Limitada (“Borrower”), DBS Bank (Hong Kong) Limited (“Lender”) and Branch
Banking and Trust Company (“BB&T” or “New Factor”).   The
agreement is comprised of three facilities including a maximum of $7.0 million
on 80% of qualified accounts receivable, a maximum letter of credit facility of
$4.0 million for accounts payable financing and a maximum of $2.0 million for
the negotiation of export bills under letter of credit.
 
 According
to the factoring facility, BB&T will serve as the correspondent factor for
the Lender and does not advance funds to the Company directly. The Company
assigns the proceeds from customers to the Lender and the Lender advances funds
to the Borrower.The
maximum amount for the advance is approximately $7.0 million or 80% of the
qualified accounts receivable, which ever is higher.  The New Factor
assumes credit risk on approved accounts (factor risk accounts).  For
non-approved accounts, the Company will assume the credit risk (client risk
accounts).  The factoring fees will be .675% of the gross invoice for
both client risk (recourse) and factor risk (non-recourse) accounts. As of March
31, 2009 there was a total of $2,030,317 of open accounts receivable assigned to
the New Factor.  The Company assumed credit risk (recourse) in the
amount of $382,140.  Credit risk on the remaining factor assigned
receivables in the amount of $1,648,177 was assumed by the New Factor
(non-recourse). This agreement is effective October 16, 2008 and replaces the
previous four-party agreement between the Company, Starlight Marketing Limited
(a related party), Standard Chartered Bank (Hong Kong), Limited and CIT. As of
March 31, 2009 and March 31, 2008 the outstanding amount due from BB&T was
$70,538 and $0 respectively.  The amounts represent excess of customer
payments received by BB&T that had yet to be transferred to DBS
bank.  As of March 31, 2009 and March 31, 2008 the outstanding amount
under the factoring facility with DBS Bank was $799,112 and $0 respectively.
This amount represents advances made by the Bank on non-recourse receivables and
have been offset against accounts receivable in the accompanying consolidated
balance sheet. The terms of the agreement are more particularly described in
Note 8.
 
 Prior to
2008 the Company executed an agreement with The CIT Group/Commercial Services,
Inc. (“CIT”) on August 13, 2007 to factor its receivables. CIT assumed the
credit risk on approved accounts (factor risk accounts).  For
non-approved accounts, the Company assumed the credit risk (client risk
accounts).  The factoring fees, for the client risk accounts, were .3%
of the gross invoice.  For the factor risk accounts, the fees were
..55% of the gross invoice. The annual minimum charge was $24,000.  CIT
did not advance funds to the Company directly. On October 26, 2007, the Company
entered into a four- party agreement with CIT(“Previous Factor”), Standard
Chartered Bank (Hong Kong), Limited (“Lender”) and Starlight Marketing Limited
(“Borrower”), a related party. According to the agreement, the Company assigned
the proceeds from customers to the Lender, the Lender advanced the loans to the
Borrower. The Borrower then directed the advance to the Company. Both the
Borrower and the Company guaranteed the repayment of the advance. The maximum
amount for the advance was approximately $4.5 million or 85% of the qualified
accounts receivable, which ever was higher. As of March 31, 2009 and March 31,
2008 the outstanding amount due from CIT for customer payments in excess of
advances made to the Company was $3,318 and $131,451, respectively.. The
factoring agreement with CIT expired in August 2008 and the Company gave 60 days
written notice to terminate the agreement.  CIT will continue to
collect all open invoices assigned to it and remit the proceeds to the Company
upon collection.
 
 NOTE
5 - PROPERTY AND EQUIPMENT
 
 A summary
of property and equipment is as follows:
 
 USEFUL
                              
                              
                              MARCH
      31,
                              
                              
                              MARCH
      31,LIFE
                              
                              
                              2009
                              
                              
                              2008Computer
      and office equipment
                              
                              5
      years
                              
                              
                              $
                              652,235
                              
                              
                              $
                              520,182Furniture
      and fixtures
                              
                              5-7
      years
                              
                              
                              
                              220,315
                              
                              
                              
                              216,120Leasehold
      improvement
                              
                              
                              
                              *
                              
                              
                              153,993
                              
                              
                              
                              156,614Warehouse
      equipment
                              
                              7
      years
                              
                              
                              
                              86,599
                              
                              
                              
                              -Molds
      and tooling
                              
                              3
      years
                              
                              
                              
                              1,552,465
                              
                              
                              
                              1,032,9702,665,607
                              
                              
                              
                              1,925,886Less:
      Accumulated depreciation and amortization
                              
                              
                              
                              (1,778,837
                              )
                              
                              
                              (1,327,606
                              )$
                              886,770
                              
                              
                              $
                              598,280
 
 * Shorter
of remaining term of lease or useful life
 Depreciation
and amortization for fiscal years ended 2009, 2008, and 2007 was $459,354,
$311,273, and $556,051, respectively.
 
 NOTE
6 – DUE TO RELATED PARTIES, NET
 
 As of
March 31, 2009 the Company had $1,498,391 due to related parties consisting
primarily of trade payables for karaoke hardware to Starlight Marketing Macao
Commercial Offshore Ltd in the amount of  $1,580,601, offset by net
accounts receivable of $61,060 from other Starlight Group  affiliates
and  trade receivables of $21,150 from Cosmo Communications
Corp.
  F-11
  As of
March 31, 2008 we had $616,732 due to related parties. This consisted of an
interest bearing loan payable of $642,587 to Starlight Marketing Limited, an
$18,000 payable to Starlight Marketing Development Limited, and net accounts
payable of $38,751 to Starlight affiliates. These amounts were reduced by a
non-interest bearing receivable from Cosmo Communications Corp. for
$82,607.
 .
 NOTE
7 - CUSTOMER CREDITS ON ACCOUNT
 
 Customer
credits on account represent customers that have received credits in excess of
their accounts receivable balance. These balances were reclassified for
financial statement purposes as current liabilities until paid or applied to
future purchases.
 
 NOTE
8 – FINANCING
 
 On
February 12, 2008 the Macau Subsidiary entered into a Banking Facilities
agreement with Heng Seng Bank Limited (“Bank”).  Under the terms of
the agreement, the Macau Subsidiary has access to $5,100,000 in total facilities
including $500,000 for payment of goods financed under the bank’s letters of
credit, $3,000,000 for negotiation of discrepant documents presented under
export letters of credit and a factoring facility to a maximum of
$1,600,000.  Interest on open balances is due and payable monthly at a
rate of 2% per annum above LIBOR (London Interbank Offered Rate).  The
note is collateralized by a promissory note from the Macau Subsidiary of $5.8
million and an unlimited written guarantee from the Company.  There
were no amounts due to the Bank as of March 31, 2009 and March 31, 2008
respectively.
 
 On July
16, 2008 SMC-L entered into a financing arrangement with Westover Financial,
Inc. for the purchase of four forklifts for the California logistics
operations.  The terms of the agreement required an initial payment of
$18,691 and 36 monthly payments of $1,516 with effective interest rate of
18.6%.  As of March 31, 2009 the remaining amount due on this
obligation was $40,919 of which $18,186 is due within the next twelve months and
the remaining $22,733 due after one year.
 
 On August
28, 2008, the Company executed a three-party Banking Facility agreement between
the Macau Subsidiary (“Borrower”), DBS Bank (Hong Kong) Limited (“Lender”) and
BB&T (“Factor”). The agreement provides for credit facilities to a maximum
of $13.0 million consisting of the following:
 
 ·
              Maximum
      of $7.0 million on 80% of qualified accounts
  receivable.
 ·
              Maximum
      letter of credit facility of $4.0 million for accounts payable
      financing.
 ·
              Maximum
      $2.0 million negotiation of export bills under letter of
      credit.
 
 Interest
on letter of credit facilities and discounting charges on accounts receivable
advances will be charged at a rate of 1.5% per annum over LIBOR (London
Interbank Offered Rate).  The credit facility is secured with
corporate guarantees from the Company as well as a $2.0 million guarantee from
Starlight International Holdings Limited, a related party.  BB&T
will serve as the correspondent factor for the Lender for the Company’s
qualified North American accounts receivable. BB&T does not advance funds to
the Company directly. The Company assigns the proceeds from customers to the
Lender and the Lender advances funds to the Borrower.   The
combined factoring fees will be .675% of the gross invoice for all factored
accounts.  This agreement is effective October 16, 2008 and replaces
the previous four-party agreement between the Company, Starlight Marketing
Limited (a related party), Standard Chartered Bank (Hong Kong), Limited and CIT.
As of March 31, 2009 and March 31, 2008 the outstanding amount due from BB&T
was $70,538 and $0 respectively.  The amounts represent excess of
customer payments received by BB&T that had yet to be transferred to DBS
bank.   As of March 31, 2009, March 31, 2008 and March 31, 2007
the outstanding amount due to DBS Bank was $799,112, $0, and $0 respectively
pursuant to the factoring facility.  The amount has been offset
against accounts receivable in the accompanying consolidated balance
sheet.
 
 NOTE
9 - COMMITMENTS AND CONTINGENCIES
 
 LEGAL
MATTERS
 
 SYBERSOUND
RECORDS, INC. V. UAV CORPORATION; MADACY ENTERTAINMENT L.P., AUDIO STREAM, INC.,
TOP TUNES, INC., SINGING MACHINE, INC., BCI ECLIPSE COMPANY, LLC, AMOS ALTER,
DAVID ALTER, EDWARD GOETZ, DENNIS NORDEN, FRANK ROBERTSON, DOUGLAS VOGT AND
RICHARD VOGT (UNITED STATES DISTRICT COURT FOR THE CENTRAL DISTRICT OF
CALIFORNIA, CV05-5861 JFW); (UNITED STATES COURT OF APPEALS FOR THE NINTH
CIRCUIT (USCA DOCKET NO. 06-55221)
 
 The
federal court action filed on August 11, 2005 alleged violation of the Copyright
Act and the Lanham Act by the defendants, and claims for unfair competition
under California law.  Sybersound was joined in the complaint by
several publisher owners of musical compositions who alleged copyright
infringement against all the defendants except The Singing Machine
Company, Inc.  On November 7, 2005, the district court ordered the
publisher plaintiffs’ copyright claims severed from the case.  The
Singing Machine Company, Inc. is not a party to the severed cases.
 
 In
September 2005, the defendants, including The Singing Machine Company, Inc.,
filed multiple motions to dismiss the original complaint.  In October
2005, Sybersound filed a motion for summary judgment.  On January 6,
2006, the court granted the motions of the defendants and denied the plaintiff’s
motion, thereby dismissing the case against the defendants, including The
Singing Machine Company, Inc., with prejudice.  The plaintiff,
Sybersound thereafter appealed the decision to the Ninth Circuit Court of
Appeals.
  F-12
  On
February 27, 2008 the Ninth Circuit Court of Appeals affirmed the dismissal
against The Singing Machine Company, Inc. and dismissed all claims against the
Company with prejudice. Sybersound had until July 10, 2008 to file a Petition
with the United States Supreme Court to appeal that decision. Sybersound did not elect to file a
Petition, therefore the above captioned lawsuit is
concluded.
 
 The
Company is also subject to various other legal proceedings and other claims that
arise in the ordinary course of business. In the opinion of management, the
amount of ultimate liability, if any, in excess of applicable insurance
coverage, is not likely to have a material effect on the financial condition,
results of operations or liquidity of the Company. However, as the outcome of
litigation or other legal claims is difficult to predict, significant changes in
the range of possible loss could occur, which could have a material impact on
the Company's operations.
  INCOME
TAXES
 
 In a
letter dated July 21, 2008 the Internal Revenue Service (IRS) notified the
former foreign Subsidiary of an unpaid tax balance on Income Tax Return of a
Foreign Corporation (Form 1120-F) for the period ending March 31, 2003 for
International SMC (HK) Limited “ISMC (HK)”, a former
subsidiary.  According to the notice ISMC (HK) has an unpaid balance
due in the amount of $241,639 that includes an interest assessment of
$74,125.  ISMC (HK) was sold in its entirety by the Company on
September 25, 2006 to a British Virgin Islands company
(“Purchaser”).  The sale and purchase agreement with the Purchaser of
ISMC (HK) specifies that the Purchaser would ultimately be responsible for any
liabilities, including tax matters.  On June 3, 2009 the IRS filed a
federal tax lien in the amount of approximately $170,000 against ISMC (HK) under
ISMC (HK)’s federal Tax ID. Management sought independent legal counsel to
assess the potential liability, if any, on the Company.  In a
memorandum from independent counsel, the conclusion based on the facts presented
was that the IRS would not prevail against the Company for collection of the
ISMC (HK) income tax liability based on:
 
 ·
              The
      Internal Revenue Service’s asserted position that the Company is not the
      taxpayer.
 ·
              The
      1120- F tax liability was recorded under the taxpayer identification
      number belonging to ISMC and not the Company’s taxpayer identification
      number
 ·
              The
      IRS would be barred from recovery since it failed to assess or issue a
      notice of levy within the three year statute of
  limitations
 
 Based on
the conclusion reached in the legal memorandum, management does not believe that
the Company will have any further liability with regards to this
issue.
 
 LEASES
 
 The
Company has entered into various operating lease agreements for office and
warehouse facilities in Coconut Creek, Florida, City of Industry, California and
Macau. The leases expire at varying dates. Rent expense for the years ended
March 31, 2009, 2008 and 2007 was $961,226, $201,270 and $409,608,
respectively.
 
 In
addition, the Company maintains various warehouse equipment and computer
equipment operating leases.
 
 Future
minimum lease payments under property and equipment leases with terms exceeding
one year as of March 31, 2009 are as follows:
 
 Property
      Leases
                                
                                
                                Equipment
      LeasesFor
      period ending2010
                                
                                $
                                782,410
                                
                                
                                $
                                9,7472011
                                
                                
                                645,929
                                
                                
                                
                                5,8072012
                                
                                
                                665,307
                                
                                
                                
                                -2013
                                
                                
                                226,193
                                
                                
                                
                                -2014
      and beyond
                                
                                
                                -
                                
                                
                                
                                -$
                                2,319,839
                                
                                
                                $
                                15,554
 
 The above
property lease payments are gross payments which are not net of supplemental
sublease fees we receive.  During fiscal years 2009, 2008 and 2007 the
Company received fees of approximately $45,000, $543,000 and $414,000
respectively, for sublease of warehouse space and warehousing services provided
to affiliated entities out of its California warehouse.
 
 Such fees
have been offset against rent expense in the consolidated statements of
operations.
 
 LICENSE
AGREEMENTS
 
 On May
10, 2006, we entered into a two-year license agreement with MGA Entertainment,
Inc. to produce and distribute a variety of karaoke products based on MGA's
BRATZTM franchise, one of the world's leading toy lines and girls' lifestyle
brands, in North America, Europe and Australia. These karaoke products include a
TFT DVD karaoke system, sing-a-long cassette players, deluxe microphones,
electronic keyboards and an electronic drum.  The license agreement
contains a minimum guarantee payment term.
  F-13
  On
November 21, 2006 we also entered into a three-year license agreement with MGA
Entertainment, Inc. to produce and distribute a variety of consumer electronic
products based on MGA's BRATZTM franchise, one of the world's leading toy lines
and girls' lifestyle brands, in North America, New Zealand, Chile and Australia.
These consumer electronic products include boom boxes, clock radios and portable
DVDs. The license agreement contains a minimum guarantee payment
term.
 
 As of
March 31, 2009 the total amount due to MGA Entertainment, Inc. was
$438,394.  This amount includes $196,394 of additional royalties due
and is included in accrued expenses on the accompanying consolidated balance
sheet. In addition the Company owes MGA Entertainment, Inc. $242,000 for
guaranteed minimum advances due by December 31,2008. This amount has not been
included in the consolidated financial statements since it would be considered a
“gross-up” of the balance sheet.  The amounts due  have not
been paid due to an ongoing lawsuit between Mattel Inc. and MGA Entertainment
Inc. wherein Mattel has legally challenged MGA’s trademark rights to the BRATZTM
franchise.
 
 NYSE
AMEX STATUS
 
 On
September 16, 2008, the Company received notice from AMEX indicating that the
Company was below certain requirements of AMEX’s continued listing standards as
of June 30, 2008. Specifically, shareholders’ equity was less than $4,000,000
and there were losses from continuing operations in three of its four most
recent fiscal years, as set forth in Section 1003(a)(ii) of AMEX’s Company
Guide.  In response, the Company submitted a timely plan of compliance
to AMEX (the “Plan”).  In a letter dated December 12, 2008 from AMEX,
the Company was officially notified that AMEX had accepted the Company’s Plan
and that the Company had until March 31, 2009 to complete the Plan and regain
compliance with Section 1003(a)(ii) of AMEX’s Company Guide.  AMEX
Staff advised the Company that it would be subject to periodic review by AMEX
during the extension period and that failure to make progress consistent with
the Company’s Plan could result in delisting. Also in that same letter dated
December 12, 2008, AMEX Staff notified the Company that it deemed the Company’s
common stock selling price as too low. AMEX informed the Company that it must
address its low selling price by June 12, 2009 in order to remain in compliance
with AMEX Company Guide Section 1003(f)(v).
 
 In April
2009, the Company notified AMEX that it would not be able to meet its goals set
forth in the prior Plan. In particular, the Company notified AMEX that it would
not be in compliance with AMEX’s listing requirement of shareholders’ equity of
$4,000,000 as of the end of the fiscal year ended March 31, 2009. The Company
submitted a second revised plan (“Revised Plan”) to AMEX to request more time
and to show that it could regain compliance by March 31, 2010. AMEX reviewed the
Revised Plan and notified the Company on June 22, 2009 that the Company was
still not in compliance with Section 1003(a)(ii) due to the Company having
shareholders’ equity of less than $4,000,000. AMEX also indicated that the
Company was subject to Section 1002(b) of the AMEX Company Guide as a result of
its depressed selling price per share, which the Company had not remedied by the
June 12, 2009 deadline.  The AMEX Staff additionally stated that in
reaching its decision it considered that the Company has failed to meet minimum
listing standards on repeated occasions.  Consequently, AMEX stated
that it had concluded that it is appropriate to initiate immediate delisting
proceedings at this time. The Company has until June 29, 2009 to formally appeal
AMEX’s decision, after which time the AMEX Staff’s determination will become
final.  At that time, the AMEX Staff will suspend trading in the
Company’s securities and file an application with the SEC to strike the
Company’s common stock from listing and registration on AMEX in accordance with
Section 12 of the Exchange Act and the rules promulgated thereunder. Our board
of directors has decided at this time that it is not in the best interest of the
Company and its shareholders to expend the financial resources necessary to
appeal the decision and continue to be listed on AMEX, particularly in light of
the fact that the Company’s appeal would likely have little chance of
success.
 
 Once
the AMEX delists our securities from trading on its exchange, we could face
significant material adverse consequences, including:
 
 •   a
limited availability of market quotations for our securities;
 
 •   a
reduced liquidity with respect to our securities;
 
 •  a
determination that our common stock is a “penny stock” which will require
brokers trading in our common stock to adhere to more stringent rules, possibly
resulting in a reduced level of trading activity in the secondary trading market
for our common stock; and
 
 •   a
decreased ability to issue additional securities or obtain additional financing
in the future.
 
 NOTE
10 - SHAREHOLDERS’ EQUITY
 
 COMMON
STOCK ISSUANCES
 
 During
the years ended March 31, 2009, 2008, and 2007, the Company issued the following
common stock shares:
 
 2009:
 
 During
the fiscal year ended March 31, 2009 the Company issued 5,691,032 shares of its
common stock.
 
 On March
25, 2009, the Company issued 2,267,220 shares of common stock to Arts
Electronics, Ltd for $226,722 ($0.10 per share) to offset a trade
payable.
 
 On March
25, 2009, the Company issued 2,450,000 shares of common stock to koncepts
International Limited for $245,000 ($0.10 per share) to offset a trade
payable.
  F-14
  On
October 9, 2008 the Company issued 33,336 shares of common stock to our Board of
Directors at $0.45 per share, pursuant to our annual director compensation
plan.
 
 On April
1, 2008 the Company issued 940,476 shares of common stock to Starlight
Industrial Holdings, Ltd. for $197,500 ($.21 per share) to offset a trade
payable.
 
 2008:
 
 During
the year ended March 31, 2008, the Company issued 162,677 shares of common stock
to various employees, as well as directors, at prices ranging from $.32 per
share to $.93 per share pursuant to employee stock option
agreements.
 
 On March
12, 2008, the Company issued 952,381 shares of common stock to Arts Electronics
for $200,000 ($0.21 per share) as payment for a trade payable.
 
 On
September 28, 2007, the Company issued 857,143 shares of common stock to koncept
International Limited, a subsidiary of Starlight for $300,000 ($.35 per share)
as payment for certain payables owed by the Company to Starlight Marketing
Macao.
 
 On April
16, 2007, 2,500,000 warrants at $0.233 were exercised by koncept International
Limited, a subsidiary of Starlight, and the Company received a total of
$582,500.
 
 2007:
 
 On
October 3, 2006, the Company sold 1,380,000 shares of common stock to Gentle
Boss Investments LTD. for $600,300 ($.435 per share).
 
 On
October 3, 2006, the Company sold 920,000 shares of common stock to Timemate
Industries Limited for $400,200 ($.435 per share).
 
 On
September 27, 2006, the Company issued 39,065 shares of common stock to members
of the Board of Directors for services provided to the Company for fiscal year
2006, valued at $12,501, which is included in the selling, general, and
administrative expenses for the years ended December 31, 2006.
 
 On June
25, 2006, the Company issued 12,875,536 shares of common stock to koncept
International Limited, a subsidiary of Starlight for a $3 million investment
($.233 per share).
 
 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.
 
 For the
years ended March 31, 2009, 2008 and 2007, common stock equivalents to purchase
3,209,965, 2,544,824 and 1,973,446 shares of stock, respectively, were not
included in the computation of diluted earnings per share because the exercise
prices were greater than the average market price of the Company’s common stock
for the period.
 
 STOCK
OPTIONS
 
 On June
1, 2001, the Board of Directors approved the 2001 Stock Option Plan (`Plan"),
which replaced the 1994 Stock Option Plan, as amended, (the "1994 Plan"). The
Plan was developed to provide a means whereby directors and selected employees,
officers, consultants, and advisors of the Company may be granted incentive or
non-qualified stock options to purchase common stock of the Company. As of March
31, 2009, the Plan is authorized to grant options up to an aggregate of
1,950,000 shares of the Company's common stock and up to 300,000 shares for any
one individual grant in any fiscal year. As of March 31, 2009, the Company had
389,820 options available to be granted under the 2001 Plan. As of March 31,
2009, the Company had 337,500 options available to be granted under the 1994
Plan.
 
 The
Company adopted SFAS 123(R) for the reporting periods ending after June 15, 2005
and thereafter has recognized the fair value of the stock option as part of the
selling, general and administration expense. Accordingly, no compensation cost
has been recognized for options issued under the Plan in periods prior to June
15, 2005. A summary of stock option activity for each of the years presented is
summarized below.
  F-15
  Fiscal
      2009
                                                        
                                                        
                                                        Fiscal
      2008
                                                        
                                                        
                                                        Fiscal
      2007Number
      of Options
                                                        
                                                        
                                                        Weighted
                                                          Average
                                                          Exercise
      Price
                                                        
                                                        
                                                        Number
      of
                                                          Options
                                                        
                                                        
                                                        Weighted
                                                          Average
                                                          Exercise
                                                          Price
                                                        
                                                        
                                                        Number
      of
                                                          Options
                                                        
                                                        
                                                        Weighted
                                                          Average
                                                          Exercise
      PriceStock
      Options:Balance
      at beginning of period
                                                        
                                                        
                                                        1,247,815
                                                        
                                                        
                                                        $
                                                        1.25
                                                        
                                                        
                                                        
                                                        1,382,890
                                                        
                                                        
                                                        $
                                                        1.26
                                                        
                                                        
                                                        
                                                        1,300,110
                                                        
                                                        
                                                        $
                                                        1.74Granted
                                                        
                                                        
                                                        420,000
                                                        
                                                        
                                                        $
                                                        0.13
                                                        
                                                        
                                                        
                                                        120,000
                                                        
                                                        
                                                        $
                                                        0.45
                                                        
                                                        
                                                        
                                                        943,000
                                                        
                                                        
                                                        $
                                                        0.39Exercised
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        (147,515
                                                        )
                                                        
                                                        $
                                                        0.33
                                                        
                                                        
                                                        
                                                        (285,000
                                                        )
                                                        
                                                        $
                                                        0.44Forfeited
                                                        
                                                        
                                                        (534,600
                                                        )
                                                        
                                                        $
                                                        1.90
                                                        
                                                        
                                                        
                                                        (107,560
                                                        )
                                                        
                                                        $
                                                        1.27
                                                        
                                                        
                                                        
                                                        (575,220
                                                        )
                                                        
                                                        $
                                                        1.34Balance
      at end of period
                                                        
                                                        
                                                        1,133,215
                                                        
                                                        
                                                        $
                                                        0.58
                                                        
                                                        
                                                        
                                                        1,247,815
                                                        
                                                        
                                                        $
                                                        1.25
                                                        
                                                        
                                                        
                                                        1,382,890
                                                        
                                                        
                                                        $
                                                        1.26Options
      exercisable at end of period
                                                        
                                                        
                                                        709,965
                                                        
                                                        
                                                        $
                                                        0.83
                                                        
                                                        
                                                        
                                                        1,029,296
                                                        
                                                        
                                                        $
                                                        1.44
                                                        
                                                        
                                                        
                                                        582,307
                                                        
                                                        
                                                        $
                                                        2.14
 
 
 The
following table summarizes information about employee stock options outstanding
at March 31, 2009:
 
 Range
      of Exercise Price
                                            
                                            Number
      Outstanding at
                                              March
      31, 2009
                                            
                                            
                                            Weighted
      Average
                                              Remaining
      Contractural
                                              Life
                                            
                                            
                                            Weighted
      Average
                                              Exercise
      Price
                                            
                                            
                                            Number
      Exercisable at
                                              March
      31, 2009
                                            
                                            
                                            Weighted
      Average
                                              Exercise
      Price$0.11-$0.77
                                            
                                            
                                            988,485
                                            
                                            
                                            
                                            7.08
                                            
                                            
                                            $
                                            0.33
                                            
                                            
                                            
                                            568,485
                                            
                                            
                                            
                                            0.48$0.93
      - $1.97
                                            
                                            
                                            120,180
                                            
                                            
                                            
                                            6.58
                                            
                                            
                                            $
                                            1.20
                                            
                                            
                                            
                                            116,930
                                            
                                            
                                            $
                                            1.20$2.04-$5.60
                                            
                                            
                                            5,550
                                            
                                            
                                            
                                            1.43
                                            
                                            
                                            $
                                            2.04
                                            
                                            
                                            
                                            5,550
                                            
                                            
                                            $
                                            2.04$7.20-$9.00
                                            
                                            
                                            19,000
                                            
                                            
                                            
                                            3.86
                                            
                                            
                                            $
                                            9.00
                                            
                                            
                                            
                                            19,000
                                            
                                            
                                            $
                                            9.001,133,215
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            709,965
 
 Prior to
April 1, 2005, 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 options issued.
 
 STOCK
WARRANTS
 
 As of
March 31, 2009, the Company had a total of 1,250,000 stock purchase warrants
outstanding. The exercise price of these warrants is $0.35 with an expiration
date of February 21, 2010.
 
 NOTE
11 - INCOME TAXES
 
 The
Company files separate tax returns in the United States and in Macau. The Macau
Subsidiary has received approval from the Macau government to operate its
business as a Macau Offshore Company (MOC), and is exempt from the Macau income
tax. For the fiscal years ended March 31, 2009, 2008 and 2007, the Macau
Subsidiary recorded no tax provision. The Company has now exhausted its ability
to carry back any further losses and therefore will only be able to recognize
tax benefits to the extent that it has future taxable income.
 
 Due to
the change of control of the Company, the net operating loss carry over is
subject to the IRS Section 382 limitation.  As of March 31, 2009, 2008
and 2007, The Singing Machine had net deferred tax assets of approximately $3.1
million, $2.5 million, and $2.7 million, respectively, against which the Company
recorded valuation allowances totaling approximately $3.1 million, $2.5
million, and $2.7 million, respectively.
 
 FASB
Interpretation No. 48, Accounting for Uncertainty in Income
Taxes (“FIN 48”) was issued to clarify the requirements of SFAS No. 109,
Accounting for Income
Taxes, relating to the recognition of income tax benefits. FIN 48
provides a two-step approach to recognizing and measuring tax benefits when the
benefits’ realization is uncertain. The first step is to determine whether the
benefit is to be recognized; the second step is to determine the amount to be
recognized:
 ·
              Income
      tax benefits should be recognized when, based on the technical merits of a
      tax position, the company believes that if a dispute arose with the taxing
      authority and were taken to a court of last resort, it is more likely than
      not (i.e., a probability of greater than 50 percent) that the tax position
      would be sustained as filed; and
 ·
              If
      a position is determined to be more likely than not of being sustained,
      the reporting company should recognize the largest amount of tax benefit
      that is greater than 50 percent likely of being realized upon ultimate
      settlement with the taxing
authority.
 
 We
adopted FIN-48 on April 1, 2007 and it has had no impact on the financial
statements.
 
 In 2007,
as a consequence of the ISMC divestiture, and based on the opinion of the Hong
Kong tax counsel, as well as “hold harmless” representations from the present
shareholders of ISMC, the Company reversed the previously recorded provision of
Hong Kong tax of approximately $2,453,000. Such reversal has been presented in
the income tax section of the accompanying statements of
operations.
 
 The
income tax expense (benefit) for federal, foreign, and state income taxes in the
consolidated statement of operations consisted of the following components for
2009, 2008, and 2007:
  F-16
  2009
                            
                            
                            2008
                            
                            
                            2007Current:U.S.
      Federal
                            
                            $
                            (878,241
                            )
                            
                            $
                            9,181
                            
                            
                            $
                            (781,917
                            )Foreign
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (2,453,576
                            )State
                            
                            
                            (77,918
                            )
                            
                            
                            944
                            
                            
                            
                            (69,080
                            )Deferred
                            
                            
                            992,811
                            
                            
                            
                            (10,125
                            )
                            
                            
                            850,997$
                            36,652
                            
                            
                            $
                            -
                            
                            
                            $
                            (2,453,576
                            )
 
 The
United States and foreign components of income (loss) before income taxes are as
follows:
 
 2009
                      
                      
                      2008
                      
                      
                      2007United
      States
                      
                      $
                      (2,583,061
                      )
                      
                      $
                      27,002
                      
                      
                      $
                      (2,316,348
                      )Foreign
                      
                      
                      428,498
                      
                      
                      
                      (25,290
                      )
                      
                      
                      601,360$
                      (2,154,563
                      )
                      
                      $
                      1,712
                      
                      
                      $
                      (1,714,988
                      )
 
 The
actual tax expense differs from the "expected" tax expense for the years ended
March 31, 2009, 2008, and 2007 (computed by applying the U.S. Federal Corporate
tax rate of 34 percent to income before taxes) as follows:
 
 2009
                          
                          
                          2008
                          
                          
                          2007Expected
      tax (benefit) expense
                          
                          $
                          (732,551
                          )
                          
                          $
                          582
                          
                          
                          $
                          (583,096
                          )State
      income taxes, net of Federal income tax benefit
                          
                          
                          (77,919
                          )
                          
                          
                          943
                          
                          
                          
                          (69,080
                          )Permanent
      differences
                          
                          
                          6,447
                          
                          
                          
                          5,829
                          
                          
                          
                          5,640Change
      in valuation allowance
                          
                          
                          652,738
                          
                          
                          
                          (194,062
                          )
                          
                          
                          (3,702,790
                          )Tax
      rate differential on foreign earnings
                          
                          
                          (145,689
                          )
                          
                          
                          8,600
                          
                          
                          
                          (204,462
                          )Reversal
      of provision for foreign income taxes
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (2,453,576
                          )Other
                          
                          
                          333,627
                          
                          
                          
                          178,108
                          
                          
                          
                          4,553,788Actual
      tax (benefit) expense
                          
                          $
                          36,652
                          
                          
                          $
                          -
                          
                          
                          $
                          (2,453,576
                          )
 
 The tax
effects of temporary differences that give rise to significant portions of
deferred tax assets and liabilities are as follows:
  F-17
  2009
                      
                      
                      2008
                      
                      
                      2007Deferred
      tax assets:Federal
      net operating loss carryforward
                      
                      
                      1,616,816
                      
                      
                      
                      1,490,139
                      
                      
                      $
                      2,034,910State
      net operating loss carryforward
                      
                      
                      509,378
                      
                      
                      
                      518,078
                      
                      
                      
                      291,285AMT
      credit carryforward
                      
                      
                      70,090
                      
                      
                      
                      70,090
                      
                      
                      
                      70,090Inventory
      differences
                      
                      
                      445,109
                      
                      
                      
                      169,382
                      
                      
                      
                      66,942Allowance
      for doubtful accounts
                      
                      
                      89,073
                      
                      
                      
                      41,105
                      
                      
                      
                      21,021Reserve
      for sales returns
                      
                      
                      97,933
                      
                      
                      
                      74,056
                      
                      
                      
                      72,664Charitable
      contributions
                      
                      
                      60,700
                      
                      
                      
                      60,700
                      
                      
                      
                      60,700Accrued
      Vacation
                      
                      
                      12,568
                      
                      
                      
                      -
                      
                      
                      
                      -Depreciation
      and amortization
                      
                      
                      197,614
                      
                      
                      
                      -
                      
                      
                      
                      -Amortization
      of reorganization intangible
                      
                      
                      30,658
                      
                      
                      
                      53,652
                      
                      
                      
                      53,652Total
      deferred tax assets
                      
                      
                      3,129,940
                      
                      
                      
                      2,477,201
                      
                      
                      
                      2,671,264Net
      deferred tax assets before valuation allowance
                      
                      
                      3,129,940
                      
                      
                      
                      2,477,201
                      
                      
                      
                      2,671,264Valuation
      allowance
                      
                      
                      (3,129,940
                      )
                      
                      
                      (2,477,201
                      )
                      
                      
                      (2,671,264
                      )Net
      deferred tax assets
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      -
 
 At March
31, 2009, the Company has federal tax net operating loss carry forwards in the
amount of approximately $4.8 million, which expire beginning in the year
2023.  In addition, state tax net operating loss carry forwards in the
amount of approximately $6.6 million expire beginning in 2013. The Company is no
longer subject to income tax examinations for fiscal years before
2006.
 
 NOTE
12 - SEGMENT INFORMATION
 
 The
Company operates in one segment and maintains its records accordingly. The
majority of sales to customers outside of the United States are made by the
Macau Subsidiary and Hong Kong Subsidiary, until its date of sale. Sales by
geographic region for the period presented are as follows:
 
 FOR
      THE FISCAL YEARS ENDEDMarch
      31,2009
                                            
                                            
                                            2008
                                            
                                            
                                            2007North
      America
                                            
                                            $
                                            26,154,402
                                            
                                            
                                            $
                                            27,085,841
                                            
                                            
                                            $
                                            20,552,962Europe
                                            
                                            
                                            4,813,309
                                            
                                            
                                            
                                            6,314,126
                                            
                                            
                                            
                                            5,793,062Others
                                            
                                            
                                            812,998
                                            
                                            
                                            
                                            667,904
                                            
                                            
                                            
                                            386,120$
                                            31,780,709
                                            
                                            
                                            $
                                            34,067,871
                                            
                                            
                                            $
                                            26,732,144
 
 The
geographic area of sales is based primarily on the location where the product is
delivered.
 
 NOTE
13 - EMPLOYEE BENEFIT PLANS
 
 The
Company has a 401(k) plan for its employees to which the Company makes
contributions at rates dependent on the level of each employee's contributions.
Contributions made by the Company are limited to the maximum allowable for
federal income tax purposes. The amounts charged to operations for contributions
to this plan and administrative costs during the years ended March 31, 2009,
2008, and 2007 totaled $17,825, $21,674and $39,460, respectively. The amounts
are included as a component of general and administrative expense in the
accompanying Consolidated Statements of Operations. The Company does not provide
any post employment benefits to retirees.
 
 NOTE
14 - CONCENTRATIONS OF CREDIT RISK, CUSTOMERS, AND SUPPLIERS
 
 The
Company derives a majority of its revenues from retailers of products in the
United States. Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist of accounts receivable. The Company's
allowance for doubtful accounts is based upon management's estimates and
historical experience and reflects the fact that accounts receivable are
concentrated with several large customers whose credit worthiness have been
evaluated by management. At March 31, 2009, 82% of accounts receivable were due
from two customers in North America and one in Europe. Accounts receivable from
customers that individually owed over 10% of total accounts receivable was 55%
15% and 11% at March 31, 2009.  Accounts receivable from customers
that individually owed over 10% of total accounts receivable was 31% and 29% at
March 31, 2008. The Company performs ongoing credit evaluations of its
customers.
  F-18
  Revenues
derived from five customers in 2009, 2008, and 2007 were 61%, 62% and 58% of
total revenues, respectively. Revenues derived from top three customers in 2009,
2008 and 2007 as percentage of the total revenue were 21%, 18% and 10%; 22%, 11%
and 11%; and 24%, 16% and 10%, respectively. The loss of any of these customers
can have an adverse impact on the financial position of the
Company.
 
 Net sales
derived from the Hong Kong and Macau Subsidiaries aggregated $17.1 million in
2009, $17.3 million in 2008 and $16.2 million in 2007.
 
 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 2009, 2008, and 2007, manufacturers in the People's Republic of
China ("China") accounted for approximately 99%, 99% and 98%; respectively of
the Company's total product purchases, including all of the Company's hardware
purchases.
 
 The
Company is primary relying on DBS Bank to finance its accounts receivable. The
loss of the factoring facility might have an adverse effect on its
business.
 
 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 2009,
2008, and 2007 are set forth in the following table:
 
 Basic
                                                                                                      
                                                                                                      
                                                                                                      DilutedEarnings
                                                                                                      
                                                                                                      
                                                                                                      EarningsNet
      Earnings
                                                                                                      
                                                                                                      (Loss)
                                                                                                      
                                                                                                      
                                                                                                      (Loss)Sales
                                                                                                      
                                                                                                      
                                                                                                      Gross
      Profit
                                                                                                      
                                                                                                      
                                                                                                      (Loss)
                                                                                                      
                                                                                                      Per
      Share
                                                                                                      
                                                                                                      
                                                                                                      Per
      Share(In
      thousands)
                                                                                                      
                                                                                                      
                                                                                                      (In
      thousands)
                                                                                                      
                                                                                                      
                                                                                                      (In
      thousands)2009First
      quarter
                                                                                                      
                                                                                                      $
                                                                                                      1,770
                                                                                                      
                                                                                                      
                                                                                                      $
                                                                                                      203
                                                                                                      
                                                                                                      
                                                                                                      $
                                                                                                      (1,050
                                                                                                      )
                                                                                                      
                                                                                                      $
                                                                                                      (0.03
                                                                                                      )
                                                                                                      
                                                                                                      $
                                                                                                      (0.03
                                                                                                      )Second
      quarter
                                                                                                      
                                                                                                      
                                                                                                      12,616
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      2,021
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      103
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      -
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      -Third
      quarter
                                                                                                      
                                                                                                      
                                                                                                      16,612
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      3,772
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      464
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      0.01
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      0.01Fourth
      quarter
                                                                                                      
                                                                                                      
                                                                                                      783
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      (52
                                                                                                      )
                                                                                                      
                                                                                                      
                                                                                                      (1,708
                                                                                                      )
                                                                                                      
                                                                                                      
                                                                                                      (0.03
                                                                                                      )
                                                                                                      
                                                                                                      
                                                                                                      (0.03
                                                                                                      )Fiscal
      Year 2009
                                                                                                      
                                                                                                      $
                                                                                                      31,781
                                                                                                      
                                                                                                      
                                                                                                      $
                                                                                                      5,944
                                                                                                      
                                                                                                      
                                                                                                      $
                                                                                                      (2,191
                                                                                                      )
                                                                                                      
                                                                                                      $
                                                                                                      (0.07
                                                                                                      )
                                                                                                      
                                                                                                      $
                                                                                                      (0.07
                                                                                                      )2008First
      quarter
                                                                                                      
                                                                                                      $
                                                                                                      2,446
                                                                                                      
                                                                                                      
                                                                                                      $
                                                                                                      339
                                                                                                      
                                                                                                      
                                                                                                      $
                                                                                                      (852
                                                                                                      )
                                                                                                      
                                                                                                      $
                                                                                                      (0.03
                                                                                                      )
                                                                                                      
                                                                                                      $
                                                                                                      (0.03
                                                                                                      )Second
      quarter
                                                                                                      
                                                                                                      
                                                                                                      16,108
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      3,193
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      1,054
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      0.04
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      0.03Third
      quarter
                                                                                                      
                                                                                                      
                                                                                                      13,784
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      3,747
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      767
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      0.03
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      0.03Fourth
      quarter
                                                                                                      
                                                                                                      
                                                                                                      1,730
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      400
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      (967
                                                                                                      )
                                                                                                      
                                                                                                      
                                                                                                      (0.03
                                                                                                      )
                                                                                                      
                                                                                                      
                                                                                                      (0.03
                                                                                                      )Fiscal
      Year 2008
                                                                                                      
                                                                                                      $
                                                                                                      34,068
                                                                                                      
                                                                                                      
                                                                                                      $
                                                                                                      7,679
                                                                                                      
                                                                                                      
                                                                                                      $
                                                                                                      2
                                                                                                      
                                                                                                      
                                                                                                      $
                                                                                                      -
                                                                                                      
                                                                                                      
                                                                                                      $
                                                                                                      -2007First
      quarter
                                                                                                      
                                                                                                      $
                                                                                                      1,036
                                                                                                      
                                                                                                      
                                                                                                      $
                                                                                                      126
                                                                                                      
                                                                                                      
                                                                                                      $
                                                                                                      (1,151
                                                                                                      )
                                                                                                      
                                                                                                      $
                                                                                                      (0.11
                                                                                                      )
                                                                                                      
                                                                                                      $
                                                                                                      (0.11
                                                                                                      )Second
      quarter
                                                                                                      
                                                                                                      
                                                                                                      14,299
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      3,046
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      806
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      0.04
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      0.03Third
      quarter
                                                                                                      
                                                                                                      
                                                                                                      11,018
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      3,289
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      2,824
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      0.11
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      0.10Fourth
      quarter
                                                                                                      
                                                                                                      
                                                                                                      379
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      (345
                                                                                                      )
                                                                                                      
                                                                                                      
                                                                                                      (1,740
                                                                                                      )
                                                                                                      
                                                                                                      
                                                                                                      (0.08
                                                                                                      )
                                                                                                      
                                                                                                      
                                                                                                      (0.08
                                                                                                      )Fiscal
      Year 2007
                                                                                                      
                                                                                                      $
                                                                                                      26,732
                                                                                                      
                                                                                                      
                                                                                                      $
                                                                                                      6,116
                                                                                                      
                                                                                                      
                                                                                                      $
                                                                                                      739
                                                                                                      
                                                                                                      
                                                                                                      $
                                                                                                      0.03
                                                                                                      
                                                                                                      
                                                                                                      $
                                                                                                      0.03
 
 NOTE
16 – GAIN FROM DISPOSAL OF ASSETS
 
 During
fiscal 2007, the Company sold its Hong Kong subsidiary to a non-related third
party and recognized a gain of $20,078. The Company also recognized a gain of
$8,950 from the sale of old tools during 2007.
  F-19
  NOTE
17 – RELATED PARTY TRANSACTIONS
 
 TRADE
 
 On May
23, 2008, SMC Logistics entered into a service and logistics agreement with
affiliates Starlight Consumer Electronics (USA), Inc. and Cosmo Communications
Corp. to provide logistics, fulfillment, and warehousing services for Starlight
and Cosmo’s domestic sales. The Agreement generated approximately $.8 million
dollars for fiscal year 2009 and is expected to generate $1.1M for fiscal year
2010.
 
 The
Company purchased products from Starlight Marketing Macao, a subsidiary of
Starlight International Holding Ltd. The purchases from Starlight for the fiscal
year ended March 31, 2009 and 2008 were $10,170,825 and $5,775,074,
respectively. In addition, the Company also purchased molds and tooling from
Starlight in the amount of $235,000 and $126,282 in fiscals 2009 and 2008,
respectively, which are included in Property and Equipment in the accompanying
Consolidated Balance Sheets.
 
 On August
1, 2006, the Company entered into a service agreement with Starlight Electronics
Co., Ltd, a subsidiary of Starlight International Holding Ltd, to provide
shipping and engineering service to the Company at a charge of $25,000 per
month.  This amount increased to $29,000 per month effective July 1,
2008 however, due to a decrease in services provided to the Company in fiscal
2009 the service charge was temporarily reduced for a period of time. For the
fiscal year ended March 31, 2009 and 2008, this service charge was $261,000 and
$200,000 per annum respectively and is included in the general and
administrative expenses in the accompanying Consolidated Statements of
Operations.
 
 In
addition, on October 1, 2006 the Company entered into a warehouse services
agreement with Starlight Industrial Holding LTD, to provide them with
warehousing services at the Company’s California warehouse at a monthly service
charge of $26,000.  In May 2008, that amount was increased to $39,000
per month. This amount was used to offset logistics expenses for the warehouse
and is shown in the accompanying Consolidated Statements of Operations as a
component of general and administrative expenses.
 
 SUPPLEMENTAL
DATA
 SCHEDULE
II
 
 Balance
      at
                                          
                                          
                                          Charged
      to
                                          
                                          
                                          Reduction
      to
                                          
                                          
                                          Credited
      to
                                          
                                          
                                          Balance
      atBeginning
      of
                                          
                                          
                                          Costs
      and
                                          
                                          
                                          for
      Write off
                                          
                                          
                                          Costs
      and
                                          
                                          
                                          End
      ofDescription
                                          Period
                                          
                                          
                                          Expenses
                                          
                                          
                                          
                                          
                                          
                                          Expenses
                                          
                                          
                                          PeriodYear
      ended March 31, 2009Reserves
      deducted from assets to which they apply:Allowance
      for doubtful accounts
                                          
                                          $
                                          120,899
                                          
                                          
                                          $
                                          197,178
                                          
                                          
                                          $
                                          (71,068
                                          )
                                          
                                          $
                                          13,961
                                          
                                          
                                          $
                                          260,970Deferred
      tax valuation allowance
                                          
                                          $
                                          2,477,202
                                          
                                          
                                          $
                                          689,390
                                          
                                          
                                          $
                                          (36,652
                                          )
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          3,129,940Inventory
      reserve
                                          
                                          $
                                          497,984
                                          
                                          
                                          $
                                          700,709
                                          
                                          
                                          $
                                          (316,734
                                          )
                                          
                                          $
                                          (136,571
                                          )
                                          
                                          $
                                          745,388Year
      ended March 31, 2008Reserves
      deducted from assets to which they apply:Allowance
      for doubtful accounts
                                          
                                          $
                                          61,824
                                          
                                          
                                          $
                                          112,390
                                          
                                          
                                          $
                                          (53,315
                                          )
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          120,899Deferred
      tax valuation allowance
                                          
                                          $
                                          2,671,264
                                          
                                          
                                          $
                                          123,910
                                          
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          (317,972
                                          )
                                          
                                          $
                                          2,477,202Inventory
      reserve
                                          
                                          $
                                          198,848
                                          
                                          
                                          $
                                          382,048
                                          
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          (82,911
                                          )
                                          
                                          $
                                          497,984Year
      ended March 31, 2007Reserves
      deducted from assets to which they apply:Allowance
      for doubtful accounts
                                          
                                          $
                                          103,615
                                          
                                          
                                          $
                                          40,082
                                          
                                          
                                          $
                                          (26,973
                                          )
                                          
                                          $
                                          (54,900
                                          )
                                          
                                          $
                                          61,824Deferred
      tax valuation allowance
                                          
                                          $
                                          6,374,053
                                          
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          (3,702,789
                                          )
                                          
                                          $
                                          2,671,264Inventory
      reserve
                                          
                                          $
                                          1,096,123
                                          
                                          
                                          $
                                          121,969
                                          
                                          
                                          $
                                          (747,505
                                          )
                                          
                                          $
                                          (271,739
                                          )
                                          
                                          $
                                          198,848
  F-20