SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                   FORM 10-KSB

(MARK ONE)

[X]      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES 
         EXCHANGE ACT OF 1934 [FEE REQUIRED]
         For the fiscal year ended MARCH 31, 1997

                                       OR

[ ]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
         For the transition period from  _______________ to _______________

                         Commission File Number: 0-24968

                        THE SINGING MACHINE COMPANY, INC.
                (Name of Registrant as specified in its charter)

             DELAWARE                                    95-3795478
             --------                                    ----------
   (State or Other Jurisdiction             (I.R.S. Employer Identification No.)
  Incorporation or Organization)

  3101 N.W. 25TH AVENUE, POMPANO BEACH, FL                 33069
  ----------------------------------------                 -----
  (Address of principal executive offices)              (Zip Code)
Registrant's telephone number: 954-968-8006

Securities registered pursuant to Section 12(b) of the Act:

                                                NAME OF EACH EXCHANGE ON
         TITLE OF EACH CLASS                         WHICH REGISTERED
         -------------------                    ------------------------
         Common Stock
         Par Value $.01 per share                  OTC Bulletin Board
         Common Stock Purchase Warrant             OTC Bulletin Board

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

Check 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 [ ]          No [X]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B 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-KSB or any amendment to
this Form 10-KSB. [X]

State issuer's revenues for its most recent fiscal year:     $10,674,879

<PAGE>



                   AGGREGATE MARKET VALUE OF THE VOTING STOCK
                     HELD BY NONAFFILIATES OF THE REGISTRANT

As of March 31, 1997, 2,883,582 shares of Common Stock, par value $.01 per share
("Common Stock"), of the Registrant were outstanding. Based on the average of
the closing bid and asked prices of the Common Stock on the OTC Bulletin Board
("OTC") as of March 31, 1997 ($0.0625), the aggregate market value of the
1,859,083 shares of the Common Stock held by persons other than officers,
directors and persons known to the Registrant to be the beneficial owner (as
that term is defined under the rules of the Securities and Exchange Commission)
of more than five percent of the Common Stock on that date was approximately
$116,000. By the foregoing statements, the Registrant does not intend to imply
that any of these officers, directors or beneficial owners are affiliates of the
Registrant or that the aggregate market value, as computed pursuant to rules of
the Securities and Exchange Commission, is in any way indicative of the amount
which could be obtained for such shares of Common Stock.

             APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
                  PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

Indicate by check mark whether the Registrant has filed all documents and
reports required to be filed by Section 12, 13 or 14(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.

Yes [ ]   No [X]

                   (APPLICABLE ONLY TO CORPORATE REGISTRANTS)

State the number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date:

                2,883,582 shares of Common Stock, par value $.01
                per share, were outstanding as of March 31, 1997

                       DOCUMENTS INCORPORATED BY REFERENCE

                  Exhibits contained in Registration Statement
                   on Form SB-2 (Registration No. 33-81974-A)
                    filed by the Registrant on July 27, 1994.
                       Form 10-KSB filed on June 28, 1995.
                     Form 10-QSB filed on November 13, 1995.
                      Forms 8-K filed on December 4, 1995,
                       February 23, 1996, and May 6, 1997.

                                       ii

<PAGE>

                                TABLE OF CONTENTS

                                                                            PAGE
                                                                            ----
                                     Part I

Item  1.    Business......................................................... 1

Item  2.    Properties.......................................................12

Item  3.    Legal Proceedings................................................13

Item  4.    Submission of Matters to a Vote of Security Holders..............14

                                     Part II

Item  5.    Market for Registrant's Common Equity and Related
              Stockholder Matters............................................14

Item  6.    Management's Discussion and Analysis of Financial Condition
              and Results of Operations......................................15

Item  7.    Financial Statements and Supplementary Data......................27

Item  8.    Changes in and disagreements with Accountants on Accounting 
              and Financial Disclosure.......................................28

                                    Part III

Item  9.    Directors and Executive Officers of the Registrant...............28

Item 10.    Executive Compensation...........................................31

Item 11.    Security Ownership of Certain Beneficial Owners and Management...34

Item 12.    Certain Relationships and Related Transactions...................35

Item 13.    Exhibits and Reports on Form 8-K.................................37

            Signatures.......................................................40

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

                                       iii

<PAGE>

                                     PART I

Item 1.  BUSINESS

GENERAL

The Singing Machine Company, Inc. (the "Company") is engaged in the distribution
and marketing of electronic KARAOKE audio equipment which plays backing tracks
(music without lyrics) of popular songs and records the vocal accompaniment of
professional and amateur singers to those backing tracks. The Company contracts
for the manufacture of all of its electronic equipment products with
manufacturers located in the Far East. The Company also produces and markets
KARAOKE audio software, including CDS, CD and graphics, video tapes and audio
tapes, containing music and lyrics of popular songs for use with KARAOKE
recording equipment. One track of those tapes offers complete music and vocals
for practice and the other track is instrumental only for performance by the
participant. Virtually all audio software sold by the Company is accompanied by
printed lyrics and the Company's KARAOKE video tapes contain lyrics which appear
on the video screen. The Company contracts for the reproduction of its audio
software, which is produced by the Company or by an exclusive independent
producer.

The Company currently has a product line of 11 different models of recording and
playback units incorporating such features as a dual cassette player, graphic
equalizer and high-output stereo amplifier and markets certain of its units
under the popular national brand Memorex(TM) as well as its registered trademark
THE SINGING MACHINE(R). In addition, the Company believes that it has one of the
larger backing track libraries of music in the KARAOKE industry consisting of
over 2,000 songs.

The Company sells audio software under the trademarks KARAOKE KASSETTE(TM),
KARAOKE KOMPACT DISC(TM) and KARAOKE VIDEO KASSETTE(TM) and KARAOKE recording
and playback units under its registered trademark THE SINGING MACHINE(R). The
Company also licenses its trademark, on a non-exclusive basis, to others for
sales around the world. The Company believes that it is one of several companies
in the KARAOKE industry in the United States which sells both hardware and
software.

BACKGROUND AND FORMATION OF THE COMPANY

The KARAOKE industry began in Japan in the 1970s. In Japanese society,
entertaining is not typically conducted in individual homes, but rather in
restaurants and nightclubs. KARAOKE, which translated literally means "empty
orchestra", is a concept that allows participants to sing words to soundtracks
of popular songs, reading lyrics from video monitors or scripts. The concept is
identical to that employed in the "follow the bouncing ball" segment of the
"Sing Along with Mitch" television program from the 1960s. The instrumental
music, or backing track, is provided by pre-recorded soundtracks on CDs or audio
or video tapes. In Japan, KARAOKE clubs and public establishments became popular
vehicles for social occasions and business entertainment.

The Company was incorporated in California in 1982. The Company originally sold
its products exclusively to professional and semi-professional singers. In 1988,
it began marketing KARAOKE equipment for home use. The Company believes it was
the first to offer KARAOKE electronic recording equipment and audio software for
home use in the United States.

In February 1990 all of the outstanding Common Stock was purchased by Magna
International, Inc. ("Magna"). In March 1990, the Company relocated its offices
from California to South, Florida. In September 1991, Messrs. Paul Wu, Eugene B.
Settler and Edward Steele purchased an option from Magna for 100% of the
Company's then outstanding Common Stock, which option was exercised in May 1994,
by Messrs. Settler

                                        1

<PAGE>



and Steele and, Mr. Wu's designees. In September 1992, Magna and an affiliate
thereof agreed to exchange $816,574 of debt owed by the Company to Magna and an
affiliate thereof for additional shares of the Company's Common Stock (the
"Additional Shares"). That agreement, as amended, gave Magna the right to
require the Company to repurchase the Additional Shares, on December 31, 1996,
for $816,574 plus interest at 8% per annum from September 30, 1994. On November
10, 1994 Magna exchanged the Additional Shares for the Company's promissory note
(the "Magna Note") in the amount of $816,574. In addition, in May 1994, the
Company was merged into a wholly-owned subsidiary of the Company incorporated in
Delaware with the same name. As a result of that merger, the Delaware
corporation became the successor to the business and operations of the
California corporation and retained the name The Singing Machine Company, Inc.

REORGANIZATION

In November and December, 1996, the Company made two payments of $20,000 each to
a former employee ("Judgement Creditor") who obtained a judgement in the amount
of $248,000 against the Company for wrongful termination. These payments
adversely affected the Company's cash flow. This decrease in cash flow was
compounded by the fact that sales of hardware and software during the fourth
quarter of fiscal 1997 were well below projections. The low sales of software
were especially problematic because the Company carried, and continues to carry,
a gross oversupply of software inventory which has severely impacted liquidity.

To complicate matters further, the Company was advised by Montgomery Ward, a
major customer, that the Company had to accept returns of approximately
$270,000, representing almost fifty percent of what had been shipped and
invoiced to this customer during the selling season of fiscal 1997. This
severely impacted the Company's cash flow, which combined with low sales volume
prompted the Company's factor to stop advancing funds in order to cover the
factors' shortfall on the Montgomery Ward receivables.

Additionally, due to this cash flow crisis, the Company defaulted on its monthly
rent payment, which resulted in a default notice and the threat of eviction. The
Company also defaulted on the quarterly royalty payments due, as well as
payments due the Harry Fox Agency, the Company's primary copyright royalty
creditor, per a prior agreement. This resulted in a demand letter and the threat
to cancel the Company's music licensing agreements which would endanger the
Company's ability to continue operations.

The garnishment of the Company's factor and bank accounts by the Judgement
Creditor, and the resultant institution of legal suits by other creditors
prompted the Company to commence a reorganization case by filing a voluntary
petition ("Petition") for relief under Chapter 11 of the Bankruptcy Code
("Bankruptcy Code") with the United States Bankruptcy Court for the Southern
District of Florida ("Bankruptcy Court") on April 11, 1997 ("Petition Date").

As a result of filing the Petition, the Company is prohibited from paying any
pre-petition liabilities and is currently in default under all of its funded
debt agreements in effect prior to the Petition Date. As a result, all unpaid
principal of, and accrued pre-petition interest on, such debt became immediately
due and payable. In accordance with the Bankruptcy Code, the Company can seek
Bankruptcy Court approval for the rejection of any executory contracts or
unexpired leases, including real property leases. Any such rejection may give
rise to a pre-petition unsecured claim for damage.

The ability of the Company to effect a successful reorganization under Chapter
11 of the Bankruptcy Code will depend, in significant part, upon the Company's
ability to formulate a Reorganization Plan ("Plan") that is approved by the
Bankruptcy Court and meets the standards for plan confirmation under the
Bankruptcy Code. In a Chapter 11 reorganization plan, the rights of the
Company's creditors and stockholders may be substantially altered. Creditors may
realize substantially less than the full amount of their claim. Equity

                                        2
<PAGE>

interests of the Company's stockholders may be diluted or even canceled.
Investment in any security of the Company, therefore should be regarded as
highly speculative.

The Company has entered into discussions with its secured and significant
unsecured creditors concerning the Company's Plan. In addition the Company has
taken actions in the Bankruptcy Court to facilitate its reorganization,
including (i) filing a Disclosure Statement ("Disclosure Statement") including
schedules of assets and liabilities and a statement of financial affairs and
amendments thereto as required, (ii) filing a motion requesting a bar date for
filing proofs of claims against the Company, and (iii) filing a Plan and
amendments as required.

On December 17, 1997, the Bankruptcy Court approved the Company's amended
Disclosure Statement. This Disclosure Statement and amended Plan has been filed
and has been mailed together with ballots to the Company's pre-petition
shareholders and creditors on January 5, 1998. The Company anticipates emerging
from Chapter 11 after Bankruptcy Court approval, which is expected to occur at a
hearing scheduled for February 26, 1998.

SIGNIFICANT POST-PETITION EVENTS

Since the Chapter 11 filing, the Company has made considerable positive
advancements. The Company has moved into much smaller corporate offices and
warehousing operations with an emphasis on reduction of inventory. Total
combined operating space was reduced from 29,000 to 10,000 square feet, thereby
reducing rental facility expenses by $12,000 per month, and the Company's staff
has been reduced to the minimum needed to continue to operate efficiently. The
Company has also arranged with Dero Research, Ltd. in Hong Kong, of which a
former director of the Company is a principal stockholder, letter of credit
financing up to $200,000 for purchases of new inventory as well as an
arrangement with Asiatech 52 Manufacturing Ltd. ("A-Tech") in Hong Kong for 90
day document of acceptance ("DA") financing up to $200,000.

With regard to the retention of the Company's customer base, the major accounts,
Target, J.C. Penney, Fingerhut and FAO Schwarz have continued to purchase
products from the Company. In addition, the Company began a new customer
relationship with Best Buy, which had shipments exceeding $1,000,000 during the
fiscal 1998 selling season. The Company did loose some catalog house business
including Sears and Service Merchandise, but is confident this business will be
regained upon emergence from Chapter 11.

The Company filed a motion with the Bankruptcy Court, which is currently
pending, to approve an agreement, entered into on December 16, 1997, regarding
the treatment of the Harry Fox Agency in the Plan. The Harry Fox Agency, Inc.,
("HFA"), is the Company's principal copyright royalty creditor to whom the
Company owes approximately $820,000, which is governed by the terms of a prior
settlement agreement and collateralized by the Company's master song recordings.
In the agreement, HFA agreed to amend its proof of claim and to reflect this
$820,000 as general unsecured debt and further, to elect to accept issuance of
shares of the reorganized Company on the following basis: for each $2.00 of
debt, HFA will receive one share of common stock or approximately 410,000
shares.

On February 9, 1998, the Bankruptcy Court granted the Company's motion to
approve a settlement agreement entered into on December 24, 1997, between the
Company and Eugene Settler ("Settler"), a shareholder as well as former officer
and director of the Company. Prior to this settlement agreement, there was
pending in the Bankruptcy Court an adversary proceeding brought by the Company
against Settler, for recovery of certain alleged preferential transfers arising
from certain payments made to Settler as a result of legal proceedings brought
by Settler against the Company for wrongful termination. The parties mediated
the dispute and reached a settlement which resolves the adversary proceeding,
certain alleged claims by Settler against the

                                        3

<PAGE>

Company and others, and provides for an exchange of releases amongst all
parties. Under the terms of the agreement, Settler also resigned as a director
of the Company and assigned all of his stock certificates and options to the
Company. This settlement did not require the payment of any funds by the Company
other than a portion of mediation costs incurred.

CONFIRMATION

The Bankruptcy Court has set a hearing to consider confirmation of the Plan for
February 26, 1998. The significant elements of the Plan include (i) additional
estimated administrative costs of $100,000 for the Company's bankruptcy counsel,
(ii) the secured claim by Bankers Capital, the Company's factor, of $124,000
shall be paid according to the terms of its contract with the company, which is
current, (iii) general unsecured creditors whose claims are equal to or less
than $300 shall receive a cash payment of 15% of the amount of their allowed
claim, and (iv) general unsecured creditors whose claims exceed $300 shall be
given the option of receiving a cash payment of 10% of the amount of their
allowed claim or receiving one share of new common stock in the reorganized
company for each $2.00 of an allowed claim. Any cash payments to unsecured
creditors would be paid in two equal installments, ten days after the Plan is
confirmed and six months thereafter. Holders of existing common shares of the
Company, equity interest holders, will have their interest diluted by ninety
percent (90%) at confirmation under the Plan, so that for each ten shares of
common stock owned they will receive one share of new common stock in the
reorganized company.

Although the Company anticipates that the Plan will be confirmed by the
Bankruptcy Court, there can be no assurance that it will be. If the Company is
unable to obtain confirmation of a plan of reorganization, its creditors or
equity holders could seek other alternatives for the Company including bids for
the Company or parts thereof through an auction process. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Legal Proceedings".

STRATEGY

Currently the Company is focusing on its audio equipment operations with the
intention of increasing cash flow, improving operating efficiency, increasing
internal growth and returning to profitability. The Company's intent is to
obtain additional market share through an emphasis on the affordability,
selection and quality of its products.

The Company is also focusing greater sales efforts on mass market retailers,
such as Target and Montgomery Ward, which the Company believes have greater
potential for increased software sales. The Company has historically sold its
software products predominately to chain music stores and music distributors and
believes that the potential in this market has decreased. In order to reduce
expenses, management has limited the development of new products for both audio
equipment and audio software. There can be no assurance that the Company will be
able to successfully implement its strategy.

                                        4

<PAGE>

PRODUCTS

The following table sets forth the approximate amounts and percentages of the
Company's net revenues by product type during the periods shown, excluding
certain ancillary revenues.

<TABLE>
<CAPTION>
                                                         YEAR ENDED MARCH 31,
                  ----------------------------------------------------------------------------------------------
                           1997                    1996                     1995                   1994
                  --------------------   ----------------------    ---------------------  ----------------------
                     NET      PERCENT       NET        PERCENT        NET       PERCENT      NET        PERCENT
                   REVENUES   OF TOTAL    REVENUES     OF TOTAL     REVENUES    OF TOTAL   REVENUES     OF TOTAL
                  ----------  --------   ----------    --------    ----------   --------  ----------    --------
<S>               <C>          <C>       <C>             <C>       <C>           <C>      <C>             <C>

Audio software    $1,610,594   15.2%     $1,255,932      24.9%     $3,258,312    56.4%    $5,414,215      63.3%

Audio equipment    8,953,462   84.8%      3,795,447      75.1%      2,520,194    43.6%     3,133,508      36.7%
</TABLE>

The Company currently offers 11 different models of electronic recording and
playback equipment with retail prices ranging from $30 for basic units to $300
for semi-professional units with CD and graphics player sound enhancement,
graphic equalizers, tape record/playback features and multiple inputs and
outputs for connection to compact disc players and video cassette recorders.

The Company currently offers its audio software in four formats - multiplex
cassettes, CDS, CD and graphics, and video cassette tapes with retail prices
ranging from $3.99 to $14.98. The Company purchases recordings from an
independent producer, and currently has a song library of over 2,000 songs. The
Company's backing track product line covers the entire range of musical tastes
including popular hits, golden oldies, country, standards, rock and roll and
rap. The Company even has backing tracks for opera and certain foreign language
recordings.

NEW PRODUCT DEVELOPMENT

Management believes that the enhancement and extension of the Company's existing
products and the selective development of new product lines are important to the
Company's continued growth. The Company combines the style and content of its
products to meet customer requirements for quality, product mix and pricing.
Company employees work closely with both retailers and suppliers to identify
trends in consumer preferences and to generate new product ideas. The Company's
employees evaluate new ideas and seek to develop new products and improvements
to existing products to satisfy industry requirements and changing consumer
preferences.

During the fiscal year ended March 31, 1997, the Company introduced four new
models of recording equipment, and approximately 100 new song titles and 100 new
compilations of existing titles.

SALES, MARKETING AND DISTRIBUTION

The Company distributes its products to retailers and wholesale distributors
through two methods: domestic sales, i.e., shipment of products from the
Company's inventory; and direct sales, i.e., shipments directly from the
Company's Hong Kong subsidiary or manufacturers in the Far East, of products
sold by the Company's sales force. Domestic sales, which account for
substantially all of the Company's audio software sales, are made to customers
located throughout the United States from the Company's inventories maintained
at its warehouse facility in Florida, and a warehouse in California, or directly
from U.S. software manufacturers.

                                        5

<PAGE>

DOMESTIC SALES. The Company's strategy of selling products from a domestic
warehouse enables it to provide timely delivery and serve as a "domestic
supplier of imported goods". The Company purchases electronic recording products
overseas for its own account and warehouses the products in a leased facility in
Florida and a warehouse in California. The Company is responsible for costs of
shipping, insurance, customs clearance and duties, storage and distribution
related to such warehouse products and therefore, warehouse sales command higher
sales prices than direct sales. The Company generally sells from its own
inventory in less than container-sized lots to customers. For each of the fiscal
years ended March 31, 1996 and 1997 domestic sales accounted for approximately
73% and 46%, respectively, of the Company's revenues. This decrease is
attributable to the formation of a new international subsidiary early in fiscal
1996 and the full impact a change in the method by which the Company accounts
for foreign sales. Previously, the Company, through related party transactions,
recorded commissions earned on foreign shipments. See Item 6 "Management's
Discussion and Analysis of Financial Condition and Results of Operations".

DIRECT SALES. The formation of a new subsidiary early in 1996, International SMC
(HK) Ltd. ("International") is attributable for the advent of foreign equipment
sales in fiscal years 1996 and 1997, which accounted for 24% and 53%
respectively, of total revenues. Some products sold by the Company are shipped
directly to its customers from the Far East through either International or The
SMC Singing Machine Company, Ltd., a Hong Kong trading company ("LTD"). Paul Wu,
a director of the Company and a director of a principal stockholder of the
Company, is the Chairman of the Board of LTD. Sales made through International
or LTD are completed by either delivering products to the customers' common
carriers at the shipping point or by shipping the products to customers'
distribution centers, warehouses or stores. Direct sales are made in large
quantities (generally container-sized lots) to customers located in Canada and
the United States, who pay International or LTD pursuant to their own
international, irrevocable, transferable letters of credit or on open credit
with the Company's suppliers in the Far East. Pursuant to an agreement with LTD,
the Company receives 50% of LTD's net profits as commissions, for all direct
sales originated by the Company. For the fiscal years ended March 31, 1996 and
1997, approximately 2.5% and 0.8% respectively, of the Company's revenues were
attributable to commissions from LTD. See Item 6 - "Management's Discussion and
Analysis of Financial Condition and Results of operations".

The Company relies on its Management's ability to determine the existence and
extent of available markets for its products. Company Management has
considerable marketing and sales backgrounds and devotes a significant portion
of its time to marketing-related activities. The Company achieves both domestic
and direct sales, and markets its hardware and software products, primarily
through its own sales force and approximately 25 independent sales
representatives. The Company's representatives are located in various states and
are paid a commission based upon sales in their respective territories. The
Company's sales representative agreements are generally one year agreements
which automatically renew on an annual basis, unless terminated by either party
on 90 day's notice. The Company works closely with its major customers to
determine marketing and advertising plans.

The Company also markets its products at various national and international
trade shows each year. The Company regularly attends the following trade shows
and conventions: CES ("Consumer Electronics Show") each January in Las Vegas;
Hong Kong Electronics Show each October in Hong Kong; and the American Toy Fair
each February in New York.

The Company's electronic recording products are marketed under THE SINGING
MACHINE(R) or Memorex(TM) trademarks, and its audio software is marketed under
the KARAOKE Kassette(TM), KARAOKE Kompact Disc(TM) and KARAOKE Video
Kassette(TM) trademarks, throughout the United States primarily through
department stores, lifestyle merchants, mass merchandisers, direct mail catalogs
and showrooms, music and record stores, national chains, specialty stores and
warehouse clubs. The Company's KARAOKE machines are currently sold in such

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<PAGE>

stores as Target, Toys R Us, J.C. Penney, Fingerhut, Best Buy, and Wal-Mart. In
addition, the Company's KARAOKE software customers include J.C. Penney,
Fingerhut, Target, Best Buy, and Musicland.

As a percentage of total revenues, the Company's net sales in the aggregate to
its five largest customers during the fiscal years ended March 31, 1996 and
1997, were approximately 63% and 79%, respectively. For the fiscal 1996 period
J.C. Penney accounted for 18%, Montgomery Ward 16%, Fingerhut 12%, and Target
10% of total revenues for such period. For the fiscal 1997 period Target
accounted for 47% and J.C. Penney 13%.

Although the Company has long-established relationships with many of its
customers, it does not have long-term contractual arrangements with any of them.
A decrease in business from any of its major customers could have a material
adverse effect on the Company's results of operations and financial condition.

The Company manages credit policies with respect to its customer base. The
Company has not suffered significant credit losses to date, even during a period
when many major retailers, including customers of the Company, experienced
significant difficulties, including filing for protection under federal
bankruptcy laws. In the cases where a customer of the Company has filed for
protection under federal bankruptcy laws, it has not had a significant impact on
the Company's revenues or other categories of financial performance.

RETURNS

Returns of electronic hardware products by the Company's customers are generally
not permitted except in approved situations involving quality defects, damaged
goods or goods shipped in error or in an untimely manner. Returned hardware
products are placed in inventory by the Company for future sale and, if
necessary, refurbished. The practice in the prerecorded music industry is to
permit retailers to return or exchange audio software merchandise. In general,
the policy of the Company is to give credit to its distributors for audio
software returned in conjunction with the receipt of new replacement purchase
orders. Any such returns of software are available for resale by the Company.
Separate and apart from its copyright royalty reserves, the Company has
historically established return reserves of from approximately 15% to 22% of
total sales for financial statement reporting purposes. Such reserves also
include reserves for returns resulting from direct sales by LTD. The Company
believes such reserves are consistent with industry standards.

IMPORTING

The Company presently purchases and imports virtually all of its electronic
recording products from four suppliers located in the People's Republic of
China. In fiscal 1996 and 1997, suppliers in the People's Republic of China
accounted for in excess of 70% of the Company's total product purchases,
including virtually all of the Company's hardware purchases. The Company's
primary suppliers of electronic recording products are located in the Shenzen
province of the People's Republic of China.

While the Company purchases its products from a small number of large suppliers
with whom it maintains close alliances, there are numerous other suppliers from
which the same products could be purchased. The Company provides key suppliers
with design and quality specifications. In return for ongoing business which the
Company provides these suppliers, such suppliers maintain production capacity
for the Company's production needs. To ensure its high standards of product
quality and that shipping schedules are met by suppliers, the Company utilizes
Hong Kong based agents as representatives. Those agents include product
inspectors who are knowledgeable about the Company's product specifications and
work closely with the suppliers to verify that such specifications are met.
Additionally, key officers of the Company frequently visit suppliers for quality
assurance and to support good working relationships.

                                        7

<PAGE>

On October 27, 1995, the Company entered into an agreement with Memcorp, Inc.
("Memcorp"), a Florida corporation holding rights to "Memorex", a registered
trademark name. The agreement is a five year exclusive arrangement, whereby the
Company became the exclusive sub-distributor of KARAOKE hardware products under
the "Memorex" trademark ("Memcorp Sub-distributor Agreement"). The
sub-distributor agreement requires the Company to pay a commission fee on all
hardware sales utilizing the brand name during the term of the agreement. In
addition to the sub-distributor agreement, the "Memcorp Administrative
Agreement" provides the Company administrative assistance and the use of office
and warehouse space in Asia as may be required for the purchase, distribution
and sale of products. The Company pays Memcorp a commission fee on all shipped
products for these services.

As part of the consideration for the sub-distributor and administrative
agreements, the Company granted Memcorp an option (the "Memcorp Option"),
exercisable until October 26, 1996, to purchase one million (1,000,000) shares
of the Company's common stock at a price of one dollar ($1) per share. Memcorp
was granted certain registration rights for one year with respect to the shares
underlying the option. This option has now expired unexercised.

In the spring of 1997, the President of the United States renewed the People's
Republic of China's "Most Favored Nation" ("MFN") treatment for the entry of
goods into the United States for an additional year. In the context of United
States tariff legislation, MFN treatment means that products are subject to
favorable duty rates upon entry into the United States. If MFN status for China
is restricted or revoked in the future, the Company's cost of goods purchased
from Chinese vendors is likely to increase. A resultant change in suppliers
would likely have an adverse effect on the Company's operations, and possibly,
earnings. Although Management believes such adversity would be short-term as a
result of its ability to find alternative suppliers, it is unlikely that any
such suppliers would offer the same preferred financing terms that are currently
offered by FLX (HK) Ltd., a Hong Kong corporation ("FLX"). Management continues
to closely monitor the situation and has determined that the production
capabilities in countries outside China which have MFN status, and, therefore
have favorable duty rates, would meet the Company's production needs.

MANUFACTURING AND PRODUCTION

The electronic recording devices sold by the Company are manufactured and
assembled by third parties pursuant to design specifications provided by the
Company. The Company's electronic recording devices are assembled by four
factories in the People's Republic of China. See "Notes to Financial Statements
- No. 7, Related Party Transactions". The finished products are packaged and
labeled under either the Company's registered trademark, THE SINGING MACHINE(R),
the Memorex(TM) brand name, or under a customer's private label, such as Radio
Shack.

The Company's products contain electronic components manufactured by other
companies such as Panasonic and Sony. Various subcontractors in the Far East
produce printed circuit boards and audio components in accordance with
specifications of the Company. The electronic components are installed in
cabinets manufactured by FLX and other manufacturers. Tools and dies used in the
production of certain models of the electronic audio equipment sold by the
Company are owned by LTD and may be used by LTD to manufacture other companies'
products. In March 1995, the Company purchased tools and dies for two new models
from LTD for $318,000, which were subsequently sold to International, primarily
in order to have the exclusive right to use such tools and dies.

                                        8

<PAGE>

All of the electronic components and raw materials used by the Company are
available from several sources of supply and the Company does not anticipate
that the loss of any single supplier would have a material long-term adverse
effect on its business, operations or financial condition.

The Company's audio software is produced by an independent producer. After the
selection of songs for inclusion in a particular collection, Company personnel
attempt to contact the publishers of the songs to obtain permission to re-record
the music and print the lyrics. Based on the original musical arrangement, the
independent producer retains singers and musicians to create a re-recording of
the original work. Songs are recorded once with both music and lyrics, to allow
the KARAOKE participant to hear an example of the songs performance, and once
without lyrics to provide a "backing track" to accompany the original singing of
the KARAOKE participant. Collections of such songs are then assembled on master
digital audio tapes. The master tapes are then sent to various subcontractors in
the United States and/or Hong Kong for duplication. The Company reproduces its
original master tapes in two formats: audio cassette tapes; and CD&G.

WARRANTIES

All of the electronic equipment sold by the Company is warranted against
manufacturing defects for a period of 90 days for labor and one year for parts.
All audio software sold by the Company is similarly warranted for a period of 30
days. During the fiscal years ended March 31, 1996 and 1997, warranty claims
have not been material to the Company's results of operations.

BACKLOG

At March 31, 1997, the Company had approximately $100,000, net of cancellations,
of unfilled customer orders. The amount of unfilled orders at any particular
time is affected by a number of factors, including scheduling of manufacturing
and shipping of products, which in some instances is dependent on the needs of
the customer.

COMPETITION

The Company's business is highly competitive. In addition, the Company competes
with all other existing forms of entertainment including, but not limited to,
motion pictures, video arcade games, home video games, theme parks, nightclubs,
television and prerecorded tapes, CDs and video cassettes. The Company's
financial position depends, among other things, on its ability to keep pace with
such changes and developments and to respond to the requirements of its
customers. Many of the Company's competitors have significantly greater
financial, marketing and operating resources and broader product lines than does
the Company. The Company's major electronic component competitors include: Grand
Prix; Casio; and NewTech. The Company's major audio software competitors are
Pocket Songs and Sound Choice.

The Company believes that competition in its markets is based primarily on
price, product performance, reputation, delivery times and customer support. The
Company believes that, due to its proprietary know-how, it has the ability to
develop and produce hardware and software on a cost-effective basis.

TRADEMARKS AND LICENSES

The Company has registered The Singing Machine(R) trademark in the United
States, Canada, Austria, Benelux, Germany, France and the United Kingdom. The
Company also utilizes the common law trademarks KARAOKE KASSETTE(TM), KARAOKE
KOMPACT DISC(TM) and KARAOKE VIDEO KASSETTE(TM) in connection with the sale of
its audio software.

                                        9

<PAGE>

The Company holds federal and international copyrights to substantially all of
the audio productions comprising its song library. However, since each of those
productions is a re-recording of an original work by others, the Company is
subject to both contractual and statutory licensing agreements with the
publishers who own or control the copyrights of the underlying musical
compositions and is obligated to pay royalties to the holders of such copyrights
for the original music and lyrics of all of the songs in its library that have
not passed into the public domain. Since most audio software distributed by the
Company is accompanied by printed lyrics, the Company is also subject to written
print royalty license agreements. The Company is currently a party to more than
13,000 different written copyright license agreements covering more than 30,000
separate copyright holders.

The Federal Copyright Act (the "Act") creates a compulsory statutory license for
all nondramatic musical works which have been distributed to the public in the
United States. Under the Act, with respect to each work included in an audio
software product distributed by the Company under a compulsory license, the
Company is required to pay a royalty of the greater of $0.0697 per song or
$0.013 per minute of playing time or fraction thereof with respect to each item
of audio software produced and distributed by the Company (the "Statutory
Rate"). Royalties due under compulsory licenses are payable monthly. The Company
currently has compulsory statutory licenses for approximately 200 songs in its
song library.

The majority of the songs in the Company's song library are subject to written
copyright license agreements. The Company's written licensing agreements for
audio software ("mechanical licenses") typically provide for royalties at the
Statutory Rate although some provide for lower royalty rates. Written licenses
typically provide for quarterly royalty payments. The Company also has written
license agreements for substantially all of the printed lyrics which are
distributed with its audio software products ("print licenses"), which licenses
also typically provide for quarterly payments of royalties at the Statutory
Rate.

The Act allows a deferral of royalty payments for products sold subject to a
right of return. The practice in the recorded music industry is to permit
retailers to return or exchange merchandise. Accordingly, each audio production
sold by the Company is sold subject to a right of return for credit against
future purchases or exchange. Royalties are due with respect to such sales on
the earlier to occur of nine months after the date of distribution or the date
on which the revenue from the sale is recognized in accordance with generally
accepted accounting principles. The Company has reached agreement on a 25%
reserve with a music publisher representing over 22% of its print licenses,
which agreement requires the payment of deferred royalties no later than nine
months after the date of distribution. With regard to the other principal
copyright royalty holders, the Company has deferred, and intends to continue to
defer, approximately 25% of royalty payments for approximately nine months, an
amount and period which the Company believes is appropriate for the KARAOKE
industry.

In May 1994, the Company requested its principal copyright royalty creditor, the
Harry Fox Agency, Inc. ("HFA"), which represents the majority of copyright
holders for which the Company is obligated to pay royalties, to audit its
records for the period October 1991 through March 1994. On May 22, 1995, the
Company executed a settlement agreement (the "Settlement Agreement") with HFA,
with respect to all non-current royalty obligations and claims for the period
from October 1, 1991 through March 31, 1994 in the amount of $1,030,000. The
Company had accrued approximately $1.0 million in its financial statements for
royalty obligations to HFA, and on February 22, 1995, paid HFA $200,000 to be
applied against the settlement amount. The total amount of settlement payments
made during fiscal 1996 was $432,000, and the balance of approximately $400,000,
as of March 31, 1996, was anticipated to be paid in monthly installments,
through April 1997, of principal and interest at 8.0% per annum. After a period
of default, the Company entered into an amended payment agreement with HFA,
stipulating a lump sum payment to bring its account current and

                                       10

<PAGE>

monthly installments thereafter. As collateral security for the payment of its
obligations under the Settlement Agreement, the Company has granted HFA a
security interest in the Company's master sound recordings.

With the completion of its negotiations with HFA, the Company had entered
settlement agreements, totaling approximately $1.35 million, with creditors
representing a majority of its non-current copyright royalty obligations.
Pursuant to those settlement agreements, the Company intended to satisfy all
non-current royalty obligations with the creditors in question by October 1997.
As of March 31, 1997, the Company had paid approximately $925,000 pursuant to
those settlement agreements. An audit was performed by HFA for the period April
1, 1994 through March 31, 1996, and all royalties due were accrued. The balance
of pre-petition debt with HFA per the December 1997 agreement is approximately
$820,000, of which approximately one half represents pre-paid royalties on
inventory.

As a result of the Company's historical copyright royalty reserve practices, the
Company could be subject to various claims for damages under its written
copyright licensing agreements, the Act and common law (the "Claims"). In cases
of copyright infringement, the Act permits the copyright holder to elect to
recover either actual damages, and any additional profits of the infringer, or
statutory damages. Statutory damages under the Act range from $500 to $20,000
for each infringement, and the Act gives the federal courts complete authority
over the size of damage awards. In cases where the copyright owner sustains the
burden of proving, and the court finds, that infringement was committed
wilfully, the court in its discretion may increase the award of statutory
damages to a sum of not more than $100,000 per work infringed. In PEER
INTERNATIONAL CORPORATION V. PAUSA RECORDS, INC., 909 F.2d 1332 (9th Cir. 1990),
the Court of Appeals held that statutory damages are not available for a failure
to pay royalties under a private license agreement since such a failure is not
an act of infringement within the meaning of the Act. The Court in that case
suggested that the only remedy for a failure to pay royalties under a written
license agreement is a common law action to recover the unpaid amounts. However,
there can be no assurance that courts in other jurisdictions will adopt the
holding in Peer.

The Company's executive officer, Mr. Edward Steele, and former president and
member of the Board of Directors, Mr. Eugene Settler, had agreed to indemnify
the Company against certain claims arising out of the Company's compulsory,
statutory (i.e., non-written) licensing agreements (an "Indemnifiable Claim")
asserted with respect to the period from September 3, 1991 through November 10,
1994 by pledging all of their shares of Common Stock to the Company. In the
event of the assertion of such an Indemnifiable Claim, the Company may require
the return of shares of Common Stock to the Company with a market value
collectively equal to the Indemnifiable Claim. There can be no assurance,
however, that the Company would be able to sell or otherwise dispose of such
shares for cash or raise a sufficient amount from the sale of such shares in
order to satisfy the Indemnifiable Claim. In addition, the Company would
continue to bear all other costs and expenses incurred by, or assessed against,
the Company (including legal) associated with such an Indemnifiable Claim,
whether or not such Indemnifiable Claim is resolved in favor of the Company. The
Company has agreed to release certain shares of Common Stock from the provisions
of the pledge and indemnity agreement during the period beginning December 10,
1995, under certain circumstances based upon the performance of the Company. No
such shares have been released as of March 31, 1997. The pledge and indemnity
agreement would also terminate as to Messrs. Steele or Settler in the event of
their deaths, provided the Company then maintains life insurance of at least
$1,000,000 on each party. No such insurance is presently in place. Mr. Settler's
pledge and indemnification have been nullified by the settlement agreement to
which he and the Company are parties, which was approved by the Bankruptcy Court
in January 1998, effective September 17, 1997.

                                       11

<PAGE>

No Claims have been asserted against the Company to date with respect to
copyright infringement. The Company believes that the assertion of any such
Claims is remote, primarily as a result of its actual and proposed satisfaction
of all material past due royalty obligations and the payment agreements which
the Company has negotiated with its principal copyright royalty creditors.
However, there can be no assurance that such Claims will not be asserted or, if
asserted, that such Claims will not have material adverse effect on the
Company's financial position.

INFORMATION SYSTEMS

During fiscal 1996, in an effort to reduce overhead expenses, the Company
entered into an open-ended agreement with Memcorp, Inc., whereby the Company
physically transferred its mainframe computer system and associated software
licenses to Memcorp, Inc., an electronics distributor located in Hialeah,
Florida, at no cost to Memcorp in exchange for the Company's indefinite
continued use of such system. Via telephonic communications, the Company
maintains twenty four hour, seven day a week access to the system. Under the
terms of the agreement, Memcorp is responsible for all of the system's
operating, maintenance and licensing fees. The system provides current on-line
information to assist the Company in analyzing purchasing patterns which enables
it to better identify product demand. Sales information is maintained and
tracked by major product category and customer. The information system generates
analyses of individual products to support Management in analyzing sales trends
and price sensitivity.

EMPLOYEES

At March 31, 1997, the Company had 12 full-time employees, 5 of whom were
engaged in warehousing and technical support and 7 in marketing and
administrative functions. The total number of employees has been reduced from
the prior year's total through both layoffs and attrition, as management pursues
cost cutting measurers. As of this filing the staff has been further reduced to
the minimum needed to operate efficiently. During peak shipping periods,
temporary labor is hired, lessening permanent overhead and fringe benefits on an
ongoing basis. None of the employees is represented by a labor union. The
Company believes that its employee relations are adequate.

Item 2.  PROPERTIES

As of October 1995, the Company's United States distribution warehouse and
corporate offices were located in a 29,762 square foot facility in Pompano
Beach, Florida. The lease was for a 62-month term, with two three-year extension
options and provided for base rent, excluding common area maintenance, taxes and
insurance of approximately $138,000 during the first year with fixed increases
thereafter. As a result of the Chapter 11 filing this lease was rejected. The
Company acknowledges that as a result of the lease being rejected, this landlord
is entitled to a general unsecured claim of approximately $24,000.

On May 1, 1997 the Company entered into a lease for a 10,000 square foot office
and warehouse facility located in Pompano Beach for a term of 25 months.
Pursuant to the terms of the lease the Company must pay maintenance, insurance
and real estate taxes. This smaller facility reduces the Company's overhead
expenses by approximately $12,000 per month.

                                       12

<PAGE>

Item 3.  LEGAL PROCEEDINGS

The Company filed a voluntary petition ("Petition") for relief under Chapter 11
of the Bankruptcy Code ("Bankruptcy Code") with the United States Bankruptcy
Court for the Southern District of Florida ("Bankruptcy Court") on April 11,
1997 ("Petition Date"). The case was assigned #97-22199-BKC-RBR.

On December 17, 1997, the Bankruptcy Court approved the Company's amended
Disclosure Statement. This Disclosure Statement and amended Plan has been filed
and has been mailed together with ballots to the Company's pre-petition
shareholders and creditors on January 5, 1998. The Company anticipates emerging
from Chapter 11 after Bankruptcy Court approval, which is expected to occur at a
hearing scheduled for February 26, 1998.

Other than the Chapter 11 proceeding instituted on April 11, 1997, and the two
agreements described below, the Company is not a party to any material legal
proceeding, and does not anticipate instituting or being named a party to any
legal proceeding.

On February 9, 1998, the Bankruptcy Court granted the Company's motion to
approve a settlement agreement entered into on December 24, 1997, between the
Company and Eugene Settler ("Settler"), a shareholder as well as former officer
and director of the Company. Prior to this settlement agreement, there was
pending in the Bankruptcy Court an adversary proceeding brought by the Company
against Settler, for recovery of certain alleged preferential transfers arising
from certain payments made to Settler as a result of legal proceedings brought
by Settler against the Company for wrongful termination. The parties mediated
the dispute and reached a settlement which resolves the adversary proceeding,
certain alleged claims by Settler against the Company and others, and provides
for an exchange of releases amongst all parties. Under the terms of the
agreement, Settler also resigned as a director of the Company and assigned all
of his stock certificates and options to the Company. This settlement did not
require the payment of any funds by the Company other than a portion of
mediation costs incurred.

The Company filed a motion with the Bankruptcy Court, which is currently
pending, to approve an agreement, entered into on December 16, 1997, regarding
the treatment of the Harry Fox Agency in the Plan. The Harry Fox Agency, Inc.,
("HFA"), is the Company's principal copyright royalty creditor to whom the
Company owes approximately $820,000, which is governed by the terms of a prior
settlement agreement and collateralized by the Company's master song recordings.
In the agreement, HFA agreed to amend its proof of claim and to reflect this
$820,000 as general unsecured debt and further, to elect to accept issuance of
shares of the reorganized Company on the following basis: for each $2.00 of
debt, HFA will receive one share of common stock or approximately 410,000
shares.

The Bankruptcy Court has set a hearing to consider confirmation of the Plan for
February 26, 1998. The significant elements of the Plan include additional
estimated administrative costs of $100,000 for the Company's bankruptcy counsel,
the secured claim by Bankers Capital, the Company's factor, of $124,000 shall be
paid according to the terms of its contract with the company, which is current,
general unsecured creditors whose claims are equal to or less than $300 shall
receive a cash payment of 15% of the amount of their allowed claim, and general
unsecured creditors whose claims exceed $300 shall be given the option of
receiving a cash payment of 10% of the amount of their allowed claim or
receiving one share of new common stock in the reorganized company for each
$2.00 of an allowed claim. Any cash payments to unsecured creditors would be
paid in two equal installments ten days after the Plan is confirmed and six
months thereafter. Holders of existing common shares of the Company, equity
interest holders, will have their interest diluted by ninety percent (90%) at
confirmation under the Plan, so that for each ten shares of common stock owned
they will receive one share of new common stock in the reorganized company.

                                       13

<PAGE>

Although the Company anticipates that the Plan will be confirmed by the
Bankruptcy Court, there can be no assurance that it will be. If the Company is
unable to obtain confirmation of a plan of reorganization, its creditors or
equity holders could seek other alternatives for the Company including bids for
the Company or parts thereof through an auction process.

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

As part of the Company's Amended Plan of Reorganization approved by the
Bankruptcy Court on December 17, 1997, the equity security holders of the
Company are entitled to enter a ballot voting for acceptance or rejection of the
Plan. Holders of existing common shares of the Company will have their interest
diluted by ninety percent (90%) at confirmation under the Plan, so that for each
ten shares of common stock owned they will receive one share of new common stock
in the reorganized company.

The deadline for filing ballots accepting or rejecting the Plan is February 16,
1998.

                                     PART II

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

On November 17, 1995 the Company was informed by The Nasdaq Stock Market, Inc.,
that the Common Stock of the Company did not meet the minimum bid price of $1.00
per share, and that the Company's net tangible assets did not meet the minimum
requirement of $4,000,000. On January 25, 1996, pursuant to a January 19, 1996
hearing before a Nasdaq Hearing Panel, the Nasdaq Listings Qualifications
Committee ("Committee"), denied the Company's request for an exception to the
minimum bid price requirement. In addition the Committee indicated that the
Company did not meet the minimum quantitative criteria for inclusion on the
Nasdaq SmallCap Market. Accordingly, effective January 26, 1996, the Company's
securities were delisted from the Nasdaq Stock Market. However, the Company's
securities were immediately eligible to trade on the OTC Bulletin Board.

The Common Stock is currently traded on the OTC Bulletin Board under the symbol
"SING". The following table sets forth, for the fiscal periods indicated, the
high and low bid prices for the Common Stock on the Nasdaq National Market for
the periods prior to January 26, 1996, and the OTC Bulletin Board thereafter, as
adjusted for the fiscal fourth quarter 1995 20% Stock Dividend. The Company's
Common Stock commenced trading on November 10, 1994. Prior thereto, there was no
public market for the Company's Common Stock.

                                       14

<PAGE>

        Fiscal 1997                                          High      Low
        -------------------------------------------------   ------    ------
        First Quarter....................................   $0.250    $0.100
        Second Quarter...................................    0.100     0.100
        Third Quarter....................................    0.100     0.078
        Fourth Quarter ..................................    0.100     0.078
        -------------------------------------------------   ------    ------

        Fiscal 1996                                          High      Low
        -------------------------------------------------   ------    ------
        First Quarter....................................   $1.63      $1.50
        Second Quarter...................................    1.50       1.00
        Third Quarter....................................    1.03       0.75
        Fourth Quarter (through January 25,1996).........    0.78       0.50
        Fourth Quarter (from January 26,1996; OTC)(1)....    0.25       0.25

        Fiscal 1995                                          High      Low
        -------------------------------------------------   ------    ------
        Third Quarter (from November 10, 1994)...........   $4.48      $2.92
        Fourth Quarter ..................................    2.50       1.25
        ---------
        (1) Stock quoted on OTC as of January 26, 1996.

As of February 10, 1998, the last reported bid price of the Common Stock on the
OTC Bulletin Board was $0.13 per share. The number of record holders of the
Common Stock at February 10, 1998 was 157, although the Company believes that
the number of beneficial owners of such Common Stock is much greater.

As a result of being delisted from the Nasdaq National Market, stockholders may
find it more difficult to dispose of, or to obtain accurate quotations as to the
market value of, the Company's Common Stock.

The Company has never declared or paid cash dividends on its capital stock and
the Company's Board of Directors intends to continue this policy for the
foreseeable future. Earnings, if any, will be used to finance the development
and expansion of the Company's business. Future dividend policy will depend upon
the Company's earnings, capital requirements, financial condition and other
factors considered relevant by the Company's Board of Directors and will be
subject to limitations imposed under Delaware law and the agreement with the
representatives of the underwriters for the Company's initial public offering
(the "Representatives").

Item 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH, AND IS
QUALIFIED IN ITS ENTIRETY BY, THE FINANCIAL STATEMENTS AND SELECTED FINANCIAL
INFORMATION INCLUDED ELSEWHERE HEREIN. HISTORICAL RESULTS ARE NOT NECESSARILY
INDICATIVE OF TRENDS IN OPERATING RESULTS FOR ANY FUTURE PERIOD.

                                       15

<PAGE>

RESULTS OF OPERATIONS

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

                                                     YEAR ENDED MARCH 31
                                           ------------------------------------
                                           1997      1996       1995       1994
                                           ----      ----       ----       ----
Revenues:
  Equipment sales, net..................   83.9%     73.0%      41.9%      35.1%
  Music sales, net......................   15.1      24.2       54.2       60.5
  Commission income - related party
    and other...........................    1.0       2.8        3.9        4.4

Total revenues                            100.0%    100.0%     100.0%     100.0%

Cost of Sales (1):
  Cost of equipment sales...............   90.0%     89.6%      89.9%      77.6%
  Cost of music sales...................   67.3     110.8       72.5       52.8

Expenses:
  Other operating expenses..............    5.4      13.6        7.8        4.8
  Selling, general and administrative
    expenses............................   22.2      48.2       38.2       18.6
  Depreciation and amortization.........    3.7       4.4        2.1        0.5
  Impairment of long-lived assets.......   15.1       7.8        --         --

Operating income (loss).................  (32.1)    (66.2)     (25.1)      16.9
Other expenses, net ....................   (4.2)     (7.9)     (12.1)       7.6
Income (loss) before taxes..............  (36.3)    (74.1)     (37.2)       9.2
Provision (benefit) for income taxes....    --        --        (5.7)       2.0
Income (loss)...........................  (36.3)    (74.1)     (31.5)       7.2
----------
(1) Expressed as a percentage of related sales.

GENERAL

The Company is currently operating under Chapter 11 of the Bankruptcy Code as a
result of its filing for protection on April 11, 1997, and is awaiting a hearing
on confirmation of its Plan of reorganization set for February 26, 1998. For
fiscal 1997 and fiscal 1996, the Company's total revenues were approximately
$10.7 million and $5.2 million, respectively. Although total revenues more than
doubled in fiscal 1997, the Company had a net loss of approximately $3.9 million
which equaled its net loss in fiscal 1996. As a result of historical losses, a
net working capital deficiency and lack of financing, the Company's auditors
expressed substantial doubt about the Company's ability to continue as a going
concern based on their audit of the Company's financial statements for the
fiscal year ended March 31, 1997. See "Results of Operations", "Liquidity and
Capital Resources", and "Going Concern".

                                       16

<PAGE>

THE YEAR ENDED MARCH 31, 1997
COMPARED TO YEAR ENDED MARCH 31, 1996.

Total revenues slightly more than doubled to $10.7 million for the fiscal year
ended March 31, 1997 compared to the $5.2 million reported for fiscal 1996. The
increase was primarily attributable to a sharp increase in equipment sales.

Revenues from equipment sales increased $5.2 million or 136% to approximately
$9.0 million during fiscal 1997 compared to approximately $3.8 million for
fiscal 1996. The increase reflects the impact of the Memorex trademark, a new
product mix featuring CD plus graphics players, a concerted sales effort by the
Company's management and a less competitive marketplace. The increase primarily
reflects higher foreign sales totaling approximately $5.6 million. The recording
of foreign equipment sales is attributable to sales made by the Company's
subsidiary, International SMC (HK) Ltd. ("International"), which began
operations in the first quarter of fiscal 1996, and represents 63% of equipment
sales and 53% of total revenues, for fiscal 1997. Previously, the Company,
through related party transactions, recorded commissions earned on foreign
shipments. Because of the additional costs related to importing goods and the
difficulty in obtaining inventory financing, management has decided to emphasize
direct sales from its Far East equipment suppliers via International as opposed
to domestic sales from inventory in the future.

Revenues from music sales increased by $355,000 or 28% to approximately $1.6
million in fiscal 1997 from the approximately $1.3 million recorded during
fiscal 1996. This apparent increase in music sales was due to significant
returns in the fourth quarter of fiscal 1996. Because of such returns and excess
inventory, management had decided to redirect music sales away from distributors
who historically have high merchandise return rates in favor of mass market
retailers. The primary impact from this change in strategy was reflected in
fiscal 1996, when music sales decreased $2.0 million from the fiscal 1995
period. Fundamentally in fiscal 1997, sales of the Company's eight song and four
song music formats declined which was partially offset by increases in sales of
the CD&G format.

Commission income decreased to approximately $90,000 during fiscal 1997 compared
to $130,000 during the prior year. The decrease of $40,000 was primarily due to
a decrease in commission income from a related party. The Company anticipates
commission income from a related party to continue to decline due to the
formation of International and the decision to conduct substantially all foreign
sales through such subsidiary.

Cost of equipment sales for the year ended March 31, 1997, expressed as a
percentage of related sales, was 90%, unchanged from fiscal 1996. Cost of
equipment sales included inventory write-downs of $529,000 and $371,000, for
years 1997 and 1996, respectively. The cost of music sales, expressed as a
percentage of music sales, decreased to 67% for the current year, from nearly
111% in fiscal 1996. Among other items, this decrease in the cost of music sales
reflects approximately $190,000 in adjustments to inventory values based on
changing market conditions during fiscal 1996.

Other operating expenses decreased approximately $130,000, or 18%, for fiscal
1997, compared to the prior year. The decrease reflects managements' efforts to
control operating expenses in light of a significant increase in equipment sales
and primarily reflects lower warehouse rent, occupancy costs, and warehouse
personnel expense, partially offset by higher cost of supplies.

Selling, general & administrative expenses ("SG&A expenses") decreased $135,000
or 5% for fiscal 1997 compared to fiscal 1996. This decrease was primarily due
to management's commitment to reduce total overhead in light of a substantial
increase in sales. Categories which decreased include salaries and benefits,

                                       17

<PAGE>

promotional expenses including catalog, advertising and show/convention costs,
product development, travel and entertainment, and insurance. These decreases
were partially offset by higher professional fees.

The Company continues to take action to reduce its SG&A expenses, which can be
seen in the above comparison, taking into consideration the increase in sales.
The Company believes that an additional impact of staff and other reductions
will be seen in fiscal 1998. Product development costs are being curtailed,
computer support expenses have been reduced, rigid restrictions have been placed
on overtime and travel, and discretionary expenditures are being carefully
reviewed and eliminated by management. In addition, the Company has entered into
a new lease and moved its headquarters, which has reduced overhead expenses by
approximately $12,000 per month.

Depreciation and amortization expense increased approximately $170,000 or 76% to
$400,000 during the fiscal year ended March 31, 1997. The increase was primarily
the result of accelerating the depreciation of tools and dies on the books of
International which are carried on its books at $318,000, and reducing the
estimated useful lives of certain intangible assets, trademark and cost in
excess of net assets (goodwill), as of April 1, 1996.

As a result of the significant decline in music sales during fiscal 1996 and
1997, the Company reviewed the carrying value of costs in excess of net assets
acquired (goodwill) and trademarks carried on its balance sheet. As a result of
this review the Company recorded a reduction in the carrying value of such
assets relating to music sales in the amount of $405,000 for fiscal 1996 and
$1,081,000 for fiscal 1997, which amounts were charged to operations. See "Notes
to Consolidated Financial Statements No. 1 - Organization and Summary of
Significant Accounting Policies".

A similar review was conducted on the carrying value of the Company's investment
in song library, which consists of costs incurred in the production or purchase
of master song tapes. Based upon the outcome of such review, the Company
recorded a reduction in the carrying value of such assets of $820,000, which was
charged to operations. See "Notes to Consolidated Financial Statements No. 1 -
Organization and Summary of Significant Accounting Policies".

The operating loss for fiscal 1997 was approximately $3.4 million which is equal
to the operating loss reported for fiscal 1996. As a percentage of total
revenues, the operating loss decreased to 32% for fiscal 1997 from 66% in the
prior year. Both periods' operating income included significant accounting
adjustments to long-lived assets and inventory, among others. Excluding these
adjustments the fiscal 1997 operating loss would have been $1.3 million. This
improvement from the prior year was related to a combination of factors
including the increase in total revenues, a change in sales mix, and decreases
in other operating and SG&A expenses. The ratio of higher gross margin music
sales to total revenues continued to decrease to 15% in fiscal 1997 from 24% the
prior year. Gross profit, expressed as a percentage of equipment sales improved
to 16% for fiscal 1997, but is still below management targets. Gross profit from
equipment sales increased approximately $1.0 million for the same period. This
increase was attributable to increased volume of approximately $4.4 million from
the Company's subsidiary, International, as well as the impact on both sales and
margins due to less competitive pressures. Gross profit from music sales was
approximately $526,000 or 33%, for the current year compared to a loss of
$136,000 or 10% of related sales for the prior fiscal year. The improvement in
gross profit from music sales was primarily because of management's change in
policy to reduce returned merchandise and the impact of inventory valuation
adjustments in the prior year.

Net interest expense was relatively unchanged from the prior year, the major
components being interest expense on the Magna Note and on the debt to HFA for
past due royalty obligations.

                                       18

<PAGE>

Loss on sales of accounts receivable was 2.2% and 4.8% of total revenues for the
fiscal years 1997 and 1996, respectively. The decrease of approximately $16,000
was primarily because of a decrease in fees charged by the Company's factor
combined with the fact that the majority of the increase in total revenues took
place at the Company's foreign subsidiary, which does not utilize the services
of the factor.

Net loss for fiscal 1997 was approximately $3.9 million, unchanged from the loss
of $3.9 million reported for fiscal year 1996. Although the loss for fiscal
1997, excluding accounting adjustments of $2.1 million, was significantly lower
than the prior year, and management has made great strides in reducing overhead,
the primary reason for both periods losses is the inability to obtain sufficient
gross margins on hardware sales to cover overhead and debt payments combined
with decreased levels of high margin music sales. Although projections can be
overly optimistic and purchase orders can be canceled, management believes that
the reduction of debt which will be accomplished upon confirmation of the Plan,
in conjunction with the accounting adjustments to inventory and the carrying
value of intangible assets, as well as the significant reductions in cost
structures, will position the Company for profitability in fiscal 1998.

THE YEAR ENDED MARCH 31, 1996
COMPARED TO YEAR ENDED MARCH 31, 1995 (THE "FISCAL 1995 PERIOD").

The following discussion of fiscal year 1996 is in comparison to the Fiscal 1995
Period which is presented on a pro forma combined basis for the periods from
April 1, 1994 through May 4, 1994 (the "Predecessor Period") and from May 5,
1994 through March 31, 1995 (the "Successor Period"). As a result of the
application of "pushdown" accounting during the Fiscal 1995 Period, the
information with respect to such Fiscal 1995 Period may not necessarily be
comparable with the year ended March 31, 1996.

Total revenues declined by approximately $0.8 million or 14% for the fiscal year
ended March 31, 1996 compared to the $6.0 million reported for the Fiscal 1995
Period. The decline was attributable to decreases in music sales, master tape
sales, and commission income partially offset by sales from the Company's new
Hong Kong subsidiary.

Revenues from equipment sales increased $1.3 million or 52% to approximately
$3.8 million during fiscal 1996 compared to approximately $2.5 million for the
Fiscal 1995 Period. The increase is a result of foreign sales totaling
approximately $1.3 million. The recording of foreign equipment sales is
attributable to sales made by the Company's subsidiary, International SMC (HK)
Ltd. ("International"), formed in April, 1995, which represents 33% of equipment
sales and 24% of total revenues, for fiscal 1996. Previously, the Company,
through related party transactions, recorded commissions earned on foreign
shipments. But for such change in the method of recognizing income from foreign
hardware shipments, the Company's revenues from equipment sales for fiscal 1996
would have been relatively unchanged from the 1995 Period.

Revenues from music sales declined by $2.0 million or 61% to approximately $1.3
million in fiscal 1996 from the approximately $3.3 million recorded during the
Fiscal 1995 Period. The decline in music sales was due to less than expected
sales in certain music formats and master tape sales as well as management's
decision to redirect music sales away from distributors who historically have
high merchandise return rates in favor of mass market retailers. Sales of the
Company's four (4) song music format to a major customer declined by more than
$1.3 million for fiscal 1996. The Company did not report any master tape sales
revenue for fiscal 1996 compared to $279,000 during the Fiscal 1995 Period. The
Company's master tape agreement with an unrelated party expired September 1,
1995, which accounts for this decrease.

Commission income decreased to approximately $130,000 during fiscal 1996
compared to $230,000 during the Fiscal 1995 Period. The decrease of
approximately $100,000 or 43% was primarily because of a decrease

                                       19

<PAGE>

in commission income from a related party. The Company anticipates commission
income from a related party to continue to decline due to the formation of
International and the decision to conduct substantially all foreign sales
through International.

Cost of equipment sales for the year ended March 31, 1996, expressed as a
percentage of related sales, was essentially unchanged from the approximate 90%
reported for the Fiscal 1995 Period. The cost of music sales, expressed as a
percentage of music sales, increased from almost 73% in fiscal 1995 to nearly
111% for the current year. Among other items this increase in cost of music
sales includes, approximately $190,000 in adjustments to inventory values based
on changing market conditions and the greater impact of amortization expense on
substantially lower sales volume.

Other operating expenses increased approximately $235,000, or 50%, for fiscal
1996, compared to the Fiscal 1995 Period. The increase was primarily because of
increased warehouse rent and occupancy costs of approximately ($81,000), costs
of outside storage expenses for merchandise ($20,000), cost of freight ($73,000)
and an increase in warehouse salaries ($53,000).

Selling, general & administrative expenses ("SG&A expenses") increased
approximately $200,000 or 9% for fiscal 1996 compared to the Fiscal 1995 Period.
The increase was primarily due to expenses associated with the administration of
the Company's new international subsidiary in Hong Kong of approximately
($170,000), costs associated with product development ($150,000), directors and
officers insurance ($57,000), catalog expense ($38,000), bad debt expense
($31,000), and financial consulting fees ($29,000). These increases were
partially offset by a decrease in expenses related to Bridge Warrant price
adjustments $169,000, and decreases in accounting fees of $100,000 and legal
fees of $61,000, which were incurred in the prior year and related to the
Company's IPO. A quarterly comparison of SG&A expenses indicates reductions in
the majority of categories totaling approximately $500,000 or 57%, including
salaries $78,000, catalog expense $48,000, public relations $20,000, accounting
$127,000 and legal $105,000.

During fiscal 1995, the Company received approximately $380,000 of reimbursed
expense credits from its related party supplier, FLX. The Company received
approximately $150,000 of such credits from FLX during fiscal 1996. Excluding
these credits, selling, general and administrative expenses year to year would
have been essentially unchanged.

The Company continues to take action to reduce its SG&A expenses, which can be
seen in the fourth quarter comparison. The Company believes that the full impact
of staff reductions will be seen in fiscal 1997; product development costs are
being curtailed, computer support expenses have been reduced, rigid restrictions
have been placed on overtime and travel, and discretionary expenditures are
being carefully reviewed and eliminated by management. In addition, although the
Company has not entered into any written agreements, it is actively seeking
parties to sublet a portion of its warehouse facility in order to further reduce
overhead.

Depreciation and amortization expense increased approximately $100,000 or 81% to
$227,000 during the fiscal year ended March 31, 1996. The increase was primarily
due to depreciation expense associated with International's purchase of tools
and dies which are carried on its books at $318,000.

As a result of the significant decline in music sales during fiscal 1996 the
Company reviewed the carrying value of costs in excess of net assets acquired
(goodwill) and trademarks carried on its balance sheet. As a result of this
review the Company recorded a reduction in the carrying value of such assets
relating to music sales in the amount of $405,000 which was charged to
operations. See "Notes to Consolidated Financial Statements No. 1 - Organization
and Summary of Significant Accounting Policies".

                                       20

<PAGE>

Operating loss for fiscal 1996 was approximately $3.4 million compared to a loss
of $1.5 million for the Fiscal 1995 Period. As a percentage of total revenues,
the operating loss increased to 66% for fiscal 1996 from 25% in the prior year.
The decrease in operating income was related to a combination of factors
including the decrease in total revenues, a significant change in sales mix, an
unfavorable accounting adjustment and an increase in selling, general and
administrative expenses. The ratio of higher gross margin music sales to total
revenues decreased to 24% in fiscal 1996 from 54% the prior year. Gross profit,
expressed as a percentage of equipment sales remained the same compared to the
prior year at 10%. Gross profit from equipment sales increased approximately
$140,000 for the same period. This increase was attributable to increased volume
of approximately $1.3 million from the Company's new subsidiary, International,
as well as the elimination of price concessions granted to certain customers
during the Fiscal 1995 Period. Gross profit (loss) from music sales decreased
approximately $1.0 million to (11%) of related sales for the fiscal year ended
March 31,1996, compared to 27%, for the Fiscal 1995 Period. The decline in gross
profit from music sales was primarily because of an increase in returned
merchandise ($355,000), the decline in master tape sales ($279,000), the
inventory valuation adjustments of approximately ($190,000), and the loss of
approximately $1,300,000 in music sales to a major customer of the Company's
four (4) song music format compared to the Fiscal 1995 Period.

Net interest expense decreased approximately $110,000 or 40% for fiscal 1996
compared to the Fiscal 1995 Period. The decrease was primarily due to
non-recurring interest expense associated with bridge financing of approximately
$137,000 in fiscal 1995 and a decrease in interest expense on related party
obligations $69,000, partially offset by interest expense on debt owed to Magna
International ($58,000), and past due royalty obligations to the Harry Fox
Agency, Inc.($33,000).

Loss on sales of accounts receivable was 5% and 7% of total revenues for the
fiscal years 1996 and 1995, respectively. The decrease of approximately $160,000
or 39% was primarily because of a decrease in fees charged by the Company's
factor, negotiated in the third quarter of fiscal 1995, combined with the
decrease in total revenues.

Net loss for fiscal 1996 was approximately $3.9 million, an increase of $2.0
million from the loss of $1.9 million reported for the Fiscal 1995 Period. The
loss for fiscal 1996 was primarily attributable to the 61% decline in high gross
margin music sales, the high level of merchandise returns and the related
reduction in carrying value of goodwill and trademarks. Although projections can
be overly optimistic and purchase orders can be canceled , and such items are no
guarantee of revenue, the Company has projections for fiscal 1997 sales based on
customer inquiries in excess of $10.5 million, of which $8.0 million are
substantiated by purchase orders.

SEASONAL FACTORS

As is typical in the KARAOKE industry, the Company's operations have been
seasonal, with the highest net sales occurring in the second and third quarter
(reflecting increased orders for equipment and music merchandise during the
Christmas selling months) and to a lesser extent the first and fourth quarters
of the fiscal year.

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

                                       21

<PAGE>

INFLATION

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

POSSIBLE CLAIMS

The Company may be subject to various Claims for damages and other remedies
under its written copyright licensing agreements or pursuant to Title 17 of the
United States Code. The Company is current with respect to compulsory licenses,
granted pursuant to the federal copyright statute. As of December, 1997, the
Company had entered into a definitive settlement agreement with its principal
copyright royalty creditor regarding past due obligations, contingent upon
confirmation of the Plan. Although the Company believes that the assertion of
any such Claims is remote, primarily as a result of the aforementioned
agreement, there can be no assurance that such Claims will not be asserted or,
if asserted, that such Claims will not have a material adverse effect on the
Company's financial position. See Item 1 - "Business - Trademarks and Licenses."

LIQUIDITY AND CAPITAL RESOURCES

The Company continues to suffer from a lack of liquidity and capital resources
which have affected its ability to conduct business in a profitable manner. The
Company's working capital deficit at March 31, 1997, was approximately ($3.9)
million. While the Company is currently seeking additional financing for its
inventory and working capital needs there is no guarantee that it will be
successful in obtaining such financing on satisfactory terms.

The Company is a party to a factoring agreement, dated June 3, 1992, as amended
December 30, 1994, with Bankers Capital ("Bankers"), a division of Bankers
Leasing Association, Inc., pursuant to which Bankers purchases certain of the
Company's accounts receivable. Under the agreement, Bankers purchases certain
selected accounts receivable from the Company and advances 70% of the face
amount of those receivables to the Company. Bankers retains discretion to
determine which of the Company's accounts receivable it will purchase. Once
Bankers purchases the account receivable of any particular customer of the
Company, all accounts receivable of such customer (whether or not so purchased)
are collected by Bankers and applied first to payment of the particular accounts
receivable purchased by Bankers. As a result of the greater incidence of
returned merchandise by the Company's software customers, Bankers purchases a
lesser percentage of the Company's total accounts receivable relating to
software merchandise than hardware merchandise.

The Company is charged interest on all advances against the purchased accounts
receivable, at an annual rate of 1.5% in excess of the prime rate of interest
charged by Harris Trust and Savings Bank (8.50% on February 10, 1998), until the
receivables subject to the advances are collected. For accounts receivable
purchased by Bankers the Company will be charged a fee, from 2.0% to 3.0%,
depending on the period the receivable has been outstanding, and receives
payment from Bankers of the remaining 30% of the face amount of the receivable.
All receivables which are not collected within 150 days are charged back to the
Company and deducted from the total advances available to the Company. All of
the Company's accounts receivable, inventories and intangibles are pledged as
security under this agreement. The Company has agreed to pay minimum monthly
fees of $10,000 under the agreement. As of February 10, 1998, the outstanding
balance for which the Company is contingently liable to Bankers, was
approximately $50,000. The agreement with Bankers expired on June 28, 1997. By
Orders dated August 14 and September 5, 1997, the Bankruptcy Court authorized
post-petition financing with Bankers via the extension, under the same terms, of
its prior financing agreement for nine months expiring June 5, 1998.

                                       22

<PAGE>

In September 1992, Magna agreed to exchange $816,574 of debt owed by the Company
to Magna, and an affiliated company of Magna, for additional shares of the
Company's Common Stock (the "Additional Shares"). That agreement, as amended,
gave Magna the right to require the Company to repurchase the Additional Shares,
on December 31, 1996, for $816,574 plus interest at 8% per annum from September
30, 1994. On November 10, 1994, Magna exchanged the Additional Shares for the
Company's promissory note (the "Magna Note") in the amount of $816,574. Payment
of the note was guaranteed by a pledge from Gemco Pacific, Inc., an assignee of
Paul Wu, a director of the Company, of all of its shares of the Company's Common
Stock until the payment and satisfaction of fifty percent of the principal
amount of the note, and fifty percent of such shares until the remaining
principal balance of the note is paid.

The Magna Note was due in two equal installments on November 10, 1995 and May
10, 1996. The Company did not pay either installment. However, the Company did
make partial payments through June 30, 1996 of $275,000, which includes
principal and interest. As a result of the Company's failure to timely pay the
agreed upon installments the remaining balance of the note became due and
payable in full. The default provision of the Magna Note provides for a cure
period of 15 days after written notice has been given to the Company from Magna.
Written notice of default to the Company from Magna has not yet been received,
however, it is not required. The Company is subject to pay any reasonable
attorney's fees incurred by Magna in enforcing the rights of Magna while the
loan is in default. Notice of default has been given to Magna and no wavier of
default has been obtained by the Company. The entire note is classified as a
current obligation on the Company's balance sheet and continues to accrue
interest. As a result of the Chapter 11 filing, this debt is classified as a
general unsecured claim and will be paid according to the Plan if confirmed by
the Bankruptcy Court. See "Business - Confirmation".

On March 31, 1997 and 1996, the Company had accrued on its financial statements
total royalties payable, comprised of audio and written lyric components, of
approximately $720,000 and $1.1 million, respectively. As of March 31, 1997 the
Company remained delinquent in the payment of its copyright royalty obligations
imposed pursuant to written agreements with The Harry Fox Agency, Inc. ("HFA").
Due to its liquidity problems, the Company could only meet its other operating
obligations by not timely paying such royalty obligations.

In May 1994, the Company requested its principal copyright royalty creditor, the
Harry Fox Agency, Inc. ("HFA"), which represents the majority of copyright
holders for which the Company was obligated to pay royalties, to audit its
records for the period October 1991 through March 1994. On May 22, 1995, the
Company executed a settlement agreement (the "Settlement Agreement") with HFA,
with respect to all non-current royalty obligations and claims for the period
from October 1, 1991 through March 31, 1994 in the amount of $1,030,000. The
Company had accrued approximately $1.0 million in its financial statements for
royalty obligations to HFA and, on February 22, 1995, paid HFA $200,000 to be
applied against the settlement amount. The total amount of settlement payments
made during fiscal 1996 was $432,000, and the balance of approximately $400,000,
as of March 31, 1997, was anticipated to be paid in monthly installments,
through April 1997, of principal and interest at 8.0% per annum. After a period
of default, the Company entered into an amended payment agreement with HFA,
stipulating a lump sum payment to bring its account current and monthly
installments thereafter. As collateral security for the payment of its
obligations under the Settlement Agreement, the Company has granted HFA a
security interest in the Company's master sound recordings. An audit was
performed by HFA for the period April 1, 1994 through March 31, 1996 and all
royalties due were accrued.

The Bankruptcy Court is evaluating the Company's motion to approve an agreement,
entered into on December 16, 1997, regarding the treatment of the Harry Fox
Agency in the Plan. In the agreement approved by the Bankruptcy Court, HFA
agreed to amend its proof of claim and to reflect $820,000, which includes

                                       23
<PAGE>

pre-payment of royalties on inventory, as general unsecured debt and further, to
elect to accept issuance of shares of the reorganized Company on the following
basis: for each $2.00 of debt, HFA will receive one share of common stock. This
agreement is subject to the Plan being confirmed by the Bankruptcy Court. See
"Business - Confirmation".

The Company may be subject to various Claims for damages and other remedies
under its written copyright licensing agreements or pursuant to Title 17 of the
United States Code. The Company satisfied its outstanding royalty obligations
with respect to compulsory licenses, granted pursuant to the federal copyright
statute, and has been current thereafter with respect to such compulsory royalty
obligations. Although the Company believes that the assertion of any such claims
is remote, primarily as a result of the completed negotiations for specific
payment agreements with its principal copyright royalty creditors, there can be
no assurance that such Claims will not be asserted or, if asserted, that such
Claims will not have a material adverse effect on the Company's financial
position.

On July 20, 1994, the Company closed a private financing pursuant to which it
issued secured subordinated promissory notes in an aggregate principal amount of
$400,000, and issued Bridge Warrants to purchase 360,000 shares of Common Stock.
Such notes, together with interest at a rate of 8% per annum, were repaid on
November 18, 1994. The Bridge Warrants were exercisable at a price of $1.20 per
share of Common Stock commencing February 8, 1995 and expire on August 15, 1999.
As of June 30, 1997, 272,250 of such Bridge Warrants had been exercised,
resulting in gross proceeds of $326,000 to the Company.

Since September 1991, FLX (HK) Ltd., a Hong Kong corporation ("FLX") and The
Singing Machine Company, Ltd., a Hong Kong trading company ("LTD") have sold
merchandise to the Company under deferred payment terms. Paul Wu, a director of
the Company, is the Chairman of the Board and a principal stockholder of FLX and
LTD. For the fiscal years ended March 31, 1997 and 1996, the total inventory
purchases from FLX and LTD were approximately $1.9 million and $1.2 million,
respectively. In the normal course of business, the Company enters into
negotiations with FLX and LTD, with respect to the terms and the nature of
transactions conducted with those companies. For the fiscal year 1997 and 1996,
such negotiations resulted in the Company receiving credits totaling
approximately $70,000 and $150,000, respectively, from such companies for such
items as refurbishing of defective merchandise by the Company and promotional
and advertising expenses, with a concomitant credit to results of operations.
See Item 12 - "Certain Relationships and Related Transactions".

At March 31, 1996, the Trade payables - related party, which totaled
approximately $425,000, were composed of amounts due by the Company for
merchandise received from overseas suppliers. FLX and LTD have also advanced
funds directly to, or on behalf of the Company, with respect to inventory
purchaseS.

Primarily due to the Company's continued negative cash flow from operations and
as a result of the net losses incurred by the Company for the fiscal years ended
1996 and 1997, the Company did not believe, prior to its Chapter 11 filing, that
its credit facility with Bankers and its financing arrangements with, Memcorp,
FLX and LTD would be sufficient to meet its future cash flow needs. Memcorp had
provided up to $2.2 million of inventory financing to the Company via letters of
credit but has no requirement to continue to do so. FLX and LTD had agreed to
provide up to $500,000 of inventory financing to the Company through April 1,
1996. Since April 1, 1995, FLX and LTD have provided inventory financing to the
Company in excess of their $500,000 commitment, but have no obligation to do so
in the future. Dero and A-Tech have agreed to provide up to $200,000 in
inventory financing each, as of the date of this filing.

                                       24

<PAGE>

Because of the additional costs related to importing goods and the difficulty in
obtaining inventory financing, management has decided to emphasize direct sales
from its Far East equipment suppliers via International as opposed to domestic
sales from inventory in the future.

Although the Company is currently engaged in negotiations with regard to
securing third-party financing to replace or augment the financing arrangements
mentioned, there can be no assurance that such financing will be available on
terms satisfactory to the Company or at all, that FLX, LTD, Dero and A-Tech will
continue to provide financing to the Company, or that FLX and LTD will continue
to provide over-funding to the Company.

The Chapter 11 filing and related reorganization, provided such is confirmed by
the Bankruptcy Court, will have a significant positive impact on the Company's
cash flow and liquidity. It is projected that the reorganization will reduce the
Company's liabilities in excess of $4 million, thereby returning the Company to
solvency.

                                       25

<PAGE>

GOING CONCERN

The report by the Company's independent auditors on its 1997 financial
statements express substantial doubt about the Company's ability to continue as
a going concern. The independent auditors attributed this substantial doubt to
substantial net operating losses in the fiscal year ended March 31, 1997 and an
accumulated deficit of approximately $9.5 million. In addition, the Company does
not have a line of credit in place to finance its seasonal needs for inventory
purchases. These conditions raise substantial doubt about the Company's ability
to continue as a going concern. The financial statements do not include
adjustments relating to the recoverability and classification of the recorded
carrying value of assets or the amounts or classifications of other liabilities
that might be necessary should the Company be unable to successfully negotiate
additional inventory financing and continue as a going concern.

                                       26

<PAGE>

Item 7.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

HISTORICAL FINANCIAL STATEMENTS

    Report of Independent Certified Public Accountants,
      Millward & Co..........................................................F-1

    Balance Sheet at March 31, 1997..........................................F-2

    Statements of Operations for the fiscal years ended
      March 31, 1997 and  March 31, 1996.....................................F-3

    Statements of Shareholders Equity for the fiscal years
      ended March 31, 1997 and March 31, 1996................................F-4

    Statements of Cash Flows for the fiscal years ended
      March 31, 1997 and March 31, 1996......................................F-5

    Notes to Financial Statements............................................F-7

                                       27

<PAGE>


               Report of Independent Certified Public Accountants

Board of Directors and Shareholders
The Singing Machine Company, Inc.
(Debtor-in-Possession)
Pompano Beach, Florida

We have audited the accompanying consolidated balance sheet of The Singing
Machine Company, Inc. and Subsidiary (Debtor-in-possession) as of March 31, 1997
and the related consolidated statements of operations, shareholders' equity
(deficiency) and cash flows for each of the two years in the period ended March
31, 1997. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of The Singing Machine
Company, Inc. and Subsidiary at March 31, 1997 and the results of their
operations and their cash flows for each of the two years in the period ended
March 31, 1997 in conformity with generally accepted accounting principles.

The accompanying consolidated financial statements have been prepared assuming
that The Singing Machine Company, Inc. and Subsidiary will continue as a going
concern. As more fully described in Note 2, the Company has incurred recurring
operating losses and a shareholders' deficiency of $ 9,546,672, and on April 11,
1997, the Company filed for relief pursuant to Chapter 11 of the United States
Bankruptcy Act. In addition, the Company does not have a line of credit in place
to finance its seasonal needs for inventory purchases. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans as to these matters are also described in Note 2. The
consolidated financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
the amounts and classification of liabilities that may result from the inability
of The Singing Machine Company, Inc. and Subsidiary to continue as a going
concern.


/s/ MILLWARD & CO.
-------------------------
Millward & Co. CPAs
Fort Lauderdale, Florida
December 3, 1997

                                       F-1


<PAGE>
                THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
                             (DEBTOR-IN-POSSESSION)
                           CONSOLIDATED BALANCE SHEET
                                 March 31, 1997

                                     ASSETS

CURRENT ASSETS:
    Cash                                                            $    10,222
    Trade Accounts Receivable, Net of Allowance
        for Doubtful Accounts of $80,000                                309,480
    Due from Officer                                                     31,178
    Inventories, Net                                                  1,170,017
    Prepaid Expenses and Other Current Assets                            52,834
                                                                    -----------

          Total Current Assets                                        1,573,731
                                                                    -----------

PROPERTY AND EQUIPMENT, Net of Accumulated
    Depreciation of $296,713                                            178,030
                                                                    -----------

INTANGIBLE ASSET:
    Investment in Song Library, Net of Accumulated
        Amortization of $353,836                                         91,082
                                                                    -----------

          Total Assets                                              $ 1,842,843
                                                                    -----------

                   LIABILITIES AND SHAREHOLDERS' DEFICIENCY

CURRENT LIABILITIES SUBJECT TO COMPROMISE:
    Bank Overdraft                                                  $    10,599
    Trade Accounts Payable                                            2,263,188
    Trade Accounts Payable to Related Parties                           424,863
    Accrued Expenses                                                    954,310
    Royalties Payable                                                   720,265
    Loan Payable                                                        643,305
    Due to Factor                                                       222,443
                                                                    -----------

          Total Current Liabilities Subject to Compromise             5,238,973
                                                                    -----------

CURRENT LIABILITIES NOT SUBJECT TO COMPROMISE:
    Trade Accounts Payable of Subsidiary                                277,258
                                                                    -----------

COMMITMENTS AND CONTINGENCIES

SHAREHOLDERS' DEFICIENCY:
    Common Stock, $.01 Par Value; 10,000,000 Shares
        Authorized; 2,883,582 Shares Issued and Outstanding              28,836
    Additional Paid-in Capital                                        5,844,448
    Accumulated Deficit                                              (9,546,672)
                                                                    -----------

          Total Shareholders' Deficiency                             (3,673,388)
                                                                    -----------

          Total Liabilities and Shareholders' Deficiency            $ 1,842,843
                                                                    ===========


        The accompanying notes are an integral part of these statements.

                                      F-2

<PAGE>
<TABLE>
<CAPTION>

                THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
                             (DEBTOR-IN-POSSESSION)
                      CONSOLIDATED STATEMENTS OF OPERATIONS


                                                        FOR THE YEAR ENDED MARCH 31,
                                                           1997              1996
                                                      ------------      ------------
 <S>                                                  <C>               <C> 
 REVENUES:
     Equipment Sales, Net                             $  8,953,462      $  3,795,447
     Music Sales, Net                                    1,610,594         1,255,932
     Commission Income - Related Party                      90,583           130,893
     Other Income                                           20,240            13,295
                                                      ------------      ------------

       Total Revenues                                   10,674,879         5,195,567
                                                      ------------      ------------

 COST AND EXPENSES:
     Cost of Equipment Sales                             8,060,973         3,399,282
     Cost of Music Sales                                 1,084,386         1,391,588
     Other Operating Expenses                              576,602           705,496
     Selling, General and Administrative Expenses        2,370,746         2,380,976
     Depreciation and Amortization                         400,084           351,408
     Impairment of Long-Lived Assets                     1,609,973           405,085
                                                      ------------      ------------

           Total Costs and Expenses                     14,102,764         8,633,835
                                                      ------------      ------------

           Loss from Operations                         (3,427,885)       (3,438,268)
                                                      ------------      ------------

 OTHER (EXPENSES) INCOME:
     Interest Expense                                     (173,639)         (172,467)
     Interest Income                                         5,033             8,315
     Factoring Fees                                       (235,312)         (250,818)
     Gain (Loss) on Sale or Abandonment Property
         and Equipment                                     (43,325)            2,258
                                                      ------------      ------------

           Total Other Expenses                           (447,243)         (412,712)
                                                      ------------      ------------

 LOSS BEFORE PROVISION FOR INCOME TAXES                 (3,875,128)       (3,850,980)

 PROVISION FOR INCOME TAXES                                   --                --
                                                      ------------      ------------

 NET LOSS                                             $ (3,875,128)     $ (3,850,980)
                                                      ============      ============

 NET LOSS PER COMMON SHARE                            $      (1.38)     $      (1.38)
                                                      ============      ============
 WEIGHTED AVERAGE COMMON AND COMMON
     EQUIVALENT SHARES OUTSTANDING                       2,816,513         2,806,361
                                                      ============      ============
</TABLE>

        The accompanying notes are an integral part of these statements.

                                      F-3


<PAGE>
<TABLE>
<CAPTION>

                THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
                             (DEBTOR-IN-POSSESSION)
          CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY)
                   For the Year Ended March 31, 1997 and 1996

                                                                 
                                           COMMON STOCK                                              TOTAL
                                          $.01 PAR VALUE          ADDITIONAL                      SHAREHOLDERS'
                                    -------------------------       PAID-IN       ACCUMULATED        EQUITY
                                      SHARES         AMOUNT         CAPITAL         DEFICIT        (DEFICIENCY)
                                    -----------   -----------     -----------     -----------      -----------
<S>                                 <C>           <C>             <C>             <C>              <C>        
Balance at March 31, 1995           2,539,332     $    25,393     $ 5,509,314     $(1,820,564)     $ 3,714,143

Exercise of Bridge Warrants           272,250           2,723         317,855            --            320,578

Net Loss for the Year Ended
     March 31, 1996                      --              --              --        (3,850,980)      (3,850,980)
                                  -----------     -----------     -----------     -----------      -----------

Balance at March 31, 1996           2,811,582          28,116       5,827,169      (5,671,544)         183,741

Issuance of Common Shares for
     Debt settlement                   72,000             720          17,279            --             17,999

Net Loss for the Year Ended
     March 31, 1997                      --              --              --        (3,875,128)      (3,875,128)
                                  -----------     -----------     -----------     -----------      -----------

Balance at March 31, 1997           2,883,582     $    28,836     $ 5,844,448     $(9,546,672)     $(3,673,388)
                                  ===========     ===========     ===========     ===========      ===========
</TABLE>

        The accompanying notes are an integral part of these statements.

                                      F-4

<PAGE>
<TABLE>
<CAPTION>

                THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
                             (DEBTOR-IN-POSSESSION)
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                                              FOR THE YEAR ENDED MARCH 31,
                                                                                 1997             1996
                                                                             -----------      -----------
<S>                                                                          <C>              <C>
CASH FLOWS FROM OPERATING ACTIVITIE
    Net Loss                                                                 $(3,875,128)     $(3,850,980)
    Adjustments to Reconcile Net Loss to Net
        Cash Provided by (Used in) Operations:

            Depreciation and Amortization                                        400,084          351,408
            Impairment of Long-Lived Assets                                    1,609,973          405,085
            (Gain) Loss on Sale or Abandonment of Property and Equipment          43,325           (2,780)
            Changes in Operating Assets and Liabilities:
               Trade Accounts Receivable                                        (124,873)         915,996
                Due from Factor                                                   33,833          274,469
                Inventories                                                    1,136,415          348,878
                Prepaid Expenses and Other                                        50,037          221,664
                Income Tax Receivable                                               --            211,188
                Bank Overdraft                                                    10,599             --
                Trade Accounts Payable                                         1,101,286          580,252
                Trade Accounts Payable to Related Parties                        (80,771)        (456,982)
                Accrued Expenses                                                 (53,127)         436,866
                Royalties Payable                                               (123,784)         373,621
                                                                             -----------      -----------

Net Cash Provided by (Used in) Operating Activities                              127,869         (191,315)
                                                                             -----------      -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
    Purchases of Property and Equipment                                             (732)         (64,111)
    Proceeds from Sale of Property and Equipment                                    --              5,000
    Additions to Song Library                                                       --            (71,972)
    Due from Officer                                                                (975)             447
    Other Assets                                                                    --             32,158
                                                                             -----------      -----------

Net Cash Used in Investing Activities                                             (1,707)         (98,478)
                                                                             -----------      -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
    Increase in Due to Factor                                                    222,443
    Issuance of Bridge Warrants                                                     --            320,578
    Repayment of Long-Term Debt                                                 (338,496)        (771,021)
                                                                             -----------      -----------

Net Cash Used in Financing Activities                                           (116,053)        (450,443)
                                                                             -----------      -----------

Net Increase (Decrease)  in Cash                                                  10,109         (740,236)

Cash at Beginning of Year                                                            113          740,349
                                                                             -----------      -----------

Cash at End of Year                                                          $    10,222      $       113
                                                                             ===========      ===========
</TABLE>

        The accompanying notes are an integral part of these statements.

                                      F-5

<PAGE>


                THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
                             (DEBTOR-IN-POSSESSION)
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                 FOR THE YEAR ENDED MARCH 31,
                                                     1997          1996
                                                 -----------    ------------
SUPPLEMENTAL CASH FLOW INFORMATION:

  Cash Paid for Interest                           $     --     $ 103,000
                                                   ========     =========

  Cash Paid (Received) for Income Taxes            $     --     $(211,000)
                                                   ========     =========
NON-CASH FINANCING ACTIVITY:

  Long-Term Note Receivable Given for Certain
      Past Due Royalty Payments                    $     --     $ 830,000
                                                   ========     =========
  Long-Term Debt Incurred for the
      Acquisition of Property and Equipment        $     --     $  31,212
                                                   ========     =========
  Long-Term Debt and Accounts Payable
      Incurred for Insurance                       $     --     $  51,350
                                                   ========     =========

  Issuance of Common Stock for Debt Settlement     $ 17,999     $      --
                                                   ========     =========

        The accompanying notes are an integral part of these statements.

                                      F-6



<PAGE>


                THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
                             (DEBTOR-IN-POSSESSION)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 March 31, 1997

NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

1. ORGANIZATION AND BASIS OF PRESENTATION - The Singing Machine Company, Inc.
and Subsidiary (the Company) is primarily engaged in the production,
distribution and marketing of karaoke music recordings, as well as the
distribution and marketing of electronic karaoke audio equipment and
accessories. The Company also acts as the exclusive commissioned sales agent for
a related party which sells karaoke audio equipment to both unrelated parties
located in the United States and internationally, and to the Company for
distribution within the United States.

On November 18, 1994, the Company completed an initial public offering of its
common stock on Form SB-2.

On April 11, 1997, The Singing Machine Company, Inc. filed a voluntary petition
for relief pursuant to Chapter 11 of the United States Bankruptcy Act.
Accordingly, all debts have been classified as debts subject to compromise. See
Note 12 to the consolidated financial statements related to the Company's Plan
of Reorganization.

2. PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include
the accounts of The Singing Machine Company, Inc. and its wholly owned foreign
subsidiary. All significant intercompany transactions have been eliminated.

3. USE OF ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

4. FOREIGN CURRENCY TRANSLATION - Local currency is generally considered the
functional currency outside the United States. Assets and liabilities are
translated at the year-end exchange rate. Income and expense items are
translated at average rates of exchange prevailing during the year. The related
translation adjustment is not material.

5. INVENTORIES - Inventories are substantially all finished goods, which consist
primarily of electronic karaoke audio equipment and accessories, audio and video
tapes, and compact discs. Inventories are stated at the lower of cost (first-in,
first-out method) or market. As of March 31, 1997, the carrying value of audio
and video tapes was reviewed by the Company and based upon the outcome of such
review, the Company has recorded a reduction in the carrying value of such
assets in the amount of $529,414 which was charged to cost of sales.

6. CASH EQUIVALENTS - The Company considers all highly liquid investments with a
maturity of three months or less when purchased to be cash equivalents.

7. INVESTMENT IN SONG LIBRARY - Investment in song library consists of costs
incurred in the production or purchase of master song tapes. The carrying value
of investment in song library is reviewed if the facts and circumstances suggest
that it may be impaired. If this review indicates that the investment in song
library will not be recoverable, as determined based on the estimated
undiscounted cash of the entity acquired over the remaining amortization period,
the Company's carrying value of the investment in song library is reduced by the
estimated shortfall of discounted cash flows. As of March 31, 1997, the Company
reviewed the carrying value of investment in song library and based upon the
outcome of such review, the Company has recorded a reduction in the carrying
value of such assets in the amount of $819,740. Accordingly, the write down of
the investment in song library has been charged to operations. Amortization
expense charged to operations for the fiscal years ended March 31, 1997 and 1996
amounted to $126,507 and $123,023, respectively.

8. PROPERTY AND EQUIPMENT - Property and equipment is recorded at cost less
accumulated depreciation and amortization. Depreciation is provided using an
accelerated method over the estimated useful lives of the related assets.
Leasehold improvements are amortized over the shorter of the estimated useful
lives of the improvements or the term of the related lease.

                                       F-7

<PAGE>


                THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
                             (DEBTOR-IN-POSSESSION)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 March 31, 1997

NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
         (CONTINUED)

9. COSTS IN EXCESS OF NET ASSETS ACQUIRED AND TRADEMARKS - The carrying value of
goodwill and trademarks are reviewed if the facts and circumstances suggest that
it may be impaired. If this review indicates that the goodwill and trademarks
will not be recoverable, as determined based on the estimated undiscounted cash
of the entity acquired over the remaining amortization period, the Company's
carrying value of the goodwill and trademarks is reduced by the estimated
shortfall of discounted cash flows. As of March 31, 1997 and 1996, the carrying
value of goodwill and trademarks was reviewed by the Company and based upon the
outcome of such review, the Company has recorded a reduction in the carrying
value of such assets relating to music sales in the amount of $1,080,828 and
$405,085, respectively. Accordingly, the write down of goodwill and trademarks
has been charged to operations. Amortization expense charged to operations for
the fiscal years ended March 31, 1997 and 1996 amounted to $134,425 and $89,617,
respectively.

10. Income Taxes - Income taxes are accounted for under the asset and liability
method of Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes" ("SFAS 109"). Deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit carryforwards.
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 109, the effect
on deferred tax assets and liabilities or a change in tax rate is recognized in
income in the period that includes the enactment date. Deferred tax assets are
reduced to estimated amounts to be realized by use of a valuation allowance.

The principal types of temporary differences between assets and liabilities for
financial statement and tax return purposes are net operating loss carryforwards
and allowances for doubtful accounts.

11. REVENUE RECOGNITION - Revenue from the sale of equipment and music are
recognized upon shipment and are reported net of returns and allowances.
Commission income is recognized as earned.

12. LOSS PER COMMON SHARE - Loss per common share is calculated based on the
weighted average number of common shares and dilutive common stock equivalents
outstanding during the period. For the fiscal 1997 and 1996 periods, the effect
of the common stock equivalents would be antidilutive and has not been included
in the calculation.

13. RECENT PRONOUNCEMENTS - In February 1997, the FASB issued Statement No. 128,
"Earnings Per Share" ("FAS 128"). FAS 128 is effective for financial statements
for periods ending after December 31, 1997 and early adoption is not permitted.
The adoption of FAS 128 is not expected to have a material impact on the
Company's consolidated financial statements.

14. FAIR MARKET VALUE OF FINANCIAL INSTRUMENTS - The carrying amount reported in
the consolidated balance sheet for cash and cash equivalents, note payable,
accounts payable and accrued liabilities approximates fair market value due to
the immediate or short-term maturity of these financial instruments. The
Company's liabilities are subject to compromise as discussed in note 12 to the
consolidated financial statements.

                                       F-8

<PAGE>


                THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
                             (DEBTOR-IN-POSSESSION)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 March 31, 1997

NOTE 2 - GOING CONCERN

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As shown in the accompanying
consolidated financial statements, the Company incurred losses and there is an
accumulated deficit of $9,546,672 at March 31, 1997. In addition, the Company
does not have a line of credit in place to finance its seasonal needs for
purchases of inventory. Management of the Company believes that it has
instituted certain initiatives, including an enhanced sales focus and cost
reductions that will result in returning the Company to profitable operations in
fiscal 1998 although there can be no assurance that this can happen. In
addition, as described in note 12, the Company has filed a voluntary petition
for bankruptcy under Chapter 11 of the United States Bankruptcy Act and is
awaiting approvals of its plan of reorganization. The consolidated financial
statements do not include any adjustments to reflect the possible future effects
on the recoverability and classification of assets or the amounts and
classification of liabilities that may result from the possible inability of the
Company to continue as a going concern.

NOTE 3 - SALE OF RECEIVABLES WITH RECOURSE

The Company sells certain trade accounts receivable, subject to full recourse
provisions, pursuant to a factoring agreement, as amended. At March 31, 1997,
the outstanding balance of such receivables for which the Company is
contingently liable was approximately $300,757.

The Company received proceeds of approximately $2,855,000 and $3,191,000 in the
fiscal 1997 period and fiscal 1996, respectively, upon the sale of trade
accounts receivable under this agreement, and incurred approximately $235,000
and $251,000 in factor fees, respectively. All of the Company's accounts
receivables, inventories and intangibles are pledged as collateral under this
agreement, and the factor holds back 30% of the approved receivable face amount
as security. Minimum factor fees were $10,000 per month.

NOTE 4 - PROPERTY AND EQUIPMENT

A summary of property and equipment as of March 31, 1997 is as follows:

                                                ESTIMATED
                                               USEFUL LIVES
                                                  (YEARS)
                                               ------------

          Computer Equipment                         5       $ 60,139
          Office and Warehouse Equipment             7         94,114
          Tools and Dies                             5        320,490
                                                             --------
                                                              474,743

          Less Accumulated Depreciation                      (296,713)
                                                             --------
                                                             $178,030
                                                             ========

Depreciation and amortization expense on property and equipment for the fiscal
1997 and 1996 is approximately $139,152 and $137,231, respectively.

                                       F-9

<PAGE>


                THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
                             (DEBTOR-IN-POSSESSION)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 March 31, 1997

NOTE 5 - LOAN PAYABLE

As of March 31, 1997, loan payable consists of the follows:

Note payable, bearing interest monthly at 8%, due upon demand and 
subject to compromise. Collateralized by a pledge of 256,666 shares 
of common stock held by the designee of a director.                   $ 643,305
                                                                      =========

NOTE 6 - COMMITMENTS AND CONTINGENCIES

In May 1, 1997, the Company entered into a lease for an office and warehouse
facility for a term of 25 months. Pursuant to the terms of the lease, the
Company must pay maintenance, insurance and real estate taxes. Total rent
expense was approximately $203,000 and $170,000 in the fiscal 1997 and fiscal
1996 periods, respectively. Future minimum lease commitments under
noncancelable, the operating lease are as follows:

YEAR ENDING MARCH 31:
---------------------

     1998        59,027
     1999        78,703
     2000        26,234
               --------

               $163,964
               ========

NOTE 7 - RELATED PARTY TRANSACTIONS

At March 31, 1997, the amount due from officer bears interest monthly at 9% per
annum and is due on March 31, 1998.

The Company's Hong Kong wholly owned subsidiary, International SMC (HK) Ltd.,
operates as an intermediary to purchase karaoke hardware from factories located
in China.

Memcorp Asia Limited, a company related by a common director, acts as the
exclusive agent for International SMC (HK) Ltd. and is paid a commission of 3%
of sales for all F.O.B. Hong King shipments. Memcorp Asia coordinates the
purchases to, and shipments from various factories in China, processes letters
of credit from the customers of International SMC (HK) Ltd., and handles the
payments and receipts of funds on behalf of the Company. During fiscal 1997, the
Company paid $534,000 to Memcorp Asia Limited in commissions.

During the fiscal 1997 and 1996 periods, the Company purchased certain karaoke
audio equipment and accessories from Far East companies (related party
suppliers) controlled by a director. During fiscal 1997, the Company purchased
goods from FLX (HK) Limited, a company related through a common director, in the
amount of approximately $1,900,000. During fiscal 1996, the Company purchased
under deferred payment terms, certain karaoke audio equipment and accessories
from FLX (HK) Limited. Upon delivery of such equipment in the United States, the
Company executes documents of acceptance in favor of a bank in the Far East,
which are guaranteed by the director.

                                      F-10

<PAGE>


                THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
                             (DEBTOR-IN-POSSESSION)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 March 31, 1997

NOTE 7 - RELATED PARTY TRANSACTIONS (CONTINUED)

The director has also advanced funds directly to, or on behalf of, the Company
with respect to such equipment purchases. For the year ended March 31, 1997, the
director did not advance any funds. Amounts outstanding under documents of
acceptances or owed directly to these related party suppliers incur interest at
8.0% - 9.5% per annum from the date of shipment to the Company.

In the fiscal 1997 and 1996 periods, equipment purchases from the related party
suppliers were approximately $1,923,000 and $1,200,000, respectively; and
approximately $40,000 of interest expense was incurred related to these
purchases during fiscal 1996. During the fiscal 1995 period, the Company entered
into an agreement with the above noted director which provided inventory
financing through April 1, 1995 of up to $2,200,000 (inclusive of amounts owed
directly, and amounts guaranteed under documents of acceptances). On May 4,
1995, the agreement was renegotiated whereby the director provided inventory
financing through April 1, 1996 of up to $500,000. The Company has not
negotiated any new agreement with this related supplier. At March 31, 1997,
amounts owed directly to the director and amounts owed under documents of
acceptances guaranteed by the director were $0.

NOTE 8 - SHAREHOLDERS' DEFICIENCY

Effective May 3, 1994, the Company adopted a stock option plan (the Plan), which
provides for the granting of both incentive and nonqualified stock options to
key personnel, including officers, directors, consultants and advisors of the
Company, based upon the determination of the Board of Directors. The Plan was
amended on June 29, 1994, and incentive stock options were granted under the
Plan to purchase 293,700 shares of the Company's common stock at an exercise
price of $3.00 to $5.50. The incentive stock options expire in 1999 and 2004.

At March 31, 1997, 215,000 of these options are currently exercisable, and the
remaining 78,700, held by three individuals, become exercisable in maximum
increments of 20,000 each year through June 29, 1999. Additional incentive or
nonqualified stock options may be granted to purchase up to 186,300 shares of
the Company's common stock. At March 31, 1997, 480,000 shares or common stock
have been reserved for issuance under the Plan.

On November 18, 1994, the Company closed the initial public offering of
1,380,000 shares of its common stock and 1,380,000 warrants (the Public
Warrants) for an aggregate purchase price of approximately $7,080,000. The
Public Warrants entitle the registered holders to purchase 1.2 shares of common
stock at an exercisable price of $3.60 per share. The Public Warrants may be
exercised at anytime beginning November 10, 1995 and continuing thereafter until
November 10, 1999.

Also, included in the offering were 144,000 warrants issued to the Company's
underwriters (the Representatives Warrants). The Representative's Warrants
entitle the registered holders to purchase one share of the Company's common
stock and a warrant to purchase an additional share of common stock. The
exercise price of the warrants for common stock, the underlying warrants, and
the common stock subject to issuance pursuant to the underlying Public Warrants
is $4.50, $.08 and $5.40, respectively. The warrants became exercisable November
10, 1995 and continuing thereafter until November 10, 1999.

                                      F-11


<PAGE>

                THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
                             (DEBTOR-IN-POSSESSION)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 March 31, 1997

NOTE 8 - SHAREHOLDERS' DEFICIENCY (CONTINUED)

During April 1995, 272,250 Bridge Warrants were exercised resulting in net
proceeds to the Company of $320,578.

During March 1997, the Company issued 72,000 shares of common stock to settle
outstanding debt of approximately $18,000.

NOTE 9 - INCOME TAXES

On September 3, 1991, the Company underwent a change of ownership (as defined by
Internal Revenue Code Section 382). This change limits the Company's ability to
utilize its approximately $4,057,000 of net operating loss carryforwards (NOL's)
as of March 31, 1997 to $14,000 per year (these NOL's expire from 2003 to 2007).
At March 31, 1997, the Company has net operating loss carryforwards of
approximately $6,900,000, (which are not subject to the above limitations) that
expire through 2012. A valuation allowance of approximately $2,700,000 has been
recognized to offset primarily all of the deferred tax assets related to these
carryforwards.

The differences between the statutory United States federal income tax rate and
the effective tax rate are as follows:

                                     YEAR ENDED          YEAR END
                                   MARCH 31, 1997     MARCH 31, 1996
                                   --------------     --------------

                                      

Statutory rate                          (34.0)%           (34.0)%
State income tax effect, net of
  federal benefit                        (4.6)%            (4.6)%
Changes in valuation allowance           38.6              38.6
                                         ----              ----
Effective rate                              -%                -%
                                         ====              ====

At March 31, 1997, the components of the cumulative effect of temporary
differences in the deferred income tax liability and income tax asset balances
are as follow:

                                           TOTAL
                                        -----------
Assets:
Net operating loss carryforwards        $ 2,669,000

Reserves for bad debts, sales
   returns and warranties                    31,000
                                        -----------
                                          2,700,000
Valuation allowance                      (2,700,000)
                                        -----------
Net deferred tax assets                 $      --
                                        ===========

The net change in the valuation allowance during the fiscal 1997 period was an
increase of $1,083,000.

                                      F-12

<PAGE>

                THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
                             (DEBTOR-IN-POSSESSION)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 March 31, 1997

NOTE 10 - CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS

The Company derives primarily all of its equipment and music sales revenues from
distributors and retailers of such products in the United States. Financial
instruments, which potentially subject the Company to concentrations of credit
risk, consist principally of cash and accounts receivable (including receivables
sold to factor with recourse). The credit risk associated with cash is
considered low due to the credit quality of the depository institution. The
Company's allowance for doubtful accounts is based upon management's estimates
and historical experience. The Company performs ongoing credit evaluations of
its customers and generally does not require collateral.

During the fiscal 1997 and 1996 periods 79% and 63%, respectively, of the
Company's total revenues were derived from sales to five customers. Sales
derived from customers who individually purchased greater than 10% of total
revenues were as follows:

                      FISCAL    FISCAL
                       1997      1996
                      ------    ------

J.C. Penney            13%        18%
Montgomery Ward        --         16%
Fingerhut              --         12%
Target                 47%        10%


NOTE 11 - FOURTH QUARTER ADJUSTMENTS (UNAUDITED)

The following is a summary of certain year end adjustments that are considered
material in the aggregate to the results of the fourth quarter.

                                       FISCAL           FISCAL
                                        1997             1996
                                    -----------      -----------

Inventory write-down                $   529,414      $   371,000

Impairment of long-lived assets       1,900,568          405,085

Adjustment of royalties payable        (290,595)            --
                                    -----------      -----------

                                    $ 2,139,387      $   776,085
                                    ===========      ===========

                                      F-13

<PAGE>


                THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
                             (DEBTOR-IN-POSSESSION)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 March 31, 1997

NOTE 12 - DESCRIPTION OF PETITION

On April 11, 1997, The Singing Machine Company, Inc. filed a voluntary petition
for relief pursuant to Chapter 11 of the United States Bankruptcy Act. Under
Chapter 11, certain claims against the Debtor in existence prior to the filing
of the petitions for relief under the federal bankruptcy laws are stayed while
the Debtor continues business operations as Debtor-in-possession. These claims
are reflected in the March 31, 1997, balance sheet as "liabilities subject to
compromise." Additional claims (liabilities subject to compromise) may arise
subsequent to the filing date resulting from rejection of executory contracts,
including leases, and from the determination by the court (or agreed to by
parties in interest) of allowed claims for contingencies and other disputed
amounts. Claims secured against the Debtor's assets ("secured claims") also are
stayed, although the holders of such claims have the right to move the court for
relief from the stay. Secured claims are secured primarily by liens on the
Debtor's property, plant, and equipment.

As of February 18, 1998, the Debtor had not received approval from the
Bankruptcy Court to pay or otherwise honor certain of its pre-petition
obligations including employee wages. The Debtor has determined that there is
insufficient collateral to cover the interest portion of scheduled payments on
its pre-petition debt obligations. The Debtor has discontinued accruing interest
on these obligations.

On December 17, 1997, the United States Bankruptcy court approved the Company's
amended disclosure statement. This statement and amended plan of reorganization
has been filed and is being mailed together with ballots to the Company's
pre-petition shareholders and creditors. The Company expects to emerge from
Chapter 11 after court approval.

                                      F-14

<PAGE>

Item 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE

    None.

                                    PART III

Item 9.  DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

The following are the directors of the Company as of this filing, their
respective ages, the year in which each was elected a director and, where
applicable, the office of the Company held by the director. Each director
elected will hold office for a one year term or until their respective
successors have been duly elected and qualified:

                                SERVED AS
                                DIRECTOR
NAME                      AGE     SINCE    OFFICE
---------------------     ---    --------  -------------------------------------
Edward Steele             68      1991     Chief Executive Officer, President,
                                           Chief Financial Officer, and Director
Eugene B. Settler (1)     61      1991     Director
Paul Wu                   67      1991     Director
Josef A. Bauer (2)        60      1995     Director
R. Edward Pearson (3)     35      1997     Vice President and Director
---------
(1) Mr. Settler resigned from the board as of March 26, 1997
(2) Mr. Bauer resigned from the board as of July 16, 1997
(3) Mr. R. Edward Pearson was promoted to Vice President and appointed to the 
     board effective July 16, 1997.

Edward Steele joined the Company in 1988 and has served as the Company's Chief
Executive Officer, Chief Financial Officer and as a director since September
1991. As of February 29, 1996, Mr. Steele also assumed the office of President
of the Company. From October 1988 to September 1991, Mr. Steele was responsible
for the development of the Company's electronic hardware products in the Far
East and was the Company's sales director. Prior to joining the Company, Mr.
Steele served in executive capacities at a number of companies in the toy and
electronics fields, including Managing Director in charge of worldwide sales of
Concept 2000, a manufacturer of consumer electronics, from 1971 to 1978;
President of Wicely Corp., a distributor of electronic toys and consumer
electronics, from 1978 to 1983; and President of Justin Products Corp., an
electronic toy manufacturer, from 1983 to 1988.

Eugene B. Settler joined the Company as President in 1988 and served in that
office until the termination of his employment agreement on February 22, 1996.
Mr. Settler held the office of Director as of March 31, 1997, as he has since
September 1991. Mr. Settler resigned his position as Director as of September
17, 1997. Prior to joining the Company, Mr. Settler served as Director of Sales
and Marketing for CBS-Epic Records from 1968 to 1971, as Executive Vice
President of Marketing for RCA Records from 1971 to 1973, and as Vice President
of Marketing of TMC Music Corp. from 1973 to 1974. Mr. Settler was President of
Request Records from 1976 to 1981 and Executive Vice President of IJE, Inc. (Kid
Stuff Records) from 1981 to 1987.

                                       28

<PAGE>

Paul Wu has been a director of the Company since September 1991 and was the
Chairman of the Board of Directors from September 1991 to February 1995. Mr. Wu
is a private investor and has been engaged in the electronics business in the
Far East and the United States. Since 1979, Mr. Wu has been the Chairman of the
Board and a principal stockholder of FLX (HK) Ltd., a Hong Kong corporation
("FLX"), which manufactures consumer electronics. Mr. Wu has also been the
Chairman and a principal stockholder of The SMC Singing Machine Co., Ltd., a
Hong Kong corporation ("LTD"), since 1991, which is a trading company for
consumer electronics. Mr. Wu is also a director of Gemco Pacific, Inc., a
principal stockholder of the Company.

Josef A. Bauer was appointed to the Board of Directors on February 3, 1995 and
resigned from such position as of October 10, 1997. Since 1992, Mr. Bauer has
been a managing director and principal stockholder of Dero Research Ltd. in Hong
Kong, which serves as a manufacturer's representative for the sale of telephone
and electronic products. From 1970 to 1993, Mr. Bauer served as managing
director and was a principal stockholder of Dero Research Corporation in Tokyo,
Japan, which was engaged in the design, engineering and manufacture of
automobile audio equipment. He served as a director from 1991 to 1994, of
AmeriData Technologies, Inc., a publicly traded computer products and service
company. In December 1994, Mr. Bauer was elected to the Board of Directors of
Go-Video, Inc., a publicly traded video electronics manufacturer and
distributor. Mr. Bauer has also served as president of Banisa Corporation, a
privately owned investment company, since 1975. Mr. Bauer is also President of
Magna (a position he has held since 1989) and was formerly a director of the
Company from February 1990 until September 1991. See Item 12 - "Certain
Relationships and Related Transactions."

R. Edward Pearson, age 35, joined the Company in 1995 and has served as the
Company's Vice President and Director since July, 1997. Mr. Pearson's duties at
the Company include, among others, all facets of sales and marketing of the
Company's products to mass merchant and catalog retailers in North America, the
development of and implementation of sales plans and presentations to major
electronic buyers, management of over 25 independent sales representatives
throughout the country, development of karaoke programs for individual
retailers, development of all sales support materials and after-sale
implementation of sales and shipment programs. Prior to joining the Company, Mr.
Pearson was employed by one of Japan's largest karaoke companies with annual
revenues of approximately $750 million.

The Company has agreed, until November 10, 1999, that the representatives
("Representatives") of the underwriters for the Company's initial public
offering which closed on November 18, 1994, may designate a nominee to the Board
of Directors, reasonably acceptable to the Company, or have a representative
attend all Board Meetings. No such nominee has yet been designated. The
officers, certain directors and certain stockholders of the Company have agreed
to vote their shares for the election of such nominee.

The Company's directors serve for a term of one year, or until their successors
shall have been elected and qualified. The Company has in place an employment
agreement with its Chief Executive Officer, Mr. Steele.
See Item 10 - "Executive Compensation, Employment Agreements".

DIRECTORS' FEES

The Company currently reimburses each director for expenses incurred in
connection with his attendance at each meeting of the Board of Directors or a
committee on which he serves. In addition, non-employee directors are entitled
to be paid a fee of $750 for each board or committee meeting attended and are
entitled to receive 2,500 common stock options per year. No such fees were paid
nor options issued for fiscal 1997.

                                       29

<PAGE>

BOARD COMMITTEES

On February 3, 1995, the Board of Directors appointed Audit and Executive
Compensation/Stock Option Committees. The Audit Committee consisted of Messrs.
Steele, Wu and Bauer and the Executive Compensation/Stock Option Committee
consisted of Messrs. Settler, Wu and Bauer. The Audit Committee recommends the
engagement of independent auditors to the Board, initiates and oversees
investigations into matters relating to audit functions, reviews the plans and
results of audits with the Company's independent auditors, reviews the Company's
internal accounting controls, and approves services to be performed by the
Company's independent auditors. The Executive Compensation/Stock Option
Committee considers and authorizes remuneration arrangements for senior
management and grants options under, and administers, the Company's 1994 Amended
and Restated Management Stock Option Plan. The entire board of directors
operates as a nominating committee. Upon emergence from Chapter 11, the board is
expected to re-appoint committee members as a result of the changes in board
membership since the end of fiscal 1997.

BOARD AND BOARD COMMITTEE MEETINGS

During the fiscal year ended March 31, 1997, there were two meetings of the
Board of Directors. The board members also communicate on a regular basis during
the normal course of the business of the Company. The Audit and Executive
Compensation/Stock Option Committees of the Board did not meet during the year.
All directors attended at least 75% of the meetings of the Board.

EXECUTIVE OFFICERS

The following are the executive officers of the Company, their respective ages,
the office of the Company held and the year in which first elected an officer.
The executive officers will hold office until the next annual meeting of the
Board of Directors or until their respective successors have been duly elected
and qualified.

OFFICER'S NAME       AGE    OFFICE                               OFFICER SINCE
-----------------    ---    ----------------------------------   --------------
Edward Steele        68     Chief Executive Officer, President,  September 1991
                            Chief Financial Officer

R. Edward Pearson    35     Vice President                       July 1997

John Klecha          47     Secretary and Treasurer              October 1997

For information regarding Mr. Steele and Mr. Pearson, see description above.

Mr. John Klecha, General Manager of the Company since July 1997, was promoted to
Secretary and Treasurer as of October 10, 1997. Mr. Klecha is in charge of all
financial and administrative operations of the Company, including the Company's
daily operations, shipping and inventory. Mr. Klecha manages the Company's staff
and is in control of the Company's billing and order entry, accounts payable and
accounts receivable. Prior to joining the Company, Mr. Klecha managed all
financial and administrative functions for a toy design, manufacturing and
distribution company encompassing 26 employees and revenues of $20 million. Mr.
Klecha is a former Certified Public Accountant with more than 25 years of
financial and management experience.

                                       30

<PAGE>

Item 10.  EXECUTIVE COMPENSATION

EXECUTIVE COMPENSATION

The following table sets forth the annual and long-term compensation paid to or
accrued for the executive officers of the Company whose annual compensation
exceeded $100,000 during the Company's last two fiscal years.

                           SUMMARY COMPENSATION TABLE
               FOR THE FISCAL YEARS ENDED MARCH 31, 1997 AND 1996

                                                                    LONG TERM
                                                                   COMPENSATION
                                       ANNUAL COMPENSATION            AWARDS
                                ------------------------------------------------
NAME AND                                          OTHER ANNUAL        OPTIONS
PRINCIPAL POSITION       YEAR    SALARY   BONUS  COMPENSATION(2) (NO. OF SHARES)
                         ----  ---------- -----  ---------------  --------------
Edward Steele
Chief Executive Officer,
President and Chief      1997  $170,167    $-0-      $7,200            -0-
Financial Officer        1996   145,731(1)  -0-       8,617            -0-
Eugene B. Settler
President (3)            1996   140,841     -0-      11,803            -0-
---------
(1)  Mr. Steele enacted a 15% voluntary pay reduction as of September 1995, in
     light of the Company's poor financial performance and retracted such
     beginning fiscal 1997.
(2)  Fiscal 1997 reflects automobile allowance in total for Mr. Steele; 1996
     includes $3,600 in automobile allowance for Messrs. Steele and Settler,
     respectively. 
(3)  Employment agreement terminated by Company February 22,
     1996.

EMPLOYMENT AGREEMENTS

The Company executed an employment agreement with Mr. Steele which commenced as
of October 1, 1994 and terminated on March 31, 1997. Pursuant to Mr. Steele's
employment agreement, he is entitled to received base compensation of $150,000
per year, which amount automatically increases during the second and third
fiscal years by the greater of 5% or the annual increase in the Consumer Price
Index. The agreement also provides for bonuses based on a percentage of a bonus
pool tied to the annual pre-tax net income (as defined in the agreement) of the
Company. No such bonuses were paid for the 1997 or 1996 fiscal years. Mr. Steele
would receive 45% of the bonus pool. In the event of a termination of his
employment following a change-in-control, Mr. Steele would be entitled to a
lump-sum payment of 300% of the amount of his total compensation in the twelve
months preceding such termination. During the term of his agreement and for a
period of two years after his termination for cause or his voluntary termination
of his employment agreement, Mr. Steele could not directly or indirectly compete
with the Company in the KARAOKE industry in the United States.

Mr. Steele is currently working under the terms of his prior employment
agreement and is expected to enter into negotiations for a new agreement upon
the Company's emergence from Chapter 11.

                                       31

<PAGE>

The Company had also entered into an employment agreement with Mr. Settler,
which was terminated by the Company on February 22, 1996. As a result of the
termination, the Company ceased payments thereunder. Mr. Settler filed a
complaint which, under the terms of the employment agreement, was to be settled
via binding arbitration. During January, 1998, the Bankruptcy Court granted the
Company's motion to approve a settlement agreement effective September 17, 1997,
between the Company and Mr. Settler. Prior to this settlement agreement, there
was pending in the Bankruptcy Court an adversary proceeding brought by the
Company against Settler, for recovery of certain alleged preferential transfers
arising from certain payments made to Settler as a result of legal proceedings
brought by Settler against the Company for wrongful termination. The parties
mediated the dispute and reached a settlement which resolves the adversary
proceeding, certain alleged claims by Settler against the Company and others,
and provides for an exchange of releases amongst all parties. Under the terms of
the agreement, Settler also resigned as a director of the Company and assigned
all of his stock certificates and options to the Company. This settlement did
not require the payment of any funds by the Company other than a portion of
mediation costs incurred.

                                       32

<PAGE>

STOCK OPTION GRANTS IN LAST FISCAL YEAR

There were no stock options granted to the Company's executive officers during
the fiscal year ended March 31, 1997.

The following table sets forth information regarding stock options granted to
the Company's executive officers during the fiscal year ended March 31, 1995 and
the potential value of such options at the end of their terms, assuming certain
levels of stock price appreciation:

                                       GRANTS IN FISCAL YEAR 1995
                                          INDIVIDUAL GRANTS(1)
                       ---------------------------------------------------------
                                          PERCENT OF TOTAL
                       SHARES UNDERLY-  OPTIONS GRANTED TO
                        ING OPTIONS        EMPLOYEES IN     EXERCISE  EXPIRATION
       NAME             GRANTED (#)        FISCAL YEAR       PRICE       DATE
       ----            ---------------  ------------------  --------  ----------

Edward Steele..........    75,000             34.3%          $5.50     6/29/99
Eugene B. Settler (2)..    75,000             34.3%          $5.50     6/29/99
---------
(1)  All options are incentive stock options granted pursuant to the Company's
     Plan and have a term of five years. These options were granted on June 29,
     1994. 20,000 of such options for each of Messrs. Steele and Settler were
     immediately exercisable with the balance becoming exercisable in increments
     of 20,000 shares per year.
(2)  Mr. Settler surrendered all of his stock and options, in conjunction with
     the terms of a settlement agreement effective September 17, 1997.

STOCK OPTION EXERCISES AND HOLDINGS

The following table provides certain information concerning the unexercised
options to purchase shares of Common Stock held by the Company's executive
officers as of March 31, 1997. No stock options were exercised by any executive
officer of the Company during fiscal 1997.

<TABLE>
<CAPTION>
                                          LONG-TERM INCENTIVE PLANS
                                          AWARDS IN LAST FISCAL YEAR

                                                                               VALUE OF UNEXERCISED
                                                  UNDERLYING UNEXERCISED      IN-THE-MONEY OPTIONS AT
                                                    OPTIONS AT 3/31/97                3/31/97
                                                           (#)                        ($)(1)
                                                 --------------------------  --------------------------
                      SHARES ACQUIRED   VALUE
NAME                  ON EXERCISE(#)   REALIZED  EXERCISABLE  UNEXERCISABLE  EXERCISABLE  UNEXERCISABLE
----                  --------------   --------  -----------  -------------  -----------  -------------
<S>                        <C>           <C>       <C>           <C>             <C>           <C>
Edward Steele........       0             0        60,000        15,000          (1)           (1)
Eugene B. Settler(2)        0             0        60,000        15,000          (1)           (1)
---------
(1)  No executive of the Company held any "in the money" options in which the
     fair market value of the Common Stock exceeded the option exercise price as
     of March 31, 1997.
(2)  Mr. Settler surrendered all of his stock and options, in conjunction with
     the terms of a settlement agreement effective September 17, 1997.
</TABLE>

                                       33

<PAGE>

Item 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth, as of March 31, 1997, the shares of Common Stock
beneficially owned by each director of the Company, each executive officer of
the Company named in the Summary Compensation Table under the caption "Item 10 -
Executive Compensation", each person known to the Company to own more than 5% of
the outstanding shares of Common Stock and all directors and executive officers
as a group.

                                                 SHARES
                                              BENEFICIALLY         PERCENT OF
NAME AND ADDRESS OF BENEFICIAL OWNER             OWNED               CLASS
------------------------------------          ------------        -----------
Gemco Pacific, Inc.(1)                          256,666               9.1%
500 Hennessy Road
Causeway, Hong Kong

Edward Steele (6)                              245,000(2)             8.7
1551 W. Copans Road, #100
Pompano Beach, Florida  33064

Eugene B. Settler (7)                          242,000(2)             8.6
1551 W. Copans Road, #100
Pompano Beach, Florida  33064

Ford Harvest Ltd.                              183,333                6.5
500 Hennessy Road
Causeway, Hong Kong

Paul Wu                                         75,000(3)             2.7
985 Rexdale Blvd.
Rexdale, Ontario M9W 1R9

Josef A. Bauer                                  22,500(4)             *
820 Park Avenue
New York, NY  10021

All directors and executive officers           584,500(5)            20.8%
as a group (4 persons)
---------
*    Less than 1%
(1)  Mr. Wu is a director of Gemco Pacific, Inc. ("Gemco"). Mr. Wu disclaims
     beneficial ownership of the shares owned by Gemco. All 256,666 of such
     shares have been pledged by Gemco to Magna International, Inc. ("Magna") to
     secure payment of an $816,574 promissory note of the Company to Magna.
(2)  Includes immediately exercisable options to purchase 60,000 shares of
     Common Stock.
(3)  Includes immediately exercisable options to purchase 75,000 shares of
     Common Stock.
(4)  Consists of immediately exercisable warrants to acquire such shares. Does
     not include 256,666 shares pledged to Magna by Gemco to secure an
     outstanding obligation of the Company to Magna. Mr. Bauer is President of
     Magna.
(5)  Includes immediately exercisable options to purchase 195,000 shares of
     Common Stock and immediately exercisable warrants to acquire 22,500 shares
     of Common Stock.
(6)  Mr. Steele disclaims beneficial ownership of 6,500 shares owned by his
     wife.
(7)  Mr. Settler surrendered all of his stock and options, in conjunction with
     the terms of a settlement agreement effective September 17, 1997.

                                       34

<PAGE>

Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership of such securities with the Securities and
Exchange Commission. Officers, directors and greater than ten-percent beneficial
owners are required by applicable regulations to furnish the Company with copies
of all Section 16(a) forms they file. The Company is not aware of any beneficial
owner of more than ten percent of its Common Stock.

Based solely upon a review of the copies of the forms furnished to the Company,
if any, the Company believes that all filing requirements applicable to its
officers and directors were complied with during the 1997 fiscal year.

POSSIBLE CHANGE IN CONTROL

The Company's principal executive officer, Mr. Steele, and its former president
and director, Mr. Settler, had agreed to indemnify the Company against certain
claims related to compulsory copyright obligations (an "Indemnifiable Claim")
asserted with respect to the period from September 3, 1991 through November 10,
1994 by pledging all of their shares of Common Stock to the Company. In the
event of the assertion of an Indemnifiable Claim, the Company may require the
return of shares of Common Stock to the Company with a market value collectively
equal to the Indemnifiable Claim. Mr. Settler has since been released from such
indemnification as a result of a settlement agreement effective September 17,
1997. As a result of that indemnification, the Company could reacquire up to
approximately 3.25% of its outstanding shares of Common Stock (assuming
2,811,582 shares of Common Stock outstanding as of June 30, 1997) from Mr.
Steele.

Gemco had pledged all 256,666 of its shares of the Company's common stock to
Magna to secure payment of an $816,574 promissory note (the Magna Note) of the
Company to Magna. Josef A. Bauer, a former director of the Company, is President
of Magna. The remaining balance of approximately $630,000 is currently
classified as a general unsecured claim in the Chapter 11 proceedings. As a
result of such default, Magna could acquire approximately 9.1% of the Company's
outstanding Common Stock if it pursues legal remedy.

Item 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

On September 3, 1991, in consideration for $200,000, Magna, the then owner of
all of the issued and outstanding shares of the Company's Common Stock, entered
into an option agreement (the "Option Agreement") with Wedge Corp., a Florida
corporation ("Wedge"), to sell Wedge's designee 100% of the Company's Common
Stock. The stockholders of Wedge were Paul Wu, Edward Steele and Eugene B.
Settler (the "Optionees"). In connection with the grant of the option, Wedge
agreed to pledge all of the shares subject to the option to Magna as security
for the Company's satisfaction of various loans from Magna and an affiliate of
Magna. On May 5, 1994, the option was exercised for no additional consideration,
and Magna transferred 883,332 shares of the Company's Common Stock to Messrs.
Settler and Steele and Mr. Wu's designees, Gemco Pacific, Inc. ("Gemco") and
Ford Harvest Ltd. The 256,666 shares held by Gemco are held by Magna as security
for the loans from Magna and an affiliate of Magna. Mr. Wu is a director of
Gemco. Magna has not provided any material services to the Company since
September 3, 1991. Josef A. Bauer, President of Magna, was elected to the
Company's Board of Directors on February 3, 1995 and resigned on July 16, 1997.

In September 1992, Magna and an affiliate thereof agreed to exchange $816,574 of
debt owed by the Company to Magna and an affiliate thereof for additional shares
of the Company's Common Stock (the "Additional Shares"). That agreement, as
amended, gave Magna the right to require the Company to repurchase the
Additional Shares, on December 31, 1996, for $816,574 plus interest at 8% per
annum from September 30,

                                       35

<PAGE>

1994. On November 10, 1994 Magna exchanged the Additional Shares for the
Company's promissory note in the amount of $816,574. Payment of the note was
guaranteed by a pledge from Gemco Pacific, Inc., an assignee of Paul Wu, a
director of the Company, of all of its shares of the Company's Common Stock
until the payment and satisfaction of fifty percent of the principal amount of
the note, and fifty percent of such shares until the remaining principal balance
of the note is paid.

The Company has an agreement with FLX to produce electronic recording equipment,
based on the Company's specifications. The Company acts as exclusive agent for
LTD and receives commission income from such company based upon 50% of the net
profits, as defined, related to sales arranged by the Company for LTD. Paul Wu,
a director of the Company, is the Chairman of the Board and a principal
stockholder of FLX and LTD. During the fiscal years ended March 31, 1997 and
1996, the Company purchased approximately $1.9 million and $1.2 million,
respectively, in equipment from FLX and LTD and received approximately $90,000
and $130,000, respectively, in commission income from LTD. See Item 6 -
"Managements Discussion and Analysis of Financial Condition and Results of
Operations".

On May 4, 1992, the Company sold all of its tools and dies used in the
production of electronic recording equipment to LTD for approximately $344,000,
resulting in a gain to the Company of approximately $202,000. In March 1995, the
Company purchased tools and dies for two new models from LTD for $318,000.

The Company believes that all of the foregoing transactions with FLX and LTD
have been on terms no less favorable to the Company than could have been
obtained from unaffiliated third parties in arms-length transactions under
similar circumstances.

Approximately $1.6 million of the net proceeds of the Company's initial public
offering in November 1994 were used to satisfy certain accounts and note payable
to FLX and LTD. Paul Wu, a director of the Company, is an officer, director and
principal stockholder of FLX and LTD. The accounts payable are composed of
amounts due with respect to payments made, or guaranteed, by FLX and LTD in
connection with the issuance of documents of acceptance ("D/As") by the Company
for merchandise received from overseas suppliers. The Company purchases
electronic recording products for its own account from manufacturers in the Far
East. Upon delivery of such merchandise in the United States, the Company
executes D/As in favor of a bank in the Far East with respect to payment for
that merchandise. FLX and LTD have guaranteed the Company's obligations to those
banks. In addition, FLX and LTD have also advanced funds directly to, or on
behalf of the Company, with respect to inventory purchases.

Mr. Wu, as Chairman of FLX and LTD, had agreed that FLX and LTD would continue
to provide up to $500,000 of inventory financing in the form of loans to, or on
behalf of, the Company, or the provision of D/As on the Company's behalf through
April 1, 1996. Since April 1, 1995, FLX and LTD have provided inventory
financing to the Company in excess of their $500,000 commitment, but have no
obligation to do so in the future. The Company has not negotiated any new
agreement with these related suppliers. At March 31, 1997, amounts owed directly
to Mr. Wu and amounts owed under documents of acceptance were $0.

                                       36

<PAGE>

The Company has arranged with Dero Research, Ltd. in Hong Kong, of which Mr.
Bauer is a principal stockholder, letter of credit financing up to $200,000 for
purchases of new inventory. Previously, on a case-by-case basis with respect to
certain purchase orders, and subject to his discretion, Mr. Bauer has agreed,
directly or through a company controlled by Mr. Bauer, to provide inventory
financing in the form of letters of credit on the Company's behalf. In exchange,
the Company has agreed to reimburse Mr. Bauer for all expenses incurred with
respect to such letters of credit and to pay a commission of four percent on the
face amount of the letter of credit. In July 1995, Mr. Bauer funded letters of
credit aggregating $130,000 for the Company's benefit and has provided no
further funding to date.

Memcorp Asia Ltd., act as the exclusive agent for the Company's Hong Kong
subsidiary, International, and is paid a commission of 5% of sales for all
F.O.B. Hong Kong shipments. Memcorp Asia coordinates the purchases to, and
shipments from various factories in China, processes letters of credit from
customers of International, and handles the payments and receipts of funds on
behalf of the Company. During fiscal 1997 the Company paid $534,000 to Memcorp
Asia, a company in which Mr. Joseph Maurice Taub is a common director.

The Company's principal executive officer, Mr. Steele, and its former president
and director, Mr. Settler, had agreed to indemnify the Company against certain
Indemnifiable Claims asserted with respect to the period from September 3, 1991
through November 10, 1994 by pledging all of their shares of Common Stock to the
Company. In the event of the assertion of any Indemnifiable Claim, the Company
may require the return of shares of Common Stock to the Company with a market
value collectively equal to the Indemnifiable Claim. There can be no assurance,
however, that the Company would be able to sell or otherwise dispose of such
shares for cash in order to satisfy the Indemnifiable Claim. In addition, the
Company would continue to bear all other costs and expenses incurred by, or
assessed against, the Company (including legal) associated with such an
Indemnifiable Claim, whether or not such Indemnifiable Claim is resolved in
favor of the Company. The Company has agreed to release certain shares of Common
Stock from the provisions of the pledge and indemnity agreement during the
period beginning 13 months after November 10, 1994 under certain circumstances
based upon the performance of the Company. No such shares have been released as
of June 30, 1997. Mr. Settler has since been released from such indemnification
as a result of a settlement agreement effective September 17, 1997. The pledge
and indemnity agreement will also terminate as to Messrs. Steele or Settler in
the event of their death, provided the Company then maintains life insurance of
at least $1,000,000 on each party. No such insurance is presently in place.

Item 13.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)       Exhibits.

EXHIBIT NO.                    DESCRIPTION
-----------                    -----------

1(a)      Form of Underwriting Agreement between the Company and the
          Representatives(5) 
1(b)      Form of Selected Dealers Agreement(3) 
3(a)      Certificate of Incorporation of the Company, including amendment to be
          filed with the Secretary of State of Delaware1 
3(b)      By-Laws of the Company(1)
4(a)      Form of Warrant issued in connection with July, 1994 private
          offering(1)
4(b)      Warrant Agreement and related Warrant Certificate to be issued in
          connection with the public offering by the Company on November 18,
          1994(6)

                                       37

<PAGE>

4(c)      Underwriter's Warrant issued to the Underwriters on November 18,
          1994(6)
*10(a)    Employment Agreement between the Company and Edward Steele, dated
          November 18, 1994(6) 
*10(b)    Employment Agreement between the Company and Eugene B. Settler, dated
          November 18, 1994(6) 
*10(c)    Employment Agreement between the Company and Howard Miller, dated
          November 18, 1994(6)
10(d)     Agreement dated February 28, 1994 between the Company and Magna
          International Corp(1) 
*10(e)    1994 Amended and Restated Management Stock Option Plan(1)
10(f)     Financial Consulting Agreement between the Company and the
          Representatives, dated November 18, 1994(3)
10(g)     Consulting Agreement between the Company and Genesis Partners, Inc.,
          dated December 9, 1993, as amended September 2, 1994 and October 20,
          1994(4)
10(h)     Agreement of Merger dated February 28, 1994, among with Company, The
          Singing Machine Company, Inc., a California corporation, and Magna
          International Corp.(1)
10(I)     Supply, Support and Distributorship Agreement dated as of January 1,
          1994, between the Company and FLX (HK) Ltd(1)
10(j)     Supply, Support and Distributorship Agreement dated as of January 1,
          1994, between the Company and The SMC Singing Machine Co., Ltd.(1)
10(k)     Accounts Receivable Agreement, dated June 15, 1992, between the
          Company and Bankers Capital, as amended September 22, 1994 and
          December 30, 1994(2)
10(l)     Letter Agreement, dated May 4, 1994, among the Company, Paul Wu,
          Edward Steele and Eugene B. Settler(1)
10(m)     Letter Agreement, dated May 4, 1994, among the Company, Edward Steele
          and Eugene B. Settler(1)
10(n)     Indemnity and Stock Pledge Agreement, dated July 20, 1994, among
          Eugene B. Settler, Edward Steele and the Company(1)
10(o)     Agreement dated June 29, 1994 among the Company, Magna International
          Corp., Edward Steele, Eugene B. Settler and Gemco Pacific, Inc.(1)
10(p)     Trademark certificates(2)
10(q)     Form of Subscription Agreement evidencing registration rights(3)
10(r)     Letter Agreement, dated March 27, 1995, among the Company and Paul
          Wu(7)
10(s)     Letter Agreement, dated May 15, 1995, between the Company and The
          Harry Fox Agency, Inc.(8)
10(t)     Security Agreement, dated May 22, 1995, between the Company and The
          Harry Fox Agency, Inc.(8)
10(u)     Draft form of Indemnity and Contribution Agreement by and among Eugene
          B. Settler, Edward Steele and Gemco(9)
10(v)     Sub-distribution agreement between the Company and Memcorp, Inc.,
          dated October 27, 1995(10)
10(w)     Administrative agreement between the Company and Memcorp, Inc., dated
          October 27, 1995(10)
10(x)     Option agreement to purchase one million shares between the Company
          and Memcorp, Inc., dated October 27, 1995(10)
10(y)     Debtor's Amended Disclosure Statement, dated December 17, 1997.
10(z)     Debtor's Amended Plan of Reorganization, dated December 17, 1997.
10(aa)    Agreement regarding treatment of Harry Fox Agency in Debtor's Plan of
          Reorganization, dated December 16, 1997.
27        Financial Data Schedule.

---------- 
 *   Compensatory Plan or Management Contract

(1)  Incorporated by reference to the Company's Registration Statement on Form
     SB-2 (Registration No. 33- 81974-A) (the "Registration Statement") as filed
     on July 27, 1994.
(2)  Incorporated by reference to the Amendment No. 1 to the Registration
     Statement as filed on September 28, 1994.

                                       38

<PAGE>

(3)  Incorporated by reference to the Amendment No. 3 to the Registration
     Statement as filed on October 21, 1994.
(4)  Incorporated by reference to the Amendment No. 4 to the Registration
     Statement as filed on November 4, 1994.
(5)  Incorporated by reference to the Amendment No. 5 to the Registration
     Statement as filed on November 8, 1994.
(6)  Incorporated by reference to the Post-Effective Amendment No. 1 to the
     Registration Statement as filed on December 13, 1994.
(7)  Incorporated by reference to the Post-Effective Amendment No. 4 to the
     Registration Statement as filed on March 29, 1995.
(8)  Incorporated by reference to the Company's Report on Form 8-K dated June 5,
     1995.
(9)  Incorporated by reference to the Company's Annual Report on Form10-KSB for
     the fiscal year ended March 31, 1995 as filed on June 28, 1995.
(10) Incorporated by reference to the Company's Quarterly Report on Form10-QSB
     for the quarter ended September 30, 1995 as filed on November 13, 1995.

(b)       Reports on Form 8-K.

          The Company filed two reports on Form 8-K during the year ended March
          31, 1996. The Company filed one Item 4 Form 8-K on December 4, 1995,
          and one Item 6 Form 8-K on February 23, 1996.

          The Company did not file any reports on Form 8-K during the year ended
          March 31, 1997.

          The Company filed one Form 8-K on May 6, 1997.

                                       39

<PAGE>

                                   SIGNATURES

In accordance with the requirements of Section 13 and 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized1.

                              THE SINGING MACHINE COMPANY, INC.

                              By: /s/ EDWARD STEELE
                                  -----------------
                              Edward Steele, Chief Executive Officer, President,
                              and Director (Principal Executive, Financial and
                              Accounting Officer)

                              Dated: February 24, 1998

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

SIGNATURE                           CAPACITY                        DATE
---------                           --------                        ----
/s/ EDWARD STEELE
    -------------
    Edward Steele      Chief Executive Officer, President,    February 24, 1998
                       and Director (Principal Executive,
                       Financial and Accounting Officer)

/s/ R. EDWARD PEARSON
    -----------------
    Edward Pearson     Vice President and Director            February 24, 1998

/s/ PAUL WU 
    -------
    Paul Wu            Director                               February 24, 1998

                                       40


<PAGE>

                                 EXHIBIT INDEX


EXHIBIT                       DESCRIPTION
-------                       -----------

10(y)     Debtor's Amended Disclosure Statement, dated December 17, 1997.
10(z)     Debtor's Amended Plan of Reorganization, dated December 17, 1997.
10(aa)    Agreement regarding treatment of Harry Fox Agency in Debtor's Plan of
          Reorganization, dated December 16, 1997.
27        Financial Data Schedule.