**UNITED
      STATES SECURITIES AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**Form
      10-K**




(Mark one)





R
            **ANNUAL
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934****For
                the fiscal year ended March 31, 2008**£
            **TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934**


For
      the
      transition period from _________ to ___________





Commission
      file number 000-24968





**THE
      SINGING MACHINE COMPANY, INC.**


*(Exact
      name of registrant as specified in its charter* *)*





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





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


*(Address
      of principal executive offices)*





**(954)
      596-1000**


**(** *Registrant’s
      telephone number, including area code* **)**





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





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





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





Indicate
      by check mark if the registrant is not required to file reports pursuant to
      Section 13 or Section 15(d) of the Act. Yes £NoR





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





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





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





.
      Large
      accelerated filer £ Accelerated
      filer £ Non-accelerated
      filer R





Indicate
      by check mark whether the registrant is a shell company (as defined by Rule
      12b-2 of the Exchange Act) Yes £NoR





As
      of
      June 23, 2008, the aggregate market value of the issued and outstanding common
      stock held by non-affiliates of the registrant, based upon the closing price
      of
      the common stock as quoted on the American Stock Exchange of $0.22 was
      approximately $7,005,000 (based on 31,841,728 shares outstanding). For purposes
      of the above statement only, all directors, executive officers and 10%
      shareholders are assumed to be affiliates. This determination of affiliate
      status is not necessarily a conclusive determination for any other purpose.





Number
      of
      shares of common stock outstanding as of June 23, 2008 was
      31,841,728.





DOCUMENTS
      INCORPORATED BY REFERENCE **–
      None**







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





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





**FOR
      THE FISCAL YEAR ENDED MARCH 31, 2008**





PAGEPART IItem 1.
            Business
            2Item 1A.
            Risk
                Factors
            8Item 1B.
            Unresolved
                Staff Comments
            13Item 2.
            Properties
            13Item 3.
            Legal
                Proceedings
            14Item 4.
            Submission
                of Matters to a Vote of Security Holders
            14PART IIItem 5.
            Market
                for Company's Common Equity and Related Stockholder Matters and Issuer
                Purchases of Equity Securities
            15Item 6.
            Selected
                Financial Data
            16Item 7.
            Management's
                Discussion and Analysis of Financial Condition and Results of
                Operations
            17Item 7A
            Quantitative
                and Qualitative Disclosures About Market Risk
            23Item 8.
            Financial
                Statements and Supplementary Data
            23Item 9.
            Changes
                in and Disagreements With Accountants on Accounting and Financial
                Disclosure
            23Item 9A.
            Controls
                and Procedures
            24Item 9B.
            Other
                Information
            24PART IIIItem 10.
            Directors
                and Executive Officers of the Registrant
            25Item 11.
            Executive
                Compensation
            27Item 12.
            Security
                Ownership of Certain Beneficial Owners and Management and Related
                Stockholder Matters
            33Item 13.
            Certain
                Relationships and Related Transactions and Director
                Independence
            35Item 14.
            Principal
                Accounting Fees and Services
            35PART IVItem 15.
            Exhibits,
                Financial Statement Schedules
            36





**DISCLOSURE
      REGARDING FORWARD-LOOKING STATEMENTS**





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





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





**•**
            
            our
                ability to attract and retain management;**•**
            
            our
                growth strategies;**•**
            
            anticipated
                trends in our business;**•**
            
            our
                future results of operations;**•**
            
            our
                ability to make or integrate
                acquisitions;




1




**•**
            
            our
                liquidity and ability to finance our acquisition and development
                activities;**•**
            
            the
                timing, cost and procedure for proposed acquisitions;**•**
            
            the
                impact of government regulation;**•**
            
            planned
                capital expenditures (including the amount and nature
                thereof);**•**
            
            our
                financial position, business strategy and other plans and objectives
                for
                future operations;**•**
            
            competition;**•**
            
            the
                ability of our management team to execute its plans to meet our
                goals;**•**
            
            general
                economic conditions, whether internationally, nationally or in the
                regional and local market areas in which we are doing business, that
                may
                be less favorable than expected; and**•**
            
            other
                economic, competitive, governmental, legislative, regulatory, geopolitical
                and technological factors that may negatively impact our businesses,
                operations and pricing.





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





**PART
      I**





**ITEM
      1. BUSINESS**





**OVERVIEW**





The
      Singing Machine Company, Inc. (“Company,” “Singing Machine,” “we,” “us,” or,
“our”) is engaged in the development, production, marketing and distribution of
      consumer karaoke audio equipment, accessories, music, musical instruments,
      and
      licensed youth electronic products. We contract for the manufacturing of all
      our
      electronic equipment products with factories located in China. We also produce
      and market karaoke music, including compact discs plus graphics ("CD+G's"),
      which contain music and lyrics of popular songs for use with karaoke recording
      equipment. We obtain the song licenses from major publishers such as EMI,
      Universal, Sony and Warner and contract for the reproduction of music recordings
      with independent studios. We have also begun collaborating with a music download
      service provider for an expanded library of musical selections. This
      collaboration provides the Company with not only an expanded library of music
      for sale and distribution; it opens up the Company’s music sales to customers
      who purchase our competitors’ karaoke machines as well. Further, the
      capabilities of the Company’s new download music distribution system includes
      the ability to stream selections from this expanded content library, creating
      the opportunity to open new revenue sources through the sale of subscriptions.
      The Company is also in the process of expanding its web presence by creating
      a
      hosted cyber-community where customers can upload their individual karaoke
      performances to share.





We
      were
      incorporated in California in 1982. We originally sold our products exclusively
      to professional and semi-professional singers. In 1988, we began marketing
      karaoke equipment for home use. We believe we are the first company to introduce
      the home karaoke products to the United States. In May 1994, we merged into
      a
      wholly-owned subsidiary incorporated in Delaware with the same name. As a result
      of that merger, the Delaware Corporation became the successor to the business
      and operations of the California Corporation and retained the name The Singing
      Machine Company, Inc. In July 1994, we formed a wholly owned subsidiary in
      Hong
      Kong, known as International SMC (HK) Ltd. ("International SMC" or "Hong Kong
      subsidiary"), to coordinate our engineering, production, logistics and financial
      operations in China. In September 2006, International SMC was sold to See Bright
      Investments Limited, a non-related third party. In December 2005, we formed
      a
      wholly-owned subsidiary SMC (Comercial Offshore De Macau) Limitada in Macau,
      China (“SMC Macau” or “Macau subsidiary”), to provide sales, financing,
      shipping, engineering and sourcing support for Singing Machine and Subsidiaries.
      Our Macau subsidiary has been approved to operate its business in Macau as
      Macau
      Offshore Company (MOC) and is exempt for the Macau corporate income tax. In
      February 2008, we formed a wholly-owned subsidiary SMC Logistics, Inc.
      (“SMC-L”), a California corporation, to manage the U.S. domestic logistics and
      fulfillment warehouse servicing for the Company and in April 2008 a wholly-owned
      subsidiary, SMC Music, Inc. (“SMC-M”) to contract with third party music
      providers.





In
      November 1994, we closed an initial public offering of 2,070,000 shares of
      our
      common stock and 2,070,000 warrants. In April 1997, we filed a voluntary
      petition for relief under Chapter 11 of the U.S. Bankruptcy Code. On March
      17,
      1998, our plan of reorganization was approved by the U.S. Bankruptcy Court.
      On
      June 10, 1998, our plan of reorganization had been fully implemented and we
      emerged from the reorganization proceeding. Since then, we have developed the
      Karaoke products featuring on-screen lyric, built-in camera and digital key
      control functions. We have been listed on the AMEX since March 8, 2001. Our
      common stock currently trades on under the stock symbol "SMD." Our principal
      executive offices are located in Coconut Creek, Florida.





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




2




**GROWTH
      STRATEGY**





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





**Organic
      Growth Strategy**




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





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





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





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





*Establish
      the music download business* .
      Downloading music is one of the fastest growing areas in the music industry.
      We
      believe that the future of karaoke music distribution is through legal mediums
      of internet download sites (e.g. iTunes, iPhone, Amazon, etc). Since karaoke
      music only accounts for a small percentage of total music business, retailers
      usually only offer a limited selection of karaoke products. Thus, it is
      difficult for the customers to find karaoke music in retail outlets, especially
      for the songs they enjoy. While we maintain a physical CD distribution business,
      we will concurrently launch a music download project in calendar 2009 to
      capitalize on this new distribution model. The benefit to the Company are
      multifaceted including the opportunity to: offer downloadable music which means
      less physical inventory for the Company and our retail customers to carry;
      reduce financial return risk since a downloaded pieced of karaoke music is
      not
      returnable; make available increased marketing opportunities by offering
      downloads for those who sign up and provide their contact information enabling
      the Company to create future marketing and advertising campaigns; create an
      opportunity to sell our karaoke music to not only our customers but also to
      owners of our competitors’ machines (new and old); create cross-promotions with
      our retail-customers by giving away music downloads to purchasers of karaoke
      machines as an incentive to sell more machines.





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




3




**External
      Growth Strategy**





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





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





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





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


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


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


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





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





**PRODUCT
      LINES**





We
      currently have four different product lines which consist of over 50 different
      models. The product lines consist of the following:





·
            **Karaoke
                Machines**that incorporate such features as CD plus graphics player, sound
                enhancement, echo, tape record/playback features, and multiple inputs
                and
                outputs for connection to compact disc players, built-in camera,
                video
                cassette recorders, and home theater systems. Our machines sell at
                retail
                prices ranging from $30 for basic units to $200 for semi-professional
                units


·
            **Music**which includes a song library of over 2,500 recordings, which we
                license
                from their publishers. Our library of master recordings covers an
                eclectic
                range of musical tastes including popular hits, golden oldies, country,
                rock and roll, Motown, Christian, Latin, and Rap. SMC offers an exclusive
                line of Original Artist karaoke music under the monikers of “Real Karaoke”
                and “Motown Original Artist Karaoke”. Our music sells at retail prices
                ranging from $6.99 to $19.99.Additionally,
                SMC has executed an agreement with a third party to provide both
                physical
                and digital music content. The library available through these third
                parties extends to 15,000 selections and will be available in physical
                CD
                and downloadable formats. These physical titles will be directly
                distributed into mass merchants, specialty stores, e-tailers and
                music
                stores.


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


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





**MARKETING,
      SALES**





Our
      karaoke machines and music are sold nationally and internationally to a broad
      spectrum of customers, primarily through mass merchandisers, department stores,
      direct mail catalogs and showrooms, music and record stores, national chains,
      specialty stores and warehouse clubs. Our product lines are currently sold
      in
      such stores as Best Buy, Wal-Mart, Costco, J.C. Penney, Kohl's, Radio Shack
      and
      Sam's Club. Our sales strategy include offering Domestic Sales as well as Direct
      import sales made off-shore.




4




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





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





In
      fiscal
      2008, approximately 51% of sales revenues were from direct sales and 49% of
      revenues were domestic sales. Our sales within the US are primarily made by
      our
      in-house sales team and our independent sales representatives. Our independent
      sales representatives are paid a commission based upon sales made in their
      respective territories. We utilize some of our outside independent sales
      representatives to help us provide service to our mass merchandisers and other
      retailers. The sales representative agreements are generally one (1) year
      agreements, which automatically renew on an annual basis, unless terminated
      by
      either party on 30 days' notice. Our international sales are primarily made
      by
      our in-house sales representatives and our independent distributors.





As
      a
      percentage of total revenues, our net sales in the aggregate to our five largest
      customers during the fiscal years ended March 31, 2008, 2007, and 2006, were
      approximately 62%, 57%, and 55%, respectively. In fiscal 2008, the top three
      major customers accounted for 22%, 11% and 11% of our net revenues. Although
      we
      have long-established relationships with all of our customers, we do not have
      quantity contractual arrangements with any of them. A decrease in business
      from
      any of our major customers could have a material adverse effect on our results
      of operations and financial condition.





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





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





**RETURNS**





Returns
      of electronic hardware and music products by our customers generally occur
      after
      approval involving quality defects, damaged goods or goods shipped in error.
      Our
      policy is to give credit to our customers for the returns in conjunction with
      the receipt of new replacement purchase orders. Recently the increasingly
      competitive environment has forced the Company to extend more liberal return
      authorizations as a marketing tool to extend, prolong or develop deeper business
      relationships with key customers. Our total returns represented 8.6%, 13.4%,
      and
      7.4% of our net sales in fiscal 2008, 2007, and 2006, respectively.





**LICENSE
      AGREEMENTS**





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





We
      entered into a license agreement with Nickelodeon, Inc., a division of Viacom
      International, Inc. in December 2002. Under this agreement, we licensed
      Nickelodeon branded machines and a wide assortment of music. This license
      originally expired on December 31, 2004. The Company extended the agreement
      to
      December 31, 2006. Over the term of the license agreement, we were obligated
      to
      make guaranteed minimum royalty payments in the amount of $450,000, which was
      paid in full as of March 31, 2005. The agreement expired without renewal on
      December 31, 2006 without any additional minimum guarantee payments. On May
      10,
      2006, we entered into a two-year license agreement with MGA Entertainment,
      Inc.
      to produce and distribute a variety of karaoke products based on MGA's BRATZTM
franchise, one of the world's leading toy lines and girls' lifestyle brands,
      in
      North America, Europe and Australia. These karaoke products include a TFT DVD
      karaoke system, sing-a-long cassette players, deluxe microphones, electronic
      keyboards, and an electronic drum.





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




5




**TOTAL
      LICENSE SALES**


**FOR
      THE FISCAL YEAR ENDED**


March
      31,





2008
            
            2007
            
            2006MTV
            
            
            0.0
            %
            
            8.9
            %
            
            2.1
            %Nickelodeon
            
            
            0.0
            %
            
            0.0
            %
            
            0.0
            %Bratz
            
            
            15.0
            %
            
            0.0
            %
            
            0.0
            %Other
                Licenses
            
            
            0.0
            %
            
            0.0
            %
            
            0.9
            %Total
                Licenses Sales
            
            
            15.0
            %
            
            8.9
            %
            
            3.0
            %




**DISTRIBUTION**





We
      distribute hardware products to retailers and wholesale distributors through
      two
      methods: shipment of products from inventory held at our warehouse facilities
      in
      Florida and California (domestic sales), shipments directly through our Macau
      subsidiary, and manufacturers in China of products (direct sales). Domestic
      sales, which account for substantially all of our music sales, are made to
      customers located throughout North America from consignment inventories
      maintained at our distributor warehouse facilities. In the fiscal year ended
      March 31, 2008, approximately 49% of our sales were sales from our domestic
      warehouses ("Domestic Sales") and 51% were sales shipped directly from China
      ("Direct Sales").





**MANUFACTURING
      AND PRODUCTION**





Our
      karaoke machines are manufactured and assembled by third parties pursuant to
      design specifications provided by us. Currently, we have ongoing relationships
      with six factories, located in Guangdong Province of the People's Republic
      of
      China, which assemble our karaoke machines. During fiscal 2009, we anticipate
      that 90% of our karaoke products will be produced by one of these factories,
      which has agreed to extend the financing to us. We believe that the
      manufacturing capacity of our factories is adequate to meet the demands for
      our
      products in fiscal year 2009. However, if our primary factory in China was
      prevented from manufacturing and delivering our karaoke products, our operation
      would be severely disrupted until alternative sources of supply are located
      (See
      "Risk Factors - We are relying on one factory to manufacture and produce the
      majority of our karaoke machines for fiscal 2009" on page 9) .
      In
      manufacturing our karaoke related products, these factories use molds and
      certain other tooling, most of which are owned by us. Our products contain
      electronic components manufactured by other companies such as Panasonic, Sanyo,
      Toshiba, and Sony. Our manufacturers purchase and install these electronic
      components in our karaoke machines and related products. The finished products
      are packaged and labeled under our trademark, The Singing Machine (R) and
      private labels. We use outside companies to mass-produce the CD+G's once the
      masters have been completed.





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





All
      of
      the electronic equipment sold by us is warranted to the end user against
      manufacturing defects for a period of ninety (90) days for labor and parts.
      All
      music sold is similarly warranted for a period of 30 days. During the fiscal
      years ended March 31, 2008, 2007, and 2006, warranty claims have not been
      material to our results of operations.





**COMPETITION**





Our
      business is highly competitive. Our major competitors for karaoke machines
      and
      related products are Memorex, GPX and other consumer electronics companies.
      We
      believe that competition for karaoke machines is based primarily on price,
      product features, reputation, delivery times, and customer support. We believe
      that our brand name is well recognized in the industry and helps us compete
      in
      the karaoke machine category. Our primary competitors for producing karaoke
      music are Pocket Songs, UAV, Sybersound and Sound Choice. We believe that
      competition for karaoke music is based primarily on popularity of song titles,
      price, reputation, and delivery times. As far as the musical instrument market,
      our key competitors include Yamaha, ION, and others. For Bratz products, our
      competitors are Memorex and Emerson, which also make licensed products for
      youth
      electronics.





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




6




**TRADEMARKS
      AND PATENTS**





We
      have
      obtained registered trademarks for The Singing Machine name and the logo in
      the
      United States and in the European Union. We have also filed trademark
      applications in Australia and Hong Kong. We also filed various trademarks for
      our products. In the past few years, we have also obtained two U.S. patents
      for
      karaoke machines.





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





**COPYRIGHTS
      AND LICENSES**





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





The
      majority of the songs in our song library are subject to written copyright
      license agreements, often times referred to as synchronization licenses. Our
      written licensing agreements for music provide for royalties to be paid on
      each
      song. The actual rate of royalty is negotiable, but typically ranges from $0.09
      to $0.15 per song on each CD that is sold. Similarly, the terms of the licenses
      vary, but typically range from 2 to 5 years. Our written licenses typically
      provide for quarterly royalty payments, although some publishers require
      reporting on a semi-annual basis.





**GOVERNMENT
      REGULATION**





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





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





**SEASONALITY
      AND SEASONAL FINANCING**





Our
      business is highly seasonal, with consumers making a large percentage of karaoke
      purchases around the traditional holiday season in our second and third quarter.
      These seasonal purchasing patterns and requisite production lead times cause
      risk to our business associated with the underproduction or overproduction
      of
      products that do not match consumer demand. Retailers also attempt to manage
      their inventories more tightly, requiring that we ship products closer to the
      time that retailers expect to sell the products to consumers. These factors
      increase the risk that we may not be able to meet demand for certain products
      at
      peak demand times, or that our own inventory levels may be adversely impacted
      by
      the need to pre-build products before orders are placed. As of March 31, 2008,
      we had inventory of $3.5 million (net of reserves totaling $497,985) compared
      to
      inventory of $2.3 million as of March 31, 2007 (net of reserves totaling
      $198,848 million).





Our
      financing of seasonal working capital during fiscal 2007 was from vendor
      financing and factoring the accounts receivables.





Our
      major
      shareholder, Starlight International, is willing and able to provide the
      financing to the Company until March 31, 2008.





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





**BACKLOG**





We
      ship
      our products in accordance with delivery schedules specified by our customers,
      which usually request delivery within three months of the date of the order.
      In
      the consumer electronics industry, orders are subject to cancellation or change
      at any time prior to shipment. In recent years, a trend toward just-in-time
      inventory practices in the consumer electronics industry has resulted in fewer
      advance orders and therefore less backlog of orders for the Company. We believe
      that backlog orders at any given time may not accurately indicate future sales.
      We believe that we will be able to fill all of these orders in fiscal year
      2009.
      However, these orders can be cancelled or modified at any time prior to
      delivery. This backlog does not take into account of any sales ordered by
      customers directly from our domestic inventory with order turnaround time of
      one
      to two weeks. We normally have to keep the minimum inventory in our domestic
      warehouses for this type of sales.




7




**EMPLOYEES**





As
      of
      July 1, 2008 we employed twenty people, all of whom are full-time employees,
      with the exception of our chief executive officer who divides his time between
      the Company and his legal practice. One of our employees is located at SMC
      Macau’s offices. The remaining employees are based in the United States,
      including one executive officer, five engaged in warehousing and technical
      support and thirteen in accounting, marketing, sales and administrative
      functions.





**ITEM
      1A. RISK FACTORS**





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





**RISKS
      ASSOCIATED WITH OUR BUSINESS**





**WE
      HAVE ENTERED INTO AN AGREEMENT WITH STARLIGHT TO MANAGE THEIR LOGISTICS AND
      FULFILLMENT SERVICES IN THE UNITED STATES. IF WE ARE UNABLE TO PERFORM UNDER
      THIS AGREEMENT, IT COULD NEGATIVELY IMPACT OUR REVENUES AND CASH FLOW.**





On
      May
      23, 2008 we entered into a services agreement to receive orders, warehouse,
      and
      ship all of the Starlight Group’s United States domestic goods. The value of
      this contract is approximately $1.1 million dollars per year. If we are unable
      to perform the duties under this contract, it could negatively impact our
      revenue and cash flow.





**WE
      ARE RELYING ON A FACTORING FACILITY TO FINANCE OUR ACCOUNTS RECEIVABLE. THE
      LOSS
      OF THE FACTORING FACILITY MAY CAUSE A PROBLEM TO FULFILL THE CUSTOMER ORDERS
      AND
      THE LOSS OF THE REVENUES.**





We
      currently have a factoring facility with CIT Group/Commercial Services to
      finance our accounts receivable. If we lose our banking facility, we may need
      to
      borrow a bridge loan or request the factories to extend the payment terms.
      If we
      fail to do so, we may suffer cash flow problems and not be able to fulfill
      customer orders.





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





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





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





We
      rely
      on a few large customers to provide a substantial portion of our revenues.
      As a
      percentage of total revenues, our net sales to our five largest customers during
      the years ended March 31, 2008 and 2007 were approximately 62% and 57%,
      respectively. We do not have long-term contractual arrangements with any of
      our
      customers and they can cancel their orders at any time prior to delivery. A
      substantial reduction in or termination of orders from any of our largest
      customers would decrease our revenues and cash flow.





**WE
      ARE RELYING ON ONE FACTORY TO MANUFACTURE AND PRODUCE THE MAJORITY OF OUR
      KARAOKE MACHINES FOR FISCAL 2009, AND IF THE RELATIONSHIP WITH THIS FACTORY
      IS
      DAMAGED OR INJURED IN ANY WAY, IT WOULD REDUCE OUR REVENUES AND PROFITABILITY.**





We
      have
      worked out a written agreement with a factory in China to produce most of our
      karaoke machines for fiscal 2009. If the factory is unwilling or unable to
      deliver our karaoke machines to us, our business will be adversely affected.
      Because our cash on hand is minimal, we are relying on revenues received from
      the sale of our ordered karaoke machines to provide cash flow for our
      operations. If we do not receive cash from these sales, we may not be able
      to
      continue our business operations.




8




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





In
      fiscal
      2008 and 2007, a number of our customers and distributors returned karaoke
      products that they had purchased from us. Our customers returned goods valued
      at
      $2.9 million or 8.6% of our net sales in fiscal 2008. A majority of these
      returns resulted from defective manufacturing from two of our main factories.
      These factories have agreed to waive a majority of the repair and freight
      charges due to the abnormally high percentage of returns. If this occurs again
      in the future and our factories are unwilling to waive repair or freight costs
      this will adversely reduce our revenues and profitability. If any of our
      customers were to return karaoke products to us, it would reduce our revenues
      and profitability.





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





Because
      there is intense competition in the karaoke industry, we are subject to pricing
      pressure from our customers. Many of our customers have demanded that we lower
      our prices or they will buy our competitor's products. If we do not meet our
      customer's demands for lower prices, we will not sell as many karaoke products.
      In the fiscal year ended March 31, 2008, our sales to customers in the United
      States decreased because of increased price competition. We are also subject
      to
      pressure from our customers regarding certain financial incentives, such as
      return credits or large advertising or cooperative advertising allowances,
      which
      effectively reduce our profit. We gave advertising allowances of approximately
      $458,099 during fiscal 2008 and $200,000 during fiscal 2007. We have
      historically offered advertising allowances to our customers because it is
      standard practice in the retail industry.





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





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





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





Many
      of
      our customers place orders with us several months prior to the holiday season,
      but they schedule delivery two or three weeks before the holiday season begins.
      As such, we are subject to the risks and costs of carrying inventory during
      the
      time period between the placement or the order and the delivery date, which
      reduces our cash flow. As of March 31, 2008 we had $3.5 million in inventory
      on
      hand. It is important that we sell this inventory during fiscal 2009, so we
      have
      sufficient cash flow for operations.





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





Over
      the
      past year, our gross profit margins have generally decreased due to competition
      and increasing costs except for fiscal 2005 when we developed several new
      models, which were in demand and yielded higher profit margins. We expect that
      our gross profit margin might decrease under downward pressure in fiscal 2009
      because of currency fluctuations, increasing labor costs and the increasing
      cost
      of petroleum based raw materials and services which is affecting the entire
      market segment.





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





Sales
      of
      consumer electronics and toy products in the retail channel are highly seasonal,
      with a majority of retail sales occurring during the period from September
      through December in anticipation of the holiday season, which includes
      Christmas. A substantial majority of our sales occur during the second quarter
      ending September 30 and the third quarter ending December 31. Sales in our
      second and third quarter, combined, accounted for approximately 87.0%, 94.0%,
      and 87.5% of net sales in fiscal 2008, 2007, and 2006, respectively.





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





Our
      major
      competitors for karaoke machines and related products are Memorex and GPX.
      We
      believe that competition for karaoke machines is based primarily on price,
      product features, reputation, delivery times, and customer support. Our primary
      competitors for producing karaoke music are Compass, Pocket Songs, Sybersound,
      UAV and Sound Choice. We believe that competition for karaoke music is based
      primarily on popularity of song titles, price, reputation, and delivery times.
      To the extent that we lower prices to attempt to enhance or retain market share,
      we may adversely impact our operating margins. Conversely, if we opt not to
      match competitor's price reductions we may lose market share, resulting in
      decreased volume and revenue. To the extent our leading competitors reduce
      prices on their karaoke machines and music; we must remain flexible to reduce
      our prices. If we are forced to reduce our prices, it will result in lower
      margins and reduced profitability. Because of intense competition in the karaoke
      industry in the United States during fiscal 2008, we expect that the intense
      pricing pressure in the low end of the market will continue in the karaoke
      market in the United States in fiscal 2009. In addition, we must compete with
      all the other existing forms of entertainment including, but not limited to:
      motion pictures, video arcade games, home video games, theme parks, nightclubs,
      television, prerecorded tapes, CD's, and video cassettes.




9




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





The
      karaoke industry is characterized by rapid technological change, frequent new
      product introductions and enhancements and ongoing customer demands for greater
      performance. In addition, the average selling price of any karaoke machine
      has
      historically decreased over its life, and we expect that trend to continue.
      As a
      result, our products may not be competitive if we fail to introduce new products
      or product enhancements that meet evolving customer demands. The development
      of
      new products is complex, and we may not be able to complete development in
      a
      timely manner. To introduce products on a timely basis, we must:





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





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





·
            transition
                our products to new manufacturing process technologies;





·
            identify
                emerging technological trends in our target markets;





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





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





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





We
      believe that we will need to continue to enhance our karaoke machines and
      develop new machines to keep pace with competitive and technological
      developments and to achieve market acceptance for our products. At the same
      time, we need to identify and develop other products which may be different
      from
      karaoke machines.





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





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





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





We
      are
      using eight factories in the People's Republic of China to manufacture the
      majority of our karaoke machines. These factories will be producing nearly
      all
      of our karaoke products in fiscal 2009. Our arrangements with these factories
      are subject to the risks of doing business abroad, such as import duties, trade
      restrictions, work stoppages, and foreign currency fluctuations, limitations
      on
      the repatriation of earnings and political instability, which could have an
      adverse impact on our business. Furthermore, we have limited control over the
      manufacturing processes. As a result, any difficulties encountered by our
      third-party manufacturers that result in product defects, production delays,
      cost overruns or the inability to fulfill orders on a timely basis could
      adversely affect our revenues, profitability and cash flow. Also, since we
      do
      not have written agreements with any of these factories, we are subject to
      additional uncertainty if the factories do not deliver products to us on a
      timely basis.





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





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




10




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





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





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





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





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





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





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





We
      sell
      products to retailers, including department stores, lifestyle merchants, direct
      mail catalogs and showrooms, national chains, specialty stores, and warehouse
      clubs. Some of these retailers, such as K-Mart, FAO Schwarz and KB Toys, have
      engaged in leveraged buyouts or transactions in which they incurred a
      significant amount of debt, and operated under the protection of bankruptcy
      laws. As of July 2, 2007 we are aware of only three customers, FAO Schwarz,
      Musicland, and KB Toys, which are operating under the protection of bankruptcy
      laws. Deterioration in the financial condition of our customers could result
      in
      bad debt expense to us and have a material adverse effect on our revenues and
      future profitability.





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





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





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





During
      fiscal 2008, approximately 49.0% of our sales were domestic warehouse sales,
      which were made from our warehouses in California and Florida. During the third
      quarter of fiscal 2003, the dock strike on the West Coast affected sales of
      two
      of our karaoke products and we estimate that we lost between $3 and $5 million
      in orders because we could not get the containers of these products off the
      pier. If another strike or work slow-down occurs and we do not have a sufficient
      level of inventory, a strike or work slow-down would result in increased costs
      to us and may reduce our profitability.




**CURRENCY
      EXCHANGE RATE RISK**





During
      fiscal year 2008, the Chinese local currency has had no material effect on
      the
      value of the US dollar as Chinese local currency is pegged to the US dollar.




11




**INCREASED
      RAW MATERIAL/PRODUCTION PRICING**





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





**RISKS
      ASSOCIATED WITH OUR CAPITAL STRUCTURE**





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





From
      December 1, 2004 through March 31, 2008, our common stock has traded between
      a
      high of $1.60 and a low of $0.21. During this period, we had liquidity problems
      and incurred a net loss of $1.9 million in fiscal 2006 and loss of $3.6 million
      in fiscal 2005. Our stock price may continue to be volatile based on similar
      or
      other adverse developments in our business. In addition, the stock market
      periodically experiences significant adverse price and volume fluctuations
      which
      may be unrelated to the operating performance of particular companies.





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





During
      the past year, a number of investors have held a short position in our common
      stock. As of March 31, 2008, investors held a short position of approximately
      30,400 shares of our common stock which represented 0.09% of our public float.
      The anticipated downward pressure on our stock price due to actual or
      anticipated sales of our stock by some institutions or individuals who engage
      in
      short sales of our common stock could cause our stock price to decline.
      Additionally, if our stock price declines, it may be more difficult for us
      to
      raise capital.





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





On
      September 6, 2006, the Company received notice from The American Stock Exchange
      (the "Amex") that the Company has fallen below the continued listing standards
      of the Amex and that its listing is being continued pursuant to an extension.
      Specifically, for the fiscal years ended March 31, 2007 and March 31, 2006,
      the
      Company was not in compliance with Section 1003(a)(ii) of the Amex Company
      Guide
      with shareholders' equity of less than $4,000,000 and net losses in three of
      its
      four most recent fiscal years. The Company was successful in exercising a
      turnaround plan and on March 28, 2008, the Company received a notice from Amex
      stating that the Singing Machine has resolved the aforementioned listing
      deficiency and was restored to its full listing status. Amex has fully re-listed
      the Company as a member in good-standing; however the Company still needs to
      remain in compliance with Amex Company Guide Section 1009(h). If the company
      fails to remain in good standing, there is still a possibility of delisting.
      If
      our common stock is removed from listing on Amex, it may become more difficult
      for us to raise funds through the sales of our common stock or
      securities.





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





As
      of
      March 31, 2008, there were outstanding stock options to purchase an aggregate
      of
      1,029,296 shares of common stock at exercise prices ranging from $0.32 to $11.09
      per share, not all of which are immediately exercisable. The weighted average
      exercise price of the outstanding stock options is approximately $1.44 per
      share. As of March 31, 2007, there were outstanding and immediately exercisable
      options to purchase an aggregate of 1,382,890. There were outstanding stock
      warrants to purchase 1,250,000 shares of common stock at an exercise price
      of
      $.35 per share, all of which are exercisable.





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





As
      of
      June 23, 2008 there were 31,841,728 shares of our common stock outstanding.
      We
      have filed two registration statements registering an aggregate 3,794,250 of
      shares of our common stock (a registration statement on Form S-8 to register
      the
      sale of 1,844,250 shares underlying options granted under our 1994 Stock Option
      Plan and a registration statement on Form S-8 to register 1,950,000 shares
      of
      our common stock underlying options granted under our Year 2001 Stock Option
      Plan). An additional registration statement on Form S-1 was filed in October
      2003, registering an aggregate of 2,795,465 shares of our common stock. The
      market price of our common stock could drop due to the sale of large number
      of
      shares of our common stock, such as the shares sold pursuant to the registration
      statements or under Rule 144, or the perception that these sales could occur.





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





Our
      Certificate of Incorporation authorizes the issuance of 100,000,000 shares
      of
      common stock as amended in January 2006. As of June 23, 2008 we had 31,841,728
      shares of common stock issued and outstanding and an aggregate of 3,484,593
      shares issuable under our outstanding options and warrants. As such, our Board
      of Directors has the power, without stockholder approval, to issue up to
      64,673,679 shares of common stock. Any issuance of additional shares of common
      stock, whether by us to new stockholders or the exercise of outstanding warrants
      or options, may result in a reduction of the book value or market price of
      our
      outstanding common stock. Issuance of additional shares will reduce the
      proportionate ownership and voting power of our then existing stockholders.




12




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





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





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





Our
      internal controls over financial reporting may have weaknesses and conditions
      that need to be addressed, the disclosure of which may have an adverse impact
      on
      the price of our common stock. We are required to establish and maintain
      appropriate internal controls over financial reporting. Failure to establish
      those controls, or any failure of those controls once established, could
      adversely impact our public disclosures regarding our business, financial
      condition or results of operations. In addition, our management’s assessment of
      internal controls over financial reporting may identify weaknesses and
      conditions that need to be addressed in our internal controls over financial
      reporting or other matters that may raise concerns for investors. Any actual
      or
      perceived weaknesses and conditions that need to be addressed in our internal
      controls over financial reporting, disclosure of our management’s assessment of
      our internal controls over financial reporting or disclosure of our public
      accounting firm’s attestation to or report on management’s assessment of the
      Company’s internal controls over financial reporting may have an adverse impact
      on the price of our common stock. .





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





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


◦
                our
                    ability to execute our business
                    plan;


◦
                operating results below
      expectations;


◦
                loss of any strategic
      relationship;


◦
                industry
      developments;


◦
                economic and other
      external factors; and


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





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




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




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





**ITEM
      1B. UNRESOLVED STAFF COMMENTS**





None.





**ITEM
      2. PROPERTIES**





Our
      corporate headquarters is located in Coconut Creek, Florida in approximately
      8,000 square feet office and warehouse facility. The lease expires on May 31,
      2010. The annual rental expense is $72,000.





We
      have
      one warehouse facility in City of Industry, California. The City of Industry
      warehouse facility has 90,000 square feet (with an option to acquire an
      additional 90,000 square feet) and the lease expires on April 30, 2013. The
      annual rental expense is approximately $600,000.





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




13




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





**ITEM
      3. LEGAL PROCEEDINGS**





**LEGAL
      MATTERS**





None
      pending.





**HISTORICALLY:**





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





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





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





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





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





**On
      February 27, 2008 the Ninth Circuit Court of Appeals affirmed the dismissal
      against The Singing Machine Company, Inc. and dismissed all claims against
      the
      Company with prejudice.**





**OTHER
      MATTERS**





None.





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





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




14





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





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





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





**PART
      II**





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





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





FISCAL
                PERIOD
            
            HIGH
            
            LOW2008:First
                quarter (April 1 - June 30, 2007)
            
            $
            0.87
            
            $
            0.60Second
                quarter (July 1 - September 30, 2007)
            
            
            0.90
            
            
            0.34Third
                quarter (October 1 - December 31, 2007)
            
            
            0.78
            
            
            0.29Fourth
                quarter (January 1 - March 31, 2008)
            
            
            0.35
            
            
            0.202007:First
                quarter (April 1 - June 30, 2006)
            
            $
            0.40
            
            $
            0.23Second
                quarter (July 1 - September 30, 2006)
            
            
            0.55
            
            
            0.25Third
                quarter (October 1 - December 31, 2006)
            
            
            0.79
            
            
            0.24Fourth
                quarter (January 1 - March 31, 2007)
            
            
            1.60
            
            
            0.70





As
      of
      June 15, 2008, there were approximately 355 record holders of our outstanding
      common stock. Because brokers and other institutions hold many of the shares
      on
      behalf of shareholders, we are unable to determine the actual number of
      shareholders represented by these record holders.





**DIVIDENDS**





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





**EQUITY
      COMPENSATION PLAN INFORMATION**




The
      following table summarizes our equity compensation plan information as of March
      31, 2007:




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




15




**RECENT
      SALES OF UNREGISTERED SECURITIES**





During
      the fiscal year ended March 31, 2008 the Company issued 1,892,857 shares of
      its
      common stock.





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





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





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





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





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





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





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





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





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





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





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





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





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





*All
      of
      the above issuances and sales were deemed to be exempt under Rule 506 of
      Regulation D and/or Section 4 (2) of the Securities Act of 1933, as amended
      (the
“Securities Act”). No advertising or general solicitation was employed in
      offering the securities. The offerings and sales were made to a limited number
      of persons, all of whom were accredited investors, business associates of the
      Singing Machine or executive officers of the Singing Machine, and transfer
      was
      restricted by the Singing Machine in accordance with the requirement of the
      Securities Act. In addition to representations by the above-reference persons,
      we have made independent determinations that all of the above-referenced persons
      were accredited or sophisticated investors, and that they were capable of
      analyzing the merits and risks of their investment, and that they understood
      the
      speculative nature of their investment. Furthermore, all of the above-referenced
      persons were provided with access to our Securities and Exchange Commission
      filings.




**PURCHASES
      OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
      PURCHASERS**




None.





**ITEM
      6. SELECTED FINANCIAL DATA**





The
      following selected consolidated financial data should be read in conjunction
      with our consolidated financial statements and related notes and “Management’s
      Discussion and Analysis of Financial Condition and Results of Operations”
included elsewhere in this Annual Report on Form 10-K. The statements of
      operations data for the years ended March 31, 2008, 2007, and 2006 and the
      balance sheet data at March 31, 2008 and 2007 are derived from our audited
      financial statements which are included elsewhere in this Form 10-K. The
      statement of operations data for the year ended March 31, 2005 and 2004 and
      the
      balance sheet data at March 31, 2006, 2005 and 2004 are derived from our audited
      financial statements which are not included in this Form 10-K. The historical
      results are not necessarily indicative of results to be expected for future
      periods.




16




**2008**
            
            **2007**
            
            **2006**
            
            **2005**
            
            **2004****Statement
                of Operations:**Net
                Sales
            
            $
            34,048,858
            
            $
            26,732,144
            
            $
            32,305,560
            
            $
            38,209,825
            
            $
            70,541,128Income
                (loss) before income taxes
            
            $
            1,712
            
            $
            (1,714,988
            )
            $
            (1,905,250
            )
            $
            (3,591,975
            )
            $
            (21,924,919
            )Income
                tax benefit (expense)
            
            $
            0
            
            $
            2,453,576
            
            $
            0
            
            $
            0
            
            $
            (758,505
            )Net
                income (loss)
            
            $
            1,712
            
            $
            738,588
            
            $
            (1,905,250
            )
            $
            (3,591,975
            )
            $
            (22,683,424
            )**Balance
                Sheet:**Working
                capital
            
            $
            3,300,422
            
            $
            2,394,796
            
            $
            (4,274,100
            )
            $
            (3,378,528
            )
            $
            (1,382,939
            )Current
                ratio
            
            
            204
            %
            
            187
            %
            
            48
            %
            
            65
            %
            
            90
            %Property,
                plant and equipment, net
            
            $
            598,280
            
            $
            446,510
            
            $
            513,615
            
            $
            1,038,843
            
            $
            983,980Total
                assets
            
            $
            7,236,167
            
            $
            5,657,800
            
            $
            4,524,267
            
            $
            7,668,808
            
            $
            15,417,395Shareholders'
                equity
            
            $
            4,068,064
            
            $
            2,897,359
            
            $
            (3,661,798
            )
            $
            (1,985,023
            )
            $
            216,814**Per
                Share Data:**Income
                (loss) per common share – basic
            
            $
            0.000
            
            $
            0.03
            
            $
            (0.19
            )
            $
            (0.39
            )
            $
            (2.65
            )Income
                (loss) per common share – diluted
            
            $
            0.000
            
            $
            0.03
            
            $
            (0.19
            )
            $
            (0.39
            )
            $
            (2.65
            )Cash
                dividends paid
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            0





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





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





**OVERVIEW**





Our
      primary objectives for fiscal 2008 were to:





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


·
            continue
                to drive down the operating costs;


·
            turn
                the operations to profit;


·
            obtain
                better financing facilities;


·
            raise
                additional equity.





We
      believe that the plans were well executed and we have achieved our primary
      goals. During fiscal 2008, our revenue has increased by 27.4% while the total
      operation expenses decrease by 3.7%. Most importantly, we have generated profit
      from operations after a four year restructuring effort. We also have raised
      approximately $1.1 million equity from major suppliers. As a result, we
      successfully remedied our non-compliance status with the American Stock Exchange
      in fiscal 2008.




17




**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:




**2008**
            
            **2007**
            
            **2006**Total
                Revenues
            
            
            100.0
            %
            
            100.0
            %
            
            100.0
            %Cost
                of Sales
            
            
            77.5
            %
            
            77.1
            %
            
            78.1
            %Operating
                expenses
            
            
            22.1
            %
            
            29.2
            %
            
            28.6
            %Operating
                (loss) income
            
            
            0.5
            %
            
            -6.4
            %
            
            -6.7
            %Other
                (expenses), income, net
            
            
            -0.5
            %
            
            -0.1
            %
            
            0.8
            %Income
                (Loss) before taxes
            
            
            0.1
            %
            
            -6.5
            %
            
            -5.9
            %Provision
                (benefit) for income taxes
            
            
            0.0
            %
            
            9.2
            %
            
            0.0
            %Net
                Income (loss)
            
            
            0.1
            %
            
            2.8
            %
            
            -5.9
            %





**FISCAL
      YEAR ENDED MARCH 31, 2008 COMPARED WITH FISCAL YEAR ENDED MARCH 31,
      2007**





**NET
      SALES**





Net
      sales
      for the fiscal year ended March 31, 2008 were approximately $34.0 million,
      an
      increase of approximately $7.3 million from approximately $26.7 million for
      fiscal 2007. The increase in net sales was primarily due to the sales increase
      for the Bratz licensed products of $4 million and the Musical instrument of
      $2.5
      million, as well as the small increase in karaoke products sales. The music
      CD
      sales continued to decrease from approximately $700,000 in fiscal 2007 to less
      than $100,000 in fiscal 2008 due to the overall CD sales decline in the entire
      music industry.





In
      fiscal
      2008, 59% of our sales were direct sales, which represent sales made by
      International SMC and SMC Macau, and 41% were domestic sales, which represents
      sales made from our warehouses in the United States. The ratio is very similar
      to that of fiscal 2007.





**GROSS
      PROFIT**





Gross
      profit for fiscal 2008 was approximately $7.7 million or 22.5% of total revenues
      compared to approximately $6.1 million or 22.9% of sales for fiscal 2007. The
      increase in gross margin, compared to the prior year, was primarily due to
      a
      better pricing model. However, the higher profit margin was partially off set
      by
      the cost increase in China and the lower music sales. The music sales usually
      yielded a higher margin than that of the hardware sales.





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





**OPERATING
      EXPENSES**





Operating
      expenses, including depreciation and amortization, for the fiscal year ended
      March 31, 2008 decreased from approximately $7.8 million to approximately $7.5
      million, a decrease of approximately $0.3 million or 3.7% compared to the same
      period last year. The decrease in operating expenses consists of approximately
      $0.6 million increase in selling expenses, which include advertising,
      commission, freight and royalty expenses, and an approximately $0.9 million
      decrease in general and administration expenses. The increase of selling
      expenses was proportional to the increase of the revenues. The decrease of
      the
      general and administrative expenses was primarily due to reductions in warehouse
      expenses and compensation expenses.





**DEPRECIATION
      AND AMORTIZATION**





Our
      depreciation and amortization expenses were $311,273 for fiscal 2008 compared
      to
      $556,051 for fiscal 2007. The fixed assets mainly consist of the tools and
      molds, which are depreciated with three years straight-line method. In the
      past
      three years, we have utilized some existing tools and molds for the new product
      designs. It helps drive down the tooling cost. We have also improved the product
      design process, which allow us to make fewer models of new products with higher
      sales volume for each models.





**NET
      OTHER INCOME (EXPENSES)**





Net
      other
      expense was $154,672 in fiscal 2008 compared to net other income of $13,327
      in
      fiscal 2007. The increase was primarily due to the increase of the borrowing
      cost. The higher borrowing cost was a result of the higher domestic sales,
      which
      required a longer term to finance inventory and accounts receivable.





**INCOME
      BEFORE TAXES**





We
      had an
      income before taxes of $1,712 in fiscal 2008 compared to a loss before taxes
      of
      $1,714,988 in fiscal 2007. The improved profit was a result of higher revenues
      and successfully lowering operating expenses.





18




**INCOME
      TAX EXPENSE**





Significant
      management judgment is required in developing our provisions for income taxes,
      including the determination of foreign tax liabilities, deferred tax assets
      and
      liabilities and any valuation allowances that might be required against deferred
      tax assets. Management evaluates its ability to realize its deferred tax assets
      on a quarterly basis and adjusts its valuation allowance when it believes that
      it is not likely to be realized. On March 31, 2008 and 2007, we had gross
      deferred tax assets of approximately  $
      2.7
      million and
      approximately $6.4 million, against which we recorded valuation allowances
      totaling approximately  $
      2.7
      million and
      approximately $6.4, respectively.





For
      the
      fiscal years ended March 31, 2008 and March 31, 2007, we did not record any
      income tax expense. This occurred because the Company had taxable losses for
      the
      US operations and the Macau subsidiary is exempt from income tax according
      to
      the Macau Offshore Company (MOC) regulations.





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





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




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





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





**NET
      LOSS/NET INCOME**





As
      a
      result of the foregoing, we had net income of approximately $1,712 in fiscal
      2008 from operations as compared to a net income of 738,588 in fiscal 2007
      as a
      result of a one-time tax reversal of approximately $2.5 million in fiscal 2007.





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





**NET
      SALES**





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





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


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


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





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





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





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




19


**GROSS
      PROFIT**





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





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





**OPERATING
      EXPENSES**





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





**DEPRECIATION
      AND AMORTIZATION**





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





**NET
      OTHER INCOME (EXPENSES)**





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





**INCOME
      BEFORE TAXES**





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





**INCOME
      TAX EXPENSE**





Significant
      management judgment is required in developing our provisions for income taxes,
      including the determination of foreign tax liabilities, deferred tax assets
      and
      liabilities and any valuation allowances that might be required against deferred
      tax assets. Management evaluates its ability to realize its deferred tax assets
      on a quarterly basis and adjusts its valuation allowance when it believes that
      it is not likely to be realized. On March 31, 2007 and 2006, we had gross
      deferred tax assets of approximately  $
      2.7
      million and
      approximately $6.4 million, against which we recorded valuation allowances
      totaling approximately  $
      2.7
      million and
      approximately $6.4, respectively.





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





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





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




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





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




20




**NET
      LOSS/NET INCOME**





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







**LIQUIDITY
      AND CAPITAL RESOURCES**





On
      March
      31, 2008, we had cash on hand of approximately $0.4 million compared to cash
      on
      hand of approximately $1.2 million on March 31, 2007. The decrease of cash
      on
      hand was primarily due to the increase of the inventory of approximately $1.4
      million and the increase of the accounts receivable of approximately $0.9
      million. The increase of the inventory and the accounts receivable was a result
      of the increased domestic sales.





Cash
      used
      in the operating activities for the year ended March 31, 2008 was $1,352,223.
      The cash was spent to finance a higher level of the inventory and accounts
      receivable. We used the company common stock and vendor financing to off set
      portion of the cash requirement.





Cash
      used
      in investing activities for the year ended March 31, 2008 was $490,697. Cash
      used in investing activities was for the purchase of tooling and
      molds.





Cash
      provided by financing activities was $1,101,836 for the fiscal year ended March
      31, 2008, which was due to additional equity investments of approximately
      $630,881 and the working capital loan from the related party – Starlight Holding
      Company.





As
      of
      March 31, 2008, our working capital was approximately $3.3 million. Our current
      liabilities of approximately $3.2 million include:





·
            Customer
                credit on account of approximately $778,993 – the amount will be offset by
                future purchases or refund.


·
            Accounts
                payable of $1,145,150 of which $755,000 was due to a major supplier
                in
                China.


·
            Related
                party loan of $616,732 due to Starlight Holding
                Company.





As
      of
      June 16, 2008, our cash on hand is approximately $450,000. Our average monthly
      operating expenses are approximately $300,000 and we need approximately $0.9
      million to cover our operating expenses during the next three month period.
      Our
      primary expenses are normal operating costs including salaries, lease payments
      for our warehouse space in California and other operating costs.





As
      of
      March 31, 2008, our commitments for debt and other contractual arrangements
      are
      summarized as follows:




Total
            
            Less
                than 1 year
            
            1
                -
                3 years
            
            3
                -
                5 years
            
            Over
                5 yearsProperty
                Leases
            
            $
            3,398,205
            
            $
            556,673
            
            $
            2,115,596
            
            $
            725,936.35
            
            $
            -Equipment
                Leases
            
            
            24,763
            
            
            9,888
            
            
            14,875
            
            
            -
            
            
            -Licensing
                Agreement
            
            
            242,000
            
            
            242,000
            
            
            
            
            
            -
            
            
            -Loan
                Payable-Related Party
            
            
            616,732
            
            
            616,732
            
            
            -
            
            
            -
            
            
            -Total
            
            $
            4,281,700
            
            $
            1,425,293
            
            $
            2,130,471
            
            $
            725,936
            
            $
            -





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





**WORKING
      CAPITAL REQUIREMENTS DURING THE SHORT AND LONG TERM**





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





1)
      Equity
      investments – The Company is actively seeking equity investments to expand its
      business. We expect to raise additional capital as required for fiscal year
      2009.


2)
      Vendor
      financing – Our key vendors in China have agreed to manufacture on behalf of the
      Company without advanced payments and have extended payment terms to the
      Company. The terms with the factories are sufficient to cover the factory direct
      sales, which accounted for more than 60% of the total revenues.


3)
      Factoring of accounts receivable - The Company factors its accounts receivable
      for sales originated in the United States. We are continually exploring better
      rates and terms with various banks. The Company has currently received numerous
      proposals with higher credit facility at better rates to meet the cash
      requirements of the shipping season. We continue to evaluate all offers.


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


5)
      Bridge
      Loan - We may be able to raise additional short term bridge loan from the parent
      of our majority shareholder, Starlight International, who is also one of our
      suppliers.




21




6)
      Reduce
      cost of operation – The Company has incorporated SMC Logistics, Inc. as a
      wholly-owned subsidiary to operate our California warehouse. For fiscal 2009,
      SMC Logistics has signed an agreement with the Starlight Group to handle the
      logistics and fulfillment of Starlight Groups’ domestic products for a service
      fee. This arrangement effectively turns our warehouse from a cost-center to
      a
      profit-center.





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





During
      fiscal 2009, we will strive to reduce additional operating costs. In order
      to
      reduce the need to maintain inventory in our warehouses in California and
      Florida, we intend to continue to ship a significant portion of our total sales
      directly from SMC Macau. The goods shipped directly to our customers from ports
      in China are primarily backed by customer letters of credit. The customers
      take
      title to the merchandise at their consolidators in China and are responsible
      for
      the shipment, duty, clearance and freight charges to their locations. In order
      to keep our inventory low, we have been helping our customers forecast and
      manage their Singing Machine inventories. This will prevent the overstocking
      situation with customers.





Except
      for the foregoing, we do not have any present commitment that is likely to
      cause
      our liquidity to increase or decrease in any material way. In addition, except
      for the Company’s need for additional capital to finance inventory purchases,
      the Company is not aware of any trend, additional demand, event or uncertainty
      that will result in, or that is reasonably likely to result in, the Company’s
      liquidity increasing or decreasing in any material way.





**EXCHANGE
      RATES**





We
      sell
      all of our products in U.S. dollars and pay for all of our manufacturing costs
      in either U.S. or Hong Kong dollars. Operating expenses of our former Hong
      Kong
      office were paid in Hong Kong dollars. Operating expenses of the Macau office
      are paid in either Hong Kong dollars or Macau currency (MOP) The exchange rate
      of the Hong Kong dollar to the U.S. dollar has been fixed by the Hong Kong
      government since 1983 at HK$7.80 to U.S. $1.00 and, accordingly, has not
      represented a currency exchange risk to the U.S. dollar. The exchange rate
      of
      the MOP to the U.S. dollar is MOP $8.05 to U.S. $1.00. We cannot assure you
      that
      the exchange rate between the United States, Macau and Hong Kong currencies
      will
      continue to be fixed or that exchange rate fluctuations will not have a material
      adverse effect on our business, financial condition or results of operations.





**SEASONAL
      AND QUARTERLY RESULTS**





Historically,
      our operations have been seasonal, with the highest net sales occurring in
      the
      second and third quarters (reflecting increased orders for equipment and music
      merchandise during the Christmas selling months) and to a lesser extent the
      first and fourth quarters of the fiscal year. Sales in our fiscal second and
      third quarter, combined, accounted for approximately 87.8%, 94.0% and 87.5
      % of
      net sales in fiscal 2008, 2007, and 2006.





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





We
      are
      currently developing and considering selling products other than karaoke
      category during the slow season to fulfill the revenue shortfall.





**INFLATION**





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





**OFF
      BALANCE SHEET ARRANGEMENTS**





None.




**CRITICAL
      ACCOUNTING POLICIES**





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




22




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





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





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





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





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





**RECENT
      ACCOUNTING PRONOUNCEMENTS:**


See
      "Note
      1" to the attached financial statements.





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





Market
      risk represents the risk of loss that may impact our financial position, results
      of operations or cash flows due to adverse changes in financial and commodity
      market prices and interest rates. We are exposed to market risk in the areas
      of
      changes in United States and international borrowing rates and changes in
      foreign currency exchange rates. In addition, we are exposed to market risk
      in
      certain geographic areas that have experienced or remain vulnerable to an
      economic downturn, such as China. We purchase substantially all our inventory
      from companies in China, and, therefore, we are subject to the risk that such
      suppliers will be unable to provide inventory at competitive prices. While
      we
      believe that, if such an event were to occur we would be able to find
      alternative sources of inventory at competitive prices, we cannot assure you
      that we would be able to do so. These exposures are directly related to our
      normal operating and funding activities. Historically and as of March 31, 2008,
      we have not used derivative instruments or engaged in hedging activities to
      minimize market risk.





**INTEREST
      RATE RISK**




As
      of
      March 31, 2008, our exposure to market risk resulting from changes in interest
      rates is immaterial.





**FOREIGN
      CURRENCY RISK**





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





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





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





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





N/A




23




**ITEM
      9A.****CONTROLS
      AND PROCEDURES**





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





Management
      is responsible for establishing and maintaining adequate internal control over
      financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the
      Exchange Act. This rule defines internal control over financial reporting as
      a
      process designed by, or under the supervision of Company management to provide
      reasonable assurance regarding the reliability of financial reporting and the
      preparation of financial statements for external purposes in accordance with
      U.S. GAAP.





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





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





The
      material weaknesses were primarily due to the following:





*(i)
      Lack of accounting management personnel.* At
      the
      time of this Annual Report the Company does not currently have a financial
      controller or on-site Chief Financial Officer. As a result, t here
      is
      no material division of duties that would insure that information is checked
      or
      verified before it is entered into the accounting system or that entries into
      the accounting system accurately reflect transactions. Reconciliations of
      accounts, when performed, are conducted by the individual that is responsible
      for entering information into the account. Additionally there is currently
      no
      management oversight to ensure transactions or postings are accurately recorded.


*(ii)
      Lack of effective financial control policies and procedures.* The
      Company does not currently have sufficient written policies and procedures
      dealing with account reconciliations or charge-backs by customers. As a result,
      many unauthorized charge-backs may be taken without proper review or dispute.
      There also lacks proper documentation or internal testing to assure all postings
      and transactions are accurately and timely reported.


*(iii)
      Transition of accounting system* .
      For
      fiscal year 2008, management has identified inadequate features and preventive
      measures with our Traverse accounting system. For business and financial control
      reasons management has decided to upgrade and convert to a new accounting system
      in March 2008. As of the date of this Annual Report, the Company has switched
      all functions over to this new system. However, due to employee unfamiliarity
      with the new software and reliance upon sensitive reports generated by the
      new
      system, such data input and output may not be timely or accurate.





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





(b)  ***Management’s
      Plan for Remediation of Material Weaknesses***





In
      light
      of the conclusion that our internal control over financial reporting was not
      effective, our management is in the process of implementing a plan intended
      to
      remediate such ineffectiveness and to strengthen our internal controls over
      financial reporting through the implementation of certain measures. At the
      filing of this Annual Report, Management has addressed the need for a financial
      controller and has hired a full-time controller. For fiscal 2009, Management
      is
      committed to improve control and oversight relating to financial controls and
      will work with our Audit Committee to formulate written policies and procedures
      to address deficiencies described above. Additionally, Management has engaged
      the services of a technical consulting company that is familiar with our new
      accounting system to address the deficiencies reported above.





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





(c)  ***Changes
      in Internal Controls***





There
      were no changes in the Company’s internal controls over financial reporting
      during the year ended March 31, 2008, that materially affected, or were
      reasonably likely to materially affect, the Company’s internal control over
      financial reporting, other than the remediation measures described
      above.





**ITEM
      9B. OTHER INFORMATION**





None.




24




**PART
      III**





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





The
      following table sets forth certain information with respect to our executive
      officers, directors and significant employees as of June 15, 2008.





**Name**
            **Age**
            **Position**Anton
                H. Handal
            53
            Chief
                Executive OfficerAlicia
                Haskamp (1)
            60
            Former
                Senior VP of Sales and Product DevelopmentDanny
                Zheng (2)
            38
            Former
                Chief Financial OfficerCarol
                Lau
            59
            Chief
                Financial Officer and ChairwomanHarvey
                Judkowitz
            53
            DirectorBernard
                Appel
            76
            DirectorStewart
                A. Merkin
            65
            DirectorPeter
                Hon
            67
            DirectorYat
                Tung Lau
            29
            DirectorJosef
                A. Bauer (3)
            69
            Former
                Director





(1)
      Ms.
      Haskamp resigned as our Senior VP of Sales and Product Development on February
      5, 2008.


(2)
      Mr.
      Zheng resigned as our Chief Financial Officer on May 22, 2008.


(3)
      Mr.
      Bauer resigned from our Board of Directors of February 4, 2008.





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




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





**Anton
      “Tony” H.**  **Handal** became
      the CEO of the Singing Machine on June 21, 2007. Mr. Handal is also the founder
      and principal of Handal & Associates.  Mr. Handal has extensive
      practical business experience. He has negotiated, documented and closed a myriad
      of business transactions and has successfully managed several mergers,
      acquisitions and reverse mergers. Mr. Handal, together with a close group of
      financial and accounting affiliates, has structured corporate finance
      transactions, managed due diligence assignments and negotiated purchase and
      sale
      agreements. He has also overseen corporate due diligence, licensed Intellectual
      Property and negotiated vendor/supply agreements.





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





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





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





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





**Danny
      Zheng** had been
      part of the Singing Machine management team since April 2004 and had served
      as
      financial controller and principal accounting officer until April 5, 2005 when
      he became the Chief Financial Officer of the Singing Machine. On January 1,
      2007, Danny became the interim Chief Executive Officer of the Company until
      Mr.
      Handal was appointed Chief Executive Officer on June 21, 2007. Mr. Zheng has
      since resigned from the Company effective March 22, 2008. Mr. Zheng is a
      certified public accountant licensed by the state of Delaware. He held
      controller and VP finance positions with various private and public companies.
      Previously, he was also employed by a New York regional CPA firm as tax
      consultant for 4 years. Mr. Zheng also served as general manager from 1999
      to
      2002 for PC Ware International Miami branch, a Taiwan based computer
      manufacturer. He was responsible for its distribution, marketing and finance
      operation in six countries throughout Latin America. He also served as director
      of operations for PC Micro, a joint venture computer manufacturer in Manaus,
      Brazil from 1999 to 2002. Mr. Zheng earned a B.S. degree in accounting from
      Nankai University in China. Mr. Zheng is currently pursuing an Executive MBA
      degree at the Wharton School, University of Pennsylvania.




25




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





**Harvey
      Judkowitz** has
      served as a director since March 29, 2004 and is the chairman of the Audit
      Committee. He is licensed as a Certified Public Accountant in New York and
      Florida. From 1988 to the present date, Mr. Judkowitz has conducted his own
      CPA
      practices. He has served as the Chairman and CEO of UniPro Financial Services,
      a
      diversified financial services company up until the company was sold in
      September of 2005. He presently is the Chairman of AHM Financial Services Inc.,
      a start-up management company.





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





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





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





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





**BOARD
      COMMITTEES**





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





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





As
      of
      July 2, 2007, the executive compensation/stock option committee consisted of
      Ms.
      Carol Lau (Chairwoman) and Messrs. Judkowitz. In May 2008, Ms. Lau assumed
      the
      position of Interim CFO, replacing Danny Zhang and was thus ineligible to sit
      on
      the compensation committee. Ms. Lau was replaced by Stewart Merkin on the
      compensation committee on July 8, 2008. The executive compensation/stock option
      committee considers and authorizes remuneration arrangements for senior
      management and grants options under, and administers our employee stock option
      plan.





As
      of
      July 2, 2007, the nominating committee consists of Messrs. Appel (Chairman),
      Merkin and Yat Tung Lau. The nominating committee is responsible for reviewing
      the qualifications of potential nominees for election to the Board of Directors
      and recommending the nominees to the Board of Directors for such election.




**Nomination
      of Directors**





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




26




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





•
            
            high
                personal and professional ethics and integrity;





•
            
            the
                ability to exercise sound judgment;





•
            
            the
                ability to make independent analytical inquiries;





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





•
            
            the
                appropriate and relevant business experience and acumen.





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





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





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





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





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





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





**FAMILY
      RELATIONSHIPS**





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





**CODE
      OF ETHICS**





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





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





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





**ITEM
      11. EXECUTIVE COMPENSATION**





**COMPENSATION
      DISCUSSION AND ANALYSIS**





*PHILOSOPHY*





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





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




27




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





*BASE
      SALARIES*





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





*INCENTIVE
      CASH BONUSES*





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





*LONG
      TERM COMPENSATION - STOCK OPTION GRANTS*





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





**COMPENSATION
      OF OFFICERS**





Anton
      Handal became the Chief Executive Officer of the Company on June 21, 2007.
      Mr.
      Handal does not have an employment contract with the Company and does not
      receive a salary. In exchange for his services, Mr. Handal has an option from
      koncepts International Limited to purchase 750,000 stock warrants of The Singing
      Machine Company, Inc. held by koncepts International Limited, at any time,
      upon
      payment of $5,000.





Danny
      Zheng served as the Company’s Interim Chief Executive Officer from January 1,
      2007 through June 21, 2007 and as the Chief Financial Officer from June 21
      through May 22, 2008. During this time, Mr. Zheng had an employment contract,
      for the Chief Financial Officer position, which was entered into on July 20,
      2006. Based on the agreement, Mr. Zheng’s base salary is $160,000 per year. The
      agreement also includes a monthly car allowance of $500 per month and a bonus,
      which is at the sole discretion of the Company’s Board of Directors. Mr. Zheng
      was not granted any cash bonuses in fiscal 2008.





**COMPENSATION
      COMMITTEE REPORT**





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





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





Submitted
      by the Compensation Committee of the Board of Directors:





***Stewart
      Merkin & Harvey Judkowitz***





The
      following table provides certain summary information concerning compensation
      awarded to, earned by or paid to our Chief Executive Officer and other named
      executive officers of our Company whose total compensation exceeded $100,000
      (collectively, the “named officers”) for fiscal year 2007.




28







**SUMMARY
      COMPENSATION TABLE**




**Name
                and Principal**
              **Position**
            
            **Year**
            
            **Salary**
            
            **Bonus**
            
            **Stock**
              **Awards**
            
            **Option
                Awards**
              **(1)**
            
            **Non-Equity
                incentive** **plan compensation**
            
            **Change in**
              **Pension****Value**
              **and**
              **Non-Qualified**
              **Deferred**
              **Compensation
                Earnings**
            
            **All other
                compensation (2)**
            
            **Total**
              **Compensation****Anton
                Handal (3)**
            
            
            2008
            
            $
            0.00
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -*Chief
                Executive Officer***Danny
                Zheng (4)**
            
            
            2008
            
            $
            166,154.00
            
            $
            5,000.00
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            $
            12,876.84
            
            $
            184,030.84*Former
                Chief Financial Officer***Alicia
                Haskamp (5)**
            
            
            2008
            
            $
            127,884.60
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            $
            48,498.71
            
            $
            176,383.31*Former
                Senior Vice President of Sales and Product
                Development*





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





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





(3)
      Mr.
      Handal does not receive a salary however pursuant to a warrants option agreement
      with koncepts International Limited, he has an option to purchase 750,000 stock
      warrants in the Company for $5,000, exercisable at any time.





(4)
      Mr.
      Danny Zheng joined our Company on April 19, 2004 as financial controller and
      became our Chief Financial Officer on April 5, 2005 and our Interim Chief
      Executive Officer on January 1, 2007. On June 21, 2007, Mr. Zheng resigned
      as
      our Interim Chief Executive Officer and Mr. Anton “Tony” H. Handal was appointed
      as our Chief Executive Officer. Mr. Zheng subsequently resigned as Chief
      Financial Officer effective March 22, 2008.





(5)
      Ms.
      Haskamp resigned effective February 5, 2008.





**OPTION
      GRANTS IN FISCAL 2008**





The
      following table sets forth information regarding stock option awards to our
      named executive officers under our Year 2001 Stock Option Plan during the fiscal
      year ended March 31, 2008:




**GRANTS
      OF PLAN BASED AWARDS**


**Name
                  and Principal Position**
              
              **Grant Date**
              
              **All Other Option
                       Awards: Number of**
                  **Securities**
                **Underlying Options(#)**
              
              **Exercise or**
                  **Base Price of**
                  **Option Awards**
                **($/Sh) (1)**
              
              **Grant Date**
                  **Fair Value**
                  **of
                    Stock and**
                **Option Awards (2)**N/A
                  (1)
              
              
              N/A
              
              
              N/A
              
              
              N/A
              
              
              N/A




(1)
      No
      grants of plan based awards were issued during FY 2008





**OUTSTANDING
      EQUITY AWARDS AT FISCAL YEAR-END**





The
      following table sets forth information with respect to grants of options to
      purchase our common stock under our Year 2001 Stock Option Plan to the named
      executive officers during the fiscal year ended March 31, 2008:


29





**Name
                and Principal Position**
            
            **Number of
                Securities Underlying Unexercised Options (#)
                Exercisable**
            
            **Number of
                Securities Underlying Unexercised Options (#)
                Unexercisable**
            
            **Equity Incentive**
              **Plan
                Awards: Number of Securities Underlying Unexercised
                Unearned Options (#)**
            
            **Option
                Exercise Price ($)**
            
            **Option
                Expiration Date**
            
            **Number of
                Shares or Units of**
              **Stock**
              **That
                Have**
              **Not
                Vested**
              **(#)**
            
            **Market**
              **Value of
                Shares or Units of**
              **Stock**
              **That
                Have**
              **Not
                Vested**
              **($)**
            
            **Equity Incentive**
              **Plan
                Awards: Number of Unearned Shares, Units**
              **or
                Other**
              **Rights That**
              **Have Not
                Vested (#)**
            
            **Equity Incentive
                Plan Awards: Market or Payout Value of Unearned
                Shares, Units or Other Rights That Have Not
                Vested ($)**Danny
                Zheng
            
            
            9,600
            
            
            2,400
            
            
            N/A
            
            
            1.05
            
            
            4/26/2014
            
            
            N/A
            
            
            N/A
            
            
            N/A
            
            
            N/A*Former
                Chief Financial Officer*
            
            
            46,667
            
            
            23,333
            
            
            
            
            
            0.60
            
            
            5/8/201530,000
            
            
            -
            
            
            
            
            
            0.34
            
            
            1/19/2011100,000
            
            
            
            
            
            
            
            
            0.33
            
            
            4/9/2011186,267
            
            
            25,733Alicia
                Haskamp*Former
                Senior VP of Sales & Product Development*
            
            
            18,000
            
            
            -
            
            
            N/A
            
            
            9.00
            
            
            10/31/2012
            
            
            N/A
            
            
            N/A
            
            
            N/A
            
            
            N/A30,000
            
            
            -
            
            
            
            
            
            5.60
            
            
            3/7/201311,200
            
            
            2,800
            
            
            
            
            
            1.97
            
            
            12/19/201310,600
            
            
            -
            
            
            
            
            
            1.97
            
            
            12/19/201353,333
            
            
            26,667
            
            
            
            
            
            0.60
            
            
            5/8/201550,000
            
            
            50,000
            
            
            
            
            
            0.33
            
            
            4/9/2011173,133
            
            
            79,467




*The
      Company does not grant any stock-based awards




The
      following table sets forth with respect to the named director, compensation
      information inclusive of equity awards and payments made in the fiscal year
      ended March 31, 2008. All option awards were granted from our Year 2001 Stock
      Option Plan.





**DIRECTOR
      COMPENSATION**




**Name**
            
            **Fees Earned or
                Paid in Cash**
            
            **Stock Awards**
            
            **Option**
            
            **Non-Equity
                Incentive Plan Compensation ($)**
            
            **Change in
                Pension Value and Nonqualified Deferred Compensation
                Earnings**
            
            **All Other
                Compensation**
            
            **Total**Bernie
                Appel
            
            $
            8,900
            
            $
            2,500
            
            $
            2,400
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            13,800Jay
                Bauer (1)
            
            $
            8,000
            
            $
            1,959
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            9,959Peter
                Hon
            
            $
            -
            
            $
            2,500
            
            $
            2,400
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            4,900Harvey
                Judkowitz
            
            $
            9,100
            
            $
            2,500
            
            $
            2,400
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            14,000Carol
                Lau
            
            $
            1,400
            
            $
            2,500
            
            $
            2,400
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            6,300Yat
                Tung Lau
            
            $
            500
            
            $
            2,500
            
            $
            2,400
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            5,400Stewart
                Merkin
            
            $
            9,100
            
            $
            2,500
            
            $
            2,400
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            14,000





(1)
            Jay
                Bauer resigned from our Board effective February 4,
                2008.





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





During
      fiscal 2008, our compensation package for our non-employee directors consisted
      of grants of stock options, cash payments, stock issuances and reimbursement
      of
      costs and expenses associated with attending our Board meetings. Our eight
      non-employee directors during fiscal 2008 were Messrs. Appel, Judkowitz, Hon,
      Carol Lau, Yat Tung Lau and Merkin.





During
      fiscal 2008, we have utilized the following compensation policy for our
      directors:





·
            An
                initial grant of 20,000 Singing Machine stock options with an exercise
                price determined as the closing price on the day of joining the board.
                The
                options will vest in one year and expire in ten years while they
                are board
                members or 90 days once they are no longer board
                members.





·
            An
                annual cash payment of $7,500 will be made for each completed full
                year of
                service or prorated for a partial year. The payment will be made
                as of
                March 31.


30





·
            An
                annual stock grant of stock equivalent in value to $2,500 for each
                completed full year of service or prorated for a partial year. The
                stock
                price at grant will be determined at the closing price on the day
                of the
                Annual Shareholder Meeting. The actual grant will be made on or before
                March 31.





·
            An
                annual grant of 20,000 Singing Machine stock options with an exercise
                price determined as the closing price on the day of the Annual Shareholder
                Meeting. If the Annual Meeting is held less than 6 months after the
                board
                member first joined the board he or she will not receive another
                option
                grant.





·
            Independent
                board members will receive a $500 fee for each board meeting and
                annual
                meeting they attend. Committee meetings and telephone board meetings
                will
                be compensated with a $200 fee.





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





**EMPLOYMENT
      AGREEMENTS**





As
      of
      June 30, 2008 the Company has no employment contracts with any of its employees.
      The Company had an employment contract with Danny Zheng, former Chief Financial
      Officer, which terminated as of May 22, 2008. The employment agreement was
      entered into on July 20, 2006. Based on the agreement, Mr. Zheng’s base salary
      was $160,000 per year. Mr. Zheng will serve as a consultant to the Company
      for
      three months from the date of his resignation ending August 31, 2008 during
      which time he will be paid his normal base salary and benefits.





Mr.
      Zheng
      received a cash bonus of $5,000 in fiscal 2008 and $12,000 in fiscal year
      2006.





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





In
      addition, the Company previously had an employee agreement with Alicia Haskamp,
      former Senior Vice President of Sales and Product Development prior to her
      resignation on February 5, 2008. Based upon that agreement, her base salary
      was
      $160,000 per year and included a $500 monthly car allowance and a bonus which
      is
      based on hardware net sales revenue. Ms. Haskamp served as consultant to the
      company until March 31, 2008 through which she was paid her full base salary,
      benefits, and commissions.





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





**SEPARATION
      AND CONSULTING AGREEMENTS**





As
      of
      June 30, 2008 the Company currently only has one consulting agreement. Pursuant
      to his resignation, Danny Zheng has agreed to consult for the Company until
      August 31, 2008, during which time he will be paid his normal compensation
      package and benefits. The Company also had a consulting agreement with Alicia
      Haskamp, which terminated on March 31, 2008. Ms. Haskamp was paid her full
      salary, benefits, and commission.





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





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


31





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





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





**YEAR
      1994 PLAN**





Our
      1994
      Plan was originally adopted by our Board of Directors in May 1994 and was
      approved by our shareholders on June 29, 1994. Our shareholders approved
      amendments to our 1994 Plan in March 1999 and September 2000. The 1994 Plan
      reserved for issuance up to 1,950,000 million share of our common stock pursuant
      to the exercise of options granted under the Plan. As of March 31, 2003, we
      had
      granted all the options that are available for grant under our 1994 Plan. As
      of
      March 31, 2007, we have 13,050 options issued and outstanding under the 1994
      Plan and all of these options are fully vested as of March 31, 2007.





**YEAR
      2001 PLAN**





On
      June
      1, 2001, our Board of Directors approved the Year 2001 Plan and it was approved
      by our shareholders at our special meeting held September 6, 2001. The Year
      2001
      Plan was developed to provide a means whereby directors and selected employees,
      officers, consultants, and advisors of the Company may be granted incentive
      or
      non-qualified stock options to purchase common stock of the Company. The Year
      2001 Plan authorizes an aggregate of 1,950,000 shares of the Company `s common
      stock with a maximum of 450,000 shares to any one individual in any one fiscal
      year. The shares of common stock available under the Year 2001 Plan are subject
      to adjustment for any stock split, declaration of a stock dividend or similar
      event. At March 31, 2007, we have granted 1,369,840 options under the Year
      2001
      Plan, 569,257 of which are fully vested.





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





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





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





**401(K)
      PLAN**





Effective
      January 1, 2001, we adopted a voluntary 401(k) plan. All employees with at
      least
      one year of service are eligible to participate in our 401(k) plan. We make
      a
      matching contribution of 100% of salary deferral contributions up to 3% of
      pay,
      plus 50% of salary deferral contributions from 3% to 5% of pay for each payroll
      period. The amounts charged to earnings for contributions to this plan and
      administrative costs during the years ended March 31, 2008, 2007, 2006 and
      2005
      totaled approximately $21,674, $39,460, $39,572 and $30,025, respectively.


32


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





The
      following table sets forth as of June 15, 2008, certain information concerning
      beneficial ownership of our common stock by:





·
            all
                directors of the Singing Machine,


·
            all
                named executive officers of the Singing Machine;
                and


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





We
      had
      31,841,728 shares of our common stock issued and outstanding. In addition,
      the
      following amounts are included as they will be exercisable within 60 days of
      June 15, 2008: 33,333 shares of common stock, and 1,029,296 stock options issued
      under the 1994 and 2001 Stock Option Plans.





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


33





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


**As
      of June 15, 2008**





Name
              and position of owner
            
            Title
                of Class
            
            Shares of
              Common
              Stock (1)
            
            Percent of
                Common
                StockAnton
                Handal
            
            
            N/A
            
            
            0
            
            
            *Chief
                Executive OfficerDanny
                Zheng
            
            
            Common Stock
            
            
            186,267
            
            
            *Former
                Chief Financial OfficerAlicia
                Haskamp
            
            
            Common StockFormer
                Sr. Vice President of Sales and Product Development
            
            52,000
            
            
            *Joseph
                Bauer (2)
            
            
            Common Stock
            
            
            1,284,591
            
            
            3.91
            %DirectorBernard
                Appel
            
            
            Common Stock
            
            
            74,022
            
            
            *DirectorHarvey
                Judkowitz
            
            
            Common Stock
            
            
            74,022
            
            
            *DirectorCarol
                Lau
            
            
            Common Stock
            
            
            574
            
            
            *ChairwomanYat
                Tung Lau
            
            
            Common Stock
            
            
            574
            
            
            *DirectorPeter
                Hon
            
            
            Common Stock
            
            
            574
            
            
            *DirectorStewart
                Merkin
            
            
            Common Stock
            
            
            51,675
            
            
            *DirectorKoncept
                International Ltd (3)
            
            
            Common Stock
            
            
            17,875,536
            
            
            54.38
            %Majority
                ShareholderGentle
                Boss Investments Ltd
            
            
            Common Stock
            
            
            2,100,000
            
            
            6.39
            %ShareholderAll
                Directors and Executive Officers as a Group
            
            
            Common Stock
            
            
            1,724,299
            
            
            5.25
            %**Total
                Shares of Common Stock @ 6/15/08**
            
            
            
            
            
            **31,841,728****Stock
                Options Exercisable within 60 days of 6/15/08**
            
            
            
            
            
            **1,029,296****Total**
            
            
            
            
            
            **32,871,024**





*Less
      than 1%.





(1)
      Includes as to the person indicated the following outstanding stock options
      to
      purchase shares of the Company’s Common Stock issued under the 1994 and 2001
      Stock Option Plans, which will be vested and exercisable within 60 days of
      July
      15, 2008: 186,267 options held by Danny Zheng; 60,000 options held by Bernie
      Appel; 60,000 options held by Harvey Judkowitz and 40,000 held by Stewart
      Merkin.




34




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




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





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




**Review,
      Approval or Ratification of Transactions with Related
      Persons**


We
      believe that the terms of all of the above transactions are commercially
      reasonable and no less favorable to us than we could have obtained from an
      unaffiliated third party on an arm’s length basis. Our policy requires that all
      related parties recuse themselves from negotiating and voting on behalf of
      our
      company in connection with related party transactions.




**Parents**


Not
      applicable




**Promoter
      and Certain Control Persons**


Not
      applicable.




**CORPORATE
      GOVERNANCE**




**Board
      Determination of Independence**





The
      Board
      has determined that Messrs. Judkowitz, Merkin and Appel are "independent
      directors" within the meaning of the listing standards of the American Stock
      Exchange. The audit committee recommends the engagement of independent auditors
      to the board, initiates and oversees investigations into matters relating to
      audit functions, reviews the plans and results of audits with our independent
      auditors, reviews our internal accounting controls, and approves services to
      be
      performed by our independent auditors.





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





The
      following is a summary of the fees billed to the Singing Machine by Berkovits
      & Co, LLP and HLB Hodgson Impey Chengfor professional services rendered for
      the fiscal years ended March 31, 2008 and 2007:





Fee
                Category
            
            Fiscal 2008
            
            Fiscal 2007Audit
                Fees
            
            $
            164,194
            
            $
            227,675Tax
                Fees
            
            
            15,000
            
            
            15,000All
                Other Fees
            
            
            1,600
            
            
            1,150Total
                Fees
            
            $
            180,794
            
            $
            243,825





Audit
      Fees - Consists of fees billed for professional services rendered for the audit
      of the Singing Machine's consolidated financial statements and review of the
      interim consolidated financial statements included in quarterly reports and
      services that were provided by Berkovits & Co, LLP in connection with
      statutory and regulatory filings or engagements





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





All
      Other
      Fees - Consists of fees for products and services other than the services
      reported above.





Out
      of
      the total fiscal 2008 and fiscal 2007 audit and other fees, $164,194 and
      $164,774 were billed by Berkovits and Co., LLP, respectively.





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





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


35


**PART
      IV**





**ITEM
      15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES**





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




Consolidated
      Balance Sheets— March 31, 2008 and 2007




Consolidated
      Statements of Operations—Years ended March 31, 2008, 2007 and 2005.




Consolidated
      Statements of Shareholders' (deficit) Equity—Years ended March 31, 2008, 2007
      and 2005.




Consolidated
      Statements of Cash Flows—Years ended March 31, 2008, 2007 and 2005.




2.
      Notes
      to Consolidated Financial Statements




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




(b)
      Exhibits.





**Exhibit No.**
            
            **Description**




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





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





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





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





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





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





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





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





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





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





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


36





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





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





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





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





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





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





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





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





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





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





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





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





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





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





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





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





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





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





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


37





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





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





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





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





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





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





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





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





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





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





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





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





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





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





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




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





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





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





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





*
      Filed
      herewith


+
      Compensatory plan or arrangement.


38


**SIGNATURES**





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





**THE
      SINGING MACHINE COMPANY, INC.**


Date: 
                July 9, 2008
            *By:*
            */s/ Anton
                H. Handal*Anton
                H. HandalChief
                Executive Officer





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




SIGNATURE
            
            CAPACITY
            
            DATE/s/
                Anton H. Handal
            
            Chief
                Executive Officer
            
            July
                9, 2008Anton
                H. Handal/s/
                Carol Lau
            
            Chief
                Financial Officer
            
            July
                9, 2008Carol
                Lau/s/
                BERNARD APPEL
            
            Director
            
            July
                9, 2008Bernard
                Appel/s/
                HARVEY JUDKOWITZ
            
            Director
            
            July
                9, 2008Harvey
                Judkowitz/s/
                STEWART MERKIN
            
            Director
            
            July
                9, 2008Stewart
                MerkinYAT
                TUNG LAU
            
            Director
            
            July
                9, 2008Yat
                Tung LauPETER
                HON
            
            Director
            
            July
                9, 2008Peter
                Hon


39




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




**FINANCIAL
      STATEMENTS**




**INDEX
      TO FINANCIAL STATEMENTS**




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




F-1


**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**





To
      the
      Board of Directors and Shareholders of


The
      Singing Machine Company, Inc. and Subsidiaries




We
      have
      audited the accompanying consolidated balance sheets of The Singing Machine
      Company, Inc. and Subsidiaries (the “Company”) as of March 31, 2008 and 2007,
      and the related consolidated statements of operations, shareholders’ equity, and
      cash flows for each of the years in the three year period ended March 31, 2008.
      These financial statements are the responsibility of the Company’s management.
      Our responsibility is to express an opinion on these consolidated financial
      statements based on our audits.





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




In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the financial position of the Company as of March
      31,
      2008 and 2007, and the results of its operations and its cash flows for each
      of
      the years in the three year period ended March 31, 2008, in conformity with
      accounting principles generally accepted in the United States of
      America.




We
      have
      also audited Schedule II of the Company for the years ended March 31, 2008,
      2007, 2006. In our opinion, this schedule, when considered in relation to the
      basic consolidated financial statements taken as a whole, presents fairly,
      in
      all material respects, the information therein.




/s/
      Berkovits & Company, LLP.




Fort
      Lauderdale, Florida


July
      2,
      2008





F-2




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


**CONSOLIDATED
      BALANCE SHEETS**


**March 31, 2008**
              
              **March 31, 2007****Assets****Current
                  Assets**Cash
                  and cash equivalents
              
              $
              447,816
              
              $
              1,188,900Accounts
                  receivable, net of allowances of $120,899 and$61,825,
                  respectively
              
              
              1,961,721
              
              
              1,054,371Due
                  from factor
              
              
              131,451
              
              
              109,991Inventories,net
              
              
              3,514,984
              
              
              2,280,083Prepaid
                  expenses and other current assets
              
              
              412,552
              
              
              521,891**Total
                  Current Assets**
              
              
              6,468,524
              
              
              5,155,236**Property
                  and Equipment, net**
              
              
              598,280
              
              
              446,510**Other
                  Non-Current Assets**
              
              
              169,362
              
              
              56,054**Total
                  Assets**
              
              $
              7,236,166
              
              $
              5,657,800**Liabilities
                  and Shareholders' Equity****Current
                  Liabilities**Accounts
                  payable
              
              $
              1,145,150
              
              $
              903,243Due
                  to related parties, net
              
              
              616,732
              
              
              199,316Accrued
                  expenses
              
              
              409,415
              
              
              624,994Customer
                  credits on account
              
              
              778,993
              
              
              594,169Deferred
                  gross profit on estimated returns
              
              
              217,812
              
              
              213,718Subordinated
                  debt - related parties
              
              
              -
              
              
              225,000**Total
                  Current Liabilities**
              
              
              3,168,102
              
              
              2,760,440**Shareholders'
                  Equity**Preferred
                  stock, $1.00 par value; 1,000,000 shares authorized, noshares
                  issued and outstanding
              
              
              -
              
              
              -Common
                  stock, Class A, $.01 par value; 100,000 sharesauthorized;
                  no shares issued and outstanding
              
              
              -
              
              
              -Common
                  stock, $0.01 par value; 100,000,000 shares authorized;31,758,400
                  and 27,286,199 shares issued and outstanding
              
              
              317,584
              
              
              272,862Additional
                  paid-in capital
              
              
              18,430,612
              
              
              17,306,342Accumulated
                  deficit
              
              
              (14,680,132
              )
              
              (14,681,844
              )**Total
                  Shareholders' Equity**
              
              
              4,068,064
              
              
              2,897,360**Total
                  Liabilities and Shareholders' Equity**
              
              $
              7,236,166
              
              $
              5,657,800




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





F-3





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


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**





**For the Years Ended****03/31/08**
            
            **03/31/07**
            
            **03/31/06****Net
                Sales**
            
            $
            34,067,871
            
            $
            26,732,144
            
            $
            32,305,560**Cost
                of Goods Sold**
            
            
            26,389,070
            
            
            20,616,541
            
            
            25,223,056**Gross
                Profit**
            
            
            7,678,801
            
            
            6,115,603
            
            
            7,082,504**Operating
                Expenses**Selling
                expenses
            
            
            2,931,416
            
            
            2,308,959
            
            
            2,169,168General
                and administrative expenses
            
            
            4,279,728
            
            
            4,952,254
            
            
            6,140,542Depreciation
                and amortization
            
            
            311,273
            
            
            556,051
            
            
            932,216**Total
                Operating Expenses**
            
            
            7,522,417
            
            
            7,817,264
            
            
            9,241,926**Income
                (Loss) from Operations**
            
            
            156,384
            
            
            (1,701,661
            )
            
            (2,159,422
            )**Other
                Income (Expenses)**Other
                income
            
            
            -
            
            
            -
            
            
            103,396(Loss)
                Gain on sale of subsidiary and other assets
            
            
            (27,654
            )
            
            29,028
            
            
            -Net
                gain on retirement of convertible debenturesincluding
                unpaid accrued interest of $259,726
            
            
            -
            
            
            -
            
            
            2,253,725Interest
                expense, net of interest income
            
            
            (127,018
            )
            
            (42,355
            )
            
            (487,307
            )Interest
                expense - Amortization of discounton
                convertible debentures
            
            
            -
            
            
            -
            
            
            (1,615,642
            )**Net
                Other Income (Expenses)**
            
            
            (154,672
            )
            
            (13,327
            )
            
            254,172**Income
                (loss) before reversal of provision for income
                taxes**
            
            
            1,712
            
            
            (1,714,988
            )
            
            (1,905,250
            )**Reversal
                of provision for income taxes**
            
            
            -
            
            
            2,453,576
            
            
            -**Net
                Income (Loss)**
            
            $
            1,712
            
            $
            738,588
            
            $
            (1,905,250
            )**Income
                (Loss) per Common Share**Basic
            
            $
            0.000
            
            $
            0.035
            
            $
            (0.190
            )Diluted
            
            $
            0.000
            
            $
            0.030
            
            $
            (0.190
            )**Weighted
                Average Common and Common****Equivalent
                Shares:**Basic
            
            
            29,925,952
            
            
            21,145,003
            
            
            10,029,085Diluted
            
            
            30,910,424
            
            
            24,753,864
            
            
            10,029,085





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





F-4


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


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**





**For the Years Ended****March 31, 2008**
            
            **March 31, 2007**
            
            **March 31, 2006****Cash
                flows from operating activities***Net
                Income (Loss)*
            
            $
            1,712
            
            $
            738,588
            
            $
            (1,905,250
            )Adjustments
                to reconcile net income (loss) to net cash and cash equivalents used
                in
                operating activities:Reversal
                of provision for income taxes
            
            
            -
            
            
            (2,453,576
            )
            
            -Gain
                from debt restructure
            
            
            -
            
            
            -
            
            
            (2,253,725
            )Gain
                on sale of subsidiary and other assets
            
            
            -
            
            
            (29,028
            )
            
            -Loss
                on disposal of property and equipment
            
            
            27,654
            
            
            -
            
            
            -Depreciation
                and amortization
            
            
            311,273
            
            
            556,051
            
            
            688,951Change
                in inventory reserve
            
            
            131,154
            
            
            (902,071
            )
            
            (681,767
            )Change
                in allowance for bad debts
            
            
            17,284
            
            
            (41,790
            )
            
            95,016Amortization
                of discount/deferred fees on convertible debentures
            
            
            -
            
            
            -
            
            
            1,858,911Stock
                compensation
            
            
            38,112
            
            
            194,870
            
            
            22,473Deferred
                gross profit on estimated sales returns
            
            
            4,094
            
            
            27,436
            
            
            (209,949
            )*Changes
                in assets and liabilities:*(Increase)
                Decrease in:Accounts
                receivable
            
            
            (924,634
            )
            
            156,690
            
            
            (113,445
            )Inventories
            
            
            (1,366,055
            )
            
            310,046
            
            
            2,088,646Prepaid
                expenses and other current assets
            
            
            109,339
            
            
            (293,489
            )
            
            278,902Other
                non-current assets
            
            
            (113,308
            )
            
            42,633
            
            
            12,711Increase
                (Decrease) in:Accounts
                payable
            
            
            441,906
            
            
            (160,565
            )
            
            97,239Accrued
                expenses
            
            
            (215,579
            )
            
            (23,190
            )
            
            214,133Customer
                credits on account
            
            
            184,824
            
            
            (440,046
            )
            
            (625,110
            )Net
                cash used in operating activities
            
            
            (1,352,224
            )
            
            (2,317,441
            )
            
            (432,264
            )**Cash
                flows from investing activities**Purchase
                of property and equipment
            
            
            (490,697
            )
            
            (488,946
            )
            
            (163,723
            )Receipt
                of restricted cash
            
            
            -
            
            
            268,405
            
            
            602,390Proceeds
                from sales of assets
            
            
            -
            
            
            29,028
            
            
            -Net
                cash (used in)/provided by investing activities
            
            
            (490,697
            )
            
            (191,513
            )
            
            438,667**Cash
                flows from financing activities**Proceeds
                from (payments to) factoring, net
            
            
            (21,460
            )
            
            24,290
            
            
            (99,909
            )Payment
                on related party loans
            
            
            (225,000
            )
            
            -
            
            
            -Payment
                on convertible debentures
            
            
            -
            
            
            -
            
            
            (2,000,000
            )Proceeds
                from issuance of stock
            
            
            630,881
            
            
            3,125,700
            
            
            -Net
                advanced from related parties
            
            
            717,416
            
            
            124,316
            
            
            1,900,000Net
                cash provided by/(used in) financing activities
            
            
            1,101,837
            
            
            3,274,306
            
            
            (199,909
            )**Change
                in cash and cash equivalents**
            
            
            (741,084
            )
            
            765,352
            
            
            (193,506
            )**Cash
                and cash equivalents at beginning of period**
            
            
            1,188,900
            
            
            423,548
            
            
            617,054**Cash
                and cash equivalents at end of period**
            
            $
            447,816
            
            $
            1,188,900
            
            $
            423,548**Supplemental
                Disclosures of Cash Flow Information:**Cash
                paid for Interest
            
            $
            78,898
            
            $
            57,769
            
            $
            272,852**Supplemental
                Disclosures of Non-Cash Financing Activities:**Payment
                of trade payable with stock
            
            $
            500,000
            
            $
            500,000
            
            
            -Conversion
                of loan payable to equity
            
            $
            -
            
            $
            2,000,000
            
            $
            200,000





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




F-5


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


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


**Preferred Stock**
              
              **Common Stock**
              
              **Additional Paid**
              
              **Accumulated****Shares**
              
              **Amount**
              
              **Shares**
              
              **Amount**
              
              **in Capital**
              
              **Deficit**
              
              **Total****Balance
                  at March 31, 2005**
              
              
              -
              
              $
              -
              
              
              **9,769,593**
              
              **$**
              **97,696**
              
              **$**
              **11,432,463**
              
              **$**
              **(13,515,182**
              **)**
              **$**
              **(1,985,023**
              **)**Net
                  Loss
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (1,905,250
              )
              
              (1,905,250
              )Conversion
                  of Insider Loan
              
              
              -
              
              
              -
              
              
              290,689
              
              
              2,907
              
              
              206,260
              
              
              
              
              
              209,167Warrants
                  related to debenture payment settlement
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              6,000
              
              
              -
              
              
              6,000Employee
                  compensation - stock option
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              13,308
              
              
              -
              
              
              13,308**Balance
                  at March 31, 2006**
              
              
              -
              
              
              -
              
              
              **10,060,282**
              
              
              **100,603**
              
              
              **11,658,031**
              
              
              **(15,420,432**
              **)**
              
              **(3,661,798**
              **)**Net
                  Income
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              738,588
              
              
              738,588Employee
                  compensation-stock option
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              182,369
              
              
              -
              
              
              182,369Exercise
                  of employee stock options
              
              
              -
              
              
              -
              
              
              285,000
              
              
              2,850
              
              
              122,350
              
              
              -
              
              
              125,200Director
                  Fees
              
              
              -
              
              
              -
              
              
              39,065
              
              
              391
              
              
              12,110
              
              
              -
              
              
              12,501Issuances
                  of common stock
              
              
              -
              
              
              -
              
              
              16,901,852
              
              
              169,018
              
              
              5,331,482
              
              
              -
              
              
              5,500,500**Balance
                  at March 31, 2007**
              
              
              -
              
              
              -
              
              
              **27,286,199**
              
              
              **272,862**
              
              
              **17,306,342**
              
              
              **(14,681,844**
              **)**
              
              **2,897,360**Net
                  Income
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              1,712
              
              
              1,712Employee
                  compensation-stock option
              
              
              -
              
              
              -
              
              
              
              
              
              
              
              
              24,010
              
              
              -
              
              
              24,010Exercise
                  of employee stock options
              
              
              -
              
              
              -
              
              
              147,515
              
              
              1,475
              
              
              46,905
              
              
              -
              
              
              48,380Director
                  Fees
              
              
              -
              
              
              -
              
              
              15,162
              
              
              152
              
              
              13,950
              
              
              -
              
              
              14,102Issuances
                  of common stock
              
              
              -
              
              
              -
              
              
              4,309,524
              
              
              43,095
              
              
              1,039,405
              
              
              -
              
              
              1,082,500**Balance
                  at March 31, 2008**
              
              
              -
              
              $
              -
              
              
              **31,758,400**
              
              $
              **317,584**
              
              $
              **18,430,612**
              
              $
              **(14,680,132**
              **)**
              $
              **4,068,064**
 
 ***The
        accompanying notes are an integral part of these financial
        statements***
  F-6





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




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





**NOTE
      1 - BASIS OF PRESENTATION**





**OVERVIEW**





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





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





**NOTE
      2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**





**PRINCIPLES
      OF CONSOLIDATION** The
      accompanying consolidated financial statements include the accounts of The
      Singing Machine Company, Inc. and its wholly-owned subsidiaries: SMC (Comercial
      Offshore De Macau) Limitada (“Macau Subsidiary”), The Singing Machine Holdings
      Ltd. (a B.V.I. company) and SMC Logistics, Inc., a California company. All
      inter-company accounts and transactions have been eliminated in consolidation
      for all periods presented.





**USE
      OF ESTIMATES** The
      Singing Machine makes estimates and assumptions in the ordinary course of
      business relating to sales returns and allowances, warranty reserves, and
      reserves for promotional incentives that affect the reported amounts of assets
      and liabilities and of contingent assets and liabilities at the date of the
      consolidated financial statements and the reported amounts of revenues and
      expenses during the reporting period. Historically, past changes to these
      estimates have not had a material impact on the Company's financial condition.
      However, circumstances could change which may alter future expectations.





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





**FOREIGN
      CURRENCY TRANSLATION**





The
      functional currency of the Macau Subsidiary is the Hong Kong dollar. The
      financial statements of the subsidiaries are translated to U.S. dollars using
      year-end rates of exchange for assets and liabilities, and average rates of
      exchange for the year for revenues, costs, and expenses. Net gains and losses
      resulting from foreign exchange transactions and translations were not material
      during the periods presented.





**CONCENTRATION
      OF CREDIT RISK**





The
      Company maintains cash balances in foreign financial institutions. Such balances
      are not insured. The uninsured amounts at March 31, 2008 and March 31, 2007
      are
      $407,376 and $240,682, respectively.





**INVENTORY**





Inventories
      are comprised of electronic karaoke equipment, accessories, and compact discs
      and are stated at the lower of cost or market, as determined using the first
      in,
      first out method. The Singing Machine reduces inventory on hand to its net
      realizable value on an item-by-item basis when it is apparent that the expected
      realizable value of an inventory item falls below its original cost. A charge
      to
      cost of sales results when the estimated net realizable value of specific
      inventory items declines below cost. Management regularly reviews the Company's
      investment in inventories for such declines in value.


F-7


**REVENUE
      RECOGNITION**





Revenue
      from the sale of equipment, accessories, and musical recordings are recognized
      upon the later of: (a) the time of shipment or (b) when title passes to the
      customers and all significant contractual obligations have been satisfied and
      collection of the resulting receivable is reasonably assured. Revenues from
      sales of consigned inventory are recognized upon sale of the product by the
      consignee. Net sales are comprised of gross sales net of actual and estimated
      future returns, discounts and volume rebates. The total returns represent 8.6%,
      13.4%, and 7.4% of the gross sales for the twelve months ended March 31, 2008,
      2007, and 2006, respectively.





**STOCK
      BASED COMPENSATION**





The
      Company began to apply the provisions of SFAS No. 123 (revised 2004),
      Share-Based Payments ("SFAS 123 (R)"), starting on January 1, 2006. SFAS 123
      (R)
      which became effective after June 15, 2005, replaces SFAS No. 123, Accounting
      for Stock-Based Compensation, and supersedes Accounting Principles Board Opinion
      ("APB") No. 25, Accounting for Stock Issued to Employees. SFAS 123 (R) requires
      all share-based payments to employees including grants of employee stock
      options, be measured at fair value and expensed in the consolidated statement
      of
      operations over the service period (generally the vesting period). Upon
      adoption, the Company transitioned to SFAS 123 (R) using the modified
      prospective application, whereby compensation cost is only recognized in the
      consolidated statements of operations beginning with the first period that
      SFAS
      123 (R) is effective and thereafter, with prior periods' stock-based
      compensation still presented on a pro forma basis. Under the modified
      prospective approach, the provisions of SFAS 123 (R) are to be applied to new
      employee awards and to employee awards modified, repurchased, or cancelled
      after
      the required effective date. Additionally, compensation cost for the portion
      of
      employee awards for which the requisite service has not been rendered that
      are
      outstanding as of the required effective date shall be recognized as the
      requisite service is rendered on or after the required effective date. The
      compensation cost for that portion of employee awards shall be based on the
      grant-date fair value of those awards as calculated for either recognition
      or
      pro-forma disclosures under SFAS 123. The Company continues to use the
      Black-Scholes option valuation model to value stock options. As a result of
      the
      adoption of SFAS 123 (R), for the years ended March 31, 2008, 2007 and 2006,
      ,
      the stock option expense was $24,010, $182,3969 and $13,307, respectively.
      Employee stock option compensation expense in fiscal years 2008, 2007 and 2006
      includes the estimated fair value of options granted, amortized on a
      straight-line basis over the requisite service period for the entire portion
      of
      the award.





Prior
      to
      June 15, 2005, the Company followed Accounting Principles Board Opinion ("APB")
      No. 25, Accounting for Stock Issued to Employees. Reported and pro forma net
      loss and loss per share based on APB No. 25 for the last fiscal year of
      transition would have been as follows:





For year endedMarch 31, 2006Net
                loss, as reported
            
            $
            (1,905,250
            )Less:
                Total stock-based employee compensation expense determined under
                fair
                value based method
            
            
            (484,103
            )Net
                loss, pro forma
            
            $
            (2,389,353
            )Net
                loss, per share -
                basic                                As
                reported
            
            $
            (0.19
            )Pro
                forma
            
            $
            (0.24
            )Net
                loss, per share -
                diluted                             As
                reported
            
            $
            (0.19
            )Pro
                forma
            
            $
            (0.24
            )





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





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





·
            For
                the year ended March 31, 2007: expected dividend yield 0%, risk-free
                interest rate of 4.65% to 5.1%, volatility 90.77% and 91.6% and expected
                term of three years.





·
            For
                the year ended March 31, 2006: expected dividend yield 0%, risk-
                free
                interest rate from 4% to 4.86%, volatility from 91% to 104% and expected
                term of three to five years.




F-8


**ADVERTISING**





Costs
      incurred for producing and publishing advertising of the Company, are charged
      to
      operations as incurred. The Company has entered into cooperative advertising
      agreements with its major customers that specifically indicated that the
      customer has to spend the cooperative advertising fund upon the occurrence
      of
      mutually agreed events. The percentage of the cooperative advertising allowance
      ranges from 2% to 5% of the purchase. The customers have to advertise the
      Company's products in the customer's catalog, local newspaper and other
      advertising media. The customer must submit the proof of the performance (such
      as a copy of the advertising showing the Company’s products) to the Company to
      request for the allowance. The customer does not have the ability to spend
      the
      allowance at their discretion. The Company believes that the identifiable
      benefit from the cooperative advertising program and the fair value of the
      advertising benefit is equal or greater than the cooperative advertising
      expense. Advertising expense for the years ended March 31, 2008, 2007 and 2006
      was $470,671, $212,362 and $168,739, respectively.





**RESEARCH
      AND DEVELOPMENT COSTS**





All
      research and development costs are charged to results of operations as incurred.
      These expenses are shown as a component of selling, general and administrative
      expenses in the consolidated statements of operations. For the years ended
      March
      31, 2008, 2007 and 2006, these amounts totaled $22,491, $104,218 and $132,282,
      respectively.





**FAIR
      VALUE OF FINANCIAL INSTRUMENTS**





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





The
      carrying amounts of the Company's short-term financial instruments, including
      accounts receivable, due from factors, accounts payable, loan-related party,
      customer credits on account, subordinated debt-related parties and accrued
      expenses approximates fair value due to the relatively short period to maturity
      for these instruments.





**RECLASSIFICATIONS**





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





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





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





Effective April
      1, 2007, we adopted the provisions of the Financial Accounting Standards Board
      (“FASB”) Interpretation (FIN) No. 48, *Accounting
      for Uncertainty in Income Taxes* – *an
      interpretation of FASB Statement No. 109* .
      FIN 48
      contains a two-step approach to recognizing and measuring uncertain tax
      positions accounted for in accordance with SFAS No. 109, *Accounting
      for Income Taxes* .
      The
      first step is to evaluate the tax position for recognition by determining if
      the
      weight of available evidence indicates it is more likely than not that the
      position will be sustained on audit, including resolution of related appeals
      or
      litigation processes, if any. The second step is to measure the tax benefit
      as
      the largest amount which is more than 50% likely of being realized upon ultimate
      settlement. We consider many factors when evaluating and estimating its tax
      positions and tax benefits, which may require periodic adjustments and which
      may
      not accurately anticipate actual outcomes. The impact of FIN 48 on our financial
      position is discussed in Note 13 – Income Taxes.





**LONG-LIVED
      ASSETS**





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





**PROPERTY
      AND EQUIPMENT**





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


F-9


**CASH
      AND CASH EQUIVALENTS**





The
      Company considers all highly liquid investments with maturities of three months
      or less at the time of purchase to be cash equivalents. Cash and cash equivalent
      balances at March 31, 2008 and March 31, 2007 were $447,816 and $1,188,900,
      respectively.





**SHIPPING
      AND HANDLING COSTS**





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





**NOTE
      3- RECENT ACCOUNTING PRONOUNCEMENTS**





In
      December 2007, FASB issued SFAS No. 141 (revised 2007), *Business
      Combinations* ,
      which
      replaces SFAS No 141. The statement retains the purchase method of accounting
      for acquisitions, but requires a number of changes, including changes in the
      way
      assets and liabilities are recognized in the purchase accounting. It also
      changes the recognition of assets acquired and liabilities assumed arising
      from
      contingencies, requires the capitalization of in-process research and
      development at fair value and requires the expensing of acquisition-related
      costs as incurred. We are currently assessing the potential impact that adoption
      of SFAS No. 141 would have on our financial statements.





In
      December 2007, the FASB issued SFAS No. 160. *Noncontrolling
      Interests in Consolidated Financial Statements, and amendment of ARB 51 (“SFAS
      No. 160”)* ,
      which
      changes the accounting and reporting for minority interests. Minority interests
      will be recharacterized as noncontrolling interests and will be reported as
      a
      component of equity separate from the parent’s equity, and purchases or sales of
      equity interests that do not result in a change of control will be accounted
      for
      as equity transactions. In addition, net income attributable to the
      noncontrolling interest will be included in consolidated net income on the
      face
      of the income statement and upon a loss of control, the interest sold, as well
      as any interest retained, will be recorded at fair value with any gain or loss
      recognized in earnings.. We are currently assessing the potential impact that
      adoption of SFAS No. 160 would have on our financial statements.





**NOTE
      4 - INVENTORIES**





Inventories
      are comprised of the following components:





March 31,
            
            March 31,2008
            
            2007Finished
                Goods
            
            $
            4,012,969
            
            $
            2,334,381Inventory
                in Transit
            
            
            -
            
            
            144,550Less:
                Inventory Reserve
            
            
            (497,985
            )
            
            (198,848
            )Total
                Inventories
            
            $
            3,514,984
            
            $
            2,280,083





Inventory
      consigned to customers at March 31, 2008 and March 31, 2007 were $372,012 and
      $418,598, respectively.





**NOTE
      5 - ACCOUNTS RECEIVABLE FACTORING AGREEMENT**





The
      Company executed an agreement with CIT on August 13, 2007 to factor its
      receivables. CIT assumes the credit risk on approved accounts (factor risk
      accounts). For non-approved accounts, the Company will assume the credit risk
      (client risk accounts). The factoring fees, for the client risk accounts, are
      .3% of the gross invoice. For the factor risk accounts, the fees are .55% of
      the
      gross invoice. The annual minimum charge is $24,000. The agreement will expire
      August 2008. After that date, each party will have to give 60 days written
      notice to terminate the agreement. CIT does not advance funds to the Company
      directly. On October 26, 2007, the Company entered into a four- party agreement
      with CIT(“Factor”), Standard Chartered Bank (Hong Kong), Limited (“Lender”) and
      Starlight Marketing Limited (“Borrower”), a related party. According to the
      agreement, the Company assigns the proceeds from customers to the Lender, the
      Lender advances the loans to the Borrower. The Borrower sends the advance to
      the
      Company. Both the Borrower and the Company guarantee the repayment of the
      advance. The maximum amount for the advance is approximately $4.5 million or
      85%
      of the qualified accounts receivable, which ever is higher. As of March 31,
      2008
      and 2007, the outstanding amount due from the factor was $131,451 and $109,991,
      respectively. The amounts represent excess of customer payments received by
      the
      factor over advances made to the Company.




F-10




**NOTE
      6 - PROPERTY AND EQUIPMENT**





A
      summary
      of property and equipment is as follows:





USEFUL
            
            MARCH 31,
            
            MARCH 31,LIFE
            
            2008
            
            2007Computer
                and office equipment
            
            
            5
                years
            
            $
            520,182
            
            $
            440,946Furniture
                and fixtures
            
            
            5-7
                years
            
            
            216,120
            
            
            220,171Leasehold
                improvement
            
            
            *
            
            
            156,614
            
            
            209,004Molds
                and tooling
            
            
            3
                years
            
            
            1,032,970
            
            
            621,5081,925,886
            
            
            1,491,629Less:
                Accumulated depreciation
            
            
            
            
            
            (1,327,606
            )
            
            (1,045,119
            )$
            598,280
            
            $
            446,510





·
            Shorter
                of remaining term of lease or useful life


Depreciation
      for fiscal years ended 2008, 2007, and 2006 was $311,273, $556,051, and
      $688,951, respectively.





**NOTE
      7 – DUE TO RELATED PARTIES, NET**





As
      of
      March 31, 2008 we had $616,732 due to related parties. This consists of an
      interest bearing loan payable of $642,587 to Starlight Marketing Limited, an
      $18,000 payable to Starlight Marketing Development Limited, and net accounts
      payable of $38,751 to related parties. These amounts were reduced by a
      non-interest bearing receivable from Cosmo Communications Corp. for
      $82,607.





As
      of
      March 31, 2007, due to related parties represented accounts payable for
      inventory purchased from Starlight Marketing Limited.





**NOTE
      8 - SUBORDINATED DEBT - RELATED PARTIES**





These
      related party loans as of March 31, 2007 were in the amount of $225,000 and
      were
      due to a former director and his associate. The loans carried an interest rate
      of 5.5%. The loans were paid during fiscal year 2008.





**NOTE
      9 - CUSTOMER CREDITS ON ACCOUNT**





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





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





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





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





**NOTE
      1** **1
      - COMMITMENTS AND CONTINGENCIES**





**LEGAL
      MATTERS**





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





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





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




F-11





On
      February 27, 2008 the Ninth Circuit Court of Appeals affirmed the dismissal
      against The Singing Machine Company, Inc. and dismissed all claims against
      the
      Company with prejudice. Sybersound has until July 10, 2008 to file a Petition
      with the United States Supreme Court to appeal that decision. If Sybersound
      does
      not elect to file a Petition, the above captioned lawsuit will be concluded.





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





**LEASES**





The
      Company has entered into various operating lease agreements for office and
      warehouse facilities in Coconut Creek, Florida, City of Industry, California
      and
      Macau. The leases expire at varying dates. Rent expense for the years ended
      March 31, 2008, 2007 and 2006 was $201,270, $409,608 and $632,586,
      respectively .





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





Future
      minimum lease payments under property and equipment leases with terms exceeding
      one year as of March 31, 2008 are as follows:





Property Leases
            
            Equipment LeasesFor
                period ending2009
            
            $
            556,673
            
            $
            9,8882010
            
            
            714,004
            
            
            14,8752011
            
            
            732,359
            
            
            -2012
            
            
            669,233
            
            
            -2013
                and beyond
            
            
            725,936
            
            
            -$
            3,398,204
            
            $
            24,763





The
      above
      property lease payments are gross payments which are not net of supplemental
      sublease fees we receive. During fiscal years 2008 and 2007 the Company received
      fees of approximately $543,000 and $414,000 respectively, for warehousing
      services provided to affiliated entities out of its California
      warehouse.





Such
      fees
      have been offset against rent expense in the consolidated statements of
      operations. The affiliated entities are committed to pay fees to the Company
      of
      approximately $429,000 during fiscal year 2009.





**LICENSE
      AGREEMENTS**





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





On
      November 21, 2006 we also entered into a three-year license agreement with
      MGA
      Entertainment, Inc. to produce and distribute a variety of consumer electronic
      products based on MGA's BRATZTM franchise, one of the world's leading toy lines
      and girls' lifestyle brands, in North America, New Zealand, Chile and Australia.
      These consumer electronic products include boom boxes, clock radios and portable
      DVDs. The license agreement contains a minimum guarantee payment
      term.





Future
      royalty payments due under license agreements at March 31, 2008 are as follows:





Royalty PaymentsFor
                period ending2009
            
            $
            242,000Thereafter$
            242,000




F-12





**AMERICAN
      STOCK EXCHANGE STATUS**





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





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





In
      a
      letter dated March 28, 2008, the American Stock Exchange reviewed the Company’s
      fiscal year 2008 financial statements and in light of its performance,
      determined that Singing Machine has resolved its listing deficiency from
      September 6, 2006. The Company is fully reinstated as an Amex member in good
      standing, but will still have to comply with continued listing standards
      pursuant to Amex Company Guide Section 1009(h).





**NOTE
      12 - STOCKHOLDERS' EQUITY**





**COMMON
      STOCK ISSUANCES**





During
      the years ended March 31, 2008, 2007 and 2006, the Company issued the following
      common stock shares:





2008:





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





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





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





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





2007:





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





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





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





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





2006:





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





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





**EARNINGS
      PER SHARE**





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





For
      the
      years ended March 31, 2008, 2007 and 2006, common stock equivalents to purchase
      2,544,824, 1,973,446 and 1,133,201 shares of stock, respectively, were not
      included in the computation of diluted earnings per share because the exercise
      prices were greater than the average market price of the Company’s common stock
      for the period.




F-13





**STOCK
      OPTIONS**





On
      June
      1, 2001, the Board of Directors approved the 2001 Stock Option Plan (`Plan"),
      which replaced the 1994 Stock Option Plan, as amended, (the "1994 Plan"). The
      Plan was developed to provide a means whereby directors and selected employees,
      officers, consultants, and advisors of the Company may be granted incentive
      or
      non-qualified stock options to purchase common stock of the Company. As of
      March
      31, 2008, the Plan is authorized to grant options up to an aggregate of
      1,950,000 shares of the Company's common stock and up to 300,000 shares for
      any
      one individual grant in any fiscal year. As of March 31, 2008, the Company
      had
      275,220 options available to be granted under the 2001 Plan. As of March 31,
      2008, the Company had 337,500 options available to be granted under the 1994
      Plan.





The
      Company adopted SFAS 123(R) for the reporting periods ending after June 15,
      2005
      and thereafter has recognized the fair value of the stock option as part of
      the
      selling, general and administration expense. Accordingly, no compensation cost
      has been recognized for options issued under the Plan in periods prior to June
      15, 2005. A summary of stock option activity for each of the years presented
      is
      summarized below.





**Fiscal
                2008**
            
            **Fiscal
                2007**
            
            **Fiscal
                2006****Number of Options**
            
            **Weighted**
              **Average**
              **Exercise Price**
            
            **Number of**
              **Options**
            
            **Weighted**
              **Average**
              **Exercise**
              **Price**
            
            **Number of**
              **Options**
            
            **Weighted**
              **Average**
              **Exercise Price****Stock
                Options:****Balance
                at beginning of period**
            
            
            1,382,890
            
            $
            1.26
            
            
            1,300,110
            
            $
            1.74
            
            
            1,041,610
            
            $
            3.67**Granted**
            
            
            120,000
            
            $
            0.45
            
            
            943,000
            
            $
            0.39
            
            
            841,000
            
            $
            0.50**Exercised**
            
            
            (147,515
            )
            $
            0.33
            
            
            (285,000
            )
            $
            0.44
            
            
            -
            
            $
            0.00**Forfeited**
            
            
            (107,560
            )
            $
            1.27
            
            
            (575,220
            )
            $
            1.34
            
            
            (582,500
            )
            $
            3.48**Balance
                at end of period**
            
            
            1,247,815
            
            $
            1.25
            
            
            1,382,890
            
            $
            1.26
            
            
            1,300,110
            
            $
            1.74**Options
                exercisable at end of period**
            
            
            1,029,296
            
            $
            1.44
            
            
            582,307
            
            $
            2.14
            
            
            392,161
            
            $
            3.52





The
      following table summarizes information about employee stock options outstanding
      at March 31, 2008:





Range of Exercise Price
            
            Number Outstanding at
              March 31, 2008
            
            Weighted Average
              Remaining Contractural
              Life
            
            Weighted Average
              Exercise Price
            
            Number Exercisable at
              March 31, 2008
            
            Weighted Average
              Exercise Price$0.32-$0.77
            
            
            1,018,485
            
            
            5.37
            
            $
            0.51
            
            
            811,152
            
            
            0.50$1.05-$1.97
            
            
            116,780
            
            
            6.02
            
            $
            1.51
            
            
            105,594
            
            
            1.50$2.04-$5.60
            
            
            35,550
            
            
            4.55
            
            $
            5.04
            
            
            35,550
            
            
            5.04$7.20-$11.09
            
            
            77,000
            
            
            4.66
            
            $
            9.58
            
            
            77,000
            
            
            9.581,247,815
            
            
            
            
            
            
            
            
            1,029,296





Prior
      to
      April 1, 2005, in accordance with SFAS No. 123, for options issued to employees,
      the Company applies the intrinsic value method of APB Opinion No. 25 and related
      interpretations in accounting for options issued.





**STOCK
      WARRANTS**





As
      of
      March 31, 2008, the Company had a total of 2,500,000 stock purchase warrants
      outstanding. The exercise price of these warrants range from $0.28 to $0.35.
      The
      expiration date of these warrants range from July 25, 2009 to July 26,
      2010.





**NOTE
      13 - INCOME TAXES**





The
      Company files separate tax returns in the United States and in Macau. The Macau
      Subsidiary has received approval from the Macau government to operate its
      business as a Macau Offshore Company (MOC), and is exempt from the Macau income
      tax. For the fiscal years ended March 31, 2008, 2007 and 2006, the Company
      recorded no tax provision. The Company has now exhausted its ability to carry
      back any further losses and therefore will only be able to recognize tax
      benefits to the extent that it has future taxable income.





Due
      to
      the change of control of the Company, the net operating loss carry over is
      subject to the IRS Section 382 limitation. As of March 31, 2008, 2007 and 2006,
      The Singing Machine had net deferred tax assets of approximately $2.5 million,
      $2.7 million, and $6.4 million, respectively, against which the Company recorded
      valuation allowances totaling approximately $ 2.5 million,
      $2.7 million, and $6.4 million, respectively.





FASB
      Interpretation No. 48, *Accounting
      for Uncertainty in Income Taxes* (“FIN
      48”) was issued to clarify the requirements of SFAS No. 109, *Accounting
      for Income Taxes* ,
      relating to the recognition of income tax benefits. FIN 48 provides a two-step
      approach to recognizing and measuring tax benefits when the benefits’
realization is uncertain. The first step is to determine whether the benefit
      is
      to be recognized; the second step is to determine the amount to be
      recognized:


·
            Income
                tax benefits should be recognized when, based on the technical merits
                of a
                tax position, the company believes that if a dispute arose with the
                taxing
                authority and were taken to a court of last resort, it is more likely
                than
                not (i.e., a probability of greater than 50 percent) that the tax
                position
                would be sustained as filed; and




F-14




·
            If
                a position is determined to be more likely than not of being sustained,
                the reporting company should recognize the largest amount of tax
                benefit
                that is greater than 50 percent likely of being realized upon ultimate
                settlement with the taxing
                authority.





We
      adopted FIN on April 1, 2007 and it has had no impact on the financial
      statements.





In
      2007,
      as a consequence of the ISMC divestiture, and based on the opinion of the Hong
      Kong tax counsel, as well as “hold harmless” representations from the present
      shareholders of ISMC, the Company reversed the previously recorded provision
      of
      Hong Kong tax of approximately $2,453,000. Such reversal has been presented
      in
      the income tax section of the accompanying statements of operations.





The
      income tax expense (benefit) for federal, foreign, and state income taxes in
      the
      consolidated statement of operations consisted of the following components
      for
      2008, 2007, and 2006:


2008
              
              2007
              
              2006Current:U.S.
                  Federal
              
              $
              9,181
              
              $
              (781,917
              )
              $
              550,839Foreign
              
              
              -
              
              
              (2,453,576
              )
              
              (129,090
              )State
              
              
              944
              
              
              (69,080
              )
              
              74,870Deferred
              
              
              (10,125
              )
              
              850,997
              
              
              (496,619
              )$
              -
              
              $
              (2,453,576
              )
              $
              -





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





2008
            
            2007
            
            2006United
                States
            
            $
            27,002
            
            $
            (2,316,348
            )
            $
            (1,167,591
            )Foreign
            
            
            (25,290
            )
            
            601,360
            
            
            (737,659
            )$
            1,712
            
            $
            (1,714,988
            )
            $
            (1,905,250
            )




The
      actual tax expense differs from the "expected" tax expense for the years ended
      March 31, 2008, 2007, and 2006 (computed by applying the U.S. Federal Corporate
      tax rate of 34 percent to income before taxes) as follows:





2008
            
            2007
            
            2006Expected
                tax (benefit) expense
            
            $
            582
            
            $
            (583,096
            )
            $
            (647,785
            )State
                income taxes, net of Federal income tax benefit
            
            
            943
            
            
            (69,080
            )
            
            (110,506
            )Permanent
                differences
            
            
            5,829
            
            
            5,640
            
            
            5,550Deemed
                Dividend
            
            
            -
            
            
            -
            
            
            1,224,000Change
                in valuation allowance
            
            
            (194,062
            )
            
            (3,702,790
            )
            
            (4,019,030
            )Tax
                rate differential on foreign earnings
            
            
            8,600
            
            
            (204,462
            )
            
            121,714Reversal
                of provision for foreign income taxes
            
            
            -
            
            
            (2,453,576
            )
            
            -Other
            
            
            178,108
            
            
            4,553,788
            
            
            3,426,057Actual
                (benefit) tax expense
            
            $
            -
            
            $
            (2,453,576
            )
            $
            -




F-15






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





2008
            
            2007
            
            2006Deferred
                tax assets:Federal
                net operating loss carryforward
            
            $
            1,490,139
            
            $
            2,034,910
            
            $
            2,325,138State
                net operating loss carryforward
            
            
            518,078
            
            
            291,285
            
            
            466,092Hong
                Kong net operating loss carryforward
            
            
            -
            
            
            -
            
            
            340,916AMT
                credit carryforward
            
            
            70,090
            
            
            70,090
            
            
            70,090Inventory
                differences
            
            
            169,382
            
            
            66,942
            
            
            505,452Hong
                Kong foreign tax credit
            
            
            -
            
            
            -
            
            
            2,453,576Allowance
                for doubtful accounts
            
            
            41,105
            
            
            21,021
            
            
            35,229Reserve
                for sales returns
            
            
            74,056
            
            
            72,664
            
            
            63,336Charitable
                contributions
            
            
            60,700
            
            
            60,700
            
            
            60,573Amortization
                of reorganization intangible
            
            
            53,652
            
            
            53,652
            
            
            53,652Total
                deferred tax assets
            
            
            2,477,202
            
            
            2,671,264
            
            
            6,374,054Deferred
                tax liability:Depreciation
            
            
            -
            
            
            -
            
            
            -Total
                deferred tax liability
            
            
            -
            
            
            -
            
            
            -Net
                deferred tax assets before valuation allowance
            
            
            2,477,202
            
            
            2,671,264
            
            
            6,374,054Valuation
                allowance
            
            
            (2,477,202
            )
            
            (2,671,264
            )
            
            (6,374,054
            )Net
                deferred tax assets
            
            $
            -
            
            $
            -
            
            $
            -





At
      March
      31, 2008, the Company has federal tax net operating loss carry forwards in
      the
      amount of approximately $4.4 million, which expires beginning in the year 2023.
      In addition, state tax net operating loss carry forwards in the amount of
      approximately $6.6 million expires beginning in 2013. The Company is no longer
      subject to income tax examinations for fiscal years before 2005.





**NOTE
      14 - SEGMENT INFORMATION**





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





**FOR
                THE FISCAL YEARS ENDED**March
                31,2008
            
            2007
            
            2006North
                America
            
            $
            27,085,842
            
            $
            20,552,962
            
            $
            22,458,950Europe
            
            
            6,314,126
            
            
            5,793,062
            
            
            9,655,939Others
            
            
            667,904
            
            
            386,120
            
            
            190,671$
            34,067,871
            
            $
            26,732,144
            
            $
            32,305,560




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





**NOTE
      15 - EMPLOYEE BENEFIT PLANS**





The
      Company has a 401(k) plan for its employees to which the Company makes
      contributions at rates dependent on the level of each employee's contributions.
      Contributions made by the Company are limited to the maximum allowable for
      federal income tax purposes. The amounts charged to operations for contributions
      to this plan and administrative costs during the years ended March 31, 2008,
      2007, and 2006 totaled $21,674, $39,460 and $39,571, respectively. The amounts
      are included as a component of general and administrative expense in the
      accompanying Consolidated Statements of Operations. The Company does not provide
      any post employment benefits to retirees.





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





The
      Company derives a majority of its revenues from retailers of products in the
      United States. Financial instruments, which potentially subject the Company
      to
      concentrations of credit risk, consist of accounts receivable. The Company's
      allowance for doubtful accounts is based upon management's estimates and
      historical experience and reflects the fact that accounts receivable are
      concentrated with several large customers whose credit worthiness have been
      evaluated by management. At March 31, 2008, 65% of accounts receivable were
      due
      from three customers in North America. Accounts receivable from customers that
      individually owed over 10% of total accounts receivable was 31% and 29% at
      March
      31, 2008. Accounts receivable from customers that individually owed over 10%
      of
      total accounts receivable was 29% at March 31, 2007. The Company performs
      ongoing credit evaluations of its customers.




F-16




Revenues
      derived from five customers in 2008, 2007, and 2006 were 62%, 58% and 56% of
      total revenues, respectively. Revenues derived from top three customers in
      2008,
      2007 and 2006 as percentage of the total revenue were 22%, 11% and 11%, 24%,
      16%
      and 10%, and 13%, 12% and 11%, respectively. The loss of any of these customers
      can have an adverse impact on the financial position of the
      Company.





Net
      sales
      derived from the Hong Kong and Macau Subsidiaries aggregated $17.3 million
      in
      2008, $16.2 million in 2007 and $21.9 million in 2006.





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





During
      fiscal years 2008, 2007, and 2006, manufacturers in the People's Republic of
      China ("China") accounted for approximately 99%, 98% and 98%; respectively
      of
      the Company's total product purchases, including all of the Company's hardware
      purchases.





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





**NOTE
      17 - QUARTERLY FINANCIAL DATA - UNAUDITED**





The
      following financial information reflects all normal recurring adjustments that
      are, in the opinion of management, necessary for a fair statement of the results
      of the interim periods. The quarterly unaudited results for the years 2008,
      2007, and 2006 are set forth in the following table:


**Basic**
                    
                    **Diluted****Earnings**
                    
                    **Earnings****Net** **Earnings**
                    
                    **(Loss)**
                    
                    **(Loss)****Sales**
                    
                    **Gross
                        Profit**
                    
                    **(Loss)**
                    
                    **Per** **Share**
                    
                    **Per** **Share**(In thousands)
                    
                    (In thousands)
                    
                    (In thousands)**2008**First
                        quarter
                    
                    $
                    2,446
                    
                    $
                    339
                    
                    $
                    (852
                    )
                    $
                    (0.03
                    )
                    $
                    (0.03
                    )Second
                        quarter
                    
                    
                    16,108
                    
                    
                    3,193
                    
                    
                    1,054
                    
                    
                    0.04
                    
                    
                    0.03Third
                        quarter
                    
                    
                    13,784
                    
                    
                    3,747
                    
                    
                    767
                    
                    
                    0.03
                    
                    
                    0.03Fourth
                        quarter
                    
                    
                    1,730
                    
                    
                    400
                    
                    
                    (967
                    )
                    
                    (0.03
                    )
                    
                    (0.03
                    )Fiscal
                        Year 2008
                    
                    $
                    34,068
                    
                    $
                    7,679
                    
                    $
                    2
                    
                    $
                    -
                    
                    $
                    -**2007**First
                        quarter
                    
                    $
                    1,036
                    
                    $
                    126
                    
                    $
                    (1,151
                    )
                    $
                    (0.11
                    )
                    $
                    (0.11
                    )Second
                        quarter
                    
                    
                    14,299
                    
                    
                    3,046
                    
                    
                    806
                    
                    
                    0.04
                    
                    
                    0.03Third
                        quarter
                    
                    
                    11,018
                    
                    
                    3,289
                    
                    
                    2,824
                    
                    
                    0.11
                    
                    
                    0.10Fourth
                        quarter
                    
                    
                    379
                    
                    
                    (345
                    )
                    
                    (1,740
                    )
                    
                    (0.08
                    )
                    
                    (0.08
                    )Fiscal
                        Year 2007
                    
                    $
                    26,732
                    
                    $
                    6,116
                    
                    $
                    739
                    
                    $
                    0.03
                    
                    $
                    0.03**2006**First
                        quarter
                    
                    $
                    2,792
                    
                    $
                    437
                    
                    $
                    (1,902
                    )
                    $
                    (0.19
                    )
                    $
                    (0.19
                    )Second
                        quarter
                    
                    
                    18,532
                    
                    
                    3,823
                    
                    
                    926
                    
                    
                    0.09
                    
                    
                    0.09Third
                        quarter
                    
                    
                    9,877
                    
                    
                    2,580
                    
                    
                    (565
                    )
                    
                    (0.06
                    )
                    
                    (0.06
                    )Fourth
                        quarter
                    
                    
                    1,104
                    
                    
                    243
                    
                    
                    (364
                    )
                    
                    (0.03
                    )
                    
                    (0.03
                    )Fiscal
                        Year 2006
                    
                    $
                    32,305
                    
                    $
                    7,083
                    
                    $
                    (1,905
                    )
                    $
                    (0.19
                    )
                    $
                    (0.19
                    )




**NOTE
      18 – GAIN FROM DISPOSAL OF ASSETS**





During
      fiscal 2007, the Company sold its Hong Kong subsidiary to a non-related third
      party and recognized a gain of $20,078. The Company also recognized a gain
      of
      $8,950 from the sale of old tools during 2007.




F-17




The
      buyer
      of the Hong Kong Subsidiary, See Bright Investments Ltd, also assumed the
      approximate potential tax liability of $2.4 million. See Income Tax Note
      13.





**NOTE
      19 – RELATED PARTY TRANSACTIONS**





**INVESTMENT**





koncept
      International Limited, a subsidiary of Starlight International Holding Ltd,
      invested $3 million in the Company. The investment was approved by the American
      Stock Exchange on July 25, 2006. Currently, koncept owns 51% of the Company’s
      outstanding common stock.





**TRADE**





On
      May
      23, 2008, SMC Logistics entered into a service and logistics agreement with
      affiliates Starlight Consumer Electronics (USA), Inc. and Cosmo Communications
      Corp. to provide logistics, fulfillment, and warehousing services for Starlight
      and Cosmo’s domestic sales. The Agreement is expected to generate approximately
      $1.1 million dollars for fiscal year 2009.





The
      Company purchased products from Starlight Marketing Macao, a subsidiary of
      Starlight International Holding Ltd. The purchases from Starlight for the fiscal
      year ended March 31, 2008 and 2007 were $5,775,074 and $3,232,694, respectively.
      In addition, the Company also purchased molds and tooling from Starlight in
      the
      amount of $126,282 and $269,700 in fiscals 2008 and 2007, respectively, which
      are included in Property and Equipment in the accompanying Consolidated Balance
      Sheets.





On
      August
      1, 2006, the Company entered into a service agreement with Starlight Electronics
      Co., Ltd, a subsidiary of Starlight International Holding Ltd, to provide
      shipping and engineering service to the Company at a charge of $25,000 per
      month. For the fiscal year ended March 31, 2008 and 2007, this service charge
      was $200,000 per annum and is included in the general and administrative
      expenses in the accompanying Consolidated Statements of Operations.





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





**FINANCING**





On
      August
      3, 2007, the Company entered into a three party Assignment Agreement in which
      Starlight Marketing Limited, a subsidiary of Starlight International Holding
      Ltd, provides financing to the Company. In return, the Company has agreed to
      assign to Starlight its rights to receive all monies from time to time due
      to it
      under the Factoring Agreement with CIT Group. On October 26, 2007, the three
      party Assignment Agreement was replaced by the four party Assignment Agreement,
      in which, the Standard Charter Bank (Hong Kong) was added as the Lender. (see
      Note 5). The amount due to Starlight as of March 31, 2008 resulting from the
      Assignment Agreement is $642,587 of which approximately $138,448 is
      interest.




F-18




**SUPPLEMENTAL
      DATA**


**SCHEDULE
      II**




**Balance** **at**
              
              **Charged** **to**
              
              **Reduction to**
              
              **Credited** **to**
              
              **Balance** **at****Beginning** **of**
              
              **Costs** **and**
              
              **Allowance**
              
              **Costs** **and**
              
              **End
                  of**Description
              
              **Period**
              
              **Expenses**
              
              **for** **Write** **off**
              
              **Expenses**
              
              **Period**Year
                  ended March 31, 2008Reserves
                  deducted from assets to which they apply:Allowance
                  for doubtful accounts
              
              $
              61,824
              
              $
              112,390
              
              $
              (53,315
              )
              $
              -
              
              $
              120,899Deferred
                  tax valuation allowance
              
              $
              2,671,264
              
              $
              123,910
              
              $
              -
              
              $
              (317,972
              )
              $
              2,477,202Inventory
                  reserve
              
              $
              198,848
              
              $
              382,048
              
              $
              -
              
              $
              (82,911
              )
              $
              497,985Year
                  ended March 31, 2007Reserves
                  deducted from assets to which they apply:Allowance
                  for doubtful accounts
              
              $
              103,615
              
              $
              40,082
              
              $
              (26,973
              )
              $
              (54,900
              )
              $
              61,824Deferred
                  tax valuation allowance
              
              $
              6,374,053
              
              $
              -
              
              $
              -
              
              $
              (3,702,789
              )
              $
              2,671,264Inventory
                  reserve
              
              $
              1,096,123
              
              $
              121,969
              
              $
              (747,505
              )
              $
              (271,739
              )
              $
              198,848Year
                  ended March 31, 2006Reserves
                  deducted from assets to which they apply:Allowance
                  for doubtful accounts
              
              $
              117,805
              
              $
              561,271
              
              $
              (575,460
              )
              $
              -
              
              $
              103,615Deferred
                  tax valuation allowance
              
              $
              10,393,084
              
              $
              -
              
              $
              -
              
              $
              (4,019,031
              )
              $
              6,374,053Inventory
                  reserve
              
              $
              1,668,430
              
              $
              83,099
              
              $
              (516,742
              )
              $
              (138,664
              )
              $
              1,096,123





F-19