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
      1934For
      the fiscal year ended March 31, 2009OR£
                  TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the transition period from _________ to ___________Commission
      file number
000-24968




THE SINGING MACHINE COMPANY, INC.





(Exact
name of registrant as specified in its charter)





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





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


(Address
of principal executive offices)


(954)
596-1000


(Registrant’s telephone number,
including area code)


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





NYSE
Amex Equities


(Name
of each exchange on which registered)





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





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





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





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





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





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





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





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





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





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





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


DOCUMENTS INCORPORATED BY
REFERENCE–
None









THE
SINGING MACHINE COMPANY, INC. AND SUBSIDIARIES
 
 INDEX
TO ANNUAL REPORT ON FORM 10-K
 
 FOR
THE FISCAL YEAR ENDED MARCH 31, 2009
 
 PAGEPART
      IItem
      1.
                      Business
                      3Item
      1A.
                      Risk
      Factors
                      9Item
      1B.
                      Unresolved
      Staff Comments
                      16Item
      2.
                      Properties
                      16Item
      3.
                      Legal
      Proceedings
                      16Item
      4.
                      Submission
      of Matters to a Vote of Security Holders
                      16PART
      IIItem
      5.
                      Market
      for Registrant's Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
                      16Item
      6.
                      Selected
      Financial Data
                      18Item
      7.
                      Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
                      18Item
      7A.
                      Quantitative
      and Qualitative Disclosures About Market Risk
                      24Item
      8.
                      Financial
      Statements and Supplementary Data
                      24Item
      9.
                      Changes
      in and Disagreements With Accountants on Accounting and Financial
      Disclosure
                      24Item
      9A(T).
                      Controls
      and Procedures
                      24Item
      9B.
                      Other
      Information
                      25PART
      IIIItem
      10.
                      Directors,
      Executive Officers and Corporate Governance
                      26Item
      11.
                      Executive
      Compensation
                      29Item
      12.
                      Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                      32Item
      13.
                      Certain
      Relationships and Related Transactions and Director
      Independence
                      34Item
      14.
                      Principal
      Accounting Fees and Services
                      35PART
      IVItem
      15.
                      Exhibits,
      Financial Statement Schedules
                      35Signatures
                      40
  2
 
 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 within the meaning of Section 27A of the Securities Act of 1933,
as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
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;
 •
                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 Annual
Report.
 
 PART
I
 
 ITEM
1. BUSINESS
 
 OVERVIEW
 
 The
Singing Machine Company, Inc., doing business as SMC Global, (“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.
  3
  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 (“U.S.”). 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. (“SMC”). 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 NYSE Amex Equities (“AMEX”) (formerly known as the American
Stock Exchange) since March 8, 2001, however we have received notice from AMEX
that it has determined that our common stock will be delisted and no longer
trade on the exchange.  The Company has until June 29, 2009 to
formally appeal AMEX’s decision, after which time the AMEX Staff’s determination
will become final.  Our board of directors has decided at this time
that it is not in the best interest of the Company and its shareholders to
expend the financial resources necessary to appeal the decision and continue to
be listed on AMEX.  The Company believes that AMEX’s insistence that
the Company perform a reverse stock split is subjective and does not consider
the current economic turmoil in the global markets. Management also believes
performing a reverse stock split would significantly harm the Company and
diminish shareholder’s value. In addition, the Company has elected not to appeal
the decision and intends to seek admission to the Over the Counter Bulleting
Board (“OTCBB”) for the following reasons:
 
 (a)
              Due
      to being listed on AMEX, the Company has incurred substantial annual
      listing fees, additional listing application fees, and professional
      service fees which can approach six figures each
  year;
 (b)
              The
      OTCBB requires no annual listing fees or additional listing application
      fees;
 (c)
              Management
      believes that performing a reverse stock split as requested
      by AMEX is not in the best interest of the Company or
      its shareholders; and
 (d)
              Management
      believes it will have closer, more personal contact with its market makers
      and shareholders on the OTCBB.
 
 The
Company will seek to have its common stock traded on the OTC BB shortly after
trading is suspended on AMEX, which will approximately be on or about July 2,
2009, however such date is approximate due to various administrative schedules
at Amex and the SEC. Our common stock currently trades on AMEX under the stock
symbol “SMD,” however, the symbol will likely change, particularly if the
Company’s common stock becomes quoted on the OTCBB. 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:
koncepts International Limited (part of the Starlight International Holdings Ltd
Group) and Arts Electronics Co., Ltd. We believe the investments from these
major suppliers underscore their support to the Company.
 
 koncepts
International Limited (“koncepts”) is a major stockholder of the Company, owning
approximately 52% of our shares of common stock outstanding on a fully diluted
basis as of June 15, 2009.  koncepts is an indirect wholly-owned
subsidiary of Starlight International Holdings Limited (“Starlight
International”), a company whose principal activities include designing,
manufacturing and selling electronic products through its various subsidiaries.
Starlight International’s products include television sets, consumer karaoke
audio equipment and DVD products. We do business with a number of entities that
are indirectly wholly-owned or majority owned subsidiaries of Starlight
International, including Starlight Marketing Limited, Cosmo Communications
Corporation, Starlite Consumer Electronics (USA), Inc., and Starlight Marketing
Macao Commercial Offshore Limited, among others (Starlight International and its
subsidiaries collectively referred to herein as the “Starlight
Group”).
 
 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 an affiliate of the
Starlight 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.
  4
  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, Streaming 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 supplier, Starlight International, parent of koncepts, 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 expense reimbursement opportunity for the Company. Not only does the
Starlight Group get a partner for its domestic U.S. warehousing and logistics,
we get service fees which defray the cost of our own historical warehouse
expense.  We are currently exploring other synergies including
customer representative relationships, customer service functions and accounting
services. These opportunities may lead to new top line revenue growth and
enhance profitability.
 
 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.
  5
  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 U.S. 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,
however for fiscal year 2010 we anticipate access to capital funding will be
limited.
 
 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;
 ·
              What
      we believe to be 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 stockholders 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 three different product lines which consists in total 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 the
      respective 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. We offer 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,
      we have executed an agreement with a third party to provide digital music
      content.  The digital content consists of a library of over
      5,000 songs which can be individually downloaded and burned to CD+G format
      using our own proprietary software.
 ·
              Musical Instrumentswhich we sell under the “Sound X” TM brand.These include
      digital drum sets and keyboards. The retail price will range from $49 to
      $299. In the winter of 2009 we will add a “Sound X Kids” TM line of musical
      instruments targeted towards children to “tween” age
      demographics.
 
 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
the following stores, among others: Costco, J.C. Penney, Toys R’ Us, Kohl's,
Wal-Mart.com and Sam's Club. Our sales strategy include offering domestic sales
as well as direct import sales made direct to the customer.
 
 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.
  6
  In fiscal
2009, approximately 54% of sales revenues were from direct sales and 46% of
revenues were domestic sales. Our sales within the U.S. 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, 2009, 2008, and 2007, were
approximately 61%, 62%, and 58%, respectively. In fiscal 2009, the top three
major customers accounted for 21%, 18% and 10% 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 or a loss of 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.
 
 We
believe 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 and
declining economic conditions 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 9.4%,
8.6%, and 13.4% of our net sales in fiscal 2009, 2008, and 2007,
respectively.
 
 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.
 
 On
November 21, 2006, we entered into a three-year license agreement with MGA
Entertainment, Inc. to produce and distribute a variety of consumer electronic
products based on MGA's BRATZTM franchise. These consumer electronic products
include boom boxes, clock radios, and portable DVDs. The license agreement
contains a minimum guarantee payment term.
 
 TOTAL
LICENSE SALES
 FOR
THE FISCAL YEAR ENDED
 March
31,
 
 2009
                      
                      
                      2008
                      
                      
                      2007MTV
                      
                      
                      0.0
                      %
                      
                      
                      0.0
                      %
                      
                      
                      8.9
                      %Bratz
                      
                      
                      6.2
                      %
                      
                      
                      15.0
                      %
                      
                      
                      0.0
                      %Total
      Licenses Sales
                      
                      
                      6.2
                      %
                      
                      
                      15.0
                      %
                      
                      
                      8.9
                      %
 
 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, 2009, approximately 46% of our sales were sales from our domestic
warehouses ("Domestic Sales") and 54% were sales shipped directly from China
("Direct Sales").
  7
  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 2010, we anticipate
that 99% of our karaoke products will be produced by one of these factories,
which has verbally 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 2010. 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 2010" 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.   We depend on limited
suppliers for some key components and the loss of any single supplier may 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, 2009, 2008, and 2007, warranty claims have not been
material to our results of operations.
 
 COMPETITION
 
 Our
business is highly competitive. Our major competitors for karaoke machines and
related products are Memorex, GPX and other consumer electronics companies. We
believe that competition for karaoke machines is based primarily on price,
product features, reputation, delivery times, and customer support. We believe
that our brand name is well recognized in the industry and helps us compete in
the karaoke machine category. Our primary competitors for producing karaoke
music are Pocket Songs, UAV, Sybersound and Sound Choice. We believe that
competition for karaoke music is based primarily on popularity of song titles,
price, reputation, and delivery times.  As far as the musical
instrument market, our key competitors include Yamaha, ION, and others. For
Bratz products, our competitors are Memorex and Emerson, which also make
licensed products for youth electronics.
 
 In
addition, we compete with all other existing forms of entertainment including,
but not limited to, motion pictures, video arcade games, home video games, theme
parks, nightclubs, television and prerecorded tapes, CD's, and videocassettes.
Our financial position depends, among other things, on our ability to keep pace
with changes and developments in the entertainment industry and to respond to
the requirements of our customers. Many of our competitors have significantly
greater financial, marketing, and operating resources and broader product lines
than we do.
 
 TRADEMARKS
AND PATENTS
 
 We have
obtained registered trademarks for The Singing Machine name and the logo in the
U.S. 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 2003 we also obtained two U.S. design patents for karaoke machines,
patent numbers US D505,960 S and US D524,325 S which expire in
2017.
 
 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.
  8
 
 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
U.S. 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 U.S.
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 U.S. tariff laws, which provides a favorable category of U.S. 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
ending September 30 and December 31. 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 affected by the need to pre-build products before orders
are placed. As of March 31, 2009, we had inventory of $4.7 million (net of
reserves totaling $745,389) compared to inventory of $3.5 million as of March
31, 2008 (net of reserves totaling $497,985).
 
 Our
financing of seasonal working capital during fiscal 2009 was from vendor
financing and factoring the accounts receivables.
 
 We
anticipate our affiliate, Starlight International, will provide financing to the
Company through March 31, 2010.
 
 During
Fiscal 2010, we plan on financing our inventory purchases by using credit lines
that have been extended to us by the factories in China, a letter of credit
facility to pay factories provided by our DBS financing facility and with
letters of credit that are issued by our customers to be used as collateral for
payment to our vendors.
 
 EMPLOYEES
 
 As of
June 15, 2009 we employed thirty people, all of whom are full-time employees,
with the exception of our chief executive officer who divides his time between
managing the Company and his legal practice. Two of our employees are located at
SMC Macau’s offices. The remaining employees are based in the U.S., including
one executive officer, fifteen engaged in warehousing and administrative
logistics/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 OUR AFFILIATES, STARLITE CONSUMER
ELECTRONICS (USA), INC. AND COSMO COMMUNICATIONS CORPORATION, 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 U.S. domestic goods. The value of this
contract is approximately $1.1 million per year. If we are unable to perform the
duties under this contract, it could negatively impact our revenue and cash
flow.
  9
  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 DBS Bank (Macao Branch) 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 less than 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, 2009 and 2008 were approximately 61% and 62%,
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 OUR AFFILIATE COMPANIES WHICH ARE A PART OF THE STARLIGHT GROUP
TO MANUFACTURE AND PRODUCE THE MAJORITY OF OUR KARAOKE MACHINES FOR FISCAL 2010,
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 an agreement with our main supplier in China to produce most of our
karaoke machines for fiscal 2010. If the factory is  unable to deliver
our karaoke machines to us, our business will be adversely affected. Because our
cash on hand is minimal, we are relying on revenues received from the sale of
our ordered karaoke machines to provide cash flow for our operations. If we do
not receive cash from these sales, we may not be able to continue our business
operations.
 
 WE
ARE SUBJECT TO THE RISK THAT SOME OF OUR LARGE CUSTOMERS MAY RETURN KARAOKE
PRODUCTS THAT THEY HAVE PURCHASED FROM US AND IF THIS HAPPENS, IT WOULD REDUCE
OUR REVENUES AND PROFITABILITY.
 
 In fiscal
2009 and 2008, a number of our customers and distributors returned karaoke
products that they had purchased from us. Our customers returned goods valued at
$3.1 million or 9.7% of our net sales in fiscal 2009. 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, 2009, our sales to customers in the United
States decreased because of increased price competition and deteriorating
economic conditions. 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 $339,343 during fiscal
2009 and $458,099 during fiscal 2008. 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.
  10
  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, 2009 we had $4.7 million in inventory on
hand. It is important that we sell this inventory during fiscal 2010, 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,
increasing costs and deteriorating economic conditions 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 stabilize in fiscal
2010 provided that the worldwide economy begins to recover.
 
 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 92.0%, 87.0%,
and 94.0% of net sales in fiscal 2009, 2008, and 2007,
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 2009, 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 2010. In addition, we must compete with
all the other existing forms of entertainment including, but not limited to:
motion pictures, video arcade games, home video games, theme parks, nightclubs,
television, prerecorded tapes, CD's, and video cassettes.
 
 IF
WE ARE UNABLE TO DEVELOP NEW KARAOKE PRODUCTS, OUR REVENUES MAY NOT CONTINUE TO
GROW.
 
 The
karaoke industry is characterized by rapid technological change, frequent new
product introductions and enhancements and ongoing customer demands for greater
performance. In addition, the average selling price of any karaoke machine has
historically decreased over its life, and we expect that trend to continue. As a
result, our products may not be competitive if we fail to introduce new products
or product enhancements that meet evolving customer demands. The development of
new products is complex, and we may not be able to complete development in a
timely manner. To introduce products on a timely basis, we must:
 
 ·
              accurately
      define and design new products to meet market
  needs;
 
 ·
              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.
  11
 
 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 and our results of
operations adversely affected.
 
 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 four 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 2010. Our arrangements with these factories
are subject to the risks of doing business abroad, such as import duties, trade
restrictions, work stoppages, and foreign currency fluctuations, limitations on
the repatriation of earnings and political instability, which could have an
adverse impact on our business. Furthermore, we have limited control over the
manufacturing processes. As a result, any difficulties encountered by our
third-party manufacturers that result in product defects, production delays,
cost overruns or the inability to fulfill orders on a timely basis could
adversely affect our revenues, profitability and cash flow. Also, since we do
not have written agreements with any of these factories, we are subject to
additional uncertainty if the factories do not deliver products to us on a
timely basis.
 
 WE
DEPEND ON THIRD PARTY SUPPLIERS FOR PARTS FOR OUR KARAOKE MACHINES AND RELATED
PRODUCTS, AND IF WE CANNOT OBTAIN SUPPLIES AS NEEDED, OUR OPERATIONS WILL BE
SEVERELY DAMAGED.
 
 Our
growth and ability to meet customer demand depends in part on our capability to
obtain timely deliveries of karaoke machines and our electronic products. We
rely on third party suppliers to produce the parts and materials we use to
manufacture and produce these products. If our suppliers are unable to provide
our factories with the parts and supplies, we will be unable to produce our
products. We cannot guarantee that we will be able to purchase the parts we need
at reasonable prices or in a timely fashion. In the last several years, there
have been shortages of certain chips that we use in our karaoke machines. If we
are unable to anticipate any shortages of parts and materials in the future, we
may experience severe production problems, which would impact our
sales.
 
 CONSUMER
DISCRETIONARY SPENDING MAY AFFECT KARAOKE PURCHASES AND IS AFFECTED BY VARIOUS
ECONOMIC CONDITIONS AND CHANGES.
 
 Our
business and financial performance may be damaged more than most companies by
adverse financial conditions affecting our business or by a general weakening of
the economy. Purchases of karaoke machines and music are considered
discretionary for consumers. Our success will therefore be influenced by a
number of economic factors affecting discretionary and consumer spending, such
as employment levels, business, interest rates, and taxation rates, all of which
are not under our control. Additionally, other extraordinary events such as
terrorist attacks or military engagements, which adversely affect the retail
environment may restrict consumer spending and thereby adversely affect our
sales growth and profitability.
 
 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.
  12
  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 June 15, 2009 we are aware of only four customers, FAO Schwarz,
Musicland, KB Toys, and e-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 2009, approximately 46.0% 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.
 
 CURRENT
LEVELS OF SECURITIES AND FINANCIAL MARKET VOLATILITY ARE
UNPRECEDENTED.
 
 The
capital and credit markets have been experiencing volatility and disruption for
more than 12 months. In recent months, the volatility and disruption has reached
unprecedented levels. In some cases, the markets have produced downward pressure
on stock prices and credit availability for certain issuers. We believe these
credit market disruptions have likely decreased our ability to access debt and
equity financing. If current levels of market disruption and volatility continue
or worsen, there can be no assurance that we will not experience an adverse
effect, which may be material, on our ability to access capital and on our
business, financial condition and results of operations.
 CURRENCY
EXCHANGE RATE RISK
 
 The
majority of our products are currently manufactured in the People’s Republic of
China.  During the fiscal year ended March 31, 2009, the Chinese local
currency had no material effect on the Company as all of our purchases are
denominated in U.S. currency.   However, in the event our
purchases are required to be made in Chinese local currency, the Yuan, we will
be subject to the risks involved in foreign exchange rates.  Although
currently pegged to the U.S. dollar, in the future the value of the Yuan may
depend to a large extent on the Chinese government’s policies and China’s
domestic and international economic and political developments. As a result, our
production costs may increase if we are required to make purchases using the
Yuan instead of the U.S. dollar and the value of the Yuan increases over
time.  Any significant increase in the cost of manufacturing our
products would have a material adverse affect on our business and results of
operations.
 
 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, 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.
  13
 
 RISKS
ASSOCIATED WITH OUR CAPITAL STRUCTURE
 
 OUR
COMMON STOCK WILL BE DELISTED FROM AMEX, WHICH MAY HAVE A MATERIAL ADVERSE
IMPACT ON THE PRICING AND TRADING OF OUR COMMON STOCK.
 
 On
September 16, 2008, the Company received notice from AMEX indicating that the
Company was below certain requirements of AMEX’s continued listing standards as
of June 30, 2008. Specifically, shareholders’ equity was less than $4,000,000
and there were losses from continuing operations in three of its four most
recent fiscal years, as set forth in Section 1003(a)(ii) of AMEX’s Company
Guide.  In response, the Company submitted a timely plan of compliance
to AMEX (the “Plan”).  In a letter dated December 12, 2008 from AMEX,
the Company was officially notified that AMEX had accepted the Company’s Plan
and that the Company had until March 31, 2009 to complete the Plan and regain
compliance with Section 1003(a)(ii) of AMEX’s Company Guide.  AMEX
Staff advised the Company that it would be subject to periodic review by AMEX
during the extension period and that failure to make progress consistent with
the Company’s Plan could result in delisting. Also in that same letter dated
December 12, 2008, AMEX Staff notified the Company that it deemed the Company’s
common stock selling price as too low. AMEX informed the Company that it must
address its low selling price by June 12, 2009 in order to remain in compliance
with AMEX Company Guide Section 1003(f)(v).
 
 In April
2009, the Company notified AMEX that it would not be able to meet its goals set
forth in the prior Plan. In particular, the Company notified AMEX that it would
not be in compliance with AMEX’s listing requirement of shareholders’ equity of
$4,000,000 as of the end of the fiscal year ended March 31, 2009. The Company
submitted a second revised plan (“Revised Plan”) to AMEX to request more time
and to show that it could regain compliance by March 31, 2010. AMEX reviewed the
Revised Plan and notified the Company on June 22, 2009 that the Company was
still not in compliance with Section 1003(a)(ii) due to the Company having
shareholders’ equity of less than $4,000,000. AMEX also indicated that the
Company was subject to Section 1002(b) of the AMEX Company Guide as a result of
its depressed selling price per share, which the Company had not remedied by the
June 12, 2009 deadline.  The AMEX Staff additionally stated that in
reaching its decision it considered that the Company has failed to meet minimum
listing standards on repeated occasions.  Consequently, AMEX stated
that it had concluded that it is appropriate to initiate immediate delisting
proceedings at this time. The Company has until June 29, 2009 to formally appeal
AMEX’s decision, after which time the AMEX Staff’s determination will become
final.  At that time, the AMEX Staff will suspend trading in the
Company’s securities and file an application with the SEC to strike the
Company’s common stock from listing and registration on AMEX in accordance with
Section 12 of the Exchange Act and the rules promulgated thereunder. Our board
of directors has decided at this time that it is not in the best interest of the
Company and its shareholders to expend the financial resources necessary to
appeal the decision and continue to be listed on AMEX, particularly in light of
the fact that the Company’s appeal would likely have little chance of
success.
 
 Once
the AMEX delists our securities from trading on its exchange, we could face
significant material adverse consequences, including:
 
 •   a
limited availability of market quotations for our securities;
 
 •   a
reduced liquidity with respect to our securities;
 
 •  a
determination that our common stock is a “penny stock” which will require
brokers trading in our common stock to adhere to more stringent rules, possibly
resulting in a reduced level of trading activity in the secondary trading market
for our common stock; and
 
 •   a
decreased ability to issue additional securities or obtain additional financing
in the future.
 
 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, 2009, our common stock has traded between a
high of $1.60 and a low of $0.07. During this period, we incurred a net loss of
$2.2 million in Fiscal 2009, 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.  Moving from AMEX to the OTCBB may also cause additional
volatility which may cause our stock price to decline further.
 
 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, 2009, investors held a short position of approximately
26,000 shares of our common stock which represented 0.1% of our public float.
The anticipated downward pressure on our stock price due to actual or
anticipated sales of our stock by some institutions or individuals who engage in
short sales of our common stock could cause our stock price to
decline.  Additionally, if our stock price declines, it may be more
difficult for us to raise capital.
 
 IF
OUR OUTSTANDING DERIVATIVE SECURITIES ARE EXERCISED OR CONVERTED, OUR EXISTING
SHAREHOLDERS WILL SUFFER DILUTION.
 
 As of
March 31, 2009, there were outstanding stock options to purchase an aggregate of
1,133,215 shares of common stock at exercise prices ranging from $0.11 to $9.00
per share, not all of which are immediately exercisable. The weighted average
exercise price of the outstanding stock options is approximately $0.58 per
share. As of March 31, 2008, there were outstanding and immediately exercisable
options to purchase an aggregate of 1,029,296 shares of common stock. There were
outstanding stock warrants to purchase 2,500,000 shares of common stock at an
average exercise price of $.315 per share, all of which are
exercisable.
  14
 
 FUTURE
SALES OF OUR COMMON STOCK HELD BY CURRENT SHAREHOLDERS AND INVESTORS MAY DEPRESS
OUR STOCK PRICE.
 
 As of
June 15, 2009 there were 37,449,432 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, as amended in January 2006, authorizes the
issuance of 100,000,000 shares of common stock.  As of June 15, 2009,
we had 37,449,432 shares of common stock issued and outstanding and an aggregate
of 3,633,215 shares issuable under our outstanding options and warrants. As
such, our Board of Directors has the power, without stockholder approval, to
issue up to 58,917,353 shares of common stock. Any issuance of additional shares
of common stock, whether by us to new shareholders 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
shareholders.
 
 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 shareholders to elect directors and take
other corporate actions. These provisions of our certificate of incorporation
include: authorizing our board of directors to issue additional preferred stock,
limiting the persons who may call special meetings of shareholders, and
establishing advance notice requirements for nominations for election to our
board of directors or for proposing matters that can be acted on by shareholders
at shareholder 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 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 have identified weaknesses and conditions that need to be
addressed in our internal controls over financial reporting or other matters
that may raise concerns for investors. The material weaknesses were primarily
due to the following: (i) lack of procedure to collect on past-due accounts
receivable in our Macau subsidiary, which has resulted in some accounts
remaining uncollected in excess of 90 days; and (ii) lack of formalized
financial closing procedures which has hindered scheduled closing in a timely
manner, resulting in the Company’s accounting department receiving supplemental
information regarding certain items which require adjustment after the initial
closing has taken place. 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.
  15
 
 ITEM
1B. UNRESOLVED STAFF COMMENTS
 
 None.
 
 ITEM
2. PROPERTIES
 
 Our
corporate headquarters are located in Coconut Creek, Florida where we lease
approximately 8,000 square feet office and warehouse facility. The lease expires
on May 31, 2010. The annual rental expense is $102,194.
 
 We lease
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 in August
2009.  The annual rent expense is $8,400. Management is currently
negotiating to renew the lease for two years at the same or lower
rent.
 
 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
 
 None.
 
 ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
 None.
 
 PART
II
 
 ITEM
5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
 
 Our
common stock traded on the NYSE Amex Equities (“AMEX”) under the symbol "SMD,
however the Company currently faces delisting. See Note 9 to the Financial
Statements for additional information." Set forth below is the range of high and
low information for our common stock as traded on the AMEX during Fiscal 2009
and Fiscal 2008.
 
 FISCAL PERIOD
                    
                    HIGH
                    
                    
                    LOWFiscal
      2009:First
      quarter  (April 1 - June 30, 2008)
                    
                    $
                    0.32
                    
                    
                    $
                    0.20Second
      quarter  (July 1 - September 30, 2008)
                    
                    
                    0.23
                    
                    
                    
                    0.12Third
      quarter  (October 1 - December 31, 2008)
                    
                    
                    0.18
                    
                    
                    
                    0.07Fourth
      quarter  (January 1 - March 31, 2009)
                    
                    
                    0.17
                    
                    
                    
                    0.08Fiscal
      2008: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
                    
                    
                    
                    0.20
  As of
June 15, 2009, there were approximately 355 record holders of our outstanding
common stock, solely based upon the count our transfer agent provided us as of
that date. This number does not include:
 
 •
              any
      beneficial owners of common stock whose shares are held in the names of
      various dealers, clearing agencies, banks, brokers and other fiduciaries,
      or
  •
              broker-dealers
      or other participants who hold or clear shares directly or indirectly
      through the Depository Trust Company, or its nominee, Cede &
      Co.
  16
 
 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, 2009:
 
 WEIGHTED-AVERAGE
                      
                      
                      NUMBER
      OF SECURITIESNUMBER
      OF SECURITIES
                      
                      
                      EXERCISE
      PRICE OF
                      
                      
                      REMAINING
      AVAILABLE FOR FUTUREISSUANCE
      UNDER EQUITYTO
      BE ISSUED UPON
                      
                      
                      OUTSTANDING
                      
                      
                      COMPENSATION
      PLANSEXERCISE
      OF OUTSTANDING
                      
                      
                      OPTIONS,
      WARRANTS
                      
                      
                      (EXCLUDING
      SECURITIES INPLAN
      CATEGORY
                      
                      OPTIONS,
      WARRANTS AND RIGHTS
                      
                      
                      AND
      RIGHTS
                      
                      
                      COLUMN
      (A))Equity
      Compensation Plans approved by Security Holders
                      
                      
                      1,133,215
                      
                      
                      $
                      .58
                      
                      
                      
                      727,320Equity
      Compensation Plans Not approved by Security Holders
                      
                      
                      0
                      
                      
                      $
                      0
                      
                      
                      
                      0
  RECENT
SALES OF UNREGISTERED SECURITIES
 
 During
the fiscal year ended March 31, 2009 the Company issued 4,750,556 shares of its
common stock.
 
 On March
25, 2009, the Company issued 2,267,220 shares of common stock to Arts
Electronics, Ltd for $226,722 ($0.10 per share) to offset a trade
payable.
 
 On March
25, 2009, the Company issued 2,450,000 shares of common stock to koncepts
International Limited for $245,000 ($0.10 per share) to offset a trade
payable.
 
 On
October 9, 2008, the Company issued 33,336 shares of common stock to our Board
of Directors at $0.45 per share, pursuant to our annual director compensation
plan.
 
 On April
1, 2008, the Company issued 940,476 shares of common stock to Starlight
Industrial Holdings, Ltd., a wholly-owned subsidiary of Starlight International,
for $197,500 ($.21 per share) to offset a trade payable.
 
 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.  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.
  17
 
 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, 2009, 2008, and 2007 and the
balance sheet data at March 31, 2009 and 2008 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,
2006 and 2005 and the balance sheet data at March 31, 2007, 2006 and 2005 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.
 
 2009
                  
                  
                  2008
                  
                  
                  2007
                  
                  
                  2006
                  
                  
                  2005Statement
      of Operations:Net
      Sales
                  
                  $
                  31,780,709
                  
                  
                  $
                  34,067,871
                  
                  
                  $
                  26,732,144
                  
                  
                  $
                  32,305,560
                  
                  
                  $
                  38,209,825Income
      (loss) before income taxes
                  
                  $
                  (2,154,563
                  )
                  
                  $
                  1,712
                  
                  
                  $
                  (1,714,988
                  )
                  
                  $
                  (1,905,250
                  )
                  
                  $
                  (3,591,975
                  )Income
      tax benefit (expense)
                  
                  $
                  (36,652
                  )
                  
                  $
                  0
                  
                  
                  $
                  2,453,576
                  
                  
                  $
                  0
                  
                  
                  $
                  0Net
      income (loss)
                  
                  $
                  (2,191,215
                  )
                  
                  $
                  1,712
                  
                  
                  $
                  738,588
                  
                  
                  $
                  (1,905,250
                  )
                  
                  $
                  (3,591,975
                  )Balance
      Sheet:Working
      capital
                  
                  $
                  1,535,498
                  
                  
                  $
                  3,300,422
                  
                  
                  $
                  2,394,796
                  
                  
                  $
                  (4,274,100
                  )
                  
                  $
                  (3,378,528
                  )Current
      ratio
                  
                  
                  127
                  %
                  
                  
                  204
                  %
                  
                  
                  187
                  %
                  
                  
                  48
                  %
                  
                  
                  65
                  %Property,
      plant and equipment, net
                  
                  $
                  886,770
                  
                  
                  $
                  598,280
                  
                  
                  $
                  446,510
                  
                  
                  $
                  513,615
                  
                  
                  $
                  1,038,843Total
      assets
                  
                  $
                  8,325,724
                  
                  
                  $
                  7,236,167
                  
                  
                  $
                  5,657,800
                  
                  
                  $
                  4,524,267
                  
                  
                  $
                  7,668,808Shareholders'
      equity
                  
                  $
                  2,578,897
                  
                  
                  $
                  4,068,064
                  
                  
                  $
                  2,897,359
                  
                  
                  $
                  (3,661,798
                  )
                  
                  $
                  (1,985,023
                  )Per
      Share Data:Income
      (loss) per common share – basic
                  
                  $
                  (0.07
                  )
                  
                  $
                  0.000
                  
                  
                  $
                  0.04
                  
                  
                  $
                  (0.19
                  )
                  
                  $
                  (0.39
                  )Income
      (loss) per common share – diluted
                  
                  $
                  (0.07
                  )
                  
                  $
                  0.000
                  
                  
                  $
                  0.03
                  
                  
                  $
                  (0.19
                  )
                  
                  $
                  (0.39
                  )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 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.
 
 Statements
included in this Annual Report that do not relate to present or historical
conditions are called “forward-looking statements” within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Such forward-looking statements involve known
and unknown risks and uncertainties and other factors that could cause actual
results or outcomes to differ materially from those expressed in, or implied by,
the forward-looking statements. Forward-looking statements may include, without
limitation, statements relating to our plans, strategies, objectives,
expectations and intentions. Words such as “believes,” “forecasts,” “intends,”
“possible,” “estimates,” “anticipates,” “expects,” “plans,” “should,” “could,”
“will,” and similar expressions are intended to identify forward-looking
statements. Our ability to predict or project future results or the effect of
events on our operating results is inherently uncertain. Forward-looking
statements should not be read as a guarantee of future performance or results,
and will not necessarily be accurate indications of the times at, or by which,
such performance or results will be achieved.
 
 OVERVIEW
 
 Our
primary objectives for the fiscal year ended March 31, 2009 (“Fiscal 2009”) 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; and
 ·
              raise
      additional equity.
  18
  We
believe that our efforts to meet our goals in Fiscal 2009 were adversely
affected by the decline in worldwide economic conditions. More specifically, we
experienced increased competitive pricing pressures, lack of stability and
confidence in the retail market, a substantial increase of returned goods,
quality issues with one of our major suppliers, and additional startup expenses
associated with our logistics operation. During Fiscal 2009, our revenue has
decreased by 6.7%, and gross margin decreased by 3.8% while total operating
expenses increased by 5.9%.  Our decrease in revenue was primarily due
to one our large customers, Circuit City, filing for bankruptcy protection and
therefore not electing to purchase inventory we had manufactured for them and
increased pricing and return concessions due to economic
conditions.  We also experienced increased operating costs due to
freight expense associated with returns and startup costs associated with our
logistics operations.  We did secure what we believe to be more
favorable financing facility of $13 million with DBS Bank during Fiscal
2009.   We also issued approximately $472,000 of equity in
exchange for reduced accounts payable with some of our
vendors.  However, due to our net loss and reduced shareholder’s
equity in Fiscal 2009 we have again been out of compliance with the AMEX’s
listing requirements.  As a result, AMEX notified the Company on June
23, 2009 that the Company was still not in compliance with its listing
requirements and that AMEX had determined that it is appropriate to initiate
immediate delisting proceedings at this time. The Company has until June 29,
2009 to formally appeal AMEX’s decision, after which time the AMEX Staff’s
determination will become final and AMEX will suspend trading in the Company’s
securities and file an application with the SEC to strike the Company’s common
stock from listing and registration on AMEX in accordance with Section 12 of the
Exchange Act and the rules promulgated thereunder.  Our board of
directors has decided at this time that it is not in the best interest of the
Company and its shareholders to expend the financial resources necessary to
appeal the decision and continue to be listed on AMEX, particularly in light of
the fact that the Company’s appeal would likely have little chance of
success.  The Company is currently seeking to have its common stock
quoted on the OTCBB.  Once the AMEX delists our securities from
trading on its exchange, we could face significant material adverse
consequences, including:
 
 •   a
limited availability of market quotations for our securities;
 
 •   a
reduced liquidity with respect to our securities;
 
 •  a
determination that our common stock is a “penny stock” which will require
brokers trading in our common stock to adhere to more stringent rules, possibly
resulting in a reduced level of trading activity in the secondary trading market
for our common stock; and
 
 •   a
decreased ability to issue additional securities or obtain additional financing
in the future.
 There is
no guarantee that our common stock will be accepted for quotation on the OTCBB
or that if our common stock is quoted on the OTCBB, that the price of our common
stock will not decline further.
 
 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:
 
 2009
                      
                      
                      2008
                      
                      
                      2007Total
      Revenues
                      
                      
                      100.0
                      %
                      
                      
                      100.0
                      %
                      
                      
                      100.0
                      %Cost
      of Sales
                      
                      
                      81.3
                      %
                      
                      
                      77.5
                      %
                      
                      
                      77.1
                      %Operating
      Expenses
                      
                      
                      25.1
                      %
                      
                      
                      22.1
                      %
                      
                      
                      29.2
                      %Operating
      (Loss) Income
                      
                      
                      -6.4
                      %
                      
                      
                      0.5
                      %
                      
                      
                      -6.4
                      %Other
      (Expenses), Income, net
                      
                      
                      -0.4
                      %
                      
                      
                      -0.5
                      %
                      
                      
                      -0.1
                      %(Loss)
      Income before Taxes
                      
                      
                      -6.8
                      %
                      
                      
                      0.1
                      %
                      
                      
                      -6.5
                      %(Provision)
      Benefit for Income Taxes
                      
                      
                      -0.1
                      %
                      
                      
                      0.0
                      %
                      
                      
                      9.2
                      %Net
      (Loss) Income
                      
                      
                      -6.9
                      %
                      
                      
                      0.1
                      %
                      
                      
                      2.8
                      %
 
 FISCAL
YEAR ENDED MARCH 31, 2009 COMPARED WITH FISCAL YEAR ENDED MARCH 31,
2008
 
 NET
SALES
 
 Net sales
for Fiscal 2009 were approximately $31.8 million. This represents a decrease of
approximately $2.1 million as compared to approximately $34.1 million in the
fiscal year ended March 31, 2008 (“Fiscal 2008”). The decrease in net sales was
primarily due to a $2.4 million decrease in sales for our Bratz licensed
products.   We believe this reduction is primarily due to the
ongoing litigation between Mattel and MGA Entertainment over the alleged
intellectual property infringement of the “Bratz” dolls by MGA Entertainment. We
did experience a slight increase in sales of karaoke products which partially
offset the $2.4 million reduction in revenue from licensed products, however we
missed additional sales opportunities caused by late shipments from vendors and
declining economic conditions which led to increased return and price
concessions.  In addition, the bankruptcy filing of Circuit City
presented an additional lost revenue opportunity of approximately $1.0
million.
 
 We
continue to develop additional features to our karaoke line to maintain and grow
this core product.   Music now accounts for less that 1% of total
revenue due to the overall CD sales decline in the entire music
industry.  In an attempt to regain this revenue stream we have
recently launched a music download program on our internet website to supplement
our distribution of CDG discs.
 
 GROSS
PROFIT
 
 Gross
profit for Fiscal 2009 was approximately $5.9 million or 18.7% of total revenues
compared to approximately $7.7 million or 22.5% of sales for Fiscal 2008 (a
decrease of $1.8 million). This decrease was primarily due to the decrease in
sales which accounted for approximately $400,000 of the decrease in gross profit
with the 3.8% decline in gross margin accounting for the remaining
decrease.   Heavily discounted sales of excess Bratz licensed
product contributed approximately 0.6% to the decreased margin.  The
remaining decline was primarily due to competitive pricing pressures and
declining worldwide economic conditions which lead to increased discounts,
markdowns and return concessions to major retailers.
  19
  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 Fiscal 2009 increased
from approximately $7.5 million to approximately $8.0 million, an increase of
approximately $0.5 million or 5.9% compared to the same period last year. The
increase in operating expenses consists of approximately $0.2 million increase
in selling expenses, which include advertising, commission, freight and royalty
expenses. The increase is primarily due to an increase in freight expense
associated with increased volume of returns from our customers. General and
administrative expenses increased $0.1 million and depreciation expenses
increased approximately $0.2 million accounting for the remaining increase in
operating expenses.
 
 DEPRECIATION
AND AMORTIZATION
 
 Our
depreciation and amortization expenses were $459,354 for Fiscal 2009 compared to
$311,273 for Fiscal 2008. The fixed assets mainly consist of the tools and
molds, which are depreciated with three years straight-line
method.  During the past year we have invested in approximately
$500,000 in tooling for new karaoke models as well as approximately $85,000 in
warehouse equipment for the logistics operation as well as an additional
$132,000 for a new business computer system and accessories.  These
additions are the primary reason for the increase in depreciation expense over
the prior fiscal year.
 
 NET
OTHER INCOME (EXPENSES)
 
 Net other
expense was $131,755 in Fiscal 2009 compared to net other expense of $154,672 in
Fiscal 2008. The decrease was primarily due to the decrease of our borrowing
cost from our new factoring arrangement with DBS Bank.
 
 INCOME
BEFORE TAXES
 
 We had a
loss before taxes of $2,154,563 in Fiscal 2009 compared to income before taxes
of $1,712 in Fiscal 2008. The decrease in profit was primarily due to declining
worldwide economic conditions which lead to decreased sales, decreased profit
margins due to competitive pricing pressures and increased selling expenses
associated with freight increases relating to increased returns.
 
 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, 2009 and 2008, we had gross
deferred tax assets of approximately $ 3.1 million and approximately $2.5
million, against which we recorded valuation allowances totaling
approximately $ 3.1 million and approximately $2.5 million,
respectively.
 
 For
Fiscal 2009, the provision for income taxes increased by $36,652 as compared to
Fiscal 2008 due to an unexpected payment made for alternative minimum tax. We
did not record any additional income tax expense for Fiscal 2009. This occurred
because the Company had taxable losses for the U.S. operations and the Macau
subsidiary is exempt from income tax according to the Macau Offshore Company
(MOC) regulations.
 
 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 loss of approximately $2,191,215 in Fiscal
2009 from operations as compared to a net income of $1,712 in Fiscal
2008.
 
 FISCAL
YEAR ENDED MARCH 31, 2008 COMPARED WITH FISCAL YEAR ENDED MARCH 31,
2007
 
 NET
SALES
 
 Net sales
for Fiscal 2008 were approximately $34.1 million, an increase of approximately
$7.4 million from approximately $26.7 million for the fiscal year ended March
31, 2007 (“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.
  20
 
 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 U.S. 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 offset 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 Fiscal 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.
 
 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 $ 2.5 million and approximately $2.7
million, against which we recorded valuation allowances totaling
approximately $ 2.5 million and approximately $2.7 million,
respectively.
 
 For
Fiscal 2008 and Fiscal 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 the fiscal years ended March 31,
2003, March 31,2002 and March 31, 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 tockshareholder 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.
  21
  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.
 
 LIQUIDITY
AND CAPITAL RESOURCES
 
 On March
31, 2009, we had cash on hand of approximately $1.0 million compared to cash on
hand of approximately $0.4 million on March 31, 2008. The increase of cash on
hand was primarily due to the increase in trade and related party accounts
payable of approximately $3.6 million offset by an increase in inventory of
approximately $1.5 million, an increase in fixed asset investments of
approximately $0.8 million and approximately $0.7 million to pay off the loans
from related party. The increase of the inventory was a result of decreased
domestic sales and increased product returns.
 
 Cash from
operating activities Fiscal 2009 was $1,027,810. The cash was generated
primarily from increases in trade and related party accounts payable. We used
the Company’s common stock and vendor financing to offset portions of the cash
requirement.
 
 Cash used
in investing activities for Fiscal 2009 was $747,844. Cash used in investing
activities was for the purchase of tooling and molds, a new business computer
system and warehouse equipment for our logistics operation.
 
 Cash
provided by financing activities was $229,381 for Fiscal 2009, which was due
primarily to advances by DBS bank on our factoring facility offset by repayment
of a working capital loan from various related parties within the Starlight
Group.
 
 As of
March 31, 2009, our working capital was approximately $1.5 million. Our current
liabilities of approximately $5.7 million include:
 
 ·
              Customer
      credit on account of approximately $908,449 – the amount will be offset by
      future purchases or refund.
 ·
              Accounts
      payable of $2,588,769 of which $1,300,000 was due to a major supplier in
      China.
 ·
              Related
      party loan of $1,498,391 due various parties within the Starlight
      Group.
 
 As of
June 15, 2009, our cash on hand is approximately $621,000. Our average monthly
operating expenses are approximately $400,000 and we need approximately $1.2
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.
 
 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 financing to expand its
business. We expect to raise additional capital as required for fiscal year
ended March 31, 2010 (“Fiscal 2010”).
 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 U.S. We are continually exploring better rates and
terms with various banks, however the current facility with DBS Bank is
considered adequate for Fiscal 2010 requirements.
 4) Cost
reduction - The Company has reduced significant operating expenses in recent
years with the exception of fiscal 2009. The cost reduction initiatives are part
of our intensive effort to achieve a successful turn-around restructuring. The
Company plans to resume its cost cutting efforts in Fiscal 2010.
 5) Bridge
Loan - We may be able to raise additional short term bridge capital from
Starlight International, the parent of our major stockholder, koncepts, who is
also one of our suppliers.
 6) Reduce
cost of operation – The Company has incorporated SMC-L as a wholly-owned
subsidiary to operate our California warehouse. For Fiscal 2010, SMC-L will
renew an agreement with the Starlight Group to handle the logistics and
fulfillment of Starlight Groups’ domestic products for a service fee. This
arrangement is expected to significantly offset the Company’s own logistics
expenses.
 
 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.
  22
  During
Fiscal 2010, 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 92.0%, 87.8% and 94.0 % of
net sales in Fiscal 2009, Fiscal 2008, and Fiscal 2007.
 
 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.
 
 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.
  23
  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
2" to the attached financial statements.
 
 ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
 We are a
smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are
not required to provide the information required under this item.
 
 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
 
 ITEM
9A(T). CONTROLS AND PROCEDURES
 
 (a)           Evaluation of
Disclosure Controls and Procedures
 
 As of the
end of the period covered by this Annual Report, we conducted an evaluation,
under the supervision and with the participation of our Chief Executive Officer
and interim Chief Financial Officer of our disclosure controls and procedures
(as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act). Based
upon this evaluation, our Chief Executive Officer and interim Chief Financial
Officer concluded that our disclosure controls and procedures are effective to
ensure that information required to be disclosed by us in the reports that we
file or submit under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the Commission's rules and
formsand is
accumulated and communicated to the Company’s management, including its chief
executive officer and interim chief financial officer, as appropriate, to allow
timely decisions regarding required disclosure
 
 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
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. Management has assessed the effectiveness of our internal control
over financial reporting using the components established in the Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission.
 
 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.
  24
  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 procedure to collect on
past-due accounts receivable in Macau subsidiary.A substantial majority
of sales reported through our Macau subsidiary are direct import and payment is
tendered via letter of credit or wire transfer in advance of shipment. For those
few customers that are shipped with credit terms there is currently no formal
policies and procedures relating to resolving disputed balances in a timely
manner.As a
result, some accounts have remained uncollected in excess of 90
days.
 
 (ii)           Lack of financial closing
procedures. The Company and its subsidiaries do not currently have
formalized financial closing procedures which would facilitate scheduled closing
in a timely manner. As a result, the Company’s accounting department may receive
supplemental information regarding certain items which require adjustment after
the initial closing has taken place.
 
 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.
 
 (c)           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. For Fiscal
2010, 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. Management will
address the above material weaknesses by formalizing a closing checklist and
time schedule which will require all relevant information to be provided and
reviewed by certain deadlines prior to closing. 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.
 
 (d)           Changes in
Internal Controls
 
 In our
Annual Report for Fiscal 2008, we concluded that our internal control over
financial reporting was not effective and identified three material weaknesses.
Since then, management has addressed these weaknesses and disclosed remediation
of two out of the three weaknesses as of our December 31, 2008 Quarterly Report
on Form 10-Q. Since the filing of our last Annual Report, our financial
controller has assumed the responsibility of approving customer charge-backs and
reviewing account reconciliations. The Company has also hired an accounting
manager that has a duty to oversee and develop proper written policies and
procedures in accounts receivable and accounts payable. Consequently, management
is still in the process of remediating a prior material weaknesses identified in
Form 10-K for Fiscal 2008.  Management will provide updates via our
quarterly reports on the status of the remediation of the above
weakness.
 
 There
were no other changes in the Company’s internal controls over financial
reporting during the quarter ended March 31, 2009, 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.
 
 This
Annual Report does not include an attestation report of the Company’s
independent registered public accounting firm regarding internal control over
financial reporting. Management’s report was not subject to attestation by the
Company’s independent registered public accounting firm pursuant to temporary
rules of the SEC that permit the Company to provide only management’s report in
this Annual Report.
 
 ITEM
9B. OTHER INFORMATION
 
 None.
  25
  PART
III
 
 ITEM
10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
 
 The
following table sets forth certain information with respect to our executive
officers, directors and significant employees as of June 15, 2009.
 
 For
Fiscal Year Ended March 31, 2009
 
 Name
                Age
                PositionAnton
      H. Handal
                54
                Chief
      Executive OfficerBernardo
      Melo
                32
                VP
      Global Sales and MarketingLionel
      Marquis
                56
                Principal
      Accounting OfficerGary
      Atkinson
                27
                Secretary,
      General CounselCarol
      Lau
                60
                ChairwomanHarvey
      Judkowitz
                64
                DirectorBernard
      Appel
                77
                DirectorStewart
      A. Merkin
                66
                DirectorPeter
      Hon
                68
                DirectorYat
      Tung Lau
                30
                Director
  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. Handalhas served as the Chief
Executive Officer of the Singing Machine since 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 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.  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 U.S. legal
counsel for our affiliate Starlight International, the parent company of 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.
 
 Bernardo Melo has been with
the Company since February 2003 and has served as the Vice President of Global
Sales and Marketing (“VP of Sales”) since 2008.  During his tenure at
the Singing Machine, Mr. Melo has overseen the sales and operations of the music
division as well as managed the customer service department.  Before
taking over the responsibility of VP of Sales, Mr. Melo held dual roles with the
Company managing the operations, licensing and sales of the music division while
concentrating on hardware sales for the Latin America and Canada market as well
as key U.S. accounts such as Toys R’ Us.  Prior to joining the
Company, Mr. Melo held a consulting role for Rewards Network formerly
Idine.  Mr. Melo’s assignment during his tenure was improving their
operational procedures while increasing efficiencies and lowering operating
cost.  Mr. Melo also worked at Coverall North America as Director of
Sales managing a start up initiative for the company covering 15 regional office
and 40 sales reps across North America focusing on franchise
sales.  Overall Mr. Melo has over 10 years of sales, marketing and
management experience.
  26
  Lionel Marquis joined the
Company in June 2008 as Controller and Principal Accounting
Officer.  For the past 15 years Mr. Marquis has served as Controller
and or Chief Financial Officer for several manufacturing
and  distribution companies in the South Florida area
..  Some of these companies include Computer Products, Inc (Artesyn
Technologies Inc),  U S Plastic Lumber Corporation, Casi-Rusco,
(division of Interlogix Inc.), DHF Industries, Inc and Ingear Fashions,
Inc.  Mr. Marquis graduated from Bryant College with a Bachelors
Degree in Business Administration with a major in accounting.  Mr.
Marquis is a Certified Public Accountant in the state of Florida.
 
 Gary Atkinson joined the
Company in January 2008. Mr. Atkinson is a licensed attorney in the State of
Florida and Georgia and serves as General Counsel and Corporate Secretary. He
graduated from the University of Rochester with a Bachelors Degree in Economics
and has been awarded a dual-degree J.D./M.B.A. from Case Western Reserve
University School of Law and Weatherhead School of Management.
 
 Carol Lau joined the Company’s
board of directors on January 12, 2007 and has served as the Company’s interim
chief financial officer since May 23, 2008. Ms. Lau has been with the Starlight
Group since 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 of the Company 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 is currently the President and Chief Operating Officer of
Photovoltaic Solar Cells, Inc., a start-up company involved in the manufacture
of solar cells.
 
 Bernard S. Appel has served as
a director of the Company 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 of the Company 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 served as a
director of the Company since January 12, 2007. Mr. 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.
 
 Yat Tung Lau has served as
director of the Company since January 12, 2007. Mr. Lau joined the Starlight
Group in 2003 as assistant to the Chairman of the Board of Starlight
International 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.
 
 BOARD
COMMITTEES
 
 We have
an audit committee, a compensation committee and a nominating
committee.
 
 The audit
committee consists of Messrs. Judkowitz (Chairman), Appel and Merkin. The Board
has determined that Mr. Judkowitz qualifies as an "audit committee financial
expert," as defined under Item 407 of Regulation S-K of the Exchange Act. The
Board has determined that each of Messrs. Judkowitz, Merkin and Appel are
"independent directors" within the meaning of the listing standards of the AMEX
and Rule 10A-3 of the Exchange Act. The audit committee recommends the
engagement of independent auditors to the board, initiates and oversees
investigations into matters relating to audit functions, reviews the plans and
results of audits with our independent auditors, reviews our internal accounting
controls, and approves services to be performed by our independent
auditors.
 
 The
compensation committee consists of Messrs. Judkowitz and Merkin. The
compensation committee considers and authorizes remuneration arrangements for
senior management and grants options under, and administers our employee stock
option plan.
 
 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.
  27
 
 Nomination
of Directors
 
 As
provided in our nominating committee 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
shareholders, (4) our Chief Executive Officer or Chairman, and (5) third parties
such as professional search firms. In evaluating potential candidates for
director, the Nominating Committee considers the entirety of each candidate’s
credentials.
 
 Qualifications
for consideration as a director nominee may vary according to the particular
areas of expertise being sought as a complement to the existing composition of
the Board of Directors. However, at a minimum, candidates for director must
possess:
 
 •
              
              high
      personal and professional ethics and
integrity;
 
 •
              
              the
      ability to exercise sound judgment;
 
 •
              
              the
      ability to make independent analytical
  inquiries;
 
 •
              
              a
      willingness and ability to devote adequate time and resources to
      diligently perform Board and committee duties;
  and
 
 •
              
              the
      appropriate and relevant business experience and
  acumen.
 
 In
addition to these minimum qualifications, the Nominating Committee also takes
into account when considering whether to nominate a potential director candidate
the following factors:
 
 •
              
              whether
      the person possesses specific industry expertise and familiarity with
      general issues affecting our
business;
 
 •
              
              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 AMEX;
 
 •
              
              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.
 
 There
have been no material changes to the procedures by which stockholders may
recommend nominees to the Company’s board of directors as set forth in the
Company’s Proxy Statement on Schedule 14A filed with the SEC on November 18,
2008.
 
 FAMILY
RELATIONSHIPS
 
 There are
no 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 and Secretary.
 
 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 is posted on the Company’s website at
www.singingmachine.com. 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
 
 Section
16(a) of the Exchange Act requires our officers, directors, and persons who own
more than ten percent of a registered class of our equity securities to file
reports of securities ownership and changes in such ownership with the SEC and
AMEX. Officers, directors, and greater-than-ten-percent stockholders are
required by SEC regulations to furnish us with copies of all Section 16(a) forms
that they file.
 
 Based
solely upon a review of Forms 3, Forms 4, and Forms 5 furnished to us pursuant
to Rule 16a-3 under the Exchange Act, we believe that all such forms required to
be filed pursuant to Section 16(a) of the Exchange Act during the year ended
March 31, 2009 were timely filed, as necessary, by the officers, directors, and
security holders required to file such forms, except for the
following:
  28
 
 Mr. Anton
Handal filed a Form 5 as a result of his failure to file his initial Form 3 and
a Form 4 with respect to two transactions;
 
 Mr.
Lionel Marquis filed an untimely Form 3;
 
 Mr.
Bernardo Melo filed a Form 5 as a result of his failure to file his initial Form
3;
 
 Mr.
Bernard Appel filed a Form 5 as a result of his failure to file a Form 4 with
respect to nine transactions;
 
 Mr.
Harvey Judkowitz filed one Form 4 late and filed a Form 5 as a result of his
failure to file a Form 4 with respect to nine transactions;
 
 Ms. Carol
Lau filed a Form 5 as a result of her failure to file her initial Form 3 and a
Form 4 with respect to three transactions;
 
 Mr. Yat
Tung Lau filed a Form 5 as a result of his failure to file a Form 4 with respect
to four transactions;
 
 Mr. Peter
Hon filed a Form 5 as a result of his failure to file a Form 4 with respect to
four transactions;
 
 Mr.
Stewart Merkin filed his initial Form 3 late and filed a Form 5 as a result of
his failure to file a Form 4 with respect to eight transactions;
 
 koncepts
International Limited filed its initial Form 3 late, one Form 4 late and failed
to file a Form 4 with respect to two transactions;
 
 Arts
Electronics Ltd. failed to file its initial Form 3; and
 
 Mr.
Daniel Zheng, our former Chief Financial Officer, failed to file Form 4s with
respect to 4 transactions.
 
 ITEM
11. EXECUTIVE COMPENSATION
 
 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 (collectively, the “named executive officers”)
for Fiscal 2009.
 
 SUMMARY
COMPENSATION TABLE
 
 Name
      and Principal Position
                                      
                                      Year
                                      
                                      Salary
                                      
                                      
                                      Bonus
                                      
                                      
                                      Stock
      Awards
                                      
                                      
                                      Option
      Awards
                                      
                                      
                                      Non-Equity
                                        Incentive
      Plan
                                        Comp
                                      
                                      
                                      Change
      in Pension Value and
                                        Non-Qualified
      Deferred
                                        Compensation
      Earnings
                                      
                                      
                                      Other
      Comp
                                      
                                      
                                      TOTAL
      COMPAnton
      Handal (1)
                                      
                                      2009
                                      
                                      $
                                      0.00
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      $
                                      11,744.00
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      $
                                      11,744.00Chief
      Executive Officer
                                      
                                      2008
                                      
                                      $
                                      0.00
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      $
                                      0.00Lionel
      Marquis (2)
                                      
                                      2009
                                      
                                      $
                                      100,000.00
                                      
                                      
                                      $
                                      2,000.00
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      $
                                      102,000.00Financial
      ControllerBernardo
      Melo (2)
                                      
                                      2009
                                      
                                      $
                                      130,000.00
                                      
                                      
                                      $
                                      29,515.95
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      $
                                      3,662.50
                                      
                                      
                                      $
                                      163,178.45VP
      Global Sales & MarketingDanny
      Zheng (3)
                                      
                                      2009
                                      
                                      $
                                      63,384.67
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      $
                                      18,464.91
                                      
                                      
                                      $
                                      81,849.58Former
      Chief Financial Officer
                                      
                                      2008
                                      
                                      $
                                      166,154.00
                                      
                                      
                                      $
                                      5,000.00
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      $
                                      12,876.84
                                      
                                      
                                      $
                                      184,030.84Alicia
      Haskamp (4)
                                      
                                      2008
                                      
                                      $
                                      127,884.60
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      $
                                      48,498.71
                                      
                                      
                                      $
                                      176,383.31Former
      Senior Vice President of Sales and Product Development
 
 (1) Mr.
Handal does not receive a salary however he has an option to purchase warrants
held by koncepts International Limited which expires on July 1, 2009. Upon
payment of $5,000, Mr. Handal has the option to purchase 750,000 stock warrants
in the Company with an exercise price of $0.35 per share, exercisable at any
time. Mr. Handal was also awarded 300,000 stock options on October 3, 2008, with
an exercise price of $0.14 per share, which are not exercisable until October 3,
2009.  The fair value of the option award has been calculated in
accordance with FAS 123R.
 
 (2) Mr.
Marquis joined the Company in June 2008 and therefore received no compensation
in Fiscal 2008. Mr. Melo was not promoted until Fiscal 2009 and was not an
officer as defined by Section 16 of the Exchange Act during Fiscal
2008.
 
 (3) Danny
Zheng resigned as Chief Financial Officer effective May 23, 2008. His Fiscal
2009 compensation includes his regular salary through May 23, 2008 and his
regular salary for three (3) months thereafter in which Mr. Zheng provided
consulting services to the Company. His “other compensation” included $16,097 in
unused vacation pay and a car allowance of $2,368.
 
 (4) Ms.
Haskamp resigned on February 5, 2008 and therefore received no compensation
during Fiscal 2009.
  29
  NARRATIVE
DISCLOSURE TO SUMMARY COMPENSATION TABLE
 
 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 held by koncepts International Limited, at any time, upon payment of
$5,000. The warrants have an exercise price of $0.35 per share and the warrant
option agreement expires on July 1, 2009. On October 3, 2008, Mr. Handal was
also awarded 300,000 options to purchase common stock at $0.14 per share,
exercisable on October 3, 2009.
 
 As of
June 15, 2009, the Company had no employment contracts with any of its employees
nor separation or consulting agreements with any individuals or
entities.
 
 OPTION
GRANTS IN FISCAL 2009
 
 No grants
of stock option awards were made to our named executive officers during Fiscal
2009.
  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 Fiscal 2009:
 
 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 ($)Anton
      Handal
                      
                      
                      -
                      
                      
                      
                      300,000
                      
                      
                      
                      N/A
                      
                      
                      
                      0.14
                      
                      10/3/2018
                      
                      
                      N/A
                      
                      
                      
                      N/A
                      
                      
                      
                      N/A
                      
                      
                      
                      N/ABernardo
      Melo
                      
                      
                      4,000
                      
                      
                      
                      -
                      
                      
                      
                      N/A
                      
                      
                      
                      1.97
                      
                      12/19/2013
                      
                      
                      N/A
                      
                      
                      
                      N/A
                      
                      
                      
                      N/A
                      
                      
                      
                      N/A6,500
                      
                      
                      
                      -
                      
                      
                      
                      N/A
                      
                      
                      
                      1.54
                      
                      2/6/201420,000
                      
                      
                      
                      -
                      
                      
                      
                      N/A
                      
                      
                      
                      0.6
                      
                      5/8/201530,000
                      
                      
                      
                      -
                      
                      
                      
                      N/A
                      
                      
                      
                      0.33
                      
                      4/9/201160,500
                      
                      
                      
                      -
  The
following table sets forth with respect to the named director, compensation
information inclusive of equity awards and payments made in Fiscal 2009. All
option awards were granted from our Year 2001 Stock Option Plan.
 
 DIRECTOR
COMPENSATION
 Name
                  
                  Fees
      Earned or
                    Paid
      in Cash
                  
                  
                  Stock
      Awards (1)
                  
                  
                  Option
      Awards
                    (2)
                  
                  
                  Non-Equity
                    Incentive
      Plan
                    Compensation
      ($)
                  
                  
                  Change
      in
                    Pension
      Value
                    and
                    Nonqualified
                    Deferred
                    Compensation
                    Earnings
                  
                  
                  All
      Other
                    Compensation
                  
                  
                  TotalBernard
      Appel
                  
                  $
                  8,500
                  
                  
                  $
                  2,500
                  
                  
                  $
                  689
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  11,689Peter
      Hon
                  
                  $
                  7,500
                  
                  
                  $
                  2,500
                  
                  
                  $
                  689
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  10,689Harvey
      Judkowitz
                  
                  $
                  8,500
                  
                  
                  $
                  2,500
                  
                  
                  $
                  689
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  11,689Carol
      Lau
                  
                  $
                  8,500
                  
                  
                  $
                  2,500
                  
                  
                  $
                  689
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  11,689Yat
      Tung Lau
                  
                  $
                  7,500
                  
                  
                  $
                  2,500
                  
                  
                  $
                  689
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  10,689Stewart
      Merkin
                  
                  $
                  8,500
                  
                  
                  $
                  2,500
                  
                  
                  $
                  689
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  11,689
 
 Refer to
Note 1 “Stock Based Compensation” in the Notes to the Consolidated Financial
Statements included elsewhere in this Annual Report for the relevant assumptions
used to determine the valuation of our option awards.
  30
  (1) As of
March 31, 2009 the aggregate number of stock awards held by Messrs. Appel,
Merkin, and Judkowitz is 19,578, 17,231, and 29,578, respectively. The aggregate
stock awards held by Messrs. Hon, Yat Tung Lau and Ms. Lau are
6,130.
 
 (2) As of
March 31, 2009 the aggregate number of Company stock options held by Messrs.
Appel and Judkowitz is 120,000. Mr. Merkin holds 100,000 options and Messrs.
Hon, Yat Tung Lau, and Ms. Lau each hold 40,000 options.
 
 During
Fiscal 2009, 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 six
non-employee directors during Fiscal 2009 were Messrs. Appel, Judkowitz, Hon,
Yat Tung Lau and Merkin and Ms. Carol Lau.
 
 During
Fiscal 2009, 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.
 
 ·
              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 Stockholder 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 Stockholder
      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.
 
 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 shares 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, 2009, we have 5,550 options issued and outstanding under
the 1994 Plan and all of these options are fully vested as of March 31,
2009.
 
 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, 2009, we have granted 1,127,665 options under the Year 2001
Plan, 709,965 of which are fully vested.
 
 The Year
2001 Plan is administered by our Compensation 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, then the
option, as to the excess, will be treated as NSO's.
  31
 
 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 options 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, 2009, 2008, 2007 and 2006
totaled approximately $10,886, $21,674, $39,460 and $39,572,
respectively.
 
 ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
 
 The
following table sets forth as of June 15, 2009 (the “record date”), certain
information concerning beneficial ownership of our common stock by:
 
 ·
              all
      directors of the Singing Machine,
 ·
              all
      named executive officers of the Singing Machine;
  and
 ·
              persons
      known to own more than 5% of our common
stock.
 
 Security
ownership is based on 37,449,432 shares of our common stock issued and
outstanding.  In computing the number and percentage of shares
beneficially owned by a person, shares of common stock subject to convertible
securities and options currently convertible or exercisable, or convertible or
exercisable within 60 days of June 15, 2009, are counted as outstanding, but
these shares are not counted as outstanding for computing the percentage
ownership of any other person.
 
 As used
herein, the term beneficial ownership with respect to a security is defined by
Rule 13d-3 under the Securities Exchange Act of 1934 as consisting of sole or
shared voting power (including the power to vote or direct the vote) and/or sole
or shared investment power (including the power to dispose or direct the
disposition of) with respect to the security through any contract, arrangement,
understanding, relationship or otherwise, including a right to acquire such
power(s) during the next 60 days.  Unless otherwise noted below, and
subject to applicable property laws, to our knowledge each person has sole
investment and sole voting power over the shares shown as beneficially owned by
them.   Unless otherwise noted, the principal address of each of
the directors and officers listed below is c/o The Singing Machine Company,
Inc., 6601 Lyons Road,, Building A-7, Coconut Creek, FL 33073.
  32




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





Name
      and address of Beneficial Owner
                                
                                Amount and Nature of
                                  Certain Beneficial
                                  Ownership ofCommon Stock
                                
                                
                                Percent of
                                  Outstanding
                                  Shares
      of
                                  Common
      StockSecurity Ownership of
      Management:Anton
      Handal (1)
                                
                                
                                750,000
                                
                                
                                
                                2.0
                                %Lionel
      Marquis
                                
                                
                                -
                                
                                
                                
                                *Bernardo
      Melo (2)
                                
                                
                                60,500
                                
                                
                                
                                *Bernard
      Appel (3)
                                
                                
                                119,578
                                
                                
                                
                                *Harvey
      Judkowitz (3)
                                
                                
                                129,578
                                
                                
                                
                                *Carol
      Lau (3)
                                
                                
                                26,130
                                
                                
                                
                                *Yat
      Tung Lau (3)
                                
                                
                                26,130
                                
                                
                                
                                *Peter
      Hon (3)
                                
                                
                                26,130
                                
                                
                                
                                *Stewart
      Merkin (3)
                                
                                
                                97,231
                                
                                
                                
                                *Officers
      & Directors as a Group (9 persons)
                                
                                
                                1,235,277
                                
                                
                                
                                3.3
                                %Security Ownership of Certain Beneficial
      Owners:koncepts
      International Ltd. (4)
                                
                                
                                19,932,679
                                
                                
                                
                                53.2
                                %Arts
      Electronics Ltd. (5)
                                
                                
                                3,745,917
                                
                                
                                
                                10.0
                                %Gentle
      Boss Investments Ltd (6)
                                
                                
                                2,100,000
                                
                                
                                
                                5.6
                                %





* Less
than 1%




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





(2)
Includes stock options to purchase 60,500 shares of common stock, which is
exercisable within 60 days of the record date.





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





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





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





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





EQUITY
COMPENSATION PLANS AND 401(K) PLAN





We have
two stock option plans: our Amended and Restated 1994 Management Stock Option
Plan ("1994 Plan") and our Year 2001 Stock Option Plan ("Year 2001 Plan"). Both
the 1994 Plan and the Year 2001 Plan provide for the granting of incentive stock
options and non-qualified stock options to our employees, officers, directors
and consultants. As of March 31, 2009, we had 5,550 options issued and
outstanding under our 1994 Plan and 1,127,665 options are issued and outstanding
under our Year 2001 Plan.





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





33




WEIGHTED-AVERAGE
                      
                      
                      NUMBER OF SECURITIESNUMBER OF SECURITIES
                      
                      
                      EXERCISE PRICE OF
                      
                      
                      REMAINING AVAILABLE FOR EQUITYTO BE ISSUED UPON
                      
                      
                      OUTSTANDING
                      
                      
                      COMPENSATION PLANSEXERCISE OF OUTSTANDING
                      
                      
                      OPTIONS, WARRANTS
                      
                      
                      (EXCLUDING SECURITIES INPLAN CATEGORY
                      
                      OPTIONS, WARRANTS AND RIGHTS
                      
                      
                      AND RIGHTS
                      
                      
                      COLUMN (A))Equity
      Compensation Plans approved by Security Holders
                      
                      
                      1,133,215
                      
                      
                      $
                      .58
                      
                      
                      
                      727,320Equity
      Compensation Plans Not approved by Security Holders
                      
                      
                      0
                      
                      
                      $
                      0
                      
                      
                      
                      0





ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE





Approximately
49% of our karaoke products in Fiscal 2009 were produced by factory owned by the
Starlight Group and we anticipate that approximately 60% of our karaoke products
will be manufactured by the Starlight Group in Fiscal 2010.  Starlight
International has verbally agreed to manufacture our karaoke products without
requiring prepayment from us and will instead assume the cost of manufacturing
the products until such time as we are paid by the customers who are purchasing
those products from us.





On August
28, 2008, we executed a three-party banking facility agreement between SMC
Macau, DBS Bank (Hong Kong) Limited and BB&T. The agreement provides for
credit facilities to a maximum of $13.0 million.  The credit facility
is secured with corporate guarantees from us as well as a $2.0 million guarantee
from Starlight International, the parent of koncepts, which is the holder of
approximately 50% of our shares of common stock outstanding.  This
agreement was effective October 16, 2008 and replaced the previous four-party
agreement between us, Starlight Marketing Limited, an indirect wholly-owned
subsidiary of Starlight International (“Starlight Marketing”), Standard
Chartered Bank (Hong Kong) (“Standard”), Limited and CIT (“Prior
Agreement”).  Under the Prior Agreement dated August 3, 2007, we
assigned the proceeds from our customers to Standard, which then advanced the
loans to Starlight Marketing, who then sent the advance to us.  Both
us and Starlight Marketing guaranteed the repayment of the
advance.  The maximum amount for the advance was approximately $4.5
million.





In May
2008, we entered into a services agreement with Cosmo Communications Corporation
(“Cosmo”). Cosmo is approximately 85% owned by Master Light Enterprise Limited,
an indirect wholly-owned subsidiary of Starlight International.  The
agreement provides that we will provide management services to Cosmo with
respect to the employment of certain Cosmo sales persons as employees of SMC,
including the payment of such persons salaries and benefits.  The cost
of such employment was $410,425 for Fiscal 2009.  In exchange for
these services, Cosmo agreed to pay us a service fee equal to 2.8% of Cosmo’s
“net sales” defined as gross invoice less returns, charge-backs, promotions and
marketing allowances. The agreement was terminated by both parties on June 1,
2009.





In May
2008, our subsidiary SMC-L entered into a service and logistics agreement with
Starlite Consumer Electronics (USA), Inc. (“Starlite USA”), n indirect
wholly-owned subsidiary of Starlight International, and Cosmo to provide
logistics, fulfillment, and warehousing services for Starlite USA and Cosmo’s
domestic sales.  For these services, Starlite USA and Cosmo have
agreed to pay us an annual service fee of $1,137,501, payable monthly beginning
July 1, 2008.  The agreement generated approximately $0.8 million in
fees for Fiscal 2009 and is anticipated to generate $1.1 million for Fiscal
2010.





We
purchase products from Starlight Marketing Macao Commercial Offshore Limited
(“Starlight Macao”), an indirect wholly-owned subsidiary of Starlight
International. The purchases from Starlight Macao for Fiscal 2009 and Fiscal
2008 were $10,170,825 and $5,775,074, respectively. In addition, we also
purchased molds and tooling from Starlight Macao in the amount of $235,000 and
$126,282 in Fiscal 2009 and Fiscal 2008, respectively.





On
October 1, 2006, we entered into a warehouse services agreement with Starlight
Industrial Holdings, a wholly-owned subsidiary of Starlight International
whereby we agreed to provide them with warehousing services at our California
warehouse for a minimum monthly service charge of $26,000.  In May
2008, that amount was increased to $39,000 per month.





On August
1, 2006, our subsidiary SMC Macao entered into a service agreement with Star
Light Electronics Company Limited, an indirect wholly-owned subsidiary of
Starlight International, to provide shipping and engineering services to us for
a fee of $25,000 per month.  This amount increased to $29,000 per
month effective July 1, 2008 however, due to a decrease in services provided to
us in Fiscal 2009, the fee was temporarily reduced for a period of time. For
Fiscal 2009 and Fiscal 2008, this service charge was $261,000 and $200,000 per
annum, respectively.




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. While we do not maintain
a written policy with respect to related party transactions, our board of
directors routinely reviews potential transactions with those parties we have
identified as related parties prior to the consummation of the transaction. Each
transaction is reviewed to determine that a related party transaction is entered
into by us with the related party on an “arms length” basis, or pursuant to
normal competitive negotiation. We also generally require that all related
parties recuse themselves from negotiating and voting on behalf of the Company
in connection with related party transactions.





34




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 for professional services rendered for Fiscal 2009 and Fiscal
2008:





Fee
      Category
                  
                  Fiscal
      2009
                  
                  
                  Fiscal
      2008Audit
      Fees
                  
                  $
                  134,950
                  
                  
                  $
                  164,194Tax
      Fees
                  
                  
                  11,000
                  
                  
                  
                  15,000All
      Other Fees
                  
                  
                  1,954
                  
                  
                  
                  1,600Total
      Fees
                  
                  $
                  147,904
                  
                  
                  $
                  180,794





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 2009 and Fiscal 2008 audit and other fees, $134,950 and
$164,194 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.




PART
IV





ITEM
15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES





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




Consolidated
Balance Sheets— March 31, 2009 and 2008




Consolidated
Statements of Operations—Years ended March 31, 2009, 2008 and 2006.




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




Consolidated
Statements of Cash Flows—Years ended March 31, 2009, 2008 and 2006.





35




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)





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)





36




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).





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)





37




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)




10.41
Amendment to lease for executive offices dated April 3, 2008 by and between The
Singing Machine Company, Inc. and Lyons Corporate Park, LLLP. *
 
 10.42  Lease
for City of Industry, CA warehouse by and between The Singing Machine Company,
Inc. and Sun-Yin USA, Inc. *
 
 10.43
Cosmo employee management agreement dated May 23, 2008 by and among The Singing
Machine Company, Inc. and Cosmo Communications Corporation. *
 
 10.44
Logistics Agreement dated May 23, 2008 by and among The Singing Machine Company,
Inc. and Starlite Consumer Electronics (USA), Inc., Cosmo Communications Corp.
*
 
 10.45 DBS
Banking Facility Agreement dated August 28, 2008 by and among The Singing
Machine Company, Inc. and SMC (Comercial Offshore De Macau) Limitada.
*
 
 10.46
BB&T Factoring and Security Agreement dated September 19, 2008 by and among
The Singing Machine Company, Inc. and Branch Banking and Trust Company.
*
 
 10.47
Assignment of Factoring Proceeds and Intercreditor Agreement dated September 19,
2008 by and among The Singing Machine Company, Inc., SMC (Comercial Offshore De
Macau) Limitada, Branch Banking and Trust Company, and DBS Bank (Hong Kong)
Limited. *





38




10.48  Hang
Seng Bank Banking Facility dated February 12, 2008 by and among SMC (Comercial
Offshore De Macau) Limitada and Hang Seng Bank. *


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





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





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





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





* Filed
herewith


+
Compensatory plan or arrangement.





39





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: 
      June 29, 2009
                By:
                
                /s/ Anton H. HandalAnton
      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
            
            June
      29, 2009Anton
      H. Handal/s/ Carol Lau
            
            Chief
      Financial Officer
            
            June
      29, 2009Carol
      LauBERNARD APPEL
            
            Director
            
            June
      29, 2009Bernard
      AppelHARVEY JUDKOWITZ
            
            Director
            
            June
      29, 2009Harvey
      JudkowitzSTEWART MERKIN
            
            DIRECTOR
            
            JUNE
      29, 2009Stewart
      MerkinYAT TUNG LAU
            
            DIRECTOR
            
            JUNE
      29, 2009Yat
      Tung LauPETER HON
            
            DIRECTOR
            
            JUNE
      29, 2009Peter
      Hon




40




THE
SINGING MACHINE COMPANY, INC. AND SUBSIDIARIES
 
 FINANCIAL
STATEMENTS
 
 INDEX
TO FINANCIAL STATEMENTS
 
 Reports
      of Independent Registered Public Accounting Firm
                  
                  F-2Consolidated
      Balance Sheets
                  
                  F-3Consolidated
      Statements of Operations
                  
                  F-4Consolidated
      Statements of Cash Flows
                  
                  F-5Consolidated
      Statements of Shareholders' Equity (Deficit)
                  
                  F-6Notes
      to Consolidated Financial Statements
                  
                  F-7
  
  REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 To the
Board of Directors and Shareholders of
 The
Singing Machine Company, Inc. and Subsidiaries
  We have
audited the accompanying consolidated balance sheets of The Singing Machine
Company, Inc. and Subsidiaries (the “Company”) as of March 31, 2009 and 2008,
and the related consolidated statements of operations, shareholders’ equity, and
cash flows for each of the years in the three year period ended March 31, 2009.
These financial statements are the responsibility of the Company’s management.
Our responsibility is to express an opinion on these consolidated financial
statements based on our audits.
 
 We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
  In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of March 31,
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, 2009,
2008, 2007. In our opinion, this schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly, in
all material respects, the information therein.
  /s/
Berkovits & Company, LLP.
  Fort
Lauderdale, Florida
 June 29 ,
2009
  F-2
 
 THE
SINGING MACHINE COMPANY, INC. AND SUBSIDIARIES
 CONSOLIDATED
BALANCE SHEETS
 
 March 31, 2009
                      
                      
                      March 31, 2008AssetsCurrent
      AssetsCash
                      
                      $
                      957,163
                      
                      
                      $
                      447,816Accounts
      receivable, net of allowances of $261,980 and $120,899,
      respectively
                      
                      
                      972,345
                      
                      
                      
                      1,961,721Due
      from factor
                      
                      
                      73,854
                      
                      
                      
                      131,451Inventories,net
                      
                      
                      4,729,667
                      
                      
                      
                      3,514,984Prepaid
      expenses and other current assets
                      
                      
                      526,563
                      
                      
                      
                      412,552Total
      Current Assets
                      
                      
                      7,259,592
                      
                      
                      
                      6,468,524Property and
      Equipment,net
                      
                      
                      886,770
                      
                      
                      
                      598,280Other
      Non-Current Assets
                      
                      
                      179,362
                      
                      
                      
                      169,362Total
      Assets
                      
                      $
                      8,325,724
                      
                      
                      $
                      7,236,166Liabilities and Shareholders'
      EquityCurrent
      LiabilitiesAccounts
      payable
                      
                      $
                      2,588,769
                      
                      
                      $
                      1,145,150Due
      to related parties - net
                      
                      
                      1,498,391
                      
                      
                      
                      616,732Accrued
      expenses
                      
                      
                      422,260
                      
                      
                      
                      409,415Current
      portion of long-term financing obligation
                      
                      
                      18,186
                      
                      
                      
                      -Customer
      credits on account
                      
                      
                      908,449
                      
                      
                      
                      778,993Deferred
      gross profit on estimated returns
                      
                      
                      288,039
                      
                      
                      
                      217,812Total
      Current Liabilities
                      
                      
                      5,724,094
                      
                      
                      
                      3,168,102Long-term
      financing obligation, less current portion
                      
                      
                      22,733
                      
                      
                      
                      -Total
      Liabilities
                      
                      
                      5,746,827
                      
                      
                      
                      3,168,102Shareholders'  EquityPreferred
      stock, $1.00 par value; 1,000,000 shares authorized, no shares issued and
      outstanding
                      
                      
                      -
                      
                      
                      
                      -Common
      stock, Class A, $.01 par value;  100,000 shares authorized; no
      shares issued and outstanding
                      
                      
                      -
                      
                      
                      
                      -Common
      stock, $0.01 par value;  100,000,000 shares authorized;
      37,449,432 and 31,758,400 shares issued and outstanding
                      
                      
                      374,494
                      
                      
                      
                      317,584Additional
      paid-in capital
                      
                      
                      19,075,750
                      
                      
                      
                      18,430,612Accumulated
      deficit
                      
                      
                      (16,871,347
                      )
                      
                      
                      (14,680,132
                      )Total
      Shareholders' Equity
                      
                      
                      2,578,897
                      
                      
                      
                      4,068,064Total
      Liabilities and Shareholders' Equity
                      
                      $
                      8,325,724
                      
                      
                      $
                      7,236,166
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  F-3
 
 THE
SINGING MACHINE COMPANY, INC. AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF OPERATIONS
 
 For the Years EndedMarch 31, 2009
                    
                    
                    March 31, 2008
                    
                    
                    March 31, 2007Net
      Sales
                    
                    $
                    31,780,709
                    
                    
                    $
                    34,067,871
                    
                    
                    $
                    26,732,144Cost
      of Goods Sold
                    
                    
                    25,836,586
                    
                    
                    
                    26,389,070
                    
                    
                    
                    20,616,541Gross
      Profit
                    
                    
                    5,944,123
                    
                    
                    
                    7,678,801
                    
                    
                    
                    6,115,603Operating
      ExpensesSelling
      expenses
                    
                    
                    3,160,950
                    
                    
                    
                    2,931,416
                    
                    
                    
                    2,308,959General
      and administrative expenses
                    
                    
                    4,346,627
                    
                    
                    
                    4,279,728
                    
                    
                    
                    4,952,254Depreciation
      and amortization
                    
                    
                    459,354
                    
                    
                    
                    311,273
                    
                    
                    
                    556,051Total
      Operating Expenses
                    
                    
                    7,966,931
                    
                    
                    
                    7,522,417
                    
                    
                    
                    7,817,264(Loss)
      Income from Operations
                    
                    
                    (2,022,808
                    )
                    
                    
                    156,384
                    
                    
                    
                    (1,701,661
                    )Other
      Expenses(Loss)
      Gain on sale of subsidiary and other assets
                    
                    
                    -
                    
                    
                    
                    (27,654
                    )
                    
                    
                    29,028Interest
      expense
                    
                    
                    (131,755
                    )
                    
                    
                    (127,018
                    )
                    
                    
                    (42,355
                    )-Net
      Other Expenses
                    
                    
                    (131,755
                    )
                    
                    
                    (154,672
                    )
                    
                    
                    (13,327
                    )(Loss)
      Income before provision for income taxes
                    
                    
                    (2,154,563
                    )
                    
                    
                    1,712
                    
                    
                    
                    (1,714,988
                    )(Provision)
      reversal of provision for  income taxes
                    
                    
                    (36,652
                    )
                    
                    
                    -
                    
                    
                    
                    2,453,576Net
      (Loss) Income
                    
                    $
                    (2,191,215
                    )
                    
                    $
                    1,712
                    
                    
                    $
                    738,588(Loss)
      Income per Common ShareBasic
                    
                    $
                    (0.067
                    )
                    
                    $
                    0.000
                    
                    
                    $
                    0.035Diluted
                    
                    $
                    (0.067
                    )
                    
                    $
                    0.000
                    
                    
                    $
                    0.030Weighted
      Average Common and CommonEquivalent
      Shares:Basic
                    
                    
                    32,712,191
                    
                    
                    
                    29,925,952
                    
                    
                    
                    21,145,003Diluted
                    
                    
                    32,712,191
                    
                    
                    
                    30,910,424
                    
                    
                    
                    24,753,864
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  F-4





THE
SINGING MACHINE COMPANY, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS


For
      the Years EndedMarch
      31, 2009
                                                                                  
                                                                                  
                                                                                  March
      31, 2008
                                                                                  
                                                                                  
                                                                                  March
      31, 2007Cash
      flows from operating activitiesNet
      (Loss) Income
                                                                                  
                                                                                  $
                                                                                  (2,191,215
                                                                                  )
                                                                                  
                                                                                  $
                                                                                  1,712
                                                                                  
                                                                                  
                                                                                  $
                                                                                  738,588Adjustments
      to reconcile (net loss) net income to net cash and cash equivalents used
      in operating activities:Reversal
      of provision for income taxes
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  (2,453,576
                                                                                  )Gain
      on sale of subsidiary and other assets
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  (29,028
                                                                                  )Loss
      on disposal of property and equipment
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  27,654
                                                                                  
                                                                                  
                                                                                  
                                                                                  -Depreciation
      and amortization
                                                                                  
                                                                                  
                                                                                  459,354
                                                                                  
                                                                                  
                                                                                  
                                                                                  311,273
                                                                                  
                                                                                  
                                                                                  
                                                                                  556,051Change
      in inventory reserve
                                                                                  
                                                                                  
                                                                                  247,404
                                                                                  
                                                                                  
                                                                                  
                                                                                  131,154
                                                                                  
                                                                                  
                                                                                  
                                                                                  (902,071
                                                                                  )Change
      in allowance for bad debts
                                                                                  
                                                                                  
                                                                                  141,081
                                                                                  
                                                                                  
                                                                                  
                                                                                  17,284
                                                                                  
                                                                                  
                                                                                  
                                                                                  (41,790
                                                                                  )Stock
      compensation
                                                                                  
                                                                                  
                                                                                  32,826
                                                                                  
                                                                                  
                                                                                  
                                                                                  38,112
                                                                                  
                                                                                  
                                                                                  
                                                                                  194,870Deferred
      gross profit on estimated sales returns
                                                                                  
                                                                                  
                                                                                  70,227
                                                                                  
                                                                                  
                                                                                  
                                                                                  4,094
                                                                                  
                                                                                  
                                                                                  
                                                                                  27,436Changes
      in assets and liabilities:(Increase)
      Decrease in:Accounts
      receivable
                                                                                  
                                                                                  
                                                                                  49,182
                                                                                  
                                                                                  
                                                                                  
                                                                                  (924,634
                                                                                  )
                                                                                  
                                                                                  
                                                                                  156,690Inventories
                                                                                  
                                                                                  
                                                                                  (1,462,087
                                                                                  )
                                                                                  
                                                                                  
                                                                                  (1,366,055
                                                                                  )
                                                                                  
                                                                                  
                                                                                  310,046Prepaid
      expenses and other current assets
                                                                                  
                                                                                  
                                                                                  (114,011
                                                                                  )
                                                                                  
                                                                                  
                                                                                  109,339
                                                                                  
                                                                                  
                                                                                  
                                                                                  (293,489
                                                                                  )Other
      non-current assets
                                                                                  
                                                                                  
                                                                                  (10,000
                                                                                  )
                                                                                  
                                                                                  
                                                                                  (113,308
                                                                                  )
                                                                                  
                                                                                  
                                                                                  42,633Increase
      (Decrease) in:Accounts
      payable
                                                                                  
                                                                                  
                                                                                  1,670,341
                                                                                  
                                                                                  
                                                                                  
                                                                                  441,906
                                                                                  
                                                                                  
                                                                                  
                                                                                  (160,565
                                                                                  )Accounts
      payable - related party
                                                                                  
                                                                                  
                                                                                  1,992,407
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  -Accrued
      expenses
                                                                                  
                                                                                  
                                                                                  12,845
                                                                                  
                                                                                  
                                                                                  
                                                                                  (215,579
                                                                                  )
                                                                                  
                                                                                  
                                                                                  (23,190
                                                                                  )Customer
      credits on account
                                                                                  
                                                                                  
                                                                                  129,456
                                                                                  
                                                                                  
                                                                                  
                                                                                  184,824
                                                                                  
                                                                                  
                                                                                  
                                                                                  (440,046
                                                                                  )Net
      cash from (used in) operating activities
                                                                                  
                                                                                  
                                                                                  1,027,810
                                                                                  
                                                                                  
                                                                                  
                                                                                  (1,352,224
                                                                                  )
                                                                                  
                                                                                  
                                                                                  (2,317,441
                                                                                  )Cash
      flows from investing activitiesPurchase
      of property and equipment
                                                                                  
                                                                                  
                                                                                  (747,844
                                                                                  )
                                                                                  
                                                                                  
                                                                                  (490,697
                                                                                  )
                                                                                  
                                                                                  
                                                                                  (488,946
                                                                                  )Receipt
      of restricted cash
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  268,405Proceeds
      from sales of assets
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  29,028Net
      cash used in investing activities
                                                                                  
                                                                                  
                                                                                  (747,844
                                                                                  )
                                                                                  
                                                                                  
                                                                                  (490,697
                                                                                  )
                                                                                  
                                                                                  
                                                                                  (191,513
                                                                                  )Cash
      flows from financing activitiesBorrowings
      from (retention by) factor, net
                                                                                  
                                                                                  
                                                                                  57,597
                                                                                  
                                                                                  
                                                                                  
                                                                                  (21,460
                                                                                  )
                                                                                  
                                                                                  
                                                                                  24,290Proceeds
      from issuance of stock
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  630,881
                                                                                  
                                                                                  
                                                                                  
                                                                                  3,125,700Proceeds
      persuant to factoring facility
                                                                                  
                                                                                  
                                                                                  799,113
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  -Net
      proceeds from long-term financing obligation
                                                                                  
                                                                                  
                                                                                  40,919
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  -Net
      loan (payments to) proceeds from related parties
                                                                                  
                                                                                  
                                                                                  (668,248
                                                                                  )
                                                                                  
                                                                                  
                                                                                  492,416
                                                                                  
                                                                                  
                                                                                  
                                                                                  124,316Net
      cash provided by financing activities
                                                                                  
                                                                                  
                                                                                  229,381
                                                                                  
                                                                                  
                                                                                  
                                                                                  1,101,837
                                                                                  
                                                                                  
                                                                                  
                                                                                  3,274,306Change
      in cash and cash equivalents
                                                                                  
                                                                                  
                                                                                  509,347
                                                                                  
                                                                                  
                                                                                  
                                                                                  (741,084
                                                                                  )
                                                                                  
                                                                                  
                                                                                  765,352Cash
      and cash equivalents at beginning of period
                                                                                  
                                                                                  
                                                                                  447,816
                                                                                  
                                                                                  
                                                                                  
                                                                                  1,188,900
                                                                                  
                                                                                  
                                                                                  
                                                                                  423,548Cash
      and cash equivalents at end of period
                                                                                  
                                                                                  $
                                                                                  957,163
                                                                                  
                                                                                  
                                                                                  $
                                                                                  447,816
                                                                                  
                                                                                  
                                                                                  $
                                                                                  1,188,900Supplemental
      Disclosures of Cash Flow Information:Cash
      paid for Interest
                                                                                  
                                                                                  $
                                                                                  136,826
                                                                                  
                                                                                  
                                                                                  $
                                                                                  78,898
                                                                                  
                                                                                  
                                                                                  $
                                                                                  57,769Cash
      paid for Income Taxes
                                                                                  
                                                                                  $
                                                                                  60,322
                                                                                  
                                                                                  
                                                                                  $
                                                                                  -
                                                                                  
                                                                                  
                                                                                  $
                                                                                  -Non-Cash
      Financing Activities:Conversion
      of loan payable to equity
                                                                                  
                                                                                  $
                                                                                  -
                                                                                  
                                                                                  
                                                                                  $
                                                                                  -
                                                                                  
                                                                                  
                                                                                  $
                                                                                  2,000,000Conversion
      of trade payable to equity
                                                                                  
                                                                                  $
                                                                                  669,222
                                                                                  
                                                                                  
                                                                                  $
                                                                                  500,000
                                                                                  
                                                                                  
                                                                                  $
                                                                                  500,000
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  F-5




THE
SINGING MACHINE COMPANY, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT)





Preferred
      Stock
                                                  
                                                  
                                                  Common
      Stock
                                                  
                                                  
                                                  Additional
      Paid
                                                  
                                                  
                                                  AccumulatedShares
                                                  
                                                  
                                                  Amount
                                                  
                                                  
                                                  Shares
                                                  
                                                  
                                                  Amount
                                                  
                                                  
                                                  in
      Capital
                                                  
                                                  
                                                  Deficit
                                                  
                                                  
                                                  TotalBalance
      at March 31, 2006
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  10,060,282
                                                  
                                                  
                                                  $
                                                  100,603
                                                  
                                                  
                                                  $
                                                  11,658,031
                                                  
                                                  
                                                  $
                                                  (15,420,432
                                                  )
                                                  
                                                  $
                                                  (3,661,798
                                                  )Net
      Income
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  738,588
                                                  
                                                  
                                                  
                                                  738,588Employee
      compensation-stock option
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  182,369
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  182,369Exercise
      of employee stock options
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  285,000
                                                  
                                                  
                                                  
                                                  2,850
                                                  
                                                  
                                                  
                                                  122,350
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  125,200Director
      Fees
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  39,065
                                                  
                                                  
                                                  
                                                  391
                                                  
                                                  
                                                  
                                                  12,110
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  12,501Issuances
      of common stock
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  16,901,852
                                                  
                                                  
                                                  
                                                  169,018
                                                  
                                                  
                                                  
                                                  5,331,482
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  5,500,500Balance
      at March 31, 2007
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  27,286,199
                                                  
                                                  
                                                  
                                                  272,862
                                                  
                                                  
                                                  
                                                  17,306,342
                                                  
                                                  
                                                  
                                                  (14,681,844
                                                  )
                                                  
                                                  
                                                  2,897,360Net
      Income
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  1,712
                                                  
                                                  
                                                  
                                                  1,712Employee
      compensation-stock option
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  24,010
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  24,010Exercise
      of employee stock options
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  147,515
                                                  
                                                  
                                                  
                                                  1,475
                                                  
                                                  
                                                  
                                                  46,905
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  48,380Director
      Fees
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  15,162
                                                  
                                                  
                                                  
                                                  152
                                                  
                                                  
                                                  
                                                  13,950
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  14,102Issuances
      of common stock
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  4,309,524
                                                  
                                                  
                                                  
                                                  43,095
                                                  
                                                  
                                                  
                                                  1,039,405
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  1,082,500Balance
      at March 31, 2008
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  31,758,400
                                                  
                                                  
                                                  
                                                  317,584
                                                  
                                                  
                                                  
                                                  18,430,612
                                                  
                                                  
                                                  
                                                  (14,680,132
                                                  )
                                                  
                                                  
                                                  4,068,064Net
      Loss
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  (2,191,215
                                                  )
                                                  
                                                  
                                                  (2,191,215
                                                  )Employee
      compensation-stock option
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  17,825
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  17,825Director
      Fees
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  33,336
                                                  
                                                  
                                                  
                                                  333
                                                  
                                                  
                                                  
                                                  14,668
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  15,001Issuances
      of common stock
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  5,657,696
                                                  
                                                  
                                                  
                                                  56,577
                                                  
                                                  
                                                  
                                                  612,645
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  669,222Balance
      at March 31, 2009
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  37,449,432
                                                  
                                                  
                                                  $
                                                  374,494
                                                  
                                                  
                                                  $
                                                  19,075,750
                                                  
                                                  
                                                  $
                                                  (16,871,347
                                                  )
                                                  
                                                  $
                                                  2,578,897





F-6





THE
SINGING MACHINE COMPANY, INC AND SUBSIDIARIES




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





NOTE
1 - BASIS OF PRESENTATION





OVERVIEW





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





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





NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





PRINCIPLES OF CONSOLIDATIONThe accompanying consolidated financial statements include the accounts
of the Company, Macau Subsidiary, SMC-L, SMC-M and The Singing Machine Holdings
Ltd.  (a B.V.I. company). All inter-company accounts and transactions
have been eliminated in consolidation for all periods presented.





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





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





ACCOUNTS RECEIVABLE
FACTORING.The Company’s factoring facility only finances
non-recourse accounts receivable.  Such receivables are considered to
have been sold in accordance with FASB 140 Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of
Liabilities.  Accordingly, advances received pursuant to the factoring
facility have been netted against the accounts receivable on the accompanying
Balance Sheet.





FOREIGN
CURRENCY TRANSLATION





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





CONCENTRATION
OF CREDIT RISK





The
Company maintains cash balances in foreign financial institutions. The insured
amounts at foreign financial institutions at March 31, 2009 and March 31, 2008
are $666,643 and $407,376, respectively.  At times the Company
maintains cash in United States bank accounts that are in excess of the Federal
Deposit Insurance Corporation (“FDIC”) insured amounts of up to
$250,000.  As of March 31, 2009 and March 31, 2008 the amounts
uninsured in United States banks was an additional $1,438 and $0
respectively.




F-7




INVENTORY





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





REVENUE
RECOGNITION





Revenue
from the sale of equipment, accessories, and musical recordings are recognized
upon the later of: (a) the time of shipment or (b) when title passes to the
customers and all significant contractual obligations have been satisfied and
collection of the resulting receivable is reasonably assured. Revenues from
sales of consigned inventory are recognized upon sale of the product by the
consignee. Net sales are comprised of gross sales net of actual and estimated
future returns, discounts and volume rebates. The total returns represent 9.4%,
8.6%, and 13.4% of the gross sales for the twelve months ended March 31, 2009,
2008, and 2007, respectively.





STOCK
BASED COMPENSATION





The
Company began to apply the provisions of SFAS No. 123 (revised 2004),
Share-Based Payments ("SFAS 123 (R)"), starting on January 1,
2006.  SFAS 123 (R) which became effective after June 15, 2005,
replaces SFAS No. 123, Accounting for Stock-Based Compensation, and supersedes
Accounting Principles Board Opinion ("APB") No. 25, Accounting for Stock Issued
to Employees. SFAS 123 (R) requires all share-based payments to employees
including grants of employee stock options, be measured at fair value and
expensed in the consolidated statement of operations over the service period
(generally the vesting period). Upon adoption, the Company transitioned to SFAS
123 (R) using the modified prospective application, whereby compensation cost is
only recognized in the consolidated statements of operations beginning with the
first period that SFAS 123 (R) is effective and thereafter, with prior periods'
stock-based compensation still presented on a pro forma basis. Under the
modified prospective approach, the provisions of SFAS 123 (R) are to be applied
to new employee awards and to employee awards modified, repurchased, or
cancelled after the required effective date. Additionally, compensation cost for
the portion of employee awards for which the requisite service has not been
rendered that are outstanding as of the required effective date shall be
recognized as the requisite service is rendered on or after the required
effective date. The compensation cost for that portion of employee awards shall
be based on the grant-date fair value of those awards as calculated for either
recognition or pro-forma disclosures under SFAS 123. The Company continues to
use the Black-Scholes option valuation model to value stock options. As a result
of the adoption of SFAS 123 (R), for the years ended March 31, 2009, 2008 and
2007, , the stock option expense was $17,825, $24,010 and $182,369,
respectively.  Employee stock option compensation expense in fiscal
years 2009, 2008 and 2007 includes the estimated fair value of options granted,
amortized on a straight-line basis over the requisite service period for the
entire portion of the award.





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





·
            For
      the year ended March 31, 2009: expected dividend yield 0%, risk-free
      interest rate of 0.57% to 1.41%, volatility 70.22% and 80.07% and expected
      term of three years.





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





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





ADVERTISING





Costs
incurred for producing and publishing advertising of the Company, are charged to
operations as incurred. The Company has entered into cooperative advertising
agreements with its major customers that specifically indicated that the
customer has to spend the cooperative advertising fund upon the occurrence of
mutually agreed events. The percentage of the cooperative advertising allowance
ranges from 2% to 8% of the purchase. The customers have to advertise the
Company's products in the customer's catalog, local newspaper and other
advertising media. The customer must submit the proof of the performance (such
as a copy of the advertising showing the Company’s products) to the Company to
request for the allowance. The customer does not have the ability to spend the
allowance at their discretion. The Company believes that the identifiable
benefit from the cooperative advertising program and the fair value of the
advertising benefit is equal or greater than the cooperative advertising
expense. Advertising expense for the years ended March 31, 2009, 2008 and 2007
was $475,167, $470,671 and $212,362, respectively.





RESEARCH
AND DEVELOPMENT COSTS





All
research and development costs are charged to results of operations as incurred.
These expenses are shown as a component of selling, general and administrative
expenses in the consolidated statements of operations. For the years ended March
31, 2009, 2008 and 2007, these amounts totaled $51,634, $22,491 and $104,218,
respectively.




F-8




FAIR
VALUE OF FINANCIAL INSTRUMENTS, FINANCIAL ASSETS AND LIABILITIES AND
MEASUREMENTS





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





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





SFAS
No. 157, “Fair Value Measurements” defines fair value, establishes a
framework for measuring fair value in accounting principles generally accepted
in the United States, and expands disclosures about fair value measurements. It
does not require any new fair value measurements.This
Statement clarifies that the exchange price is the price in an orderly
transaction between market participants to sell the asset or transfer the
liability in the market in which the reporting entity would transact for the
asset or liability, that is, the principal or most advantageous market for the
asset or liability.  We adopted the provisions of SFAS 157 for
financial assets and liabilities in the fourth quarter of fiscal 2009. The
adoption of SFAS 157 did not have a material impact on our consolidated
financial statements.





SFAS No.
159, “The Fair Value Option for Financial Assets and Financial Liabilities”
  permits entities to choose to measure many financial instruments and
certain other items at fair value.  This statement allows companies
the opportunity to reduce volatility in reported earnings by measuring assets
and liabilities differently without requiring the application of complex hedging
accounting provisions. We adopted the provisions of SFAS 159 for financial
assets and liabilities in the fourth quarter of fiscal 2009. The adoption of
SFAS 159 did not have an impact on our consolidated financial
statements.





RECLASSIFICATIONS





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





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





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





As of
March 31, 2009 and March 31, 2008, The Singing Machine had gross deferred tax
assets of approximately $3.1 million and $2.5 million, respectively, against
which the Company recorded valuation allowances totaling approximately $3.1
million+ and $2.5 million, respectively.





On April
1, 2007 we adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes (“FIN 48”).   FIN 48 clarifies the requirements of
SFAS No. 109, Accounting for
Income Taxes, relating to the recognition of income tax benefits. FIN 48
provides a two-step approach to recognizing and measuring tax benefits when the
benefits’ realization is uncertain. The first step is to determine whether the
benefit is to be recognized; the second step is to determine the amount to be
recognized:


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


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


The
adoption of FIN 48 had no impact on these consolidated financial
statements.





LONG-LIVED
ASSETS





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




F-9




PROPERTY
AND EQUIPMENT





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





CASH
AND CASH EQUIVALENTS





The
Company considers all highly liquid investments with maturities of three months
or less at the time of purchase to be cash equivalents.   Cash
and cash equivalent balances at March 31, 2009 and March 31, 2008 were $957,163
and $447,816, respectively.





SHIPPING
AND HANDLING COSTS





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





RECENT
ACCOUNTING PRONOUNCEMENTS




SFAS
165




In May
2009, the FASB issued SFAS No. 165, Subsequent Events (“FSAB 165”).The
purpose of SFAS 165 is to establish a general standard of accounting for the
disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued.  The
statement outlines the following:




·
            The
      period after the balance sheet date during which management of a reporting
      entity should evaluate events or transactions that may occur for potential
      recognition or disclosure in the financial
  statements




·
            The
      circumstances under which an entity should recognize events or
      transactions occurring after the balance sheet date in its financial
      statements




·
            The
      disclosures that an entity should make about events or transactions that
      occurred after the balance sheet
date.





FSAB
165 is effective for interim and annual periods ending after June 15, 2009. FSAB
165 is not expected to have a material impact on our consolidated financial
statements.




SFAS
160




In
December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS
No. 160, “Noncontrolling Interests in Consolidated Financial Statements”.
SFAS 160 establishes accounting and reporting standards for ownership interests
in subsidiaries held by parties other than the parent, the amount of
consolidated net income attributable to the parent and to the noncontrolling
interest, changes in a parent’s ownership interest and the valuation of retained
noncontrolling equity investments when a subsidiary is deconsolidated. SFAS 160
also establishes disclosure requirements to identify and distinguish between the
interests of the parent and the interests of the noncontrolling owners. SFAS
No. 160 is effective for fiscal years beginning on or after
December 15, 2008. We do not expect the implementation of this standard to
have a material impact on our consolidated financial statements.





NOTE
3 - INVENTORIES





Inventories
are comprised of the following components:





March
      31,
                    
                    
                    March
      31,2009
                    
                    
                    2008Finished
      Goods
                    
                    $
                    5,475,056
                    
                    
                    $
                    4,012,969Less:
      Inventory Reserve
                    
                    
                    (745,389
                    )
                    
                    
                    (497,985
                    )Total
      Inventories
                    
                    $
                    4,729,667
                    
                    
                    $
                    3,514,984





Inventory
consigned to a distribution center at March 31, 2009 and March 31, 2008 were
$352,214 and $372,012, respectively.




F-10




NOTE
4 - ACCOUNTS RECEIVABLE FACTORING AGREEMENT





On August
28, 2008, the Company executed a three-party Banking Facility agreement between
the Company’s wholly owned subsidiary SMC (Commercial Offshore De Macau)
Limitada (“Borrower”), DBS Bank (Hong Kong) Limited (“Lender”) and Branch
Banking and Trust Company (“BB&T” or “New Factor”).   The
agreement is comprised of three facilities including a maximum of $7.0 million
on 80% of qualified accounts receivable, a maximum letter of credit facility of
$4.0 million for accounts payable financing and a maximum of $2.0 million for
the negotiation of export bills under letter of credit.





According
to the factoring facility, BB&T will serve as the correspondent factor for
the Lender and does not advance funds to the Company directly. The Company
assigns the proceeds from customers to the Lender and the Lender advances funds
to the Borrower.The
maximum amount for the advance is approximately $7.0 million or 80% of the
qualified accounts receivable, which ever is higher.  The New Factor
assumes credit risk on approved accounts (factor risk accounts).  For
non-approved accounts, the Company will assume the credit risk (client risk
accounts).  The factoring fees will be .675% of the gross invoice for
both client risk (recourse) and factor risk (non-recourse) accounts. As of March
31, 2009 there was a total of $2,030,317 of open accounts receivable assigned to
the New Factor.  The Company assumed credit risk (recourse) in the
amount of $382,140.  Credit risk on the remaining factor assigned
receivables in the amount of $1,648,177 was assumed by the New Factor
(non-recourse). This agreement is effective October 16, 2008 and replaces the
previous four-party agreement between the Company, Starlight Marketing Limited
(a related party), Standard Chartered Bank (Hong Kong), Limited and CIT. As of
March 31, 2009 and March 31, 2008 the outstanding amount due from BB&T was
$70,538 and $0 respectively.  The amounts represent excess of customer
payments received by BB&T that had yet to be transferred to DBS
bank.  As of March 31, 2009 and March 31, 2008 the outstanding amount
under the factoring facility with DBS Bank was $799,112 and $0 respectively.
This amount represents advances made by the Bank on non-recourse receivables and
have been offset against accounts receivable in the accompanying consolidated
balance sheet. The terms of the agreement are more particularly described in
Note 8.





Prior to
2008 the Company executed an agreement with The CIT Group/Commercial Services,
Inc. (“CIT”) on August 13, 2007 to factor its receivables. CIT assumed the
credit risk on approved accounts (factor risk accounts).  For
non-approved accounts, the Company assumed the credit risk (client risk
accounts).  The factoring fees, for the client risk accounts, were .3%
of the gross invoice.  For the factor risk accounts, the fees were
..55% of the gross invoice. The annual minimum charge was $24,000.  CIT
did not advance funds to the Company directly. On October 26, 2007, the Company
entered into a four- party agreement with CIT(“Previous Factor”), Standard
Chartered Bank (Hong Kong), Limited (“Lender”) and Starlight Marketing Limited
(“Borrower”), a related party. According to the agreement, the Company assigned
the proceeds from customers to the Lender, the Lender advanced the loans to the
Borrower. The Borrower then directed the advance to the Company. Both the
Borrower and the Company guaranteed the repayment of the advance. The maximum
amount for the advance was approximately $4.5 million or 85% of the qualified
accounts receivable, which ever was higher. As of March 31, 2009 and March 31,
2008 the outstanding amount due from CIT for customer payments in excess of
advances made to the Company was $3,318 and $131,451, respectively.. The
factoring agreement with CIT expired in August 2008 and the Company gave 60 days
written notice to terminate the agreement.  CIT will continue to
collect all open invoices assigned to it and remit the proceeds to the Company
upon collection.





NOTE
5 - PROPERTY AND EQUIPMENT





A summary
of property and equipment is as follows:





USEFUL
                            
                            
                            MARCH
      31,
                            
                            
                            MARCH
      31,LIFE
                            
                            
                            2009
                            
                            
                            2008Computer
      and office equipment
                            
                            5
      years
                            
                            
                            $
                            652,235
                            
                            
                            $
                            520,182Furniture
      and fixtures
                            
                            5-7
      years
                            
                            
                            
                            220,315
                            
                            
                            
                            216,120Leasehold
      improvement
                            
                            
                            
                            *
                            
                            
                            153,993
                            
                            
                            
                            156,614Warehouse
      equipment
                            
                            7
      years
                            
                            
                            
                            86,599
                            
                            
                            
                            -Molds
      and tooling
                            
                            3
      years
                            
                            
                            
                            1,552,465
                            
                            
                            
                            1,032,9702,665,607
                            
                            
                            
                            1,925,886Less:
      Accumulated depreciation and amortization
                            
                            
                            
                            (1,778,837
                            )
                            
                            
                            (1,327,606
                            )$
                            886,770
                            
                            
                            $
                            598,280





* Shorter
of remaining term of lease or useful life


Depreciation
and amortization for fiscal years ended 2009, 2008, and 2007 was $459,354,
$311,273, and $556,051, respectively.





NOTE
6 – DUE TO RELATED PARTIES, NET





As of
March 31, 2009 the Company had $1,498,391 due to related parties consisting
primarily of trade payables for karaoke hardware to Starlight Marketing Macao
Commercial Offshore Ltd in the amount of  $1,580,601, offset by net
accounts receivable of $61,060 from other Starlight Group  affiliates
and  trade receivables of $21,150 from Cosmo Communications
Corp.




F-11




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


.


NOTE
7 - CUSTOMER CREDITS ON ACCOUNT





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





NOTE
8 – FINANCING





On
February 12, 2008 the Macau Subsidiary entered into a Banking Facilities
agreement with Heng Seng Bank Limited (“Bank”).  Under the terms of
the agreement, the Macau Subsidiary has access to $5,100,000 in total facilities
including $500,000 for payment of goods financed under the bank’s letters of
credit, $3,000,000 for negotiation of discrepant documents presented under
export letters of credit and a factoring facility to a maximum of
$1,600,000.  Interest on open balances is due and payable monthly at a
rate of 2% per annum above LIBOR (London Interbank Offered Rate).  The
note is collateralized by a promissory note from the Macau Subsidiary of $5.8
million and an unlimited written guarantee from the Company.  There
were no amounts due to the Bank as of March 31, 2009 and March 31, 2008
respectively.





On July
16, 2008 SMC-L entered into a financing arrangement with Westover Financial,
Inc. for the purchase of four forklifts for the California logistics
operations.  The terms of the agreement required an initial payment of
$18,691 and 36 monthly payments of $1,516 with effective interest rate of
18.6%.  As of March 31, 2009 the remaining amount due on this
obligation was $40,919 of which $18,186 is due within the next twelve months and
the remaining $22,733 due after one year.





On August
28, 2008, the Company executed a three-party Banking Facility agreement between
the Macau Subsidiary (“Borrower”), DBS Bank (Hong Kong) Limited (“Lender”) and
BB&T (“Factor”). The agreement provides for credit facilities to a maximum
of $13.0 million consisting of the following:





·
            Maximum
      of $7.0 million on 80% of qualified accounts
  receivable.


·
            Maximum
      letter of credit facility of $4.0 million for accounts payable
      financing.


·
            Maximum
      $2.0 million negotiation of export bills under letter of
      credit.





Interest
on letter of credit facilities and discounting charges on accounts receivable
advances will be charged at a rate of 1.5% per annum over LIBOR (London
Interbank Offered Rate).  The credit facility is secured with
corporate guarantees from the Company as well as a $2.0 million guarantee from
Starlight International Holdings Limited, a related party.  BB&T
will serve as the correspondent factor for the Lender for the Company’s
qualified North American accounts receivable. BB&T does not advance funds to
the Company directly. The Company assigns the proceeds from customers to the
Lender and the Lender advances funds to the Borrower.   The
combined factoring fees will be .675% of the gross invoice for all factored
accounts.  This agreement is effective October 16, 2008 and replaces
the previous four-party agreement between the Company, Starlight Marketing
Limited (a related party), Standard Chartered Bank (Hong Kong), Limited and CIT.
As of March 31, 2009 and March 31, 2008 the outstanding amount due from BB&T
was $70,538 and $0 respectively.  The amounts represent excess of
customer payments received by BB&T that had yet to be transferred to DBS
bank.   As of March 31, 2009, March 31, 2008 and March 31, 2007
the outstanding amount due to DBS Bank was $799,112, $0, and $0 respectively
pursuant to the factoring facility.  The amount has been offset
against accounts receivable in the accompanying consolidated balance
sheet.





NOTE
9 - COMMITMENTS AND CONTINGENCIES





LEGAL
MATTERS





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





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





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




F-12




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





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




INCOME
TAXES





In a
letter dated July 21, 2008 the Internal Revenue Service (IRS) notified the
former foreign Subsidiary of an unpaid tax balance on Income Tax Return of a
Foreign Corporation (Form 1120-F) for the period ending March 31, 2003 for
International SMC (HK) Limited “ISMC (HK)”, a former
subsidiary.  According to the notice ISMC (HK) has an unpaid balance
due in the amount of $241,639 that includes an interest assessment of
$74,125.  ISMC (HK) was sold in its entirety by the Company on
September 25, 2006 to a British Virgin Islands company
(“Purchaser”).  The sale and purchase agreement with the Purchaser of
ISMC (HK) specifies that the Purchaser would ultimately be responsible for any
liabilities, including tax matters.  On June 3, 2009 the IRS filed a
federal tax lien in the amount of approximately $170,000 against ISMC (HK) under
ISMC (HK)’s federal Tax ID. Management sought independent legal counsel to
assess the potential liability, if any, on the Company.  In a
memorandum from independent counsel, the conclusion based on the facts presented
was that the IRS would not prevail against the Company for collection of the
ISMC (HK) income tax liability based on:





·
            The
      Internal Revenue Service’s asserted position that the Company is not the
      taxpayer.


·
            The
      1120- F tax liability was recorded under the taxpayer identification
      number belonging to ISMC and not the Company’s taxpayer identification
      number


·
            The
      IRS would be barred from recovery since it failed to assess or issue a
      notice of levy within the three year statute of
  limitations





Based on
the conclusion reached in the legal memorandum, management does not believe that
the Company will have any further liability with regards to this
issue.





LEASES





The
Company has entered into various operating lease agreements for office and
warehouse facilities in Coconut Creek, Florida, City of Industry, California and
Macau. The leases expire at varying dates. Rent expense for the years ended
March 31, 2009, 2008 and 2007 was $961,226, $201,270 and $409,608,
respectively.





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





Future
minimum lease payments under property and equipment leases with terms exceeding
one year as of March 31, 2009 are as follows:





Property
      Leases
                              
                              
                              Equipment
      LeasesFor
      period ending2010
                              
                              $
                              782,410
                              
                              
                              $
                              9,7472011
                              
                              
                              645,929
                              
                              
                              
                              5,8072012
                              
                              
                              665,307
                              
                              
                              
                              -2013
                              
                              
                              226,193
                              
                              
                              
                              -2014
      and beyond
                              
                              
                              -
                              
                              
                              
                              -$
                              2,319,839
                              
                              
                              $
                              15,554





The above
property lease payments are gross payments which are not net of supplemental
sublease fees we receive.  During fiscal years 2009, 2008 and 2007 the
Company received fees of approximately $45,000, $543,000 and $414,000
respectively, for sublease of warehouse space and warehousing services provided
to affiliated entities out of its California warehouse.





Such fees
have been offset against rent expense in the consolidated statements of
operations.





LICENSE
AGREEMENTS





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




F-13




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





As of
March 31, 2009 the total amount due to MGA Entertainment, Inc. was
$438,394.  This amount includes $196,394 of additional royalties due
and is included in accrued expenses on the accompanying consolidated balance
sheet. In addition the Company owes MGA Entertainment, Inc. $242,000 for
guaranteed minimum advances due by December 31,2008. This amount has not been
included in the consolidated financial statements since it would be considered a
“gross-up” of the balance sheet.  The amounts due  have not
been paid due to an ongoing lawsuit between Mattel Inc. and MGA Entertainment
Inc. wherein Mattel has legally challenged MGA’s trademark rights to the BRATZTM
franchise.





NYSE
AMEX STATUS





On
September 16, 2008, the Company received notice from AMEX indicating that the
Company was below certain requirements of AMEX’s continued listing standards as
of June 30, 2008. Specifically, shareholders’ equity was less than $4,000,000
and there were losses from continuing operations in three of its four most
recent fiscal years, as set forth in Section 1003(a)(ii) of AMEX’s Company
Guide.  In response, the Company submitted a timely plan of compliance
to AMEX (the “Plan”).  In a letter dated December 12, 2008 from AMEX,
the Company was officially notified that AMEX had accepted the Company’s Plan
and that the Company had until March 31, 2009 to complete the Plan and regain
compliance with Section 1003(a)(ii) of AMEX’s Company Guide.  AMEX
Staff advised the Company that it would be subject to periodic review by AMEX
during the extension period and that failure to make progress consistent with
the Company’s Plan could result in delisting. Also in that same letter dated
December 12, 2008, AMEX Staff notified the Company that it deemed the Company’s
common stock selling price as too low. AMEX informed the Company that it must
address its low selling price by June 12, 2009 in order to remain in compliance
with AMEX Company Guide Section 1003(f)(v).





In April
2009, the Company notified AMEX that it would not be able to meet its goals set
forth in the prior Plan. In particular, the Company notified AMEX that it would
not be in compliance with AMEX’s listing requirement of shareholders’ equity of
$4,000,000 as of the end of the fiscal year ended March 31, 2009. The Company
submitted a second revised plan (“Revised Plan”) to AMEX to request more time
and to show that it could regain compliance by March 31, 2010. AMEX reviewed the
Revised Plan and notified the Company on June 22, 2009 that the Company was
still not in compliance with Section 1003(a)(ii) due to the Company having
shareholders’ equity of less than $4,000,000. AMEX also indicated that the
Company was subject to Section 1002(b) of the AMEX Company Guide as a result of
its depressed selling price per share, which the Company had not remedied by the
June 12, 2009 deadline.  The AMEX Staff additionally stated that in
reaching its decision it considered that the Company has failed to meet minimum
listing standards on repeated occasions.  Consequently, AMEX stated
that it had concluded that it is appropriate to initiate immediate delisting
proceedings at this time. The Company has until June 29, 2009 to formally appeal
AMEX’s decision, after which time the AMEX Staff’s determination will become
final.  At that time, the AMEX Staff will suspend trading in the
Company’s securities and file an application with the SEC to strike the
Company’s common stock from listing and registration on AMEX in accordance with
Section 12 of the Exchange Act and the rules promulgated thereunder. Our board
of directors has decided at this time that it is not in the best interest of the
Company and its shareholders to expend the financial resources necessary to
appeal the decision and continue to be listed on AMEX, particularly in light of
the fact that the Company’s appeal would likely have little chance of
success.





Once
the AMEX delists our securities from trading on its exchange, we could face
significant material adverse consequences, including:





•   a
limited availability of market quotations for our securities;





•   a
reduced liquidity with respect to our securities;





•  a
determination that our common stock is a “penny stock” which will require
brokers trading in our common stock to adhere to more stringent rules, possibly
resulting in a reduced level of trading activity in the secondary trading market
for our common stock; and





•   a
decreased ability to issue additional securities or obtain additional financing
in the future.





NOTE
10 - SHAREHOLDERS’ EQUITY





COMMON
STOCK ISSUANCES





During
the years ended March 31, 2009, 2008, and 2007, the Company issued the following
common stock shares:





2009:





During
the fiscal year ended March 31, 2009 the Company issued 5,691,032 shares of its
common stock.





On March
25, 2009, the Company issued 2,267,220 shares of common stock to Arts
Electronics, Ltd for $226,722 ($0.10 per share) to offset a trade
payable.





On March
25, 2009, the Company issued 2,450,000 shares of common stock to koncepts
International Limited for $245,000 ($0.10 per share) to offset a trade
payable.




F-14




On
October 9, 2008 the Company issued 33,336 shares of common stock to our Board of
Directors at $0.45 per share, pursuant to our annual director compensation
plan.





On April
1, 2008 the Company issued 940,476 shares of common stock to Starlight
Industrial Holdings, Ltd. for $197,500 ($.21 per share) to offset a trade
payable.





2008:





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





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





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





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





2007:





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





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





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





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





EARNINGS
PER SHARE





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





For the
years ended March 31, 2009, 2008 and 2007, common stock equivalents to purchase
3,209,965, 2,544,824 and 1,973,446 shares of stock, respectively, were not
included in the computation of diluted earnings per share because the exercise
prices were greater than the average market price of the Company’s common stock
for the period.





STOCK
OPTIONS





On June
1, 2001, the Board of Directors approved the 2001 Stock Option Plan (`Plan"),
which replaced the 1994 Stock Option Plan, as amended, (the "1994 Plan"). The
Plan was developed to provide a means whereby directors and selected employees,
officers, consultants, and advisors of the Company may be granted incentive or
non-qualified stock options to purchase common stock of the Company. As of March
31, 2009, the Plan is authorized to grant options up to an aggregate of
1,950,000 shares of the Company's common stock and up to 300,000 shares for any
one individual grant in any fiscal year. As of March 31, 2009, the Company had
389,820 options available to be granted under the 2001 Plan. As of March 31,
2009, the Company had 337,500 options available to be granted under the 1994
Plan.





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




F-15




Fiscal
      2009
                                                      
                                                      
                                                      Fiscal
      2008
                                                      
                                                      
                                                      Fiscal
      2007Number
      of Options
                                                      
                                                      
                                                      Weighted
                                                        Average
                                                        Exercise
      Price
                                                      
                                                      
                                                      Number
      of
                                                        Options
                                                      
                                                      
                                                      Weighted
                                                        Average
                                                        Exercise
                                                        Price
                                                      
                                                      
                                                      Number
      of
                                                        Options
                                                      
                                                      
                                                      Weighted
                                                        Average
                                                        Exercise
      PriceStock
      Options:Balance
      at beginning of period
                                                      
                                                      
                                                      1,247,815
                                                      
                                                      
                                                      $
                                                      1.25
                                                      
                                                      
                                                      
                                                      1,382,890
                                                      
                                                      
                                                      $
                                                      1.26
                                                      
                                                      
                                                      
                                                      1,300,110
                                                      
                                                      
                                                      $
                                                      1.74Granted
                                                      
                                                      
                                                      420,000
                                                      
                                                      
                                                      $
                                                      0.13
                                                      
                                                      
                                                      
                                                      120,000
                                                      
                                                      
                                                      $
                                                      0.45
                                                      
                                                      
                                                      
                                                      943,000
                                                      
                                                      
                                                      $
                                                      0.39Exercised
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      (147,515
                                                      )
                                                      
                                                      $
                                                      0.33
                                                      
                                                      
                                                      
                                                      (285,000
                                                      )
                                                      
                                                      $
                                                      0.44Forfeited
                                                      
                                                      
                                                      (534,600
                                                      )
                                                      
                                                      $
                                                      1.90
                                                      
                                                      
                                                      
                                                      (107,560
                                                      )
                                                      
                                                      $
                                                      1.27
                                                      
                                                      
                                                      
                                                      (575,220
                                                      )
                                                      
                                                      $
                                                      1.34Balance
      at end of period
                                                      
                                                      
                                                      1,133,215
                                                      
                                                      
                                                      $
                                                      0.58
                                                      
                                                      
                                                      
                                                      1,247,815
                                                      
                                                      
                                                      $
                                                      1.25
                                                      
                                                      
                                                      
                                                      1,382,890
                                                      
                                                      
                                                      $
                                                      1.26Options
      exercisable at end of period
                                                      
                                                      
                                                      709,965
                                                      
                                                      
                                                      $
                                                      0.83
                                                      
                                                      
                                                      
                                                      1,029,296
                                                      
                                                      
                                                      $
                                                      1.44
                                                      
                                                      
                                                      
                                                      582,307
                                                      
                                                      
                                                      $
                                                      2.14








The
following table summarizes information about employee stock options outstanding
at March 31, 2009:





Range
      of Exercise Price
                                          
                                          Number
      Outstanding at
                                            March
      31, 2009
                                          
                                          
                                          Weighted
      Average
                                            Remaining
      Contractural
                                            Life
                                          
                                          
                                          Weighted
      Average
                                            Exercise
      Price
                                          
                                          
                                          Number
      Exercisable at
                                            March
      31, 2009
                                          
                                          
                                          Weighted
      Average
                                            Exercise
      Price$0.11-$0.77
                                          
                                          
                                          988,485
                                          
                                          
                                          
                                          7.08
                                          
                                          
                                          $
                                          0.33
                                          
                                          
                                          
                                          568,485
                                          
                                          
                                          
                                          0.48$0.93
      - $1.97
                                          
                                          
                                          120,180
                                          
                                          
                                          
                                          6.58
                                          
                                          
                                          $
                                          1.20
                                          
                                          
                                          
                                          116,930
                                          
                                          
                                          $
                                          1.20$2.04-$5.60
                                          
                                          
                                          5,550
                                          
                                          
                                          
                                          1.43
                                          
                                          
                                          $
                                          2.04
                                          
                                          
                                          
                                          5,550
                                          
                                          
                                          $
                                          2.04$7.20-$9.00
                                          
                                          
                                          19,000
                                          
                                          
                                          
                                          3.86
                                          
                                          
                                          $
                                          9.00
                                          
                                          
                                          
                                          19,000
                                          
                                          
                                          $
                                          9.001,133,215
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          709,965





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





STOCK
WARRANTS





As of
March 31, 2009, the Company had a total of 1,250,000 stock purchase warrants
outstanding. The exercise price of these warrants is $0.35 with an expiration
date of February 21, 2010.





NOTE
11 - INCOME TAXES





The
Company files separate tax returns in the United States and in Macau. The Macau
Subsidiary has received approval from the Macau government to operate its
business as a Macau Offshore Company (MOC), and is exempt from the Macau income
tax. For the fiscal years ended March 31, 2009, 2008 and 2007, the Macau
Subsidiary recorded no tax provision. The Company has now exhausted its ability
to carry back any further losses and therefore will only be able to recognize
tax benefits to the extent that it has future taxable income.





Due to
the change of control of the Company, the net operating loss carry over is
subject to the IRS Section 382 limitation.  As of March 31, 2009, 2008
and 2007, The Singing Machine had net deferred tax assets of approximately $3.1
million, $2.5 million, and $2.7 million, respectively, against which the Company
recorded valuation allowances totaling approximately $3.1 million, $2.5
million, and $2.7 million, respectively.





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


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


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





We
adopted FIN-48 on April 1, 2007 and it has had no impact on the financial
statements.





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





The
income tax expense (benefit) for federal, foreign, and state income taxes in the
consolidated statement of operations consisted of the following components for
2009, 2008, and 2007:




F-16




2009
                          
                          
                          2008
                          
                          
                          2007Current:U.S.
      Federal
                          
                          $
                          (878,241
                          )
                          
                          $
                          9,181
                          
                          
                          $
                          (781,917
                          )Foreign
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (2,453,576
                          )State
                          
                          
                          (77,918
                          )
                          
                          
                          944
                          
                          
                          
                          (69,080
                          )Deferred
                          
                          
                          992,811
                          
                          
                          
                          (10,125
                          )
                          
                          
                          850,997$
                          36,652
                          
                          
                          $
                          -
                          
                          
                          $
                          (2,453,576
                          )





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





2009
                    
                    
                    2008
                    
                    
                    2007United
      States
                    
                    $
                    (2,583,061
                    )
                    
                    $
                    27,002
                    
                    
                    $
                    (2,316,348
                    )Foreign
                    
                    
                    428,498
                    
                    
                    
                    (25,290
                    )
                    
                    
                    601,360$
                    (2,154,563
                    )
                    
                    $
                    1,712
                    
                    
                    $
                    (1,714,988
                    )





The
actual tax expense differs from the "expected" tax expense for the years ended
March 31, 2009, 2008, and 2007 (computed by applying the U.S. Federal Corporate
tax rate of 34 percent to income before taxes) as follows:





2009
                        
                        
                        2008
                        
                        
                        2007Expected
      tax (benefit) expense
                        
                        $
                        (732,551
                        )
                        
                        $
                        582
                        
                        
                        $
                        (583,096
                        )State
      income taxes, net of Federal income tax benefit
                        
                        
                        (77,919
                        )
                        
                        
                        943
                        
                        
                        
                        (69,080
                        )Permanent
      differences
                        
                        
                        6,447
                        
                        
                        
                        5,829
                        
                        
                        
                        5,640Change
      in valuation allowance
                        
                        
                        652,738
                        
                        
                        
                        (194,062
                        )
                        
                        
                        (3,702,790
                        )Tax
      rate differential on foreign earnings
                        
                        
                        (145,689
                        )
                        
                        
                        8,600
                        
                        
                        
                        (204,462
                        )Reversal
      of provision for foreign income taxes
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (2,453,576
                        )Other
                        
                        
                        333,627
                        
                        
                        
                        178,108
                        
                        
                        
                        4,553,788Actual
      tax (benefit) expense
                        
                        $
                        36,652
                        
                        
                        $
                        -
                        
                        
                        $
                        (2,453,576
                        )





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




F-17




2009
                    
                    
                    2008
                    
                    
                    2007Deferred
      tax assets:Federal
      net operating loss carryforward
                    
                    
                    1,616,816
                    
                    
                    
                    1,490,139
                    
                    
                    $
                    2,034,910State
      net operating loss carryforward
                    
                    
                    509,378
                    
                    
                    
                    518,078
                    
                    
                    
                    291,285AMT
      credit carryforward
                    
                    
                    70,090
                    
                    
                    
                    70,090
                    
                    
                    
                    70,090Inventory
      differences
                    
                    
                    445,109
                    
                    
                    
                    169,382
                    
                    
                    
                    66,942Allowance
      for doubtful accounts
                    
                    
                    89,073
                    
                    
                    
                    41,105
                    
                    
                    
                    21,021Reserve
      for sales returns
                    
                    
                    97,933
                    
                    
                    
                    74,056
                    
                    
                    
                    72,664Charitable
      contributions
                    
                    
                    60,700
                    
                    
                    
                    60,700
                    
                    
                    
                    60,700Accrued
      Vacation
                    
                    
                    12,568
                    
                    
                    
                    -
                    
                    
                    
                    -Depreciation
      and amortization
                    
                    
                    197,614
                    
                    
                    
                    -
                    
                    
                    
                    -Amortization
      of reorganization intangible
                    
                    
                    30,658
                    
                    
                    
                    53,652
                    
                    
                    
                    53,652Total
      deferred tax assets
                    
                    
                    3,129,940
                    
                    
                    
                    2,477,201
                    
                    
                    
                    2,671,264Net
      deferred tax assets before valuation allowance
                    
                    
                    3,129,940
                    
                    
                    
                    2,477,201
                    
                    
                    
                    2,671,264Valuation
      allowance
                    
                    
                    (3,129,940
                    )
                    
                    
                    (2,477,201
                    )
                    
                    
                    (2,671,264
                    )Net
      deferred tax assets
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -





At March
31, 2009, the Company has federal tax net operating loss carry forwards in the
amount of approximately $4.8 million, which expire beginning in the year
2023.  In addition, state tax net operating loss carry forwards in the
amount of approximately $6.6 million expire beginning in 2013. The Company is no
longer subject to income tax examinations for fiscal years before
2006.





NOTE
12 - SEGMENT INFORMATION





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





FOR
      THE FISCAL YEARS ENDEDMarch
      31,2009
                                          
                                          
                                          2008
                                          
                                          
                                          2007North
      America
                                          
                                          $
                                          26,154,402
                                          
                                          
                                          $
                                          27,085,841
                                          
                                          
                                          $
                                          20,552,962Europe
                                          
                                          
                                          4,813,309
                                          
                                          
                                          
                                          6,314,126
                                          
                                          
                                          
                                          5,793,062Others
                                          
                                          
                                          812,998
                                          
                                          
                                          
                                          667,904
                                          
                                          
                                          
                                          386,120$
                                          31,780,709
                                          
                                          
                                          $
                                          34,067,871
                                          
                                          
                                          $
                                          26,732,144





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





NOTE
13 - EMPLOYEE BENEFIT PLANS





The
Company has a 401(k) plan for its employees to which the Company makes
contributions at rates dependent on the level of each employee's contributions.
Contributions made by the Company are limited to the maximum allowable for
federal income tax purposes. The amounts charged to operations for contributions
to this plan and administrative costs during the years ended March 31, 2009,
2008, and 2007 totaled $17,825, $21,674and $39,460, respectively. The amounts
are included as a component of general and administrative expense in the
accompanying Consolidated Statements of Operations. The Company does not provide
any post employment benefits to retirees.





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





The
Company derives a majority of its revenues from retailers of products in the
United States. Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist of accounts receivable. The Company's
allowance for doubtful accounts is based upon management's estimates and
historical experience and reflects the fact that accounts receivable are
concentrated with several large customers whose credit worthiness have been
evaluated by management. At March 31, 2009, 82% of accounts receivable were due
from two customers in North America and one in Europe. Accounts receivable from
customers that individually owed over 10% of total accounts receivable was 55%
15% and 11% at March 31, 2009.  Accounts receivable from customers
that individually owed over 10% of total accounts receivable was 31% and 29% at
March 31, 2008. The Company performs ongoing credit evaluations of its
customers.




F-18




Revenues
derived from five customers in 2009, 2008, and 2007 were 61%, 62% and 58% of
total revenues, respectively. Revenues derived from top three customers in 2009,
2008 and 2007 as percentage of the total revenue were 21%, 18% and 10%; 22%, 11%
and 11%; and 24%, 16% and 10%, respectively. The loss of any of these customers
can have an adverse impact on the financial position of the
Company.





Net sales
derived from the Hong Kong and Macau Subsidiaries aggregated $17.1 million in
2009, $17.3 million in 2008 and $16.2 million in 2007.





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





During
fiscal years 2009, 2008, and 2007, manufacturers in the People's Republic of
China ("China") accounted for approximately 99%, 99% and 98%; respectively of
the Company's total product purchases, including all of the Company's hardware
purchases.





The
Company is primary relying on DBS Bank to finance its accounts receivable. The
loss of the factoring facility might have an adverse effect on its
business.





NOTE
15 - QUARTERLY FINANCIAL DATA - UNAUDITED





The
following financial information reflects all normal recurring adjustments that
are, in the opinion of management, necessary for a fair statement of the results
of the interim periods. The quarterly unaudited results for the years 2009,
2008, and 2007 are set forth in the following table:





Basic
                                                                                                    
                                                                                                    
                                                                                                    DilutedEarnings
                                                                                                    
                                                                                                    
                                                                                                    EarningsNet
      Earnings
                                                                                                    
                                                                                                    (Loss)
                                                                                                    
                                                                                                    
                                                                                                    (Loss)Sales
                                                                                                    
                                                                                                    
                                                                                                    Gross
      Profit
                                                                                                    
                                                                                                    
                                                                                                    (Loss)
                                                                                                    
                                                                                                    Per
      Share
                                                                                                    
                                                                                                    
                                                                                                    Per
      Share(In
      thousands)
                                                                                                    
                                                                                                    
                                                                                                    (In
      thousands)
                                                                                                    
                                                                                                    
                                                                                                    (In
      thousands)2009First
      quarter
                                                                                                    
                                                                                                    $
                                                                                                    1,770
                                                                                                    
                                                                                                    
                                                                                                    $
                                                                                                    203
                                                                                                    
                                                                                                    
                                                                                                    $
                                                                                                    (1,050
                                                                                                    )
                                                                                                    
                                                                                                    $
                                                                                                    (0.03
                                                                                                    )
                                                                                                    
                                                                                                    $
                                                                                                    (0.03
                                                                                                    )Second
      quarter
                                                                                                    
                                                                                                    
                                                                                                    12,616
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    2,021
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    103
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    -
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    -Third
      quarter
                                                                                                    
                                                                                                    
                                                                                                    16,612
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    3,772
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    464
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    0.01
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    0.01Fourth
      quarter
                                                                                                    
                                                                                                    
                                                                                                    783
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    (52
                                                                                                    )
                                                                                                    
                                                                                                    
                                                                                                    (1,708
                                                                                                    )
                                                                                                    
                                                                                                    
                                                                                                    (0.03
                                                                                                    )
                                                                                                    
                                                                                                    
                                                                                                    (0.03
                                                                                                    )Fiscal
      Year 2009
                                                                                                    
                                                                                                    $
                                                                                                    31,781
                                                                                                    
                                                                                                    
                                                                                                    $
                                                                                                    5,944
                                                                                                    
                                                                                                    
                                                                                                    $
                                                                                                    (2,191
                                                                                                    )
                                                                                                    
                                                                                                    $
                                                                                                    (0.07
                                                                                                    )
                                                                                                    
                                                                                                    $
                                                                                                    (0.07
                                                                                                    )2008First
      quarter
                                                                                                    
                                                                                                    $
                                                                                                    2,446
                                                                                                    
                                                                                                    
                                                                                                    $
                                                                                                    339
                                                                                                    
                                                                                                    
                                                                                                    $
                                                                                                    (852
                                                                                                    )
                                                                                                    
                                                                                                    $
                                                                                                    (0.03
                                                                                                    )
                                                                                                    
                                                                                                    $
                                                                                                    (0.03
                                                                                                    )Second
      quarter
                                                                                                    
                                                                                                    
                                                                                                    16,108
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    3,193
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    1,054
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    0.04
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    0.03Third
      quarter
                                                                                                    
                                                                                                    
                                                                                                    13,784
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    3,747
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    767
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    0.03
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    0.03Fourth
      quarter
                                                                                                    
                                                                                                    
                                                                                                    1,730
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    400
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    (967
                                                                                                    )
                                                                                                    
                                                                                                    
                                                                                                    (0.03
                                                                                                    )
                                                                                                    
                                                                                                    
                                                                                                    (0.03
                                                                                                    )Fiscal
      Year 2008
                                                                                                    
                                                                                                    $
                                                                                                    34,068
                                                                                                    
                                                                                                    
                                                                                                    $
                                                                                                    7,679
                                                                                                    
                                                                                                    
                                                                                                    $
                                                                                                    2
                                                                                                    
                                                                                                    
                                                                                                    $
                                                                                                    -
                                                                                                    
                                                                                                    
                                                                                                    $
                                                                                                    -2007First
      quarter
                                                                                                    
                                                                                                    $
                                                                                                    1,036
                                                                                                    
                                                                                                    
                                                                                                    $
                                                                                                    126
                                                                                                    
                                                                                                    
                                                                                                    $
                                                                                                    (1,151
                                                                                                    )
                                                                                                    
                                                                                                    $
                                                                                                    (0.11
                                                                                                    )
                                                                                                    
                                                                                                    $
                                                                                                    (0.11
                                                                                                    )Second
      quarter
                                                                                                    
                                                                                                    
                                                                                                    14,299
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    3,046
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    806
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    0.04
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    0.03Third
      quarter
                                                                                                    
                                                                                                    
                                                                                                    11,018
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    3,289
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    2,824
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    0.11
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    0.10Fourth
      quarter
                                                                                                    
                                                                                                    
                                                                                                    379
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    (345
                                                                                                    )
                                                                                                    
                                                                                                    
                                                                                                    (1,740
                                                                                                    )
                                                                                                    
                                                                                                    
                                                                                                    (0.08
                                                                                                    )
                                                                                                    
                                                                                                    
                                                                                                    (0.08
                                                                                                    )Fiscal
      Year 2007
                                                                                                    
                                                                                                    $
                                                                                                    26,732
                                                                                                    
                                                                                                    
                                                                                                    $
                                                                                                    6,116
                                                                                                    
                                                                                                    
                                                                                                    $
                                                                                                    739
                                                                                                    
                                                                                                    
                                                                                                    $
                                                                                                    0.03
                                                                                                    
                                                                                                    
                                                                                                    $
                                                                                                    0.03





NOTE
16 – GAIN FROM DISPOSAL OF ASSETS





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




F-19




NOTE
17 – RELATED PARTY TRANSACTIONS





TRADE





On May
23, 2008, SMC Logistics entered into a service and logistics agreement with
affiliates Starlight Consumer Electronics (USA), Inc. and Cosmo Communications
Corp. to provide logistics, fulfillment, and warehousing services for Starlight
and Cosmo’s domestic sales. The Agreement generated approximately $.8 million
dollars for fiscal year 2009 and is expected to generate $1.1M for fiscal year
2010.





The
Company purchased products from Starlight Marketing Macao, a subsidiary of
Starlight International Holding Ltd. The purchases from Starlight for the fiscal
year ended March 31, 2009 and 2008 were $10,170,825 and $5,775,074,
respectively. In addition, the Company also purchased molds and tooling from
Starlight in the amount of $235,000 and $126,282 in fiscals 2009 and 2008,
respectively, which are included in Property and Equipment in the accompanying
Consolidated Balance Sheets.





On August
1, 2006, the Company entered into a service agreement with Starlight Electronics
Co., Ltd, a subsidiary of Starlight International Holding Ltd, to provide
shipping and engineering service to the Company at a charge of $25,000 per
month.  This amount increased to $29,000 per month effective July 1,
2008 however, due to a decrease in services provided to the Company in fiscal
2009 the service charge was temporarily reduced for a period of time. For the
fiscal year ended March 31, 2009 and 2008, this service charge was $261,000 and
$200,000 per annum respectively and is included in the general and
administrative expenses in the accompanying Consolidated Statements of
Operations.





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





SUPPLEMENTAL
DATA


SCHEDULE
II





Balance
      at
                                        
                                        
                                        Charged
      to
                                        
                                        
                                        Reduction
      to
                                        
                                        
                                        Credited
      to
                                        
                                        
                                        Balance
      atBeginning
      of
                                        
                                        
                                        Costs
      and
                                        
                                        
                                        for
      Write off
                                        
                                        
                                        Costs
      and
                                        
                                        
                                        End
      ofDescription
                                        Period
                                        
                                        
                                        Expenses
                                        
                                        
                                        
                                        
                                        
                                        Expenses
                                        
                                        
                                        PeriodYear
      ended March 31, 2009Reserves
      deducted from assets to which they apply:Allowance
      for doubtful accounts
                                        
                                        $
                                        120,899
                                        
                                        
                                        $
                                        197,178
                                        
                                        
                                        $
                                        (71,068
                                        )
                                        
                                        $
                                        13,961
                                        
                                        
                                        $
                                        260,970Deferred
      tax valuation allowance
                                        
                                        $
                                        2,477,202
                                        
                                        
                                        $
                                        689,390
                                        
                                        
                                        $
                                        (36,652
                                        )
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        3,129,940Inventory
      reserve
                                        
                                        $
                                        497,984
                                        
                                        
                                        $
                                        700,709
                                        
                                        
                                        $
                                        (316,734
                                        )
                                        
                                        $
                                        (136,571
                                        )
                                        
                                        $
                                        745,388Year
      ended March 31, 2008Reserves
      deducted from assets to which they apply:Allowance
      for doubtful accounts
                                        
                                        $
                                        61,824
                                        
                                        
                                        $
                                        112,390
                                        
                                        
                                        $
                                        (53,315
                                        )
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        120,899Deferred
      tax valuation allowance
                                        
                                        $
                                        2,671,264
                                        
                                        
                                        $
                                        123,910
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        (317,972
                                        )
                                        
                                        $
                                        2,477,202Inventory
      reserve
                                        
                                        $
                                        198,848
                                        
                                        
                                        $
                                        382,048
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        (82,911
                                        )
                                        
                                        $
                                        497,984Year
      ended March 31, 2007Reserves
      deducted from assets to which they apply:Allowance
      for doubtful accounts
                                        
                                        $
                                        103,615
                                        
                                        
                                        $
                                        40,082
                                        
                                        
                                        $
                                        (26,973
                                        )
                                        
                                        $
                                        (54,900
                                        )
                                        
                                        $
                                        61,824Deferred
      tax valuation allowance
                                        
                                        $
                                        6,374,053
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        (3,702,789
                                        )
                                        
                                        $
                                        2,671,264Inventory
      reserve
                                        
                                        $
                                        1,096,123
                                        
                                        
                                        $
                                        121,969
                                        
                                        
                                        $
                                        (747,505
                                        )
                                        
                                        $
                                        (271,739
                                        )
                                        
                                        $
                                        198,848




F-20