UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    Form 10-K

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

                    For the fiscal year ended March 31, 2006

                                       Or

|_|  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934

                        Commission file number 000-24968

                        THE SINGING MACHINE COMPANY, INC.
             (Exact name of registrant as specified in its charter)

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

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

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

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

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

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

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 |X|

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 |X| No |_|

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

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

Large accelerated filer |_|   Accelerated filer |_|   Non-accelerated filer |X|

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

As of June 30, 2006, the aggregate market value of the issued and outstanding
common stock held by non-affiliates of the registrant, based upon the closing
price of the common stock as quoted on the American Stock Exchange of $0.32 was
approximately $3,219,290 (based on 10,060,282 shares outstanding). For purposes
of the above statement only, all directors, executive officers and 10%
shareholders are assumed to be affiliates. This determination of affiliate
status is not necessarily a conclusive determination for any other purpose.

Number of shares of common stock outstanding as of June 30, 2006 was 10,060,282.

                   DOCUMENTS INCORPORATED BY REFERENCE - None

<PAGE>

                THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY

                       INDEX TO ANNUAL REPORT ON FORM 10-K

                    FOR THE FISCAL YEAR ENDED MARCH 31, 2006

                                                                          PAGE
                                                                          ----
                                 PART I
Item 1.  Business                                                           2
Item 1A. Risk Factors                                                       7
Item 1B. Unresolved Staff Comments                                         12
Item 2.  Properties                                                        12
Item 3.  Legal Proceedings                                                 13
Item 4.  Submission of Matters to a Vote of Security Holders               13

                                PART II

Item 5.  Market for Company's Common Equity and Related Stockholder
           Matters and Issuer Purchases of Equity Securities               14
Item 6.  Selected Financial Data                                           15
Item 7.  Management's Discussion and Analysis of Financial Condition
           and Results of Operations                                       15
Item 7A  Quantitative and Qualitative Disclosures About Market Risk        21
Item 8.  Financial Statements and Supplementary Data                       22
Item 9.  Changes in and Disagreements With Accountants on Accounting
           and Financial Disclosure                                        22
Item 9A. Controls and Procedures                                           22
Item 9B. Other Information                                                 23

                                PART III

Item 10. Directors and Executive Officers of the Registrant                23
Item 11. Executive Compensation                                            25
Item 12. Security Ownership of Certain Beneficial Owners and Management
           and Related Stockholder Matters                                 30
Item 13. Certain Relationships and Related Transactions                    31
Item 14. Principal Accounting Fees and Services                            31

                                PART IV

Item 15. Exhibits, Financial Statement Schedules                           32

                 DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

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

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

                                     PART I

ITEM 1. BUSINESS

OVERVIEW

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


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We were incorporated in California in 1982. We originally sold our products
exclusively to professional and semi-professional singers. In 1988, we began
marketing karaoke equipment for home use. In May 1994, we merged into a wholly
owned subsidiary incorporated in Delaware with the same name. As a result of
that merger, the Delaware Corporation became the successor to the business and
operations of the California Corporation and retained the name The Singing
Machine Company, Inc. In July 1994, we formed a wholly owned subsidiary in Hong
Kong, now known as International SMC (HK) Ltd. ("International SMC" or "Hong
Kong subsidiary"), to coordinate our engineering, production, logistic and
finance in China. In December 2005, we formed a wholly owned subsidiary SMC
(Comercial Offshore De Macau) Limidata in Macau, China to process the orders
that ship directly from the factories in China. In the future, the Hong Kong
subsidiary will only handle the engineering and production in China.

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

As used herein, the "Singing Machine," "we," us" and similar terms include The
Singing Machine Company, International SMC and SMC (Comercial Offshore Do Macau)
Limidata, unless the context indicates otherwise.

PRODUCT LINES

We currently have a product line of 21 different models of karaoke machines plus
5 accessories such as microphones, incorporating such features as CD plus
graphics player, sound enhancement, echo, tape record/playback features, and
multiple inputs and outputs for connection to compact disc players, video
cassette recorders, and home theater systems. Our machines sell at retail prices
ranging from $30 for basic units to $200 for semi-professional units. We
currently offer our music in two formats - multiplex cassettes and CD+G's with
retail prices ranging from $6.99 to $19.99. We currently have a song library of
over 2500 recordings, which we license from publishers. Our library of master
recordings covers the entire range of musical tastes including popular hits,
golden oldies, country, rock and roll, Christian, Latin music and rap. We even
have backing tracks for opera and certain foreign language recordings.

MARKETING, SALES

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

In fiscal 2006, approximately 70 % of revenues were to the customers within the
US and 30% of revenues were international sales. Our sales within the US are
primarily made by our in-house sales team and our independent sales
representatives. Our independent sales representatives are paid a commission
based upon sales 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, 2006, 2005, and 2004,
respectively, were approximately 55%, 40% and 54%, respectively. In fiscal 2006,
top three major customers accounted for 13%, 12% and 11% of our net revenues.
Although we have long-established relationships with all of our customers, we do
not have contractual arrangements with any of them. A decrease in business from
any of our major customers could have a material adverse effect on our results
of operations and financial condition.

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

Our licensing agreements with MTV Networks, Inc. and Nickelodeon, both a
division of Viacom International, Inc and Universal Music Entertainment, Inc.
have also helped us to expand our product name. Our new licensing agreement with
Bratz and Hi-5 will help us to promote our new product lines to the youth
electronics market.

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


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<PAGE>

RETURNS

Returns of electronic hardware and music products by our customers are generally
not permitted except in approved situations involving quality defects, damaged
goods, goods shipped in error. Our policy is to give credit to our customers for
the returns in conjunction with the receipt of new replacement purchase orders.
Our total returns represented 7.4% and 9.4% of our net sales in fiscal 2006 and
2005, respectively.

DISTRIBUTORSHIP AGREEMENTS

In September 2005, we signed a one-year exclusive distribution agreement with
Warner Elektra Atlantic (WEA) Company to distribute our karaoke music products
in the United States. Our karaoke music products are placed at major mass
merchants, specialty stores and music stores through WEA distribution network.
WEA has an option to renew the distribution agreement for another year. The
music products are shipped to WEA warehouse at a consignment basis.

In March 2003, we signed an international distributorship agreement with Top-Toy
(Hong Kong) Ltd. Top Toy is the exclusive distributor of Singing Machine(R)
karaoke machines and music products in Denmark, Norway, Sweden, Iceland and
Faeroe Islands. The agreement is for three years, from April 1, 2003 through
March 31, 2006. The agreement contains an automatic renewal provision whereby if
either party does not give notice at least 3 months before March 31, 2006. The
agreement was terminated on March 31, 2006. We also have verbal agreements with
six other independent distributors who sell our products throughout Europe

LICENSE AGREEMENTS

In February 2003, we entered into a multi-year license agreement with Universal
Music Entertainment to market a line of Motown Karaoke machines and music. This
agreement and its subsidiary agreement signed in March 2003, allow us to be the
first to use original artist recordings for our CD+G formatted karaoke music.
Over the term of the license agreement, we are obligated to make guaranteed
minimum royalty payments in the amount of $300,000, which has been paid in full
as of March 31, 2005. The Universal Music Entertainment license expired on March
31, 2006 and did not contain any automatic renewal provisions. However, the
agreement was extended to December 31, 2006 without any additional minimum
guarantee payments.

We entered into a license agreement with Nickelodeon, Inc., a division of Viacom
International, Inc. in December 2002. Under this agreement, we licensed
Nickelodeon branded machines and a wide assortment of music. This license
originally expired on December 31, 2004. The company has extended the agreement
to December 31, 2005. Over the term of the license agreement, we are obligated
to make guaranteed minimum royalty payments in the amount of $450,000, which has
been paid in full as of March 31, 2005. The agreement was extended to December
31, 2006.

On December 20, 2005, we entered into a three-year license agreement with Hi-5
to produce and distribute karaoke software, including compact discs with
graphics (CDGs) and karaoke music downloadable via the Internet, a variety of
karaoke hardware products, and youth-oriented cassette players, CD and DVD
players, and clock radios based on the popular "Hi-5" television show. The
agreement contains an option to extend for an additional three years.

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 BRATZ(TM) 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.

                               TOTAL LICENSE SALES
                            FOR THE FISCAL YEAR ENDED
                                    March 31,

                       2006   2005   2004
                       ----   ----   ----

MTV                     2.1%  17.6%  11.8%
Nickelodeon             0.0%   0.5%   5.5%
Other Licenses          0.9%   2.5%   3.9%
                        ---   ----   ----
Total Licenses Sales    3.0%  20.6%  21.2%
                        ===   ====   ====

In the future, we might use our own brand or other brands.


                                        4

<PAGE>

DISTRIBUTION

We distribute hardware products to retailers and wholesale distributors through
two methods: shipment of products from inventory held at our warehouse
facilities in Florida and California (domestic sales), and shipments directly
through our Hong Kong subsidiary and manufacturers in China of products (direct
sales). Domestic sales, which account for substantially all of our music sales,
are made to customers located throughout the United States from inventories
maintained at our warehouse facilities. In the fiscal year ended March 31, 2006,
approximately 33% of our sales were sales from our domestic warehouses
("Domestic Sales") and 67% were sales shipped directly from China ("Direct
Sales").

Domestic Sales. Our strategy of selling products from a domestic warehouse
enables us to provide timely delivery and serve as a domestic supplier of
imported goods. We purchase karaoke machines overseas from certain factories in
China for our own account, and warehouse the products in leased facilities in
Florida and California. We are responsible for costs of shipping, insurance,
customs clearance, duties, storage and distribution related to such products
and, therefore, 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 International SMC, our subsidiary. Sales made through
International SMC are completed by either delivering products to the customers'
common carriers at the shipping point or by shipping the products to the
customers' distribution centers, warehouses, or stores. Direct sales are made in
larger quantities (generally container sized lots) to customers' world wide, who
pay International SMC pursuant to their own international, irrevocable,
transferable letters of credit or on open account.

MANUFACTURING AND PRODUCTION

Our karaoke machines are manufactured and assembled by third parties pursuant to
design specifications provided by us. Currently, we have ongoing relationships
with six factories, located in Guangdong Province of the People's Republic of
China, who assemble our karaoke machines. During fiscal 2007, we anticipate that
75% of our karaoke products will be produced by one of these factories, which
has agreed to extend financing to us. We believe that the manufacturing capacity
of our factories is adequate to meet the demands for our products in fiscal year
2007. However, if our primary factory in China was prevented from manufacturing
and delivering our karaoke products, our operation would be severely disrupted
while alternative sources of supply are located. See "Risk Factors - We are
relying on one factory to manufacture and produce the majority of our karaoke
machines for fiscal 2007" on page 17. In manufacturing our karaoke related
products, these factories use molds and certain other tooling, most of which are
owned by the Company. 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 have obtained copyright licenses from music publishers for all of the songs
in our music library. We contract with outside studios on a work-for hire basis
to produce recordings of these songs. After the songs have been recorded, we
author the CD+G's in our in house studio. In some cases, we also use outside
firm to author the CD+G's. We use outside companies to mass-produce the CD+G's
and audiocassettes, once the masters have been completed.

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

All of the electronic equipment sold by us is warranted to the end user against
manufacturing defects for a period of ninety (90) days for labor and parts. All
music sold is similarly warranted for a period of 30 days. During the fiscal
years ended March 31, 2006, 2005 and 2004, 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 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.

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.


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<PAGE>

TRADEMARKS AND PATENTS

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

In the past few years, we have also obtain two U.S. patents for Karaoke
machines.

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

COPYRIGHTS AND LICENSES

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

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

We currently have compulsory statutory licenses for certain songs in our song
library which are reproduced on audiocassettes. The Federal Copyright Act
creates a compulsory statutory license for all non-dramatic musical works, which
have been distributed to the public in the United States. Royalties due under
compulsory licenses are payable quarterly and are based on the statutory rate.

GOVERNMENT REGULATION

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

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

SEASONALITY AND SEASONAL FINANCING

Our business is highly seasonal, with consumers making a large percentage of
karaoke purchases around the traditional holiday season in our second and third
quarter. These seasonal purchasing patterns and requisite production lead times
cause risk to our business associated with the underproduction or overproduction
of products that do not match consumer demand. Retailers also attempt to manage
their inventories more tightly, requiring that we ship products closer to the
time that retailers expect to sell the products to consumers. These factors
increase the risk that we may not be able to meet demand for certain products at
peak demand times, or that our own inventory levels may be adversely impacted by
the need to pre-build products before orders are placed. As of March 31, 2006,
we had inventory of 1.7million (net of reserves totaling $1.1 million) compared
to inventory of $3.1 million as of March 31, 2005 (net of reserves totaling $1.7
million).

Our financing of seasonal working capital during fiscal 2006 was from selling of
the inventory carried over from prior year, factoring the accounts receivables.
We financed the purchase of new inventory with our short-term lines of credit in
Hong Kong and through factory financing in China.

During fiscal 2007, we plan on financing our inventory purchases by using credit
that has been extended to us by the factories in China, by using our short term
lines of credit in Hong Kong and with letters of credit that are issued by our
customers to be used as collateral for payment to our vendors.


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BACKLOG

We ship our products in accordance with delivery schedules specified by our
customers, which usually request delivery within three months of the date of the
order. In the consumer electronics industry, orders are subject to cancellation
or change at any time prior to shipment. In recent years, a trend toward
just-in-time inventory practices in the consumer electronics industry has
resulted in fewer advance orders and therefore less backlog of orders for the
Company. We believe that backlog orders at any given time may not accurately
indicate future sales. We believe that we will be able to fill all of these
orders in fiscal year 2007. However, these orders can be cancelled or modified
at any time prior to delivery. This backlog does not take into account of any
sales ordered by customers directly from our domestic inventory with order
turnaround time of one to two weeks. We normally have to keep the minimum
inventory in our domestic warehouses for this type of sales.

EMPLOYEES

As of June 30, 2006, we employed 30 persons, all of whom are full-time
employees, including two executive officers. Fifteen of our employees are
located at International SMC's corporate offices in Hong Kong. The remaining
fifteen employees are based in the United States, including two executive
positions, two engaged in warehousing and technical support, and eleven 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 SIGNIFICANT WORKING CAPITAL NEEDS AND IF WE ARE UNABLE TO OBTAIN
ADDITIONAL FINANCING, WHEN NEEDED, WE MAY NOT HAVE SUFFICIENT CASH FLOW TO RUN
OUR BUSINESS.

As of June 30, 2006, our cash on hand is limited. We need approximately $1.1
million in working capital in order to finance our operations over the next
three months. We will finance our working capital needs from the collection of
accounts receivable, and sales of existing inventory. As of March 31, 2006, our
inventory was valued at $1.7 million. See "Liquidity" beginning on page 19. If
these sources do not provide us with adequate financing, we may try to seek
financing from lenders and investors. If we are not able to obtain adequate
financing, when needed, it will have a material adverse effect on our cash flow
and our ability to continue as a going concern. If we have a severe shortage of
working capital, we may not be able to continue our business operations and may
be required to file a petition for bankruptcy under Chapter 11 of the U.S.
Bankruptcy Code or enter into some other form of liquidation or reorganization
proceeding.

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

As of March 31, 2006, our cash position is limited and we had negative equity.
We are not able to pay all of our creditors on a timely basis. We are not
current on our accounts payable of $0.4 million to our factory in China. If we
are not able to pay our current debts as they become due, we may be deemed to be
insolvent. We may be required to file a petition for bankruptcy under Chapter 11
of the U.S. Bankruptcy Code or enter into some other form of liquidation or
reorganization proceedings.

OUR INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS RAISED SUBSTANTIAL DOUBT
ABOUT OUR ABILITY TO CONTINUE AS A GOING CONCERN AS OF MARCH 31, 2006.

We received a report dated May 26, 2006 from our independent certified public
accountants covering the consolidated financial statements for our fiscal year
ended March 31, 2006 that included an explanatory paragraph which stated that
the financial statements were prepared assuming that the Singing Machine would
continue as a going concern. This report stated that our operating performance
in fiscal 2006 and our minimal liquidity raised substantial doubt about our
ability to continue as a going concern. If we are not able to raise additional
capital, we may need to curtail or stop our business operations. We may be
required to file a petition for bankruptcy under Chapter 11 of the U.S.
Bankruptcy Code or enter into some other form of liquidation or reorganization
proceedings.

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 year ended March 31, 2006 and year ended March 31, 2005
were approximately 56% and 40%, 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.


                                        7

<PAGE>

WE ARE RELYING ON ONE FACTORY TO MANUFACTURE AND PRODUCE THE MAJORITY OF OUR
KARAOKE MACHINES FOR FISCAL 2006, AND IF THE RELATIONSHIP WITH THIS FACTORY IS
DAMAGED OR INJURED IN ANY WAY, IT WOULD REDUCE OUR REVENUES AND PROFITABILITY.

We have worked out a written agreement with factories in China to produce most
of our karaoke machines for fiscal 2007. We owe one factory approximately $0.4
million as of March 31, 2006 and have worked out a verbal payment plan with it.
If the factory is unwilling or unable to deliver our karaoke machines to us, our
business will be adversely affected. Because our cash on hand is minimal, we are
relying on revenues received from the sale of our ordered karaoke machines to
provide cash flow for our operations. If we do not receive cash from these
sales, we may not be able to continue our business operations.

WE ARE RELYING ON ONE DISTRIBUTOR TO DISTRIBUTE OUR MUSIC PRODUCTS, IF THE
DISTRIBUTION AGREEMENT IS TERMINATED, IT WOULD REDUCE OUR REVENUES AND
PROFITABILITY.

We are relying on Warner Elektra Atlantic Corporation (WEA) to distribute our
music products in fiscal 2006, if the distribution agreement is terminated, our
music revenues might decrease as well as our profitability.

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 2006 and 2005, a number of our customers and distributors returned
karaoke products that they had purchased from us. Our customers returned goods
valued at $2.4 million, or 7.4% of our net sales in fiscal 2006. Some of the
returns resulted from customer's overstock of the products. Although we were not
contractually obligated to accept this return of the products, we accepted the
return of the products because we valued our relationship with our customers.
Because we are dependent upon a few large customers, we are subject to the risk
that any of these customers may elect to return unsold karaoke products to us in
the future. If any of our customers were to return karaoke products to us, it
would reduce our revenues and profitability.

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 fiscal year ended March 31, 2006, our sales to customers in the
United States decreased because of increased price competition. We are also
subject to pressure from our customers regarding certain financial incentives,
such as return credits or large advertising or cooperative advertising
allowances, which effectively reduce our profit. We gave advertising allowances
in the amount of $0.2 million during fiscal 2006 and $0.6 million during fiscal
2005. We have historically offered advertising allowances to our customers
because it is standard practice in the retail industry.

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

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

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

Many of our customers place orders with us several months prior to the holiday
season, but they schedule delivery two or three weeks before the holiday season
begins. As such, we are subject to the risks and costs of carrying inventory
during the time period between the placement or the order and the delivery date,
which reduces our cash flow. As of March 31, 2006 we had $1.6 million in
inventory on hand. It is important that we sell this inventory during fiscal
2007, 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 the
competition except for fiscal 2005 when we had developed several new models,
which were in demand and yielded higher profit margins. We expect that our gross
profit margin might decrease under downward pressure in fiscal 2007.


                                        8

<PAGE>

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

Our license with MTV Networks is important to our business. We generated 2.1%
and 17.6% of our consolidated net sales from products sold under the MTV license
in fiscal 2006 and 2005, respectively. Our MTV license was terminated on
December 31, 2004, with an extension to sell certain existing inventory by
September 30, 2005. We expect the MTV branded products will be phased out and
replaced with SMC brand products going forward.

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

Sales of consumer electronics and toy products in the retail channel are highly
seasonal, with a majority of retail sales occurring during the period from
September through December in anticipation of the holiday season, which includes
Christmas. A substantial majority of our sales occur during the second quarter
ended September 30 and the third quarter ending December 31. Sales in our second
and third quarter, combined, accounted for approximately 87.5%, 86.7% and 87.2%
of net sales in fiscal 2006, 2005 and 2004, 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 is Memorex. We
believe that competition for karaoke machines is based primarily on price,
product features, reputation, delivery times, and customer support. Our primary
competitors for producing karaoke music are Compass, Pocket Songs, Sybersound,
UAV and Sound Choice. We believe that competition for karaoke music is based
primarily on popularity of song titles, price, reputation, and delivery times.
To the extent that we lower prices to attempt to enhance or retain market share,
we may adversely impact our operating margins. Conversely, if we opt not to
match competitor's price reductions we may lose market share, resulting in
decreased volume and revenue. To the extent our leading competitors reduce
prices on their karaoke machines and music, we must remain flexible to reduce
our prices. If we are forced to reduce our prices, it will result in lower
margins and reduced profitability. Because of intense competition in the karaoke
industry in the United States during fiscal 2006, 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 2007. 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:

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

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

     o    transition our products to new manufacturing process technologies;

     o    identify emerging technological trends in our target markets;

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

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

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

We believe that we will need to continue to enhance our karaoke machines and
develop new machines to keep pace with competitive and technological
developments and to achieve market acceptance for our products. 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 Compton, California.
Retailers that take delivery of our products in China rely on a variety of
carriers to import those products. Any disruptions in shipping, whether in
California or China, caused by labor strikes, other labor disputes, terrorism,
and international incidents 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.


                                        9

<PAGE>

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 six factories in the People's Republic of China to manufacture the
majority of our karaoke machines. These factories will be producing
approximately 98% of our karaoke products in fiscal 2007. 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 themselves. As a result,
any difficulties encountered by our third-party manufacturers that result in
product defects, production delays, cost overruns or the inability to fulfill
orders on a timely basis could adversely affect our revenues, profitability and
cash flow. Also, since we do not have written agreements with any of these
factories, we are subject to additional uncertainty if the factories do not
deliver products to us on a timely basis.

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

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

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

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

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

Over the past several years, 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, or is in the
process of settling such claims, with each one of the complaining copyright
owners. 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 if left unchecked or unresolved, the reason Singing Machine
pursues licenses so diligently.

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

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

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

We sell products to retailers, including department stores, lifestyle merchants,
direct mail retailers, which are catalogs and showrooms, national chains,
specialty stores, and warehouse clubs. Some of these retailers, such as K-Mart,
FAO Schwarz and KB Toys, have engaged in leveraged buyouts or transactions in
which they incurred a significant amount of debt, and operated under the
protection of bankruptcy laws. As of June 30, 2006, we are aware of only three
customers, FAO Schwarz, Musicland and KB Toys, which are operating under the
protection of bankruptcy laws. Deterioration in the financial condition of our
customers could result in bad debt expense to us and have a material adverse
effect on our revenues and future profitability.


                                       10

<PAGE>

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

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

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

During fiscal 2006, approximately 33% 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.

                   RISKS ASSOCIATED WITH OUR CAPITAL STRUCTURE

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

From December 1, 2004 through March 31, 2006, our common stock has traded
between a high of $.95 and a low of $0.22. During this period, we had liquidity
problems and incurred a net loss of $1.9 million in fiscal 2006 and loss of $3.6
million in fiscal 2005. Our stock price may continue to be volatile based on
similar or other adverse developments in our business. In addition, the stock
market periodically experiences significant adverse price and volume
fluctuations which may be unrelated to the operating performance of particular
companies.

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

During the past year, a number of investors have held a short position in our
common stock. As of June 12, 2006, investors hold a short position in 283,000
shares of our common stock which represents 4.0% of our public float. The
anticipated downward pressure on our stock price due to actual or anticipated
sales of our stock by some institutions or individuals who engage in short sales
of our common stock could cause our stock price to decline. Additionally, if our
stock price declines, it may be more difficult for us to raise capital.

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

The Company has received a non-compliance notice from The American Stock
Exchange (the "Amex") on July 18, 2005. The notice indicated that the Company
has fallen below the continued listing standards of the Amex and that its
listing is being continued pursuant to an extension. Specifically, for the
fiscal year ended March 31, 2005, the Company was not in compliance with the
minimum shareholders' equity requirement of $2,000,000, and had reported net
losses in each of the past two fiscal years, resulting in the Company's
non-compliance with Sections 1003(a)(i) and 1003(a)(iv) of the Amex Company
Guide. In addition, the Company failed to announce in a press release, as
required by Section 610(b) of the Amex Company Guide, that it received an audit
opinion which contained a going concern qualification as disclosed in its Form
10-K for fiscal 2005 that was filed on June 29, 2005.

In order to maintain its Amex listing, the Company submitted a plan by August
18, 2005 advising the Amex of actions it will take, which may allow it to regain
compliance within a maximum of 18 months and 12 months from July 18, 2005,
respectively.

The Exchange has completed its review of The Singing Machine's plan of
compliance and supporting documentation and has determined that, in accordance
with Section 1009 of the Company Guide, the Plan makes a reasonable
demonstration of the Company's ability to regain compliance with the continued
listing standards within a maximum of 18 months and 12 months from July 18,
2005, respectively.

The Company must regain compliance with the $4,000,000 minimum shareholders'
equity requirement by January 18, 2007. Failure to regain compliance within
these time frames likely will result in the Exchange Staff initiating delisting
proceedings pursuant to Section 1009 of the Company Guide. Further, if our
common stock is removed from listing on Amex, it may become more difficult for
us to raise funds through the sales of our common stock or securities.


                                       11

<PAGE>

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

As of March 31, 2006, there were outstanding stock options to purchase an
aggregate of 1,300,110 shares of common stock at exercise prices ranging from
$.32 to $11.09 per share, not all of which are immediately exercisable. The
weighted average exercise price of the outstanding stock options is
approximately $2.42 per share. As of March 31, 2006, there were outstanding
immediately exercisable options to purchase an aggregate of 392,161 shares of
our common stock. There were outstanding stock warrants to purchase 5,591,040
shares of common stock at exercise prices ranging from $1.41 to $4.03 per share,
all of which are exercisable. The weighted average exercise price of the
outstanding stock warrants is approximately $0.85 per share..

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

As of June 30, 2006, there were 10,060,282 shares of our common stock
outstanding. Of these shares, approximately 960,924 shares are eligible for sale
under Rule 144. We have filed two registration statements registering an
aggregate 3,794,250 of shares of our common stock (a registration statement on
Form S-8 to register the sale of 1,844,250 shares underlying options granted
under our 1994 Stock Option Plan and a registration statement on Form S-8 to
register 1,950,000 shares of our common stock underlying options granted under
our Year 2001 Stock Option Plan). An additional registration statement on Form
S-1 was filed in October 2003, registering an aggregate of 2,795,465 shares of
our common stock. The market price of our common stock could drop due to the
sale of large number of shares of our common stock, such as the shares sold
pursuant to the registration statements or under Rule 144, or the perception
that these sales could occur.

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

Our Certificate of Incorporation authorizes the issuance of 100,000,000 shares
of common stock as amended in January 2006. As of June 30, 2006, we had
10,060,282 shares of common stock issued and outstanding and an aggregate of
6,891150 shares issuable under our outstanding options and warrants. As such,
our Board of Directors has the power, without stockholder approval, to issue up
to 83,048,568 shares of common stock.

According to the Security Purchase Agreement dated on February 21, 2006, the
Company is required to issue 12,875,536 shares of common stock to Koncepts
International at $0.233 per shares for $3 million investment. The agreement is
currently under review by American Stock Exchange (AMEX). The shares are
expected to be issued on July 31, 2006 once approval from AMEX has been
received.

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

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

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

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

Our corporate headquarters are located in Coconut Creek, Florida in a 7,000
square feet office and warehouse facility. The lease expires on April 30, 2007.
The annual rental expense is $87,000.

We have one warehouse facility in Compton California. The Compton warehouse
facility has 79,000 square feet and the lease expires on February 23, 2008. We
have subleased approximately 40,000 square feet. The annual rental expense is
$525,000 and our sublease income is approximately $240,000 per year.

We have leased 3,579 square feet of office space in Hong Kong from which we
oversee China based manufacturing operations. The lease expires April 30, 2008.
The annual rental expense is $107,370.

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.


                                       12

<PAGE>

ITEM 3. LEGAL PROCEEDINGS

LEGAL MATTERS

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

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

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

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

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

Despite the confidence of The Singing Machine Company, Inc. that the ruling in
its favor at the district court level will be affirmed on appeal, it is not
possible to predict such outcomes with any degree of certainty.

OTHER MATTERS

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

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

We held our Annual Meeting of stockholders on Tuesday, January 17, 2006 at 9:30
a.m. at Company's executive offices. There were present in person or by proxy
8,864,270 shares of Common Stock, of a total of 10,060,282 shares of Common
Stock entitled to vote. At the Annual Meeting, our stockholders voted in favor
of the following proposals:

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

     Nominee       Number of Shares
----------------   ----------------
Bernard Appel          8,778,680
Josef Bauer            8,771,700
Yi Ping Chan           8,227,980
Marc Goldberg          8,778,680
Stewart Merkin         8,778,680
Harvey Judkowitz       8,778,680


                                       13

<PAGE>

2. 8,132,948 shares were voted in favor of amending the Company's Certificate of
Incorporation to increase the number of authorized shares common stock, par
value $0.01 per share, from 18,900,000 to 100,000,000 shares.

3. 8,780,542 shares were voted in favor of the appointment of Berkovits, Lago, &
Company LLP as the Company's independent auditors for the fiscal year ending
March 31, 2006.

                                     PART II

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

Our common stock currently trades on the American Stock Exchange under the
symbol "SMD." Set forth below is the range of high and low information for our
common stock as traded on the American Stock Exchange during fiscal 2006 and
fiscal 2005. This information regarding trading on AMEX represents prices
between dealers and does not reflect retail mark-up or markdown or commissions,
and may not necessarily represent actual market transactions.

                FISCAL PERIOD                    HIGH    LOW
---------------------------------------------   -----   -----
2006:
First quarter (April 1 - June 30, 2005)         $0.80   $0.55
Second quarter (July 1 - September 30, 2005)     0.67    0.39
Third quarter (October 1 - December 31, 2005)    0.50    0.22
Fourth quarter (January 1 - March 31, 2006)      0.47    0.23

2005:
First quarter (April 1 - June 30, 2004)         $1.30   $ .36
Second quarter (July 1 - September 30, 2004)      .72     .30
Third quarter (October 1 - December 31, 2004)    1.15     .51
Fourth quarter (January 1 - March 31, 2005)      1.05     .61

As of June 30, 2006, there were approximately 317 record holders of our
outstanding common stock. Because brokers and other institutions hold many of
the shares on behalf of shareholders, we are unable to determine the actual
number of shareholders represented by these record holders.

COMMON STOCK

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

During the fiscal year ended March 31, 2006 and 2005, the Company issued 290,689
and 1,017,275 shares of its common stock.

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

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

On February 21, 2006, we entered into a Securities Purchase Agreement (the
"Purchase Agreement") with koncepts International Limited (the "Purchaser")
pursuant to which we agreed to sell and issue 12,875,536 shares of common stock,
$.01 par value per share (the "Common Shares"), and 3 common stock purchase
warrants (the "Warrants") to purchase an aggregate of 5,000,000 shares of our
common stock for an aggregate purchase price of $3,000,000, or a per share
purchase price of $.233. Subject to additional closing conditions as specified
in the Purchase Agreement, the closing of the offering is subject to our
successful restructuring of our $4,000,000 principal amount subordinated
debenture which came due on February 20, 2006, as well as the approval of the
American Stock Exchange and the shareholders of Starlight International Holdings
Ltd., parent company of the Purchaser, as per the requirements of Hong Kong
Stock Exchange. The parties intend to complete this offering within the next 60
days, assuming all closing conditions are met.

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


                                       14

<PAGE>

*All of the above issuances and sales were deemed to be exempt under Rule 506 of
Regulation D and Section (2) of the Securities Act of 1933, as amended. 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 of 1933. In
addition to representations by the above-reference persons, we have made
independent determinations that 11 of the above-referenced person 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.

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, 2006, 2005 and 2004 and the
balance sheet data at March 31, 2006 and 2005 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, 2003 and 2002 and the
balance sheet data at March 31, 2004, 2003 and 2002 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.

<TABLE>
<CAPTION>
                                          2006          2005            2004           2003          2002*
                                     ------------   ------------   -------------   ------------   -----------
<S>                                  <C>            <C>            <C>             <C>            <C>
Statement of Operations:
Net Sales                            $ 32,305,560   $ 38,209,825   $  70,541,128   $ 95,613,766   $62,475,753
Earnings(loss) before income taxes    ($1,905,250)   ($3,591,975)   ($21,924,919)  $  1,416,584   $ 8,184,559
Income tax expense                   $          0   $          0        $758,505   $    198,772   $ 1,895,494
Net earnings (loss)                   ($1,905,250)   ($3,591,975)   ($22,683,424)  $  1,217,813   $ 6,289,065
Balance Sheet:
Working capital                       ($4,274,100)   ($3,378,528)    ($1,382,939)  $ 15,281,023   $14,577,935
Current ratio                                0.48%            65%             90%           172%          382%
Property, plant and equipment, net   $    513,615   $  1,038,843   $     983,980   $  1,096,424   $   574,657
Total assets                         $  4,524,267   $  7,668,808   $  15,417,395   $ 38,935,294   $21,403,196
Shareholders' equity                  ($3,661,798)   ($1,985,023)  $     216,814   $ 17,685,364   $16,225,433
Per Share Data:
Earnings (loss) per common
share - basic                              ($0.19)        ($0.39)         ($2.65)  $       0.15   $      0.88
Earnings (loss) per common
share - diluted                            ($0.19)        ($0.39)         ($2.65)  $       0.14   $      0.79
Cash dividends paid                             0              0               0              0             0
</TABLE>

* Restated

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

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

OVERVIEW

Our primary objectives for fiscal 2006 were:

      o     restructure the $4 million convertible debts;

      o     raise additional capital;


                                       15

<PAGE>

      o     stabilize our revenues;

      o     continue to drive down the operating costs;

      o     expand our business into other product categories.

We believe that we have achieved our primary goal in almost every category. Our
revenues has been stabilized, the decrease of sales was moderate compared to the
decrease of sales in fiscal 2005 and fiscal 2004. Our gross profit margin only
decreased by 2% in fiscal 2006 compared to prior year in light of increase of
factory labor cost and the raw material. Our fixed operating expenses
(compensation and selling, general and administrative expense) in fiscal 2006
decreased to $7.1 million from $7.3 million, a decrease of $0.2 million or 3%
compared to prior year. The decrease of fixed operating expenses was primarily
due to the continuing cost cutting efforts. We have successfully restructured
the $4 million debenture and recorded one time gain of $2.2 million as other
income. As a result, our net loss decreased by $1.7 million to $1.9 million in
fiscal 2006 from $3.6 million in fiscal 2005.

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:

                                        2006    2005    2004
                                       -----   -----   -----

Total Revenues                         100.0%  100.0%  100.0%
Cost of Sales                           78.1%   75.8%   97.4%
Operating expenses                      28.6%   28.5%   31.2%
Operating (loss) income                 -6.7%   -4.2%  -28.6%
Other (expenses), income, net           0.10%   -5.2%   -2.5%
(Loss) Income before taxes              -5.9%   -9.4%  -31.1%
Provision (benefit) for income taxes     0.0%    0.0%    1.1%
(Loss) Income                           -5.9%   -9.4%  -32.2%

FISCAL YEAR ENDED MARCH 31, 2006 COMPARED WITH FISCAL YEAR ENDED MARCH 31, 2005

                                    NET SALES

One of our primary goals in fiscal 2006 was to stabilize the revenues. Net sales
for the fiscal year ended March 31, 2006 was approximately $32.3 million, a
decrease of approximately $5.9 million from approximately $38.2 million for
fiscal 2005 compared to a decrease of approximately $32.3 million from fiscal
2004 to fiscal 2005. The decrease in net sales was a result of both decreases in
unit volume as well as pricing. The decrease in sales is primarily attributed
to:

      o     Customers concerned of our financial liquidity;

      o     Most of the overstock inventory from prior years has been sold at a
            very lower price in fiscal 2004 and fiscal 2005, which generated the
            higher revenues. There were only approximately $2 million of old
            inventory carried over to fiscal 2006;

      o     Increase of price competition in the United States and international
            market.

In fiscal year 2006, 67% of our sales were direct sales, which represent sales
made by International SMC, and 33% were domestic sales, which represents sales
made from our warehouse in the United States.

The sales decrease occurred in all segments of our business. Our total hardware
sales decreased to approximately $30.9 million, in fiscal 2006 compared to total
hardware sales of approximately $35.9 million in fiscal 2005.

Music sales decreased to approximately $1.4 million, or 5% of net sales, in
fiscal 2006, compared to approximately $2.3 million, or 6% of net sales, in
fiscal 2005. The decrease in music sales was a result of increased competition
in this category.

                                  GROSS PROFIT

Gross profit for fiscal 2006 was approximately $7.1 million or 21.9% of total
revenues compared to approximately $9.3 million or 24.2%of sales for fiscal
2005. The decrease in gross margin, compared to the prior year, was primarily
due to increased price competition and the increase of factory labor and raw
material cost. The decrease of music sales also had negative effect on the gross
margin since music sales yield higher profit margin than our other products.

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


                                       16

<PAGE>

                               OPERATING EXPENSES

Operating expenses for the fiscal year ended March 31, 2006 decreased from
approximately $10.9 million to approximately $9.2 million, a decrease of
approximately $1.7 million or 15.1% compared to the same period last year. The
decrease in operating expenses consists of a $1.4 million decrease in variable
expenses (Advertising, Commission, Freight and Royalty expenses) and a $0.3
decrease in fixed expenses (compensation and general and administration
expenses). The variable expenses were decreased proportionally as revenues
decreased. The fixed expense decrease of approximately $0.3 million was
primarily due to reductions in warehouse expenses and compensation expenses,
which were partially off set by an increase of bad debts expense.

                          DEPRECIATION AND AMORTIZATION

Our depreciation and amortization expenses were $688,951 for fiscal 2006
compared to $709,291 for fiscal 2005. This decrease in depreciation and
amortization expenses can be attributed to the fact that we produced fewer
models with higher volume per model, which increased the economies of scale for
our product lines.

                           NET OTHER INCOME (EXPENSES)

Net other income was $254,172 in fiscal 2006 compared to net other expenses of
$1,971,740 in fiscal 2005. Net other expenses decrease was because we recognized
approximately $2.2 million one time gain from restructuring of approximately $4
million convertible debts and decrease of interest expense of $62,199.

                               INCOME BEFORE TAXES

We had a net loss before taxes of $1,905,250 in fiscal 2006 compared to a net
loss before taxes of $3,591,975 in fiscal 2005. The decreased net loss was
primarily due to approximately $2.2 million gain from debts restructuring.

                               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, 2006 and
2005, we had gross deferred tax assets of approximately $6.4 million and
approximately $10.4 million, against which we recorded valuation allowances
totaling approximately $6.4 million and approximately $10.4, respectively.

For the fiscal year ended March 31, 2006, we did not record income tax expenses.
This occurred because the company had taxable losses for both US operations and
Hong Kong operations.

Our subsidiary has applied for an exemption of income tax in Hong Kong. Although
no decision has been reached by the governing body, the parent company has
decided to provide for the possibility that the exemption could be denied and
accordingly has recorded a provision for Hong Kong taxes in fiscal 2003 and
2002. There was no provision for Hong Kong income taxes in fiscal 2006 and
fiscal 2005 due to the subsidiary's taxable loss. Hong Kong income taxes payable
totaled approximately $2.4 million at March 31, 2006 and 2005 and is included in
the accompanying balance sheets as income taxes payable.

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

                               NET LOSS/NET INCOME

As a result of the foregoing, we had a net loss of approximately $1.9 million in
fiscal 2006 compared to a net loss of approximately $3.6 million in fiscal 2005.
Our decrease in net loss is primarily attributable to $2.2 million one time gain
from the restructuring of the $4 million convertible debentures.


FISCAL YEAR ENDED MARCH 31, 2005 COMPARED WITH FISCAL YEAR ENDED MARCH 31, 2004

                                    NET SALES

Net sales for the fiscal year ended March 31, 2005 decreased to approximately
$38.2 million compared to revenues of approximately $70.5 million in the fiscal
year ended March 31, 2004. The decrease in net sales was a result of both
decreases in unit volume as well as pricing. The decrease in sales is primarily
attributed to:


                                       17

<PAGE>

      o     We made a decision not to pursue low margin accounts which tie up
            cash flow but do not provide enough profit margins;

      o     Customers concerned of our financial liquidity;

      o     Customers had high level of inventory on hand from prior year;

      o     Increase of competition in the United States and international
            market.

In fiscal year 2005, 64% of our sales were direct sales, which represent sales
made by International SMC, and 36% were domestic sales, which represents sales
made from our warehouse in the United States.

The sales decrease occurred in all segments of our business. Our total hardware
sales decreased to approximately $35.9 million, in fiscal 2005 compared to total
hardware sales of approximately $67.7 million in fiscal 2004.

Music sales decreased to approximately $2.3 million, or 6% of net sales, in
fiscal 2005, compared to approximately $2.8 million, or 4% of net sales, in
fiscal 2004. The decrease in music sales was a result of increased competition
in this category.

                                  GROSS PROFIT

Gross profit for fiscal 2005 was approximately $9.3 million or 24.2% of total
revenues compared to approximately $1.8 million or 2.6% of sales for fiscal
2004. The increase in gross margin, compared to the prior year, was primarily
due to the development of new products and better sales planning. We developed
seven new models in fiscal 2005, which made up approximately $19.0 million in
sales or 54% of the hardware sales in fiscal 2005. Our new products have
differentiated us from our competitors and yield a higher profit margin.

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

                               OPERATING EXPENSES

Operating expenses for the fiscal year ended March 31, 2005 decreased from
approximately $22.0 million to approximately $10.9 million, a decrease of
approximately $11.1 million or 50.5% compared to the same period last year. The
decrease in operating expenses consists of a decrease in variable expenses and
fixed expenses. The variable expenses (Advertising, Commission, Freight and
Royalty expenses) were decreased proportionally as revenues decreased. The fixed
expense decrease of $7.6 million was primarily due to the following factors:

      o     Decreases in compensation expenses in the amount of approximately
            $2.2 million due to business downsizing and staff cuts.

      o     Decreases in professional fees and legal expenses of approximately
            $2.1 million due to the completion of a class action lawsuit and
            management's assumption of additional responsibilities, which were
            previously performed by outside professionals.

      o     Decreased rent expense of approximately $870,000 due to the early
            termination of one of our warehouses in California and the sublease
            of the existing warehouse space.

      o     Decreases in defective product repair fees of approximately $796,000
            due to our testing line in our California warehouse. We have sent
            fewer real defective products to the factory for repair in fiscal
            2005.

      o     Decreased product licensing royalty of approximately $1.0 million
            due to the termination of several licensing agreements. Our
            dependency on other brands has decreased in the past.

                          DEPRECIATION AND AMORTIZATION

Our depreciation and amortization expenses were $709,290 for fiscal 2005
compared to $750,359 for fiscal 2004. This decrease in depreciation and
amortization expenses can be attributed to the fact that we produced fewer
models with higher volume per model, which increased the economies of scale for
our product lines.

                               NET OTHER EXPENSES

Net other expenses were $1,971,740 in fiscal 2005 compared to $1,729,620 in
fiscal 2004. Net other expenses increased because our interest expense increased
to approximately $2.1 million in fiscal 2005 compared to approximately $1.7
million in fiscal 2004. Our interest expense increased because we recorded
approximately $1.6 million for the amortization of the discount on our
convertible debentures. The increase in interest expense was partially offset by
other income. We expect interest expense to maintain the same level for fiscal
2006.

                               INCOME BEFORE TAXES

We had a net loss before taxes of $3,591,975 in fiscal 2005 compared to a net
loss before taxes of $21,924,919 in fiscal 2004. The decreased net loss was the
result of increased profit margins and decreased expenses in every category.


                                       18

<PAGE>

                               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, 2005 and
2004, we had gross deferred tax assets of approximately $10.4 million and $8.2
million, against which we recorded valuation allowances totaling approximately
$10.4 million and $8.2, respectively.

For the fiscal year ended March 31, 2005, we did not record income tax expenses.
This occurred because the company had taxable losses for both US operations and
Hong Kong operations.

Our subsidiary has applied for an exemption of income tax in Hong Kong.
Therefore, no taxes have been expensed or provided for at the subsidiary level.
Although no decision has been reached by the governing body, the parent company
has decided to provide for the possibility that the exemption could be denied
and accordingly has recorded a provision for Hong Kong taxes in fiscal 2003 and
2002. There was no provision for Hong Kong income taxes in fiscal 2005 and
fiscal 2004 due to the subsidiary's taxable loss. Hong Kong income taxes payable
totaled approximately $2.4 million at March 31, 2005 and 2004 and is included in
the accompanying balance sheets as income taxes payable.

We effectively repatriated approximately $0, $2.0 million and $5.6 million from
our foreign operations in 2005, 2004 and 2003, respectively. Accordingly, these
earnings were taxed as a deemed dividend based on U.S. statutory rates. We have
no remaining undistributed earnings of our foreign subsidiary.

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

                               NET LOSS/NET INCOME

As a result of the foregoing, we had a net loss of $3.6 million in 2005 compared
to a net loss of $22.7 million in fiscal 2004.

LIQUIDITY AND CAPITAL RESOURCES

On March 31, 2006, we had cash on hand of approximately $0.4 million in addition
to approximately $0.3 million of restricted cash compared to cash on hand of
approximately $0.6 million and restricted cash of approximately $0.9 million on
March 31, 2005. The decrease of cash on hand was primarily due to net loss of
the operation.

Cash used by operating activities were approximately $0.4 million for the twelve
months ended March 31, 2006. This was primarily due to a net operation loss of
approximately $1.9 million and settlement of the customer credit balance of
approximately $0.6 million, which was offset by decrease of approximately $2.1
million of old inventory.

Cash provided by investing activities for the twelve months ended March 31, 2006
was approximately $0.4 million. Cash provided by investing activities was from
the release of the restricted cash of $0.6 million from a bank in Hong Kong
offset by the purchase of tooling and molds in the amount of $0.2 million.

Cash used in financing activities were approximately $0.2 million for the fiscal
year ended March 31, 2006, which was due to the payment of insider loan and the
increase of cash reserve in the factoring bank.

As of March 31, 2006, our working capital was approximately ($4.3) million. Our
current liabilities of approximately $8.1 million include:

      o     Amount due to one factory of approximately $0.4 million - we have
            worked out the payment plan with the factory to pay off the balance
            by the end of this year.

      o     Customer credit on account of approximately $0.6 million - the
            amount might be offset by the products or refund.

      o     Loan payable - $2 million bridge loan from Starlight to pay off the
            $4 million convertible debentures. The loan will be converted into
            equity upon closing of Starlight $3 investment.

      o     Subordinate debt of approximately $0.3 million - $50,000 will be
            paid upon closing of Starlight investment, the remaining balance
            will be extended for 3 years.

      o     Hong Kong income tax payable of approximately $2.5 million (see
            Income Tax Expense on Page 17 for details) - We do not expect the
            complete tax payment to come due in the short term. Our tax
            exemption application is still pending with the Hong Kong tax
            authority. Even if the outcome is unfavorable, the Company still has
            the right to appeal, which could take more than a year to settle.

      o     Current liabilities resulted from normal course of the business of
            approximately $1.7 million.

As of June 30, 2006, our loan balance with Crestmark Bank was $0. The Company
can borrow up to the lesser of the $2.5 million or 70% of the eligible accounts
receivable. Per the agreement we are only allowed to factor the sales
originating from the warehouses in the United States. The factor company
determines the eligible receivables based on their own credit standard, and the
accounts' aging. As of June 30, 2006, there approximately $150,000 availability
under the Crestmark facility.

As of June 30, 2006, our cash on hand is limited. 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 Compton, California and other operating costs.


                                       19

<PAGE>

As of March 31, 2006, our commitments for debt and other contractual
arrangements are summarized as follows:

<TABLE>
<CAPTION>
                                       Total     Less than 1 year   1 - 3 years   3 - 5 years   Over 5 years
                                    ----------   ----------------   -----------   -----------   ------------
<S>                                 <C>              <C>              <C>           <C>              <C>
Property Leases                     $1,301,788       $733,302         $568,486      $      0         $0
Equipment Leases                        14,533          3,791           10,742             0          0
Subordinated Debt - Related Party      300,000         50,000                0       250,000          0
Interest payments                       18,705         18,705                0             0          0
                                    ----------       --------         --------      --------        ---
Total                               $1,635,026       $805,798         $579,228      $250,000         $0
                                    ==========       ========         ========      ========        ===
</TABLE>

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

           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 investment - The shareholders of Starlight International have approved
a $3 million investment. The Company has received $1 million from Starlight in
June, 2006 in addition to $2 million received in March, which was used to settle
the $4 million convertible debentures.

2) Related Party Loan - We might be able to raise additional short term loan
from our new equity holder, who is also one of our suppliers.

3) 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 more than 60% of the total revenues.

4) Factoring of accounts receivable - The Company would factor its accounts
receivable for sales originated in the United States.

5) Cost reduction - The Company has reduced significant operating expenses in
this fiscal year. The cost reduction initiatives are part of our intensive
effort to achieve a successful turn-around restructuring. The Company plans to
continue its cost cutting efforts in fiscal 2007.

6) Bank facility - The Company is actively seeking additional banking facilities
to finance its domestic purchase.

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

During fiscal 2007, we will strive to reduce additional operating costs. In
order to reduce the need to maintain inventory in our warehouse in California
and Florida, we intend to generate a larger share of our total sales through
sales directly from International SMC. The goods are shipped directly to our
customers from ports in China and are primarily backed by customer letters of
credit. The customers take title to the merchandise at their consolidators in
China and are responsible for the shipment, duty, clearance and freight charges
to their locations. These sales in which the customer purchases the goods for
delivery at a specific destination are referred to as "Direct" sales. We will
also help our customers forecast and manage their inventories of our product. We
are also planning to finance a significant amount of our sales with customer
issued letters of credit, using credit facility with banks in Hong Kong and
Macau, and relying on financing from two of our factories in China including our
new majority equity owner - Starlight International.

In the event that we do not sell sufficient products in our second and third
quarters, we have considered other sources of financing, such as trying to
secure an additional credit facility, private offerings and/or a venture capital
investment. We expect that the profit margin for sales of our karaoke products
will continue to be under price pressure, because of the competitors in the
marketplace. During fiscal 2007, we plan on introducing products other than
karaoke to fulfill our sales seasonality gap.

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


                                       20

<PAGE>

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 88%,
86.7% and 87.2% of net sales in fiscal 2006, 2005 and 2004.

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 the products and considering trading 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.

CRITICAL ACCOUNTING POLICIES

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

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

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

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

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.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk represents the risk of loss that may impact our financial position,
results of operations or cash flows due to adverse changes in financial and
commodity market prices and interest rates. We are exposed to market risk in the
areas of changes in United States and international borrowing rates and changes
in foreign currency exchange rates. In addition, we are exposed to market risk
in certain geographic areas that have experienced or remain vulnerable to an
economic downturn, such as China. We purchase substantially all our inventory
from companies in China, and, therefore, we are subject to the risk that such
suppliers will be unable to provide inventory at competitive prices. While we
believe that, if such an event were to occur we would be able to find
alternative sources of inventory at competitive prices, we cannot assure you
that we would be able to do so. These exposures are directly related to our
normal operating and funding activities. Historically and as of March 31, 2006,
we have not used derivative instruments or engaged in hedging activities to
minimize market risk.

INTEREST RATE RISK

As or March 31, 2006, we exposure to market risk resulting from changes in
interest rates is immaterial.


                                       21

<PAGE>

FOREIGN CURRENCY RISK

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

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

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

CHANGE OF ACCOUNTANTS

On October 15, 2004, Grant Thornton LLP (the "Former Accountant") resigned as
the auditors for The Singing Machine Company, Inc. (the "Company"). On October
15, 2004, the Company engaged Berkovits, Lago & Company, LLP (the "New
Accountant"), as its independent certified public accountant. The Company's
decision to engage the New Accountant was approved by its Audit Committee on
October 15, 2004.

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

The reports of the Former Accountant on the financial statements of the Company
prior to their resignation, did not contain an adverse opinion or disclaimer of
opinion and were not qualified or modified as to uncertainty, audit scope or
accounting principles, except that the Former Accountant's opinions on the
reports expressed substantial doubt with respect to the Company's ability to
continue as a going concern.

During the Company's two most recent fiscal years and the subsequent interim
period through the date of resignation, there were no reportable events as the
term described in Item 304(a)(1)(v) of Regulation S-K, except for:

Management and the Former Accountant, advised to our Audit Committee that
during the course of the audits conducted by the former auditor for fiscal 2005,
they noted deficiencies in internal controls relating to:

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

o    accounting for consigned inventory and inventory costing.

The Former Accountant has advised the Audit Committee that each of these
internal control deficiencies constitute a material weakness as defined in
Statement of Auditing Standards No. 60. Certain of these internal control
weaknesses may also constitute material weaknesses in our disclosure controls.
The Company has strengthen its internal controls in those areas as of March 31,
2006.

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


ITEM 9A. CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this report, we conducted an evaluation,
under the supervision and with the participation of our chief executive officer
and 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 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 forms.


                                       22

<PAGE>

(b) Changes in Internal Controls

There was no change in our internal controls or in other factors that could
affect these controls during our last fiscal quarter that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.

ITEM 9B. OTHER INFORMATION

None.

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The following table sets forth certain information with respect to our executive
officers, directors and significant employees as of March 31, 2006.

Name                Age   Position
-----------------   ---   ------------------------------------------------------
Yi Ping Chan         42   Interim CEO, Chief Operating Officer, Director,
                          Secretary
Danny Zheng          36   Chief Financial Officer
Josef A. Bauer       67   Chairman
Harvey Judkowitz     61   Director
Bernard Appel        74   Director
Marc D. Goldberg     61   Director
Stewart A. Merkin    63   Director

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

Danny Zheng has been part of the Singing Machine management team since April
2004 and has served as financial controller and principal accounting officer.
Danny is a certified public accountant licensed by the state of Delaware. He has
more than 10 years of hands-on controllership experience. He held controller and
VP finance positions with various private and public companies. Previously, he
was also employed by a New York regional CPA firm as tax consultant for 4 years.
Danny was also served as general manager from 1999 to 2002 for PC Ware
International Miami branch, a Taiwan based computer manufacturer. He was
responsible for its distribution, marketing and finance operation in six
countries throughout Latin America. He also served as director of operation for
PC Micro, a joint venture computer manufacturer in Manaus, Brazil from 1999 to
2002. Danny earned a B.S. degree in accounting from Nankai University in China.

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

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

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


                                       23

<PAGE>

Marc Goldberg has served as a director since December 1, 2004. He has been
President since 1995 of SuMa Partners, Ltd., a human resources, labor relations
and employee communication consulting firm. In addition to his consulting
practice, he has more than twenty-five years of applied expertise in
organizational effectiveness, change management and performance improvement in
Fortune 500 and emerging companies. Prior to founding SuMa Partners, Mr.
Goldberg was Vice President, Human Resources at Mobile Telecommunication
Technologies. He also served as an organization design consultant for The Mescon
Group, Inc., Vice President, Human Resources at Contel Business
Systems/Executone, Inc., and Manager, Human Resources at GE Integrated
Communication Services. He obtained his J.D. and his Bachelor of Arts in
Sociology from Boston University, and is certified as a Senior Professional in
Human Resources (SPHR) and as a Business Manager(CBM).

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

BOARD COMMITTEES

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

As of June 30, 2006, the audit committee consists of Messrs. Judkowitz
(Chairman), Appel and Merkin. The Board has designated Mr. Judkowitz as the
"audit committee financial expert," as defined by Item 401(h) of Regulation S-K
of the Securities Exchange Act of 1934. The Board has determined that Messrs.
Judkowitz, Merkin and Appel are "independent directors" within the meaning of
the listing standards of the American Stock Exchange. The audit committee
recommends the engagement of independent auditors to the board, initiates and
oversees investigations into matters relating to audit functions, reviews the
plans and results of audits with our independent auditors, reviews our internal
accounting controls, and approves services to be performed by our independent
auditors.

As of June 30, 2006, the executive compensation/stock option committee consists
of Messrs. Goldberg (Chairman), Judkowitz and Bauer. The executive
compensation/stock option committee considers and authorizes remuneration
arrangements for senior management and grants options under, and administers our
employee stock option plan.

As of June 30, 2006, the nominating committee consists of Messrs. Appel
(Chairman), Bauer, Merkin and Chan. The nominating committee is responsible for
reviewing the qualifications of potential nominees for election to the Board of
Directors and recommending the nominees to the Board of Directors for such
election.

Nomination of Directors

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

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:

      o     high personal and professional ethics and integrity;

      o     the ability to exercise sound judgment;

      o     the ability to make independent analytical inquiries;

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

      o     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:

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

      o     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;


                                       24

<PAGE>

      o     whether the person would qualify as an "independent" director under
            the listing standards of the American Stock Exchange;

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

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

CODE OF ETHICS

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

DIRECTOR'S COMPENSATION

During fiscal 2006, our compensation package for our non-employee directors
consisted of grants of stock options, cash payment and reimbursement of costs
and expenses associated with attending our Board meetings. Our five non-employee
directors during fiscal 2006 were Messrs. Bauer, Appel, Judkowitz, Goldberg and
Merkin.

During fiscal 2006, we have implemented the following compensation policy for
our directors.

      o     An initial grant of 20,000 SMD 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.

      o     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.

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

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

      o     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.

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

COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

To our knowledge, based solely on a review of the copies of such reports
furnished to the Company and written representations that no other reports were
required, the Company believes that during the year ended March 31, 2006, its
officers, directors and 10% shareholders complied with all Section 16(a) filing.


                                       25

<PAGE>

ITEM 11. EXECUTIVE COMPENSATION

The following table sets forth certain compensation information for the fiscal
years ended March 31, 2006, 2005 and 2004 with regard to (i) Yi Ping Chan, our
Interim Chief Executive Officer and Chief Operating Officer, from October 17,
2003 through the present date, and each of our other executive officers whose
compensation exceeded $100,000 on an annual basis (the "Named Officers"):

<TABLE>
<CAPTION>
                                                                Summary Compensation Table
                                       ----------------------------------------------------------------------------
                                           Annual Compensation                   Long Term Compensation
                                       ---------------------------   ----------------------------------------------
                                                                                       Securities
                                                                                       Underlying
Name of Individual and Principal                                       Other Annual     Options /      All Other
Position                               Year    Salary       Bonus    Compensation(1)      SAR's     Compensation(2)
------------------------------------   ----   --------     -------   ---------------   ----------   ---------------
<S>                                    <C>    <C>          <C>            <C>            <C>            <C>
Yi Ping Chan                           2006   $250,000                    $6,000           80,000       $14,560
  Interim CEO & COO                    2005   $246,038          --        $6,000               --       $ 4,560
                                       2004    247,470(5)       --        $6,000           52,800       $12,180

Edward Steele                          2006   $203,548                    $5,417           50,000       $ 5,060
  Former Chief Executive Officer (3)   2005   $249,038          --        $6,500               --       $ 6,000
                                       2004   $372,809(5)       --        $6,000           10,000       $17,949

Danny Zheng                            2006   $127,297     $12,000        $6,000          100,000            --
  Chief Financial Officer (4)          2005   $ 84,884          --             0           12,000       $ 3,420
</TABLE>

(1) The amounts disclosed in this column for fiscal 2006, 2005 and 2004 include
automobile expense allowances.

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

(3) Mr. Steele served as our Chief Executive Officer from September 1991 through
July 23, 2003. He serves as our Senior Advisor and Director of Product
Development since then. Mr. Steele resigned on July 18, 2005. His fiscal 2006
salary includes $125,000 severance payment.

(4) Mr. Danny Zheng joined our company on April 19, 2004 as financial controller
and became our Chief Financial Officer on April 5, 2005.

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

OPTION GRANTS IN FISCAL 2006

The following table sets forth information concerning all options granted to our
officers and directors during the year ended March 31, 2006. No stock
appreciation rights ("SAR's") were granted.

<TABLE>
<CAPTION>
                      SHARES     TOTAL OPTIONS                                    POTENTIAL REALIZABLE VALUE AT
                    UNDERLYING     GRANTED TO     EXERCISE                     ASSUMED ANNUAL RATES OF STOCK PRICE
                     OPTIONS      EMPLOYEES IN   PRICE PER                         APPRECIATION FOR OPTION
                   GRANTED (1)    FISCAL YEAR      SHARE     EXPIRATION DATE                   TERM
                   -----------   -------------   ---------   ---------------   -----------------------------------
                                                                                         5% (2)   10% (2)
<S>                   <C>              <C>          <C>       <C>                        <C>      <C>
Bernard Appel         20,000            2%          0.32           03/30/16              10,425    16,600
Danny Zheng           70,000            8%          0.52           05/08/15              59,292    94,412
Danny Zheng           30,000            4%          0.34           01/19/11              16,615    26,456
Eddie Steele          50,000            6%          0.60      Cancelled (3)              48,867    77,812
Harvey Judkowitz      20,000            2%          0.32           03/30/16              10,425    16,600
Jay Bauer             20,000            2%          0.32           03/30/11              10,425    16,600
Marc Goldberg         20,000            2%          0.32           03/30/16              10,425    16,600
Stewart Merkin        20,000            2%          0.32           03/30/16              10,425    16,600
Yi Ping Chan          80,000           10%          0.60           05/08/15              78,187   124,500
</TABLE>

(1) All of these options were granted under a Year 2001 Stock Option Plan. The
Options granted to Mr. Judkowitz, Mr. Bauer, Mr. Goldberg, Mr. Merkin and Mr.
Appel vest in one year, on March 31, 2006 according to director compensation
policy. The Options granted to Mr. Chan and Mr. Zheng vested in three years.

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


                                       26

<PAGE>

(3) Mr. Steele received a grant of 50,000 options on May 9, 2005. These options
will expire on October 18, 2005 ninety days after Mr. Steele resigned from our
company.

AGGREGATED OPTION EXERCISES IN FISCAL YEAR ENDED MARCH 31, 2006 AND OPTION
VALUES

The following table sets forth information as to the exercise of stock options
during the fiscal year ended March 31, 2006 by our officers listed in our
Summary Compensation Table and the fiscal year-end value of unexercised options.

<TABLE>
<CAPTION>
                                                          NUMBER OF          VALUE OF UNEXERCISED
                                                     UNEXERCISED OPTIONS   IN-THE-MONEY OPTIONS AT
                                                      AT FISCAL YEAR END      FISCAL YEAR END (2)
                     SHARES ACQUIRED      VALUE          EXERCISABLE/            EXERCISABLE/
NAME OF INDIVIDUAL    UPON EXERCISE    REALIZED(1)      UNEXERCISABLE           UNEXERCISABLE
------------------   ---------------   -----------   -------------------   -----------------------
<S>                         <C>             <C>         <C>                          <C>
Yi Ping Chan                --              --          35,200/97,600                0/0
Danny Zheng                 --              --          4,800/107,200                0/0
</TABLE>

EMPLOYMENT AGREEMENTS

There is no employment contract with executive officers of the Company as of
July 14, 2006.

SEPARATION AND CONSULTING AGREEMENTS

Edward Steele resigned as Senior Advisor and Director of Product Development on
July 18, 2005. In connection with his resignation, we entered into a separation
and release agreement with Mr. Steele. Under this agreement, we agreed to
provide Mr. Steele with a severance payment equal to $134,194, which consisted
of (i) auto allowance in the amount of $3,250, (ii) a COBRA reimbursement
payment equal to $3,060, (iii) payment for accrued vacation time equal to $2,884
and (v) severance payments in the amount of $125,000. In exchange, Mr. Steele
agreed to release the Singing Machine from any liability in connection with the
termination of his employment.

Mr. Barocas resigned as our Chief Financial Officer effective March 31, 2005. In
connection with his resignation, we entered into a separation and release
agreement with Mr. Barocas. Under this agreement, we agreed to provide Mr.
Barocas with a severance payment equal to $50,157, which consisted of (i) salary
payment in the amount of $13,846, (ii) auto allowance in the amount of $554,
(iii) a COBRA reimbursement payment equal to $1,142, (iv) payment for accrued
vacation time equal to $5,769 and (v) severance payments in the amount of
$28,846.15. In exchange, Mr. Barocas agreed to release the Singing Machine from
any liability in connection with the termination of his employment.

EQUITY COMPENSATION PLANS AND 401(K) PLAN

We have two stock option plans: our 1994 Amended and Restated Stock Option Plan
("1994 Plan") and our Year 2001 Stock Option Plan ("Year 2001 Plan"). Both the
1994 Plan and the Year 2001 Plan provide for the granting of incentive stock
options and non-qualified stock options to our employees, officers, directors
and consultants As of March 31, 2006, we had 20,550 options issued and
outstanding under our 1994 Plan and 1,279,560 options are issued and outstanding
under our Year 2001 Plan.

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

<TABLE>
<CAPTION>
                                                                       WEIGHTED-AVERAGE        NUMBER OF SECURITIES
                                            NUMBER OF SECURITIES      EXERCISE PRICE OF   REMAINING AVAILABLE FOR EQUITY
                                             TO BE ISSUED UPON           OUTSTANDING            COMPENSATION PLANS
                                          EXERCISE OF OUTSTANDINGS    OPTIONS, WARRANTS      (EXCLUDING SECURITIES IN
            PLAN CATEGORY               OPTION, WARRANTS AND RIGHTS       AND RIGHTS                COLUMN (A))
-------------------------------------   ---------------------------   -----------------   ------------------------------
<S>                                              <C>                        <C>                       <C>
Equity Compensation Plans approved by            1,300,110                  $3.52                     992,940
  Security Holders

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


                                       27

<PAGE>

YEAR 1994 PLAN

Our 1994 Plan was originally adopted by our Board of Directors in May 1994 and
it was approved by our shareholders on June 29, 1994. Our shareholders approved
amendments to our 1994 Plan in March 1999 and September 2000. The 1994 Plan
reserved for issuance up to 1,950,000 million share of our common stock pursuant
to the exercise of options granted under the Plan. As of March 31, 2003, we had
granted all the options that are available for grant under our 1994 Plan. As of
March 31, 2006, we have 20,550 options issued and outstanding under the 1994
Plan and all of these options are fully vested as of March 31, 2006.

YEAR 2001 PLAN

On June 1, 2001, our Board of Directors approved the Year 2001 Plan and it was
approved by our shareholders at our special meeting held September 6, 2001. The
Year 2001 Plan was developed to provide a means whereby directors and selected
employees, officers, consultants, and advisors of the Company may be granted
incentive or non-qualified stock options to purchase common stock of the
Company. The Year 2001 Plan authorizes an aggregate of 1,950,000 shares of the
Company's common stock and a maximum of 450,000 shares to any one individual in
any one fiscal year. The shares of common stock available under the Year 2001
Plan are subject to adjustment for any stock split, declaration of a stock
dividend or similar event. At March 31, 2006, we have granted 1,279,560 options
under the Year 2001 Plan, 371,611 of which are fully vested.

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

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

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

401(K) PLAN

Effective January 1, 2001, we adopted a voluntary 401(k) plan. All employees
with at least one year of service are eligible to participate in our 401(k)
plan. We made 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, 2006, 2005
and 2004 totaled approximately $39,572, $30,025 and $55,402, respectively.

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

EXECUTIVE COMPENSATION PHILOSOPHY

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


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


                                       28

<PAGE>

BASE SALARIES

During fiscal 2006, we had an employment agreement with one executive officer.
The base salary of each of our executive officers was determined based on
comparison to executives with similar responsibilities at other public
companies: The persons that served as executive officers during fiscal 2006 are
listed below.

Eddie Steele, who served as our Chief Executive Officer from September 1991
through August 3, 2004 and as our Director of Product Development from August 3,
2004 through July 18, 2005.

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

Danny Zheng who has served as our Financial Controller from April 19, 2004 to
April 3, 2005 and served as our Chief Financial Officer from April 4, 2005
through the present date.

INCENTIVE CASH BONUSES

Generally, we award cash bonuses to our management employees and other
employees, based on their personal performance in the past year and overall
performance of our company. During fiscal 2006, we awarded a $12,000 bonus to
Mr. Zheng, our Chief Financial Officer.

LONG TERM COMPENSATION - STOCK OPTION GRANTS

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

During fiscal 2006, we granted an aggregate of 330,000 options to our senior
executive officers. All options grants in fiscal 2006 were made under our Year
2001 Stock Option Plan. See "Executive Compensation -Option Grants in Last
Fiscal Year" on pages 26 for information about the number of options granted to
each individual. Each of the option grants was at a price that was equal to the
closing price of our common stock on the date of grant.

RELATIONSHIP BETWEEN OUR COMPENSATION POLICIES AND CORPORATE PERFORMANCE

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

COMPENSATION OF CHIEF EXECUTIVE OFFICER

Effective as of October 17, 2003, Yi Ping Chan became our Interim Chief
Executive Officer. Mr. Chan's salary is $250,000 per year, as set forth in his
employment agreement. In July 2003, Mr. Chan agreed to accept 15% of his salary
during the nine-month period between July 1, 2003 through March 31, 2004 in the
form of stock rather than cash. We also agreed to grant Mr. Chan options to
purchase 150,000 shares of our common stock, at an exercise price of $5.60 per
share, of which 50,000 options vest each year and to reimburse him for moving
expenses of up to $40,000. Mr. Chan has voluntarily cancelled the 150,000
options on May 10, 2006.

We did not grant any cash bonuses to Mr. Chan in fiscal 2006.

We awarded stock options to Mr. Chan in December 2003. We awarded Mr. Chan
options to purchase 52,800 shares of our common stock at an exercise price of
$1.97 per share. We awarded 80,000 stock options to Mr. Chan at exercise price
of $0.60 on May 9, 2005. These options were granted under our Year 2001 Stock
Option Plan and were granted at a price that was equal to closing price of our
common stock on the date of grant. Mr. Chan's options vest at a rate of
one-third per year over a period of three years.

COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN

The graph below compares the performance of the Singing Machine's common stock
with the American Stock Market Index ("AMEX Index") and the Dow Jones - Consumer
Electronics Index ("Dow Jones-CSE"), during the period beginning March 31, 2000
through March 31, 2005. The graph assumes the investment of $100 on March 31,
2000 in the Singing Machine's common stock, in the AMEX Index and the Dow
Jones-CSE Index. Total shareholder return was calculated on the basis that in
each case all dividends were reinvested.


                                       29

<PAGE>

<TABLE>
<CAPTION>
                                         2001     2002     2003    2004    2005     2006
                                        ------   ------   ------   -----   -----   ------
<S>                                     <C>      <C>      <C>      <C>     <C>     <C>
The Singing Machine Company             100.00   333.13   146.67   24.38   15.83     6.67
Dow Jones Consumer Electronics  Index   100.00    82.80    52.86   83.23   50.10   121.44
AMEX Market Index                       100.00    99.18    94.72   84.13   67.24    64.83
</TABLE>

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

The following table sets forth as of June 30, 2006, certain information
concerning beneficial ownership of our common stock by:

      o     all directors of the Singing Machine,

      o     all executive officers of the Singing Machine.

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

We had 10,060,282 shares of our common stock issued and outstanding.

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

<TABLE>
<CAPTION>
                                                  Shares of   Percent of
                                                    Common      Common
                                                  Stock (1)    Stock (2)
                                                  ---------   ----------
<S>                                               <C>            <C>
Yi Ping Chan                                        104,924       1.04%
Interim CEO snd Chief Operating
Danny Zheng                                          30,533           *
Chief Financial Officer
Joseph Bauer                                      1,369,230      13.60%
Chairman
Bernard Appel                                        40,000           *
Director
Harvey Judkowitz                                     40,000           *
Director
Marc Goldberg                                        20,000           *
Director
Stewart Merkin                                       20,000           *
Director
Target Capital                                      755,600       7.51%
All Directors and Executive Officers as a Group   1,624,687      15.32%
</TABLE>

*     Less than 1%.

(1) Includes as to the person indicated the following outstanding stock options
to purchase shares of the Company's Common Stock issued


                                       30

<PAGE>

under the 1994 and 2001 Stock Option Plans , which will be vested and
exercisable within 60 days of June 30, 2006: 61,867 options held by Yi Ping
Chan; 30,533 options held by Danny Zheng; 79,827 options held by Joseph Bauer;
40,000 options held by Bernard Appel; 40,000 options held by Harvey Judkowitz;
20,000 options held by Marc Goldberg and 20,000 options held by Stewart Merkin.

(2) Includes 126,913 shares held individually by Mr. Bauer, 323,216 held by Mr.
Bauer's wife, 224,374 held jointly by Mr. Bauer and his wife, 369,400 shares
held by Mr. Bauer's pension account, 245,500 shares held in Mr. Bauer's Family
LTD Partnership and 79,827 issuable upon the exercise of stock options that can
be exercisable within 60 days of June 30, 2006.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

On or about July 10, 2003, an officer and two directors of our Company advanced
$1 million to our Company pursuant to written loan agreements. The officer is Yi
Ping Chan and the directors were Josef A. Bauer and Howard Moore. Mr. Moore
resigned from our Board, effective as of October 17, 2003. Additionally, Maureen
LaRoche, a business associate of Mr. Bauer, participated in the financing. The
loans are subordinated to the factoring company and accrued interest at 9.5% per
annum. These loans were originally scheduled to be repaid by October 31, 2003,
but were extended past March 31, 2006. All interest was accrued, and the unpaid
amount totaled approximately $9,500. A portion of the loans and the accrued
interest in the amount of $409,500 has been converted into 563,274 shares of
common stock at $0.72 per share on January 5, 2005. In addition, another portion
of the loans in the amount of $200,000 has been converted into 277,778 shares of
common stock on May 18, 2005. On November 30, 2005, Maureen LaRoche was repaid
$107,917 ($100,000 principle and $7,917 interest). The balance of related party
loan as of March 31, 2006 was $300,000. According Starlight Security Purchase
Agreement dated on February 21, 2006, the company might use $50,000 from $3
million investment to retire part of the loans. The remainder of the loan will
be extended for 3 years at an interest rate of 5.5%.

On June 27, 2005, the Company received a $200,000 loan from Andrew Shapiro, a
relative of Mr. Bauer. The interest rate on the loan is 12% per annum and is due
on November 30, 2005 or such later date as mutually agreed between the parties.

On June 2, 2006, the Company received a $200,000 loan from Andrew Shapiro, a
relative of Mr. Bauer. The interest rate on the loan is 8% per annum and is due
on June 20, 2006 or such later date as mutually agreed between the parties. The
loan was repaid on June 30, 2006 with interest.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

The following is a summary of the fees billed to the Singing Machine by
Berkovits, Lago & Co, LLP and Grant Thornton, LLP for professional services
rendered for the fiscal years ended March 31, 2006 and 2005:

Fee Category     Fiscal 2006   Fiscal 2005
                 -----------   -----------
Audit Fees          $155,193     $289,790
Tax Fees            $      0     $ 33,543
All Other Fees      $  1,500     $ 12,938
                    --------     --------
Total Fees          $156,693     $336,271
                    ========     ========

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, Lago & Co, LLP and Grant Thornton 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. In fiscal 2005, these services included general
business meetings between auditors, and executives and directors of The Singing
Machine.

Out of the total fiscal 2006 and fiscal 2005 audit and other fees, $151,943 and
$86,219 were billed by Berkovits, Lago 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.


                                       31

<PAGE>

                                     PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES EXHIBITS

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


                                       32

<PAGE>

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)

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)


                                       33

<PAGE>

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, 2006, 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, 2006)

10.32 Registration Rights Agreement dated February 21, 2006, 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, 2006)

10.33 One Year Stock Purchase Warrant of The Singing Machine Company, Inc. dated
February 21, 2006. (incorporated by reference to the Singing Machine's Current
Report on Form 8-K filed with the SEC on February 27, 2006)

10.34 Three Year Stock Purchase Warrant of The Singing Machine Company, Inc.
dated February 21, 2006. (incorporated by reference to the Singing Machine's
Current Report on Form 8-K filed with the SEC on February 27, 2006)

10.35 Four Year Stock Purchase Warrant of The Singing Machine Company, Inc.
dated February 21, 2006. (incorporated by reference to the Singing Machine's
Current Report on Form 8-K filed with the SEC on February 27, 2006)

10.36 Bridge Loan Agreement dated March 8, 2006, 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,
2006)

10.37 Collateral Security Agreement dated March 8, 2006, 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, 2006)

10.38 Bridge Note of The Singing Machine Company, Inc. dated March 8, 2006.
(incorporated by reference to the Singing Machine's Current Report on Form 8-K
filed with the SEC on March 14, 2006)

10.39 Settlement Agreement and Release dated as of March 5, 2006 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,
2006)

10.40 Settlement Agreement dated April 27, 2006, 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,
2006)

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

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

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

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

* Filed herewith


                                       34

<PAGE>

                                   SIGNATURES

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

                        THE SINGING MACHINE COMPANY, INC.


Dated: July 14, 2006                    By: /s/ YI PING CHAN
                                        ----------------------------------------
                                        Interim Chief Executive Officer
                                        (Principal Executive Officer)

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

         SIGNATURE                         CAPACITY                    DATE
--------------------------   ----------------------------------   --------------


/s/ YI PING CHAN             Chief Executive Officer               July 14, 2006
--------------------------   (Principal Executive Officer)
Yi Ping Chan


/s/ Danny Zheng              Chief Financial Officer (Principal    July 14, 2006
--------------------------   Financial and Accounting Officer)
Danny Zheng


/s/ JOSEF A. BAUER           Director                              July 14, 2006
--------------------------
Josef A. Bauer


/s/ BERNARD APPEL            Director                              July 14, 2006
--------------------------
Bernard Appel


/s/ HARVEY JUDKOWITZ         Director                              July 14, 2006
--------------------------
Harvey Judkowitz


/s/ MARC GOLDBERG            Director                              July 14, 2006
--------------------------
Marc Goldberg


/s/ STEWART MERKIN           Director                              July 14, 2006
--------------------------
Stewart Merkin


                                       35

<PAGE>

                THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY

                          INDEX TO FINANCIAL STATEMENTS

Reports of Independent Registered Public Accounting Firms                     37
Consolidated Balance Sheets                                                   39
Consolidated Statements of Operations                                         40
Consolidated Statements of Stockholders' Equity (Deficit)                     41
Consolidated Statements of Cash Flows                                         42
Notes to Consolidated Financial Statements                                    43


                                       36

<PAGE>

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We have audited the accompanying consolidated balance sheets of The Singing
Machine Company, Inc. and it's Subsidiaries (the "Company") as of March 31, 2006
and 2005, and the related consolidated statements of operations, shareholders'
deficit, and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these 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
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, 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, 2006 and 2005, and the results of its operations and its cash flows
for the years then ended, in conformity with accounting principles generally
accepted in the United States of America.

We have also audited Schedule II of the Company for the years ended March 31,
2006 and 2005. In our opinion, this schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly, in
all material respects, the information therein.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company's inability to obtain outside
long term financing and recurring losses from operations raise substantial doubt
about the Company's ability to continue as a going concern. Management's plans
are also described in Note 2 to the consolidated financial statements. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.

/s/ Berkovits, Lago & Company, LLP

Fort Lauderdale, Florida
May 26, 2006


                                       37

<PAGE>

                        REPORT OF INDEPENDENT REGISTERED
                             PUBLIC ACCOUNTING FIRM

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

We have audited the accompanying consolidated statements of operations and cash
flows of The Singing Machine Company, Inc. and subsidiary (the "Company") for
the year ended March 31, 2004. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements and financial statement schedule based on our audit.

We conducted our audit in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform an audit of its internal control over
financial reporting. Our audit 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
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.

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

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

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

/s/ Grant Thornton LLP

Miami, Florida
June 16, 2004 (except for the last paragraph of Note 7, as to
which the date is July 14, 2004 and the fifth paragraph of Note 3, as to which
the date is September 20, 2004)


                                       38

<PAGE>

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

<TABLE>
<CAPTION>
                                                                     March 31       March 31
                                                                       2006           2005
                                                                   ------------   ------------
<S>                                                                <C>            <C>
                                     Assets
Current Assets
  Cash and cash equivalents                                        $    423,548   $    617,054
  Restricted cash                                                       268,405        870,795
  Accounts receivable, less allowances of $103,615 and $117,806,
    respectively                                                      1,169,271      1,150,842
  Due from factor                                                       134,281         34,372
  Inventories                                                         1,688,058      3,094,937
  Prepaid expenses and other current assets                             228,402        507,304
                                                                   ------------   ------------
      Total Current Assets                                            3,911,965      6,275,304
Property and Equipment, at cost less accumulated depreciation
   of $4,268,833 and $3,579,882, respectively                           513,615      1,038,843
Other Non-Current Assets                                                 98,687        354,661
                                                                   ------------   ------------
      Total Assets                                                 $  4,524,267   $  7,668,808
                                                                   ============   ============

                      Liabilities and Shareholders' Deficit
Current Liabilities
  Accounts payable                                                 $  1,563,810   $  1,466,571
  Accrued expenses                                                      648,182        693,776
  Customer credits on account                                         1,034,215      1,659,324
  Deferred gross profit on estimated returns                            186,282        396,231
  Convertible debentures, net of unamortized discount of
    $1,615,647 in 2005, retired in 2006                                      --      2,384,353
  Loan payable                                                        2,000,000             --
  Subordinated debt-related parties                                     300,000        600,000
  Income tax payable                                                  2,453,576      2,453,576
                                                                   ------------   ------------
      Total Current Liabilities                                       8,186,065      9,653,831
                                                                   ------------   ------------

Shareholders'  Deficit
  Preferred stock, $1.00 par value; 1,000,000 shares authorized,
    no shares issued and outstanding                                         --             --
  Common stock, Class A, $.01 par value;  100,000 shares
    authorized; no shares issued and outstanding                             --             --
  Common stock, $0.01 par value;  100,000,000 shares authorized;
    10,060,282 and 9,769,593 shares issued and outstanding              100,603         97,696
  Additional paid-in capital                                         11,658,031     11,432,463
  Accumulated deficit                                               (15,420,432)   (13,515,182)
                                                                   ------------   ------------
      Total Shareholders' Deficit                                    (3,661,798)    (1,985,023)
                                                                   ------------   ------------
      Total Liabilities and Shareholders' Deficit                  $  4,524,267   $  7,668,808
                                                                   ============   ============
</TABLE>

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


                                       39

<PAGE>

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

<TABLE>
<CAPTION>
                                                                  For Years Ended
                                                     ----------------------------------------
                                                      March 31,     March 31,      March 31,
                                                         2006         2005           2004
                                                     -----------   -----------   ------------
<S>                                                  <C>           <C>           <C>
Net Sales                                            $32,305,560   $38,209,825   $ 70,541,128
Cost of Goods Sold                                    25,223,056    28,945,283     68,722,578
                                                     -----------   -----------   ------------
Gross Profit                                           7,082,504     9,264,542      1,818,550
Operating Expenses
  Advertising                                            168,739       597,821      2,340,439
  Commissions                                            745,305       947,945      1,024,883
  Compensation                                         2,451,509     2,854,142      5,048,831
  Freight and handling                                   680,037       991,866      1,423,082
  Royalty expense                                        575,087     1,008,553      2,294,727
  General and administrative expenses                  4,621,249     4,484,450      9,881,887
                                                     -----------   -----------   ------------
Total Operating Expenses                               9,241,926    10,884,777     22,013,849
                                                     -----------   -----------   ------------
Loss from Operations                                  (2,159,422)   (1,620,235)   (20,195,299)
Other Income (Expenses)
  Other income                                           103,396       204,267         22,116
  Net gain on retirement of convertible debentures
    including unpaid accrued interest of $259,726      2,253,725            --             --
  Interest expense                                      (487,307)     (549,506)      (993,885)
  Interest expense - Amortization of discount
    on convertible debentures                         (1,615,642)   (1,626,501)      (757,851)
                                                     -----------   -----------   ------------
Net Other Income (Expenses)                              254,172    (1,971,740)    (1,729,620)
                                                     -----------   -----------   ------------
Net Loss Before Income Taxes                          (1,905,250)   (3,591,975)   (21,924,919)
                                                     -----------   -----------   ------------
Provision for Income Taxes                                    --            --        758,505
                                                     -----------   -----------   ------------
Net Loss                                             $(1,905,250)  $(3,591,975)  $(22,683,424)
                                                     ===========   ===========   ============
Loss per Common Share:
  Basic and diluted                                  $     (0.19)  $     (0.39)  $      (2.65)
Weighted Average Common and Common
  Equivalent Shares:
  Basic                                               10,029,085     9,112,278      8,566,116
  Diluted                                             10,029,085     9,112,278      8,566,116
</TABLE>

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


                                       40

<PAGE>

                THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT

<TABLE>
<CAPTION>
                                                 Preferred Stock      Common Stock
                                                 ---------------  --------------------  Additional Paid   Accumulated
                                                  Shares  Amount    Shares     Amount      in Capital       Deficit        Total
                                                  ------  ------  ----------  --------  ---------------  ------------  ------------
<S>                                                 <C>     <C>   <C>         <C>         <C>            <C>           <C>
Balance at March 31, 2003                                          8,171,678  $ 81,717    $ 4,843,430    $ 12,760,217  $ 17,685,364
Net loss                                            --      --            --        --             --     (22,683,424)  (22,683,424)
Exercise of employee stock options                  --      --       448,498     4,485      1,076,885              --     1,081,370
Warrants issued in connection with convertible
  debenture amendment                               --      --            --        --         30,981              --        30,981
Financing fees paid with warrants                   --      --            --        --        268,386              --       268,386
Warrants issued in connection with beneficial
  conversion feature of convertible debentures      --      --            --        --      3,312,362              --     3,312,362
Issuance of common stock                            --      --       132,142     1,321        520,454              --       521,775
                                                   ---     ---    ----------  --------    -----------    ------------  ------------
Balance at March 31, 2004                           --      --     8,752,318    87,523     10,052,498      (9,923,207)      216,814
Net loss                                            --      --            --        --             --      (3,591,975)   (3,591,975)
Adjustment for 3 to 2 rev. split fraction share     --      --         4,001        40            (40)             --            --
Stock Compensation                                  --      --       450,000     4,500        288,500              --       293,000
Additional discount due to Convertible
  debentures price reset                            --      --            --        --        687,638              --       687,638
Stock issued as payment of related party loans      --      --       563,274     5,633        403,867              --       409,500
                                                   ---     ---    ----------  --------    -----------    ------------  ------------
Balance at March 31, 2005                           --      --     9,769,593    97,696     11,432,463     (13,515,182)   (1,985,023)
Net Loss                                            --      --            --        --             --      (1,905,250)   (1,905,250)
Conversion of related party loan and director
  fee payments                                      --      --       290,689     2,907        206,260              --       209,167
Warrants related to debenture payment
  settlement                                        --      --            --        --          6,000              --         6,000
Employee compensation - stock option                --      --            --        --         13,308              --        13,308
                                                   ---     ---    ----------  --------    -----------    ------------  ------------
Balance at March 31, 2006                           --      --    10,060,282  $100,603    $11,658,031    $(15,420,432) $ (3,661,798)
                                                   ===     ===    ==========  ========    ===========    ============  ============
</TABLE>

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


                                       41

<PAGE>

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

<TABLE>
<CAPTION>
                                                                                          For Years Ended
                                                                         ------------------------------------------------
                                                                         March 31, 2006   March 31, 2005   March 31, 2004
                                                                         --------------   --------------   --------------
<S>                                                                       <C>              <C>              <C>
Cash flows from operating activities
  Net Loss                                                                $(1,905,250)     $(3,591,975)     $(22,683,424)
  Adjustments to reconcile net loss to net cash (used in) provided by
    operating activities:
      Gain from debt restructure                                           (2,253,725)              --                --
      Depreciation and amortization                                           688,951          709,291           750,359
      Impairment of tooling                                                        --               --           628,405
      Change in inventory reserve                                            (681,767)      (4,912,717)        3,446,518
      Change in allowance for bad debts                                        95,016           19,797          (159,676)
      Amortization of discount/deferred fees on convertible debentures      1,858,911          938,864           909,891
      Other stock compensation                                                 22,473          990,138           632,451
      Change in deferred taxes                                                     --               --         1,925,612
      Deferred gross profit on estimated sales returns                       (209,949)         396,231                --
  Changes in assets and liabilities:
    (Increase) Decrease in:
      Accounts receivable                                                    (113,445)       2,635,527         2,116,454
      Insurance receivable                                                         --          800,000          (800,000)
      Due from manufacturer                                                        --           95,580           996,291
      Inventories                                                           2,088,646        7,741,047        15,824,562
      Prepaid expenses and other assets                                       278,902          276,188           666,013
      Other non-current assets                                                 12,711          261,112         1,204,630
    Increase (Decrease) in:
      Accounts payable                                                         97,239       (3,185,104)       (2,901,332)
      Accrued expenses                                                        214,133       (2,788,129)        2,038,499
      Customer credits on account                                            (625,110)        (452,160)        1,178,482
      Current income taxes                                                         --        1,184,342        (2,551,811)
                                                                          -----------      -----------      ------------
        Net cash (used in) provided by operating activities                  (432,264)       1,118,031         3,221,924
                                                                          -----------      -----------      ------------
Cash flows from investing activities
  Purchase of property and equipment                                         (163,723)        (764,153)       (1,266,321)
  Restricted cash                                                             602,390            3,488           (35,872)
                                                                          -----------      -----------      ------------
        Net cash provided by (used in) investing activities                   438,667         (760,665)       (1,302,193)
                                                                          -----------      -----------      ------------
Cash flows from financing activities
  Borrowing from revolving credit facilities                                       --               --        28,863,712
  Repayment to revolving credit facilities                                         --               --       (35,646,536)
  Borrowing from factoring, net                                               (99,909)         (34,372)               --
  Bank overdraft                                                                   --          (62,282)         (254,364)
  Proceeds from convertible debentures                                             --               --         4,000,000
  Payment on convertible debenture                                         (2,000,000)              --          (255,000)
  Proceeds from related party loans                                         2,200,000          240,000           600,000
  Proceeds from exercise of stock options                                          --               --           860,535
  Payment on related party loans                                             (300,000)        (240,000)               --
                                                                          -----------      -----------      ------------
        Net cash (used in) financing activities                              (199,909)         (96,654)       (1,831,653)
                                                                          -----------      -----------      ------------
Change in cash and cash equivalents                                          (193,506)         260,712            88,078
Cash and cash equivalents at beginning of period                              617,054          356,342           268,264
                                                                          -----------      -----------      ------------
Cash and cash equivalents at end of period                                $   423,548      $   617,054      $    356,342
                                                                          ===========      ===========      ============
Supplemental Disclosures of Cash Flow Information:
  Cash paid for Interest                                                  $   272,852      $   557,339      $    943,018
                                                                          ===========      ===========      ============
  Cash paid for Taxes                                                              --      $    50,000      $  1,388,804
                                                                          ===========      ===========      ============
Non-Cash Financing Activities:
  Discounts for warrants issued in connection with the
    beneficial conversion feature of convertible debentures               $        --      $   687,638      $  3,312,362
                                                                          ===========      ===========      ============
  Financing fees in connection with convertible debentures
    issuance, paid in stock and warrants                                  $        --      $        --      $    409,527
                                                                          ===========      ===========      ============
  Warrants issued in connection with convertible
    debentures amendment                                                  $        --      $        --      $     30,981
                                                                          ===========      ===========      ============
  Insider loan and interest paid off with stock                           $   200,000      $   409,500      $         --
                                                                          ===========      ===========      ============
</TABLE>

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


                                       42

<PAGE>

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

NOTE 1 - SUMMARY OF ACCOUNTING POLICIES

OVERVIEW

The Singing Machine Company, Inc., a Delaware corporation, and Subsidiary (the
"Company," or "The Singing Machine") is primarily engaged in the development,
marketing, and sale of consumer karaoke audio equipment, accessories, musical
instrument 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.

THE MANAGEMENT OF THE COMPANY BELIEVES THAT THE FOLLOWING ACCOUNTING POLICIES
REQUIRE A HIGH DEGREE OF JUDGMENT OR COMPLEXITY:

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

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

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

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.

As of March 31, 2006 and 2005, The Singing Machine had gross deferred tax assets
of $6.4 million and $10.4 million, against which the Company recorded valuation
allowances totaling $6.4 million and $10.4, respectively.

For the fiscal years ended March 31, 2006 and March 31, 2005, the Company
recorded no tax provision. We received a tax refund of $1.1 million on August
24, 2005, which was used to pay related party loans and the vendors. The Company
has now exhausted its ability to carry back any further losses and therefore
will only be able to recognize tax benefits to the extent that it has future
taxable income.

The Company's subsidiary has applied for an exemption of income tax in Hong
Kong. Therefore, no taxes have been expensed or provided for at the subsidiary
level. Although no decision has been reached by the governing body, the parent
company has reached the decision to provide for the possibility that the
exemption could be denied and accordingly has recorded a provision for Hong Kong
taxes in fiscal 2004 and 2002. There was no provision for Hong Kong income taxes
in fiscal 2005 and fiscal 2006 due to the subsidiary's net operating losses.

Hong Kong income taxes payable totaled $2.4 million at March 31, 2006 and 2005
and is included in the accompanying balance sheets as income taxes payable.


                                       43

<PAGE>

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

THE FOLLOWING ARE THE COMPANY'S REMAINING ACCOUNTING POLICIES:

PRINCIPLES OF CONSOLIDATION

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

FOREIGN CURRENCY TRANSLATION

The functional currency of the Hong Kong Subsidiary is its local currency. The
financial statements of the subsidiary are translated to U.S. dollars using
year-end rates of exchange for assets and liabilities, and average rates of
exchange for the year for revenues, costs, and expenses. Net gains and losses
resulting from foreign exchange transactions are included in the consolidated
statements of operations and were not material during the periods presented. The
effect of exchange rate changes on cash at March 31, 2006, 2005 and 2004 were
also not material.

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid investments with maturities of three
months or less at the time of purchase to be cash equivalents. Cash and cash
equivalent balances at March 31, 2006 and March 31, 2005 were $423,548 and
$617,054, respectively.

CONCENTRATION OF CREDIT RISK

Occasionally the Company maintains cash balances in foreign financial
institutions. Such balances are not insured. The uninsured amounts at March 31,
2006 and 2005 approximate $251,108 and $379,000 respectively.

INVENTORIES

Inventories are comprised of electronic karaoke equipment, accessories, and
compact discs and are stated at the lower of cost or market, as determined using
the first in, first out method.

LONG-LIVED ASSETS

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

SHIPPING AND HANDLING COSTS

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

PROPERTY AND EQUIPMENT

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

REVENUE RECOGNITION

Revenue from the sale of equipment, accessories, and musical recordings are
recognized upon the later of (a) the time of shipment or (b) when title passes
to the customers 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 a provision for actual
and estimated future returns, discounts and volume rebates. The provision for
actual and estimated sales returns for fiscal years ended March 31, 2006, 2005
and 2004 was $2.4 million, $3.6 million and $6.7 million, respectively. The
total returns represents 7.4%, 9.3% and 9.4% of the net sales for fiscal year
ended March 31, 2006, 2005 and 2004, respectively.


                                       44

<PAGE>

STOCK BASED COMPENSATION

Effective June 15, 2005, the Company adopted SFAS No. 123 (revised 2004),
Share-Based Payments ("SFAS 123 (R)"), which 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), the Company recognized a charge of $13,307 (included
in selling, general and administrative expenses) in the year ended March 31,
2006 associated with the expensing of stock options. Employee stock option
compensation expense in 2006 includes the estimated fair value of options
granted, amortized on a straight-line basis over the requisite service period
for the entire portion of the award.

Reported and pro forma net income (loss) and earnings (loss) per share are as
follows:

<TABLE>
<CAPTION>
                                                                               For years ended
                                                              ------------------------------------------------
                                                              March 31, 2006   March 31, 2005   March 31, 2004
                                                              --------------   --------------   --------------
<S>                                                            <C>              <C>              <C>
Net Loss as reported                                           $(1,905,250)     $(3,591,975)     $(22,683,424)
Less: Total stock-based employee compensation
expense determined under fair value based
method                                                         $  (484,103)     $  (497,902)     $   (723,058)
Net loss pro forma                                             $(2,389,353)     $(4,089,877)     $(23,406,482)
Net loss per share - basic                      As reported    $     (0.19)     $     (0.39)     $      (2.65)
                                                Pro forma      $     (0.24)     $     (0.45)     $      (2.73)
Net loss per share - diluted                    As reported    $     (0.19)     $     (0.39)     $      (2.65)
                                                Pro forma      $     (0.24)     $     (0.45)     $      (2.73)
</TABLE>

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 in the table below.
During fiscal year 2006, the Company took into consideration guidance under SFAS
123 (R) and SEC Staff Accounting Bulletin No. 107 (SAB 107) when reviewing and
updating assumptions. 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.

Fiscal 2006: expected dividend yield 0%, risk- free interest rate between 4% to
4.86%, volatility between 91% and 104% and expected term of three to five years.

Fiscal 2005: expected dividend yield 0%, risk- free interest rate of 4%,
volatility between 110% and 199% and expected term of three to five years.

Fiscal 2004: expected dividend yield 0%, risk- free interest rate of 4%,
volatility between 80% and 110% 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 had entered into cooperative
advertising agreements with its major clients that specifically indicated that
the client has to spend the cooperative advertising fund on mutually agreed
events. The percentage of the cooperative advertising allowance ranges from 2%
to 5% of the purchase. The clients have to advertise the Company's products in
the client's catalog, local newspaper and other advertising media. The client
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
client does not have the ability to spend the allowance at their discretion. The
Company believes that the identifiable benefit from the cooperative advertising
program and the fair value of the advertising benefit is equal or greater than
the cooperative advertising expense. Advertising expense for the years ended
March 31, 2006, 2005 and 2004 was $168,739, $597,821 and $2,340,439,
respectively.


                                       45

<PAGE>

RESEARCH AND DEVELOPMENT COSTS

All research and development costs are charged to results of operations as
incurred. These expenses are shown as a component of selling, general &
administrative expenses in the consolidated statements of operations. For the
years ended March 31, 2006, 2005 and 2004, these amounts totaled $132,282,
$239,242 and $302,144, respectively.

EARNINGS PER SHARE

In accordance with SFAS No, 128, "Earnings per Share," basic (loss) earnings per
share are computing 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.

FAIR VALUE OF FINANCIAL INSTRUMENTS

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

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

RECLASSIFICATIONS

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

RECENT ACCOUNTING PRONOUNCEMENTS

In November 2004, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 151, "Inventory Costs - an
amendment of ARB No. 43, Chapter 4" (SFAS 151), effective for inventory costs
incurred during fiscal years beginning after June 15, 2005. This Statement
amends the guidance in Accounting Research Bulletin (ARB) No. 43, Chapter 4,
"Inventory Pricing," to clarify the accounting for abnormal amounts of idle
facility expense, freight, handling costs and wasted material (spoilage).
Paragraph 5 of ARB No. 43, Chapter 4, previously stated that "...under some
circumstances, items such as idle facility expense, excessive spoilage, double
freight, and re-handling costs may be so abnormal as to require treatment as
current period charges...." SFAS 151 requires that those items be recognized as
current-period charges regardless of whether they meet the criterion of "so
abnormal..." In addition, SFAS 151 requires that allocation of fixed production
overheads to the costs of conversion be based on the normal capacity of the
production facilities. The Company adopted SFAS 151 as of April 1, 2005. The
effect of the adoption of SFAS 151 was not material.

In December 2004, FASB issued Statement of Financial Accounting Standards No.
153, "Exchanges of Non monetary Assets - an amendment of APB Opinion No. 29"
(SFAS 153), effective for non monetary asset exchanges occurring in fiscal
periods beginning after June 15, 2005. This Statement amends Accounting
Principles Board (APB) Opinion No. 29 to eliminate the exception for non
monetary exchanges of similar productive assets and replaces it with a general
exception for exchanges of non monetary assets that do not have commercial
substance. A non-monetary exchange has commercial substance if the future cash
flows of the entity are expected to change significantly as a result of the
exchange. The Company adopted SFAS 153 as of January 1, 2005. The effect of the
adoption of SFAS 153 was not material.

In December 2004, FASB issued Statement of Financial Accounting Standards No.
123 (revised 2004), "Share-Based Payment" (SFAS 123 (revised 2004), effective as
of the beginning of the first interim or annual reporting period that begins
after June 15, 2005. This Statement is a revision of FASB Statement No. 123,
"Accounting for Stock-Based Compensation," and supersedes APB Opinion No. 25,
"Accounting for Stock Issued to Employees," and its related implementation
guidance. SFAS 123 (revised 2004) eliminates the alternative to use APB Opinion
No. 25's intrinsic value method of accounting that was provided in Statement 123
as originally issued. Under APB Opinion No. 25, issuing stock options to
employees generally resulted in recognition of no compensation cost. SFAS 123
(revised 2004) requires entities to recognize the cost of employee services
received in exchange for awards of equity instruments based on the grant-date
fair value of those awards (with limited exceptions). Recognition of that
compensation cost helps users of financial statements to better understand the
economic transactions affecting an entity and to make better resource allocation
decisions. The Company adopted SFAS 123 (revised 2004) for the fiscal quarter
ending after June 15, 2005. The effect of the adoption of SFAS 123 (revised
2004) is not material.


                                       46

<PAGE>

NOTE 2 - GOING CONCERN

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

The Company has experienced recurring losses, has an accumulated deficit and
negative working capital. Our unencumbered assets are limited and we are not
able to meet some short term obligations. These factors, among others, raise
substantial doubt that the Company may be able to continue operations as a going
concern.

Subsequent to March 31, 2006, we plan to finance our operations as follows:

1) Equity investment - The shareholders of Starlight International (Starlight)
have approved a $3 million investment in the Company's common stock. The Company
has received a $1 million (non interest bearing advance) from Starlight in June,
2006 in addition to the $2 million (interest bearing loan) received in March,
which was used to settle the $4 million convertible debentures.

2) Related Party Loan - We might be able to raise additional short term loan
from Starlight, who is also one of our suppliers.

3) 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 more than 60% of the total revenues.

4) Factoring of accounts receivable - The Company would factor its accounts
receivable for sales originated in the United States.

5) Cost reduction - The Company has reduced significant operating expenses in
this fiscal year. The cost reduction initiatives are part of our intensive
effort to achieve a successful turn-around restructuring. The Company plans to
continue its cost cutting efforts in the fiscal 2007.

6) Bank facility - The Company is actively seeking additional banking facilities
to finance its domestic purchase.

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

NOTE 3 - INVENTORIES

Inventories are comprised of the following components:

                             MARCH 31,     MARCH 31,
                                2006          2005
                            -----------   -----------
Finished Goods              $ 2,637,277   $ 4,717,455
Inventory in Transit            146,904        45,912
  Less: Inventory Reserve    (1,096,123)   (1,668,430)
                            -----------   -----------
Total Inventories           $ 1,688,058   $ 3,094,937
                            ===========   ===========

Inventory consigned to customers 2006 and March 31, 2005 was $176,750 and
$151,824, respectively.

NOTE 4 - ACCOUNTS RECEIVABLE FACTORING AGREEMENT

On August 4, 2004, the Company entered into a 3 year factoring agreement with
Crestmark Bank, Detroit, Michigan. The agreement allows the Company, at the
discretion of Crestmark, to factor its outstanding receivables, with recourse,
up to a maximum of the lesser of $2.5 million or 70% of eligible accounts
receivable. The Company pays 1% of gross receivables in fees with a $9,000
minimum maintenance fee per month. The average balance of the line will be
subject to interest payable on a monthly basis at prime plus 2% (10% at March
31, 2006). The agreement contains a liquidated damage fee, which equals to
$9,000 multiply remaining months of the contract term for early termination by
the Company.

Crestmark Bank also received a security interest in all of the Company's
accounts receivables and inventory in the United States. The related party loan
holders have subordinated their debt to the Crestmark Bank debt.

As of March 31, 2006 and 2005, the outstanding amount due from Crestmark bank
for factoring was $134,281 and $34,372, respectively. The amount represents
excess of customer payments received by Crestmark Bank over advances made to the
Company.


                                       47

<PAGE>

NOTE 5 - PROPERTY AND EQUIPMENT

A summary of property and equipment is as follows:

                                   USEFUL     MARCH 31,     MARCH 31,
                                    LIFE         2006          2005
                                 ---------   -----------   ------------
Computer and office equipment    5 years     $   516,456   $   507,953
Furniture and fixtures           5-7 years       364,026       351,510
Leasehold improvement            *               154,125       103,776
Molds and tooling                3 years       2,725,080     2,601,400
                                             -----------   -----------
                                               3,759,687     3,564,639
Less: Accumulated depreciation                (3,246,072)   (2,525,796)
                                             -----------   -----------
                                             $   513,615   $ 1,038,843
                                             ===========   ===========

*    Shorter of remaining term of lease or useful life

NOTE 6 - RESTRICTED CASH

The Company, through the Hong Kong Subsidiary, maintains a letter of credit
facility and short term loan with a major international bank. The Hong Kong
Subsidiary was required to maintain a separate deposit account in the amount
$268,405 and $870,795 at March 31, 2006 and 2005, respectively. This amount is
shown as restricted cash in the accompanying balance sheets. The restricted cash
is not covered by the bank's deposit insurance.

NOTE 7 - LOANS AND LETTERS OF CREDIT

CREDIT FACILITY

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

      o     Overdraft protection facilities

      o     Issuance and negotiation of letters of credit

      o     Trust receipts

      o     A Company credit card

These facilities are secured by a corporate guarantee from the U.S. Company,
restricted cash on deposit with the lenders and require that the Hong Kong
subsidiary maintain a minimum tangible net worth of approximately $2 million.
International SMC was in compliance with minimum tangible net worth as of March
31, 2006. The maximum available credit under the facilities is $1.5 million. The
interest rate is approximately 6%. At March 31, 2006 and March 31, 2005, there
were no borrowings against the facilities. The Hong Kong Subsidiary terminated
its credit facility with HSBC and Fortis Bank on January 23, 2006 and May 1,
2006, respectively. The Company is currently seeking a banking facility in Macau
to meet its export needs.

LOAN PAYABLE

On March 10, 2006, the Company borrowed $2 million from a subsidiary of
Starlight International to pay off the $4 million convertible debentures (see
Note 10 and Note 11). The bridge loan will be converted into equity upon closing
of Starlight $3 million investment.

RELATED PARTY LOANS

On or about July 10, 2003, an officer and two directors of our Company advanced
$1 million to our Company pursuant to written loan agreements. The officer is Yi
Ping Chan and the directors were Josef A. Bauer and Howard Moore. Mr. Moore
resigned from our Board, effective as of October 17, 2003. Additionally, Maureen
LaRoche, a business associate of Mr. Bauer, participated in the financing. The
loans are subordinated to the factoring company and accrued interest at 9.5% per
annum. These loans were originally scheduled to be repaid by October 31, 2003,
but were extended past March 31, 2006. All interest was accrued, and the unpaid
amount totaled approximately $14,250. A portion of the loans and the accrued
interest in the amount of $409,500 has been converted into 563,274 shares of
common stock at $0.72 per share on January 5, 2005. In addition, another portion
of the loans in the amount of $200,000 has been converted into 277,778 shares of
common stock on May 18, 2005. On November 30, 2005, Maureen LaRoche was repaid
$107,917 ($100,000 principle and $7,917 interest). The balance of related party
loan as of March 31, 2006 was $300,000. According the Security Purchase
Agreement with Starlight dated on February 21, 2006, the company might use
$50,000 of $3 million investment to retire a portion of the loan. The remainder
of the loan will be extended for 3 years at an interest rate of 5.5%.

On June 27, 2005, the Company received a $200,000 loan from Andrew Shapiro, a
relative of Mr. Bauer. The interest rate on the loan is 12% per annum and is due
on November 30, 2005. The loan was repaid on November 29, 2005 with interest.


                                       48

<PAGE>

On June 2, 2006, the Company received a $200,000 loan from Andrew Shapiro, a
relative of Mr. Bauer. The interest rate on the loan is 8% per annum and is due
on June 20, 2006 or such later date as mutually agreed between the parties. The
loan was repaid on June 30, 2006 with interest.

NOTE 8 - 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 9 - CONVERTIBLE DEBENTURES WITH WARRANTS

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

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

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

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

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

On February 9, 2004, the Company amended its convertible debenture agreements to
increase the interest rate to 8.5% and to grant warrants to purchase an
aggregate of 30,000 shares of the Company's common stock to the debenture
holders on a pro-rata basis. These concessions are in consideration of the
debenture holder's agreements to (i) enter into new subordination agreements
with Milberg, (ii) to waive all liquidated damages due under the transaction
documents through July 1, 2004 and (iii) to extend the effective date of the
Form S-1 registration statement until July 1, 2004. The new warrants have an
exercise price equal to $1.52 per share and the fair value of these warrants was
estimated by using the Black-Scholes Option-Pricing Model and totaled $30,981.
This amount was expensed as a component of selling, general and administrative
expenses during the three months ended December 31, 2003. Pursuant to the
Convertible Debenture agreements, the Company was required to register the
shares of common stock underlying the debentures and detachable stock purchase
warrants issued in connection with the debentures. The registration of the
common shares was required to be effective by July 1, 2004. The Form S-1
registration statement was effective on January 21, 2005.

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

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

According to the Emerging Issue Task Force (EITF) Issue No. 00-27, if the terms
of a contingent conversion option do not permit an issuer to compute the number
of shares that the holder would receive if the contingent event occurs and the
conversion price is adjusted, an issuer should wait until the contingent event
occurs and then compute the resulting number of shares that would be received
pursuant to the new conversion price. The incremental intrinsic value that
resulted from the price reset equals additional shares multiplied by the stock
market price at the issuing date of the debentures, which would be recorded as
discount of convertible debentures and amortized over the remaining life of the
debentures. The new adjusted conversion price of stock is $1.41 [3.85-
(3.85-0.60) X 75%] while the conversion price of warrant is $1.46. As of July
30, 2004, the number of shares issuable upon conversion of debenture is
2,831,858. The amount of $687,638 was recorded as additional discounts of the
debentures and will be amortized for the remaining life of the debentures. Total
amortization expense for March 31, 2006 is $1,615,642.


                                       49

<PAGE>

In connection with the Convertible Debentures, the Company paid financing fees
as follows: 103,896 stock purchase warrants with a fair value of $268,386,
28,571 shares of common stock with a fair value of $141,141, and cash of
$255,000. Total financing fees of $664,527 were recorded as deferred fees and
are being amortized over the term of the debentures. The financing fees has been
fully amortized as of March 31, 2006.

NOTE 10 - NET GAIN ON RETIREMENT OF CONVERTIBLE DEBENTURES

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

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

The funds to complete this transaction were provided by a $2 million bridge loan
from Ever Solid Ltd., a subsidiary of Starlight International Holding Ltd. The
$2 million bridge loan was recorded as loan payable in the balance sheets as of
March 31, 2006. The Company also agreed to reset the price of 457,143 warrants
issued to the debenture holders from $1.41 to $0.85. The warrants are to expire
on September 7, 2006. The Company has recorded the fair value of the price reset
in the amount of $6,000 to financing expense for the year ended March 31, 2006.

The funds for the retirement of the obligation were advanced by Starlight
pursuant to a Stock Purchase Agreement.

NOTE 11 - SECURITY PURCHASE AGREEMENT

On February 21, 2006, we entered into a Securities Purchase Agreement (the
"Purchase Agreement") with koncepts International Limited (the "Purchaser")
pursuant to which the Company agreed to sell and issue 12,875,536 shares of
common stock, $.01 par value per share (the "Common Shares"), and 3 common stock
purchase warrants (the "Warrants") to purchase an aggregate of 5,000,000 shares
of common stock for an aggregate purchase price of $3,000,000, or a per share
purchase price of $.233. Subject to additional closing conditions as specified
in the Purchase Agreement, the closing of the offering is subject to the
Company's successful restructuring of $4,000,000 principal amount subordinated
debenture which came due on February 20, 2006, as well as the approval of the
American Stock Exchange and the shareholders of Starlight International Holdings
Ltd., parent company of the Purchaser, as per the requirements of Hong Kong
Stock Exchange. The parties intend to complete this offering within the next 60
days, assuming all closing conditions are met.

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

On March 10, 2006, the Company borrow $2 million from a subsidiary of Starlight
International to pay off the $4 million convertible debentures (see Note 11).
The bridge loan will be converted into equity upon closing of Starlight $3
million investment.

On June 15, 2006, the shareholders of Starlight approved the Purchase Agreement,
the Company received $1,000,000 cash payment from Purchaser on June 20, 2006.
The Company will issue 12,875,536 shares of common stock to the Purchaser upon
receiving the approval from the American Stock Exchange on or around July 31,
2006.

NOTE 12 - COMMITMENTS AND CONTINGENCIES

LEGAL MATTERS

SYBERSOUND RECORDS, INC., d/b/a Party Tyme Karaoke v. UAV CORPORATION, d/b/a
KARAOKE BAY and d/b/a STERLING ENTERTAINMENT; MADACY ENTERTAINMENT GROUP, LTD.;
AUDIO STREAM, INC. d/b/a KEYNOTE KARAOKE; TOP TUNES, INC.; SINGING MACHINE
COMPANY; COMPASS PRODUCTIONS, INC.; BCI ECLIPSE LLC; and DOES 1 THROUGH 50
inclusive. (SUPERIOR COURT OF THE STATE OF CALIFORNIA FOR THE COUNTY OF LOS
ANGELES, WEST DISTRICT, CASE NO. SC 085498)

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

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

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

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


                                       50

<PAGE>

NON-COMPLIANCE NOTICE FROM AMEX

The Company has received a non-compliance notice from The American Stock
Exchange (the "Amex") on July 18, 2005. The notice indicated that the Company
has fallen below the continued listing standards of the Amex and that its
listing is being continued pursuant to an extension. Specifically, for the
fiscal year ended March 31, 2005, the Company was not in compliance with the
minimum shareholders' equity requirement of $2,000,000, and had reported net
losses in each of the past two fiscal years, resulting in the Company's
non-compliance with Sections 1003(a)(i) and 1003(a)(iv) of the Amex Company
Guide. In addition, the Company failed to announce in a press release, as
required by Section 610(b) of the Amex Company Guide, that it received an audit
opinion which contained a going concern qualification as disclosed in its Form
10-K for fiscal 2005 that was filed on June 29, 2005.

In order to maintain its Amex listing, the Company submitted a plan by August
18, 2005 advising the Amex of actions it will take, which may allow it to regain
compliance within a maximum of 18 months and 12 months from July 18, 2005,
respectively.

The Exchange has completed its review of The Singing Machine's plan of
compliance and supporting documentation and has determined that, in accordance
with Section 1009 of the Company Guide, the Plan makes a reasonable
demonstration of the Company's ability to regain compliance with the continued
listing standards within a maximum of 18 months and 12 months from July 18,
2005, respectively.

The Company must regain compliance with the $4,000,000 minimum shareholders'
equity requirement by January 18, 2007. Failure to regain compliance within
these time frames likely will result in the Exchange Staff initiating delisting
proceedings pursuant to Section 1009 of the Company Guide. Further, if our
common stock is removed from listing on Amex, it may become more difficult for
us to raise funds through the sales of our common stock or securities.

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

LEASES

The Company has entered into various operating lease agreements for office and
warehouse facilities in Coconut Creek, Florida, Compton, California, and
Kowloon, Hong Kong. The leases expire at varying dates. Rent expense for fiscal
2006, 2005 and 2004 was $632,586, $673,148 and $1,542,041, respectively.

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

Future minimum lease payments under property and equipment leases with terms
exceeding one year as of March 31, 2006 are as follows:

               Property Lease   Equipment Lease
               --------------   ---------------
Years ending
March 31:
  2007           $  733,302         $ 3,791
  2008              532,696           3,791
  2009               35,790           3,791
  2010                   --           3,159
                 ----------         -------
                 $1,301,788         $14,532
                 ==========         =======

MERCHANDISE LICENSE AGREEMENTS

In February 2003, we entered into a multi-year license agreement with Universal
Music Entertainment to market a line of Motown Karaoke machines and music. This
agreement and its subsidiary agreement signed in March 2003, allow us to be the
first to use original artist recordings for our CD+G formatted karaoke music.
Over the term of the license agreement, we are obligated to make guaranteed
minimum royalty payments in the amount of $300,000, which has been paid in full
as of March 31, 2005. The Universal Music Entertainment license expires on March
31, 2006 and extended to December 31, 2006.


                                       51

<PAGE>

We entered into a license agreement with Nickelodeon, Inc., a division of Viacom
International, Inc. in December 2002. Under this agreement, we licensed
Nickelodeon branded machines and a wide assortment of music. This license
originally expired on December 31, 2004. The company has extended the agreement
to December 31, 2006. Over the term of the license agreement, we are obligated
to make guaranteed minimum royalty payments in the amount of $450,000, which has
been paid in full as of December 31, 2005.

On December 20, 2005, we entered into a three-year license agreement with Hi-5
to produce and distribute karaoke software, including compact discs with
graphics (CDGs) and karaoke music downloadable via the Internet, a variety of
karaoke hardware products, and youth-oriented cassette players, CD and DVD
players, and clock radios based on the popular "Hi-5" television show. The
agreement contains an option to extend for an additional three years.

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 BRATZ(TM) 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.

NOTE 13 - STOCKHOLDERS' DEFICIT

COMMON STOCK ISSUANCES

During the fiscal year ended March 31, 2006 and 2005, the Company issued 290,689
and 1,017,275 shares of its common stock, respectively.

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

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

On January 5, 2005, the Company has authorized the issuance of 563,274 shares of
common stock for the conversion of a $400,000 related party loan and a $9,500
interest payment. The conversion rate is $0.72 per share, which is based on the
5 days average stock closing price prior to December 20, 2004.

On September 23, 2004 the Company issued 400,000 shares of common stock to the
plaintiffs in lieu of the class action lawsuit settlement. (See Note-10 "Legal
Matters")

On May 11, 2004, the Company issued 50,000 shares of common stock to a former
executive for consulting services rendered. The Company expensed the consulting
costs in fiscal 2004, the period for which services were provided.

On April 1, 2004, the Company adjusted its common stock by 4,001 shares due to a
prior year 3 to 2 stock split .

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.
The following table presents a reconciliation of basic (loss) earnings per share
and diluted earnings per share:

<TABLE>
<CAPTION>
                                                       FISCAL YEARS ENDED MARCH 31
                                                ----------------------------------------
                                                    2006          2005          2004
                                                -----------   -----------   ------------
<S>                                             <C>            <C>           <C>
Net loss                                        $(1,905,250)  $(3,591,975)  $(22,683,424)
Loss available to common shareholders           $(1,905,250)  $(3,591,975)  $(22,683,424)
Weighted average shares outstanding - basic      10,029,085     9,112,278      8,566,116
Loss per share - basic                          $     (0.19)  $     (0.39)  $      (2.65)

Effect of dilutive securities:
  Stock options/Warrants                                 --            --             --
  Convertible debentures                                 --            --             --

Weighted average shares outstanding - diluted    10,029,085     9,112,278      8,566,116
Earnings per share - diluted                    $     (0.19)  $     (0.39)  $      (2.65)
</TABLE>


                                       52

<PAGE>

For fiscal 2006, 2005 and 2004, 1,133,201, 4,674,338 and 2,657,532 common stock
equivalents were not included in the computation of diluted earnings per share
as their effect would have been antidilutive for fiscal years ended March 31,
2006, 2005 and 2004.

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, 2006, 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, 2006,
the Company had granted 1,279,560 options under the Year 2001 Plan, leaving
670,440 options available to be granted. As of March 31, 2006, the Company had
343,050 options issued and 20,550 outstanding under its 1994 Plan.

The exercise price of employee common stock option issuances in 2006, 2005 and
2004 was equal to the fair market value on the date of grant. Accordingly, no
compensation cost has been recognized for options issued under the Plan in these
years prior to June 15, 2006. The Company adopted SFAS 123(R) for the reporting
period ending after June 15, 2005 and recognized the fair value of the stock
option as part of the selling, general and administration expense. A summary of
the options issued as of the presented period and changes during the years is
presented below.

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

<TABLE>
<CAPTION>
                                                Fiscal 2006                Fiscal 2005            Fiscal 2004
                                       ----------------------------   --------------------   --------------------
                                                           Weighted               Weighted               Weighted
                                                            Average                Average                Average
                                                           Exercise   Number of   Exercise   Number of   Exercise
                                       Number of Options     Price     Options      Price     Options      Price
                                       -----------------   --------   ---------   --------   ---------   --------
<S>                                        <C>               <C>      <C>           <C>      <C>           <C>
Stock Options:
Balance at beginning of period             1,041,610         $3.67    1,027,530     $3.95    1,543,250     $4.43
Granted                                      841,000         $0.50      261,890     $0.85      423,980     $2.66
Exercised                                         --         $0.00           --     $0.00     (448,500)    $1.91
Forfeited                                  (582,500)         $3.48     (247,810)    $1.76     (491,200)    $6.75
                                           ---------                  ---------              ---------
Balance at end of period                   1,300,110         $1.74    1,041,610     $3.67    1,027,530     $3.95
                                           =========                  =========              =========
Options exercisable at end of period         392,161         $3.52      775,831     $3.58      630,168     $4.48
</TABLE>

The following table summarizes information about employee stock options
outstanding at March 31, 2006 :

<TABLE>
<CAPTION>
                                         Weighted Average
Range of Exercise   Number Outstanding       Remaining      Weighted Average   Number Exercisable   Weighted Average
      Price          at March 31, 2006   Contractual Life    Exercise Price     at March 31, 2006    Exercise Price
-----------------   ------------------   ----------------   ----------------   ------------------   ----------------
<S>                      <C>                   <C>                <C>                <C>                  <C>
   $ 0.32-$0.77            883,000             8.45               $0.56              100,000              $0.76
   $ 1.05-$1.97            243,060             7.88               $1.70              151,511              $1.64
   $ 2.04-$5.60             50,550             5.92               $4.15               50,550              $4.15
   $7.20-$11.09            123,500             6.87               $9.22               90,100              $9.38
                         ---------                                                   -------
                         1,300,110                                                   392,161
                         =========                                                   =======
</TABLE>

STOCK WARRANTS

As of March 31, 2006, the Company had a total of 591,040 stock purchase warrants
outstanding. Of the total, 457,143 warrants were issued in September 2004 to
investors in connection with the $4 million debenture offering (see Note 9) and
103,896 warrants were issued to the respective investment banker. The estimated
fair value of the warrants issued to the investors in the amount of $1,180,901
was recorded as a discount on the debentures and the estimated fair value of the
warrants issued to the investment banker in the amount of $268,386 has been
record as deferred expense. Both amounts are being amortized over the term of
the debentures. In February 2004, the Company issued an additional 30,001
warrants to the investors in connection with a settlement agreement (see Note
9). The estimated fair value of these warrants totaled $30,981, which was
expensed as component of selling, general and administrative expenses. The
weighted average fair value of warrants issued during fiscal 2005 was $2.67.


                                       53

<PAGE>

On July 30, 2005, the exercise price for 457,143 warrants issued to the
debentures' holder has been adjusted from $4.05 to $1.46 pursuant to
antidilution provision (see Note 9). On March 10, 2006, the exercise price for
457,143 has been changed from $1.46 to $0.85 (see Note 9).

NOTE 14 - INCOME TAXES

The Company files separate tax returns for the parent and for the Hong Kong
Subsidiary. The income tax expense (benefit) for federal, foreign, and state
income taxes in the consolidated statement of operations consisted of the
following components for 2006, 2005 and 2004:

                                   2006               2005              2004
                               -----------        -----------       ------------
Current:
U.S. Federal                   $   550,839        $        --       $(1,071,709)
Foreign                           (129,090)                --                --
State                               74,870                 --           (95,398)
Deferred                          (496,619)                            1,925,612
                               -----------        -----------       -----------
                               $        --        $        --       $   758,505
                               ===========        ===========       ===========

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

                                  2006               2005               2004
                             ------------       ------------       ------------

United States                $ (1,167,592)      $ (2,943,847)      $(21,362,610)
Foreign                          (737,659)          (648,128)          (562,309)
                             ------------       ------------       ------------
                             $ (1,905,251)      $ (3,591,975)      $(21,924,919)
                             ============       ============       ============

The actual tax expense differs from the "expected" tax expense for the years
ended March 31, 2006, 2005 and 2004 (computed by applying the U.S. Federal
Corporate tax rate of 34 percent to income before taxes) as follows:

<TABLE>
<CAPTION>
                                                            2006           2005           2004
                                                        -----------    -----------    -----------
<S>                                                     <C>            <C>            <C>
Expected tax expense (benefit)                          $  (647,785)   $(1,221,272)   $(7,454,472)
State income taxes, net of Federal income tax benefit      (110,506)      (195,293)      (426,796)
Permanent differences                                         5,550          5,561          5,830
Deemed Dividend                                           1,224,000             --        410,513
Change in valuation allowance                            (4,019,030)     1,370,786      8,160,924
Tax rate differential on foreign earnings                   121,714        106,941         92,781
Net operating loss carryforward ajustment                 3,426,057        (66,723)       (30,274)
                                                        -----------    -----------    -----------
Actual tax expense                                      $        --    $        --    $   758,506
                                                        ===========    ===========    ===========
</TABLE>

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


                                       54

<PAGE>

<TABLE>
<CAPTION>
                                                          2006            2005            2004
                                                     ------------    ------------    ------------
<S>                                                  <C>             <C>             <C>
Deferred tax assets:
    Federal net operating loss carryforward          $  2,325,138    $  5,874,969    $  2,425,186
    State net operating loss carryforward                 466,092         697,710         502,417
    Hong Kong net operating loss carryforward             340,916         211,826          98,404
    AMT credit carryforward                                70,090          70,090          70,090
    Inventory differences                                 505,452         600,628       2,309,488
    Hong Kong foreign tax credit                        2,453,576       2,447,746       2,447,746
    Allowance for doubtful accounts                        35,229          40,054          33,323
    Reserve for sales returns                              63,336         336,188         161,726
    Charitable contributions                               60,573          59,364          58,037
    Amortization of reorganization intangible              53,652          68,981          68,981
    Depreciation                                           12,628              --              --
                                                     ------------    ------------    ------------
         Total deferred tax assets                      6,374,054      10,407,556       8,175,397
Deferred tax liability:
    Depreciation                                               --         (14,473)        (14,473)
                                                     ------------    ------------    ------------
         Total deferred tax liability                          --         (14,473)        (14,473)
Net deferred tax assets before valuation allowance      6,374,054      10,393,083       8,160,924
Valuation allowance                                    (6,374,054)    (10,393,083)     (8,160,924)
                                                     ------------    ------------    ------------
         Net deferred tax assets                     $         --    $         --    $         --
                                                     ============    ============    ============
</TABLE>

At March 31, 2006, the Company has federal tax net operating loss carryforwards
in the amount of approximately $11.1 million which expire beginning in the year
2019. In addition, state tax net operating loss carryforwards in the amount of
approximately $9.8 million expire beginning in 2009.

NOTE 15 - SEGMENT INFORMATION

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

                       FOR THE FISCAL YEARS ENDED
                               March 31,
                    2006          2005         2004
                -----------   -----------   -----------
North America   $22,458,950   $28,227,140   $43,044,496
Europe            9,655,939     9,531,632    25,783,789
Others              190,671       451,053     1,712,843
                -----------   -----------   -----------
                $32,305,560   $38,209,825   $70,541,128
                ===========   ===========   ===========

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

NOTE 16 - 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, 2006,
2005 and 2004 totaled $39,571, $30,027 and $55,402, respectively. The amounts
are included as a component of compensation expense in the accompanying
statements of operations. The Company does not provide any post employment
benefits to retirees.


                                       55

<PAGE>

NOTE 17 - CONCENTRATIONS OF CREDIT RISK, CUSTOMERS, SUPPLIERS, AND FINANCING

The Company derives primarily all of its revenues from retailers of products in
the U.S. Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist of accounts receivable. The Company's
allowance for doubtful accounts is based upon management's estimates and
historical experience and reflects the fact that accounts receivable are
concentrated with several large customers whose credit worthiness have been
evaluated by management. At March 31, 2006, 47% of accounts receivable were due
from three customers: two from the U.S. and one from an International Customer.
Accounts receivable from customers that individually owed over 10% of total
accounts receivable was 31% at March 31, 2006. Accounts receivable from
customers that individually owed over 10% of total accounts receivable were 12%
and 10% at March 31, 2005. The Company performs ongoing credit evaluations of
its customers and generally does not require collateral.

Revenues derived from five customers in 2006, 2005 and 2004 were 56%, 40% and
54% of total revenues, respectively. Revenues derived from top three customers
in 2006, 2005 and 2004 as percentage of the total revenue were 13%, 12% and 11%;
9%, 8% and 9%; and 20%, 12% 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 Subsidiary aggregated $21.9 million in
2006, $26.9 million in 2005 and $43.1 million in 2004.

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 2006, 2005 and 2004, manufacturers in the People's Republic
of China ("China") accounted for approximately 98%, 96% and 96% respectively; of
the Company's total product purchases, including all of the Company's hardware
purchases.

The Company is primary relying on one US factoring company in the United States.
The loss of the facility might have an adverse effect on the Company's business.

NOTE 18 - 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
2006, 2005 and 2004 are set forth in the following table:

<TABLE>
<CAPTION>
                                                               Basic     Diluted
                                                             Earnings   Earnings
                                             Net Earnings     (Loss)     (Loss)
                    Sales     Gross Profit      (Loss)      Per Share   Per Share
                 ----------   ------------   ------------   ---------   ---------
                 (In          (In            (In
                 thousands)   thousands)     thousands)
                 ----------   ------------   ------------
<S>                <C>          <C>            <C>            <C>         <C>
2006

First quarter      $ 2,792      $    437       $ (1,902)      $(0.19)     $(0.19)
Second quarter      18,532         3,823            926         0.09        0.09
Third quarter        9,877         2,580           (565)       (0.06)      (0.06)
Fourth quarter       1,104           243           (364)       (0.03)      (0.03)
                   -------      --------       --------       ------      ------
Total              $32,305      $  7,083       $ (1,905)      $(0.19)      (0.19)
                   =======      ========       ========       ======      ======

2005

First quarter      $ 3,857      $    770       $ (1,520)      $(0.17)     $(0.17)
Second quarter      18,753         4,260            722         0.08        0.06
Third quarter       14,368         4,923            493         0.05        0.05
Fourth quarter       1,232          (688)        (3,287)       (0.35)      (0.33)
                   -------      --------       --------       ------      ------
Total              $38,210      $  9,265       $ (3,592)      $(0.39)     $(0.39)
                   =======      ========       ========       ======      ======

2004

First quarter      $ 7,628      $  1,726       $ (2,317)      $(0.28)     $(0.28)
Second quarter      32,852         5,420           (657)       (0.08)      (0.08)
Third quarter       28,690        (2,601)       (10,451)       (1.20)      (1.20)
Fourth quarter       1,371        (2,727)        (9,259)       (1.09)      (1.09)
                   -------      --------       --------       ------      ------
Total              $70,541      $  1,818       $(22,684)      $(2.65)     $(2.65)
                   =======      ========       ========       ======      ======
</TABLE>


                                       56

<PAGE>

NOTE 19 - SUBSEQUENT EVENTS

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 BRATZ(TM) 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 June 2, 2006, the Company received a $200,000 loan from Andrew Shapiro, a
relative of Mr. Bauer. The interest rate on the loan is 8% per annum and is due
on June 20, 2006 or such later date as mutually agreed between the parties. The
loan was repaid on June 30, 2006 with interest.

On June 15, 2006, the shareholders of Starlight has approved the Purchase
Agreement, the Company received $1,000,000 cash payment from Purchaser on June
20, 2006. The Company will issue 12,875,536 shares of common stock to the
Purchaser upon receiving the approval from the American Stock Exchange.


                                       57

<PAGE>

                                SUPPLEMENTAL DATA
                                   SCHEDULE II

<TABLE>
<CAPTION>
                                                     Balance at    Charged to    Reduction to   Credited to    Balance at
                                                    Beginning of    Costs and      Allowance     Costs and       End of
                    Description                         Period       Expenses    for Write off     Expenses       Period
                                                    ------------   ----------   -------------   -----------   -----------
<S>                                                  <C>           <C>            <C>           <C>           <C>
Year ended March 31, 2006
Reserves deducted from assets to which they apply:
  Allowance for doubtful accounts                    $   117,806   $  561,271     $(575,460)    $        --   $   103,616
  Deferred tax valuation allowance                   $10,393,084   $4,019,031     $             $             $ 6,374,053
  Inventory reserve                                  $ 1,668,430   $   83,099     $(516,742)    $  (138,664)  $ 1,096,123
Year ended March 31, 2005
Reserves deducted from assets to which they apply:
  Allowance for doubtful accounts                    $    98,009   $   42,101     $  (7,954)    $   (14,351)  $   117,806
  Deferred tax valuation allowance                   $ 8,160,924   $2,232,160     $             $             $10,393,084
  Inventory reserve                                  $ 7,161,875   $  273,611     $(191,942)    $(5,575,115)  $ 1,668,430
Year ended March 31, 2004
Reserves deducted from assets to which they apply:
  Allowance for doubtful accounts                    $   405,759   $   70,788     $(148,074)    $  (230,464)  $    98,009
  Deferred tax valuation allowance                   $        --   $8,160,924     $             $             $ 8,160,924
  Inventory reserve                                  $ 3,715,357   $7,627,926     $             $(4,181,408)  $ 7,161,875
</TABLE>


                                       58