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<SEC-DOCUMENT>0001116502-03-001858.txt : 20031009
<SEC-HEADER>0001116502-03-001858.hdr.sgml : 20031009
<ACCEPTANCE-DATETIME>20031008173542
ACCESSION NUMBER:		0001116502-03-001858
CONFORMED SUBMISSION TYPE:	S-1
PUBLIC DOCUMENT COUNT:		10
FILED AS OF DATE:		20031009

FILER:

	COMPANY DATA:	
		COMPANY CONFORMED NAME:			SINGING MACHINE CO INC
		CENTRAL INDEX KEY:			0000923601
		STANDARD INDUSTRIAL CLASSIFICATION:	PHONOGRAPH RECORDS & PRERECORDED AUDIO TAPES & DISKS [3652]
		IRS NUMBER:				953795478
		STATE OF INCORPORATION:			DE
		FISCAL YEAR END:			0331

	FILING VALUES:
		FORM TYPE:		S-1
		SEC ACT:		1933 Act
		SEC FILE NUMBER:	333-109574
		FILM NUMBER:		03933891

	BUSINESS ADDRESS:	
		STREET 1:		6601 LYONS ROAD
		STREET 2:		BLDG A-7
		CITY:			COCONUT CREEK
		STATE:			FL
		ZIP:			33073
		BUSINESS PHONE:		9545961000

	MAIL ADDRESS:	
		STREET 1:		6601 LYONS ROAD BLDG
		CITY:			COCONUT CREEK
		STATE:			FL
		ZIP:			33073
</SEC-HEADER>
<DOCUMENT>
<TYPE>S-1
<SEQUENCE>1
<FILENAME>singingmachine-s1.txt
<DESCRIPTION>THE SINGING MACHINE S-1
<TEXT>
     As filed with the Securities and Exchange Commission on October 7, 2003
                                                 Registration No.
================================================================================
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM S-1
             REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

                        The Singing Machine Company, Inc.
                 ----------------------------------------------
                 (Name of Small Business Issuer in Its Charter)

          Delaware                        5065                    95-3795478
- --------------------------------- -------------------------- -------------------
(State or other jurisdiction         (Primary Standard         (IRS Employer
of incorporation or organization) Industrial Classification) Identification No.)

                                 Robert Weinberg
                             Chief Executive Officer
                        The Singing Machine Company, Inc.

                                                      Robert Weinberg
          6601 Lyons Road                             6601 Lyons Road,
           Building A-7                                 Building A-7
      Coconut Creek, FL 33073                     Coconut Creek, FL 33073
     Telephone: (943) 596-1000                    Telephone: (954) 596-1000
     Facsimile: (954) 596-2000                    Facsimile: (954) 596-2000
- -----------------------------------              ------------------------------
   (Address and telephone number,                (Name, address and telephone
including area code of Registrant's                number of agent for service)
     principal executive offices)
                            -------------------------


<PAGE>

Approximate Date of Commencement of Proposed Sale to the Public: As soon as
practicable after the Registration Statement becomes effective.

================================================================================

         If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box:[X]

         If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering.[ ]

         If this form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]

         If this form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]

         If delivery of the Registration Statement is expected to be made
pursuant to Rule 434, check the following box. [ ]

         CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
Title of Each Class of              Proposed Maximum    Proposed Maximum   Amount of
   Securities to be    Amount to be Offering Price per Aggregate Offering Registration
      Registered        Registered     Security(1)           Price(1)         Fee
- --------------------------------------------------------------------------------------
<S>                     <C>              <C>              <C>               <C>
Common Stock(2)         1,038,962        $4.25            $4,405,198.88     $ 356.38
Common Stock(3)           561,039        $4.25            $2,384,157.50     $ 192.88
Common Stock(4)           207,791        $4.25            $  883,111.75     $  71.44
Common Stock(5)           311,680        $4.25            $1,324,640.00     $ 107.16
Common Stock(6)           635,842        $4.25            $2,702,328.50     $ 218.67
                        ---------        -----                              --------
Total                   2,755,314                                           $ 947.37
</TABLE>

- ----------
(1)  Estimated solely for the purpose of determining the registration fee, in
     accordance with Rule 457(C), based on the average high and low prices of
     our common stock as report on the American Stock Exchange on October 2,
     2003 ($4.25).

(2)  Represents shares of common stock issuable upon exercise of outstanding
     convertible debentures held by certain selling stockholders. Pursuant to
     Rule 416, there are also being registered such additional number of shares
     of common stock as may become issuable pursuant to the anti-dilution
     provisions of the debentures at the conversion price of $3.85 per share.

(3)  Represents shares of common stock being issuable upon exercise of
     outstanding common stock purchase warrants held by certain selling
     stockholders. Pursuant to Rule 416, there are also being registered such
     additional number of shares of common stock as may become issuable pursuant
     to the anti-dilution provisions of the common stock purchase warrants.

<PAGE>

(4)  Represents the anticipated maximum number of shares of common stock which
     may be issued to the holders of the debentures in payment of interest
     accruing thereon, based upon the value of the interest which the Company is
     obligated to pay for a maximum period of 30 months on an aggregate
     principal amount of $4,000,000 at the conversion rate of $3.85 per share.

(5)  Represents a good faith estimate of the number of shares which are issuable
     pursuant to certain anti-dilution provisions of the convertible debentures.

(6)  Represents the number of shares issuable upon (a) conversion of the
     convertible debentures, (b) exercise of the warrants, (c) as interest
     payments on the debentures, (d) pursuant to the anti-dilution provisions of
     the debentures, multiplied by 130%, which amount the registrant is
     obligated to register for resale under its agreements with the holders of
     the debentures and warrants.

         The registrant hereby amends this registration statement on such date
or dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.


<PAGE>

         The information contained in this preliminary Prospectus is not
complete and may be changed. These securities may not be sold until the
registration statement filed with the Securities and Exchange Commission is
effective. This Prospectus is not an offer to sell these securities and it is
not soliciting on offer to buy these securities in any state where the offer or
sale is not permitted.

                  Subject to Completion, Dated October 7, 2003

                                   PROSPECTUS

                        2,755,314 Shares of Common Stock

                        THE SINGING MACHINE COMPANY, INC.
                                [GRAPHIC OMITTED]



         We are registering for resale an aggregate of 2,755,314 shares of
common stock of The Singing Company, Inc. (the "Company," "us," or "we"), that
may be issued to certain of our stockholders named in this Prospectus and their
transferees.

         We will not receive any proceeds from the sale of the shares, but we
will receive proceeds from the selling stockholders if they exercise their
warrants. Our common stock is quoted on the American Stock Exchange under the
symbol "SMD". On October 2, 2003, the closing sales price of our common stock,
as reported on AMEX was $4.25 per share.

         The shares of common stock may be sold from time to time by the selling
stockholders in one or more transactions at fixed prices, at market prices at
the time of sale, at varying prices determined at the time of sale or at
negotiated prices. The selling stockholders and any broker-dealer who may
participate in the sale of the shares may use this Prospectus. See "Plan of
Distribution."

         INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 7.

         Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities, or determined if
this Prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.


                 The date of this Prospectus is October 7, 2003




<PAGE>

                                TABLE OF CONTENTS

Prospectus Summary...........................................................1
Risk Factors.................................................................2
Special Note regarding Forward-Looking Statements ...........................8
Use of Proceeds..............................................................9
Selling Stockholders.........................................................9
Plan of Distribution.........................................................12
Market Price of Common Stock.................................................14
Dividend Policy..............................................................14
Selected Financial Information and Other Data................................15
Management's Discussion and Analysis of Financial Condition and
   Results of Operations.....................................................17
Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.........................................................28
Business.....................................................................29
Management...................................................................37
Executive Compensation.......................................................39
Certain Transactions.........................................................44
Principal Stockholders.......................................................45
Description of Securities....................................................46
Shares Eligible for Future Sale..............................................49
Legal Matters................................................................50
Experts......................................................................50
Where You Can Find Additional Information....................................50
Index to Consolidated Financial Statements...................................F-1

We have not authorized any dealer, sales person or other person to give you
written information other than this Prospectus or to make representations as to
matters not stated in this Prospectus. You must not rely on unauthorized
information. This Prospectus is not an offer to sell these securities or our
solicitation of your offer to buy these securities in any jurisdiction where
that would not be permitted or legal. Neither the delivery of this Prospectus
nor any sale made hereunder after the date of this Prospectus shall create an
implication that the information contained herein or the affairs of The Singing
Machine Company, Inc. have not changed since the date hereof.

Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This Prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there by any sale of these securities
in any state in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such state.

                                       ii

<PAGE>


                               PROSPECTUS SUMMARY


         This Summary highlights information contained elsewhere in this
Prospectus. It does not contain all of the information that you should consider
before investing in our common shares. We encourage you to read the entire
Prospectus carefully ,including the section entitled "Risk Factors" and the
financial statements and the notes to those financial statements.

COMPANY OVERVIEW

         We are engaged in the production and distribution of karaoke audio
software and electronic recording equipment. Our electronic karaoke machines and
audio software products are marketed under the Singing Machine(R), MTV(R),
Nickelodeon(R), Hard Rock Academy(R) and Motown(R) brand names. Our corporate
offices are located at 6601 Lyons Road, Building A-7, Coconut Creek, Florida
33073, and our telephone number is (954) 596-1000.

THE OFFERING

Common Stock offered by the
Selling Stockholders..............................  2,755,314

Common Stock Outstanding
Prior to the Offering(1)..........................  8,682,596

Common Stock outstanding after the Offering(2).... 11,437,910

Use of Proceeds................................... We will not receive any
                                                   proceeds from the sale of
                                                   common stock by the selling
                                                   stockholders.
- ----------
(1)  Based on the number of shares actually outstanding as of September 15,
     2003. Does not include (a) 1,089,400 options which are currently
     outstanding under our 1994 Amended and Restated Stock Option Plan and our
     Year 2000 Stock Option Plan, and (b) an aggregate of 2,755,314 shares which
     are being registered in this registration statement.

(2)  Assumes the issuance of the 2,755,314 shares of our common stock which are
     being registered in this registration statement.

<PAGE>


                                  RISK FACTORS
                                  ------------

         You should carefully consider the following factors and other
information in this Prospectus before deciding to purchase our common stock.

RISKS RELATED TO THE COMPANY'S BUSINESS AND OPERATIONS

WE RELY ON SALES TO A LIMITED NUMBER OF KEY CUSTOMERS, WHICH ACCOUNT FOR LARGE
PORTION OF OUR NET SALES AND A REDUCTION IN ORDERS FROM ANY ONE OF THEM IS
DETRIMENTAL TO OUR BUSINESS

         As a percentage of total revenues, our net sales to our five largest
customers during the fiscal period ended March 31, 2003, 2002 and 2001 were
approximately 67%, 87% and 78% respectively. In fiscal 2003, three major
customers accounted for 21%, 17% and 15% of our net sales. Although we have
long-established relationships with many of our customers, we do not have
long-term contractual arrangements with any of them. A substantial reduction in
or termination of orders from any of our largest customers could adversely
affect our business, financial condition and results of operations. In addition,
pressure by large customers seeking price reductions, financial incentives,
changes in other terms of sale or requesting that we bear the risks and the cost
of carrying inventory, such as consignment agreements, could adversely affect
our business, financial condition and results of operations. If one or more of
our major customers were to cease doing business with us, significantly reduce
the amount of their purchases from us or return substantial amounts of our
products, it could have a material adverse effect on our business, financial
condition and results of operations.

OUR INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS RAISED SUBSTANTIAL DOUBT ABOUT OUR
ABILITY TO CONTINUE AS A GOING CONCERN FOR THE FISCAL YEAR ENDED MARCH 31, 2003

         We received a report dated June 24, 2003 (except for Note 9, as to
which the date is July 8, 2003 and Note 15, as to which the date is July 10,
2003) from our independent certified public accountants covering the
consolidated financial statements for our fiscal year ended March 31, 2003 that
included an explanatory paragraph which stated that the financial statements
were prepared assuming the Company would continue as a going concern. This
report stated that a default under our credit agreement with our commercial
lender raised substantial doubt about our ability to continue as a going
concern. In March 2003, our commercial lender, LaSalle Business Credit, LLC
notified us that we were in default of the minimum tangible net worth
requirement in our credit agreement.

         Since June 24, 2003, the date of our audit report, we have taken steps
to improve our financial position. In August 2003, our commercial lender
expressly waived our event of default of the minimum tangible net worth
requirement under our credit agreement and agreed to extend our credit facility
until March 31, 2004.

WE CURRENTLY RELY ON OUR LICENSING AGREEMENT WITH MTV NETWORKS IS A MATERIAL
SOURCE OF REVENUE AND THIS AGREEMENT CAN BE TERMINATED AT ANY TIME

         We value all of our merchandise license agreements and feel that if any
of them were to be terminated or fail to be renewed, our business, financial
condition and results of operations could be adversely affected. Our license
with MTV Networks, Inc., a division of Viacom International, Inc. ("MTV") is
particularly important to our business. We generated $30,884,344 million or
32.3% of our net sales from products sold under the MTV license in fiscal 2003.
However, management believes that our company has developed a strong brand name
in the karaoke industry and that it will be able to continue to develop and grow
its business, even if the MTV license agreement did not exist.

                                       2
<PAGE>

WE MAY HAVE DIFFICULTY MANAGING OUR INVENTORY LEVELS

         Because of our reliance on manufacturers in Asia for our production of
karaoke machines, our production lead times are relatively long. Therefore, we
must commit to production in advance of customers orders. If we fail to forecast
customers or consumer demand accurately we may encounter difficulties in filling
customer orders or liquidating excess inventories, or may find that customers
are canceling orders or returning products. Distribution difficulties may have
an adverse effect on our business by increasing the amount of inventory and the
cost of storing inventory. As of June 30, 2003, we had approximately $26 million
in inventory. We are attempting to liquidate this excess inventory during fiscal
2004. We believe that this entire inventory is highly marketable and saleable;
however, there can be no assurances that we will be able to liquidate this
inventory during our upcoming fiscal year.

WE ARE NAMED AS A DEFENDANT IN SEVERAL CLASS ACTION LAWSUITS

         At the present time, we are involved in several class action lawsuits
and a shareholders derivative lawsuit. While the specific factual allegations
vary slightly in each case, the complaints generally allege that the Company and
certain of its officers falsely represented the Company's financial results
during the relevant class periods. We believe the allegations in these cases are
without merit and we intend to vigorously defend these actions.

         While we believe that the allegations in the complaint are without
merit, an unfavorable resolution of pending litigation could have a material
adverse effect on our financial condition. Litigation may result in substantial
costs and expenses and significantly divert the attention of the Company's
management regardless of the outcome. There can be no assurance that the Company
will be able to achieve a favorable settlement of pending litigation or obtain a
favorable resolution of litigation if it is not settled. In addition, current
litigation could lead to increased costs or interruptions of normal business
operations of the Company.

OUR INABILITY TO COMPETE AND MAINTAIN OUR NICHE IN THE ENTERTAINMENT INDUSTRY
COULD HURT OUR BUSINESS

         The business in which we are engaged is highly competitive. Our major
competitors for karaoke machines and related products are Craig, Curtis, Grand
Prix and 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 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 for 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.

         We believe that our new product introductions and enhancements of
existing products are material factors for our continued growth and
profitability. In fiscal 2003, we produced new lines of karaoke machines.
However, many of our competitors have significantly greater financial, marketing
and operating resources than we have. No assurance can be given that we will
continue to be successful in introducing new products or further enhancing our
existing products. 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 and
prerecorded tapes, CD's and video cassettes.

                                       3
<PAGE>

WE ARE SUBJECT TO SEASONALITY, WHICH IS AFFECTED BY VARIOUS ECONOMIC CONDITIONS
AND CHANGES RESULTING IN FLUCTUATIONS IN QUARTERLY RESULTS

         Sales of consumer electronics and toy products in the retail channel
are highly seasonal, causing the substantial majority of our sales to occur
during the second quarter ended September 30 and the third quarter ended
December 31. Sales in our second and third quarter, combined, accounted for
approximately 85.6% of net sales in fiscal 2003, 81% of net sales in fiscal 2002
and 75% of net sales in fiscal 2001.

         The seasonal pattern of sales in the retail channel requires
significant use of our working capital to manufacture and carry inventory in
anticipation of the holiday season, as well as early and accurate forecasting of
holiday sales. Failure to predict accurately and respond appropriately to
consumer demand on a timely basis to meet seasonal fluctuations, or any
disruption of consumer buying habits during their key period, would harm our
business and operating results. In fiscal 2003, we overestimated the demand for
our product and held $26 million of inventory as of June 30, 2003. Our increased
inventory levels led to a shortage in our available working capital and our
liquidity problems. Additional factors that can cause our sales and operating
results to vary significantly from period to period include, among others, the
mix of products, fluctuating market demand, price competition, new product
introductions by competitors, fluctuations in foreign currency exchange rates,
disruptions in delivery of components, political instability, general economic
conditions, and the other considerations described in this section entitled Risk
Factors.

WE MAY HAVE SIGNIFICANT RETURNS, MARKDOWNS AND PURCHASE ORDER CANCELLATIONS

         As is customary in the consumer electronics industry, we have, on
occasion, (i) permitted certain customers to return slow-moving items for
credit, (ii) provided price protection to certain customers by making price
reductions effective as to certain products then held by customers in inventory
and (ii) accepted customer cancellations of purchase orders issued to the
Company. We expect that these practices will continue to be required to make
such accommodations in the future. Any significant increase in the amount of
returns, markdowns or purchaser order cancellations could have a material
adverse effect on our results of operations.

OUR PRODUCTS ARE SHIPPED FROM CHINA AND ANY DISRUPTION OF SHIPPING COULD HARM
OUR BUSINESS

         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 or otherwise could significantly harm our
business and reputation.

WE USE OUTSIDE FACTORIES LOCATED IN THE PEOPLE'S REPUBLIC OF CHINA TO
MANUFACTURE ALL OF OUR ELECTRONIC PRODUCTS

         We contract with six independent factories in the People's Republic of
China to manufacture all of our electronic products. 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, political instability, and other
factors, 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 the 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 business, financial
condition and results of operations. We believe that the loss of any one or more
of our manufacturers would not have a long-term material adverse effect on us
because other manufacturers with whom we do business would be able to increase
production to fulfill our requirements. However, the loss of certain of our
manufacturers, could, in the short-term, adversely affect our business until
alternative supply arrangements were secured.

                                       4
<PAGE>

WE DEPEND ON THIRD PARTY SUPPLIERS TO PRODUCE THE PARTS AND MATERIALS USED TO
MANUFACTURE AND PRODUCE OUR KARAOKE MACHINES AND RELATED PRODUCTS, AND IF WE
CANNOT OBTAIN SUPPLIERS 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
used to manufacture and produce our karaoke machines and related products. If
our suppliers are unable to provide our factories with the parts and supplies,
the factories 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. We, however, have anticipated this
shortage and have made commitments to the factories to purchase chips in
advance. 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 PURCHASE 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. Adverse economic changes affecting these factors may
restrict consumer spending and thereby adversely affect our growth and
profitability.

WE MAY BE INFRINGING UPON THE COPYRIGHTS OF THIRD PARTIES

         Each song in our catalog is licensed to us for specific uses. Because
of the numerous variations in each of our licenses for copyrighted music, there
can be no assurance that we have complied with scope of each of our licenses and
that our suppliers have complied with these licenses. Additionally, third
parties over whom we exercise no control may use our sound recordings in such a
way that is contrary to our license agreement and by violating our license
agreement we may be liable for contributory copyright infringement. Any
infringement claims may have a negative effect on our ability to sell products.

WE HAVE SIGNIFICANT RELIANCE ON LARGE RETAILERS, WHICH ARE SUBJECT TO CHANGES IN
THE ECONOMY

         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. Certain of such retailers have
engaged in leveraged buyouts or transactions in which they incurred a
significant amount of debt, and some are currently operating under the
protection of bankruptcy laws. Despite the difficulties experienced by retailers
in recent years, we have not suffered significant credit losses to date.
Deterioration in the financial condition of our customers could have a material
adverse effect on our future profitability.

                                       5
<PAGE>

OUR BUSINESS OPERATIONS COULD BE SIGNIFICANTLY DISRUPTED IF WE LOSE MEMBERS OF
OUR MANAGEMENT TEAM

         Our success depends to a significant degree upon the continued
contributions of our executive officers, both individually and as a group.
Although we have entered into employment contracts with Yi Ping Chan, our Chief
Operating Officer, April Green, our Chief Financial Officer and Jack Dromgold,
our Executive Vice President of Sales and Marketing, the loss of the services of
any of these individuals could prevent us from executing our business strategy.
We also intend on entering into an employment agreement with Robert Weinberg,
our new Chief Executive Officer. We cannot assure you that we will be able to
find appropriate replacements for Mr. Weinberg, Mr. Chan, Ms. Green or Mr.
Dromgold, if the need should arise, and any loss or interruption of their
services could adversely affect our business, financial condition and results of
operations.

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

         Within the past 12 months from October 2, 2002 through October 2, 2003,
our common stock has traded between a high of $13.49 and a low of $2.70. The
market price of shares of our common stock has been and may continue to be
highly volatile. The market prices of our common stock may be affected by many
factors, including:

- -        our ability to resell our excess inventory held as of the current date;

- -        unpredictable consumer preferences and spending trends;

- -        the actions of our customers and competitors (including new product
         line announcements and introduction;

- -        changes in our pricing policies, the pricing policies of our
         competitors and general pricing trends in the consumer and electronics
         and toy markets;

- -        regulations affecting our manufacturing operations in China;

- -        other factors affecting the entertainment and consumer electronics
         industries in general; and

- -        sales of our common stock into the public market.

         In addition, the stock market periodically has experienced significant
price and volume fluctuations, which may have been unrelated to the operating
performance of particular companies.

OUR OBLIGATION TO MAKE SEVERANCE PAYMENTS COULD PREVENT OR DELAY TAKEOVERS

         Our employment agreements with April Green, Yi Ping Chan and Jack
Dromgold require us, under certain conditions, to make substantial severance
payments to them if they resign after a change of control. These provisions
could delay or impede a merger, tender, offer or other transaction resulting in
a change in control of the Company, even if such a transaction would have
significant benefits to our shareholders. As a result, these provisions could
limit the price that certain investors might be willing to pay in the future for
shares of our common stock.

WE MAY BE SUBJECT TO CLAIMS FROM THIRD PARTIES FOR UNAUTHORIZED USE OF THEIR
PROPRIETARY TECHNOLOGY, COPYRIGHTS OR TRADE SECRETS

         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.
Any infringement claims may have a negative effect on the ability of outside
factories to manufacture our products.

                                       6
<PAGE>

A DISRUPTION IN THE OPERATION OF OUR WAREHOUSE CENTERS IN CALIFORNIA AND FLORIDA
WOULD IMPACT OUR ABILITY TO DELIVER MERCHANDISE TO OUR STORES, WHICH COULD
ADVERSELY IMPACT OUR REVENUES AND HARM OUR BUSINESS AND FINANCIAL RESULTS

         A significant amount of our merchandise is shipped to our customers
from one of our three warehouses, which are located in Compton, California,
Rancho Dominguez, 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 adversely
impact our revenues and our business and financial results.

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

         During fiscal 2003, approximately 48% of our sales were domestic 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 couldn't get the containers of these products off the pier.
If another strike or work slow-down were to occur and we do not have a
sufficient level of inventory, a strike or work slow-down would result in
increased costs to our company and may reduce our profitability. However, we
expect that this risk will be less significant in the future. As part of our new
business strategy for fiscal 2004, we intend on shipping more products directly
from Hong Kong.

YOUR INVESTMENT MAY BE DILUTED

         If additional funds are raised through the issuance of equity
securities, your percentage ownership in our equity will be reduced. Also, you
may experience additional dilution in net book value per share, and these equity
securities may have rights, preferences, or privileges senior to those of yours.

RISKS ASSOCIATED WITH OUR CAPITAL STRUCTURE

OUR OUTSTANDING CONVERTIBLE SECURITIES MAY DEPRESS OUR STOCK PRICE

         As of September 15, 2003, there were outstanding stock options to
purchase an aggregate of 1,089,400 shares of common stock at exercise prices
ranging from $2.04 to $14.00 per share, not all of which are immediately
exercisable. The weighted average exercise price of the outstanding stock
options is approximately $5.46 per share. As of September 15, 2003, there were
outstanding immediately exercisable warrants to purchase an aggregate of 561,039
shares of our common stock, which warrants are covered by this Prospectus. In
addition, we have issued $4,000,000 of convertible debentures, which are
initially convertible into an aggregate of 1,038,962 shares of common stock,
which shares are covered by this Prospectus. To the extent that the
aforementioned convertible securities are exercised or converted, dilution to
our stockholders will occur. Moreover, the terms upon which we will be able to
obtain additional equity capital may be adversely affected, since the holders of
outstanding options, warrants and debentures can be expected to exercise or
convert them at a time when we would, in all likelihood, be able to obtain any
needed capital on terms more favorable to us than the exercise and conversion
terms provided by the outstanding options, warrants and convertible debentures.

                                       7
<PAGE>

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

         As of September 15, 2003, there were 8,682,596 shares of our common
stock outstanding. We have filed three registration statements registering an
aggregate 6,549,564 shares of our common stock (this registration statement to
register the resale of 2,755,314 shares, a registration statement on Form S-8 to
register 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). 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.

ADVERSE EFFECT ON OUR STOCK PRICE FROM FUTURE ISSUANCES OF ADDITIONAL SHARES

         Our Certificate of Incorporation authorizes the issuance of 18,900,000
million shares of common stock. As of September 15, 2003, we had 8,682,596
shares of common stock issued and outstanding and an aggregate of 1,089,400
outstanding options, 561,039 warrants and 1,038,962 shares issuable upon the
conversion of the debentures. As such, our Board of Directors has the power,
without stockholder approval, to issue up to 7,228,003 shares of common stock.

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

PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW MAY 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.

         We are also subject to certain provisions of Delaware law that could
delay, deter or prevent us from entering into an acquisition, including the
Delaware General Corporation Law, which prohibits a Delaware corporation from
engaging in a business combination with an interested stockholder unless
specific conditions are met. The existence of these provisions could limit the
price that investors are willing to pay in the future for shares of our common
stock and may deprive you of an opportunity to sell your shares at a premium
over prevailing prices.

                SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
                -------------------------------------------------

         This Prospectus, including the documents that we incorporate by
reference, contains forward-looking statements within the meaning of Section 27A
of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). Any statements about our expectations, beliefs,
plans, objectives, assumptions or future events or performance are not
historical facts and may be forward-looking. These statements are often, but not
always, made through the use of words or phrases such as "anticipate,"
"estimate," "plans," "projects," "continuing," "ongoing," "expects," "management
believes," "we believe," "we intend" and similar words or phrases. Accordingly,
these statements involve estimates, assumptions and uncertainties, which could
cause actual results to differ materially from those expressed in them. Any
forward-looking statements are qualified in their entirety by reference to the
factors discussed in this Prospectus or incorporated by reference.



                                       8
<PAGE>

         Because the factors discussed in this Prospectus or incorporated by
reference could cause actual results or outcomes to differ materially from those
expressed in any forward-looking statements made by us or on behalf of our
company, you should not place undue reliance on any such forward-looking
statements. Further, any forward-looking statement speaks only as of the date on
which it is made, and we undertake no obligation to update any forward-looking
statement or statements to reflect events or circumstances after the date on
which such statement is made or to reflect the occurrence of unanticipated
events. New factors emerge from time to time, and it is not possible for us to
predict which will arise. In addition, we cannot assess the impact of each
factor on our business or the extent to which any factor, or combination of
factors, may cause actual results to differ materially from those contained in
any forward-looking statements.

                                 USE OF PROCEEDS
                                 ---------------

         We will not receive any proceeds from the sale of shares by the selling
stockholders. Although we may receive proceeds if the warrants are exercised,
these proceeds, if any, will be used for working capital purposes or any other
purpose approved by the Board of Directors.

                              SELLING STOCKHOLDERS
                              --------------------

         The following table sets forth information as of September 15, 2003
with respect to the beneficial ownership of our common stock both before and
immediately following the offering by each of the selling stockholders.

         Calculation of the percent of outstanding shares owned is based on
shares of our common stock issued and outstanding as of September 15, 2003.
Beneficial ownership is determined in accordance with Rule 13d-3 promulgated by
the Securities and Exchange Commission, and generally includes voting or
investment power with respect to securities. Except as indicated in the
footnotes to the table, we believe each holder possesses sole voting and
investment power with respect to all of the shares of common stock owned by that
holder, subject to community property laws where applicable. In computing the
number of shares beneficially owned by a holder and the percentage ownership of
that holder, shares of common stock underlying options, warrants, debentures,
notes or preferred stock by that holder that are currently exercisable or
convertible or are exercisable or convertible within 60 days after the date of
the table are deemed outstanding. Those shares, however, are not deemed
outstanding for the purpose of computing the percentage ownership of any other
person or group.

         The terms of the debentures and warrants owned by Omicron Master Trust,
SF Capital Partners, Ltd, Bristol Investment Fund, Ltd., Ascend Offshore Fund,
Ltd., Ascend Partners, LP and Ascend Partners Sapient LP prohibit conversion of
those debentures or exercise of those warrants to the extent that a conversion
of those debentures would result in the holder, together with its affiliates,
beneficially owning in excess of 4.99% of our outstanding shares of its common
stock, and to the extent that exercise of the warrants would result in the
holder, together with its affiliates, beneficially owning in excess of 4.99% of
our outstanding shares of common stock. A holder may waive the 4.99% limitation
upon 60 days prior written notice to us. Also, these limitations do not preclude
a holder from converting or exercising a debenture or warrant and selling shares
underlying that debenture or warrant in stages over time where each stage does
not cause the holder and its affiliates to beneficially own shares in excess of
the limitation amounts. In light of the limitations contained in the debentures
and warrants, the number of shares shown in the table as beneficially owned by
each holder of those debentures and warrants prior to this offering has been
limited to 4.99% of the share of our common stock outstanding as of the date of
the table. However, the number of shares being offered by each holder under this


                                       9
<PAGE>

Prospectus in excess of the amount of shares issuable to that holder without
such holder's waiver of the conversion and exercise limitations discussed above.
<TABLE>
<CAPTION>
                                   SECURITIES OWNED                              SECURITIES AFTER OFFERING
                                   PRIOR TO OFFERING                             -------------------------
                                   -----------------           SHARES OF
                                                               COMMON STOCK      NUMBER OF
                                                               BEING OFFERED     SHARES        PERCENT OF
NAME OF                           SHARES OF     PERCENT OF     UNDER THIS        COMMON        COMMON
SELLING STOCKHOLDER               STOCK(1)      STOCK          PROSPECTUS(2)     STOCK         STOCK
- -------------------               ---------     ----------     -------------     ---------     ----------
<S>                               <C>             <C>            <C>               <C>             <C>
Omicron Master Trust              434,034         4.99           1,637,662(3)      0               *
SF Capital Partners, Ltd.         187,013         2.15             327,521(4)      0               *
Bristol Investment Fund, Ltd.     112,208         1.29             196,520(5)      0               *
Ascend Offshore Fund, Ltd.        178,785         2.05             313,122(6)      0               *
Ascend Partners Sapient, LP        61,266          *               107,301(7)      0               *
Ascend Partners, LP                21,768          *                38,124(8)      0               *
Roth Capital Partners, LLC        103,896         1.18             135,064(9)      0               *
</TABLE>

- ----------
(1)  The debentures and warrants contractually limit each selling stockholder's
     right to convert the debentures or exercise of the warrants, as the case
     may be, to the extent such selling stockholder's beneficial ownership
     exceeds 4.99% of the Company's then issued and outstanding shares of common
     stock. Represents shares of common stock issuable upon conversion of the
     debentures and exercise of the warrants, which the holders have the right
     to acquire within sixty (60) days of September 15, 2003.

(2)  Listed shares represent shares issuable upon conversion of the debentures,
     exercise of the warrants and shares which we may issue as payment of
     interest on debentures or pursuant to certain anti-dilution provisions of
     the debentures (collectively, the "Registrable Securities"). Also includes
     an additional 30% of the Registrable Securities, which we are required to
     register pursuant to a registration rights agreement.

(3)  Shares offered pursuant to this Prospectus consist of 649,351 shares
     issuable upon conversion of the debentures; 285,714 shares issuable upon
     exercise of warrants; up to 129,870 shares which we may issued as interest
     payable on the debentures; 194,805 shares we may issue under the
     anti-dilution provisions of the debentures and 377,922 shares, an
     additional 30% of the registrable securities. Omicron Capital, L.P., a
     Delaware limited partnership ("Omicron Capital") serves as investment
     manager to Omicron Master Trust, a trust formed under the laws of Bermuda
     ("Omicron"). Omicron Capital, Inc., a Delaware corporation ("OCI") serves
     as general partner of Omicron Capital and Winchester Global Trust Company
     Limited ("Winchester") serves as the trustee of Omicron. By reason of such
     relationships, Omicron Capital and OCI may be deemed to share dispositive
     power of the shares of our common stock owned by Omicron and Winchester may
     be deemed to share voting and dispositive power over the shares of our
     common stock owned by Omicron. Omicron Capital, OCI and Winchester Capital
     has delegated authority from the board of directors of Winchester regarding
     the portfolio management decisions with respect to the shares of common
     stock owned by Omnicron and as of September 15, 2003, Mr. Oliver H. Morali
     and Mr. Bruce T. Bernstein, officers of OCI, have delegated authority from
     the board of directors of OCI regarding the portfolio management decisions
     of Omicron Capital with respect to the shares of common stock owned by
     Omicron. By reason of such delegated authority, Merssrs. Morali and
     Bernstein disclaim beneficial ownership of such shares of our common stock
     and neither of such persons has any legal right to maintain such power with
     respect to shares of our common stock offered by Omicron, as those terms as
     used for purposes of the Securities Exchange Act of 1934, as amended.

(4)  Shares offered pursuant to this Prospectus consist of 129,870 shares
     issuable upon conversion of the debentures; 57,143 shares issuable upon
     exercise of warrants, up to 25,974 shares which we may issued as interest
     payable on the debentures, 38,952 shares we may issue under the
     anti-dilution provisions of the debentures and 75,582 shares, an additional
     30% of the Registrable Securities.

(5)  Shares offered pursuant to this Prospectus consist of 77,922 shares
     issuable upon conversion of the debentures; 34,286 shares issuable upon
     exercise of warrants, up to 15,584 shares which we may issued as interest
     payable on the


                                       10
<PAGE>

debentures, 23,377 shares we may issue under the anti-dilution provisions of the
debentures and 45,351 shares, an additional 30% of the Registrable Securities.

(6)  Shares offered pursuant to this Prospectus consist of 124,156 shares
     issuable upon conversion of the debentures; 54,629 shares issuable upon
     exercise of warrants, up to 24,831 shares which we may issued as interest
     payable on the debentures, 37,247 shares we may issue under the
     anti-dilution provisions of the debentures and 72,259 shares, an additional
     30% of the Registrable Securities.

(7)  Shares offered pursuant to this Prospectus consist of 42,546 shares
     issuable upon conversion of the debentures; 18,720 shares issuable upon
     exercise of warrants, up to 8,509 shares which we may issued as interest
     payable on the debentures, 12,764 shares we may issue under the
     anti-dilution provisions of the debentures and 24,672 shares, an additional
     30% of the Registrable Securities.

(8)  Shares offered pursuant to this Prospectus consist of 15,117 shares
     issuable upon conversion of the debentures; 6,651 shares issuable upon
     exercise of warrants, up to 3,023 shares which we may issued as interest
     payable on the debentures, 4,535 shares we may issue under the
     anti-dilution provisions of the debentures and 8,789 shares, an additional
     30% of the Registrable Securities..

(9)  Shares offered pursuant to this Prospectus consist of 103,896 shares
     issuable upon exercise of warrants and 31,168, an additional 30% of the
     Registrable Securities.

         Because the selling stockholders may sell all or some portion of the
shares of common stock beneficially owned by them, only an estimate (assuming
the selling stockholders sell all of the shares offered hereby) can be given as
to the number of shares of common stock that will be beneficially owned by the
selling stockholders after this offering. In addition, any selling stockholder
may have sold, transferred or otherwise disposed or, or may sell, transfer or
otherwise dispose of, at any time or from time to time since the dates on which
they provided the information regarding the shares beneficially owned by them,
all or a portion of the shares beneficially owned by them in transactions exempt
from the registration requirements of the Securities Act of 1933.

CIRCUMSTANCES UNDER WHICH SELLING STOCKHOLDERS ACQUIRED SECURITIES

         Set forth below is a summary of the circumstances that led to the
issuance to the listed sellng stockholders of shares of our common stock and the
securities, which are exercisable or convertible into shares of our common
stock.

PRIVATE PLACEMENT

         On August 20, 2003, we entered into a Securities Purchase Agreement
("Purchase Agreement") with Omicron Master Trust, SF Capital Partners Ltd.,
Bristol Investment Fund, Ltd., Ascend Offshore Fund, Ltd., Ascend Sapient
Partners, Ltd. and Ascend Partners, LP., for the sale to these investors of 8%
debentures, convertible into shares of our common stock at a conversion price
equal to $3.85 per share, for an aggregate amount of $4 million. We closed this
offering on September 8, 2003. The investors also each received a warrant to
purchase up to, in the aggregate 457,143 shares of our common stock with an
exercise price equal to $4.025 per share.

         The debentures accrue interest at the rate of 8% per annum, and they
provide for interest only payments on a quarterly basis, at our option, in cash
or in shares of common stock. In order to use shares of our common stock to make
the interest payments, we must meet certain requirements specified in the
debentures. The debentures mature on February 20, 2006. If certain conditions
are met, we have the right, but not the obligation to redeem the debentures at
100% of their face value, plus accrued interest. The warrants are exercisable
for a period of three years from the date of issuance until September 7, 2006
and the initial exercise price is $4.025 per share. The conversion price of the
debentures and the exercise price of the warrants are subject to adjustment in
the event we issue additional shares of our common stock or securities


                                       11
<PAGE>

convertible into shares of our common stock at a price per share of common stock
less than the conversion price or exercise price on the basis of a weighted
average formula. In addition, the conversion price of the debentures and
exercise price of the warrants are subject to adjustment at any time as the
result of any subdivision, stock split, combination of shares or capitalization.

         We will account for this transaction in accordance with the Emerging
Issues Task Force Consensus on Issue 00-27 ("EITF 00-27"). The fair value of the
stock purchase warrants, as determined by a third party, will be allocated from
the proceeds of the debt issuance and recorded as a debt discount to be
amortized over the life of the debt to interest expense. The Company will then
calculate the effective conversion price of the debt to determine whether any
beneficial conversion feature exists. The results of the application of EITF
00-27 could have a material impact on our financial results.

         The investors and Roth Capital Partners, LLC ("Roth Capital"), the
placement agent in this transaction ("Roth Capital"), were also given certain
registration rights in a registration rights agreement with the Company. We
agreed to register:

         -        an aggregate of 1,038,962 shares issuable upon conversion of
                  the convertible debentures,
         -        an aggregate of 561,039 shares issuable upon exercise of
                  warrants,
         -        an aggregate of 207,791 shares issuable as interest payments
                  on the debentures;
         -        an aggregate of 311,680 shares of common stock issuable
                  pursuant to the weighted average anti-dilution provisions of
                  the debentures.

All of these shares are collectively referred to as the "Registrable
Securities." In addition, we agreed that we would register 130% of the
Registrable Securities. As such, we are registering an additional 635,842
shares. In total, we are registering 2,755,314 shares for resale by the selling
stockholders.

         The investors were granted a right of first refusal to participate in
our future offerings of our common stock or equivalent securities for a period
of one year until September 8, 2004. The investors will have the right to
participate in an any such financing in an amount equal to the greater of 50% of
the financing offered to the third party and/or the principal amount of the
debentures. Furthermore, the Purchase Agreement prevents us from issuing or
selling any capital stock or capital stock equivalents for a period of 90 days
after the effective date of this registration statement and from entering into
certain types of variable rate transactions until February 20, 2006.

         In connection with this financing, we paid Roth Capital, as placement
agent, cash compensation of 5.5% of the proceeds raised in this offering and
granted it a warrant to purchase 103,896 shares of our common stock at an
exercise price of $4.025 per share. We also agreed to register the resale of the
shares underlying the warrant issued to Roth.

                              PLAN OF DISTRIBUTION
                              --------------------

         The selling stockholders and any of their pledgees, assignees,
transferees, donees and successors-in-interest may, from time to time, sell any
or all of their shares of common stock on any stock exchange, market or trading
facility on which the shares are traded or in private transactions. These sales
may be at fixed or negotiated prices. The selling stockholders may use any one
or more of the following methods when selling shares:

         o        ordinary brokerage transactions and transactions in which the
                  broker-dealer solicits purchasers;

         o        block trades in which the broker-dealer will attempt to sell
                  the shares as agent but may position and resell a portion of
                  the block as principal to facilitate the transaction;

                                       12
<PAGE>

         o        purchases by a broker-dealer as principal and resale by the
                  broker-dealer for its account;

         o        an exchange distribution in accordance with the rules of the
                  applicable exchange;

         o        privately negotiated transactions;

         o        settlement of short sales;

         o        broker-dealers may agree with the selling stockholders to sell
                  a specified number of such shares at a stipulated price per
                  share;

         o        a combination of any such methods of sale; and

         o        any other method permitted pursuant to applicable law.

         The selling stockholders may also sell shares under Rule 144 under the
Securities Act, if available, rather than under this Prospectus. Broker-dealers
engaged by the selling stockholders may arrange for other brokers-dealers to
participate in sales. Broker-dealers may receive commissions or discounts from
the selling stockholders (or, if any broker-dealer acts as agent for the
purchaser of shares, from the purchaser) in amounts to be negotiated. The
selling stockholders do not expect these commissions and discounts to exceed
what is customary in the types of transactions involved. Broker-dealers may
agree to sell a specified number of such shares at a stipulated price per share,
and, to the extent such broker-dealer is unable to do so acting as agent for us
or a selling shareholder, to purchase as principal any unsold shares at the
price required to fulfill the broker-dealer commitment. Broker-dealers who
acquire shares as principal may thereafter resell such shares from time to time
in transactions, which may involve block transactions and sales to and through
other broker-dealers, including transactions of the nature described above, in
the over-the-counter markets or otherwise at pries and on terms then prevailing
at the time of sale, at prices than related to the then-current market price or
in negotiated transactions. In connection with such resales, broker-dealers may
pay to or receive from the purchasers such shares commissions as described
above.

         The selling stockholder may from time to time pledge or grant a
security interest in some or all of the shares or common stock or warrants owned
by them and, if they default in the performance of their secured obligations,
the pledgees or secured parties may offer and sell the shares of common stock
from time to time under this Prospectus, or under an amendment to this
Prospectus under Rule 424(b)(3) or other applicable provision of the Securities
Act of 1933 amending the list of selling stockholders to include the pledgee,
transferee or other successors in interest as selling stockholders under this
Prospectus.

         The selling stockholders also may transfer the shares of common stock
in other circumstances, in which case the transferees, pledgees or other
successors in interest will be the selling beneficial owners for purposes of
this Prospectus.

         The selling stockholders and any broker-dealers or agents that are
involved in selling the shares may be deemed to be "underwriters" within the
meaning of the Securities Act in connection with such sales. In such event, any
commissions received by such broker-dealers or agents and any profit on the
resale of the shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act. The selling stockholders have
informed the Company that none of them have any agreement or understanding,
directly or indirectly, with any person to distribute the common stock.

         The Company is required to pay all fees and expenses incurred by the
Company incident to the registration of the shares. The Company has agreed to
indemnify the selling stockholders against certain losses, claims, damages and
liabilities, including liabilities under the Securities Act.

                                       13
<PAGE>

                          MARKET PRICES OF COMMON STOCK
                          -----------------------------

         Our common stock currently trades on the American Stock Exchange under
the symbol "SMD." We began trading on the AMEX on March 8, 2001. From January
26, 1996 through March 7, 2001, we traded on the National Association of
Securities Dealers, Inc.'s OTC Bulletin Board under the symbol "SING". Set forth
below is the range of high and low information for our common stock as traded on
the American Stock Exchange from March 8, 2001 through March 31, 2003, as
reported by Commodity Systems, Inc. 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. This information contained in this table has been restated to give
effect to our 3-for-2 stock split to stockholders of record on March 4, 2002.

              FISCAL PERIOD                       HIGH        LOW
              -------------                       ----        ---
2003:
First quarter (April 1 - June 30, 2002)          $16.89     $12.06
Second quarter (July 1 - September 30, 2002       12.74       8.05
Third quarter (October 1 - December 31, 2002)     13.49       8.50
Fourth quarter (January 1 - March 31, 2003)        9.19       5.30

2002:
First Quarter (April 1 - June 30, 2001)          $ 4.45     $ 2.90
Second Quarter (July 1 - September 30, 2001)       5.02       3.70
Third Quarter (October 1 - December 31, 2001)     16.19       4.30
Fourth Quarter (January 1 - March 31, 2002)       17.80      12.53

         As of September 15, 2003, there were approximately 311 record holders
of our outstanding common stock. On March 14, 2002, the Company affected a
3-for-2 stock split for all stockholders of record on March 4, 2002.

                                 DIVIDEND POLICY
                                 ---------------

         We do not anticipate the declaration or payment of any dividends in the
foreseeable future. The Company has never declared or paid cash dividends on its
common stock and the Company's Board of Directors intends to continue its policy
for the foreseeable future. Furthermore, the Company's credit facility with
LaSalle Business Credit, LLC., restricts us from paying any dividends to our
shareholders, unless we obtain prior written consent from LaSalle. Future
dividend policy will depend upon the Company's earnings, financial condition,
contractual restrictions and other factors considered relevant by the Company's
Board of Directors and will be subject to limitations imposed under Delaware
law.

                                       14
<PAGE>

                  SELECTED FINANCIAL INFORMATION AND OTHER DATA
                  ---------------------------------------------

         The selected financial information set forth below is derived from, and
should be read in conjunction with, the more detailed financial statements
(including the notes thereto) appearing elsewhere in this Prospectus. See
"Consolidated Financial Statements."

<TABLE>
<CAPTION>
Income Statement Items
- ----------------------
                                                                                         THREE MONTHS ENDED
                                                  YEAR ENDED MARCH 31,                   JUNE 30 (UNAUDITED)
                                   2003       2002*      2001*      2000      1999       2003       2002*
                                   -------------------------------------------------     -----------------
                                         (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                <C>        <C>        <C>        <C>        <C>       <C>        <C>
Net Sales                          95,614     62,476     34,875     19,032     9,548      7,628      4,292
Cost of Sales                      72,329     40,853     22,159     13,727     7,029      5,902      2,990
Total Operating                    21,671     13,388      7,689      3,779     1,545      3,860      2,639
  Expenses
Earnings (Loss)
From Operations                     1,614      8,235      5,028      1,526       974     (2,134)    (1,333)
Net Other
(Expenses) Income                    (198)       (51)      (840)       948       220       (181)        24
Provision for Income Tax              199      1,895        492        160       170      2,315      1,309
Net Earnings (Loss)                 1,218      6,289      3,696        738       924     (2,317)    (1,427)
Net Earnings (Loss) per common
  share basic                         .15        .88        .59        .23       .37       (.28)      (.18)
Net Earnings (Loss) per common
  share diluted                       .14        .79        .50        .19       .36       (.28)      (.18)
Shares used in computing net
  earnings (loss) per common
  share - basic                     8,114      7,159      6,292      2,726     2,475      8,278      8,061
Shares used in computing net
  earnings (loss) per common
  share - diluted                   8,931      7,943      7,457      3,342     2,592      8,278      8,061

</TABLE>
- ----------
*As Restated

<TABLE>
<CAPTION>
Balance Sheet Items
- -------------------
                                                                                          THEE MONTHS
                                                     YEAR ENDED MARCH 31                  ENDED JUNE 30
                                     2003       2002*       2001*     2000      1999 1    2003      2002
                                     -------------------------------------------------    -----------------
                                                        (IN THOUSANDS)                    (UNAUDITED)
<S>                                  <C>        <C>        <C>        <C>       <C>       <C>        <C>
Cash (including restricted cash)        268      5,520      1,016       379        49         86      1,465
Total current assets                 36,565     19,947      9,016     3,789     1,813     35,074     20,152
Working capital                      15,315     14,770      7,425     3,348       399     13,084     15,386
Total Assets                         38,936     21,403     10,511     4,347     2,379     37,566     22,008
Current liabilities                  21,450      5,178      1,591       441     1,415     21,990      4,765
Long term obligations                     0          0          0        --        --         --         --
Total shareholders' equity           17,685     16,225      8,918     3,900       965     15,576     17,243
</TABLE>

- ----------
*As Restated

                                       15
<PAGE>

SELECTED QUARTERLY FINANCIAL DATA

QUARTERLY FISCAL 2004
<TABLE>
<CAPTION>
                                         UNAUDITED
                                         3 MONTHS
                                           ENDED
                                       JUNE 30, 2003
                                     ---------------
<S>                                    <C>
Net Sales                              $ 7,627,975
Gross Profit                           $ 1,726,109
Net Loss                               $(2,317,352)
Net Loss
Per Share (basic)                            (0.28)
Per Share (diluted)                          (0.28)
                                       -----------
</TABLE>

<TABLE>
<CAPTION>
QUARTERLY FISCAL 2003

                          UNAUDITED         UNAUDITED               UNAUDITED            UNAUDITED
                           3 MONTHS          3 MONTHS                3 MONTHS             3 MONTHS
                             ENDED             ENDED                   ENDED                ENDED
                        JUNE 30, 2002     SEPTEMBER 30, 2002     DECEMBER 31, 2002     MARCH 31, 2003
                        -------------     ------------------     -----------------     --------------
<S>                      <C>                <C>                     <C>                 <C>
Net Sales                $ 4,264,203        $33,044,306             $49,102,372         $ 9,202,885
Gross Profit             $ 1,273,322        $ 9,754,954             $14,525,191         $(2,268,736)
Net Earnings (loss)      $(1,358,780)       $ 4,837,926             $ 3,846,894         $(6,108,228)
Net Earnings (loss)
Per Share (basic)              (0.17)              0.60                    0.47               (0.75)
Per Share (diluted)            (0.18)              0.55                    0.48               (0.75)
</TABLE>

<TABLE>
<CAPTION>
QUARTERLY FISCAL 2002

                          UNAUDITED         UNAUDITED               UNAUDITED            UNAUDITED
                           3 MONTHS          3 MONTHS                3 MONTHS             3 MONTHS
                             ENDED             ENDED                   ENDED                ENDED
                        JUNE 30, 2001*    SEPTEMBER 30, 2001*    DECEMBER 31, 2001*    MARCH 31, 2002
                        --------------    -------------------    ------------------    --------------
<S>                      <C>                <C>                     <C>                 <C>
Net Sales                $5,523,228         $15,797,752             $34,324,556         $6,780,217
Gross Profit             $1,923,199         $ 5,408,430             $11,884,855         $2,406,429
Net Earnings (loss)      $ (470,447)        $ 1,881,321             $ 5,444,081         $ (565,890)
Net Earnings (loss)
Per Share (basic)             (0.07)               0.28                    0.74              (0.07)
Per Share (diluted)           (0.07)               0.25                    0.65              (0.07)
</TABLE>

- ----------
*As Restated

                                       16
<PAGE>

                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                     ---------------------------------------
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS
                  ---------------------------------------------

OVERVIEW

         We are engaged in the development, production, distribution, marketing
and sale of consumer karaoke audio equipment, accessories and music. We also
produce and market karaoke music, including CD plus graphics ("CD+G's"), and
audiocassette tapes containing music and lyrics of popular songs for use with
karaoke recording equipment. We sell our products under our Company(R) trademark
and with have licensing agreements with MTV Networks, Nickelodeon, Hardrock
Academy and Motown Records.

         We faced several challenges during our fiscal year ended March 31,
2003. Although our net sales increased to $95,613,766 in the twelve months ended
March 31, 2003 ("fiscal 2003") compared to net sales of $62,475,753 in the
twelve months ended March 31, 2002 ("fiscal 2002), our net income decreased to
$1,217,812 or $.15 per share in fiscal 2003 compared with net income of
$6,289,065 in fiscal 2002 or $.88 per share. Several factors contributed to this
decrease in net income, including but not limited to a loss on a guaranteed
sales contract of approximately $2.5 million, an inventory reserve charge of
approximately $3.7 million, higher than expected operating expenses of $21.6
million in fiscal 2003 and an income tax expense of $198,772.

         As a result of these factors, our net worth declined to a level which
took us out of compliance with a tangible net worth requirement contained in our
credit facility with our commercial lender, LaSalle Business Credit, LLC
("LaSalle," "commercial lender" or "lender"). In March 2003, LaSalle notified us
that we were in default of this requirement and that it could accelerate our
loan at any time. Due to the liquidity difficulties associated with the excess
inventory exposure and our lender's notice of default, we received a going
concern uncertainty paragraph on our audited financial statements for fiscal
2003. In their report dated June 24, 2003, our independent certified public
accountants stated that our event of default under our credit agreement with our
commercial lender raised substantial doubt about our ability to continue as a
going concern.

         Since June 24, 2003, the date of the audit report, we have taken
several steps to increase our liquidity. In July 2003, we raised $1 million in
subordinated debt financing from an investment group composed of an officer,
directors and an associate of a director and secured a $1 million standby letter
of credit from an unrelated third party. In August 2003, our commercial lender
extended our credit facility until March 31, 2004. Effective as of September 8,
2003, we raised $3.75 million in net proceeds in a private offering from certain
institutional investors. These funds were submitted directly to our lender to
pay down our outstanding line of credit. For more information about this private
offering, please see "Selling Stockholders - Circumstances in which Selling
Stockholders Acquired the Shares."

         We also made a decision to restate our financial statements for the
fiscal year ended March 31, 2002 and 2001 to increase the accrual for income
taxes. The restatement did not change reported revenue, gross margin or pre-tax
income for fiscal 2002 or fiscal 2001.

RESTATEMENT OF FINANCIAL STATEMENTS FOR FISCAL 2002 AND 2001

         In July 2003, management revised its position on taxation of its
subsidiary's income by the United States and by the Hong Kong tax authorities.

                                       17
<PAGE>

Taxation by Hong Kong Authorities

         With regard to taxation in Hong Kong, the Company's subsidiary had
previously applied for a Hong Kong offshore claim income tax exemption based on
the locality of profits of the Hong Kong subsidiary. Management believed that
the exemption would be approved because the source of all profits of the Hong
Kong subsidiary was from exporting to customers outside of Hong Kong.
Accordingly, no provision for income taxes was provided in the consolidated
financial statements as of March 31, 2002 and 2001. However, full disclosure was
previously reflected in the audited financial statements for years ended March
31, 2002 and 2001 of the estimated amount that would be due to the Hong Kong tax
authority should the exemption be denied. Management is continuing its exemption
application process. However, due to the extended period of time that the
application has been outstanding, as well as management's reassessment of the
probability that the application will be approved, management has determined to
restate the 2002 and 2001 consolidated financial statements to provide for such
taxes. The effect of such restatement is to increase income tax expense by
$748,672 and $468,424 in fiscal 2002 and 2001, respectively and by $0 in the
three months ended June 30, 2002. However, the Company can claim United States
foreign tax credits in 2002 for these Hong Kong taxes, which is reflected in the
final restated amounts.

Taxation of Hong Kong Income by the United States

         With regard to United States taxation of foreign income, the Company
had originally taken the position that the foreign income of the Hong Kong
subsidiary qualified for a deferral under the Internal Revenue Code allowing for
such income to be indefinitely deferred and not taxed in the United States until
such income is repatriated. Full disclosure of the amount and nature of the
indefinite deferral for fiscal year 2002 was reflected in the income tax
footnote of the consolidated financial statements for that year. The Internal
Revenue Code, regulations and case law regarding international income taxation
is quite complex and subject to interpretation. Each case is determined based on
the individual facts and circumstances. Due to certain inter-company loans made
in 2002 and 2003, the profits, previously considered to be indefinitely
deferred, became partially taxable as "deemed dividends" under Section 956 of
the Internal Revenue Code. Although certain arguments against the imposition of
a "deemed dividend" may be asserted, management has determined to restate the
fiscal year 2002 consolidated financial statements based on its reassessment of
its original position. The effect of such restatement is to increase income tax
expense by $1,027,545 in fiscal year 2002 and $0 in the three months ended June
30, 2002.

         Summary

         The net effect of the above two adjustments is to decrease our net
income by $1,776,217 and $468,424 in fiscal 2002 and 2001 and increase net
income by $118,334 in the three months ended June 30, 2002. The net effect on
basic and diluted earnings per share is a decrease of $0.25 and $0.23,
respectively for fiscal 2002; decrease of $0.07 and $0.06, respectively for the
fiscal year 2001, and increase $0.01 and $0.01, respectively for the three
months ended June 30, 2002.

         As restated, our income taxes increased from $119,277 in fiscal 2002 to
$1,895,494 and from $23,320 in fiscal 2001 to $491,744 and consequently our net
income decreased correspondingly. Our income taxes in the three months ended
June 30, 2003 were $2,315. The restatements do not change our reported revenue,
gross margin or pre-tax income for fiscal 2002 or fiscal 2001.



                                       18
<PAGE>

RESULTS OF OPERATIONS

THREE MONTHS ENDED JUNE 30, 2003 COMPARED TO
- --------------------------------------------
THE THREE MONTHS ENDED JUNE 30, 2002
- ------------------------------------

Net Sales

         Net sales for the quarter ended June 30, 2003 increased 77.5% to
$7,627,975 compared to $4,296,841 for the quarter ended June 30, 2002. The
increase in the Company's sales for this quarter is due to the addition of new
customers in Europe, as well as increased sales to existing customers. Sales in
European countries increased $2.6 million over the same period in the prior
year. The Company believes that sales in this segment will continue to increase
over the remaining fiscal year.

Gross Profit

         Gross profit for the quarter ended June 30, 2003 was $1,726,109 or
22.6% of sales as compared to $1,305,960 or 32.2% of sales for the quarter ended
June 30, 2002. The decrease in gross margin percentage compared to the prior
year is due primarily to increased sales from our Hong Kong subsidiary to
international customers. International sales were primarily in Europe for the
quarter. Sales to international customers historically maintain lower selling
prices, and thus a lower gross profit margin. Due to the increased inventory
levels at June 30, 2003, which was carried from the prior year, the Company
anticipates that the gross profit percentage for the remainder of the fiscal
year will fall below last year.

Operating Expenses

         Operating expenses were $3,860,347 or 50.6% of total revenues for the
quarter ended June 30, 2003. The expenses increased over prior year by
$1,221,344, but as a percentage of sales, decreased from 61.4% at June 30, 2002.
This decreased percentage is a result of a higher revenue base over which to
spread fixed operating costs. The primary factors that contributed to the
increase of approximately $1.2 million in operating expenses for the quarter
ended June 30, 2003 are:

         (i)      increased advertising expenses of $105,000, due primarily to
                  increased sales
         (ii)     compensation and related expenses in the amount of $341,000.
         (iii)    increased expenses of $300,000 due to the increased need for
                  space to hold our high level of inventory in California.
         (iv)     increased accounting and legal fees of $214,000
         (v)      various other smaller expenses contributed to the remainder of
                  the increase.

As a result of the merchandise license agreements and minimum guarantee
requirements, the Company expects royalty expense to increase in fiscal 2004.

Other Expenses

         Other expenses were $180,799 for the quarter ended June 30, 2003, as
compared with net other income of $23,956 at June 30, 2002. Our interest expense
increase is due to the increased use of our credit facility at the default rate
of interest during this period. For the quarter ended June 2003, the Company had
cash reserves to fund operations and did not need to borrow on the revolving
credit facility. The Company expects interest expense to continue to increase
for the remainder of fiscal 2004 due to the credit facility accruing interest at
the default rate of prime plus 2.5% (6.75% at June 30, 2003).

                                       19
<PAGE>

Income Tax Expense (Benefit)

         The Company's tax expense is based on an aggregation of the taxes on
earnings of its Hong Kong and domestic operations on an annualized basis. Income
tax rates in Hong Kong are approximately 16%, while the statutory income tax
rate in the United States is 34%. The Company's effective tax rate during the
first quarter of fiscal 2004 was 0% as compared to 19% during the first quarter
of fiscal 2003. This decrease in the effective tax rate is a result of estimated
tax benefits for fiscal 2004 resulting from estimated United States pretax loss
for fiscal 2004 offset by estimated tax expense related to the estimated Hong
Kong pretax income for fiscal 2004. As the effective tax rates are based on
estimates, the Company's future effective income tax rate will fluctuate based
on the changes in the estimates

FISCAL YEAR ENDED MARCH 31, 2003 COMPARED WITH FISCAL YEAR  ENDED MARCH 31, 2002
- --------------------------------------------------------------------------------

Net Sales

         Net sales for the fiscal year ended March 31, 2003 increased 53.0% to
$95,613,766 compared to $62,475,753 for the fiscal year ended March 31, 2002.
The Company's growth was driven in large part by the addition of International
sales in Europe, Asia, and Australia. This new market area is in its infant
stage and the Company expects continued future growth in this area. We also
generated $30,884,344 million or 32.3% of our net sales from products sold under
the MTV license in fiscal 2003.

         Strong sales of the Company's licensed merchandise and the introduction
of new karaoke machines and music titles were also driving forces in our revenue
growth for fiscal 2003. In fiscal 2003, our sales of music increased to
$8,894,743 or 9.3% of sales as compared to $6,306,547 or 10.2% in fiscal 2002.

         Sales in fiscal 2003 were reduced by a charge against sales of $2.5
million as a result of the end of a guaranteed margin agreement with a customer.

Gross Profit

         Gross profit for the fiscal year ended March 31, 2003 was $23,284,731
or 24.4% of sales as compared to $21,622,913 or 34.6% of sales for the fiscal
year ended March 31, 2002. The decrease in gross margin compared to the prior
year is due primarily to the following factors: (i) increased sales from our
Hong Kong subsidiary both to domestic and international customers; (ii) a write
down of the value of inventory and (iii) a reduction of sales due to a
guaranteed margin contract.

         International sales were primarily in Europe, Canada and Australia.
Sales to international customers historically maintain lower selling prices, and
thus, a lower gross profit margin. The main reason for this is that the sales
are made to distributors in those countries and there are no additional variable
expenses. Other variable expenses that are seen in conjunction with U.S. sales
are advertising allowances, handling charges, returns and commissions.

         The Company also undertook a revaluation of its current inventory. It
was determined that due to liquidation sales, inventory would be sold at a loss;
therefore, a decrease in the value of these specific items was made. The total
amount of the provision for inventory was $3,715,357.

         In fiscal 2003, the Company entered into a guaranteed gross margin
contract which completed on January 15, 2003. The Company entered into an
agreement with a retail customer in April 2002 whereby it guaranteed the
customer a minimum gross margin of $3,573,000 from the sale of the Company's
products during the period from September 1, 2002 through January 15, 2003.
Under the agreement, the Company agreed to reimburse the customer for the
difference between the customer's gross margin on sales and the minimum
guarantee. As of the settlement date of the contract, January 15, 2003, the net
loss on the agreement was $2,570,047. The Company also realized the consignment
sales made by this customer at January 15, 2003, in the amount of $2,441,483. As
of March 31, 2003 the total amount due under this agreement has been paid.

                                       20
<PAGE>

Operating Expenses

         Operating expenses were $21,670,501 or 22.7% of total revenues in
fiscal 2003, up from $13,387,533 or 16.1% of total revenues, in fiscal 2002. The
primary factors that contributed to the increase of approximately $8.3 million
in operating expenses for the fiscal year 2003 are:

         (i)      increased advertising expenses of $2,654,729 due to increases
                  with our outside firm, the production of a television
                  commercial, as well as cooperative advertising with customers,
                  which is variable based on the level of sales
         (ii)     the increase in depreciation in the amount of $239,686 due to
                  the addition of molds for new product additions for fiscal
                  year 2003,
         (iii)    compensation expense in the amount of $1,151,012 due to the
                  addition of key personnel in Florida, in our California
                  facility and at our Hong Kong subsidiary,
         (iv)     increased freight and handling charges to customers in the
                  amount of $869,525, (v) expansion of the California warehouse
                  and its associated expenses in the amount of $873,919,
         (vi)     expansion of International SMC's operations and its related
                  expenses, in the amount of $580,906.
         (vii)    increases in product development fees for development of
                  future product $571,370.

         Other increases in operating expenses were to selling expenses, which
are considered variable. These expenses are based directly on the level of sales
and include royalty expenses, show expenses, and other selling expenses.

         As a result of the merchandise license agreements and minimum guarantee
requirements, the Company expects royalty expense to increase in fiscal 2004.

         Our advertising expense, as discussed in (i) above, increased
$2,654,729 for the fiscal year ended March 31, 2003 as compared to fiscal 2002.
Advertising expense consists of two components: co-operative advertising and
direct advertising expense. Co-operative advertising is paid directly to the
customer and is based directly on the amount of sales. The customer has complete
discretion as to the use of these funds. Co-operative advertising expenses
accounted for $2,320,705 of the increase in advertising expenses. In fiscal
2002, the Company embarked on its first television advertising and continued
with the use of print advertising, radio spots, sponsorships, promotions and
other media. The increased costs for our advertising firm were $334,024 over the
prior year.

Depreciation and Amortization

         The Company's depreciation and amortization expenses were $634,142 for
the fiscal year ended March 31, 2003 as compared to $394,456 for the fiscal year
ended March 31, 2002. The increase in depreciation and amortization expenses can
be attributed to the Company's acquisition of new molds and tooling for our
expanded product line, as well as minimal costs for additional computer
equipment and furniture for additional personnel.

Other Expenses

         Other expenses were $197,646 for the fiscal year ended March 31, 2003
as compared with net expenses of $50,821 for the fiscal year ended March 31,
2002. Our interest expense increased during the fiscal year ended March 31, 2003
compared to the same period of the prior year primarily due to our increased use
of our credit facility with LaSalle during this period. Prior to August 2002,
the Company had cash reserves to fund operations and did not need to borrow on
the revolving credit facility. Our interest income increased from $2,475 during
the fiscal year 2002 to $11,943 during the fiscal year 2003 because we earned
income on our cash balances held by our lender by investing in 24 hour
commercial paper investments. The Company expects interest expense to increase


                                       21
<PAGE>

in fiscal 2004 due to the credit facility accruing interest at the default rate
of prime plus 2.5% (6.75% at March 31, 2003).

Income Tax Expense

            The Company's tax expense is based on an aggregation of the taxes on
earnings of its Hong Kong and domestic operations. Income tax rates in Hong Kong
are approximately 16%, while the statutory income tax rate in the United States
is 34%. The Company's effective tax rate in fiscal 2003 was 14% as compared to
23% in fiscal 2002. This decrease in the effective tax rate is a result of the
Company generating a pretax loss in the United States in fiscal 2003, resulting
in a tax benefit, as compared to pretax income in the United States in fiscal
2002. The Company's future effective income tax rate will fluctuate based on the
level of earnings of its Hong Kong and domestic operations.

FISCAL YEAR  ENDED MARCH 31, 2002 COMPARED TO FISCAL YEAR  ENDED MARCH 31, 2001
- -------------------------------------------------------------------------------

Net Sales

         Net sales for the fiscal year ended March 31, 2002 increased 80.2% to
$62,475,753 compared to $34,875,351 for the fiscal year ended March 31, 2001.
The Company's growth was driven by strong sales of the Company's MTV licensed
merchandise and the introduction of new karaoke machines and music titles. We
generated $23,354,270 million or 37.8% of our net sales from products sold under
the MTV license in fiscal 2002. Our sales of music increased to $6,306,547 or
10.2% of our net sales in fiscal 2002 compared with $3,087,615 or 9% of our net
sales in fiscal 2001.

Gross Profit

         Gross profit for the fiscal year ended March 31, 2002 was $21,622,913
or 35% of sales compared to $12,716,300 or 36% of sales for the fiscal year
ended March 31, 2001. The decrease in gross margin compared to the prior year is
due to the realization of volume discounts by our largest customers. This was
offset to some degree by reduced prices that we paid our manufacturers for our
karaoke machines because of our increased purchases.

Operating Expenses

         Operating expenses increased to $13,387,533, or 21% of sales, for the
year ended March 31, 2002 from $7,688,707, or 22% of sales, for the year ended
March 31, 2001. This increase in operating expenses was primarily attributed to
the increase in expenses associated with: (1) the opening of the Company's Hong
Kong office, (2) the Company's first advertising campaign and (3) certain
expenses which are considered variable as they relate directly to the level of
sales.

         In December 2000, the Company's wholly owned subsidiary, International
SMC, opened a Hong Kong office. For the fiscal year ended March 31, 2002, this
office incurred SG&A expenses of approximately $1,144,734 compared to $418,618
in the prior year. By opening this office, the Company saved the manufacturers
agency fees, which were paid on each shipment in prior years. The Hong Kong
office has fixed overhead expenses every month, as opposed to per shipment
agency fees. We realized the greatest benefit from our Hong Kong office in the
third quarter of fiscal 2002, when we purchased the largest amount of inventory.

         Our advertising expense increased to $2,377,638 for the fiscal year
ended March 31, 2002 compared to $921,359 for the fiscal year ended March 31,
2001. Advertising expense consists of primarily two components: Co-operative
advertising and direct advertising expense. Co-operative advertising is paid
directly to the customer and is based directly on the amount of sales. The
customer has complete discretion as to the use of these funds. Co-operative


                                       22
<PAGE>

advertising expenses accounted for $972,000 of the increase in advertising
expenses. In fiscal 2002, the Company embarked on its first formal advertising
campaign, which used print advertising, radio spots, sponsorships, promotions
and other media. The cost for this advertising campaign was approximately
$484,000 and this is a direct advertising expense.

         Other expenses, termed variable expenses, contributed to the increase
in operating expenses. These expenses included royalty expense, sales
commissions, warehouse expenses, and travel. The largest increase can be seen in
royalty expense, which increased approximately $1,713,000 over the prior year,
primarily from the sale of items under the MTV licensing agreement. Our
commissions payable to our independent sales representatives increased by
$457,000 during fiscal 2002, because of increased sales. Our warehouse related
expenses also increased by $478,000. These expenses are due to the increased
importing of the Company's karaoke machines from Hong Kong. Compensation
expenses increased $569,935. We grew from 22 employees at March 31, 2001 to 47
employees at March 31, 2002.

Depreciation and Amortization

         The Company's depreciation and amortization expenses were $394,456 for
the fiscal year ended March 31, 2002, up from $301,064 in the prior year. The
increase in depreciation and amortization expenses can be attributed to the
Company's acquisition of new fixed assets during fiscal 2002, which included
computers, furniture and other equipment in all of the Company's locations in
Florida, California and Hong Kong. It also included the addition of new molds
for our expanded product line. The amortization expense includes the
amortization of a fee paid to LaSalle Bank for our line of credit facility and
the amortization of remaining deferred guarantee fees related to the factoring
agreement we terminated in April 2001.

Other Expenses

         Other expenses were $50,821 for the fiscal year ended March 31, 2002
compared with net expenses of $839,572 for the fiscal year ended March 31, 2001.
The Company had a large decrease in these miscellaneous items primarily because
of the elimination of factoring fees and a decrease in interest expense
resulting in a net decrease of $543,279. The Company terminated its factoring
agreement in April 2001 and no longer incurs the fees and interest associated
with it. The Company replaced the factoring agreement with a lower cost credit
facility with LaSalle Business Credit in April 2001. The Company has also begun
to generate income from royalty payments received in Hong Kong for the use of
Company owned molds by other parties.

Income Before Income Tax Expense

         The Company's income before income taxes increased 95.4% to $8,184,559
for the fiscal year ended March 31, 2002, compared to $4,188,021 for the fiscal
year ended March 31, 2001. This increase in profit is due primarily to the
increase in sales.

Income Tax Expense

         Our income tax expense was restated for fiscal 2002. Our accrual for
income taxes is based on primarily two components: (i) taxes of $1,027,545 which
we are paying pursuant to Section 956 of the Internal Revenue Code on an
intercompany loans and (ii) taxes of $748,672 for International SMC's business
operations in Hong Kong. The total income tax expense for fiscal 2002 was
$1,895,494.

                                       23
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

         As of August 31, 2003, we had cash on hand of approximately $830,000,
compared to cash on hand of $86,413 on June 30, 2003 and a bank overdraft of
$46,652. As of August 31, we owed approximately $7 million to LaSalle under our
revolving credit facility. On or about September 8, 2003, we raised
approximately $3.75 million in net proceeds of the private offering of 8%
convertible debentures. These funds were used to decrease our outstanding
balance with LaSalle. As such, our outstanding credit line with LaSalle was
approximately $3.2 million as of September 9, 2003.

         Historically, the Company's 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 the Company's fiscal second and third quarter, combined,
accounted for approximately 85% of net sales in fiscal 2003, 81% of net sales in
fiscal 2002 and 75% of net sales in fiscal 2001. We intend on paying the
remaining balance of our credit facility with LaSalle and fund our continuing
operations by utilizing cash collected from sales of our products.

         On July 10, 2003, we obtained $1 million in subordinated debt financing
from a certain officer, directors and an associate of a director ("management
group"). On July 28, 2003, an unrelated party posted a $1 million standby letter
of credit as further collateral for our credit facility. It is presently
expected that these capital infusions will be payable on or after March 31,
2004, the day on which our credit agreement with LaSalle expires. The interest
rate on the $1 million loan from the management group is 9.5% per annum. We also
may grant additional compensation to this management group for advancing the $1
million to our company in the form of warrants or some other consideration.
Prior to granting any compensation to the management group, we will obtain a
fairness opinion from a third party.

         As of August 31, 2003, the Company had current assets of approximately
$42.7 million, which consisted primarily of accounts receivable and inventory;
and current liabilities of approximately $28.8 million. Our inventory levels
decreased approximately $3 million between June 30, 2003 and September 15, 2003.
The most significant current liabilities include (i) approximately $14.5 million
in accounts payable, of which approximately $12.4 million are amounts payable to
the factories in China. The majority of these payables are current. Over the
past few months, the Company has had discussions with the factories in China and
they have indicated that they are willing to extend the payment dates for the
Company's obligations.

         Our Hong Kong subsidiary, International SMC, has letters of credit and
other various credit facilities available to finance its inventory purchases.
International SMC also has a short term loan with the Hong Kong Shanghai Banking
Corporation for $2 million which is due by October 31, 2003. Additionally, one
of our directors advanced $400,000 to International SMC in March 2003. As of
June 30, 2003, the remaining balance of the loan was $200,000 and is due on or
before October 31, 2003, bearing interest at the rate of 8% per annum.

         During fiscal 2004, we plan on significantly decreasing our capital
expenditures. We currently expect to order $8-$12 million in new inventory for
domestic stock. During fiscal 2004, we will attempt to liquidate the excess
inventory from fiscal 2003. We believe this inventory is highly marketable and
saleable; however, there can be no assurances that we will be able to liquidate
this inventory during our upcoming fiscal year.

                                       24
<PAGE>

         The Company's commitments for debt and other contractual arrangements
as of March 31, 2003 are summarized as follows:

<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
                                                            Years ending March 31,
- ----------------------------------------------------------------------------------------------------
                           Total          2004          2005         2006         2007        2008
- ----------------------------------------------------------------------------------------------------
<S>                     <C>            <C>            <C>          <C>          <C>         <C>
Revolving Credit
Facility                $6,782,824             --           --           --           --          --
- ----------------------------------------------------------------------------------------------------
Merchandise License
Guarantee               $1,595,000     $1,395,000     $150,000      $50,000           --          --
- ----------------------------------------------------------------------------------------------------
Property Leases         $3,638,771     $1,330,158     $924,338     $517,071     $495,545    $371,659
- ----------------------------------------------------------------------------------------------------
Equipment Leases           $86,016        $46,525      $19,965      $10,322       $7,969      $1,235
- ----------------------------------------------------------------------------------------------------
</TABLE>

         Except for the foregoing, we do not have any present commitment that is
likely to result in our liquidity increasing or decreasing in any material way.
In addition, except for the Company's need for additional capital to finance
inventory purchases, the Company knows of no 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.

         Cash flows used in operating activities were $10,949 for the quarter
ended June 30, 2003. Cash flows were used in operating activities primarily due
to decreases in accounts receivable in the amount of $1.5 million and increases
in accounts payable of $1.3 million. Cash flows used in operating activities
were $11,532,761 during the fiscal year ended March 31, 2003. Cash flows were
used in operating activities primarily due to increases in accounts receivable
in the amount of $2,619,778 and inventory in the amount of $19,635,351 during
fiscal 2003. We purchased a higher level of inventory in fiscal 2003 as we had
anticipated a higher demand for our products.

         Cash used in investing activities for the quarter ended June 30, 2003
was $299,186. Cash used in investing activities resulted from the purchase of
fixed assets in the amount of $299,186. The purchase of fixed assets consists of
the tooling and molds required for production of new machines for this fiscal
year. Tooling and molds are depreciated over five years. Cash used in investing
activities during the fiscal year ended March 31, 2003 was $1,144,064. Cash used
in investing activities resulted primarily from the purchase of fixed assets in
the amount of $1,144,064. The purchase of fixed assets consists primarily of the
tooling and molds required for production of new machines for this fiscal year.
Tooling and molds are depreciated over three years.

         Cash flows provided by financing activities were $128,282 for the
quarter ended June 30, 2003. This consisted of proceeds from the exercise of
options in the amount of $207,735. The Company also had a short-term loan with a
director with a balance of $200,000 at June 30, 2003 and a short-term note with
a bank for $2 million. The remainder of cash provided from financing activities
was provided by net borrowings on the credit line at LaSalle National Bank in
the amount of $1.9 million to fund ongoing operations. Cash flows provided by
financing activities were $7,424,943 during the fiscal year ended March 31,
2003. This consisted of proceeds from the exercise of warrants and options in
the amount of $242,119. The Company also had a short-term loan with a director
in the amount of $400,000 during fiscal 2003. The remainder of cash provided
from financing activities was provided by net borrowings on the credit line at
LaSalle National Bank in the amount of $6,782,824 primarily for the financing of
the inventory buildup.


                                       25
<PAGE>

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. We cannot assure you that
the exchange rate fluctuations between the United States and Hong Kong
currencies will not have a material adverse effect on our business, financial
condition or results of operations.

Seasonal and Quarterly Results

         Historically, the Company's 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 the Company's fiscal second and third quarter, combined,
accounted for approximately 85% of net sales in fiscal 2003, 81% of net sales in
fiscal 2002 and 75% of net sales in fiscal 2001.

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

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

         The U.S. Securities and Exchange Commission defines critical accounting
policies as "those that are both most important to the portrayal of a company's
financial condition and results, and require management's most difficult,
subjective or complex judgments, often as a result of the need to make estimates
about the effect of matters that are inherently uncertain. The management of the
Company believes that a high degree of judgment or complexity is involved in the
following areas:

         Collectibility of Accounts Receivable. The Company'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 Company 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
the Company'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. At March 31,
2003 and 2002, the Company had net deferred tax assets of $1.9 million and $191
thousand, respectively. Management evaluates its ability to realize its deferred


                                       26
<PAGE>

tax assets on a quarterly basis and adjusts its valuation allowance as
necessary. There is no related valuation allowance at March 31, 2003 and 2002.

         The Company's Hong Kong 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 the governing body has reached no decision to
date, the U.S. parent company has reached the decision to provide for the
possibility that the exemption could be denied and accordingly has recorded a
provision in fiscal 2003, 2002, and 2001.

         The Company may be deemed to have constructively repatriated
approximately $5.6 million, $5.7 million and $0 from its foreign operations in
2003, 2002 and 2001, respectively. Accordingly, these earnings were taxed as a
deemed dividend based on U.S. statutory rates. No provision has been made for
U.S. taxes on the remaining undistributed earnings of the Company's foreign
subsidiaries of approximately $3.6 million at March 31, 2003 and $1.9 million at
March 31, 2002, as it is anticipated that such earnings would be permanently
reinvested in their respective operations in accordance with section 956 of the
Internal Revenue Code.

         The Company operates within multiple taxing jurisdictions and is
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.

         Other Estimates. The Company 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 our financial condition. However,
circumstances could change which may alter future expectations.

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 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
of 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 June 30, 2003,
we have not used derivative instruments or engaged in hedging activities to
minimize market risk.

Interest Rate Risk

         Our exposure to market risk resulting from changes in interest rates
relates primarily to debt under our credit facility with LaSalle. Under our
credit facility, our interest rate is LaSalle's prime rate plus 1/2 of 1% per
annum ("current interest rate"). As of September 15, 2003, our interest rate is
6.5% per annum. We do not believe that near-term changes in the interest rates,
if any, will result in a material effect on our future earnings, fair values or
cash flows.

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.


                                       27
<PAGE>

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.

                  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
                  ---------------------------------------------
                     ON ACCOUNTING AND FINANCIAL DISCLOSURE
                     --------------------------------------

         On March 24, 2003, we dismissed Salberg & Company, P.A. ("Salberg &
Company"), as our independent certified public accountant. On March 27, 2003, we
engaged Grant Thornton, LLP ("Grant Thornton"), as our independent certified
public accountant. The Company's decision to change accountants was approved by
its Audit Committee on March 24, 2003.

         The report of Salberg & Company on our consolidated financial
statements for fiscal 2002, fiscal 2001 did not contain an adverse opinion or
disclaimer of opinion and was not qualified or modified as to uncertainty, audit
scope or accounting principles. Furthermore, Salberg & Company did not advise
the Company that:

         1)       internal controls necessary to develop reliable consolidated
                  financial statements do not exist, or
         2)       information has come to the attention of Salberg & Company
                  which made in unwilling to rely upon management's
                  representations or made it unwilling to be associated with the
                  consolidated financial statements prepared by management, or
         3)       the scope of the audit should be expanded significantly, or
                  information has come to the attention of Salberg & Company
                  that they have concluded will, or if further investigated
                  might, materially impact the fairness or reliability of a
                  previously issued audit report or the underlying consolidated
                  financial statements, or the consolidated financial statements
                  issued or to be issued covering the fiscal periods subsequent
                  to March 31, 2002 (including information that may prevent it
                  from rendering an unqualified audit report on those
                  consolidated financial statements) or made in unwilling to
                  rely on management's representations or to be associated with
                  the consolidated financial statements prepared by management
                  or,
         4)       information has come to the attention of Salberg & Company
                  that they have concluded will, or if further investigated
                  might, materially impact the fairness or reliability of a
                  previously issued audit report or the underlying consolidated
                  financial statements or the consolidated financial statements
                  issued or to be issued covering the fiscal periods subsequent
                  to March 31, 2002 through March 28, 2003, the date of the Form
                  8-K filing reporting our change in accountants, that had not
                  been resolved to the satisfaction of Salberg & Company or
                  which would have prevented Salberg & Company from rendering an
                  unqualified audit report on such consolidated financial
                  statements.

         During the Company's two most recent fiscal years and all subsequent
interim periods through March 24, 2003 , there were no disagreements with
Salberg & Company on any matters of accounting principles or practices,
financial statement disclosure or auditing scope or procedure, which, if not
resolved to the satisfaction of Salberg & Company 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.

         The Company did not consult with Grant Thornton regarding the
application of accounting principles to a specific transaction, either completed


                                       28
<PAGE>

or proposed, or the type of audit opinion that might be rendered on our
financial statements, and no written or oral advice was provided by Grant
Thornton that was a factor considered by the Company in reaching a decision as
to the accounting, auditing or financial reporting issues.

RESTATEMENT

         In July 2003, we revised our position on the taxation of the income of
our Hong Kong subsidiary by the United States and Hong Kong tax authorities,
which was contained in our audited financial statements for fiscal 2002. We
discussed these issues with Salberg & Company and it agreed to opine on the
restated financial statements.

                                    BUSINESS
                                    --------

OVERVIEW

         We are engaged in the development, production, distribution, marketing
and sale of consumer karaoke audio equipment, accessories and music. We contract
for the manufacture of all electronic equipment products with factories located
in Asia. We also produce and market karaoke music, including CD 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.

         We were incorporated in California in 1982. We originally sold our
products exclusively to professional and semi-professional singers. In 1988, we
began marketing karaoke equipment for home use. We believe we were the first
company to offer karaoke electronic recording equipment and music for home use
in the United States.

         In May 1994, we merged into a wholly owned subsidiary incorporated in
Delaware with the same name. As a result of that merger, the Delaware
Corporation became the successor to the business and operations of the
California Corporation and retained the name The Singing Machine Company, Inc.
In July 1994, we formed a wholly owned subsidiary in Hong Kong, now known as
International SMC (HK) Ltd. ("International SMC" or "Hong Kong subsidiary"), to
coordinate our production and finance in Asia.

         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, the U.S. Bankruptcy Court approved our plan of reorganization.
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.

PRODUCT LINES

         We currently have a product line of 34 different models of karaoke
machines plus 12 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 $400 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


                                       29
<PAGE>

over 3,500 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 AND DISTRIBUTION

MARKETING

         We rely on management's ability to determine the existence and extent
of available markets for our products. Our management has considerable marketing
and sales background and devotes a significant portion of its time to marketing
related activities. We achieve both domestic and direct sales by marketing our
hardware and music products primarily through our own sales force and various
independent sales representatives. Our representatives are located across the
United States and are paid a commission based upon sales in their respective
territories. 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. At March 31, 2003, we worked with 18
independent sales representatives. We work closely with our major customers to
determine marketing and advertising plans.

         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. We spent approximately $674,925, $181,866 and $55,376 on research and
development in fiscal 2003, 2002 and 2001, respectively. The primary purpose of
our research and development expenses is to develop prototypes and working
samples.

         Our karaoke machines and music are marketed under the Company(R)
trademark throughout the United States, 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, Circuit City, J.C.
Penney, Target and Toys R Us.

         Our licensing agreements with MTV Networks and Nickelodeon have further
expanded our brand name and our customer base. Through our license with MTV, we
have begun to focus on the 12 to 24 year old market and through our agreement
with Nickelodeon, we have reached an even younger age group between the ages of
3-6. We also expanded our licensed product lines in fiscal 2003 with the
addition of Hard Rock Academy(R) and Motown(R) (Universal Music Entertainment)
agreements. We believe that the addition of these agreements will help us to
reach demographic areas covering all ages.

         In November 2001, we signed an international distributorship agreement
with Arbiter Group, PLC ("Arbiter"). Arbiter is the exclusive distributor of
Company(R) karaoke machines and music products in the United Kingdom and a
non-exclusive distributor in all other European countries. The agreement
terminates on December 31, 2003, subject to an automatic renewal provision.

         In March 2003, we signed an international distributorship agreement
with Top-Toy (Hong Kong) Ltd. Top-Toy is the exclusive distributor of Company(R)
karaoke machines and music products in Denmark, Norway, Sweden, Iceland and
Faeroe Islands. The agreement is for three years, from January 1, 2003 until
December 31, 2005.

                                       30
<PAGE>

SALES

         As a percentage of total revenues, our net sales in the aggregate to
our five largest customers during the fiscal years ended March 31, 2003, 2002
and 2001, respectively, were approximately 67%, 87% and 78% respectively. In
fiscal 2003, 2002 and 2001, Best Buy and Toys R Us each accounted for more than
10% of our revenues. In fiscal 2003 Target and in fiscal 2002 Costco also
accounted for more than 10% of our revenues. Although we have long-established
relationships with all of our customers, we do not have long-term 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.

         During the last three years, our revenues from international sales have
increased. Sales by customer geographic regions were as follows:

                              2003                2002                2001
                          -----------         -----------        -----------
United States             $76,777,138         $62,333,801        $34,391,540
Asia                           21,310              49,314                 --
Australia                     814,334                  --                 --
Canada                        919,642              47,565             11,420
Central America                96,836               5,756                 --
Europe                     15,714,846                  --            433,821
Mexico                      1,225,111                  --                 --
South America                  44,549              39,317             38,570
                          -----------         -----------        -----------
                          $95,613,766         $62,475,753        $34,875,351
                          ===========         ===========        ===========

         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 or goods that are shipped on a consignment
basis. Our policy is to give credit to our customers for the returns in
conjunction with the receipt of new replacement purchase orders. Our credit
policies are tailored to our customer base. We have not suffered significant
credit losses to date.

DISTRIBUTION

         We distribute hardware products to retailers and wholesale distributors
through two methods: shipments of product from inventory (domestic sales), and
shipments of product directly through our Hong Kong subsidiary and manufacturers
in Asia (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 Florida or California.

         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, warehouse sales command higher sales prices than direct
sales. We generally sell from our own inventory in less than container-sized
lots. In the fiscal year ended March 31, 2003, approximately 48% of our
consolidated sales were domestic sales.

         Direct Sales. We ship some hardware products sold by us directly to
customers from Asia 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 an open account. In the fiscal
year ended March 31, 2003, approximately 52% of our consolidated sales were
direct sales.

                                       31
<PAGE>

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 the Shenzhen Special Economic Zone
and Guangdong Province of the People's Republic of China, who assemble our
karaoke machines and related products. In manufacturing our karaoke machines and
related products, these factories use molds and certain other tooling, most of
which are owned by International SMC. 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 Company(R) trademarks.

         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, the Company authors the CD+G's in our in-house studio. 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 them 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,
although we primarily use six factories to manufacture our karaoke machines and
accessories, and a small number of studios to record our music (including our
in-house production), we do not anticipate that the loss of any single
manufacturer or 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, 2003, 2002 and 2001, warranty claims have not been
material to our results of operations.

MERCHANDISE LICENSE AGREEMENTS

         In November 2000, we entered into a multi-year merchandise license
agreement with MTV Networks, a division of Viacom International, Inc., to create
the first line of MTV karaoke machine and compact disks with graphics ("CD+G's")
featuring music for MTV's core audience. Under the licensing agreement, we
originally produced two MTV-branded machines for the fiscal 2002 year: (1) a
large format karaoke machine with a built in, fully functional television that
enables users to view song lyrics and (2) a small karaoke system that connects
to a television. We also produced exclusive CD+G's featuring music catering to
MTV's core audience, that were distributed with the MTV branded karaoke
machines. We have amended the agreement three times since November 2000. For
fiscal 2004, our line will consist of nine MTV branded machines and a wide
assortment of MTV branded music. Our license covers the sale of MTV products in
the United States, Canada and Australia. In December 2002, we entered into an
amendment, which adjusted some of the financial aspects of the agreement and
added an additional minimum guarantee of royalty payments of $1,500,000. The MTV


                                       32
<PAGE>

license expires on December 31, 2003 and management is currently in negotiations
to extend this agreement beyond that date. We do not believe that the payment of
these guaranteed fees will adversely affect our ongoing operations.

         In December 2001, we entered into a multi-year license agreement with
the Nickelodeon division of MTV Networks. Under this license, we originally
created a line of two Nickelodeon branded machines and music for the fiscal 2003
year. This has expanded to five machines, plus a line of Nickelodeon music.
These products are distributed through our established distribution channels.
Over the term of this license agreement, we are obligated to make guaranteed
minimum royalty payments of $450,000. We do not believe that the payment of
these guaranteed fees will adversely affect our ongoing operations. The
Nickelodeon license expires on December 31, 2004.

         In December 2002, we entered into a multi-year license agreement with
Hard Rock Academy, a division of Hard Rock Cafe. This agreement allows the
Company to produce and market a line of its karaoke machines and complementary
music through its distribution channels. The first branded machine was
introduced in the fourth quarter of fiscal 2003 and a line of music is currently
under development. Over the term of this license agreement, we are obligated to
make guaranteed minimum royalty payments over a specified period of time in the
total amount of $250,000. We do not believe that the payment of these guaranteed
fees will adversely affect our ongoing operations. The Hard Rock Academy license
expires on December 31, 2005.

         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
The Company to be the first to use original artist recordings for our CD+G
formatted karaoke music. The original introduction will be one machine and six
CD+G discs. Over the term of this license agreement, we are obligated to make
guaranteed minimum royalty payments over a specified period of time in the
amount of $300,000. We do not believe that the payment of these guaranteed fees
will adversely affect our ongoing operations. The Universal Music Entertainment
license expires on March 31, 2006.

         We distribute all of our licensed products through our established
distribution channels, including Best Buy, Costco, JC Penny, Sam's Club, Target
and Toys R Us. Our distribution network also includes the online versions of
these retail customers.

COMPETITION

         Our business is highly competitive. Our major competitors for karaoke
machines and related products are Craig, Curtis, Grand Prix and 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 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.

         We try to stay ahead of our competition by introducing new products
each year and upgrading our existing products. We believe that we were one of
the first companies to introduce CD+G technology to karaoke machines. In fiscal
2004, we will be introducing more than 20 new models of karaoke machines.

         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


                                       33
<PAGE>

have significantly greater financial, marketing, and operating resources and
broader product lines than we do.

TRADEMARKS

         We have registered various trademarks with the United States Patent &
Trademark Office for our Company(R) products and also have common law rights in
these trademarks. We have also registered our trademarks in Germany, the Benelux
countries, Switzerland and the United Kingdom. In fiscal 2003, we filed an
application to obtain a European Community Trademark for the 15 European
Community countries and filed registrations in certain Asian countries.

         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 more than 3,500 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 $0.18 per song on each CD that is sold. 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. The statutory rate is the greater of $0.08 per song for five minutes of
playing time or $0.0155 per minute of playing time or fraction thereof with
respect to each item of music produced and distributed by us. We also have
written license agreements for substantially all of the printed lyrics, which
are distributed with our audiocassettes, which licenses also typically provide
for quarterly payments of royalties at 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. or Electronic Testing Laboratories.
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, following
enactment of a bill authorizing such status upon China's admission to the World
Trade Organization ("WTO") effective as of December 1, 2001. This substantially


                                       34
<PAGE>

reduces the possibility of China losing its NTR status, which would result in
increasing costs for the Company.

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
third quarter. A significant portion of our customers place orders in our second
and third quarter in anticipation of such holiday buying. 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 the Company to ship products closer to the time that
retailers expect to sell the products to consumers. These factors increase the
risk that the Company may not be able to meet demand for certain products at
peak demand times, or that the Company's own inventory levels may be adversely
impacted by the need to pre-build products before orders are placed. In fiscal
2003, we overestimated the demand for our products and had $25 million of
inventory as of March 31, 2003.

         In fiscal 2003 and 2002, our financing of seasonal working capital grew
in the first quarter and peaked in the second and third quarter, consistent with
the industry taken as a whole. We are currently in the process of seeking to
amend our existing line of credit. If these efforts are unsuccessful, we will
need to seek alternative facilities. To finance seasonal working capital
requirements of our Hong Kong subsidiary, we expect to use short-term foreign
credit lines with a number of banks. Our foreign credit lines total
approximately $5.5 million. As of July 10, 2003, we expect to spend
approximately $15 million on inventory, in addition to the $25 million on hand
as of March 31, 2003. However, we may change this amount depending on business
requirements.

BACKLOG

         We ship our products in accordance with delivery schedules specified by
our customers, which usually request delivery within three months. 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 toy 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.

EMPLOYEES

         As of September 15, 2003, we employed 57 persons, all of whom are
full-time employees, including four executive officers. Fourteen of our
employees are located at International SMC's corporate offices in Hong Kong. The
remaining thirty-four employees are based in the United States, including the
four executive positions; sixteen are engaged in warehousing and technical
support, and fourteen in accounting, marketing, sales and administrative
functions.

PROPERTIES

         Our corporate headquarters are located in Coconut Creek, Florida in an
18,000 square foot office and warehouse facility. Our four leases for this
office space expire on August 31, 2004. We sublease showroom space at the
International Toy Center in New York City. We have leased 9,393 square feet of
office and showroom space in Hong Kong from which we oversee our China based
manufacturing operations. Our two leases for this space in the Ocean Center
building expire on April 30, 2005 and May 31, 2005, respectively.

                                       35
<PAGE>

         We have two warehouse facilities in southern California. The Compton
facility has 69,000 square feet and the lease expires on February 23, 2008. The
Rancho Dominguez location has 94,650 square feet, predominately warehouse. This
lease expires June 30, 2005. We have also subleased warehouse space in Carson,
California, that we previously leased for warehouse space to an unrelated third
party until the expiration of the lease, January 2004. We intend to consolidate
our operations by October of 2003 and sublease one of the remaining facilities
for the term of its lease.

         We believe that the facilities are well maintained, are in substantial
compliance with environmental laws and regulations, and are 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.

LEGAL PROCEEDINGS

         We filed a voluntary petition for relief under Chapter 11 of the
Bankruptcy Code in the United States Bankruptcy Court for the Southern District
of Florida, case number 97-22199-BKC-RBR, on April 11, 1997. On March 17, 1998,
the U.S. Bankruptcy Court confirmed our First Amended Plan of Reorganization. As
of June 10, 1998, our plan has been fully implemented.

         From July 2, 2003 through October 2, 2003, seven securities class
action lawsuits and a shareholder's derivative action were filed against the
Company and certain of its officers and directors in the United States District
Court for the Southern District of Florida on behalf of all persons who
purchased the Company's securities during the various class action periods
specified in the complaints. On September 18, 2003, United States District Judge
William J. Zlock entered an order consolidating the seven (7) purported class
action law suits and one (1) purported shareholder derivative action into a
single action case styled Frank Bielanski v. Salberg & Company, P.A., et al -
Case Number: 03-80596 - CIV - ZLOCK. The complaints that were filed allege
violations of Section 10(b) and Section 20(a) of the Securities Exchange Act of
1934 and Rule 10(b)-5. The complaints seek compensatory damages, attorney's fees
and injunctive relief. While the specific factual allegations vary slightly in
each case, the complaints generally allege that defendants falsely represented
the Company's financial results during the relevant class periods. We believe
the allegations in these cases are without merit and we intend to vigorously
defend these actions.

         We are also involved in certain routine litigation matters incidental
to our business and operations, which we do not believe are material to our
business. In September 2003, we had a disagreement with AG Edwards & Sons, Inc.
("AG Edwards") regarding the terms of our investment banking relationship. We
believed that AG Edwards had waived its right of first refusal to assist us in
raising capital in a private offering and retained Roth Capital Partners, LLC to
raise $4 million in the convertible debenture offering. However, AG Edwards did
not believe that it had waived its right of first refusal. Although we believe
that our position is correct, for business reasons we have decided to settle
this potential claim. We have had discussions with AG Edwards about this matter
and tentatively both parties have agreed to enter into a settlement agreement in
which we have agreed to pay AG Edwards $100,000 in cash over a five month period
and $100,000 in stock valued at the current market price. However, as of October
7, 2003, we have not yet finalized a definitive settlement agreement with them.

                                       36
<PAGE>

                                   MANAGEMENT
                                   ----------

DIRECTORS AND EXECUTIVE OFFICERS

         The following table sets forth certain information with respect to our
executive officers and directors as of September 15, 2003.

NAME                      AGE    POSITION
- ----                      ---    --------
Robert J. Weinberg        54     Chief Executive Officer & Director
Yi Ping Chan              39     Chief Operating Officer, Secretary
April J. Green            39     Chief Financial Officer
Jack Dromgold             59     Executive Vice President of Sales
                                 And Marketing
Josef A. Bauer            65     Director
Howard W. Moore           72     Chairman of the Board

         Robert Weinberg has served as our Chief Executive Officer since August
3, 2003 and has served as a director since March 9, 2001. Mr. Weinberg has
considerable experience in toy products, marketing, licensing, merchandising and
packaging. He is currently the founder and president of Value Creations Group, a
toy company based in Saddle River, New Jersey. Previously, he served in various
positions of increasing responsibility with Toys `R Us, rising through the ranks
from buyer trainee in 1971 to Senior Vice President - General Merchandise
Manager in 1997. In these later positions, he was responsible for purchasing
advertising/marketing, imports, product development, store planning and
allocations. He retired from Toys `R' Us in March 2000.

         Yi Ping Chan has served as our Chief Operating Officer since May 2,
2003. Prior to this appointment, Chan was a consultant to Company. Mr. Chan was
a founder of MaxValue Capital Ltd., a Hong Kong-based management consulting and
investment firm, and co-founder of E Technologies Ltd., Hong Kong, which
specialized in health care technology transfer from April 1996 to March 2003.
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. From 1994 to 1997, Mr. Chan was
Business Development Manager for AlliedSignal Inc. (now part of Honeywell
International, inc.) and Knorr-Bremse Far East Ltd., where he focused on joint
ventures and acquisitions in China and Japan. Earlier, he was Senior Associate
Engineer for IBM in New York, and began his career as a member of the technical
staff of TRW Corporation in Redondo Beach, California. Under IBM sponsorship,
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. Mr.
Chan is a member of the Young Entrepreneurs' Organization, serving as a board
member of the Hong Kong chapter in 2002 and 2003. He also served as a
development advisor and associate for the Global Chinese Business Initiative at
the Wharton School, University of Pennsylvania from 1998 to 2001.

         April Green has served as our Chief Financial Officer since March 15,
2002. Ms. Green joined our company in June 1999 as our controller and was
promoted to the position of Director of Finance & Administration in January 1,
2000. Prior to joining us, Ms. Green held various positions of increasing
responsibility with Monogram International, a large, Florida-based novelty and
toy company from February 1993 to June 1999. At Monogram, Ms. Green rose from
Staff Accountant to Controller. Prior to June 1999, she served in a variety of
financial positions in the automotive industry in the Tampa area. Ms. Green is a
Certified Public Accountant, a member of the American Institute of Certified
Public Accountants (AICPA) and a member of the AWSCPA (American Woman's Society
of CPA's).

                                       37
<PAGE>

         Jack Dromgold has served as our Executive Vice President of Sales and
Marketing since April 16, 2002. Prior to joining us, Mr. Dromgold served as Vice
President of Sales for Hasbro Games from 1993 through April 2002. Mr. Dromgold
is a 35-year veteran of the toy and game industry and has been involved in the
development of sales programs to support the launch of many new products over
the years.

         Josef A. Bauer has served as a director since October 15, 1999. Mr.
Bauer previously served as a director of the Company 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 companies
since 1978 and Seamon Schepps, also a jewelry manufacturing and retail sales
company since 1999.

         Howard Moore has served as a director since August 2000. Mr. Moore
served in various capacities for Toys R Us from 1984 through June 2000. From
1984, when Mr. Moore joined Toys 'R Us as executive vice president and general
merchandise manager, until 1990, when he retired, sales increased from $480
million to $4.8 billion. Mr. Moore served on the Toys 'R' Us board of directors
from 1984 until June 2000. He is also founder and president of Howard Moore
Associates, a company, which provides marketing, product licensing, packaging
and merchandising consulting to the toy industry. Previously, he was president
and CEO of Toy Town, USA, Inc. after founding and operating two other toy chain
stores. Mr. Moore is currently serving as the Chairman of the Advisory Board of
Leapfrog Enterprises, Inc.

         Our directors serve for a term of one year, or until their successors
shall have been elected and qualified. Our executive officers are appointed and
serve at the discretion of the Board of Directors. There are no family
relationships among any of our directors and executive officers. However, one of
our key personnel, John Steele, our Director of Sales - International, is the
son of Edward Steele, our former Chief Executive Officer and Director.

Board Committees

         We have an audit committee, an executive compensation/stock option
committee and a nominating committee. The audit committee consists of Messrs.
Bauer, Moore and Weinberg. The audit committee recommends the engagement of
independent auditors to the board, initiates and oversees investigations into
matters relating to audit functions, reviews the plans and results of audits
with our independent auditors, reviews our internal accounting controls, and
approves services to be performed by our independent auditors. The executive
compensation/stock option committee consists of Messrs. Bauer, Moore and
Weinberg. 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. The entire Board of
Directors operates as a nominating committee. 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.

Director's Compensation

         It is the general policy of the Board that compensation for independent
directors should be a mix of cash and equity-based compensation. Employee
directors are not paid for Board service in addition to their regular
compensation. In fiscal 2003, each independent director was paid an annual
directors fee of $10,000 in shares of our common stock.

         In addition, it is our policy to grant options to each of our outside
independent directors and reimburse each director for our of-pocket-expenses for


                                       38
<PAGE>

each Board meeting attended. Each independent director will receive 10,000
options for each year of service on our Board. The exercise price of the options
will be equal to the fair market value of our common stock on the day before our
annual or special shareholders meeting. The options will be exercisable for a
period of five years after the vesting date. During fiscal 2002, we granted each
of our three outside director an option to purchase a total of 10,000 share at
an exercise price of $11.09 per share.

                             EXECUTIVE COMPENSATION

         The following table sets forth certain compensation information for the
fiscal years ended March 31, 2003, 2002, and 2001 with regard to Edward Steele,
our Chief Executive Officer, 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
- --------------------------------------------------------------------------------------------------------------------------------
NAME OF INDIVIDUAL AND    YEAR      SALARY     BONUS      OTHER ANNUAL      RESTRICTED   SECURITIES    LTIP      ALL OTHER
PRINCIPAL POSITION                                        COMPENSATION(1)   STOCK        UNDERLYING/   PAYOUTS   COMPENSATION(2)
                                                                            AWARD(S)     OPTIONS/
                                                                                         SAR'S
- --------------------------------------------------------------------------------------------------------------------------------
<S>                       <C>      <C>        <C>             <C>               <C>       <C>             <C>     <C>
Edward Steele, CEO(3)     2003     $382,352   $      0        $8,671            0          30,000         0       $ 17,969
- --------------------------------------------------------------------------------------------------------------------------------
                          2002     $364,145   $192,133        $8,258            0          15,000         0       $ 17,908
- --------------------------------------------------------------------------------------------------------------------------------
                          2001     $320,865   $256,289        $7,938            0         315,000         0       $ 10,515
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
John Klecha,              2003     $300,117   $      0        $6,555            0          24,000                 $ 13,264
President, COO(4)
- --------------------------------------------------------------------------------------------------------------------------------
                          2002     $286,111   $157,200        $6,242            0          15,000         0       $ 11,725
- --------------------------------------------------------------------------------------------------------------------------------
                          2001     $255,777   $205,031        $6,000            0         300,000         0       $  6,007
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
April Green, CFO (5)      2003     $122,200   $ 25,000        $3,900            0          20,000         0       $ 13,551
- --------------------------------------------------------------------------------------------------------------------------------
                          2002     $ 88,825   $ 25,000        $3,900            0          30,000         0       $  7,091
- --------------------------------------------------------------------------------------------------------------------------------
                          2001     $ 83,658   $ 17,000        $3,900            0           7,500         0       $  3,321
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Jack Dromgold,            2003     $210,277   $ 50,000(7)     $5,538            0         100,000         0       $154,072(8)
Executive Vice
President, Sales &
Marketing (6)
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>

(1)      The amounts disclosed in this column for fiscal 2003, 2002 and 2001
         include automobile expense allowances, which are provided pursuant to
         the executive's employment agreements.
(2)      Includes the Company's matching contributions under its 401(k) savings
         plan and medical insurance pursuant to the executive's employment
         agreements.
(3)      Mr. Steele resigned as our Chief Executive Officer and as a director
         effective as of August 3, 2003.
(4)      Mr. Klecha resigned as our President and Chief Operating Officer
         effective as of May 2, 2003.
(5)      Ms. Green has served as our Chief Financial Officer since March 15,
         2002. She served as the Director of Finance and Administration from
         January 1, 2000 through March 14, 2002 and as our controller from June
         1999 through December 2000.
(6)      Mr. Dromgold joined our company on April 15, 2003.
(7)      Mr. Dromgold received $50,000 as a signing bonus when he joined our
         company pursuant to his employment agreement.
(8)      Includes relocation expenses of $45,529, the Company matching
         contributions of 8,543 under its 401(k) savings plan and medical
         insurance and a $100,000 value attributed to options granted to Mr.
         Dromgold. After one year of employment, Mr. Dromgold had the right to
         sell 50,000 options that were granted to him under his employment
         agreement back to the Company at a price of $100,000. Mr. Dromgold did
         not elect to exercise this right during fiscal 2003 and the Company
         extended this right for another year.

                                       39
<PAGE>

OPTION GRANTS IN FISCAL 2003

         The following table sets forth information concerning all options
granted to our officers and directors during the year ended March 31, 2003. No
stock appreciation rights ("SAR's") were granted.
<TABLE>
<CAPTION>
                                                                                            POTENTIAL REALIZABLE
                                                                                            VALUE AT ASSUMED
                                                                                            ANNUAL RATES OF STOCK
                                         TOTAL OPTIONS                                      PRICE APPRECIATION
                  SHARES                 GRANTED TO                                         FOR OPTION TERM(2)
                  UNDERLYING             EMPLOYEES IN     EXERCISE PRICE     EXPIRATION
NAME              OPTIONS GRANTED(1)     FISCAL YEAR      PER SHARE          DATE           5%          10%
- ------------------------------------------------------------------------------------------------------------------
<S>               <C>                        <C>            <C>             <C>             <C>         <C>
Edward Steele     30,000                     5.25%          $14.30           7/15/08        $118,525    $261,908

John Klecha       24,000                     4.28%          $14.30           7/15/08        $ 94,800    $209,520

Jack Dromgold     50,000(3)                  8.76%          $ 8.61           8/14/07        $ 92,775    $199,795
                  50,000(4)                                 $ 9.00          12/31/08        $124,327    $274,730

April Green       20,000(4)                  3.50%          $ 9.00          12/31/08        $ 49,731    $109,891
</TABLE>

- ----------
(1)      All options were granted pursuant to the Year 2001 Stock Option Plan.
         Option exercise prices were at the market when granted.

(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.

(3)      Half of these options, 25,000 vested on April 15, 2003 and the
         remaining 25,000 vest on April 15, 2004.

(4)      Twenty percent of the options are exercisable on January 1, 2004 and
         20% exercisable each January 1st thereafter with the last 20% becoming
         exercisable on January 1, 2008. These options expire with varying
         expiration dates from December 31, 2009 through December 31, 2013.

AGGREGATED OPTION EXERCISES IN FISCAL YEAR ENDED MARCH 31, 2003
AND OPTION VALUES

         The following table sets forth information as to the exercise of stock
options during the fiscal year ended March 31, 2002 by our officers listed in
our Summary Compensation Table and the fiscal year-end value of unexercised
options.

<TABLE>
<CAPTION>
                                                                             VALUE OF
                                                         NUMBER OF           UNEXERCISED
                                                         UNEXERCISED         IN-THE-MONEY
                                                         OPTIONS AT          OPTIONS 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>
Edward Steele                     0             0          352,500/0          $2,251,050/0
John Klecha                       0             0          382,500/0          $2,502,330/0
Jack Dromgold                     0             0           25,000/75,000     $0/0
April Green                   1,000        $3,940           26,000/20,000     $  128,440/0
</TABLE>

                                       40
<PAGE>

- ----------
(1)      Value realized is based on the difference between the closing price of
         our common stock on the date of exercise and the option exercise prices
         times the number of outstanding options.

(2)      Value of unexercised options equals $6.98, the average of the high and
         low trading prices on March 31, 2003, less the option exercise price
         multiplied by the number of shares exercisable or unexercisable.

EMPLOYMENT AGREEMENTS

         Robert Weinberg. Mr. Weinberg became our Chief Executive Officer
effective as of August 3, 2003. After we closed our private offering on
September 8, 2003, we began paying Mr. Weinberg a salary equal to $300,000 per
annum in accordance with our normal payroll practices. We intend to enter into
an employment agreement with Mr. Weinberg in the near future. However, as of
September 15, 2003, we have not finalized the terms of Mr. Weinberg's employment
with our company.

         April Green. On March 15, 2002, we entered into a three-year employment
agreement with April Green, our Chief Financial Officer. Pursuant to Ms. Green's
employment agreement, she is entitled to receive base compensation of $122,200
per year, which amount automatically increases during the second and third
fiscal years by not less than the greater of 5% or the annual increase in the
consumer price index. The agreement also provides for discretionary bonuses
based on a percentage of the Company's current bonus pool. In the event of a
termination of her employment following a change of control, Ms. Green would be
entitled to a lump sum payment of 50% of the amount of her total compensation in
the twelve months preceding such termination. During the term of her employment
agreement and for a period of one year after her termination for cause, Ms.
Green cannot directly or indirectly compete with our company in the karaoke
industry in the United States.

         Yi Ping Chan Effective as of May 2, 2003, we entered into a three-year
employment agreement with Yi Ping Chan, our Chief Operating Officer. Mr. Chan is
entitled to receive an annual salary equal to $250,000 per year, plus bonuses
and increases in his annual salary, at the sole discretion of the Company's
Board of Directors. In July 2003, Mr. Chan agreed to accept 15% of his salary
during 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 the Company's common stock, of which 50,000 options will vest
each year and to reimburse him for moving expenses of up to $40,000.

         In the event of a termination of his employment following a change of
control, Mr. Chan would be entitled to a lump sum payment of 100% of the amount
of his total compensation in the twelve months preceding such termination.
During the term of his employment agreement and for a period of two year after
his termination for cause, Mr. Chan cannot directly or indirectly compete with
our company in the karaoke industry in the United States.

         Jack Dromgold. On April 15, 2002, we entered into a three-year
employment agreement with Jack Dromgold, expiring on April 14, 2005. We hired
Mr. Dromgold to be our Executive Vice President of Sales and Marketing. Mr.
Dromgold's employment agreement will be automatically be extended for an
additional year, unless either party gives written notice at least sixty days
prior to the end of the three-year term. Pursuant to Mr. Dromgold's employment
agreement, he is entitled to receive base compensation of $220,000 per year,
which amount automatically increases during the second and third fiscal years by
not less than the greater of 5% or the annual increase in the consume price
index. In July 2003, Mr. Dromgold agreed to accept 15% of his salary during
nine-month period between July 1, 2003 through March 31, 2004 in the form of
stock rather than cash.

                                       41
<PAGE>

         As a signing bonus, we agreed to pay Mr. Dromgold a signing bonus in
the amount of $50,000 and options to purchase 50,000 shares of our common stock.
We also gave Mr. Dromgold the right to sell the 50,000 options back to us for
$100,000 after his first year of employment with the company. Mr. Dromgold did
not exercise this right after his first year of employment and in May 2003 we
verbally extend his put option for another year until April 15, 2004. We also
agreed to grant Mr. Dromgold a minimum of 50,000 options for each year of his
employment with the company. During his first year of employment, Mr. Dromgold's
bonus is equal to 1% of new accounts shipped, but will be equal to a minimum of
$50,000. During the second year of his employment, Mr. Dromgold's bonus will be
switched to 10% of the Company's then current bonus plan. We also agreed to pay
Mr. Dromgold's certain moving expenses in connection with his move from
Massachusetts to Florida. Mr. Dromgold's moving expenses were $39,000.

         In the event of a termination of Mr. Dromgold's employment in the event
of a change in control, Mr. Dromgold would be entitled to a lump sum payment of
50% of the amount of his total compensation in the twelve months preceding such
termination. During the term of his employment agreement and for a period of one
year after his termination for cause or his voluntary termination of his
employment, Mr. Dromgold can not directly or indirectly compete with our company
in the karaoke industry in the United States.

         Edward Steele. Mr. Steele resigned as our Chief Executive Officer and
as a Director effective as of August 3, 2003. Mr. Steele continues to be
employed as an employee of the Company under his employment dated March 1, 1998
and as amended on May 5, 2000. Mr. Steele's employment agreement expires on
February 28, 2004. Under this agreement, his annual compensation was $367,500
for fiscal 2003. In July 2003, Mr. Steele agreed to accept 15% of his salary
during eight month period between July 1, 2003 through February 28, 2004 in the
form of stock rather than cash. The agreement also provides for a discretionary
bonuses determined by our Board of Directors. Mr. Steele did not receive a
discretionary bonus for fiscal 2003. In the event of a termination of Mr.
Steele's employment in the event of a change in control, Mr. Steele would be
entitled to a lump sum payment of 300% of the amount of his total compensation
in the twelve months preceding such termination. During the term of his
employment agreement and for a period of one year after his termination for
cause or his voluntary termination of his employment, Mr. Steele can not
directly or indirectly compete with our company in the karaoke industry in the
United States.

         John Klecha. Mr. Klecha was employed as our Chief Operating Officer
pursuant to an employment agreement dated July 1, 2000. Mr. Klecha's employment
agreement was to expire on May 31, 2003 and would automatically extend for an
additional year, until May 31, 2004, unless either party gave written notice at
least sixty days prior to the end of the three-year term. We gave Mr. Klecha
notice that we would not renew his employment agreement in February 2003. Mr.
Klecha resigned as our Chief Operating Officer and President, effective as of
May 2, 2003. In connection with his resignation, we entered into a separation
and release agreement. Under this agreement, we agreed to provide Mr. Klecha
with a severance payment equal to $183,707, which consisted of (i) salary and
auto allowance through May 31, 2003, (ii) four weeks of accrued vacation time,
(iii) four months of salary and automobile allowance payments and (iv) seven
months COBRA reimbursement payments. In exchange, Mr. Klecha agreed to release
the Company from any liability in connection with termination of employment.

EQUITY COMPENSATION PLANS AND 401(K) PLAN

         The Company has two stock option plans: the 1994 Amended and Restated
Stock Option Plan ("1994 Plan") and the 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, 2001, we had 970,225 options


                                       42
<PAGE>

issued and outstanding under our 1994 Plan and 81,750 options are issued and
outstanding under our Year 2001 Plan.

         The following table gives information about equity awards under our
1994 Plan, the Year 2001 Plan.
<TABLE>
<CAPTION>
                            NUMBER OF SECURITIES TO BE     WEIGHTED-AVERAGE         NUMBER OF SECURITIES REMAINING
                            ISSUED UPON EXERCISE           EXERCISE PRICE OF        AVAILABLE FOR FUTURE ISSUANCE UNDER
                            OR OUTSTANDING OPTIONS,        OUTSTANDING OPTIONS,     EQUITY COMPENSATION PLANS
PLAN CATEGORY               WARRANTS AND RIGHTS            WARRANTS AND RIGHTS      (EXCLUDING SECURITIES IN COLUMN (A))
- -------------               --------------------------     --------------------     ------------------------------------
<S>                                 <C>                           <C>                           <C>
Equity Compensation
Plans approved by
Security holders                    1,513,250                     $4.38                         716,975

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

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 September 15,
2003, we had granted all the options that are available for grant under our 1994
Plan. As of September 15, 2003, we had 394,900 options issued and outstanding
under the 1994 Plan and all of these options are fully vested as of March 31,
2003.

YEAR 2001 PLAN

         On June 1, 2001, our Board of Directors approved the Year 2001 Plan and
our shareholders at a special meeting held September 6, 2001 subsequently
approved it. 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 September 15, 2003,
we have granted 694,500 options under the Year 2001 Plan, 168,333 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 non-statutory 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


                                       43
<PAGE>

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 amounts 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. In fiscal 2002, 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, 2003, 2002 and 2001 totaled $61,466, $41,733 and $8,682,
respectively.


                              CERTAIN TRANSACTIONS
                              --------------------

         On or about July 10, 2003, certain officers and directors of our
company advanced $1 million to the Company. The officer was Yi Ping Chan and the
directors were Jay Bauer and Howard Moore. Additionally, Maureen LaRoche, a
business associate of Mr. Bauer, participated in the financing. This loan bears
interest at the rate of 9.5% per annum. It is presently expected that the loan
will be repaid on or after March 31, 2004, when our credit agreement with
LaSalle expires. We also may grant additional compensation to this management
group for advancing the $1 million to our company in the form of warrants or
some other consideration. Prior to granting any compensation to the management
group, we will obtain a fairness opinion from a third party.

         On about March 4, 2003, Jay Bauer, one of our directors advanced
$400,000 to our Hong Kong subsidiary, which used the funds to pay a debt with a
trade creditor. We were to repay Mr. Bauer's loan in two months on or about May
4, 2003 and the loan bore interest at the rate of 8% per annum. We repaid
$200,000 on the loan on or about May 4, 2002 and we intend on paying the
remaining balance on or before October 31, 2003.

         On July 1, 1999, we loaned $55,000 to each of Eddie Steele and John
Klecha to purchase 2 units in our private placement. These loans bore interest
at the rate of 9% per annum and were due on June 28, 2001. Mr. Klecha and Mr.
Steele repaid these loans and all accrued interest in June 2001.

         In June 1999, we arranged a credit facility with Main Factors, whereby
Main Factors purchased certain of our accounts receivable. To secure the credit


                                       44
<PAGE>

facility, John Klecha, our Chief Operating Officer and Chief Financial Officer,
provided his personal payment guaranty. In July 1999, we entered into an
agreement with EPK Financial Corporation ("EPK") whereby EPK provided letters of
credit with our factories to import inventory for distribution to our customers.
To secure the EPK facility, Edward Steele and John Klecha provided their
personal guarantees. In consideration for providing their personal guarantees of
these credit facilities, we issued 200,000 shares of our common stock to Mr.
Steele and 150,000 shares of our common stock to Mr. Klecha in June 1999. Both
agreements with Main Factors and EPK were terminated in April 2001. We amortized
the value of these deferred guarantee fees over a two year period, which was
completed in the first quarter of fiscal 2002.

                             PRINCIPAL STOCKHOLDERS
                             ----------------------

         The following table set forth as of September 20, 2003, certain
information concerning beneficial ownership of our common stock by:

         -all directors of the Company,
         -all executive officers of the Company.
         -persons known to own more than 5% of our common stock;

         Unless otherwise indicated, the address for each person is The Singing
Machine Company, Inc., 6601 Lyons Road, Building A-7, Coconut Creek, Florida
33073. As of September 20, 2003, we had 8,687,596 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.

                                            SHARES OF          PERCENTAGE OF
                                            COMMON             COMMON
NAME                                        STOCK              STOCK
- ----                                        ---------          -------------
Robert Weinberg
Chief Executive Officer and Director           68,300(1)            *

Y.P. Chan                                       8,152(2)            *
Chief Operating Officer

April Green                                    27,050(3)            *
Chief Financial Officer

Jack Dromgold                                  45,176(4)            *
Executive Vice President

Joseph Bauer                                  971,171(5)        11.15%
Director

Howard Moore                                  332,376(6)         3.91%
Director

Eddie Steele                                1,029,910(7)         11.4%
Former Chief Executive Officer
And Director(7)

John Klecha                                   810,811(8)         9.33%
Former Officer and Director(8)

Wellington Management
Company, LLP                                  945,000(9)        11.39%

All Directors and
Executive Officers
as a Group                                  1,452,223(10)       16.44%

                                       45
<PAGE>

- ----------
Less than 1%.

(1)      Includes 55,000 shares issuable upon the exercise of stock options that
         are exercisable within 60 days of September 20, 2003.

(2)      Mr. Chan owns options to purchase 150,000 shares of the Company's
         common stock, with 1/3 of the options vesting on December 31, 2003.
         Because these options are not exercisable within 60 days, Mr. Chan is
         not deemed to be the beneficial owner under the Exchange Act.

(3)      Includes 26,000 shares issuable upon the exercise of stock options that
         are exercisable within 60 days of September 20, 2003.

(4)      Includes 25,000 shares issuable upon the exercise of stock options that
         are exercisable within 60 days of September 20, 2003.

(5)      Includes 17,596 shares which are held by Mr. Bauer directly, 360,000
         shares held by Mr. Bauer's pension plan, 179,600 shares held by the
         Bauer Family Limited Partnership, 200,000 shares held by Mr. Bauer's
         wife, 193,975 shares held by Mr. Bauer and his wife directly and 20,000
         shares issuable upon the exercise of stock options that are exercisable
         within 60 days of September 20, 2003.

(6)      Includes 256,049 shares held by the Howard & Helen Moore Living Trust,
         49,250 shares held by Howard Moore Associates, Inc. Defined Benefit
         Pension Plan, 2,077 shares held by the Howard & Helen Moore Insurance
         Trust and 25,000 shares issuable upon the exercise of stock options
         that are exercisable within 60 days of September 20, 2003.

(7)      Effective as of August 3, 2003, Mr. Steele resigned as our Chief
         Executive Officer and as a director. Mr. Steele will continue to be an
         employee of the Company until February 28, 2004. Includes 152,910
         shares held by Mr. Steele's wife and 352,500 shares issuable upon the
         exercise of stock options that are exercisable within 60 days of
         September 20, 2003.


(8)      Mr. Klecha resigned as Chief Operating Officer effective as of May 2,
         2003 and as a director effective as of July 28, 2003.

(9)      The address of Wellington Management Company, LLP is 78 State Street,
         Boston, Massachusetts 02109. All of the information presented in this
         item with respect to this beneficial owner was extracted solely from
         their Scheduled 13G filed on February 14, 2003.

(10)     Includes 145,000 shares issuable upon the exercise of stock options
         that are exercisable within 60 days of September 20, 2003.

                            DESCRIPTION OF SECURITIES
                            -------------------------

         We are authorized to issue:

         *18,900,000 shares of common stock,
         *100,000 shares of Class A common stock, and
         *1,000,000 shares of convertible preferred stock.

As of September 15, 2003, we have 8,682,596 shares of our common stock issued
and outstanding and no shares of Class A common stock or convertible preferred
stock are issued and outstanding.

                                       46
<PAGE>

COMMON STOCK

         The holders of our common stock are entitled to one vote for each share
held of record on all matters to be voted on by stockholders. There is no
cumulative voting with respect to the election of directors, with the result
that the holders of more than 50% of the shares voted for the election of
directors can elect all of the directors. The holders of our common stock are
entitled to receive dividends when, as and if declared by the Board of Directors
out of funds legally available. In the event of liquidation, dissolution or
winding up of the Company, the holders of our common stock are entitled to share
ratably in all assets remaining available for distribution to them after payment
of liabilities and after provision has been made for each class of stock, if
any, having preference over the common stock. Holders of shares of common stock,
as such, have no conversion, preemptive or other subscription rights, and,
except as noted herein, there are no redemption provisions applicable to the
common stock. All of the outstanding shares of common stock are validly issued,
fully paid and nonassessable.

CLASS A COMMON STOCK

         Our Certificate of Incorporation authorizes the issuance of 100,000
shares of Class A Common Stock. In connection with our public offering in 1994,
all issued shares of our Class A common stock were converted into shares of our
common stock. We do not plan on issuing any shares of our Class A common stock
and will delete this provision from our Certificate of Incorporation when we
file the next amendment to our Certificate of Incorporation.

CONVERTIBLE PREFERRED STOCK

         Our Board of Directors has the authority, without further action by our
stockholders, to issue up to 1,000,000 shares of our preferred stock in one or
more series and to fix the rights, preferences, privileges and restrictions
thereof. In April 1999, we authorized the issuance of 1,000,000 shares of our
convertible preferred stock in connection with a private offering of our units.
All of these shares of convertible preferred stock were converted into shares of
our common stock automatically on April 1, 2000.

         We do not plan on issuing any shares of our convertible preferred stock
in the near future and will delete this provision from our Certificate of
Incorporation when we file the next amendment to our Certificate of
Incorporation.

ANTI-TAKEOVER EFFECTS OF CERTAIN PROVISIONS OR OUR ARTICLES OF INCORPORATION,
BYLAWS AND DELAWARE LAW

         Certain provisions of our amended certificate of incorporation, bylaws
and Delaware law, which are summarized below, may be deemed to have an
anti-takeover effect and may delay, defer or prevent a tender offer or takeover
attempt that a stockholder might consider in its best interest, including those
attempts that might result in a premium over the market price for the shares
held by stockholders.

CUMULATIVE VOTING

         Our amended certificate of incorporation does not permit our
stockholders the right to cumulate votes in the election of directors.

                                       47
<PAGE>

SPECIAL MEETING OF STOCKHOLDERS

         Our bylaws provided that special meetings of our stockholders may only
be called by (1) resolution of the Board or the president or (2) the president
or the secretary upon the written request (stating the purpose of the meeting of
a majority of the directors then in office or the holders of a majority of the
outstanding shares entitled to vote.

AUTHORIZED BUT UNISSUED SHARES

         The authorized but unissued shares of common stock are available for
future issuance without stockholder approval. These additional shares may be
utilized for a variety of corporate purposes, including public or private
offerings to raise capital, corporate acquisitions and employee benefit plans.
The existence of authorized but unissued shares of common stock could render
more difficult or discourage an attempt to obtain control of us, by means of a
proxy contest, tender offer, merger or otherwise.

LIMITATIONS ON LIABILITY AND INDEMNIFICATION MATTERS

         We have adopted provisions in our amended certificate of incorporation
and bylaws that limit the liability of our directors to the fullest extent
permitted by the by the Delaware General Corporation Law. Pursuant to such
provisions, no director will be liable to the Company or its stockholders for
monetary damages for breaches of certain fiduciary duties as a director of the
Company. The limitation of liability will not affect a director's liability for
(1) a breach of the director's duty of loyalty to the Company or its
stockholders, (2) an act or omission not in good faith or that involves
intentional misconduct or a knowing violation of the law, (3) any unlawful
distributions, or (4) a transaction from which the director receives an improper
personal benefit. The limitation of liability also will not affect the
availability of equitable remedies such as injunctive relief or rescission.

         Our amended certificate of incorporation and bylaws require us to
indemnify our officers and directors to the fullest extent permitted by Delaware
law. We intend to enter into indemnification agreements with our directors and
executive officers. These agreements, among other things, indemnify our
directors and executive officers for certain expenses, judgments, fines and
settlement amounts incurred by them in any action or proceeding, including any
action by or in the right of the Company, arising out of the person's services
as a director or executive officer of the Company or any other company or
enterprise to which the person provides services at our request. We believe that
these provisions and agreements are necessary to attract and retain qualified
directors and executive officers.

         Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to our directors, officers and controlling person based on
the foregoing provisions, we have been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
and is, therefore, unenforceable.

DELAWARE LAW

         Under Delaware law, a corporation may not engage in any "business
combination" (as defined in the Delaware General Corporation Law) with an
"interested stockholder" for three years after such stockholder becomes an
interested stockholder. An interested stockholder is any person who is the
beneficial owner of 15% or more of the outstanding voting stock of the
corporation. A corporation may enter into a business combination with an
interested stockholder if:

                                       48
<PAGE>

         (a) the Board of Directors approves either the business combination or
the transaction which resulted in the stockholder becoming an interested
stockholder before the date on which the stockholder becomes an interested
stockholder;

         (b) upon consummation of the transaction resulting in the stockholder
reaching the 15% threshold, the stockholder owned 85% of the outstanding voting
shares at the time the transaction commenced, excluding those shares held by
directors who are also officers or employee stock plans in which the
participants do not have the right to determine confidentially whether shares
subject to the plan will be tendered in a tender or exchange offer; or

         (c) on or subsequent to becoming an interested stockholder, the
business combination is approved by the Board of Directors and is authorized at
a meeting by the affirmative vote of at least two-thirds of the outstanding
voting stock not owned by the interested stockholder.

TRANSFER AGENT

         The transfer agent for our common stock is Continental Stock Transfer &
Trust Co., 2 Broadway New York, New York 10004.

                         SHARES ELIGIBLE FOR FUTURE SALE
                         -------------------------------

         As of September 15, 2003, we have 8,682,596 shares of our common stock
issued and outstanding. If the 2,755,314 shares registered in this Prospectus
are issued, we will have 11,437,910 shares issued and outstanding. Of these
shares, all of the 2,755,314 shares registered in this offering will be freely
tradeable without restriction or further registration under the Securities Act,
unless such shares are purchased by "affiliates" as that term is defined in Rule
144 under the Securities Act. Shares that cannot be traded without restriction
are referred to as "restricted securities" as that term is defined in Rule 144
under the Securities Act. Restricted securities may be sold in the public market
only if registered of if they qualify for an exemption from registration under
Rule 144 of the Securities Act.

Rule 144

         In general, under Rule 144 as currently in effect, a person (or group
of person whose shares are aggregated), including affiliates of the Company, who
have beneficially owned shares of our common stock for at least one year would
be entitled to sell within any three-month period, an amount of restricted
securities that does not exceed the greater of:

         *1% of the number of shares of common stock then outstanding
         (approximately 86,825 shares as of September 15, 2003; or

         *the average weekly trading volume in the common stock during the four
         calendar weeks preceding the filing of a notice on Form 144 with
         respect to such sale.

         Sales under Rule 144 are also subject to certain manner of sale
provisions and notice requirements and to the availability of current public
information about us.

                                       49
<PAGE>

Rule 144(k)

         Under Rule 144(k), a person who is not deemed to have been one of our
affiliates at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years,
including the holding period of any prior owner other than an affiliate, is
entitled to sell such shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144.

         No prediction can be made as to the effect, if any that market sales of
the Company's common stock, or the availability of the common stock for sale,
will have on the market price of the common stock prevailing from time to time.
Nevertheless, sales of a significant number of shares of the Company's common
stock in the public market, or the perception that such sales could occur, could
adversely affect the market price of the common stock and impair our future
ability to raise capital through an offering of equity securities. See "Risk
Factors - Future sales of our common stock may depress our stock price."

                                  LEGAL MATTERS
                                  -------------

         The validity of the securities being offered hereby will be passed upon
by Adorno & Yoss, P.A., 700 S. Federal Highway, Suite 200, Boca Raton, Florida
33432.

                                     EXPERTS
                                     -------

         Our financial statements for the year ended March 31, 2003 appearing in
this Prospectus and registration statement have been audited by Grant Thornton
LLP, as independent certified public accountants, as set forth in their report
appearing elsewhere herein, and are included in reliance upon the report given
on the authority of the firm as experts in accounting and auditing. Our
financial statements for the years ended March 31, 2002 and 2001 appearing in
this Prospectus and registration statement have been audited by Salberg &
Company, P.A., as independent auditors, as set forth in their report appearing
elsewhere herein, and are included in reliance upon the report given on the
authority of the firm as experts in accounting and auditing.

                    WHERE YOU CAN FIND ADDITIONAL INFORMATION
                    -----------------------------------------

         We have filed with the Securities and Exchange Commission a
registration statement on Form S-1 pursuant to the Securities Act of 1933, as
amended, with respect to the offer, issuance and sale of 2,755,314 shares of our
common stock. This Prospectus does not contain all of the information set forth
in the registration statement. For further information with respect to us, and
the shares of our common stock to be sold in this offering, we make reference to
the registration statement. Although this Prospectus contains all material
information regarding us, statements contained in this Prospectus as the
contents of any contract, agreement or other document referred to are not
necessarily complete, and in each instance we make reference to the copy of the
contract, agreement, or other document filed as an exhibit to the registration
statement, each statement being qualified in all respects by the reference.

         You may read and copy all or any portion of the registration statement
or any other information, which we filed at the SEC's public reference rooms in
Washington, D.C., New York, New York, and Chicago, Illinois. The address for the
SEC's public reference room in Washington, D.C. is Judiciary Plaza, 450 Fifth
Street, N.W., Washington, DC 20549. You can request copies of these documents,
upon payment of a duplicating filing fee, by writing to the SEC. Please call the
Securities and Exchange Commission at 1-800-SEC-0330 for further information on
the operation of the public reference rooms. Our SEC filings are also available
to you free or charge at the SEC's web site at http://www.sec.gov.


                                       50
<PAGE>

                        THE SINGING MACHINE COMPANY, INC.

                          INDEX TO FINANCIAL STATEMENTS

                           UNAUDITED FINANCIAL STATEMENTS FOR THE
                    THREE MONTHS ENDED JUNE 30, 2003 AND 2002


Consolidated Balance Sheets - June 30, 2003 (Unaudited) and
March 31, 2003

Consolidated Statements of Operations - Three Months Ended
June 30, 2003 and 2002 (Unaudited)

Consolidated Statements of Cash Flows . - Three Months Ended
June 30, 2003 and 2002 (Unaudited)

Notes to Consolidated Financial Statements


    AUDITED FINANCIAL STATEMENTS AS OF MARCH 31, 2003 AND 2002 AND THE FISCAL
                   YEARS ENDED MARCH 31, 2003, 2002 AND 2001


Independent Auditors' Reports

Consolidated Balance Sheets as of March 31, 2003 and 2002

Consolidated Statements of Earnings
for the Years Ended March 31, 2003, 2002 and 2001

Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended March 31, 2003, 2002 and 2001

Consolidated Statements of Cash Flows
for the Years ended March 31, 2003,  2002 and 2001

Notes to Consolidated Financial Statements as of March 31, 2003, 2002 and 2001

                                      F-1

<PAGE>


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

<TABLE>
<CAPTION>
                                                                         JUNE 30,     MARCH 31,
                                                                           2003         2003
                                                                       -----------   -----------
                                                                       (unaudited)
<S>                                                                    <C>           <C>
                                  ASSETS
                                  ------
CURRENT ASSETS

Cash and cash equivalents                                              $    86,413   $   268,265
Restricted Cash                                                            862,122       838,411
Accounts Receivable, less allowances of $171,411
  and $405,759, respectively                                             4,236,488     5,762,944
Due from manufacturer                                                       60,272     1,091,871
Inventories                                                             25,959,760    25,194,346
Prepaid expense and other current assets                                 1,943,844     1,483,602
Deferred tax asset                                                       1,925,612     1,925,612
                                                                       -----------   -----------
                             TOTAL CURRENT ASSETS                       35,074,511    36,565,051
PROPERTY AND EQUIPMENT, at cost less accumulated
  depreciation of $1,648,369 and $1,472,850, respectively                2,149,919     2,026,252
OTHER NON-CURRENT ASSETS                                                   341,530       343,991
                                                                       -----------   -----------
       TOTAL PROPERTY, EQUIPMENT AND OTHER ASSETS                        2,491,449     2,370,243
                                                                       -----------   -----------
                                     TOTAL ASSETS                      $37,565,960   $38,935,294
                                                                       ===========   ===========

                      LIABILITIES AND SHAREHOLDERS' EQUITY
                      ------------------------------------

CURRENT LIABILITIES
Bank overdraft                                                              46,652       316,646
Accounts payable                                                       $ 9,785,339   $ 8,486,009
Accrued expenses                                                         1,231,491     1,443,406
Due to related party                                                       200,000       400,000
Notes payable                                                            2,000,000             0
Revolving credit facility                                                4,903,371     6,782,824
Income taxes payable                                                     3,823,360     3,821,045
                                                                       -----------   -----------
                          TOTAL CURRENT LIABILITIES                     21,990,213    21,249,930
                                                                       -----------   -----------
SHAREHOLDERS' EQUITY

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;  18,900,000 shares
   authorized; 8,300,178 and 8,171,678 shares issued and outstanding        83,002        81,717
Additional paid-in capital                                               5,049,880     4,843,430
Retained earnings                                                       10,442,865    12,760,217
                                                                       -----------   -----------
                         TOTAL SHAREHOLDERS' EQUITY                     15,575,747    17,685,364
                                                                       -----------   -----------
         TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                    $37,565,960   $38,935,294
                                                                       ===========   ===========
</TABLE>

   THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

                                       F-2
<PAGE>

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

<TABLE>
<CAPTION>
                                                  THREE MONTHS ENDED
                                                 JUNE 30,      JUNE 30,
                                                  2003          2002
                                             -------------   -----------
                                                            (as restated)
<S>                                          <C>             <C>
NET SALES                                    $   7,627,975   $ 4,296,841

COST OF SALES                                    5,901,866     2,990,881
                                             -------------   -----------

GROSS PROFIT                                     1,726,109     1,305,960

OPERATING EXPENSES
Advertising                                        270,770       165,765
Compensation                                     1,111,579       770,898
Freight & handling                                 225,866       245,490
Royalty expense                                     83,964        67,830
Selling, general & administrative expenses       2,168,168     1,389,020
                                             -------------   -----------
TOTAL OPERATING EXPENSES                         3,860,347     2,639,003
                                             -------------   -----------

LOSS FROM OPERATIONS                            (2,134,238)   (1,333,043)

OTHER INCOME (EXPENSES)
Other income                                         7,669        13,901
Interest expense                                  (188,468)       (1,549)
Interest income                                         --        11,604
                                             -------------   -----------
NET OTHER EXPENSES                                (180,799)       23,956

NET LOSS BEFORE INCOME TAX                      (2,315,037)   (1,309,087)

INCOME TAX EXPENSE                                   2,315       118,334

NET LOSS                                     $  (2,317,352)  $(1,427,421)
                                             =============   ===========

LOSS PER SHARE:
                    Basic & Diluted          $       (0.28)  $     (0.18)

WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING:

                    Basic & Diluted              8,278,469     8,061,277
</TABLE>

   THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

                                       F-3
<PAGE>

                THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
                      CONSOLIDATED STATEMENT OF CASH FLOWS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                  FOR THE QUARTER ENDED JUNE 30,
                                                                  -----------  ------------------
                                                                     2003      2002 (AS RESTATED)
                                                                  -----------  ------------------
<S>                                                               <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES
     Net Loss                                                     $(2,317,352)   $(1,309,087)
     Adjustments to reconcile net loss to net cash
        used in operating activities
     Depreciation and amortization                                    175,519        121,047
     Changes in assets and liabilities:
     (Increase) decrease in:
     Restricted cash                                                  (23,711)             0
     Accounts Receivable                                            1,526,456        924,688
     Due from manufacturer                                                  0       (251,909)
     Inventories                                                      266,185     (3,666,981)
     Prepaid Expenses and other assets                               (457,782)        87,483
     Increase (decrease) in:
     Accounts payable                                               1,299,330      2,413,542
     Accrued expenses                                                (211,914)      (784,259)
     Bank Overdraft                                                  (269,994)             0
     Income taxes payable                                               2,315        (58,542)

                                                                  -----------    -----------
                     Net Cash used in Operating Activities            (10,948)    (2,524,018)
                                                                  -----------    -----------

CASH FLOWS FROM INVESTING ACTIVITIES
     Purchase of property and equipment                              (299,186)      (612,141)
     Deposit for credit line                                                0           (650)
                                                                  -----------    -----------
                     Net cash used in Investing Activities           (299,186)      (612,791)
                                                                  -----------    -----------

CASH FLOWS FROM FINANCING ACTIVITIES
     Net revolving credit facility                                 (1,879,453)             0
     Payments on related party loan                                  (200,000)             0
     Proceeds from note payable                                     2,000,000
     Proceeds from exercise of stock options and warrants             207,735         81,785
                                                                  -----------    -----------
                      Net cash provided by Financing Activities       128,282         81,785
                                                                  -----------    -----------

DECREASE IN CASH AND CASH EQUIVALENTS                                (181,852)    (3,055,024)

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                      268,265      5,520,147
                                                                  -----------    -----------

CASH AND CASH EQUIVALENTS AT END OF PERIOD                        $    86,413    $ 2,465,123
                                                                  ===========    ===========

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for interest                            $   188,469    $     1,549
                                                                  ===========    ===========
Cash paid during the year for income taxes                        $         0    $    58,542
                                                                  ===========    ===========
</TABLE>

   THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

                                       F-4
<PAGE>

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

NOTE 1 - SUMMARY OF ACCOUNTING POLICIES

BASIS OF PRESENTATION

         The accompanying unaudited consolidated financial statements include
the accounts of The Singing Machine Company, Inc. and its subsidiary (the
"Company", "The Singing Machine"). All significant intercompany transactions and
balances have been eliminated. The unaudited consolidated financial statements
have been prepared in conformity with Rule 10-01 of Regulation S-X of the
Securities and Exchange Commission and therefore do not include information or
footnotes necessary for a complete presentation of financial position, results
of operations and cash flows in conformity with accounting principles generally
accepted in the United States of America. However, all adjustments (consisting
of normal recurring accruals), which, in the opinion of management, are
necessary for a fair presentation of the financial statements, have been
included. Operating results for the period ended June 30, 2003 are not
necessarily indicative of the results that may be expected for the remaining
quarters or the year ending March 31, 2004 due to seasonal fluctuations in The
Singing Machine's business, changes in economic conditions and other factors.
For further information, please refer to the Consolidated Financial Statements
and Notes thereto contained in The Singing Machine's Annual Report on Form 10-K
for the year ended March 31, 2003.

INVENTORIES

         Inventories are comprised of electronic karaoke audio equipment,
accessories, and compact discs and are stated at the lower of cost or market, as
determined using the first in, first out method. The following table represents
the major components of inventory at the dates specified.

                                   June 30, 2003  March 31, 2003
                                   -------------  --------------
          Finished goods           $ 27,991,580    $ 27,807,763
          Inventory in transit        1,568,870       1,101,940
          Less Inventory reserve     (3,600,690)     (3,715,357)
                                   ------------    ------------
          Total Inventory          $ 25,959,760    $ 25,194,346
                                   ============    ============

RECLASSIFICATIONS

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

STOCK BASED COMPENSATION

         The Company accounts for stock options issued to employees using the
intrinsic value method in accordance with the provisions of Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations. As such, compensation cost is measured
on the date of grant as the excess of the current market price of the underlying
stock over the exercise price. Such compensation amounts are amortized over the
respective vesting periods of the option grant. The Company applied the
disclosure provisions of Statement of Financial Accounting Standards No. 148,
"Accounting for Stock-Based Compensation-Transition and Disclosure an amendment
of FASB Statement No. 148", which permits entities to provide pro forma net
earnings (loss) and pro forma earnings (loss) per share disclosures for employee
stock option grants as if the fair-valued based method defined in SFAS No. 123
had been applied to options granted.

         Had compensation cost for the Company's stock-based compensation plan
been determined using the fair value method for awards under that plan,
consistent with Statement of Financial Accounting Standards (SFAS) No 123,
"Accounting for Stock Based Compensation" (Statement No. 123), the Company's net
earnings would have been changed to the pro-forma amounts indicated below.

<TABLE>
<CAPTION>
                                                                   JUNE 30, 2003   JUNE 30, 2002
                                                                   -------------   -------------
<S>                                                                <C>             <C>
          Net loss                                   As reported   $ (2,317,352)   $ (1,427,421)
                                                     Pro forma     $ (2,518,804)   $ (1,456,293
          Net loss per share - basic & diluted       As reported   $      (0.28)   $      (0.18)
                                                     Pro forma     $      (0.30)   $      (0.18)
</TABLE>

                                       F-5
<PAGE>

         The effect of applying Statement No. 123 is not likely to be
representative of the effects on reported net earnings for future years due to,
among other things, the effects of vesting.

         For stock options and warrants issued to consultants, the Company
applies the fair value method of accounting as prescribed by SFAS 123. There
were no consulting expenses relating to grants for the quarters ended June 30,
2003 and 2002.

         For financial statement disclosure purposes and for purposes of valuing
stock options and warrants issued to consultants, the fair market value of each
stock option granted was estimated on the date of grant using the Black-Scholes
Option-Pricing Model in accordance with SFAS 123 using the following
weighted-average assumptions:

             First Quarter 2004:       expected dividend yield 0%, risk-free
                                       interest rate of 4%, volatility 79.9% and
                                       expected term of five years.
             First Quarter 2003:       expected dividend yield 0%, risk-free
                                       interest rate of 6.8%, volatility 42%
                                       and expected term of two years.

RECENT ACCOUNTING PRONOUNCEMENTS

         SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities" amends and clarifies accounting for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities under SFAS 133. SFAS 149 is generally effective for contracts
entered into or modified after June 30, 2003 (with a few exceptions) and for
hedging relationships designated after June 30, 2003. The Company does not
expect the provisions of SFAS 149 to have a material impact on its financial
position or results of operations.

         SFAS No. 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity" ("SFAS 150"). SFAS 150 improves
the accounting for certain financial instruments that, under previous guidance,
issuers could account for as equity. The new Statement requires that those
instruments be classified as liabilities in statements of financial position.
This statement is effective at the beginning of the second quarter of fiscal
2004. The Company does not expect the provisions of SFAS 150 to have a material
impact on its financial position or results of operations.

NOTE 2 - GOING CONCERN

         The accompanying unaudited 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.

         On March 14, 2003, the Company was notified of its violation of the net
worth covenant of its Loan and Security Agreement (the "Agreement") with its
commercial lender and the Company was declared in default under the Agreement.
The lender amended the Agreement on July 31, 2003, extending the loan until
August 20, 2003, but did not waive the condition of default. This condition of
default raises substantial doubt about the Company's ability to continue as a
going concern.

         The Company is attempting to restructure and extend its revolving
credit facility. Based upon cash flow projections, the Company believes the
anticipated cash flow from operations will be sufficient to finance the
Company's operating needs until inventory is sold and the receivables
subsequently collected, provided that the bank does not call the loan. 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.

         Although the Company had a larger than normal amount of currently
saleable inventory at June 30, 2003 and March 31, 2003 (based on the Company's
recent sales trends and industry turnover standards), the Company has developed
a fiscal 2004 sales plan that it believes will allow it to sell such inventory
and recover its costs in the normal course of business.

NOTE 3 - RESTATEMENT OF FINANCIAL STATEMENTS FOR THE FISCAL YEARS 2002 AND 2001

         In June 2003, management revised its position on taxation of its
subsidiary's income by the United States and by the Hong Kong tax authorities.

                                       F-6
<PAGE>

         With regard to taxation in Hong Kong, the Company's subsidiary had
previously applied for a Hong Kong offshore claim income tax exemption based on
the locality of profits of the Hong Kong subsidiary. Management believed that
the exemption would be approved because the source of all profits of the Hong
Kong subsidiary is from exporting to customers outside of Hong Kong.
Accordingly, no provision for income taxes was provided in the consolidated
financial statements as of March 31, 2002 and 2001. However, full disclosure was
previously reflected in the audited financial statements for years ended March
31, 2002 and 2001 of the estimated amount that would be due to the Hong Kong tax
authority should the exemption be denied. Management is continuing its exemption
application process. However, due to the extended period of time that the
application has been outstanding, as well as management's reassessment of the
probability that the application will be approved, management has determined to
restate the 2002 and 2001 consolidated financial statements to provide for such
taxes. The effect of such restatement is to increase income tax expense by
$748,672 and $468,424 in fiscal 2002 and 2001, respectively. However, the
Company can claim United States foreign tax credits in 2002 for these Hong Kong
taxes, which is reflected in the final restated amounts.

         With regard to United States taxation of foreign income, the Company
had originally taken the position that the foreign income of the Hong Kong
subsidiary qualified for a deferral under the Internal Revenue Code allowing for
such income to be indefinitely deferred and not taxed in the United States until
such income is repatriated. Full disclosure of the amount and nature of the
indefinite deferral for fiscal year 2002 was reflected in the income tax
footnote of the consolidated financial statements for that year. The internal
revenue code, regulations and case law regarding international income taxation
is quite complex and subject to interpretation. Each case is determined based on
the individual facts and circumstances. Due to certain inter-company loans made
in 2002 and 2003, the profits previously considered to be indefinitely deferred
became partially taxable as "deemed dividends" under section 956 of the Internal
Revenue Code. Although certain arguments against the imposition of a "deemed
dividend" may be asserted, management has determined to restate the fiscal year
2002 consolidated financial statements based on its reassessment of its original
position. The effect of such restatement is to increase income tax expense by
$1,027,545 in fiscal year 2002, which includes the utilization of the foreign
tax credits referred to above.

         The net effect of the above two adjustments for the quarter ended June
30, 2002 is to decrease net income by $118,334. The net effect on net income per
share is to decrease net income per share basic and diluted by $0.01 for the
quarter ended June 30, 2002.

NOTE 4 - LOANS AND LETTERS OF CREDIT

CREDIT FACILITY

         The Company's Hong Kong Subsidiary maintains separate credit facilities
at two international banks.

         The Company maintains a facility with a maximum credit available of
$5.5 million U.S. dollars. The primary purpose of the facilities is to provide
the Subsidiary with the following abilities:

     o    Overdraft facilities
     o    Issuance and negotiation of letters of credit, both regular and
          discrepant
     o    Trust receipts
     o    A Company credit card

         The facilities are secured by a corporate guarantee from the U.S.
Company, maintain restricted cash on deposit with the lender and maintain net
worth as outlined in the agreement.

         The Company executed a short term loan with an international bank in
May of 2003. The $2,000,000 loan carries interest at a SIBOR (Singapore
Interbank Money Offer Rate) rate plus 2.75%. The rate at June 30, 2003 was
4.02%. The loan must be paid in full by October 31, 2003 and a deposit of
$350,000 must be retained in a restricted depository account with the lender
until such time as the loan is paid in full.

LOAN AND SECURITY AGREEMENT

         On April 26, 2001, the Company executed a Loan and Security Agreement
(the "Agreement") with a commercial lender (the "Lender"). On July 31, 2003,
this loan was amended through August 20, 2003. The following is a description of
the terms as amended.

         The Lender will advance up to 70% of the Company's eligible accounts
receivable, plus up to 20% of the eligible inventory up to $6,000,000, plus up
to 40% of the commercial letters of credit opened for the purchase of eligible
inventory up to $3 million, less reserves at the discretion of the lender.

                                       F-7
<PAGE>

         The outstanding loan limit varies between zero and $10,000,000, as
stipulated in the Agreement. The Lender also provides the Company the ability to
issue commercial letters of credit up to $3,000,000, which shall reduce the loan
limits above. The loans bear interest at the commercial lender's prime rate plus
0.5% and an annual fee equal to 1% of the maximum loan amount or $100,000 is
payable. All amounts under the loan facility are due within 90 days of demand.
The loans are secured by a first lien on all present and future assets of the
Company except for certain tooling located at a vendor in China. This amendment
expires August 20, 2003.

         The Agreement contains covenants including a restriction on the payment
of dividends as well as a financial covenant stipulating a minimum tangible net
worth of $30,000,000 as of December 31, 2002 with escalations as defined in the
Agreement. On March 15, 2003, the lender notified the Company that they are in
default of this covenant and the agreement. The balance outstanding at March 31,
2003 was $6,782,824 and was classified as a current liability under revolving
credit facility on the balance sheet. At March 31, 2003, the Company was over
advanced under the agreement by approximately $3 million. The June 30, 2003
amendment gave the Company an additional $4.5 million in availability which gave
the Company working capital and cured the over advance; however, the Amendment
requires the Company to raise $2 million in subordinated debt.

         The Company is currently negotiating a restructuring of the agreement
with the lender.

NOTE 5 - COMMITMENTS AND CONTINGENCIES

LEGAL MATTERS

         CLASS ACTION. From July 2, 2003 through August 11, 2003, ten securities
class action lawsuits were filed against The Singing Machine and certain of its
officers and directors in the United States District Court for the Southern
District of Florida on behalf of all persons who purchased The Singing Machine's
securities during the various class action periods specified in the complaints.
The Company expects that all of these actions will be consolidated in the United
States District Court for the Southern District of Florida.

         The complaints that have been filed allege violations of Section 10(b)
and Section 20(a) of the Securities Exchange Act of 1934 and Rule 10(b)-5. The
complaints seek compensatory damages, attorney's fees and injunctive relief.
While the specific factual allegations vary slightly in each case, the
complaints generally allege that defendants falsely represented the Company's
financial results for the years ended March 31, 2002 and 2001.

         The Company believes that the allegations in these cases are without
merit and the Company intends to vigorously defend these actions. However, as
the outcome of litigation is difficult to predict, significant changes in the
estimated exposures could occur which could have a material affect on the
Company's operations.

         In July 2003, a shareholder filed a derivative action against the
Company, its board of directors and senior management purporting to pursue the
action on behalf of the Company and for its benefit. No pre-lawsuit demand to
investigate the allegations or bring action was made on the board of directors.
The Company is named as a nominal defendant in this case.

         The Complaint alleges claims for breach of fiduciary duty, abuse of
control, gross mismanagement, waste of corporate assets and unjust enrichment.
The complaint alleges that the individual defendants breached their fiduciary
duties and engaged in gross mismanagement by allegedly ignoring indicators of
the lack of control over the Company's accounting and management practices,
allowing the Company to engage in improper conduct and otherwise failing to
carry out their duties and obligations to the Company. The plaintiff's seek
damages for breach of fiduciary duties, punitive and compensatory damages,
restitution, and bonuses or other incentive-based or equity based compensation
received by the CEO and CFO under the Sarbanes-Oxley Act of 2002.

         The Company believes that the allegations in this derivative lawsuit
are without merit and intends to vigorously defend this action.

         OTHER MATTERS. The Company is also subject to various other legal
proceedings and other claims that arise in the ordinary course of its 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 estimated exposures could occur, which could
have a material impact on the Company's operations.

                                       F-8
<PAGE>

NOTE 6 - STOCKHOLDERS' EQUITY

COMMON STOCK ISSUANCES

         During the first quarter of fiscal 2004 and 2003, the Company issued
the following shares of stock upon exercise of outstanding options and warrants.

- ------------- ------------------------------ --------------------------
June 30,      Number of Shares Issued        Proceeds to Company
- ------------- ------------------------------ --------------------------
2004                          128,500                   $207,735
- ------------- ------------------------------ --------------------------
2003                           69,000                    $81,785
- ------------- ------------------------------ --------------------------

EARNINGS PER SHARE

         In accordance with Statement of Financial Accounting Standards No. 128,
"Earnings per Share," basic earnings per share are computed by dividing the net
earnings for the period by the weighted average number of common shares
outstanding. Diluted earnings per share is computed by dividing net earnings by
the weighted average number of common shares outstanding including the effect of
common stock equivalents.

         The following table presents a reconciliation of basic and diluted
earnings per share:

                                                       JUNE 30,
                                                 2003           2002
                                                            (as restated)
Net loss                                      $(2,317,352)   $(1,427,421)
Loss available to common shares               $(2,317,352)   $(1,427,421)
Weighted average shares outstanding -
   basic & diluted                              8,278,469      8,061,277
Loss per share - Basic & Diluted              $     (0.28)   $     (0.18)

         For the quarter ended June 30, 2003 and 2002, 637,681 and 784,331
common stock equivalents were excluded from the computation of diluted earnings
per share because their effect was antidilutive.

NOTE 7 - 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 Company's Subsidiary. Sales by geographic region for the quarters
ended June 30 were as follows:

          SALES                       2003         2002
          United States            $3,863,002   $3,494,039

          France
                                    1,018,046           --
          Italy
                                      792,720           --
          United Kingdom            1,532,065      429,496

          Other                       422,142      373,306
                                   ----------   ----------
          Consolidated Net Sales   $7,627,975   $4,296,841
                                   ==========   ==========

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

NOTE 8 - SUBSEQUENT EVENTS

As of July 10, 2003, the Company obtained $1 million in subordinated debt
financing from a certain officer, directors and an associate of a director. The
Company has not finalized the terms of this loan; however, the Company has
immediate use and access to the $1 million of funding.

As of July 28, 2003, an unrelated party posted a $1 million standby letter of
credit as further collateral on the revolving credit facility. The consideration
to be paid in return for this has not been finalized.

                                       F-9

<PAGE>

                            [GRANT THORNTON LETTERHEAD]




                         REPORT OF INDEPENDENT CERTIFIED
                               PUBLIC ACCOUNTANTS


Board of Directors
The Singing Machine Company, Inc.

We have audited the accompanying consolidated balance sheet of The Singing
Machine Company, Inc. and subsidiary (the "Company") as of March 31, 2003 and
the related consolidated statements of earnings, shareholders' equity and cash
flows for the year then ended. 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 auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of The Singing
Machine Company, Inc. and subsidiary as of March 31, 2003 and the consolidated
results of their operations and their consolidated cash flows for the year then
ended, 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, 2003. 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 financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 2 to the financial
statements, on March 14, 2003, the Company was notified of its violation of the
net worth covenant of its Loan and Security Agreement (the "Agreement") with its
commercial lender (the "Lender") and the Company was declared in default under
the Agreement. As of June 24, 2003, the Company has minimal liquidity. In June
2003, this Lender amended the Agreement through July 31, 2003 but did not waive
the condition of default (see Note 9). This continuing condition of default
raises substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regard to increasing liquidity and restructuring
the Agreement 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 24, 2003 (except for Note 9, as to which the date is July 8, 2003 and Note
  15, as to which the date is July 10, 2003)




                                      F-10
<PAGE>


                          Independent Auditors' Report
                          ----------------------------


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

We have audited the accompanying consolidated balance sheet of The Singing
Machine Company, Inc., and Subsidiary as of March 31, 2002, and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows for the years ended March 31, 2002 and 2001. These consolidated financial
statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated 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 Singing Machine
Company, Inc. and Subsidiary as of March 31, 2002, and the results of their
operations and their cash flows for the years ended March 31, 2002 and 2001 in
conformity with accounting principles generally accepted in the United States of
America.

As more fully described in Note 3 of the fiscal 2003, 2002 and 2001 consolidated
financial statements, subsequent to the issuance of the Company's 2002 and 2001
consolidated financial statements and our report thereon dated May 23, 2002,
management determined to restate the 2002 and 2001 consolidated financial
statements to reflect a change in their position regarding taxation of certain
corporate income and a resulting increase in the income tax provision for years
2002 and 2001. In our related report, we expressed an unqualified opinion. Our
opinion on the revised consolidated financial statements, as expressed herein,
remains unqualified.

/s/ SALBERG & COMPANY, P.A.
- ---------------------------
SALBERG & COMPANY, P.A.
Boca Raton, Florida
May 23, 2002 (except for Note 3 as to which the date is July 14, 2003)


                                      F-11
<PAGE>

                THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
                           CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>

                                                                                        MARCH 31,
                                                                                -------------------------
                                                                                    2003          2002
                                                                                -----------   -----------
                                                                                             (as restated)
                                                                                               (Note 3)
<S>                                                                             <C>           <C>
                                     ASSETS
                                     ------

CURRENT ASSETS
Cash and cash equivalents                                                       $   268,265   $ 5,520,147
Restricted cash                                                                     838,411       513,684
Accounts receivable, less allowance for doubtful accounts of $405,759
in 2003 and $12,022 in 2002                                                       5,762,944     3,536,903
Due from manufacturer                                                             1,091,871       488,298
Inventories                                                                      25,194,346     9,274,352
Prepaid expenses and other current assets                                         1,449,505       422,314
Deferred tax asset                                                                1,925,612       191,418
Deposits                                                                             34,097            --
                                                                                -----------   -----------
                                                  TOTAL CURRENT ASSETS           36,565,051    19,947,116

PROPERTY AND EQUIPMENT, at cost less accumulated depreciation of
$1,472,850 in 2003 and $846,915 in 2002                                           1,096,423       574,657

OTHER ASSETS
Other non-current assets                                                          1,273,820       881,423
                                                                                -----------   -----------
                                                    TOTAL OTHER ASSETS            1,273,820       881,423
                                                                                -----------   -----------
                                                          TOTAL ASSETS          $38,935,294   $21,403,196
                                                                                ===========   ===========

                      LIABILITIES AND SHAREHOLDERS' EQUITY
                      ------------------------------------

CURRENT LIABILITIES
Bank overdraft                                                                      316,646            --
Accounts payable                                                                $ 8,486,009   $ 1,846,238
Accrued expenses                                                                  1,443,406     1,289,597
Due to related party                                                                400,000            --
Revolving credit facility                                                         6,782,824            --
Income taxes payable                                                              3,821,045     2,041,928
                                                                                -----------   -----------
                                             TOTAL CURRENT LIABILITIES           21,249,930     5,177,763
                                                                                -----------   -----------

SHAREHOLDERS' EQUITY
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;  18,900,000 shares authorized;
8,171,678 and 8,020,027 shares issued and outstanding                                81,717        80,200
Additional paid-in capital                                                        4,843,430     4,602,828
Retained earnings                                                                12,760,217    11,542,405
                                                                                -----------   -----------
                                            TOTAL SHAREHOLDERS' EQUITY           17,685,364    16,225,433
                                                                                -----------   -----------
                            TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY          $38,935,294   $21,403,196
                                                                                ===========   ===========
</TABLE>

   THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.


                                      F-12
<PAGE>

                THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
                       CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>


                                                                    For the Years Ended
                                                          March 31,       March 31,       March 31,
                                                            2003            2002            2001
                                                        ------------    ------------    ------------
                                                                        (as restated)  (as restated)
                                                                          (Note 3)       (Note 3)
<S>                                                     <C>             <C>             <C>
NET SALES                                               $ 95,613,766    $ 62,475,753    $ 34,875,351

COST OF SALES                                             72,329,035      40,852,840      22,159,051
                                                        ------------    ------------    ------------

GROSS PROFIT                                              23,284,731      21,622,913      12,716,300

OPERATING EXPENSES
Advertising                                                5,032,367       2,377,638         921,359
Commissions                                                  997,529       1,294,543         837,222
Compensation                                               3,637,559       2,486,547       1,916,612
Freight & Handling                                         2,112,435       1,242,910         882,610
Royalty Expense                                            2,257,653       1,862,116         148,643
Selling, general & administrative expenses                 7,632,958       4,123,779       2,982,261
                                                        ------------    ------------    ------------
TOTAL OPERATING EXPENSES                                  21,670,501      13,387,533       7,688,707
                                                        ------------    ------------    ------------

EARNINGS FROM OPERATIONS                                   1,614,230       8,235,380       5,027,593

OTHER INCOME (EXPENSES)
Other income                                                 196,537         215,840          32,617
Interest income                                               11,943          16,934          50,242
Interest expense                                            (406,126)       (112,123)       (424,104)

Stock based guarantee fees                                        --        (171,472)       (267,029)

Factoring fees                                                    --              --        (231,298)

                                                        ------------    ------------    ------------
NET OTHER EXPENSES                                          (197,646)        (50,821)       (839,572)

EARNINGS BEFORE INCOME TAX                                 1,416,584       8,184,559       4,188,021

PROVISION FOR INCOME TAX                                     198,772       1,895,494         491,744
                                                        ------------    ------------    ------------
NET EARNINGS                                            $  1,217,812    $  6,289,065    $  3,696,277
                                                        ============    ============    ============

EARNINGS PER COMMON SHARE:
                  Basic                                 $       0.15    $       0.88    $       0.59
                  Diluted                               $       0.14    $       0.79    $       0.50

WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES:
                  Basic                                    8,114,330       7,159,142       6,291,792
                  Diluted                                  8,931,385       7,943,473       7,457,173

</TABLE>


   THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.


                                      F-13
<PAGE>

                THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>


                                         PREFERRED STOCK                   COMMON STOCK
                                   ----------------------------    -----------------------------
                                      SHARES          AMOUNT          SHARES          AMOUNT
                                   ------------    ------------    ------------    ------------
<S>                                   <C>          <C>                <C>          <C>
BALANCE AT MARCH 31, 2000             1,000,000    $  1,000,000       4,541,430    $     45,414


Net earnings, as restated                    --              --              --              --

Conversion of preferred stock        (1,000,000)     (1,000,000)      1,500,000          15,000

Exercise of warrants                         --              --         570,000           5,700
Exercise of employee stock
options                                      --              --           2,250              23

Cancellation of shares                       --              --         (75,000)           (750)
Warrants issued for services and
as loan fees                                 --              --              --              --
Amortization of deferred
guarantee fees                               --              --              --              --
                                   ------------    ------------    ------------    ------------

BALANCE AT MARCH 31, 2001                    --              --       6,538,680          65,387


Net earnings, as restated                    --              --              --              --

Exercise of warrants                         --              --         581,100           5,811
Exercise of employee stock
options                                      --              --         900,525           9,005
Fractional share adjustment
pursuant to 3:2 stock split                  --              --            (278)             (3)
Amortization of deferred
guarantee fees                               --              --              --              --
                                   ------------    ------------    ------------    ------------

BALANCE AT MARCH 31, 2002                    --              --       8,020,027          80,200


Net earnings, as restated                    --              --              --              --

Exercise of warrants                         --              --          52,500             525
Exercise of employee stock
options                                      --              --          99,151             992
                                   ------------    ------------    ------------    ------------


BALANCE AT MARCH 31, 2003                    --    $         --       8,171,678    $     81,717
                                   ============    ============    ============    ============
[RESTUBBED]
<CAPTION>


                                                                    DEFERRED
                                     PAID IN         RETAINED       GUARANTEE
                                     CAPITAL         EARNINGS         FEES           TOTAL
                                   ------------    ------------   ------------    ------------
<S>                                <C>             <C>            <C>             <C>
BALANCE AT MARCH 31, 2000          $  1,703,910    $  1,557,063   $   (400,101)   $  3,906,286


Net earnings, as restated                    --       3,696,277             --       3,696,277

Conversion of preferred stock           985,000              --             --              --

Exercise of warrants                    574,300              --             --         580,000
Exercise of employee stock
options                                     622              --             --             645

Cancellation of shares                      750              --             --              --
Warrants issued for services and
as loan fees                             38,400              --             --          38,400
Amortization of deferred
guarantee fees                               --              --        228,629         228,629
                                   ------------    ------------   ------------    ------------

BALANCE AT MARCH 31, 2001             3,302,982       5,253,340       (171,472)      8,450,237


Net earnings, as restated                    --       6,289,065             --       6,289,065

Exercise of warrants                    584,239              --             --         590,050
Exercise of employee stock
options                                 720,135              --             --         729,140
Fractional share adjustment
pursuant to 3:2 stock split              (4,528)             --             --          (4,531)
Amortization of deferred
guarantee fees                               --              --        171,472         171,472
                                   ------------    ------------   ------------    ------------

BALANCE AT MARCH 31, 2002,            4,602,828      11,542,405             --      16,225,433


Net earnings, as restated                    --       1,217,812             --       1,217,812

Exercise of warrants                     47,600              --             --          48,125
Exercise of employee stock
options                                 193,002              --             --         193,994
                                   ------------    ------------   ------------    ------------


BALANCE AT MARCH 31, 2003          $  4,843,430    $ 12,760,217   $         --    $ 17,685,364
                                   ============    ============   ============    ============
</TABLE>


    THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS



                                      F-14
<PAGE>

                THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
                      CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>


                                                                                 FOR THE YEARS ENDED MARCH 31,
                                                                         --------------------------------------------
                                                                             2003            2002            2001
                                                                         ------------    ------------    ------------
                                                                                        (as restated)   (as restated)
                                                                                          (Note 3)        (Note 3)
<S>                                                                      <C>             <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES
     Net earnings                                                        $  1,217,812    $  6,289,065    $  3,696,277
     Adjustments to reconcile net earnings to net cash (used in)
     provided by operating activities:
     Depreciation and amortization                                            622,298         394,456         301,064
     Stock based expenses                                                          --         171,472         267,029
     Bad debt                                                                 393,737          45,078          85,302
     Provision for inventory losses                                         3,715,357              --              --
     Deferred tax benefit                                                  (1,734,194)             --              --
     Changes in assets and liabilities:
     (Increase) decrease in:
     Accounts Receivable                                                   (2,619,778)     (2,626,329)       (312,916)
     Restricted cash                                                         (324,727)       (513,684)             --
     Due from manufacturer                                                   (603,573)        210,798        (699,096)
     Inventories                                                          (19,635,351)     (4,460,891)     (3,326,255)
     Prepaid Expenses and other assets                                     (1,453,685)       (444,004)       (394,176)
     Increase (decrease) in:
     Accounts payable                                                       6,639,771       1,364,158         467,491
     Accrued expenses                                                         153,809         199,445         672,342
     Bank Overdraft                                                           316,646              --              --
     Income taxes payable                                                   1,779,117       1,811,439         479,750
                                                                         ------------    ------------    ------------
                   Net Cash (Used in) Provided by Operating Activities    (11,532,761)      2,441,003       1,236,812
                                                                         ------------    ------------    ------------

CASH FLOWS FROM INVESTING ACTIVITIES
     Purchase of property and equipment                                    (1,144,064)       (613,691)       (373,409)
     Proceeds from investment in factor                                            --         933,407              --
     Proceeds from repayment of related party loans                                --         125,117         386,261
     Investment in and Advances in unconsolidated subsidiary                       --         298,900        (374,730)
                                                                         ------------    ------------    ------------
                   Net cash (used in) provided by Investing Activities     (1,144,064)        743,733        (361,878)
                                                                         ------------    ------------    ------------

CASH FLOWS FROM FINANCING ACTIVITIES
     Proceeds from revolving credit facility                               47,825,725      21,856,653         600,000
     Repayments on revolving credit facility                              (41,042,901)    (21,856,653)       (600,000)
     Proceeds from related party loan                                         400,000              --              --
     Proceeds from exercise of stock options and warrants                     242,119       1,319,190         580,645
     Due from factor                                                               --              --        (818,206)
                                                                         ------------    ------------    ------------
                   Net cash provided by (used in) Financing Activities      7,424,943       1,319,190        (237,561)
                                                                         ------------    ------------    ------------

(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS                           (5,251,882)      4,503,926         637,373

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                            5,520,147       1,016,221         378,848
                                                                         ------------    ------------    ------------

CASH AND CASH EQUIVALENTS AT END OF PERIOD                               $    268,265    $  5,520,147    $  1,016,221
                                                                         ============    ============    ============

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for interest                                   $    406,126    $    112,123    $    424,104
                                                                         ============    ============    ============
Cash paid during the year for income taxes                               $    153,849    $    102,415    $     11,994
                                                                         ============    ============    ============
</TABLE>


   THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.



                                      F-15
<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") are primarily engaged in
the production, marketing, and sale of consumer karaoke audio equipment,
accessories, 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. These estimates and The Singing Machine's actual
results are subject to the risk factors listed in Quantitative and Qualitative
Disclosures About Market Risk Section of the Form 10-K for the year ended March
31, 2003.

         The management of the Company believes that a higher degree of judgment
or complexity is involved in the following areas:

     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
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. At March 31,
2003 and 2002, The Singing Machine had net deferred tax assets of $1.9 million
and $191 thousand, respectively. 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. There is no related valuation allowance at March 31, 2003 and 2002.

         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 Hong Kong
governing body, the Company has reached the decision to provide for the
possibility that the exemption could be denied and accordingly has recorded a
provision in fiscal 2003, 2002, and 2001.

         The Company constructively repatriated approximately $5.6 million, $5.7
million and $0 from its foreign operations in 2003, 2002 and 2001, respectively.
Accordingly, these earnings were treated as a deemed dividend and were taxed
using U.S. statutory rates. No provision has been made for U.S. taxes on the
remaining undistributed earnings of the Company's foreign subsidiary of
approximately $3.6 million at March 31, 2003 and $1.9 million at March 31, 2002,
as it is anticipated that such earnings would be permanently reinvested in their
operations.

         The Company operates within multiple taxing jurisdictions and is
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.


                                      F-16
<PAGE>

         OTHER ESTIMATES. The Singing Machine makes other estimates in the
ordinary course of business relating to sales returns and allowances, 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.

STOCK SPLITS

         On March 15, 2002, the Company effected a 3 for 2 stock split. All
share and per share data have been retroactively restated in the accompanying
consolidated financial statements to reflect the split.

FOREIGN CURRENCY TRANSLATION

         The functional currency of the Company's Hong Kong Subsidiary is the
local currency. The financial statements of the subsidiary are translated to
United States 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 earnings and were not material during
the periods presented. The effect of exchange rate changes on cash at March 31,
2003, 2002 and 2001 were 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
balances at March 31, 2003 and 2002 include approximately $73,000 and $154,000,
respectively, held in foreign banks by the Hong Kong Subsidiary.

COMPREHENSIVE EARNINGS

         Other comprehensive earnings (loss) is defined as the change in equity
of a business enterprise during a period from transactions and other events and
circumstances from non-owner sources, including foreign currency translation
adjustments and unrealized gains and losses on derivatives designated as cash
flow hedges. For the years ended March 31, 2003, 2002 and 2001 comprehensive
earnings was equal to net earnings.

INVENTORIES

         Inventories are comprised of electronic karaoke audio equipment,
accessories, and compact discs and are stated at the lower of cost or market, as
determined using the first in, first out method. Inventory reserves were
$3,715,357 and $0 for March 31, 2003 and 2002, respectively. Inventory consigned
to one customer at March 31, 2003 and 2002 was $56,695 and $2,020,172,
respectively. The following table represents the major components of inventory
at March 31.

                                        2003           2002
                                   ------------    ------------

          Finished goods           $ 27,807,763    $  7,476,237
          Inventory in transit        1,101,940       1,798,115
          Less Inventory reserve     (3,715,357)             --
                                   ------------    ------------

          Total Inventory          $ 25,194,346    $  9,274,352
                                   ============    ============

LONG-LIVED ASSETS

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


                                      F-17
<PAGE>

SHIPPING AND HANDLING COSTS

         Shipping and handling costs are classified as a separate operational
expense and those billed to customers are recorded as revenue on the statement
of earnings.

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.

RECLASSIFICATIONS

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

DUE TO RELATED PARTY

         On March 4, 2003, one of the Company's directors advanced $400,000 to
the Company's Hong Kong subsidiary, which used the funds to pay a debt with a
trade creditor. The Company was to repay this loan by May 4, 2003 and the loan
bore interest at the rate of 8% per annum. The Company repaid $200,000 of the
loan on May 4, 2003 and the director has agreed to extend the remaining balance
until October 31, 2003.

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, 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.

DUE FROM MANUFACTURER

         The Company's Hong Kong Subsidiary operates as an intermediary to
purchase karaoke hardware from factories located in China on behalf of the
Company. A manufacturer affiliated with a former director of the Company
credited the Company for returns of machines to the factory for rework. The
manufacturer also credited the Company for volume incentive rebates on purchases
in fiscal 2003. The balance as of March 31, 2003 was $1,091,871.

STOCK BASED COMPENSATION

         The Company accounts for stock options issued to employees using the
intrinsic value method in accordance with the provisions of Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations. As such, compensation cost is measured
on the date of grant as the excess of the current market price of the underlying
stock over the exercise price. Such compensation amounts are amortized over the
respective vesting periods of the option grant. The Company applied the
disclosure provisions of Statement of Financial Accounting Standards No. 148,
"Accounting for Stock-Based Compensation-Transition and Disclosure an amendment
of FASB Statement No. 148", which permits entities to provide pro forma net
earnings (loss) and pro forma earnings (loss) per share disclosures for employee
stock option grants as if the fair-valued based method defined in SFAS No. 123
had been applied to options granted.

         Had compensation cost for the Company's stock-based compensation plan
been determined using the fair value method for awards under that plan,
consistent with Statement of Financial Accounting Standards (SFAS) No 123,
"Accounting for Stock Based Compensation" (Statement No. 123), the Company's net
earnings would have been changed to the pro-forma amounts indicated below for
the years ended March 31:
<TABLE>
<CAPTION>

                                                              2003          2002              2001
                                                              ----          ----              ----
                                                                        (as restated)    (as restated)
<S>                                                        <C>             <C>              <C>
Net earnings                           As reported         $1,217,812      $6,289,065       $3,696,277
                                       Pro forma            ($522,812)     $6,173,576       $3,696,277
Net earnings per share - basic         As reported              $0.15           $0.88            $0.59
                                       Pro forma               ($0.06)          $0.86            $0.59
Net earnings per share - diluted       As reported              $0.14           $0.79            $0.50
                                       Pro forma               ($0.06)          $0.78            $0.50
</TABLE>


                                      F-18
<PAGE>

         The effect of applying Statement No. 123 is not likely to be
representative of the effects on reported net earnings for future years due to,
among other things, the effects of vesting.

         For stock options and warrants issued to consultants, the Company
applies the fair value method of accounting as prescribed by SFAS 123.
Accordingly, consulting expense of $38,400 was charged to operations in 2001.
There was no consulting expense relating to grants in 2003 and 2002.

         For financial statement disclosure purposes and for purposes of valuing
stock options and warrants issued to consultants, the fair market value of each
stock option granted was estimated on the date of grant using the Black-Scholes
Option-Pricing Model in accordance with SFAS 123 using the following
weighted-average assumptions:

                  Fiscal 2003: expected dividend yield 0%, risk-free interest
         rate of 4%, volatility 71% and expected term of three years.
                  Fiscal 2002: expected dividend yield 0%, risk-free interest
         rate of 6.08% to 6.81%, volatility 42% and expected term of two years.
                  Fiscal 2001: no options were issued; therefore there would be
         no change in net earnings

ADVERTISING

         Costs incurred for producing and communicating advertising of the
Company, are charged to operations as incurred. The Company has cooperative
advertising arrangements with its vendors and accrues the cost of advertising as
a selling expense, calculated on the related revenues. Advertising expense for
the years ended March 31, 2003, 2002 and 2001 was $5,032,367, $2,377,638 and
$921,359, respectively.

RESEARCH AND DEVELOPMENT COSTS

         All research and development costs are charged to the results of
operations when they are incurred. These expenses are shown in the selling,
general & administrative expenses on the consolidated statements of earnings.
For the years ended March 31, 2003, 2002 and 2001, the amounts expensed were
$674,925, $181,866 and $55,376, respectively.

EARNINGS PER SHARE

         In accordance with Statement of Financial Accounting Standards No. 128,
"Earnings per Share", basic earnings per share is computed by dividing the net
earnings for the period by the weighted average number of common shares
outstanding. Diluted earnings per share is computed by dividing net earnings by
the weighted average number of common shares outstanding including the effect of
common stock equivalents.

         The following table presents a reconciliation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>

                                                      2003             2002          2001
                                                      ----             ----          ----
                                                                  (as restated)   (as restated)
<S>                                                <C>             <C>             <C>
Net earnings                                       $1,217,812      $6,289,065      $3,696,277

Income available to common shares                  $1,217,812      $6,289,065      $3,696,277
Weighted average shares outstanding - basic         8,114,330       7,159,142       6,291,792
Earnings per share - Basic                         $     0.15      $     0.88      $     0.59
                                                   ==========      ==========      ==========

Income available to common shares                  $1,217,812      $6,289,065      $3,696,277
Weighted average shares outstanding - basic         8,114,330       7,159,142       6,291,792
Effect of dilutive securities:
Stock options                                         817,055         784,331       1,127,555
Warrants                                                   --              --          37,826
                                                   ----------      ----------      ----------
Weighted average shares outstanding - diluted       8,931,385       7,943,473       7,457,173
Earnings per share - Diluted                       $     0.14      $     0.79      $     0.50
                                                   ==========      ==========      ==========
</TABLE>

         In 2003, 2002 and 2001, 90,000, 0 and 2,529,000 common stock
equivalents (as restated for the 3 for 2 stock split) with exercise prices
greater than $10.66 in fiscal 2003 and $4.11 in fiscal 2001 were not included in
the computation of diluted earnings per share as their effect would have been
antidilutive.


                                      F-19
<PAGE>

FAIR VALUE OF FINANCIAL INSTRUMENTS

         Statement of Financial Accounting Standards 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, accrued expenses, revolving
credit facility and income taxes payable, approximate fair value due to the
relatively short period to maturity for these instruments.

RECENT ACCOUNTING PRONOUNCEMENTS

         In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supersedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of." SFAS No. 144 retained substantially all of the
requirements of SFAS No. 121 while resolving certain implementation issues. SFAS
No. 144 is effective for fiscal years beginning after December 15, 2001. The
impact of adopting SFAS No. 144 was not material.

         In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statement No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." Under Statement No. 4, all gains and losses from extinguishments
of debt were required to be aggregated and, if material, classified as an
extraordinary item, net of related income tax effect. This Statement eliminates
Statement No. 4 and as a result, gains and losses from extinguishment of debt
should be classified as extraordinary items only if they meet the criteria in
Accounting Principles Board Opinion 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions." Additionally, this
Statement amends SFAS No. 13, "Accounting for Leases," such that lease
modifications that have economic effects similar to sale-leaseback transactions
be accounted for in a similar manner as a sale- leaseback. This Statement is
generally effective for financial statements issued on or after May 15, 2002.
The impact of adopting SFAS No. 145 was not material to the Company.

         In July 2002, the FASB issued Statement No. 146, "Accounting for
Restructuring Costs," ("SFAS 146"). SFAS 146 applies to costs associated with an
exit activity (including restructuring) or with a disposal of long-lived assets.
Those activities can include eliminating or reducing product lines, terminating
employees and contracts and relocating plant facilities or personnel. SFAS 146
is effective prospectively for exit or disposal activities initiated after
December 31, 2002, with earlier adoption encouraged. The adoption of this
standard did not a material impact on the financial statements.

         In December 2002, the FASB issued Statement No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure an amendment of FASB
Statement No. 123" ("SFAS 143"). SFAS 148 amends FASB Statement No. 123,
"Accounting for Stock-Based Compensation", to provide alternative methods of
transition for an entity that voluntarily changes to the fair value based method
of accounting for stock-based employee compensation and to require prominent
disclosures about the effects on reported net earnings of an entity's accounting
policy decisions with respect to stock-based employee compensation. SFAS 148
also amends APB Opinion No. 28, "Interim Financial Reporting," to require
disclosures about those effects in interim financial information. The Singing
Machine currently accounts for its stock-based compensation awards to employees
and directors, under accounting prescribed by Accounting Principles Board
Opinion No. 25 and provides the disclosures required by SFAS No. 148. The
Singing Machine currently intends to continue to account for its stock-based
compensation awards to employees and directors using the intrinsic value method
of accounting as prescribed by Accounting Principles Board Opinion No. 25.

         In December 2002, the FASB issued Interpretation 45 (FIN 45),
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others. For a guarantee subject to FASB
Interpretation 45, a guarantor is required to:

 o measure and recognize the fair value of the guarantee at inception (for many
   guarantees, fair value will be determined using a present value method); and

 o provide new disclosures regarding the nature of any guarantees, the maximum
   potential amount of future guarantee payments, the current carrying amount of
   the guarantee liability, and the nature of any recourse provisions or assets
   held as collateral that could be liquidated and allow the guarantor to
   recover all or a portion of its payments in the event guarantee payments are
   required.



                                      F-20
<PAGE>


         The disclosure requirement of this Interpretation is effective for
financial statements for fiscal years ending after December 15, 2002 and did not
have a material effect on the Company's financial statements. The initial
recognition and measurement provision are effective prospectively for guarantees
issued or modified on or after January 1, 2003 and the Company does not believe
that the adoption of these provisions will have a material impact on the
Company's financial statements.

         In January 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities (and Interpretation of ARB No. 51)" ("FIN 46").
FIN 46 addresses consolidation by business enterprises of certain variable
interest entities, commonly referred to as special purpose entities. The
adoption of FIN 46 did not have a material effect on the Company's financial
statement presentation or disclosure.

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.

         On March 14, 2003, the Company was notified of its violation of the net
worth covenant of its Loan and Security Agreement (the "Agreement") with its
commercial lender and the Company was declared in default under the Agreement.
The lender amended the Agreement on June 30, 2003, extending the loan until July
31, 2003, but did not waive the condition of default. This condition of default
raises substantial doubt about the Company's ability to continue as a going
concern.

         The Company is attempting to restructure and extend its revolving
credit facility. Based upon cash flow projections, the Company believes the
anticipated cash flow from operations will be sufficient to finance the
Company's operating needs until inventory is sold and the receivables
subsequently collected, provided that the bank does not call the loan. 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.

         Although the Company had a larger than normal amount of currently
saleable inventory at March 31, 2003 (based on the Company's recent sales trends
and industry turnover standards), the Company has developed a fiscal 2004 sales
plan that it believes will allow it to sell such inventory and recover the
majority of its costs in the normal course of business. The Company has reduced
selling prices on certain inventory items and accordingly, in the fourth quarter
of fiscal 2003, the Company has taken a provision for loss against this
inventory.

NOTE 3 - RESTATEMENT OF FINANCIAL STATEMENTS FOR THE FISCAL YEARS 2002 AND 2001

         In June 2003, management revised its position on taxation of its
subsidiary's income by the United States and by the Hong Kong tax authorities.

         With regard to taxation in Hong Kong, the Company's subsidiary had
previously applied for a Hong Kong offshore claim income tax exemption based on
the locality of profits of the Hong Kong subsidiary. Management believed that
the exemption would be approved because the source of all profits of the Hong
Kong subsidiary is from exporting to customers outside of Hong Kong.
Accordingly, no provision for income taxes was provided in the consolidated
financial statements as of March 31, 2002 and 2001. However, full disclosure was
previously reflected in the audited financial statements for years ended March
31, 2002 and 2001 of the estimated amount that would be due to the Hong Kong tax
authority should the exemption be denied. Management is continuing its exemption
application process. However, due to the extended period of time that the
application has been outstanding, as well as management's reassessment of the
probability that the application will be approved, management has determined to
restate the 2002 and 2001 consolidated financial statements to provide for such
taxes. The effect of such restatement is to increase income tax expense by
$748,672 and $468,424 in fiscal 2002 and 2001, respectively. However, the
Company can claim United States foreign tax credits in 2002 for these Hong Kong
taxes, which is reflected in the final restated amounts.

         With regard to United States taxation of foreign income, the Company
had originally taken the position that the foreign income of the Hong Kong
subsidiary qualified for a deferral under the Internal Revenue Code allowing for
such income to be indefinitely deferred and not taxed in the United States until
such income is repatriated. Full disclosure of the amount and nature of the
indefinite deferral for fiscal year 2002 was reflected in the income tax
footnote of the consolidated financial statements for that year. The internal
revenue code, regulations and case law regarding international income taxation
is quite complex and subject to interpretation. Each case is determined based on
the individual facts and circumstances. Due to certain inter-company loans made
in 2002 and 2003, the profits previously considered to be indefinitely deferred
became partially taxable as "deemed dividends" under section 956 of the Internal
Revenue Code. Although certain arguments against the imposition of a "deemed
dividend" may be asserted, management has determined to restate the fiscal year
2002 consolidated financial statements based on its reassessment of its original
position. The effect of such restatement is to increase income tax expense by
$1,027,545 in fiscal year 2002, which includes the utilization of the foreign
tax credits referred to above.

         The net effect of the above two adjustments is to decrease net income
by $1,776,217 and $468,424 in fiscal 2002 and 2001. The net effect on net income
per share is to decrease net income per share basic and diluted by $0.25 and
$0.23, respectively in fiscal 2002 and decrease net income per share basic and
diluted by $0.07 and $0.06, respectively in fiscal 2001.

                                      F-21
<PAGE>

NOTE 4 - ACCOUNTS RECEIVABLE AND FACTOR AGREEMENT

         During 2001, the Company sold certain trade accounts receivable,
primarily without recourse, pursuant to a factoring agreement. The Company
terminated the factoring agreement in April 2001 upon obtaining a new Loan and
Security Agreement with a commercial lender. (See Note 8) For the year ending
March 31, 2001, the Company incurred $429,509 in factoring fees and interest.
The portion representing factor interest expense was $198,208 of the $429,506.

         During 2000, two officers of the Company entered into guarantee
agreements related to the factor agreement resulting in deferred guarantee fees
of $400,101, which was being amortized over the term of the factor agreement,
which expired on December 31, 2001. Upon termination of the factor agreement,
the unamortized deferred guarantee fees of $171,472 were charged to operations
as amortization in fiscal 2002.

NOTE 5 - SALE OF UNCONSOLIDATED SUBSIDIARY

         In November 2000, the Company closed on an acquisition of 60% of the
ordinary voting shares of a Hong Kong toy company for a total purchase price of
$170,000. The Company believed that the acquiree had agreed to extend the
effective date to June 2001, but a dispute arose and the Company committed to
dispose of the entire investment. Accordingly, pursuant to Statement of
Financial Accounting Standards No. 94 "Consolidation of All Majority-Owned
Subsidiaries," the Company treated the control of the subsidiary as temporary
and recorded the investment of $170,000 and advances of $220,661 at cost. The
Company completed a contract selling the 60% interest on September 11, 2001. The
transaction resulted in a net loss on investment of $48,912 included in selling,
general, and administrative expenses. The advances due at March 31, 2002 were
$75,831 and were included in prepaid and other current assets. There were no
advances due at March 31, 2003.

NOTE 6 - PROPERTY AND EQUIPMENT

         A summary of property and equipment at March 31, 2003 and 2002 is as
follows:
<TABLE>
<CAPTION>

                                                 USEFUL LIVES             2003              2002
         <S>                                      <C>                <C>                <C>
         Computer and office equipment            5 years            $   313,221        $  230,025
         Furniture and fixtures                   5 - 7 years            341,777           106,164
         Leasehold improvements                        *                 110,841            62,483

         Molds and tooling                        3 years              1,803,434         1,022,900
                                                                     -----------        ----------
                                                                       2,569,273         1,421,572
         Less:  accumulated depreciation                              (1,472,850)         (846,915)
                                                                     -----------        ----------
         Total net property and equipment                             $1,096,423          $574,657
                                                                     ===========        ==========
</TABLE>

*   Shorter of remaining term of lease or useful life

NOTE 7 - RESTRICTED CASH

         The Company, through its Hong Kong subsidiary, maintains a letter of
credit facility and short term loan with a major international bank. The
Company's subsidiary is required to maintain a separate deposit account in the
amount of $838,411 and $513,684 at March 31, 2003 and 2002, respectively. This
amount is shown as restricted cash at March 31, 2003 and 2002.

NOTE 8 - LOANS AND LETTERS OF CREDIT

CREDIT FACILITY

         The Company's Hong Kong Subsidiary maintains separate credit facilities
at two international banks. The maximum credit available under these agreements
is $5.5 million U.S. dollars. The primary purpose of the facilities is to
provide the Subsidiary with the following abilities:

o        Overdraft facilities
o        Issuance and negotiation of letters of credit, both regular and
         discrepant
o        Trust receipts
o        A Company credit card

         The facilities do not have an expiration date, but are considered short
term debt. Interest on these facilities range from prime plus 2 to prime plus
2.5. At March 31, the interest rate associated with these lines was 6.25% to
6.5%. The outstanding amount on these facilities at March 31, 2003, was $0 and
there was no availability.

                                      F-22
<PAGE>

LOAN AND SECURITY AGREEMENT

         On April 26, 2001, the Company executed a Loan and Security Agreement
(the "Agreement") with a commercial lender (the "Lender"). This loan was last
amended on June 30, 2003. The following is a description of the terms as
amended.

         The Lender will advance up to 70% of the Company's eligible accounts
receivable, plus up to 20% of the eligible inventory up to $6,000,000, plus up
to 40% of the commercial letters of credit opened for the purchase of eligible
inventory up to $3 million, less reserves at the discretion of the lender.

         The outstanding loan limit varies between zero and $10,000,000, as
stipulated in the Agreement. The Lender also provides the Company the ability to
issue commercial letters of credit up to $3,000,000, which shall reduce the loan
limits above. The loans bear interest at the commercial lender's prime rate plus
0.5% and an annual fee equal to 1% of the maximum loan amount or $100,000 is
payable. All amounts under the loan facility are due within 90 days of demand.
The loans are secured by a first lien on all present and future assets of the
Company except for certain tooling located at a vendor in China. This amendment
expires July 31, 2003.

         The Agreement contains covenants including a restriction on the payment
of dividends as well as a financial covenant stipulating a minimum tangible net
worth of $30,000,000 as of December 31, 2002 with escalations as defined in the
Agreement. On March 15, 2003, the lender notified the Company that they are in
default of this covenant and the agreement. The balance outstanding at March 31,
2003 was $6,782,824 and was classified as a current liability under revolving
credit facility on the balance sheet. At March 31, 2003, the Company was over
advanced under the agreement by approximately $3 million. The June 30, 2003
amendment gave the Company an additional $4.5 million in availability which gave
the Company working capital and cured the over advance; however, the Amendment
requires the Company to raise $2 million in subordinated debt. Although the
Company has only raised $1 million of the required $2 million by the due date,
the Company believes that the commercial lender will continue to support the
increased availability under the Amendment.

         The Company is currently negotiating a restructuring of the agreement
with the lender.

NOTE 9 - COMMITMENTS AND CONTINGENCIES

LEASES

         The Company has entered into various operating lease agreements for
office and warehouse facilities in Coconut Creek, Florida, Compton, California,
Rancho Dominguez, California, New York, New York and Kowloon, Hong Kong. The
leases expire at varying dates. Rent expense for fiscal 2003, 2002 and 2001 was
$901,251, $333,751 and 142,472, 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, 2003 are as follows:
<TABLE>
<CAPTION>

               -------------------- -------------------- -- -----------------------
                                        PROPERTY LEASES          EQUIPMENT LEASES
               -------------------- -------------------- -- -----------------------
               Year ending March 31:
               -------------------- -------------------- -- -----------------------
<S>                           <C>            <C>                           <C>
                              2004           $1,330,158                    $46,525
               -------------------- -------------------- -- -----------------------
                              2005              924,338                     19,965
               -------------------- -------------------- -- -----------------------
                              2006              517,071                     10,322
               -------------------- -------------------- -- -----------------------
                              2007              495,545                      7,969
               -------------------- -------------------- -- -----------------------
                              2008              371,659                      1,235
               -------------------- -------------------- -- -----------------------
                                             $3,638,771                    $86,016
               ========================================= -- =======================
</TABLE>

GUARANTEES

         The Company's Subsidiary guarantees the revolving credit facility at
the lender by a pledge of 60% of its common stock. The Company also in turn
guarantees all lines of credit of the Subsidiary.

EMPLOYMENT AGREEMENTS

         The Company has employment contracts with four key officers as of March
31, 2003. The agreements provide for base salaries, with annual cost of living
adjustments and travel allowances. The agreements also provide for aggregate
Board approved performance bonuses of up to 10% of net earnings before those
performance bonuses, interest, and taxes. During fiscal 2003, 2002 and 2001, the
bonus percentages were 0%, 5% and 10%, respectively.


                                      F-23
<PAGE>

MERCHANDISE LICENSE AGREEMENTS

         On November 1, 2000, as amended on November 29, 2001, as amended on
December 27, 2002, the Company entered into a merchandise license agreement to
license a name, trade name, and logo of a music oriented television network. The
term of the agreement is from November 1, 2000 to December 31, 2003. However,
shipment of related products did not begin until after March 31, 2001.
Accordingly, none of the minimum royalty was charged to operations as of March
31, 2001. The Company pays a royalty rate of a percentage of stipulated sales,
as defined in the agreement, with $686,250 guaranteed minimum royalties for the
term, payable on a scheduled basis as stipulated in the agreement. The initial
minimum royalty guarantee was paid in fiscal year 2002. The new amendment places
an additional guarantee for calendar year 2003 of $1,500,000, payable on a
scheduled basis as follows: $500,000 on the signing of the amendment, December
27, 2002, $333,333 on June 30, 2003, $333,333 on September 30, 2003 and $333,334
on December 31, 2003. Royalty reports are due on a quarterly basis under the
terms of the agreement and the following table represents a summary of the
agreement:
<TABLE>
<CAPTION>
              Total Expense       Prepaid Balance at March 31        Accrued Expense at March 31
<S>              <C>                                 <C>                                      <C>
2003             $1,411,403                          $355,931                                 $0
2002             $1,388,813                                $0                           $126,170
2001                     $0                           $50,000                                 $0
</TABLE>

         On December 1, 2001, the Company entered into an additional agreement
with a division of above licensor for additional license properties and
products. The license term is January 1, 2002 to December 31, 2004 with an
initial stipulated ship date of August 15, 2002. The agreement stipulates a
royalty rate as a percentage of net sales (defined as gross sales less
discounts, allowances and damaged goods returns not to exceed 8% of gross
sales), payable quarterly, with a guaranteed minimum royalty for the license
term of $450,000 payable as follows: $25,000 on execution of agreement, $85,000
on or before September 1, 2002, $85,000 on or before December 1, 2002, $85,000
on or before March 1, 2003, $85,000 on or before June 1, 2003, and $85,000 on or
before September 1, 2003 and the following table represents a summary of the
agreement:
<TABLE>
<CAPTION>
              Total Expense       Prepaid Balance at March 31        Accrued Expense at March 31
<S>                <C>                               <C>                                      <C>
2003               $127,778                          $152,222                                 $0
2002                      0                           $25,000                                 $0
2001                      0                                 0                                 $0
</TABLE>

                  In December 2002, the Company entered into an agreement with a
division of a music and memorabilia restaurant and entertainment chain. The
license term is January 1, 2003 to December 31, 2005. The Company pays a royalty
rate of a percentage of stipulated sales, as defined in the agreement, with a
$250,000 guaranteed minimum royalties for the term, payable on a scheduled basis
as follows: $25,000 on signing of the contract and payments of $25,000 at the
end of each calendar quarter starting March 31, 2003 and ending September 30,
2004, with a final payment of $50,000 due on December 31, 2004 and the following
table represents a summary of the agreement:
<TABLE>
<CAPTION>
              Total Expense       Prepaid Balance at March 31        Accrued Expense at March 31
<S>                 <C>                               <C>                                     <C>
2003                $16,656                           $33,344                                 $0
2002                      0                                 0                                 $0
2001                      0                                 0                                 $0
</TABLE>

                  In February 2003, the Company entered into an agreement with a
large music and entertainment conglomerate. The license term is April 1, 2003 to
March 31, 2006. The Company pays a royalty rate of a percentage of stipulated
sales, as defined in the agreement, with a $300,000 guaranteed minimum royalties
for the term, payable on a scheduled basis as follows: $25,000 on signing of the
contract, $50,000 on June 30, 2003 and payments of $25,000 at the end of each
calendar quarter starting September 30, 2003 and ending September 30, 2005 and
the following table represents a summary of the agreement:
<TABLE>
<CAPTION>
              Total Expense       Prepaid Balance at March 31        Accrued Expense at March 31
<S>                       <C>                         <C>                                     <C>
2003                      0                           $25,000                                 $0
2002                      0                                 0                                 $0
2001                      0                                 0                                 $0
</TABLE>

         Guaranteed royalty payments are non-refundable and not recoupable
against other license agreements with the same licensor.


                                      F-24
<PAGE>

SIGNIFICANT ESTIMATES

         The Company records an accrual for product returns in the normal course
of business. The accrual is estimated based on historical experience and is
recorded as a liability equal to the gross profit on estimated returns. At March
31, 2003 and 2002, the accrual for product returns was $324,422 and $118,488
respectively and are included in accrued expenses on the consolidated balance
sheets.

         The Company estimates an allowance for doubtful accounts using the
specific identification method since a majority of accounts receivable are
concentrated with several customers. The allowance for doubtful accounts was
$405,759 and $12,022 at March 31, 2003 and 2002, respectively.

LEGAL MATTERS

         CLASS ACTION. From July 2, 2003 through July 8, 2003, six securities
class action lawsuits were filed against The Singing Machine and certain of its
officers and directors in the United States District Court for the Southern
District of Florida on behalf of all persons who purchased The Singing Machine's
securities during the various class action periods specified in the complaints.
The Company expects that all of these actions will be consolidated in the United
States District Court for the Southern District of Florida.

         The complaints that have been filed allege violations of Section 10(b)
and Section 20(a) of the Securities Exchange Act of 1934 and Rule 10(b)-5. The
complaints seek compensatory damages, attorney's fees and injunctive relief.
While the specific factual allegations vary slightly in each case, the
complaints generally allege that defendants falsely represented the Company's
financial results for the years ended March 31, 2002 and 2001.

         The Company believes that the allegations in these cases are without
merit and the Company intends to vigorously defend these actions. However, as
the outcome of litigation is difficult to predict, significant changes in the
estimated exposures could occur which could have a material affect on the
Company's operations.

         OTHER MATTERS. The Company is also subject to various other legal
proceedings and other claims that arise in the ordinary course of its 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 estimated exposures could occur, which could
have a material impact on the Company's operations.

NOTE 10 - STOCKHOLDERS' EQUITY

AMENDMENT TO AUTHORIZED SHARES

         During September 2000, the Company filed an amendment to its Articles
of Incorporation decreasing the authorized shares of the Company's common stock
to 18,900,000 shares and 100,000 Class A common shares.

STOCK SPLIT

         On March 15, 2002, the Company effected a 3 for 2 stock split. All
share and per share data have been retroactively restated in the accompanying
consolidated financial statements to reflect the split.

PREFERRED STOCK AND WARRANTS

         During April 1999, the Company issued a private placement memorandum,
pursuant to Rule 506 of Regulation D of the 1933 Securities Act, as amended, to
offer a minimum of 40 units and a maximum of 50 units of stock and warrants.
Each unit consisted of 30,000 shares of the Company's 9% non-voting convertible
preferred stock and 6,000 common stock purchase warrants. The purchase price for
each unit was $ 27,500. Each share of preferred stock was convertible, at the
option of the holder, into one share of the Company's common stock at any time
after issuance, and was to automatically convert into one share of common stock
on April 1, 2000. All preferred shares automatically converted on April 1, 2000.
Each warrant entitles the holder to purchase one share of the Company's common
stock at $2.00 per share. The warrants expire three years from the private
placement memorandum date. Through June 1999, the maximum number of 50 units had
been sold and $1,375,000 gross funds were raised ($1,331,017 after related
costs), at which time the offer was closed. During 2000, 2001, and 2002, 24,000,
201,000, and 75,000 warrants were converted for $32,000, $268,000, and $100,000,
respectively leaving no warrants outstanding at March 31, 2002.


                                      F-25
<PAGE>

COMMON STOCK ISSUANCES

         During fiscal 2003, 2002 and 2001, the Company issued the following
shares of stock upon exercise of outstanding options and warrants.

         ---------- ----------------------------- --------------------------
                          Number of Shares Issued       Proceeds to Company
         ---------- ----------------------------- --------------------------
         2003                            151,651                   $242,119
         ---------- ----------------------------- --------------------------
         2002                          1,481,347                 $1,314,659
         ---------- ----------------------------- --------------------------
         2001                            572,250                   $580,645
         ---------- ----------------------------- --------------------------

GUARANTEE FEES

         During the year ended March 31, 2000, the Company issued 525,000 shares
of common stock to two officers of the Company in exchange for guarantees
related to the Company's factor agreement, and letter of credit agreement. These
guarantee fees totaled $590,625 and were amortized over a period of 31 months.
For the years ended March 31, 2002 and 2001 $228,629 and $361,996 of deferred
fees were charged to operations, respectively. There were no remaining deferred
guarantee fees at March 31, 2002.

         During the year ended March 31, 2001, the Company issued 37,500 common
stock options for services and 45,000 common stock warrants to two investors as
loan fees. The fair market value of the options totaling $38,400 was charged to
operations. There were no transactions made in fiscal 2002 and 2003.

STOCK OPTIONS

         On June 1, 2001, the Board of Directors approved the 2001 Stock Option
Plan, which replaced the 1994 Stock Option Plan, as amended, (the "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, 2003, 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 in any fiscal year. As of March 31, 2003, the Company had granted
745,200 options under the Year 2001 Plan, leaving 1,204,800 options available to
be granted.

         In accordance with SFAS 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 fiscal 2003, and 2002.

         The exercise price of common stock option issuances in 2003 and 2002
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 2003
or 2002. A summary of the options issued as of March 31, 2003, 2002 and 2001 and
changes during the years is presented below:
<TABLE>
<CAPTION>

                                     NUMBER OF    WEIGHTED                    WEIGHTED                    WEIGHTED
                                      OPTIONS     AVERAGE        NUMBER OF     AVERAGE       NUMBER OF     AVERAGE
                                        AND       EXERCISE      OPTIONS AND   EXERCISE      OPTIONS AND   EXERCISE
                                      WARRANTS      PRICE         WARRANTS      PRICE         WARRANTS      PRICE
FISCAL YEAR                                   2003                        2002                        2001
STOCK OPTIONS:
<S>                                  <C>             <C>         <C>            <C>          <C>            <C>
BALANCE AT BEGINNING OF PERIOD       1,094,475       $2.11       2,433,300      $1.31        1,593,300      $0.67

GRANTED                                574,926       $7.88          82,800      $3.92        1,245,750      $2.01

EXERCISED                             (151,651)      $1.63      (1,406,625)     $0.87         (371,250)     $0.84

Forfeited                               (4,500)      $2.04         (15,000)     $2.04          (34,500)     $0.92
                                   -----------                ------------                ------------
BALANCE AT END OF PERIOD             1,513,250       $4.43       1,094,475      $2.11        2,433,300      $1.31
                                   ===========                ============                ============
OPTIONS EXERCISABLE AT END OF          976,250       $2.45         647,738      $2.11        1,435,050      $0.70
PERIOD                             ===========                ============                ============
WEIGHTED AVERAGE FAIR VALUE OF                       $4.90                      $1.54                       $0.85
OPTIONS GRANTED DURING THE PERIOD
</TABLE>




                                      F-26
<PAGE>

         The following table summarizes information about employee stock options
and consultant warrants outstanding at March 31, 2003:
<TABLE>
<CAPTION>

                                                 Weighted Average
 Range of Exercise    Number Outstanding at    Remaining Contractual    Weighted Average    Number Exercisable at   Weighted Average
       Price              March 31, 2003               Life             Exercise Price        March 31, 2003        Exercise Price

<S>        <C>                <C>                      <C>                   <C>                     <C>                 <C>
           $1.11              58,500                   1.24                  $1.11                   58,500              $1.11
           $2.04             785,300                   3.67                  $2.04                  785,300              $2.04
 $3.27 -   $4.23             102,450                   3.20                  $3.83                  102,450              $3.83
 $5.60 -   $7.26             190,000                   5.69                  $6.70                        0              $0.00
  $8.61 - $11.09             377,000                   6.76                  $9.45                   30,000             $11.09
                          ----------                                                             ---------
                           1,513,250                                                                976,250
                          ==========                                                             ==========
</TABLE>

NOTE 11 - 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 earnings consisted of the
following components for 2003, 2002 and 2001:

                               2003             2002              2001
                                            (as restated)     (as restated)
        Current:
        U.S. Federal      $   663,816       $ 1,027,545      $    21,320
        Foreign             1,230,650           748,672          468,424
        State                  38,500           119,277            2,000

        Deferred           (1,734,194)                0                0
                          -----------       -----------      -----------
                          $   198,772       $ 1,895,494      $   491,744
                          ===========       ===========      ===========

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


                                 For the year ended March 31,
                     ------------------------------------------------------
                           2003               2002               2001
                     ---------------     --------------     --------------
United States        $    (5,952,129)    $    3,669,341     $    1,311,899
Foreign                    7,368,713          4,515,218          2,876,122
                     ---------------     --------------     --------------
                     $     1,416,584     $    8,184,559     $    4,188,021
                     ===============     ==============     ==============

         The actual tax expense differs from the "expected" tax expense for the
years ended March 31, 2003, 2002 and 2001 (computed by applying the U.S. Federal
Corporate tax rate of 34 percent to income before taxes) as follows:
<TABLE>
<CAPTION>

                                                               2003               2002               2001
                                                            -----------       -----------       -----------
                                                                          (as restated)      (as restated)
<S>                                                         <C>               <C>               <C>
Expected tax expense                                        $   481,880       $ 2,782,750       $ 1,423,927
State income taxes, net of Federal income tax benefit           (43,204)           78,723                --
Foreign earnings constructively distributed to the U.S.       1,011,628         1,027,545                --
Change in valuation allowance                                        --        (1,059,089)         (609,857)
Tax rate differential on undistributed foreign earnings      (1,326,368)         (812,739)         (517,702)
Other permanent differences                                      74,836          (121,696)          195,376
                                                            -----------       -----------       -----------
                                    ACTUAL TAX EXPENSE      $   198,772       $ 1,895,494       $   491,744
                                                            ===========       ===========       ===========
</TABLE>


                                      F-27
<PAGE>

         The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities at March 31, 2003 and 2002 are
as follows:
<TABLE>
<CAPTION>
                                                               2003              2002
                                                                            (as restated)
<S>                                                      <C>               <C>
          Deferred tax assets:
          Inventory differences                          $ 1,491,021                --
          State net operating loss carryforward          $   171,019       $    89,315
          Bad debt reserve                                   137,958             4,087
          Reserve for sales returns                          110,303            55,886
          Stock based expenses                                    --            13,056
          Amortization of reorganization intangible           28,076            36,400
                                                         -----------       -----------
          Total Gross Deferred Assets                      1,938,377           198,744

          Deferred tax liability:
          Depreciation                                       (12,765)           (7,326)
                                                         -----------       -----------
          Net Deferred Tax Asset                         $ 1,925,612       $   191,418
                                                         ===========       ===========
</TABLE>

         The Company believes that it is more likely than not that the deferred
tax asset will be realized; therefore, no valuation allowance is required.

NOTE 12 - CONCENTRATIONS OF CREDIT RISK, CUSTOMERS, SUPPLIERS, AND FINANCING

         The Company derives primarily all of its revenues from retailers of
products in the United States. Financial instruments, which potentially subject
the Company to concentrations of credit risk, consist of accounts receivable.
The Company's allowance for doubtful accounts is based upon management's
estimates and historical experience and reflects the fact that accounts
receivable are concentrated with several large customers whose credit worthiness
have been evaluated by management. At March 31, 2003, 67% of accounts receivable
were due from four customers: two from the U.S. and two International Customers.
Accounts receivable from four customers that individually owed over 10% of
accounts receivable at March 31, 2003 was 22%, 19%, 15% and 11%. The Company
performs ongoing credit evaluations of its customers and generally does not
require collateral.

         Revenues derived from five customers in 2003, 2002 and 2001 were 67%,
87% and 78% of revenues, respectively. Revenues derived from three customers in
2003 and 2002, and two customers in 2001, respectively, which individually
purchased greater than 10% of the Company's total revenues, were 21%, 17% and
15% in 2003, 37%, 28%, and 10% in 2002 and 32% and 23% in 2001.

         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 2003, 2002 and 2001, manufacturers in the People's
Republic of China (China) accounted for approximately 94%, 95% and 94%
respectively of the Company's total product purchases, including all of the
Company's hardware purchases.

                                      F-28
<PAGE>

         The Company finances its sales primarily through a loan facility with
one lender. (See Note 7) Although management believes there are other sources
available, a loss of the current credit facility could be in the short term,
adversely affect operations until an alternate lending arrangement is secured.
This loan, as amended, expires on July 31, 2003.

         Net sales derived from the Company's Hong Kong based subsidiary
aggregated $49,268,836 in 2003, $27,176,000 in 2002 and $12,595,800 in 2001. The
carrying value of net assets held by the Company's Hong Kong based subsidiary
was $14,932,175 at March 31, 2003.

NOTE 13 - 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 Company's Subsidiary. Sales by customer geographic region for the
years ended March 31 were as follows:
<TABLE>
<CAPTION>


SALES:                                   2003                2002              2001
<S>                                 <C>                <C>                <C>
United States                       $ 76,777,138       $ 62,333,801       $ 34,391,540
Asia                                      21,310             49,314                 --
Australia                                814,334                 --                 --
Canada                                   919,642             47,565             11,420
Central America                           96,836              5,756                 --
Europe                                15,714,846                 --            433,821
Mexico                                 1,225,111                 --                 --
South America                             44,549             39,317             38,570
                                    ------------       ------------       ------------
Consolidated Net Sales              $ 95,613,766       $ 62,475,753       $ 34,875,351
                                    ============       ============       ============
LONG LIVED ASSETS:
United States operations            $    570,065       $    311,590
Hong Kong operations                $  1,800,191       $  1,144,503
Eliminations                                 (13)               (13)
                                    ------------       ------------
Consolidated long-lived assets      $  2,370,243       $  1,456,080
                                    ============       ============
</TABLE>

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

NOTE 14 - 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 earnings for
contributions to this plan and administrative costs during the years ended March
31, 2003, 2002 and 2001 totaled $61,466, $41,733 and $8,682, respectively. The
Company does not provide any post employment benefits to retirees.

NOTE 15 - SUBSEQUENT EVENTS

         As of July 10, 2003, the Company obtained $1 million in subordinated
debt financing from certain officers, directors and an associate of a director.
The Company has not finalized the terms of this loan; however, the Company has
immediate use and access to the $1 million of funding.

                                      F-29
<PAGE>


SUPPLEMENTAL DATA

SCHEDULE I

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 results for the
years 2003 and 2002 are set forth in the following table with the assumption
that the restatement of income tax was evenly distributed over each quarter:
<TABLE>
<CAPTION>

                                                                                    Basic        Diluted
                                                                                   Earnings      Earnings
                                                              Net Earnings        (Loss) Per    (Loss) Per
                             Sales         Gross Profit          (Loss)             Share         Share
<S>                      <C>               <C>                <C>                <C>            <C>
2003
   First quarter         $    4,264,203    $  1,273,322       $ (1,358,780)      $   (0.17)     $  (0.17)
   Second quarter            33,044,306       9,754,954          4,837,926            0.6           0.54
   Third quarter             49,102,372      14,525,191          3,846,894            0.47          0.43
   Fourth quarter             9,202,886      (2,268,736)(1)     (6,108,228)          (0.75)        (0.66)
              Total      $   95,613,766    $ 23,284,730       $  1,217,812       $    0.15      $   0.14


2002 (AS RESTATED)
   First quarter         $    5,573,228    $  1,923,199       $   (470,447)      $   (0.07)     $  (0.07)
   Second quarter            15,797,752       5,408,430          1,881,321            0.28          0.25
   Third quarter             34,324,556      11,884,855          5,444,081            0.74          0.65
   Fourth quarter             6,780,217       2,406,428           (565,890)          (0.07)        (0.04)
              Total      $   62,475,753    $ 21,622,913       $  6,289,065       $    0.88      $   0.79


</TABLE>

(1)  In the fourth quarter of 2003, the Company took expenses relating to a loss
     on a guaranteed margin contract, $2.5 million and a reserve for inventory
     loss of $3.7 million. The guaranteed margin contract reduced sales and the
     reserve for inventory loss reduced cost of sales.

SCHEDULE II

VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>

                                                  BALANCE AT       CHARGED TO        REDUCTION TO     CREDITED TO       BALANCE AT
                                                 BEGINNING OF       COSTS AND        ALLOWANCE FOR     COSTS AND          END OF
                DESCRIPTION                         PERIOD          EXPENSES           WRITE OFF       EXPENSES           PERIOD
<S>                                              <C>             <C>              <C>                <C>              <C>
YEAR ENDED MARCH 31, 2003

Reserves deducted from assets to which
they apply:
      Allowance for doubtful accounts            $  12,022      $    412,055     $       --           $  (18,318)(1)   $    405,759
      Inventory reserves                         $      --      $  3,715,357     $       --           $       --       $  3,715,357
YEAR ENDED MARCH 31, 2002

Reserves deducted from assets to which
they apply:
      Allowance for doubtful accounts            $   9,812      $     45,078     $  (42,868)          $       --       $     12,022
      Inventory reserves                         $      --      $         --     $       --           $       --       $         --
YEAR ENDED MARCH 31, 2001

Reserves deducted from assets to which
they apply:
      Allowance for doubtful accounts            $      --      $     85,302     $  (75,490)          $       --       $      9,812
      Inventory reserves                         $      --      $         --     $       --           $       --       $         --



</TABLE>

(1) Recoveries of amounts previously written off against the reserve.

                                      F-30
<PAGE>

SUPPLEMENTAL DATA


SCHEDULE I

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 results for the years 2003 and
2002 are set forth in the following table with the assumption that the
restatement of income tax was evenly distributed over each quarter:
<TABLE>
<CAPTION>
                                                                                   BASIC         DILUTED
                                                                                  EARNINGS       EARNINGS
                                                              NET EARNINGS       (LOSS) PER     (LOSS) PER
                            SALES          GROSS PROFIT          (LOSS)             SHARE          SHARE
                         ------------      ------------       ------------       -----------    -----------
<S>                      <C>               <C>                <C>                <C>            <C>
2003
   First quarter         $  4,264,203      $  1,273,322       $ (1,358,780)      $     (0.17)   $     (0.17)
   Second quarter          33,044,306         9,754,954          4,837,926              0.60           0.54
   Third quarter           49,102,372        14,525,191          3,846,894              0.47           0.43
   Fourth quarter           9,202,885        (2,268,736)(1)     (6,108,228)            (0.75)         (0.66)
              Total      $ 95,613,766      $ 23,284,730       $  1,217,812       $      0.15    $      0.14

2002 (AS RESTATED)
   First quarter         $  5,573,228      $  1,923,199       $   (470,447)      $     (0.07)   $     (0.07)
   Second quarter          15,797,752         5,408,430          1,881,321              0.28           0.25
   Third quarter           34,324,556        11,884,855          5,444,081              0.74           0.65
   Fourth quarter           6,780,217         2,406,429           (565,890)            (0.07)         (0.04)
              Total      $ 62,475,753      $ 21,622,913       $  6,289,065       $      0.88    $      0.79
</TABLE>
- ----------
(1)      In the fourth quarter of 2003, the Company took expenses relating to a
         loss on a guaranteed margin contract, $2.5 million and a reserve for
         inventory loss of $3.7 million. The guaranteed margin contract reduced
         sales and the reserve for inventory loss reduced cost of sales.

(2)      This table makes the assumption that the restatement of income tax was
         evenly distributed over each quarter.

                                      F-31

<PAGE>

SUPPLEMENTAL DATA


SCHEDULE II
<TABLE>
<CAPTION>

VALUATION AND QUALIFYING ACCOUNTS
                  BALANCE AT          CHARGED TO            REDUCTION TO            CREDITED TO             BALANCE AT
                 BEGINNING OF         COSTS AND            ALLOWANCE FOR             COSTS AND                END OF
  DESCRIPTION       PERIOD             EXPENSES              WRITE OFF               EXPENSES                 PERIOD
<S>               <C>               <C>                    <C>                    <C>                     <C>
YEAR ENDED
MARCH 31, 2003
Reserves deducted
from assets to
which they apply:
     Allowance
     for
     doubtful

     accounts     $  12,022         $    412,055           $        --            $  (18,318)  (1)        $    405,759
     Inventory    $      --         $  3,715,357           $        --            $        --             $  3,715,357
     reserves
YEAR ENDED
MARCH 31, 2002
Reserves deducted
from assets to
which they apply:
     Allowance
     for
     doubtful
     accounts     $   9,812         $     45,078           $  (42,868)            $        --             $     12,022
     Inventory    $      --         $         --           $        --            $        --             $         --
     reserves
YEAR ENDED
MARCH 31, 2001
Reserves deducted
from assets to
which they apply:
     Allowance
     for
     doubtful
     accounts     $      --         $     85,302           $  (75,490)            $        --             $      9,812
     Inventory    $      --         $         --           $        --            $        --             $         --
     reserves
</TABLE>
- ----------

(1) Recoveries of amounts previously written off against the reserve.

                                      F-32


<PAGE>

                                     PART II

                     Information Not Required in Prospectus
                     --------------------------------------

Item 13. Other Expenses of Issuance and Distribution.

         The following table sets forth various expenses, which will be incurred
in connection with the registration of our securities. Other than the SEC
Registration Fee, the amounts set forth below are estimates:

         SEC Registration Fee ....................................    $   947.37
         Printing & Engraving Expenses ...........................    $ 5,000.00
         Legal Fees and Expenses .................................    $25,000.00
         Accounting Fees and Expenses ............................    $30,000.00
                                                                      ----------
                              TOTAL: .............................    $60,947.37
                                                                      ==========
Item 14. Indemnification of Directors and Officers

         As a Delaware corporation, we are subject to the Delaware General
Corporation Law. Section 102(b)(7) of Delaware law enables a corporation in its
certificate of incorporation to eliminate or limit personal liability of members
of its Board of Directors for monetary damages for breach of a director's
fiduciary duty of care. Article 10 of our Certificate of Incorporation provides
that a director shall not be personally liable to us or our stockholders for
monetary damages for breach of fiduciary duty as a director, except for
liability (i) for any breach of the director's duty of loyalty to us or our
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under Section 174 of
the General Corporation Law of Delaware or (iv) for any transaction from which
the director derived an improper personal benefit and contains a comparable
provision.

         Section 145 of Delaware law permits a corporation organized under
Delaware law to indemnify directors and officers with respect to any matter in
which the director or officer acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the company, and with
respect to any criminal action or proceeding, he had no reasonable cause to
believe his conduct was unlawful. Article VI of our Bylaws provides that our
officers, directors, employees or agent shall be indemnified to the full extent
permitted by Delaware law. Article VI also provides that we may advance expenses


                                      II-1
<PAGE>

to a director prior to the final disposition of the action. However, if required
under Delaware law, we may require an officer or director to give us an
undertaking in advance of the final disposition that he will repay all amounts
so advanced, if it shall ultimately be determined that such officer or director
is not entitled to be indemnified under our by-laws or otherwise.

         The above discussion of Delaware law and our certificate of
incorporation and bylaws is not intended to be exhaustive and is qualified in
its entirety by our certificate of incorporation, bylaws and Delaware law.

Item 15. Recent Sales of Unregistered Securities

         The following table sets forth our sale of securities during the last
three years, which securities were not registered under the Securities Act of
1933, as amended. No underwriters were employed with respect to the sale of any
of the securities listed below. All shares were issued in reliance on Section
4(2) and/or Section 3(b) of the Securities Act.

         1. During fiscal 2000, six employees exercised options to acquire 70,
500 stock options. The names of the employees, the number of shares purchased
and the proceeds to us are listed below:
<TABLE>
<CAPTION>
                               NUMBER OF          PURCHASE       PROCEEDS TO       DATE OF
         NAME                  SHARES ACQUIRED    PRICE          THE COMPANY       EXERCISE
         ----                  ---------------    --------       -----------       --------
         <S>                      <C>              <C>             <C>             <C>
         Melody Rawski             5,000           $.43            $ 2,150         12/30/99
         John Steele               5,000           $.43            $ 2,150         01/04/00
         John Klecha              50,000           $.43            $21,500         01/18/00
         Terry Marco               5,000           $.43            $ 2,150         01/25/00
         Terri Phillips            2,500           $.43            $ 1,075         02/16/00
         Adolph Nelson             1,500           $.43            $   645         03/15/00
         Jorge Otaegui             1,500           $.43            $   645         08/02/00
</TABLE>

         Each of the employees paid for the options with cash. Each employee's
exercise of the option was made in reliance on Section 4(2) of the Securities
Act. Each employee represented that he/she had no need for liquidity in his/her
investment and had adequate financial resources to withstand a total loss of
their investment. A legend was placed on the certificates stating that the
securities were not registered under the Securities Act and set forth the
restrictions on their transferability and sale.

                                      II-2
<PAGE>

         2. During fiscal 2000, fifteen warrant holders exercised their warrants
to acquire 396,000 shares of our common stock. The names of the warrant holders,
the date of exercise, the number of shares purchased, the exercise price and the
proceeds received by us are listed below.
<TABLE>
<CAPTION>

                        DATE OF         NO. OF      EXERCISE        PROCEEDS TO THE
NAME                    EXERCISE        SHARES      PRICE           COMPANY
- -----                   --------        ------      --------        ---------------
<S>                      <C>            <C>          <C>            <C>
Benchmark Capital        4/26/00        16,000       $2.00          $ 32,000
Sebastian Angelico       5/03/00         4,000       $2.00          $  8,000
Josef Bauer              5/15/00         8,000       $2.00          $ 16,000
Portfolio Research
Associates               5/17/00        76,000       $1.375         $104,500
Albert Wardi             5/22/00         2,000       $2.00          $  4,000
Jack Robbins             5/24/00        75,000       $1.00          $ 75,000
Jack Robbins             5/24/00        75,000       $1.50          $112,500
Jack Robbins             5/24/00        20,000       $2.00          $ 40,000
Wolcot Capital Inc.      5/24/00         4,000       $2.00          $128,000
Wendy Blauner            5/24/00         4,000       $2.00          $  8,000
Jon Blauner              5/24/00         4,000       $2.00          $  8,000
John Klecha              9/25/00         4,000       $2.00          $  8,000
Bank Sal. Oppenheim     10/27/00        40,000       $2.00          $ 80,000
Union Atlantic          11/01/00        20,000       $1.00          $ 20,000
Sil Venturi             12/01/00         4,000       $2.00          $  8,000
Aton Trust              12/01/00        40,000       $2.00          $ 80,000
</TABLE>

Each of these warrant holders exercised their warrants in reliance upon Section
4(2) of the Securities Act of 1933, because each of the holders was
knowledgeable, sophisticated and had access to comprehensive information about
us. We placed legends on the certificates stating that the securities were not
registered under the Securities Act and set forth the restrictions on their
transferability and sale.

         3. In May 2000, we obtained two working capital loans in the amount of
$100,000 and $500,000 from Maureen La Rouche and Josef Bauer. The loans were for
a period of eight months and bore interest at the rate of 15% per annum. As
consideration for extending the loans, we issued 5,000 warrants to Ms. La Rouche
and 25,000 warrants to Mr. Bauer. Each warrant allowed the holder to purchase
one share of our common stock at an exercise price of $3.25 per share. The
warrants expire on May 25, 2003.

         4. During September 2000, we issued 25,000 warrants to Neal Berkman for
services rendered to our Company. Mr. Berkman a principal at Berkman and
Associates, a firm that provides investor relation services to us. The warrants
have an exercise price of $3.06 per share and 25,000 warrants vest on December
1, 2001 and 50% on December 1, 2002. All warrants expire on December 1, 2006.

                                      II-3
<PAGE>

         5. In September 2000, we issued an aggregate of 625,500 options to our
employees, as consideration for services they had rendered to us. We issued
these options to our employees in reliance upon Section 4(2) of the Securities
Act, because our employees were knowledgeable, sophisticated and had access to
comprehensive information about us.
<TABLE>
<CAPTION>
                             NO. OF           EXERCISE
         NAME                OPTIONS          PRICE
         ----                -------          --------
         <S>                 <C>              <C>
         Brian Cino           10,000          $3.06
         April Green          20,000          $3.06
         Alicia Haskamp       30,000          $3.06
         John Klecha         180,000          $3.06
         Terry Marco          30,000          $3.06
         Marion McElligott     5,000          $3.06
         Jamilla Miller        3,000          $3.06
         Howard Moore         25,000          $3.06
         Adolph Nelson         2,500          $3.06
         Jorge Otaeugi         3,000          $3.06
         Terry Phillips        5,000          $3.06
         Melody Rawski        10,000          $3.06
         Eddie Steele        200,000          $3.06
         John Steele          50,000          $3.06
         Richard Torrelli      2,000          $3.06
         Edwin Young          50,000          $3.06
</TABLE>

For each employee, officer or director, fifty percent of their options are
exercisable on December 1, 2001 and 50% on December 1, 2002. The options all
expire on December 1, 2006.

         6. On September 2000, we issued an aggregate of 50,000 options to our
current directors and one previous director for their services to us during the
preceding year. We issued these options to our directors in reliance upon
Section 4(2) of the Securities Act, because our directors were knowledgeable,
sophisticated and had access to comprehensive information about us.
<TABLE>
<CAPTION>
                                   NO. OF                     EXERCISE
         NAME                      OPTIONS                    PRICE
         ----                      -------                    ---------
         <S>                       <C>                        <C>
         Josef Bauer               10,000                     $3.06
         Edward Steele             10,000                     $3.06
         John Klecha               10,000                     $3.06
         Howard Moore              10,000                     $3.06
         Alan Schor                10,000                     $3.06
</TABLE>

These options are immediately exercisable. The options all expire on September
5, 2006.

         7. On March 13, 2001, we issued 20,000 options to Robert Weinberg and
10,000 options to John DeNovi. The exercise price of these options is $4.90 per
share and the expiration date is March 13, 2006. Half of Mr. Weinberg's options
vest on December 1, 2001 and the remainder vest on December 1, 2002. Half of Mr.
DeNovi's options vest on March 13, 2002 and the remainder vest on March 13,
2003. We issued these options to Mr. Weinberg and Mr. DeNovi in reliance upon
Section 4(2) of the Securities Act, because our employees were knowledgeable,
sophisticated and had access to comprehensive information about us.

                                      II-4
<PAGE>

         8. During fiscal 2002, thirteen employees, one director and one former
director exercised stock options issued under our 1994 Amended and Restated
Management Stock Option Plan. The employees exercised options to acquire an
aggregate of 71,400 shares of our common stock. The names of the option holders,
the dates of exercise, the number of shares purchased, the exercise price and
the proceeds received by the Company are listed below.
<TABLE>
<CAPTION>

                       DATE OF        NO. OF          EXERCISE
NAME                   EXERCISE       SHARES          PRICE                 PROCEEDS
- ----                   --------       ------          ---------             --------
<S>                    <C>            <C>             <C>                   <C>
Adolph Nelson          04/30/01         1,500         $ .43                 $   645
John Steele            04/30/01         5,000         $ .43                 $ 2,150
Teresa Marco           05/01/01         5,000         $ .43                 $ 2,150
Terry Philips          05/01/01         1,500         $ .43                 $   645
Brian Cino             05/02/01         3,400         $ .43                 $ 1,462
John Klecha            05/30/01        50,000         $ .43                 $21,500
Melody Rawski          06/14/01         5,000         $ .43                 $ 2,150
Terry Phillips         07/11/01         1,500         $ .43                 $   645
April Green            07/11/01           100         $ .66                 $   166
Brian Cino             07/15/01           800         $ .43                 $   344
April Green            07/11/01           200         $1.66                 $   332
John Steele            07/24/01        10,000         $ .43                 $16,600
Josef Bauer            08/16/01        10,000         $3.06                 $30,600
April Green            08/16/01           200         $1.66                 $   332
Edward Steele          09/28/01       175,000         $ .43                 $75,250
Edward Steele          09/28/01         5,000         $3.06                 $15,300
April Green            10/02/01         1,000         $1.66                 $ 1,660
April Green            10/31/01         1,000         $1.66                 $ 1,660
John Steele            11/06/01        10,000         $1.66                 $16,600
Brian Cino             11/13/01           350         $ .43                 $   151
April Green            11/13/01         1,000         $1.66                 $ 1,660
Teresa Marco           11/13/01        10,000         $1.66                 $16,600
John Steele            12/07/01         5,000         $3.06                 $15,300
April Green            12/07/01           700         $1.66                 $ 1,162
Melody Rawski          12/18/01         5,000         $3.06                 $15,300
April Green            12/18/01         2,000         $3.06                 $ 6,120
Edwin Young            12/28/01        25,000         $3.06                 $76,500
Adolph Nelson          12/28/01         1,250         $3.06                 $ 3,825
Eddie Steele           01/03/02       262,500         $.287                 $75,250
Eddie Steele           01/03/02        45,000         $1.107                $49,800
Eddie Steele           01/03/02        15,000         $2.04                 $30,600
Alicia Haskamp         01/03/02         6,000         $2.04                 $12,240
M. McElligott          02/06/02         3,750         $2.04                 $ 7,650
Brian Cino             02/06/02           675         $.287                 $193.50
Brian Cino             02/06/02         1,350         $2.04                 $ 2,754
Jorge Otaeugi          02/06/02         2,250         $.287                 $   645
Jorge Otaeugi          02/06/02         2,250         $2.04                 $ 4,590
John Steele            02/06/02         7,500         $2.04                 $15,300
Terry Phillips         02/19/02           450         $2.04                 $   918
Alan Schor             02/19/02         7,500         $2.04                 $15,300
Robert Torrelli        03/07/02           150         $2.04                 $   306
John DeNovi            03/07/02         2,550         $3.27                 $ 8,330
John Steele            03/14/02        22,500         $2.04                 $45,900
Terry Phillips         03/22/02           900         $2.04                 $ 1,836
</TABLE>

Each person paid for theirs shares with cash. Each person exercised their
options in reliance upon Section 4(2) of the Securities Act of 1933, because
he/she was knowledgeable, sophisticated and had access to comprehensive
information about the Company. The shares issued to these optionees were
registered under the Securities Act on a registration statement on Form S-8. The
shares issued to employees who were not affiliates did not contain any
restrictive legends. The shares issued to our executive officers and our
directors contained a control legend. Control legends were contained on the
shares issued to Eddie Steele, our Chief Executive Officer and a director, John
Klecha, our Chief Operating Officer and a director and Josef Bauer, our
director.

                                      II-5
<PAGE>

            9. During fiscal 2002, ten warrant holders exercised their warrants
to acquire an aggregate of 298,400 shares of our common stock. All of these
persons acquired their warrants in the Company's private offering of units in
May 1999. The names of the warrant holders, the dates of exercise the number of
shares purchased, the exercise price and the proceeds received by the Company
are listed below.
<TABLE>
<CAPTION>
                         DATE OF         NO. OF    EXERCISE   PROCEEDS
NAME                     EXERCISE        SHARES    PRICE
- ----                     --------        ------    --------   --------
<S>                      <C>             <C>       <C>       <C>
Entropy Holdings         04/30/01        10,000    $2.00     $ 20,000
FRS Investments          04/30/01        10,000    $1.375    $ 13,750
Itamar Zac Jones         07/15/01         4,000    $2.00     $  8,000
Edward Borelli           10/29/01        95,400    $1.375    $131,175
Anthony Broy             10/31/01         4,000    $2.00     $  8,000
SISM Research            11/02/01        10,000    $2.00     $ 20,000
Clarion Finanz AG        11/08/01         7,000    $1.375    $ 92,125
FRS Investments          12/31/01        20,000    $1.375    $ 27,500
Eddie Steele             01/03/02        12,000    $1.33     $ 16,000
Fred Merz                02/19/02         6,000    $1.33     $  8,000
FRS Investments          03/04/02        30,000    $0.917    $ 27,500
John Klecha              03/19/02        30,000    $1.33     $ 40,000
</TABLE>

Each of the warrant holders paid for their shares with cash. Each of these
warrant holders exercised their warrants in reliance upon Section 4(2) of the
Securities Act of 1933, because each of these holders was knowledgeable,
sophisticated and had access to comprehensive information about the Company. The
Company placed legends on the certificates stating that the securities were not
registered under the Securities Act and set forth the restrictions on their
transferability and sale.

         10. On August 15, 2001, the Company issued an aggregate of 50,000
options to its directors pursuant to an annual grant of options to persons who
had served on the Board during the previous year. Each of the following
directors received 10,000 options: Eddie Steele, John Klecha, Josef Bauer,
Howard Moore and Robert Weinberg. The exercise price of the options is $6.35 per
share and the options expire on August 14, 2006. The options are exercisable
immediately. We issued these options to our directors in reliance upon Section
4(2) of the Securities Act, because our directors are knowledgeable,
sophisticated and have access to comprehensive information about the Company.

                                      II-6
<PAGE>

         11. On August 16, 2001, Josef Bauer and Maureen LaRoche, Mr. Bauer's
assistant, exercised warrants to acquire an aggregate of 90,000 shares of the
Company's common stock. Mr. Bauer and Ms. LaRoche acquired these warrants when
they advanced working capital to the Company in May 2000. The dates of exercise
the number of shares purchased, the exercise price and the proceeds received by
the Company are listed below.
<TABLE>
<CAPTION>
                  DATE OF         NO. OF    EXERCISE
NAME              EXERCISE        SHARES    PRICE      PROCEEDS
- ----              --------        ------    --------   --------
<S>                 <C>           <C>         <C>      <C>
Josef Bauer         8/16/01       10,000      $2.00    $20,000
Josef Bauer         8/16/01       25,000      $3.25    $81,250
Josef Bauer         8/16/01       50,000      $1.00    $50,000
Maureen LaRoche     8/16/01        5,000      $3.25    $16,250
</TABLE>

Mr. Bauer and Ms. LaRoche paid for their shares with cash and exercised their
warrants in reliance upon Section 4(2) of the Securities Act of 1933, because
each was knowledgeable, sophisticated and had access to comprehensive
information about the Company. The Company placed legends on the certificates
stating that the securities were not registered under the Securities Act and set
forth the restrictions on their transferability and sale.

         12. On November 30, 2001, Neil Berkman exercised options to acquire
25,000 shares of our common stock at a purchase price of $3.06 per share. Mr.
Berkman acquired these warrants for financial consulting services that he
rendered to the Company. Mr. Berkman paid for his shares with cash and exercised
their warrants in reliance upon Section 4(2) of the Securities Act of 1933,
because he was knowledgeable, sophisticated and had access to comprehensive
information about the Company. The Company placed legends on the certificates
stating that the securities were not registered under the Securities Act and set
forth the restrictions on their transferability and sale.

         13. On December 28, 2001, Josef Bauer exercised 10,000 stock options
acquired under our Year 2001 Stock Option Plan. Mr. Bauer exercised his options
in reliance upon Section 4(2) of the Securities Act of 1933, because he was
knowledgeable, sophisticated and had access to comprehensive information about
the Company. The Company placed legends on the certificates stating that the
securities were not registered under the Securities Act and set forth their
restrictions on transferability and sale.

         14. During fiscal 2003, five employees and a director exercised stock
options issued under our 1994 Amended and Restated Management Stock Option Plan.
The employee exercised options to acquire an aggregate of shares of our common
stock. The names of the option holder, the dates of exercise, the number of
shares purchased, the exercise price and the proceeds received by the Company
are listed below.
<TABLE>
<CAPTION>
                    Date of           No. of         Exercise
Name                Exercise          Shares         Price          Proceeds
- ----                --------          ------         --------       --------
<S>                 <C>               <C>            <C>           <C>
Alicia Haskamp      04/06/02          16,500         $2.04         $33,660
Howard Moore        07/12/02          33,750         $2.04         $68,850
Terri Phillips      07/31/02             600         $2.04         $ 1,224
Adolph Nelson       12/19/02           1,875         $2.04         $ 3,825
Edwin Young         01/21/03          37,500         $2.04         $76,500
April Green         02/24/03           1,000         $2.04         $ 2,040
</TABLE>

                                      II-7
<PAGE>

Each employee paid for the shares with cash. Each employee exercised his/her
options in reliance upon Section 4(2) of the Securities Act of 1933, because
he/she was knowledgeable, sophisticated and had access to comprehensive
information about the Company. The shares issued to employees who were not
affiliates did not contain any restrictive legends. The shares issued to our
executive officer and our director contained a control legend. Control legends
were contained on the shares issued to April Green, our Chief Financial Officer,
and Howard Moore, our director.

         15. During the three month period ended June 30, 2002, one warrant
holder exercised its warrants to acquire an aggregate of 52,500 shares of our
common stock. The name of the warrant holder, the date of exercise, the number
of shares purchased, the exercise price and the proceeds received by the Company
are listed below.
<TABLE>
<CAPTION>
                       DATE OF      NO. OF        EXERCISE
NAME                   EXERCISE     SHARES        PRICE        PROCEEDS
- ----                   --------     ------        --------     --------
<S>                    <C>          <C>           <C>          <C>
FRS Investments        05/17/02     52,500        $0.9167      $48,125
</TABLE>

FRS paid for its shares with cash. FRS exercised its warrants in reliance upon
Section 4(2) of the Securities Act of 1933, because it was knowledgeable,
sophisticated and had access to comprehensive information about the Company. The
Company placed legends on the certificates stating that the securities were not
registered under the Securities Act and set forth the restrictions on their
transferability and sale.

         16. On December 31, 2002, we issued an aggregate of 187,000 options to
our employees, as consideration for services they had rendered to us. We issued
these options to our employees in reliance upon Section 4(2) of the Securities
Act, because our employees were knowledgeable, sophisticated and had access to
comprehensive information about us.
<TABLE>
<CAPTION>
NAME                      NO. OF OPTIONS ISSUED       PRICE
- ----                      ---------------------       -----
<S>                              <C>                  <C>
Frank Abell                       6,000               $9.00
Jennifer Barnes                   5,000               $9.00
Dan Becherer                     10,000               $9.00
Almina Brady-Dykes                6,000               $9.00
Elizabeth Canela                  3,000               $9.00
Tammy Chestnut                    1,000               $9.00
Belinda Cheung                      500               $9.00
Danny Cheung                      1,000               $9.00
Jeffrey Chiu                      1,000               $9.00
Brian Cino                        3,000               $9.00
John DeNovi                      10,000               $9.00
Teresa Garcia                    15,000               $9.00
April Green                      20,000               $9.00
Alicia Haskamp                   18,000               $9.00
Michelle Ho                       3,000               $9.00
Wilson Ho                         1,000               $9.00
Dale Hopkins                     10,000               $9.00
Irene Ko                          3,000               $9.00
Bill Lau                          4,500               $9.00
Dora Lee                          3,000               $9.00
Nataly Lessard                    6,000               $9.00
Gigi Leung                          500               $9.00
Marian McElligott                15,000               $9.00
Adolph Nelson                     2,000               $9.00
Rick Ng                             500               $9.00
Cathy Novello                     4,000               $9.00
Jennifer O'Kuhn                   2,000               $9.00
Jorge Otaegui                     2,000               $9.00
Terri Phillips                    3,000               $9.00
Melody Rawski                     5,000               $9.00
Asante Sellers                    1,000               $9.00
Stacy Sethman                     5,000               $9.00
John Steele                      10,000               $9.00
Richard Torrelli                  1,000               $9.00
Nicolas Venegas                   2,000               $9.00
Vicky Xavier                      2,500               $9.00
Ho Man Yeung                        500               $9.00
Yen Yu                            1,000               $9.00
</TABLE>

                                      II-8
<PAGE>

For each employee, twenty percent (20%) of their options are exercisable on
January 1, 2004 and 20% exercisable each January 1st thereafter with the last
20% becoming exercisable on January 1, 2008. The options expire 5 years after
they become exercisable with varying expiration dates from December 31, 2009
through December 31, 2013.

         17. During the three month period ended June 30, 2003, four employees
exercised stock options issued under our 1994 Amended and Restated Management
Stock Option Plan. The employee exercised options to acquire an aggregate of
128,500 shares of our common stock. The names of the option holder, the dates of
exercise, the number of shares purchased, the exercise price and the proceeds
received by the Company are listed below.
<TABLE>
<CAPTION>
                       NO. OF OPTIONS        EXERCISE              EXERCISE
NAME                   EXERCISED             PRICE                 DATE                  PROCEEDS
- ----                   --------------        --------              --------              --------
<S>                        <C>               <C>                   <C>                   <C>
John Steele                30,000            $2.04                 04/9/03               $61,200
Allen Schor                 7,500            $2.04                 04/9/03               $15,300
Alicia Haskamp              7,500            $2.04                 04/18/03              $15,300
Alicia Haskamp             10,000            $2.04                 04/01/03              $20,400
John Klecha                58,500            $1.11                 04/22/03              $64,935
John Klecha                15,000            $2.04                 04/22/03              $30,600
</TABLE>

All of the above issuances were paid for with cash. The above employees
exercised their options in reliance upon Section 4(2) of the Securities Act of
1933, because they are knowledgeable, sophisticated and had access to
comprehensive information about the Company. The shares issued to our employees
who were not affiliates did not contain any restrictive legends. The shares were
registered under the Securities Act on a registration statement on Form S-8. As
such, no restrictive legends were placed on the shares.

         18. On September 8, 2003, we issued an aggregate of $4,000,000 of 8%
convertible debentures in a private offering to six accredited investors. The
debentures initially are convertible into shares of common stock at a price of
$3.85 per share, subject to adjustment in certain situations. Each investor also
received warrants equal to 40% of the subscription amount. The exercise price of
the warrants is $4.025 per share and the warrants expire on September 7, 2006.
We also have an obligation to register the shares of common stock underlying the
debenture and warrants, which we are satisfying by filing this registration
statement. The names of the investors, the amount of the debentures and the
number or warrants issuable to each investor are set forth below.
<TABLE>
<CAPTION>
                                     AMOUNT OF
NAME                                 DEBENTURES             NO. OF WARRANTS
- ----                                 ----------             ---------------
<S>                                  <C>                        <C>
Omnicron Master Trust                $2,500,000                 285,714
SF Capital Partners, Ltd             $  500,000                  57,143
Bristol Investment Fund, Ltd.        $  300,000                  34,286
Ascend Offshore Fund, Ltd.           $  478,000                  54,629
Ascend Partners, LP                  $   58,200                   6,651
Ascend Partners Sapient LP           $  163,800                  18,720
</TABLE>

                                      II-9
<PAGE>

The offering and sale of the debentures and the warrants was made in reliance
upon Section 4(2) (2) of the Securities Act of 1933, as amended. We used Roth
Capital as our placement agent and they received a commission equal to 5.5% of
the proceeds and a warrant to purchase 103,896 shares or our common stock. We
agreed to register the shares underlying Roth's warrant in a registration
statement. The common stock was only offered and sold to accredited investors or
persons who represented that they had no need for liquidity in their investment
and had adequate financial resources to withstand a total loss of their
investment. We issued these shares to these persons in reliance upon Section
4(2) of the Securities Act, because the shareholders were knowledgeable,
sophisticated and had access to comprehensive information about us. We placed
legends on the debentures and the warrant agreements stating that the securities
were not registered under the Securities Act and set forth the restrictions on
their transferability and sale.

Item 16. Exhibits

Exhibit No.       Description of Exhibit
- -----------       ----------------------
3.1      Certificate of Incorporation of the Company 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 Company's
         registration statement on Form SB-2 filed with the SEC on March 7,
         2000).
3.2      Certificate of Amendment of the Company filed with the Delaware
         Secretary of State on September 29, 2000 (incorporated by reference to
         Exhibit 3.1 in the Company'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 Company's registration statement on Form SB-2 filed
         with the SEC on April 11, 2000).

                                     II-10
<PAGE>

Exhibit No.       Description of Exhibit
- -----------       ----------------------
3.4      Amended By-Laws of the Company (incorporated by reference to Exhibit
         3.14 in the Company'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 Company's registration statement on
         Form SB-2 filed with the SEC on March 7, 2000)
5.1      Opinion of Adorno & Yoss, P.A.*
10.1     Securities Purchase Agreement dated as of August 20, 2003 by and among
         the Company 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").*
10.2     Amendment dated September 5, 2003 to Securities Purchase Agreement
         between the Company and the Investors*
10.3     Form of Debenture Agreement issued by the Company to each of the
         Investors*
10.4     Form of Warrant Agreement issued by the Company to the Investors*
10.5     Warrant Agreement between the Company and Roth Capital Partners, LLC*
10.6     Registration Rights Agreement between the Company and each of the
         Investors and Roth Capital Partners, LLC*
10.7     Employment Agreement dated May 1, 1998 between the Company and Edward
         Steele (incorporated by reference to Exhibit 10.1 of the Company's
         registration statement on Form SB-2 filed with SEC on March 7, 2000).
10.8     Employment Agreement dated June 1, 2000 between the Company and John
         Klecha (incorporated by reference to Exhibit 10.5 of the Company's
         registration statement on Form SB-2 filed with the SEC March 28, 2001).
10.9     Separation and Release Agreement effective as of May 2, 2003 between
         the Company and John Klecha.*
10.10    Employment Agreement dated March 15, 2002 between the Company and April
         Green (incorporated by reference to Exhibit 10.21 of the Company's
         Annual Report on Form 10-KSB/A filed with the SEC on July 23, 2002).
10.11    Employment Agreement dated April 14, 2002 between the Company and Jack
         Dromgold (incorporated by reference to Exhibit 10.20 of the Company's
         Annual Report on Form 10-KSB/A filed with the SEC on July 23, 2003).
10.12    Employment Agreement dated May 2, 2003 between the Company and Yi Ping
         Chan. (incorporated by reference to Exhibit 10.20 of the Company's
         Annual Report on Form 10-KSB/A filed with the SEC on July 23, 2003)*
10.13    Domestic Merchandise License Agreement dated November 1, 2000 between
         MTV Networks, a division of Viacom International, Inc. and the Company
         (incorporated by reference to Exhibit 10.3 of the Company's Quarterly
         Report on Form 10-Q for the quarter ended December 31, 2002, filed with
         the SEC on February 14, 2003).
10.14    Amendment dated January 1, 2002 to Domestic Merchandise License
         Agreement between MTV Networks, a division of Viacom International,
         Inc. and the Company ((incorporated by reference to Exhibit 10.4 of the
         Company's Quarterly Report on Form 10-Q for the quarter ended December
         31, 2002, filed with the SEC on February 14, 2003).

                                     II-11
<PAGE>
Exhibit No.       Description of Exhibit
- -----------       ----------------------
10.15    Second Amendment as of November 13, 2002 to Domestic Merchandise
         License Agreement between MTV Networks, a division of Viacom
         International, Inc. and the Company (incorporated by reference to
         Exhibit 10.5 of the Company's Quarterly Report on Form 10-Q for the
         quarter ended December 31, 2002, filed with the SEC on February 2003).
10.16    Third Amendment as of February 26, 2003 to Domestic Merchandise License
         Agreement between MTV Networks, a division of Viacom International,
         Inc. and the Company (incorporated by reference to Exhibit 10.10 of the
         Company's Annual Report on Form 10-K for the fiscal year ended March
         31, 2003 , filed with the SEC on July 17, 2003).
10.17    Industrial Lease dated March 1, 2002, by and between AMP Properties,
         L.P. and the Company for warehouse space in Compton, California
         (incorporated by reference to Exhibit 10.20 of the Company's Annual
         Report on Form 10-KSB/A filed with the SEC on July 23, 2002).
10.18    Loan and Security Agreement dated April 2000 between LaSalle Business
         Credit, Inc. and the Company (incorporated by reference to Exhibit 3.1
         in the Company's Quarterly Report on Form 10-QSB for the period ended
         September 30, 1999 filed with the SEC on November 14, 2000).
10.19    First through Fourth Amendment to Loan and Security Agreement dated
         October 1, 2001 through February 28, 2002 between LaSalle Business
         Credit, Inc. and the Company (incorporated by reference to Exhibits
         10.11 through 10.14 of the Company's Annual Report on Form 10-KSB/A
         filed with the SEC on July 23 , 2003).
10.20    Fifth Amendment to Loan and Security Agreement dated August 13, 2002
         between LaSalle Business Credit, Inc. and the Company (incorporated by
         reference to Exhibit 10.1 of the Company's Quarterly Report on Form
         10-Q for the quarter ended September 30, 2002 filed with the SEC on
         November 14, 2002).
10.21    Sixth Amendment to Loan and Security Agreement dated November 28, 2001
         between LaSalle Business Credit, Inc. and the Company (incorporated by
         reference to Exhibit 10.1 of the Company's Quarterly Report on Form
         10-Q for the quarter ended December 31, 2002, filed with the SEC on
         February 14, 2003).
10.22    Seventh through Tenth Amendment to Loan and Security Agreement dated
         February 2-, 2003 through March 28, 2003 between LaSalle Business
         Credit, Inc. and the Company, In (incorporated by reference to Exhibits
         10.1 through 10.5 to the Form 8-K filed with the SEC on May 21, 2003).*
10.23    Eleventh Amendment to Loan and Security Agreement dated February 28,
         2003 between LaSalle Business Credit, Inc. and the Company, Inc.
         (incorporated by reference to Exhibit 10.1 of the Company's Current
         Report on Form 8-K filed with the SEC on June 4, 2003).
10.24    Twelfth Amendment to Loan and Security Agreement dated February 28,
         2003 between LaSalle Business Credit, Inc. and the Company, Inc.*
         (incorporated by reference to Exhibit 10.1 of the Company's Current
         Report on Form 8-K filed with the SEC on July 7, 2003).
10.25    Thirteenth Amendment to Loan and Security Agreement dated August 1,
         2003 between LaSalle Business Credit, LLC and the Company (incorporated
         by reference to Exhibit 10.1 of the Company's Current Report on Form
         S-k filed with the SEC on August 1, 2003).
10.26    Fourteenth Amendment to the Loan and Security Agreement dated August
         28, 2003 between LaSalle Business Credit, LLC and the Company
         (incorporated by reference to Exhibit 10.1 of the Company's Current
         Report on Form 8-K filed with the Sec on August 28, 2003).


                                     II-12
<PAGE>

Exhibit No.       Description of Exhibit
- -----------       ----------------------
10.27    Amended and Restated 1994 Management Stock Option Plan (incorporated by
         reference to Exhibit 10.6 to the Company's registration statement on
         Form SB-2 filed with the SEC on March 28, 2001).
10.28    Year 2001 Stock Option Plan (incorporated by reference to Exhibit 10.1
         of the Company's registration statement on Form S-8 filed with the SEC
         on September 13, 2002).
10.29    Company's Amended Bankruptcy Plan of Reorganization dated December 17,
         1997 and Bankruptcy Court's Order Confirming the Plan of Reorganization
         (incorporated by reference to Exhibit 10.5 of the Company's
         registration statement on Form SB-2 filed with the SEC on March 7,
         2000).
21.1     List of Subsidiaries (incorporated by reference to Exhibit 21.1 in the
         Company's Annual Report on Form 10-K for the fiscal year ended March
         31, 2003 filed with the SEC on July 17, 2003).
23.1     Consent of Grant Thornton, LLP*
23.2     Consent of Salberg & Company, P.A.*
23.3     Consent of Adorno & Yoss, P.A. (contained in Exhibit 5.1)

- ----------
*Filed herewith.

Item 17.  Undertakings

         The undersigned registrant hereby undertakes:

         (1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement to:

         (i)      Include any Prospectus required by Section 10(a)(3) of the
                  Securities Act;

         (ii)     Reflect in the Prospectus any facts or events which,
                  individually or together, represent a fundamental change in
                  the information in the registration statement. Notwithstanding
                  the foregoing, any increase or decrease in volume of
                  securities offered (if the total dollar value of securities
                  offered would not exceed that which was registered) and any
                  deviation from the low or high end of the estimated maximum
                  offering range may be reflected in the form of Prospectus
                  filed with the Securities and Exchange Commission pursuant to
                  Rule 424(b) if, in the aggregate, the change in volume and
                  price represents no more than a 20% change in the maximum
                  aggregate offering price set forth in the "Calculation of the
                  Registration Fee" table in the effective registration
                  statement; and

         (iii)    Include any additional or changed material information on the
                  plan of distribution.

         (2) That, for the purpose of determining any liability under the
Securities Act of 1933, as amended, treat each such post-effective amendment as
a new registration statement relating to the securities offered therein, and the
offering of the securities at that time to be the initial bona fide offering
thereof.

                                     II-13
<PAGE>

         (3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.


         (4) For purposes of determining any liability under the Securities Act
of 1933, as amended, treat the information omitted from the form of Prospectus
filed as part of this registration statement in reliance upon Rule 430A, and
contained in a form of Prospectus filed by the small business issuer under Rule
424(b)(1) or (4) or 497(h) under the Securities Act as part of this registration
statement as of the time the Commission declares it effective.


         (5) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of Prospectus as a new
registration statement for the securities offered in the registration statement,
and that offering of the securities at the time as the initial bona fide
offering of those securities.

         Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended, may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act of 1933, as amended, and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933, as amended, and will be governed by the final
adjudication of such issue.

                                     II-14
<PAGE>

                                   SIGNATURES

         Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Registration Statement on Form S-1, to be signed
on its behalf by the undersigned, thereunto duly authorized in the City of
Coconut Creek, Florida, on October 7, 2003.

                                    THE SINGING MACHINE COMPANY, INC.


Dated: October 7, 2003              By: /s/ Robert Weinberg
                                       -----------------------------------------
                                        Robert Weinberg, Chief Executive Officer

Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.

SIGNATURE                     TITLE                                   DATE
- ---------                     -----                                   ----

/s/ Robert Weinberg     Chief Executive Officer                  October 7, 2003
- -------------------


/s/ April Green         Chief Financial Officer                  October 7, 2003
- -------------------


/s/ Yi Ping Chan        Chief Operating Officer                  October 7, 2003
- -------------------


/s/ Josef A. Bauer      Director                                 October 7, 2003
- -------------------
Josef A. Bauer



/s/ Howard Moore        Director                                 October 7, 2003
- -------------------
Howard Moore

                                     II-15
<PAGE>

                                INDEX TO EXHIBITS

Exhibit No.       Description of Exhibit
- -----------       ----------------------

 5.1     Opinion re: Legality of the Securities Being Registered

10.1     Securities Purchase Agreement dated as of August 20, 2003 by and among
         the Company 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")

10.2     Amendment dated September 5, 2003 to Securities Purchase Agreement
         between the Company and the Investors

10.3     Form of Debenture Agreement issued by the Company to each of the
         Investors

10.4     Form of Warrant Agreement issued by the Company to the Investors

10.5     Warrant Agreement between the Company and Roth Capital Partners, LLC

10.6     Registration Rights Agreement between the Company and each of the
         Investors and Roth Capital Partners, LLC

23.1     Consent of Grant Thornton, LLP

23.2     Consent of Salberg & Company, P.A.

23.3     Consent of Adorno & Yoss, P.A. (contained in Exhibit 5.1)





</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-5.1
<SEQUENCE>3
<FILENAME>adornoopinion.txt
<DESCRIPTION>OPINION OF ADORNO & YOSS
<TEXT>
                                                                     Exhibit 5.1

                               ADORNO & YOSS, P.A.



                                                        October 7, 2003


The Singing Machine Company, Inc.
6601 Lyons Road, Building A-7
Coconut Creek, FL 33073


             Re: The Singing Machine Company, Inc. (the "Company")
                 Registration Statement on Form S-1
              -----------------------------------------------------

Ladies and Gentlemen:

         You have requested our opinion in connection with the registration of
resales of an aggregate of 2,755,314 shares of the Company's common stock (the
"Shares"), which is described in the Company's registration statement on Form
S-1 to which this opinion is attached as Exhibit 5.1. The Shares consist of the
following:

         1.       1,038,962 shares issuable upon conversion of 8% convertible
                  debentures due on February 20, 2006 (the "Debenture Shares")
         2.       561,039 shares issuable upon exercise of outstanding warrants
                  (the "Warrants"), which were issued in connection with the
                  sale of the 8% convertible debentures (the "Warrant Shares"),
         3.       207,791 shares that are issuable as interest payments on the
                  Debentures (the "Interest Payments"),
         4.       311,680 shares that may be issued pursuant to certain
                  anti-dilution provisions in the Debentures (the "Anti-Dilution
                  Shares"),
         5.       635,842 shares that we are required to register under the
                  Registration Rights Agreement with the selling stockholders
                  (the "Registration Rights Shares")which represents 30% of the
                  shares listed in items 1 through 4 above.


         We have reviewed the Company's charter documents, the corporate
proceedings taken by the Company in connection with the original issuances of
the Debentures, the Warrants and the related transactions and such other
documents, records and matters of law as we have deemed necessary for purposes
of this opinion.

         Based on the foregoing and in reliance thereon, and subject to the
qualifications and limitations set forth below, we are of the opinion that:

         1.       The Debentures Shares, the Warrant Shares, the Interest
                  Payment Shares, the Anti-Dilution Shares and the Registration
                  Rights Shares have been duly authorized and reserved. The
                  Debentures Shares, when issued upon conversion of the
                  principal and interest of each of the Debentures in accordance
                  with their terms, and the Warrant Shares, when issued upon
                  exercise of each of the Warrants in accordance with their
                  terms, including payment of the applicable exercise price will
                  be validly issued, fully paid and non-assessable. If and when
                  the Board approves the issuance of the Interest Payment
                  Shares, the Anti-Dilution Shares and/or the Registration
                  Rights Shares, these shares will be validly issued, fully paid
                  and non-assessable.


<PAGE>

         In rendering the foregoing opinion, we have (a) that the resolutions of
the board of directors of the Company authorizing the Company to issue the
Shares will remain in full force and effect until all of the Shares have been
issued, and (b) the authenticity of all documents submitted to us as originals
and the conformity to original documents of all documents submitted to us as
copies and (ii) relied, as to certain factual matters, without any independent
investigation, inquiry or verification, upon statements or certificates of
public officials and of representatives of the Company. In addition, our
examination of matters of law has been limited to the General Corporation Law of
the State of Delaware and the federal laws of the United States of America, in
each case as in effect on the date hereof.

         We consent to the filing of this opinion as Exhibit 5.1 to the
Registration Statement and to the reference to this firm under the caption
"Legal Matters" in the prospectus which is part of the Registration Statement.
In giving this consent, we do not thereby admit that we are within the category
of persons whose consent is required under Section 7 of the Act, the rules and
regulations of the Securities and Exchange Commission promulgated thereunder or
Item 509 of Regulation S-K.

         Our opinion is expressly limited to the matters set forth above and we
render no opinion, whether by implication or otherwise, as to any other matters
relating to the Company or the Shares.

                                           Sincerely,

                                           /s/ Adorno & Yoss, P.A.


</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.1
<SEQUENCE>4
<FILENAME>securitiespurchase.txt
<DESCRIPTION>SECURITIES PURCHASE AGREEMENT
<TEXT>
                                                                    Exhibit 10.1

                          SECURITIES PURCHASE AGREEMENT

         This Securities Purchase Agreement (this "Agreement") is dated as of
August 20, 2003, among The Singing Machine Company, Inc., a Delaware corporation
(the "Company"), and the purchasers identified on the signature pages hereto
(each, including its successors and assigns, a "Purchaser" and collectively the
"Purchasers").

         WHEREAS, subject to the terms and conditions set forth in this
Agreement and pursuant to Section 4(2) of the Securities Act of 1933, as amended
(the "Securities Act") and Rule 506 promulgated thereunder, the Company desires
to issue and sell to each Purchaser, and each Purchaser, severally and not
jointly, desires to purchase from the Company, securities of the Company as more
fully described in this Agreement.

         NOW, THEREFORE, IN CONSIDERATION of the mutual covenants contained in
this Agreement, and for other good and valuable consideration the receipt and
adequacy of which are hereby acknowledged, the Company and each Purchaser agrees
as follows:

                                    ARTICLE I
                                   DEFINITIONS

         1.1 Definitions. In addition to the terms defined elsewhere in this
Agreement: (a) capitalized terms that are not otherwise defined herein have the
meanings given to such terms in the Debentures (as defined herein), and (b) the
following terms have the meanings indicated in this Section 1.1:

                  "Affiliate" means any Person that, directly or indirectly
         through one or more intermediaries, controls or is controlled by or is
         under common control with a Person, as such terms are used in and
         construed under Rule 144 under the Securities Act.

                  "Capital Shares" means the Common Stock and any shares of any
         other class of common stock whether now or hereafter authorized, having
         the right to participate in the distribution of earnings and assets of
         the Company.

                  "Capital Shares Equivalents" means any securities, rights or
         obligations that are convertible into or exchangeable for or give any
         right to subscribe for or purchase, directly or indirectly, any Capital
         Shares of the Company or any warrants, options or other rights to
         subscribe for or purchase, directly or indirectly, Capital Shares or
         any such convertible or exchangeable securities.

                  "Closing" means the closing of the purchase and sale of the
         Securities pursuant to Section 2.1.

                  "Closing Date" means the Trading Day when all of the
         Transaction Documents have been executed and delivered by the
         applicable parties thereto, and all conditions precedent to the
         Purchasers' obligations to pay the Subscription Amount have been
         satisfied or waived.
<PAGE>

                  "Commission" means the Securities and Exchange Commission.

                  "Common Stock" means the common stock of the Company, par
         value $0.001 per share, and any securities into which such common stock
         shall hereinafter have been reclassified into.

                  "Company Counsel" means Adorno & Yoss, P.A.

                  "Debentures" means, the 8% Convertible Debentures due 30
         months from their date of issuance, issued by the Company to the
         Purchasers hereunder, in the form of Exhibit A.

                  "Disclosure Schedules" shall have the meaning ascribed to such
         term in Section 3.1 hereof.

                  "Effective Date" means the date that the initial Registration
         Statement filed by the Company pursuant to the Registration Rights
         Agreement is first declared effective by the Commission.

                  "Exchange Act" means the Securities Exchange Act of 1934, as
         amended.

                  "FW" means Feldman Weinstein LLP with offices at 420 Lexington
         Avenue, Suite 2620, New York, New York 10170-0002.

                  "GAAP" shall have the meaning ascribed to such term in Section
         3.1(h) hereof.

                  "Liens" shall have the meaning ascribed to such term in
         Section 3.1(a) hereof.

                  "Losses" means any and all losses, claims, damages,
         liabilities, settlement costs and expenses, including without
         limitation costs of preparation and reasonable attorneys' fees.

                  "Material Adverse Effect" shall have the meaning assigned to
         such term in Section 3.1(b) hereof.

                  "Person" means an individual or corporation, partnership,
         trust, incorporated or unincorporated association, joint venture,
         limited liability company, joint stock company, government (or an
         agency or subdivision thereof) or other entity of any kind.

                  "Principal Market" means initially the American Stock Exchange
         and shall also include, New York Stock Exchange, the NASDAQ Small-Cap
         Market or the NASDAQ National Market, whichever is at the time the
         principal trading exchange or market for the Common Stock, based upon
         share volume.

                                      -2-
<PAGE>

                  "Proceeding" means an action, claim, suit, investigation or
         proceeding (including, without limitation, an investigation or partial
         proceeding, such as a deposition), whether commenced or threatened.

                  "Registration Statement" means the registration statement to
         be filed by the Company pursuant to the Registration Rights Agreement.

                  "Registration Rights Agreement" means the Registration Rights
         Agreement, dated the Closing Date, among the Company and the
         Purchasers, in the form of Exhibit B.

                  "Required Approvals" shall have the meaning ascribed to such
         term in Section 3.1(e) hereof.

                  "Required Minimum" means, as of any date, the maximum
         aggregate number of shares of Common Stock then issued or potentially
         issuable in the future pursuant to the Transaction Documents, including
         any Underlying Shares issuable upon exercise or conversion in full of
         all Warrants and Debentures, ignoring any conversion or exercise limits
         set forth therein, and assuming that the Set Price is at all times on
         and after the date of determination the lesser of the Set Price and 75%
         of the VWAP on the Trading Day immediately prior to the date of
         determination.

                  "Rule 144" means Rule 144 promulgated by the Commission
         pursuant to the Securities Act, as such Rule may be amended from time
         to time, or any similar rule or regulation hereafter adopted by the
         Commission having substantially the same effect as such Rule.

                  "SEC Reports" shall have the meaning ascribed to such term in
         Section 3.1(h) hereof.

                  "Securities" means the Debentures, the Warrants and the
         Underlying Shares.

                  "Securities Act" means the Securities Act of 1933, as amended.

                  "Set Price" shall have the meaning ascribed to such term in
         the Debentures.

                  "Shareholder Approval" means such approval as may be required
         by the applicable rules and regulations of the Principal Market (or any
         successor entity) from the shareholders of the Company with respect to
         the transactions contemplated by the Transaction Documents, including
         the issuance of all of the Underlying Shares and shares of Common Stock
         issuable upon exercise of the Warrants in excess of 19.9% of the
         Company's issued and outstanding Common Stock on the Closing Date.

                  "Subscription Amount" means, as to each Purchaser, the amount
         to be paid for Debentures purchased hereunder as specified below such
         Purchaser's name on the signature page of this Agreement and next to
         the heading "Subscription Amount", in United States Dollars and in
         immediately available funds.

                                      -3-
<PAGE>

                  "Subsidiary" means any subsidiary of the Company as set forth
         on Schedule 3.1(a) attached hereto.

                  "Trading Day" means any day during which the Principal Market
         shall be open for business.

                  "Transaction Documents" means this Agreement, the Debentures,
         the Warrants, the Registration Rights Agreement and any other documents
         or agreements executed in connection with the transactions contemplated
         hereunder.

                  "Underlying Shares" means the shares of Common Stock issuable
         upon conversion of the Debentures and upon exercise of the Warrants and
         issued and issuable in lieu of the cash payment of interest on the
         Debentures.

                  "Underlying Shares Registration Statement" or "Registration
         Statement" means a registration statement meeting the requirements set
         forth in the Registration Rights Agreement and covering the resale of
         the Underlying Shares by each Purchaser as provided for in the
         Registration Rights Agreement.

                  "VWAP" means, for any date, the price determined by the first
         of the following clauses that applies: (a) if the Common Stock is then
         listed or quoted on a Trading Market, the daily volume weighted average
         price of the Common Stock for such date (or the nearest preceding date)
         on the Trading Market on which the Common Stock is then listed or
         quoted as reported by Bloomberg Financial L.P. (based on a trading day
         from 9:30 a.m. Eastern Time to 4:02 p.m. Eastern Time); (b) if the
         Common Stock is not then listed or quoted on a Trading Market and if
         prices for the Common Stock are then quoted on the OTC Bulletin Board,
         the volume weighted average price of the Common Stock for such date (or
         the nearest preceding date) on the OTC Bulletin Board; (c) if the
         Common Stock is not then listed or quoted on the OTC Bulletin Board and
         if prices for the Common Stock are then reported in the "Pink Sheets"
         published by the National Quotation Bureau Incorporated (or a similar
         organization or agency succeeding to its functions of reporting
         prices), the most recent bid price per share of the Common Stock so
         reported; or (d) in all other cases, the fair market value of a share
         of Common Stock as determined by an independent appraiser selected in
         good faith by the Purchasers and reasonably acceptable to the Company.

                  "Warrants" means collectively the Common Stock purchase
         warrants, in the form of Exhibit C delivered to the Purchasers at the
         Closing in accordance with Section 2.2 hereof.

                  "Warrant Shares" means the shares of Common Stock issuable
         upon exercise of the Warrants.


                                      -4-
<PAGE>

                                   ARTICLE II
                                PURCHASE AND SALE

         2.1 Closing. Upon the terms and subject to the conditions set forth
herein, concurrent with the execution and delivery of this Agreement by the
parties hereto, the Company agrees to sell, and the Purchasers agree to purchase
in the aggregate, severally and not jointly, up to $4,000,000 principal amount
of the Debentures. Each Purchaser shall deliver to the Company via wire transfer
or a certified check immediately available funds equal to their Subscription
Amount and the Company shall deliver to each Purchaser their respective
Debenture evidencing a principal amount equal to such Purchaser's Subscription
Amount and the other items set forth in Section 2.2 issuable at the Closing.
Upon satisfaction of the conditions set forth in Section 2.2, the Closing shall
occur at the offices of FW, or such other location as the parties shall mutually
agree.

         2.2 Conditions to Closing. Upon satisfaction or waiver by the party
sought to be benefited thereby of the conditions set forth in this Section 2.2,
the Closing shall occur.

                  (a) At or prior to the Closing, the Company shall deliver or
         cause to be delivered to each Purchaser the following:

                           (i) a Debenture with a principal amount equal to such
                  Purchaser's Subscription Amount, registered in the name of
                  such Purchaser;

                           (ii) a Warrant registered in the name of such
                  Purchaser to purchase up to a number of shares of Common Stock
                  equal to 40% of such Purchaser's Subscription Amount divided
                  by $3.50 ("Closing Market Price"), with a term of 3 years and
                  an exercise price equal to $4.025, subject to adjustment
                  therein;

                           (iii) the legal opinion of Company Counsel, in the
                  form of Exhibit D attached hereto, addressed to the
                  Purchasers;

                           (iv) the Registration Rights Agreement duly executed
                  by the Company in the form of Exhibit B attached hereto;

                           (v) the written voting agreements of the officers and
                  directors of the Company to vote all Common Stock owned by
                  each of the as of the record date for the annual meeting of
                  shareholders of the Company in favor of Shareholder Approval;

                           (vi) the Company will have entered into an amendment
                  with its commercial lender, LaSalle Business Credit, LLC to
                  increase the line of credit thereunder to $12,500,000 and to
                  extend the maturity date of such line of credit to March 31,
                  2004; and

                           (vii) this Agreement, duly executed by the Company.

                  (b) At or prior to the Closing, each Purchaser shall deliver
         or cause to be delivered to the Company the following:

                           (i) such Purchaser's Subscription Amount;

                                      -5-
<PAGE>

                           (ii) this Agreement, duly executed by such Purchaser;
                  and (iii) the Registration Rights Agreement duly executed by
                  such Purchaser.

                  (c) All representations and warranties of the other party
         contained herein shall remain true and correct as of the Closing Date
         and all covenants of the other party shall have been performed if due
         prior to such date.

                  (d) There shall have been no Material Adverse Effect (as
         defined in Section 3.1(b)) with respect to the Company since the date
         hereof.

                  (e) From the date hereof to the Closing Date, trading in the
         Common Stock shall not have been suspended by the Commission (except
         for any suspension of trading of limited duration agreed to by the
         Company, which suspension shall be terminated prior to the Closing),
         and, at any time prior to the Closing Date, trading in securities
         generally as reported by Bloomberg Financial Markets shall not have
         been suspended or limited, or minimum prices shall not have been
         established on securities whose trades are reported by such service, or
         on the Principal Market, nor shall a banking moratorium have been
         declared either by the United States or New York State authorities, nor
         shall there have occurred any material outbreak or escalation of
         hostilities or other national or international calamity of such
         magnitude in its effect on, or any material adverse change in, any
         financial market which, in each case, in the reasonable judgment of the
         Purchasers, makes it impracticable or inadvisable to purchase the
         Debentures at the Closing.

                                   ARTICLE III
                         REPRESENTATIONS AND WARRANTIES

         3.1 Representations and Warranties of the Company. Except as set forth
under the corresponding section of the disclosure schedules delivered to the
Purchasers concurrently herewith (the "Disclosure Schedules") which Disclosure
Schedules shall be deemed a part hereof, the Company hereby makes the
representations and warranties set forth below to each Purchaser.

                  (a) Subsidiaries. Except as set forth in the SEC Reports, the
         Company has no direct or indirect subsidiaries. The Company owns,
         directly or indirectly, all of the capital stock or other equity
         interests of each Subsidiary free and clear of any lien, charge,
         security interest, encumbrance, right of first refusal or other
         restriction (collectively, "Liens"), and all the issued and outstanding
         shares of capital stock of each Subsidiary are validly issued and are
         fully paid, non-assessable and free of preemptive and similar rights.

                  (b) Organization and Qualification. Each of the Company and
         the Subsidiaries is an entity duly incorporated or otherwise organized,
         validly existing and in good standing under the laws of the
         jurisdiction of its incorporation or organization (as applicable), with
         the requisite power and authority to own and use its properties and
         assets and to carry on its business as currently conducted. Neither the


                                      -6-
<PAGE>

         Company nor any Subsidiary is in violation of any of the provisions of
         its respective certificate or articles of incorporation, bylaws or
         other organizational or charter documents. Each of the Company and the
         Subsidiaries is duly qualified to do business and is in good standing
         as a foreign corporation or other entity in each jurisdiction in which
         the nature of the business conducted or property owned by it makes such
         qualification necessary, except where the failure to be so qualified or
         in good standing, as the case may be, could not, individually or in the
         aggregate: (i) adversely affect the legality, validity or
         enforceability of any Transaction Document, (ii) have or result in or
         be reasonably likely to have or result in a material adverse effect on
         the results of operations, assets, prospects, business or condition
         (financial or otherwise) of the Company and the Subsidiaries, taken as
         a whole, or (iii) adversely impair the Company's ability to perform
         fully on a timely basis its obligations under any of the Transaction
         Documents (any of (i), (ii) or (iii), a "Material Adverse Effect").

                  (c) Authorization; Enforcement. The Company has the requisite
         corporate power and authority to enter into and to consummate the
         transactions contemplated by each of the Transaction Documents and
         otherwise to carry out its obligations hereunder or thereunder. The
         execution and delivery of each of the Transaction Documents by the
         Company and the consummation by it of the transactions contemplated
         hereby or thereby have been duly authorized by all necessary action on
         the part of the Company and no further consent or action is required by
         the Company other than Required Approvals. Each of the Transaction
         Documents has been (or upon delivery will be) duly executed by the
         Company and, when delivered in accordance with the terms hereof, will
         constitute the valid and binding obligation of the Company enforceable
         against the Company in accordance with its terms, subject to applicable
         bankruptcy, insolvency, fraudulent conveyance, reorganization,
         moratorium and similar laws affecting creditors' rights and remedies
         generally and general principles of equity. Neither the Company nor any
         Subsidiary is in violation of any of the provisions of its respective
         certificate or articles of incorporation, by-laws or other
         organizational or charter documents.

                  (d) No Conflicts. The execution, delivery and performance of
         the Transaction Documents by the Company and the consummation by the
         Company of the transactions contemplated thereby do not and will not:
         (i) conflict with or violate any provision of the Company's or any
         Subsidiary's certificate or articles of incorporation, bylaws or other
         organizational or charter documents, or (ii) subject to obtaining the
         Required Approvals, conflict with, or constitute a default (or an event
         that with notice or lapse of time or both would become a default)
         under, or give to others any rights of termination, amendment,
         acceleration or cancellation (with or without notice, lapse of time or
         both) of, any agreement, credit facility, debt or other instrument
         (evidencing a Company or Subsidiary debt or otherwise) or other
         understanding to which the Company or any Subsidiary is a party or by
         which any property or asset of the Company or any Subsidiary is bound
         or affected, or (iii) result, in a violation of any law, rule,
         regulation, order, judgment, injunction, decree or other restriction of
         any court or governmental authority to which the Company or a
         Subsidiary is subject (including federal and state securities laws and
         regulations), or by which any property or asset of the Company or a
         Subsidiary is bound or affected; except in the case of each of clauses
         (ii) and (iii), such as could not, individually or in the aggregate,
         have or result in a Material Adverse Effect.

                                      -7-
<PAGE>

                  (e) Filings, Consents and Approvals. Neither the Company nor
         any Subsidiary is required to obtain any consent, waiver, authorization
         or order of, give any notice to, or make any filing or registration
         with, any court or other federal, state, local or other governmental
         authority or other Person in connection with the execution, delivery
         and performance by the Company of the Transaction Documents, other than
         (i) the filings required under Section 4.7, (ii) the filing with the
         Commission of the Underlying Shares Registration Statement, (iii) the
         notice and/or application(s) to each applicable Principal Market for
         the issuance and sale of the Debentures and Warrants and the listing of
         the Underlying Shares for trading thereon in the time and manner
         required thereby, (iv) the filing of Form D with the Commission and
         applicable Blue Sky filings (collectively, the "Required Approvals")
         and (v) Shareholder Approval.

                  (f) Issuance of the Securities. The Securities are duly
         authorized and, when issued and paid for in accordance with the
         applicable Transaction Documents, will be duly and validly issued,
         fully paid and non-assessable, free and clear of all Liens. The Company
         has reserved from its duly authorized capital stock a number of shares
         of Common Stock for issuance of the Underlying Shares at least equal to
         the Required Minimum on the date hereof. The Company has not, and to
         the knowledge of the Company, no Affiliate of the Company has sold,
         offered for sale or solicited offers to buy or otherwise negotiated in
         respect of any security (as defined in Section 2 of the Securities Act)
         that would be integrated with the offer or sale of the Securities in a
         manner that would require the registration under the Securities Act of
         the sale of the Securities to the Purchasers, or that would be
         integrated with the offer or sale of the Securities for purposes of the
         rules and regulations of any Principal Market.

                  (g) Capitalization. The number of shares and type of all
         authorized, issued and outstanding capital stock of the Company is set
         forth in the Disclosure Schedules attached hereto. No securities of the
         Company are entitled to preemptive or similar rights, and no Person has
         any right of first refusal, preemptive right, right of participation,
         or any similar right to participate in the transactions contemplated by
         the Transaction Documents. Except as a result of the purchase and sale
         of the Securities, there are no outstanding options, warrants, script
         rights to subscribe to, calls or commitments of any character
         whatsoever relating to, or securities, rights or obligations
         convertible into or exchangeable for, or giving any Person any right to
         subscribe for or acquire, any shares of Common Stock, or contracts,
         commitments, understandings or arrangements by which the Company or any
         Subsidiary is or may become bound to issue additional shares of Common
         Stock, or securities or rights convertible or exchangeable into shares
         of Common Stock. The issuance and sale of the Securities will not
         obligate the Company to issue shares of Common Stock or other
         securities to any Person (other than the Purchasers) and will not
         result in a right of any holder of Company securities to adjust the
         exercise, conversion, exchange or reset price under such securities.

                                      -8-
<PAGE>

                  (h) SEC Reports; Financial Statements. The Company has filed
         all reports required to be filed by it under the Exchange Act,
         including pursuant to Section 13(a) or 15(d) thereof, for the two years
         preceding the date hereof (or such shorter period as the Company was
         required by law to file such material) (the foregoing materials being
         collectively referred to herein as the "SEC Reports") on a timely basis
         or has received a valid extension of such time of filing and has filed
         any such SEC Reports prior to the expiration of any such extension. The
         Company has identified and made available to the Purchasers a copy of
         all SEC Reports filed within the 10 days preceding the date hereof. As
         of their respective dates, the SEC Reports complied in all material
         respects with the requirements of the Securities Act and the Exchange
         Act and the rules and regulations of the Commission promulgated
         thereunder, and none of the SEC Reports, when filed, contained any
         untrue statement of a material fact or omitted to state a material fact
         required to be stated therein or necessary in order to make the
         statements therein, in light of the circumstances under which they were
         made, not misleading. The financial statements of the Company included
         in the SEC Reports comply in all material respects with applicable
         accounting requirements and the rules and regulations of the Commission
         with respect thereto as in effect at the time of filing. Such financial
         statements have been prepared in accordance with generally accepted
         accounting principles applied on a consistent basis during the periods
         involved ("GAAP"), except as may be otherwise specified in such
         financial statements or the notes thereto, and fairly present in all
         material respects the financial position of the Company and its
         consolidated subsidiaries as of and for the dates thereof and the
         results of operations and cash flows for the periods then ended,
         subject, in the case of unaudited statements, to normal, immaterial,
         year-end audit adjustments.

                  (i) Material Changes. Since the date of the latest audited
         financial statements included within the SEC Reports, except as
         specifically disclosed in the SEC Reports: (i) there has been no event,
         occurrence or development that has had or that could result in a
         Material Adverse Effect, (ii) the Company has not incurred any
         liabilities (contingent or otherwise) other than (A) trade payables and
         accrued expenses incurred in the ordinary course of business consistent
         with past practice and (B) liabilities not required to be reflected in
         the Company's financial statements pursuant to GAAP or required to be
         disclosed in filings made with the Commission, (iii) the Company has
         not altered its method of accounting or the identity of its auditors,
         (iv) the Company has not declared or made any dividend or distribution
         of cash or other property to its stockholders or purchased, redeemed or
         made any agreements to purchase or redeem any shares of its capital
         stock, and (v) the Company has not issued any equity securities to any
         officer, director or Affiliate, except pursuant to existing Company
         stock option or similar plans or for other compensatory purposes.

                  (j) Litigation. Except as disclosed in the SEC Reports, there
         is no action, suit, inquiry, notice of violation, proceeding or
         investigation pending or, to the knowledge of the Company, threatened
         against or affecting the Company, any Subsidiary or any of their
         respective properties before or by any court, arbitrator, governmental
         or administrative agency or regulatory authority (federal, state,
         county, local or foreign) (collectively, an "Action") which: (i)
         adversely affects or challenges the legality, validity or


                                      -9-
<PAGE>

         enforceability of any of the Transaction Documents or the Securities or
         (ii) could, if there were an unfavorable decision, individually or in
         the aggregate, have or reasonably be expected to result in a Material
         Adverse Effect. Neither the Company nor any Subsidiary, nor any
         director or officer thereof, is or has been the subject of any Action
         involving a claim of violation of or liability under federal or state
         securities laws or a claim of breach of fiduciary duty. The Company
         does not have pending before the Commission any request for
         confidential treatment of information. There has not been, and to the
         knowledge of the Company, there is not pending or contemplated, any
         investigation by the Commission involving the Company or any current or
         former director or officer of the Company. The Commission has not
         issued any stop order or other order suspending the effectiveness of
         any registration statement filed by the Company or any Subsidiary under
         the Exchange Act or the Securities Act.

                  (k) Compliance. Neither the Company nor any Subsidiary: (i) is
         in default under or in violation of (and no event has occurred that has
         not been waived that, with notice or lapse of time or both, would
         result in a default by the Company or any Subsidiary under), nor has
         the Company or any Subsidiary received notice of a claim that it is in
         default under or that it is in violation of, any indenture, loan or
         credit agreement or any other agreement or instrument to which it is a
         party or by which it or any of its properties is bound (whether or not
         such default or violation has been waived), (ii) is in violation of any
         order of any court, arbitrator or governmental body, or (iii) is or has
         been in violation of any statute, rule or regulation of any
         governmental authority, except in each case as could not, individually
         or in the aggregate, have or result in a Material Adverse Effect.

                  (l) Labor Relations. No material labor dispute exists or, to
         the knowledge of the Company, is imminent with respect to any of the
         employees of the Company.

                  (m) Regulatory Permits. The Company and the Subsidiaries
         possess all certificates, authorizations and permits issued by the
         appropriate federal, state, local or foreign regulatory authorities
         necessary to conduct their respective businesses as described in the
         SEC Reports, except where the failure to possess such permits could
         not, individually or in the aggregate, have or reasonably be expected
         to result in a Material Adverse Effect ("Material Permits"), and
         neither the Company nor any Subsidiary has received any notice of
         proceedings relating to the revocation or modification of any Material
         Permit.

                  (n) Title to Assets. The Company and the Subsidiaries have
         good and marketable title in fee simple to all real property owned by
         them that is material to the business of the Company and the
         Subsidiaries and good and marketable title in all personal property
         owned by them that is material to the business of the Company and the
         Subsidiaries, in each case free and clear of all Liens, except for
         Liens as do not materially affect the value of such property and do not
         materially interfere with the use made and proposed to be made of such
         property by the Company and the Subsidiaries. Any real property and
         facilities held under lease by the Company and the Subsidiaries are
         held under valid, subsisting and enforceable leases of which the
         Company and the Subsidiaries are in compliance.

                                      -10-
<PAGE>

                  (o) Patents and Trademarks. The Company and the Subsidiaries
         have, or have rights to use, all patents, patent applications,
         trademarks, trademark applications, service marks, trade names,
         copyrights, licenses and other similar rights necessary or material for
         use in connection with their respective businesses as described in the
         SEC Reports and which the failure to so have could have a Material
         Adverse Effect (collectively, the "Intellectual Property Rights").
         Neither the Company nor any Subsidiary has received a written notice
         that the Intellectual Property Rights used by the Company or any
         Subsidiary violates or infringes upon the rights of any Person. To the
         knowledge of the Company, all such Intellectual Property Rights are
         enforceable and there is no existing infringement by another Person of
         any of the Intellectual Property Rights.

                  (p) Insurance. The Company and the Subsidiaries are insured by
         insurers of recognized financial responsibility against such losses and
         risks and in such amounts as are prudent and customary in the
         businesses in which the Company and the Subsidiaries are engaged. To
         the best of Company's knowledge, such insurance contracts and policies
         are accurate and complete. Neither the Company nor any Subsidiary has
         any reason to believe it will not be able to renew its existing
         insurance coverage as and when such coverage expires or to obtain
         similar coverage from similar insurers as may be necessary to continue
         its business without a significant increase in cost.

                  (q) Transactions With Affiliates and Employees. Except as
         required to be set forth in the SEC Reports, none of the officers or
         directors of the Company and, to the knowledge of the Company, none of
         the employees of the Company is presently a party to any transaction
         with the Company or any Subsidiary (other than for services as
         employees, officers and directors), including any contract, agreement
         or other arrangement providing for the furnishing of services to or by,
         providing for rental of real or personal property to or from, or
         otherwise requiring payments to or from any officer, director or such
         employee or, to the knowledge of the Company, any entity in which any
         officer, director, or any such employee has a substantial interest or
         is an officer, director, trustee or partner.

                  (r) Internal Accounting Controls. The Company and the
         Subsidiaries maintain a system of internal accounting controls
         sufficient to provide reasonable assurance that (i) transactions are
         executed in accordance with management's general or specific
         authorizations, (ii) transactions are recorded as necessary to permit
         preparation of financial statements in conformity with GAAP and to
         maintain asset accountability, (iii) access to assets is permitted only
         in accordance with management's general or specific authorization, and
         (iv) the recorded accountability for assets is compared with the
         existing assets at reasonable intervals and appropriate action is taken
         with respect to any differences. The Company has established disclosure
         controls and procedures (as defined in Exchange Act Rules 13a-14 and
         15d-14) for the Company and designed such disclosures controls and
         procedures to ensure that material information relating to the Company,
         including its subsidiaries, is made known to the certifying officers by


                                      -11-
<PAGE>

         others within those entities, particularly during the period in which
         the Company's Form 10-K or 10-Q, as the case may be, is being prepared.
         The Company's certifying officers have evaluated the effectiveness of
         the Company's controls and procedures as of a date within 90 days prior
         to the filing date of the Form 10-Q for the quarter ended June 30, 2003
         (such date, the "Evaluation Date"). The Company presented in the Form
         10-Q for the quarter ended June 30, 2003 the conclusions of the
         certifying officers about the effectiveness of the disclosure controls
         and procedures based on their evaluations as of the Evaluation Date.
         Since the Evaluation Date, there have been no significant changes in
         the Company's internal controls (as such term is defined in Item 307(b)
         of Regulation S-K under the Exchange Act) or, the Company's knowledge,
         in other factors that could significantly affect the Company's internal
         controls.

                  (s) Solvency/Indebtedness. Based on the financial condition of
         the Company as of the Closing Date and to the knowledge of the Company:
         (i) the fair saleable value of the Company's assets exceeds the amount
         that will be required to be paid on or in respect of the Company's
         existing debts and other liabilities (including known contingent
         liabilities) as they mature; (ii) the Company's assets do not
         constitute unreasonably small capital to carry on its business for the
         current fiscal year as now conducted and as proposed to be conducted
         including its capital needs taking into account the particular capital
         requirements of the business conducted by the Company, and projected
         capital requirements and capital availability thereof; and (iii) the
         current cash flow of the Company, together with the proceeds the
         Company would receive, were it to liquidate all of its assets, after
         taking into account all anticipated uses of the cash, would be
         sufficient to pay all amounts on or in respect of its debt when such
         amounts are required to be paid. The Company does not intend to incur
         debts beyond its ability to pay such debts as they mature (taking into
         account the timing and amounts of cash to be payable on or in respect
         of its debt). The Company has no knowledge of any facts or
         circumstances which lead it to believe that it will file for
         reorganization or liquidation under the bankruptcy or reorganization
         laws of any jurisdiction within one year from the Closing Date. The SEC
         Reports set forth as of the dates thereof all outstanding secured and
         unsecured Indebtedness of the Company or any Subsidiary, or for which
         the Company or any Subsidiary has commitments. For the purposes of this
         Agreement, "Indebtedness" shall mean (a) any liabilities for borrowed
         money or amounts owed in excess of $50,000 (other than trade accounts
         payable incurred in the ordinary course of business), (b) all
         guaranties, endorsements and other contingent obligations, whether or
         not the same are or should be reflected in the Company's balance sheet
         or the notes thereto, except guaranties by endorsement of negotiable
         instruments for deposit or collection in the ordinary course of
         business, and (c) the present value of any lease payments in excess of
         $50,000 due under leases required to be capitalized in accordance with
         GAAP. Neither the Company nor any Subsidiary is in default with respect
         to any Indebtedness.

                  (t) Certain Fees. Except as set forth in Section 5.2, no
         brokerage or finder's fees or commissions are or will be payable by the
         Company to any broker, financial advisor or consultant, finder,
         placement agent, investment banker, bank or other Person with respect


                                      -12-
<PAGE>

         to the transactions contemplated by this Agreement, and the Company has
         not taken any action that would cause any Purchaser to be liable for
         any such fees or commissions. The Company agrees that the Purchasers
         shall have no obligation with respect to any fees or with respect to
         any claims made by or on behalf of any Person for fees of the type
         contemplated by this Section with the transactions contemplated by this
         Agreement.

                  (u) Private Placement. Assuming the accuracy of the
         representations and warranties of the Purchasers set forth in Sections
         3.2(b)-(f), the offer, issuance and sale of the Securities to the
         Purchasers as contemplated hereby are exempt from the registration
         requirements of the Securities Act. The issuance and sale of the
         Securities hereunder does not contravene the rules and regulations of
         the Principal Market.

                  (v) Listing and Maintenance Requirements. The Company has not,
         in the 12 months preceding the date hereof, received notice from any
         Principal Market on which the Common Stock is or has been listed or
         quoted to the effect that the Company is not in compliance with the
         listing or maintenance requirements of such Principal Market. The
         Company is, and has no reason to believe that it will not in the
         foreseeable future continue to be, in compliance with all such listing
         and maintenance requirements.

                  (w) Registration Rights. The Company has not granted or agreed
         to grant to any Person any rights (including "piggy-back" registration
         rights) to have any securities of the Company registered with the
         Commission or any other governmental authority that have not been
         satisfied.

                  (x) Application of Takeover Protections. Other than as set
         forth on Diclsoure Schedule 3.1(x), the Company and its Board of
         Directors have taken all necessary action, if any, in order to render
         inapplicable any control share acquisition, business combination,
         poison pill (including any distribution under a rights agreement) or
         other similar anti-takeover provision under the Company's Certificate
         of Incorporation (or similar charter documents) or the laws of its
         state of incorporation that is or could become applicable to the
         Purchasers as a result of the Purchasers and the Company fulfilling
         their obligations or exercising their rights under the Transaction
         Documents, including without limitation as a result of the Company's
         issuance of the Securities and the Purchasers' ownership of the
         Securities.

                  (y) Seniority. As of the Closing Date, no indebtedness of the
         Company is senior to the Debentures in right of payment, whether with
         respect to interest or upon liquidation or dissolution, or otherwise,
         other than indebtedness secured by purchase money security interests
         (which is senior only as to underlying assets covered thereby) and
         capital lease obligations (which is senior only as to the property
         covered thereby).

                  (z) Disclosure. The Company confirms that neither it nor any
         other Person acting on its behalf has provided any of the Purchasers or
         their agents or counsel with any information that constitutes or might
         constitute material, nonpublic information. The Company understands and
         confirms that the Purchasers will rely on the foregoing representations
         in effecting transactions in securities of the Company. All disclosure
         provided to the Purchasers regarding the Company, its business and the


                                      -13-
<PAGE>

         transactions contemplated hereby, including the Schedules to this
         Agreement, furnished by or on behalf of the Company with respect to the
         representations and warranties made herein are true and correct with
         respect to such representations and warranties and do not contain any
         untrue statement of a material fact or omit to state any material fact
         necessary in order to make the statements made therein, in light of the
         circumstances under which they were made, not misleading. The Company
         acknowledges and agrees that no Purchaser makes or has made any
         representations or warranties with respect to the transactions
         contemplated hereby other than those specifically set forth in Section
         3.2 hereof. Set forth on the Disclosure Schedule attached hereto is a
         schedule of all payments to be made to Acoustic Systems, Inc. (formerly
         known as Eastech).

                  (aa) Tax Status. The Company and each of its Subsidiaries has
         made or filed all federal, state and foreign income and all other tax
         returns, reports and declarations required by any jurisdiction to which
         it is subject (unless and only to the extent that the Company and each
         of its Subsidiaries has set aside on its books provisions reasonably
         adequate for the payment of all unpaid and unreported taxes) and has
         paid all taxes and other governmental assessments and charges that are
         material in amount, shown or determined to be due on such returns,
         reports and declarations, except those disclosed in the SEC Reports and
         being contested in good faith and has set aside on its books provisions
         reasonably adequate for the payment of all taxes for periods subsequent
         to the periods to which such returns, reports or declarations apply.
         There are no unpaid taxes in any material amount claimed to be due by
         the taxing authority of any jurisdiction, and the officers of the
         Company know of no basis for any such claim, except as disclosed in the
         SEC Reports. The Company has not executed a waiver with respect to the
         statute of limitations relating to the assessment or collection of any
         foreign, federal, statue or local tax. None of the Company's tax
         returns is presently being audited by any taxing authority.

                  (bb) Acknowledgment Regarding Purchasers' Purchase of
         Securities. The Company acknowledges and agrees that the Purchasers are
         acting solely in the capacity of arm's length purchasers with respect
         to this Agreement and the transactions contemplated hereby. The Company
         further acknowledges that no Purchaser is acting as a financial advisor
         or fiduciary of the Company (or in any similar capacity) with respect
         to this Agreement and the transactions contemplated hereby and any
         statement made by any Purchaser or any of their respective
         representatives or agents in connection with this Agreement and the
         transactions contemplated hereby is not advice or a recommendation and
         is merely incidental to the Purchasers' purchase of the Securities. The
         Company further represents to each Purchaser that the Company's
         decision to enter into this Agreement has been based solely on the
         independent evaluation of the Company and its representatives.

                  (cc) No General Solicitation or Advertising in Regard to this
         Transaction. Neither the Company nor, to the knowledge of the Company,
         any of its directors or officers (i) has conducted or will conduct any
         general solicitation (as that term is used in Rule 502(c) of Regulation
         D) or general advertising with respect to the sale of the Debentures or
         the Warrants, or (ii) made any offers or sales of any security or
         solicited any offers to buy any security under any circumstances that
         would require registration of the Debentures, the Underlying Shares or
         the Warrants under the Securities Act or made any "directed selling
         efforts" as defined in Rule 902 of Regulation S.

                                      -14-
<PAGE>

                  (dd) No Disagreements with Accountants and Lawyers. There are
         no disagreements of any kind presently existing, or reasonably
         anticipated by the Company to arise, between the accountants and
         lawyers formerly or presently employed by the Company and the Company
         is current with respect to any fees owed to its accountants and
         lawyers.

                  (ee) Form S-3 Eligibility. Except as set forth on Disclosure
         Schedule 3.1(ee), the Company is eligible to register the resale of the
         Underlying Shares for resale by the Purchaser on Form S-3 promulgated
         under the Securities Act.

         Each Purchaser acknowledges and agrees that the Company does not make
or has not made any representations or warranties with respect to the
transactions contemplated hereby other than those specifically se forth in this
Section 3.1.

         3.2 Representations and Warranties of the Purchasers. Each Purchaser
hereby, for itself and for no other Purchaser, represents and warrants to the
Company as follows:

                  (a) Organization; Authority. Such Purchaser is an entity duly
         organized, validly existing and in good standing under the laws of the
         jurisdiction of its organization with the requisite corporate or
         partnership power and authority to enter into and to consummate the
         transactions contemplated by the Transaction Documents and otherwise to
         carry out its obligations thereunder. The purchase by such Purchaser of
         the Securities hereunder has been duly authorized by all necessary
         action on the part of such Purchaser. Each of this Agreement and the
         Registration Rights Agreement has been duly executed by such Purchaser,
         and when delivered by such Purchaser in accordance with the terms
         hereof, will constitute the valid and legally binding obligation of
         such Purchaser, enforceable against it in accordance with its terms.


                  (b) No Conflicts. The execution, delivery and performance of
         the Transaction Documents by the Purchaser and the consummation by the
         Purchaser of the transactions contemplated thereby do not and will not:
         (i) conflict with or violate any provision of the Purchaser's
         certificate or articles of incorporation, bylaws or other
         organizational or charter documents, or (ii) conflict with, or
         constitute a default (or an event that with notice or lapse of time or
         both would become a default) under, or give to others any rights of
         termination, amendment, acceleration or cancellation (with or without
         notice, lapse of time or both) of, any agreement, credit facility, debt
         or other instrument (evidencing a Purchaser debt or otherwise) or other
         understanding to which the Purchaser is a party or by which any
         property or asset of the Purchaser is bound or affected, or (iii)
         result, in a violation of any law, rule, regulation, order, judgment,
         injunction, decree or other restriction of any court or governmental
         authority to which the Purchaser is subject (including federal and


                                      -15-
<PAGE>

         state securities laws and regulations), or by which any property or
         asset of the Purchaser is bound or affected; except in the case of each
         of clauses (ii) and (iii), such as could not, individually or in the
         aggregate, have or result in a material adverse effect on the
         Purchaser.

                  (c) Investment Intent. Such Purchaser is acquiring the
         Securities as principal for its own account for investment purposes
         only and not with a view to or for distributing or reselling such
         Securities or any part thereof, without prejudice, however, to such
         Purchaser's right, subject to the provisions of this Agreement, at all
         times to sell or otherwise dispose of all or any part of such
         Securities pursuant to an effective registration statement under the
         Securities Act or under an exemption from such registration and in
         compliance with applicable federal and state securities laws. Nothing
         contained herein shall be deemed a representation or warranty by such
         Purchaser to hold Securities for any period of time. Such Purchaser is
         acquiring the Securities hereunder in the ordinary course of its
         business. Such Purchaser does not have any agreement or understanding,
         directly or indirectly, with any Person to distribute any of the
         Securities.

                  (d) Purchaser Status. At the time such Purchaser was offered
         the Securities, it was, and at the date hereof it is, and on each date
         on which it exercises any Warrants or converts any Debentures it will
         be, an "accredited investor" as defined in Rule 501(a) under the
         Securities Act. Such Purchaser has not been formed solely for the
         purpose of acquiring the Securities. Such Purchaser is not a registered
         broker-dealer under Section 15 of the Exchange Act.

                  (e) Experience of such Purchaser. Such Purchaser, either alone
         or together with its representatives, has such knowledge,
         sophistication and experience in business and financial matters so as
         to be capable of evaluating the merits and risks of the prospective
         investment in the Securities, and has so evaluated the merits and risks
         of such investment. Such Purchaser is able to bear the economic risk of
         an investment in the Securities and, at the present time, is able to
         afford a complete loss of such investment. Such Purchaser has had the
         opportunity to ask the representatives of the Company questions about
         the Company's business and financial condition and the terms of this
         offering and has obtained such information as it has requested to the
         extent it has deemed necessary to permit it to fully evaluate the
         merits and risks of its investment in the Company. Such Purchaser also
         represents that it has had the opportunity to examine all material
         books and records of the Company and all material contracts and
         documents relating to his investment. Further, such Purchaser has
         consulted with such other of his investment and/or accounting and/or
         legal and/or tax advisors as it has deemed necessary and appropriate in
         making its decision to invest in the Company on the terms described
         herein.

                  (f) General Solicitation. Such Purchaser is not purchasing the
         Securities as a result of any advertisement, article, notice or other
         communication regarding the Securities published in any newspaper,
         magazine or similar media or broadcast over television or radio or
         presented at any seminar or any other general solicitation or general
         advertisement.

                                      -16-
<PAGE>

         The Company acknowledges and agrees that each Purchaser does not make
or has not made any representations or warranties with respect to the
transactions contemplated hereby other than those specifically se forth in this
Section 3.2.

                                   ARTICLE IV
                         OTHER AGREEMENTS OF THE PARTIES

         4.1 Transfer Restrictions.

                  (a) The Securities may only be disposed of in compliance with
         state and federal securities laws. In connection with any transfer of
         Securities other than pursuant to an effective registration statement,
         to the Company or to an Affiliate of a Purchaser, the Company may
         require the transferor thereof to provide to the Company an opinion of
         counsel selected by the transferor and reasonably acceptable to the
         Company, the form and substance of which opinion shall be reasonably
         satisfactory to the Company, to the effect that such transfer does not
         require registration of such transferred Securities under the
         Securities Act. As a condition of transfer, any such transferee shall
         agree in writing to be bound by the terms of this Agreement and shall
         have the rights of a Purchaser under this Agreement and the
         Registration Rights Agreement.

                  (b) Each Purchaser agrees to the imprinting, so long as is
         required by this Section 4.1(b), of the following legend on any
         certificate evidencing Securities: [NEITHER] THESE SECURITIES [NOR THE
         SECURITIES INTO WHICH THESE SECURITIES ARE [EXERCISABLE] [CONVERTIBLE]]
         HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE
         SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM
         REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
         "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT
         PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES
         ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT
         SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN
         ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A
         LEGAL OPINION OF COUNSEL TO THE TRANSFEROR REASONABLY ACCEPTABLE TO THE
         COMPANY TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY
         ACCEPTABLE TO THE COMPANY. THESE SECURITIES AND THE SECURITIES ISSUABLE
         UPON EXERCISE OF THESE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A
         BONA FIDE MARGIN ACCOUNT OR OTHER LOAN SECURED BY SUCH SECURITIES.

                  The Company acknowledges and agrees that a Purchaser may from
         time to time pledge pursuant to a bona fide margin agreement or grant a
         security interest in some or all of the Securities and, if required
         under the terms of such arrangement, such Purchaser may transfer
         pledged or secured Securities to the pledgees or secured parties. If


                                      -17-
<PAGE>

         required by the Company's transfer agent in order to effect a pledge,
         the Company shall cause its counsel, at no cost to the Purchasers, to
         issue an opinion of counsel to the Company's transfer agent. Further,
         no notice shall be required of such pledge. At the appropriate
         Purchaser's expense, the Company will execute and deliver such
         reasonable documentation as a pledgee or secured party of Securities
         may reasonably request in connection with a pledge or transfer of the
         Securities, including the preparation and filing of any required
         prospectus supplement under Rule 424(b)(3) of the Securities Act or
         other applicable provision of the Securities Act to appropriately amend
         the list of Selling Stockholders thereunder.

                  (c) Certificates evidencing Underlying Shares shall not
         contain any legend (including the legend set forth in Section 4.1(b)
         hereof): (i) while a registration statement (including the Underlying
         Shares Registration Statement) covering the resale of such security is
         effective under the Securities Act (unless, subsequent to the date
         hereof, the Commission enacts any new rules or regulations which
         specifically requires a legend on the certificates until a sale is made
         by the holder thereof), or (ii) following any sale of such Underlying
         Shares pursuant to Rule 144, or (iii) if such Underlying Shares are
         eligible for sale under Rule 144(k), or (iv) if such legend is not
         required under applicable requirements of the Securities Act (including
         judicial interpretations and pronouncements issued by the staff of the
         Commission); provided, however, in connection with the issuance of the
         Underlying Shares, each Purchaser, severally and not jointly with the
         other Purchasers, hereby agrees to adhere to and abide by all
         prospectus delivery requirements under the Securities Act and rules and
         regulations of the Commission. If all or any portion of a Debenture or
         Warrant is converted or exercised (as applicable) at a time when there
         is an effective registration statement to cover the resale of the
         Underlying Shares, or if such Underlying Shares may be sold under Rule
         144(k) or if such legend is not otherwise required under applicable
         requirements of the Securities Act (including judicial interpretations
         thereof) then such Underlying Shares shall be issued free of all
         legends. The Company agrees that following the Effective Date or at
         such time as such legend is no longer required under this Section
         4.1(c), it will, no later than three Trading Days following the
         delivery by a Purchaser to the Company or the Company's transfer agent
         of a certificate representing Underlying Shares issued with a
         restrictive legend (such third Trading Day, the "Legend Removal Date",
         deliver or cause to be delivered to such Purchaser a certificate
         representing such shares that is free from all restrictive and other
         legends. The Company may not make any notation on its records or give
         instructions to any transfer agent of the Company that enlarge the
         restrictions on transfer set forth in this Section.

                  (d) In addition to such Purchaser's other available remedies,
         the Company shall pay to a Purchaser, in cash, as liquidated damages
         and not as a penalty, for each $5,000 of Underlying Shares (based on
         the VWAP of the Common Stock on the date such Securities are submitted
         to the Company's transfer agent) delivered for removal of the
         restrictive legend and subject to this Section 4.1(c), $50 per Trading
         Day (increasing to $100 per Trading Day 3 Trading Days after such
         damages have begun to accrue) for each Trading Day after the Legend
         Removal Date until such certificate is delivered without a legend.

                                      -18-
<PAGE>

         4.2 Acknowledgment of Dilution. The Company acknowledges that the
issuance of the Securities may result in dilution of the outstanding shares of
Common Stock, which dilution may be substantial under certain market conditions.
The Company further acknowledges that its obligations under the Transaction
Documents, including without limitation its obligation to issue the Underlying
Shares pursuant to the Transaction Documents, are unconditional and absolute and
not subject to any right of set off, counterclaim, delay or reduction,
regardless of the effect of any such dilution or any claim the Company may have
against any Purchaser and regardless of the dilutive effect that such issuance
may have on the ownership of the other stockholders of the Company.

         4.3 Furnishing of Information. As long as any Purchaser owns
Securities, the Company covenants to timely file (or obtain extensions in
respect thereof and file within the applicable grace period) all reports
required to be filed by the Company after the date hereof pursuant to the
Exchange Act. Upon the request of any Purchaser, the Company shall deliver to
such Purchaser a written certification of a duly authorized officer as to
whether it has complied with the preceding sentence. As long as any Purchaser
owns Securities, if the Company is not required to file reports pursuant to such
laws, it will prepare and furnish to the Purchasers and make publicly available
in accordance with Rule 144(c) such information as is required for the
Purchasers to sell the Securities under Rule 144. The Company further covenants
that it will take such further action as any holder of Securities may reasonably
request, all to the extent required from time to time to enable such Person to
sell such Securities without registration under the Securities Act within the
limitation of the exemptions provided by Rule 144.

         4.4 Integration. The Company shall not, and shall use its best efforts
to ensure that no Affiliate of the Company shall, sell, offer for sale or
solicit offers to buy or otherwise negotiate in respect of any security (as
defined in Section 2 of the Securities Act) that would be integrated with the
offer or sale of the Securities in a manner that would require the registration
under the Securities Act of the sale of the Securities to the Purchasers, or
that would be integrated with the offer or sale of the Securities for purposes
of the rules and regulations of any Principal Market.

         4.5 Reservation and Listing of Securities.

                  (a) The Company shall maintain a reserve from its duly
         authorized shares of Common Stock for issuance pursuant to the
         Transaction Documents in such amount as may be required to fulfill its
         obligations in full under the Transaction Documents.

                  (b) If, on any date, the number of authorized but unissued
         (and otherwise unreserved) shares of Common Stock is less than the
         Required Minimum on such date, then the Board of Directors of the
         Company shall use commercially reasonable efforts to amend the
         Company's certificate or articles of incorporation to increase the
         number of authorized but unissued shares of Common Stock to at least
         the Required Minimum at such time, as soon as possible and in any event
         not later than the 75th day after such date.

                  (c) The Company shall, if applicable: (i) in the time and
         manner required by the Principal Market, prepare and file with such
         Principal Market an additional shares listing application covering a
         number of shares of Common Stock at least equal to the Required Minimum


                                      -19-
<PAGE>

         on the date of such application, (ii) take all steps necessary to cause
         such shares of Common Stock to be approved for listing on the Principal
         Market as soon as possible thereafter, (iii) provide to the Purchasers
         evidence of such listing, and (iv) maintain the listing of such Common
         Stock on any date at least equal to the Required Minimum on such date
         on such Principal Market or another Principal Market. In addition, the
         Company shall hold a special meeting of shareholders (which may also be
         at the annual meeting of shareholders) at the earliest practical date,
         but in no event later than November 30, 2003, for the purpose of
         obtaining Shareholder Approval, with the recommendation of the
         Company's Board of Directors that such proposal be approved, and the
         Company shall solicit proxies from its shareholders in connection
         therewith in the same manner as all other management proposals in such
         proxy statement and all management-appointed proxyholders shall vote
         their proxies in favor of such proposal.

                  (d) The Company shall not undertake a reverse or forward stock
         split or reclassification of the Common Stock without the prior written
         consent of the Purchasers holding a majority in interest of the
         Debentures.

         4.6 Conversion and Exercise Procedures. The form of Notice of Exercise
included in the Warrants and the form of Notice of Conversion included in the
Debentures set forth the totality of the procedures required of the Purchasers
in order to exercise the Warrants or convert the Debentures. No additional legal
opinion or other information or instructions shall be required of the Purchasers
to exercise their Warrants or convert their Debentures. The Company shall honor
exercises of the Warrants and conversions of the Debentures and shall deliver
Underlying Shares in accordance with the terms, conditions and time periods set
forth in the Transaction Documents. In addition, the Company shall hold a
special meeting of shareholders (which may also be at the annual meeting of
shareholders) at the earliest practical date, but in no event later than
November 30, 2003, for the purpose of obtaining Shareholder Approval, with the
recommendation of the Company's Supervisory Board that such proposal be
approved, and the Company shall solicit proxies from its shareholders in
connection therewith in the same manner as all other management proposals in
such proxy statement and all management-appointed proxyholders shall vote their
proxies in favor of such proposal.

         4.7 Securities Laws Disclosure; Publicity. The Company shall, by 8:30
a.m. Eastern time on the Trading Day following the Closing Date, issue a press
release or file a Current Report on Form 8-K reasonably acceptable to each
Purchaser disclosing all material terms of the transactions contemplated hereby.
The Company and the Purchasers shall consult with each other in issuing any
press releases with respect to the transactions contemplated hereby.
Notwithstanding the foregoing, other than in any registration statement filed
pursuant to the Registration Rights Agreement and filings related thereto, the
Company shall not publicly disclose the name of any Purchaser, or include the
name of any Purchaser in any filing with the Commission or any regulatory agency
or Principal Market, without the prior written consent of such Purchaser, except
to the extent such disclosure is required by law or Principal Market
regulations, in which case the Company shall provide each Purchaser with prior
notice of such disclosure.

                                      -20-
<PAGE>

         4.8 Non-Public Information. The Company covenants and agrees that
neither it nor any other Person acting on its behalf will provide any Purchaser
or its agents or counsel with any information that the Company believes
constitutes material non-public information, unless prior thereto such Purchaser
shall have executed a written agreement regarding the confidentiality and use of
such information. The Company understands and confirms that each Purchaser shall
be relying on the foregoing representations in effecting transactions in
securities of the Company.

         4.9 Use of Proceeds. The Company shall use the net proceeds from the
sale of the Securities hereunder for working capital purposes and not for the
satisfaction of any portion of the Company's debt (other than payment of trade
payables, capital lease obligations, and accrued expenses in the ordinary course
of the Company's business and prior practices), to redeem any Company equity or
equity-equivalent securities or to settle any outstanding litigation.

         4.10 Reimbursement. If any Purchaser becomes involved in any capacity
in any Proceeding by or against any Person who is a stockholder of the Company,
solely as a result of such Purchaser's acquisition of the Securities under this
Agreement and without causation by any other activity, obligation, condition or
liability on the part of, or pertaining to such Purchaser and not to the
purchase of Securities pursuant to this Agreement, the Company will reimburse
such Purchaser, to the extent such reimbursement is not provided for in Section
4.11, for its reasonable legal and other expenses (including the cost of any
investigation, preparation and travel in connection therewith) incurred in
connection therewith, as such expenses are incurred. The reimbursement
obligations (and limitations thereon) of the Company under this paragraph shall
be in addition to any liability which the Company may otherwise have, shall
extend upon the same terms and conditions to any Affiliates of the Purchasers
who are actually named in such action, proceeding or investigation, and
partners, directors, agents, employees and controlling persons (if any), as the
case may be, of the Purchasers and any such Affiliate, and shall be binding upon
and inure to the benefit of any successors, assigns, heirs and personal
representatives of the Company, the Purchasers and any such Affiliate and any
such Person. The Company also agrees that neither the Purchasers nor any such
Affiliates, partners, directors, agents, employees or controlling persons shall
have any liability to the Company or any Person asserting claims on behalf of or
in right of the Company solely as a result of acquiring the Securities under
this Agreement except to the extent any covenant or warranty owing to the
Company is breached.

         4.11 Indemnification of Purchasers. Subject to the provisions of this
Section 4.11, each party (the "Indemnifying Party") will indemnify and hold the
other parties and their directors, officers, shareholders, partners, employees
and agents (each, an "Indemnified Party") harmless from any and all losses,
liabilities, obligations, claims, contingencies, damages, costs and expenses,
including all judgments, amounts paid in settlements, court costs and reasonable
attorneys' fees and costs of investigation that any such Indemnified Party may
suffer or incur as a result of or relating to any breach of any of the
representations, warranties, covenants or agreements made by the Indemnifying
Party in this Agreement or in the other Transaction Documents. If any action


                                      -21-
<PAGE>

shall be brought against any Indemnified Party in respect of which indemnity may
be sought pursuant to this Agreement, such Indemnified Party shall promptly
notify the Indemnifying Party in writing, and the Indemnifying Party shall have
the right to assume the defense thereof with counsel of its own choosing. Any
Indemnified Party shall have the right to employ separate counsel in any such
action and participate in the defense thereof, but the fees and expenses of such
counsel shall be at the expense of such Indemnified Party except to the extent
that (i) the employment thereof has been specifically authorized by the
Indemnifying Party in writing, (ii) the Indemnifying Party has failed after a
reasonable period of time to assume such defense and to employ counsel or (iii)
in such action there is, in the reasonable opinion of such separate counsel, a
material conflict on any material issue between the position of the Indemnifying
Party and the position of such Indemnified Party. The Indemnifying Party will
not be liable to any Indemnified Party under this Agreement (i) for any
settlement by an Indemnified Party effected without the Indemnifying Party's
prior written consent, which shall not be unreasonably withheld or delayed; or
(ii) to the extent, but only to the extent that a loss, claim, damage or
liability is attributable to any Indemnified Party's breach of any of the
representations, warranties, covenants or agreements made by the Purchasers in
this Agreement or in the other Transaction Documents. In no event shall the
liability of any Purchaser hereunder be greater in amount than the dollar amount
of the net proceeds received by such Purchaser upon the sale of the Securities.

         4.12 Shareholders Rights Plan. In the event that a shareholders rights
plan is adopted by the Company, no claim will be made or enforced by the Company
that any Purchaser is an "Acquiring Person" under the plan or in any way could
be deemed to trigger the provisions of such plan by virtue of receiving
Securities under the Transaction Documents.

         4.13 Future Financings. From the date hereof until 90 days after the
Effective Date, other than as contemplated by this Agreement, neither the
Company nor any Subsidiary shall issue or sell any Capital Shares or Capital
Shares Equivalents. Notwithstanding anything herein to the contrary, the 120 day
period set forth in this Section 4.13 shall be extended for the number of
Trading Days during such period in which (y) trading in the Common Stock is
suspended by any Principal Market, or (z) following the Effective Date, the
Registration Statement is not effective or the prospectus included in the
Registration Statement may not be used by the Purchasers for the resale of the
Underlying Shares. Notwithstanding anything to the contrary herein, this Section
4.13 shall not apply to the following (a) the granting or issuance of shares of
Common Stock or options to employees, officers and directors of the Company
pursuant to any stock option plan or employee incentive plan or agreement duly
adopted or approved by a majority of the non-employee members of the Board of
Directors of the Company or a majority of the members of a committee of
non-employee directors established for such purpose, (b) the exercise of a
Debenture or any other security issued by the Company in connection with the
offer and sale of this Company's securities pursuant to this Agreement, or (c)
the exercise of or conversion of any Capital Shares Equivalents issued and
outstanding on the date hereof, provided that such securities have not been
amended since the date hereof, or (d) the issuance of Capital Shares or Capital
Shares Equivalents in connection with acquisitions, strategic investments or
strategic partnering arrangements, the primary purpose of which is not to raise
capital, or (e) the granting of stock, stock options and/or warrants to an
investment group in connection with the advancement of $1 million to the
Company, which transaction is described in Item 13 of the Company's Annual
Report on Form 10-K for the fiscal year ended March 31, 2003. Additionally, in
additional to the limitations set forth herein, from the date hereof until such
time as there are no longer any Debentures, the Company shall be prohibited from
effecting or enter into an agreement to effect any Subsequent Financing


                                      -22-
<PAGE>

involving a "Variable Rate Transaction" or an "MFN Transaction" (each as defined
below). The term "Variable Rate Transaction" shall mean a transaction in which
the Company issues or sells (i) any debt or equity securities that are
convertible into, exchangeable or exercisable for, or include the right to
receive additional shares of Common Stock either (A) at a conversion, exercise
or exchange rate or other price that is based upon and/or varies with the
trading prices of or quotations for the shares of Common Stock at any time after
the initial issuance of such debt or equity securities, or (B) with a
conversion, exercise or exchange price that is subject to being reset at some
future date after the initial issuance of such debt or equity security or upon
the occurrence of specified or contingent events directly or indirectly related
to the business of the Company or the market for the Common Stock. The term "MFN
Transaction" shall mean a transaction in which the Company issues or sells any
securities in a capital raising transaction or series of related transactions
which grants to an investor the right to receive additional shares based upon
future transactions of the Company on terms more favorable than those granted to
the such investor in such offering. In addition, unless Shareholder Approval has
been obtained and deemed effective in accordance with Section 4.5(c), the
Company shall not make any issuance whatsoever of Capital Shares or Capital
Shares Equivalents which would cause any adjustment of the Set Price (other than
pursuant to Section 4(c)(ii) of the Debentures) to the extent the holders of
Debentures would not be permitted, pursuant to Section 4(a)(ii)(B) of the
Debenture, to convert their respective outstanding Debentures and exercise their
respective Warrants in full.

         4.14 Participation in Future Financing. From the date hereof until the
first anniversary of the Effective Date, the Company shall not effect a
financing of its Capital Shares or Capital Shares Equivalents (a "Subsequent
Financing") unless (i) the Company delivers to each Purchaser a written notice
at least 5 Trading Days prior to the closing of such Subsequent Financing (the
"Subsequent Financing Notice") of its intention to effect such Subsequent
Financing, which Subsequent Financing Notice shall describe in reasonable detail
the proposed terms of such Subsequent Financing, the amount of proceeds intended
to be raised thereunder, the Person with whom such Subsequent Financing is
proposed to be effected, and attached to which shall be a term sheet or similar
document relating thereto and (ii) such Purchaser shall not have notified the
Company by 6:30 p.m. (New York City time) on the fifth (5th) Trading Day after
its receipt of the Subsequent Financing Notice of its willingness to provide (or
to cause its designee to provide), subject to completion of mutually acceptable
documentation, all or part of up to the greater of (a) the principal amount of
Debentures then outstanding and (b) 50% of such financing to the Company on the
same terms set forth in the Subsequent Financing Notice. If one or more
Purchasers shall fail to so notify the Company of their willingness to
participate in the Subsequent Financing, the Company may effect the remaining
portion of such Subsequent Financing on the terms and to the Persons set forth
in the Subsequent Financing Notice; provided that the Company must provide the
Purchasers with a second Subsequent Financing Notice, and the Purchasers will
again have the right of first refusal set forth above in this Section 4.14, if
the Subsequent Financing subject to the initial Subsequent Financing Notice is
not consummated for any reason on the terms set forth in such Subsequent
Financing Notice within 60 Trading Days after the date of the initial Subsequent
Financing Notice with the Person identified in the Subsequent Financing Notice.
In the event the Company receives responses to Subsequent Financing Notices from
Purchasers seeking to purchase more than the financing sought by the Company in
the Subsequent Financing such Purchasers shall have the right to purchase their
Pro Rata Portion (as defined below) of up to the greater of (a) the principal
amount of Debentures then outstanding and (b) 50% of the Capital Shares or


                                      -23-
<PAGE>

Capital Shares Equivalents to be issued in such Subsequent Financing. "Pro Rata
Portion" is the ratio of (x) the principal amount of Debentures purchased by a
Purchaser and (y) the sum of the aggregate principal amount of Debentures issued
hereunder. If any Purchaser no longer holds any Debentures, then the Pro Rata
Portions shall be re-allocated among the remaining Purchasers. Notwithstanding
anything to the contrary herein, this Section 4.14 shall not apply to the
following (a) the granting and exercise of options to employees, officers,
directors and key consultants of the Company pursuant to any stock option plan
or other plan duly adopted by a majority of the non-employee members of the
Board of Directors of the Company or a majority of the members of a committee of
non-employee directors established for such purpose, or (b) the exercise of the
Debenture or any other security issued by the Company in connection with the
offer and sale of this Company's securities pursuant to this Agreement, or (c)
the exercise of or conversion of any Capital Shares Equivalents issued and
outstanding on the Original Issue Date, provided such securities have not been
amended since the date hereof, or (d) the issuance of Capital Shares or Capital
Shares Equivalents in connection with acquisitions, strategic investments or
strategic partnering arrangements, the primary purpose of which is not to raise
capital or subsequent exercise of any such Capital Shares Equivalents, or (e)
the granting of stock, stock options and/or warrants to an investment group in
connection with the advancement of $1 million to the Company, which transaction
is described in Item 13 of the Company's Annual Report on Form 10-K for the
fiscal year ended March 31, 2003.

                                    ARTICLE V
                                  MISCELLANEOUS

         5.1 Termination. This Agreement may be terminated by any Purchaser, by
written notice to the other parties, if the Closing has not been consummated on
or before August ___, 2003; provided that no such termination will affect the
right of any party to sue for any breach by the other party (or parties).

         5.2 Fees and Expenses. At the Closing, the Company has agreed to
reimburse Omicron Master Trust ("Omicron") up to $35,000 for its legal fees and
expenses. Accordingly, in lieu of the foregoing payments, the Company, on the
Closing Date, will direct that the aggregate amount that Omicron is to pay for
the Debentures and Warrants at the Closing, be reduced by $35,000 Except as
expressly set forth in the Transaction Documents to the contrary, each party
shall pay the fees and expenses of its advisers, counsel, accountants and other
experts, if any, and all other expenses incurred by such party incident to the
negotiation, preparation, execution, delivery and performance of this Agreement.
The Company shall pay all transfer agent fees, stamp taxes and other taxes and
duties levied in connection with the issuance of any Securities.

         5.3 Entire Agreement. The Transaction Documents, together with the
exhibits and schedules thereto, contain the entire understanding of the parties
with respect to the subject matter hereof and supersede all prior agreements and
understandings, oral or written, with respect to such matters, which the parties
acknowledge have been merged into such documents, exhibits and schedules.

                                      -24-
<PAGE>

         5.4 Notices. Any and all notices or other communications or deliveries
required or permitted to be provided hereunder shall be in writing and shall be
deemed given and effective on the earliest of (a) the date of transmission, if
such notice or communication is delivered via facsimile at the facsimile number
specified on the signature page attached hereto prior to 5:30 p.m. (New York
City time) on a Trading Day and an electronic confirmation of delivery is
received by the sender, (b) the next Trading Day after the date of transmission,
if such notice or communication is delivered via facsimile at the facsimile
number specified in this Section on a day that is not a Trading Day or later
than 5:30 p.m. (New York City time) on any Trading Day, (c) three Trading Days
following the date of mailing, if sent by U.S. nationally recognized overnight
courier service, or (d) upon actual receipt by the party to whom such notice is
required to be given. The addresses for such notices and communications are
those set forth on the signature pages hereof, or such other address as may be
designated in writing hereafter, in the same manner, by such Person.

         5.5 Amendments; Waivers. No provision of this Agreement may be waived
or amended except in a written instrument signed, in the case of an amendment,
by the Company and each of the Purchasers or, in the case of a waiver, by the
party against whom enforcement of any such waiver is sought. No waiver of any
default with respect to any provision, condition or requirement of this
Agreement shall be deemed to be a continuing waiver in the future or a waiver of
any subsequent default or a waiver of any other provision, condition or
requirement hereof, nor shall any delay or omission of either party to exercise
any right hereunder in any manner impair the exercise of any such right.

         5.6 Construction. The headings herein are for convenience only, do not
constitute a part of this Agreement and shall not be deemed to limit or affect
any of the provisions hereof. The language used in this Agreement will be deemed
to be the language chosen by the parties to express their mutual intent, and no
rules of strict construction will be applied against any party.

         5.7 Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the parties and their successors and permitted assigns.
The Company may not assign this Agreement or any rights or obligations hereunder
without the prior written consent of the Purchasers. Any Purchaser may assign
its rights under this Agreement and the Registration Rights Agreement to any
Person to whom such Purchaser assigns or transfers any Securities.

         5.8 No Third-Party Beneficiaries. This Agreement is intended for the
benefit of the parties hereto and their respective successors and permitted
assigns and is not for the benefit of, nor may any provision hereof be enforced
by, any other Person, except as otherwise set forth in Sections 4.11 and 4.12.

         5.9 Governing Law; Venue; Waiver of Jury Trial. All questions
concerning the construction, validity, enforcement and interpretation of this
Agreement shall be governed by and construed and enforced in accordance with the
internal laws of the State of New York, without regard to the principles of
conflicts of law thereof. Each party hereby irrevocably submits to the exclusive
jurisdiction of the state and federal courts sitting in the City of New York,


                                      -25-
<PAGE>

borough of Manhattan for the adjudication of any dispute hereunder or in
connection herewith or with any transaction contemplated hereby or discussed
herein (including with respect to the enforcement of any of the Transaction
Documents), and hereby irrevocably waives, and agrees not to assert in any suit,
action or proceeding, any claim that it is not personally subject to the
jurisdiction of any such court, that such suit, action or proceeding is improper
or inconvenient venue for such proceeding. Each party hereby irrevocably waives
personal service of process and consents to process being served in any such
suit, action or proceeding by mailing a copy thereof via registered or certified
mail or overnight delivery (with evidence of delivery) to such party at the
address in effect for notices to it under this Agreement and agrees that such
service shall constitute good and sufficient service of process and notice
thereof. Nothing contained herein shall be deemed to limit in any way any right
to serve process in any manner permitted by law. The parties hereby waive all
rights to a trial by jury. If either party shall commence an action or
proceeding to enforce any provisions of this Agreement, then the prevailing
party in such action or proceeding shall be reimbursed by the other party for
its attorneys fees and other costs and expenses incurred with the investigation,
preparation and prosecution of such action or proceeding.

         5.10 Survival. The representations, warranties, agreements and
covenants contained herein shall survive the Closing and the delivery, exercise
and/or conversion of the Securities, as applicable for the applicable statue of
limitations.

         5.11 Execution. This Agreement may be executed in two or more
counterparts, all of which when taken together shall be considered one and the
same agreement and shall become effective when counterparts have been signed by
each party and delivered to the other party, it being understood that both
parties need not sign the same counterpart. In the event that any signature is
delivered by facsimile transmission, such signature shall create a valid and
binding obligation of the party executing (or on whose behalf such signature is
executed) with the same force and effect as if such facsimile signature page
were an original thereof.

         5.12 Severability. If any provision of this Agreement is held to be
invalid or unenforceable in any respect, the validity and enforceability of the
remaining terms and provisions of this Agreement shall not in any way be
affected or impaired thereby and the parties will attempt to agree upon a valid
and enforceable provision that is a reasonable substitute therefor, and upon so
agreeing, shall incorporate such substitute provision in this Agreement.

         5.13 Rescission and Withdrawal Right. Notwithstanding anything to the
contrary contained in (and without limiting any similar provisions of) the
Transaction Documents, whenever any Purchaser exercises a right, election,
demand or option under a Transaction Document and the Company does not timely
perform its related obligations within the periods therein provided, then such
Purchaser may rescind or withdraw, in its sole discretion from time to time upon
written notice to the Company, any relevant notice, demand or election in whole
or in part without prejudice to its future actions and rights; provided,
however, in the case of a rescission of a conversion of a Debenture or exercise
of a Warrant, the Purchaser shall be required to return any shares of Common
Stock subject to any such rescinded conversion or exercise notice.

         5.14 Replacement of Securities. If any certificate or instrument
evidencing any Securities is mutilated, lost, stolen or destroyed, the Company
shall issue or cause to be issued in exchange and substitution for and upon


                                      -26-
<PAGE>

cancellation thereof, or in lieu of and substitution therefor, a new certificate
or instrument, but only upon receipt of evidence reasonably satisfactory to the
Company of such loss, theft or destruction and customary and reasonable
indemnity, if requested. The applicants for a new certificate or instrument
under such circumstances shall also pay any reasonable third-party costs
associated with the issuance of such replacement Securities.

         5.15 Remedies. In addition to being entitled to exercise all rights
provided herein or granted by law, including recovery of damages, each of the
Purchasers and the Company will be entitled to specific performance under the
Transaction Documents. The parties agree that monetary damages may not be
adequate compensation for any loss incurred by reason of any breach of
obligations described in the foregoing sentence and hereby agrees to waive in
any action for specific performance of any such obligation the defense that a
remedy at law would be adequate.

         5.16 Payment Set Aside. To the extent that the Company makes a payment
or payments to any Purchaser pursuant to any Transaction Document or a Purchaser
enforces or exercises its rights thereunder, and such payment or payments or the
proceeds of such enforcement or exercise or any part thereof are subsequently
invalidated, declared to be fraudulent or preferential, set aside, recovered
from, disgorged by or are required to be refunded, repaid or otherwise restored
to the Company, a trustee, receiver or any other person under any law
(including, without limitation, any bankruptcy law, state or federal law, common
law or equitable cause of action), then to the extent of any such restoration
the obligation or part thereof originally intended to be satisfied shall be
revived and continued in full force and effect as if such payment had not been
made or such enforcement or setoff had not occurred.

         5.17 Usury. To the extent it may lawfully do so, the Company hereby
agrees not to insist upon or plead or in any manner whatsoever claim, and will
resist any and all efforts to be compelled to take the benefit or advantage of,
usury laws wherever enacted, now or at any time hereafter in force, in
connection with any claim, action or proceeding that may be brought by any
Purchaser in order to enforce any right or remedy under any Transaction
Document. Notwithstanding any provision to the contrary contained in any
Transaction Document, it is expressly agreed and provided that the total
liability of the Company under the Transaction Documents for payments in the
nature of interest shall not exceed the maximum lawful rate authorized under
applicable law (the "Maximum Rate"), and, without limiting the foregoing, in no
event shall any rate of interest or default interest, or both of them, when
aggregated with any other sums in the nature of interest that the Company may be
obligated to pay under the Transaction Documents exceed such Maximum Rate. It is
agreed that if the maximum contract rate of interest allowed by law and
applicable to the Transaction Documents is increased or decreased by statute or
any official governmental action subsequent to the date hereof, the new maximum
contract rate of interest allowed by law will be the Maximum Rate applicable to
the Transaction Documents from the effective date forward, unless such
application is precluded by applicable law. If under any circumstances
whatsoever, interest in excess of the Maximum Rate is paid by the Company to any
Purchaser with respect to indebtedness evidenced by the Transaction Documents,
such excess shall be applied by such Purchaser to the unpaid principal balance
of any such indebtedness or be refunded to the Company, the manner of handling
such excess to be at such Purchaser's election.

                                      -27-
<PAGE>

         5.18 Independent Nature of Purchasers' Obligations and Rights. The
obligations of each Purchaser under any Transaction Document are several and not
joint with the obligations of any other Purchaser, and no Purchaser shall be
responsible in any way for the performance of the obligations of any other
Purchaser under any Transaction Document. Nothing contained herein or in any
Transaction Document, and no action taken by any Purchaser pursuant thereto,
shall be deemed to constitute the Purchasers as a partnership, an association, a
joint venture or any other kind of entity, or create a presumption that the
Purchasers are in any way acting in concert or as a group with respect to such
obligations or the transactions contemplated by the Transaction Document. Each
Purchaser shall be entitled to independently protect and enforce its rights,
including without limitation the rights arising out of this Agreement or out of
the other Transaction Documents, and it shall not be necessary for any other
Purchaser to be joined as an additional party in any proceeding for such
purpose. Each Purchaser has been represented by its own separate legal counsel
in their review and negotiation of the Transaction Documents. For reasons of
administrative convenience only, Purchasers and their respective counsel have
chosen to communicate with the Company through FW. FW does not represent all of
the Purchasers but only Omicron. The Company has elected to provide all
Purchasers with the same terms and Transaction Documents for the convenience of
the Company and not because it was required or requested to do so by the
Purchasers.

         5.19 Liquidated Damages. The Company's obligations to pay any
liquidated damages or other amounts owing under the Transaction Documents is a
continuing obligation of the Company and shall not terminate until all unpaid
liquidated damages and other amounts have been paid notwithstanding the fact
that the instrument or security pursuant to which such liquidated damages or
other amounts are due and payable shall have been canceled.

                             ***********************


                                      -28-
<PAGE>


         IN WITNESS WHEREOF, the parties hereto have caused this Securities
Purchase Agreement to be duly executed by their respective authorized
signatories as of the date first indicated above.


                                            THE SINGING MACHINE COMPANY, INC.

                                            By:    /s/ Yi Ping Chan
                                               ---------------------------
                                            Name:  Yi Ping Chan
                                            Title: Chief Operating Officer

                                            Address for Notice:
                                            6601 Lyons Road, Building A-7
                                            Coconut Creek, FL 33073
                                            Attn:
                                            Tel: (954) 596-1000
                                            Fax:



With a copy to:


                                            Attn:
                                            Tel:
                                            Fax:

                   [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
                      SIGNATURE PAGE FOR PURCHASER FOLLOWS]

                                      -29-
<PAGE>


                           PURCHASER'S SIGNATURE PAGE

         IN WITNESS WHEREOF, the undersigned have caused this Securities
Purchase Agreement to be duly executed by their respective authorized
signatories as of the date first indicated above.

OMICRON MASTER TRUST                              Address for Notice:
By:  Omicron Capital L.P., as subadvisor          c/o Omicron Capital L.P.
By:  Omicron Capital Inc., its general partner    810 Seventh Avenue, 39th Fl.
                                                  New York, NY 10019
                                                  Fax: (212) 803-5269
By:  /s/ Bruce Bernstein                          Attn:  Brian Daly
     ----------------------------
     Name:  Bruce Bernstein
     Title:   President

Subscription Amount:  $
- --------------------
Warrant Shares:

With a copy to:
- ---------------
(which shall not constitute notice)               Feldman Weinstein LLP
                                                  420 Lexington Avenue
                                                  New York, New York 10170
                                                  Attn:  Robert F. Charron
                                                  Tel:  (212) 869-7000
                                                  Fax:  (212) 401-4741


                   [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
                      SIGNATURE PAGE FOR PURCHASER FOLLOWS]


                                      -30-
<PAGE>

                           PURCHASER'S SIGNATURE PAGE

BRISTOL INVESTMENT FUND, LTD.               Address for Notice:
                                            c/o Bristol DLP, LLC
                                            6363 Sunset Boulevard, 5th Floor
                                            Hollywood, California 90028
By: /s/ Paul Kessler                        Attn:  Amy Wang, Esq.
- --------------------------                  Fax:  (323) 468-8307
    Name:  Paul Kessler
    Title: Director

Subscription Amount: $
Warrant Shares:

                           [SIGNATURE PAGE CONTINUED]

                                      -31-
<PAGE>

                     PURCHASER'S SIGNATURE PAGE (CONT. . . )

ASCEND OFFSHORE FUND, LTD.


By:      /s/ Malcolm Fairbairn
         ---------------------------
         Name:  Malcolm Fairbairn
         Title:     Investment Manager

Subscription Amount: $478,000
- -------------------

ASCEND PARTNERS LP


By:        /s/ Malcolm Fairbairn
         ---------------------------
         Name:  Malcolm Fairbairn
         Title:    Managing Member

Subscription Amount: $58,200
- -------------------

ASCEND PARTNERS SAPIENT LP


By:       /s/ Malcolm Fairbairn
         ---------------------------
         Name:  Malcolm Fairbairn
         Title:    Managing Member

Subscription Amount: $163,800
- -------------------

Address for Notice:


                                      -32-
<PAGE>


SF CAPITAL PARTNERS, LLC


By:   /s/ Brian H. Davidson
          -------------------------------
          Name:  Brian H. Davidson
          Title:    Authorized Signatory



                                      -33-








</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.2
<SEQUENCE>5
<FILENAME>transactionamendment.txt
<DESCRIPTION>AMENDED TRANSACTION DOCUMENTS
<TEXT>
                                                                    Exhibit 10.2

                        THE SINGING MACHINE COMPANY, INC.
                          6601 Lyons Road, Building A-7
                          Coconut Creek, Florida 33073

                                                               September 5, 2003

Omicron Master Trust
SF Capital Partners, Ltd.
Bristol Investment Fund, Ltd.
Ascend Offshore Fund, Ltd.
Ascend Partners LP
Ascend Partners Sapient LP
c/o Feldman Weinstein LLP
420 Lexington Avenue
New York, NY  10170-0002


         RE: AMENDMENT TO THE TRANSACTION DOCUMENTS ("AMENDMENT")

Dear Sirs:

         Reference is made to that certain Securities Purchase Agreement
("Purchase Agreement") dated August 19, 2003 entered into by and among The
Singing Machine Company, Inc. (the "Company") 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 referred
to herein as the "Purchasers" and individually, as a "Purchaser"). All
capitalized terms not defined herein shall have the same meaning as defined
terms in the Purchase Agreement.

         The Purchasers agrees that the Company shall have forty five (45) days
from the Closing Date, to obtain approval from the American Stock Exchange
("AMEX") to list the Underlying Shares and any other securities which are being
issued in connection with the transactions set forth in the Transaction
Documents. If the Company does not obtain approval from AMEX by October 20,
2003, the Purchasers shall have the right to rescind the transactions set forth
in the Transaction Documents ("Rescission") or to provide the Company with an
additional thirty (30) day time period in which to seek AMEX approval (which
would continue every 30 days until AMEX approval is obtained). The Company shall
use its best efforts to obtain AMEX approval as soon as possible after the date
hereof.

         If the Transaction is rescinded, the Company agrees that it will return
to each Purchaser the Subscription Amount, plus interest on such amount at the
rate of 8% per annum, calculated on a pro-rata basis, on or before October 25,
2003 or such other date requested by the Purchasers. In exchange for the return
of the Subscription Amount, plus interest, each Purchaser agrees that it will
return it Debenture to the Company, along with all other Transaction Documents,
including but not limited to the Warrant, the Registration Rights Agreement and
the Purchase Agreement on or before October 25, 2003 or such other date. The
Company will place a notation on each Debenture noting that it has been "PAID IN
FULL" and will place a notation on the Warrant, Registration Rights Agreement
and Purchase Agreement noting that these agreements have been "CANCELLED AND
TERMINATED."

         If the Transaction is rescinded, the Company and the Purchaser each
agree that the other party will not have liability of any type to the other
party. Each Purchaser agrees that the return of the Subscription Amount, plus
interest, shall be their sole remedy for the Rescission.

<PAGE>


         In the Transaction Documents, there are statements that the Company
will not issue more than 19.99% of its common stock unless it obtains AMEX
approval. All of these statements are hereby deleted and replaced with the
statement that the Company will not issue any of its securities, until it has
obtained approval from AMEX to issue such shares.

         The Purchasers also agree that they will sign any subordination
agreements that LaSalle Business Credit, LLC or any of the Company's prospective
commercial lenders present to the Purchasers in connection with any new credit
agreements that the Company enters into while the Company has obligations under
the Transaction Documents, the terms of which shall be substantially similar to
the terms of the subordination agreement entered into with LaSalle Business
Credit, LLC in connection with the consummation of the Purchase Agreement and
issuance of the Debentures.

         Except as expressly amended hereby, the Purchase Agreement, the
Debentures, the Warrants and the Registration Rights Agreement are ratified and
confirmed by the parties hereto and remain in full force and effect in
accordance with the terms hereof.

         This Agreement may be executed in any number of counterparts, each of
which when so executed shall be deemed to be an original and, all of which taken
together shall constitute one and the same Agreement. In the event that any
signature is delivered by facsimile transmission, such signature shall create a
valid binding obligation of the party executing (or on whose behalf such
signature is executed) the same with the same force and effect as if such
facsimile signature were the original thereof.


                                               Sincerely,

                                               THE SINGING MACHINE COMPANY, INC.


                                               By: /s/ Yi Ping Chan
                                                       Yi Ping Chan
                                                       Chief Operating Officer



Agreed and accepted this 5th day of September, 2003:


Omicron Master Trust                         SF Capital Partners, Ltd.
By:      /s/ Bruce Bernstein                 By:      /s/ Brian Davidson
Name:    Bruce Bernstein                     Name:    Brian Davidson
Title:   Managing Partner                    Its:     Authorized Signator

Bristol Investment Fund, Ltd.                Ascend Offshore Fund, Ltd.
By:      /s/ Paul Kessler                    By:      /s/ Malcolm Fairbairn
Name:    Paul Kessler                        Name:    Malcolm Fairbairn
Title:   Director                            Title:   Managing Member

Ascend Partners LP                           Ascend Partners Sapient LP
By:      /s/ Malcolm Fairbairn               By:      /s/ Malcolm Fairbairn
Name:    Malcolm Fairbairn                   Name:    Malcolm Fairbairn
Title:   Managing Member                     Title:   Managing Member

                                       2

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.3
<SEQUENCE>6
<FILENAME>convdebenture-feb20.txt
<DESCRIPTION>CONVERTIBLE DEBENTURES DUE FEB 20
<TEXT>

                                                                    EXHIBIT 10.3

NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE
CONVERTIBLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR
THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN
AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE
SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO
SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE
COMPANY. THESE SECURITIES AND THE SECURITIES ISSUABLE UPON CONVERSION OF THESE
SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER
LOAN SECURED BY SUCH SECURITIES.

                                            Date of Issuance: September __, 2003

                                                                $_______________


                            8% CONVERTIBLE DEBENTURE
                              DUE FEBRUARY 20, 2006

         THIS DEBENTURE is one of a series of duly authorized and issued 8%
Convertible Debentures of The Singing Machine Company, Inc., a Delaware
corporation, having a principal place of business at 6601 Lyons Road, Building
A-7, Coconut Creek, FL 33073 (the "Company"), designated as its 8% Convertible
Debenture, due February __, 2006 (the "Debentures").


         FOR VALUE RECEIVED, the Company promises to pay to
________________________ or its registered assigns (the "Holder"), the principal
sum of $_______________ on February __, 2006 or such earlier date as the
Debentures are required or permitted to be repaid as provided hereunder (the
"Maturity Date"), and to pay interest to the Holder on the aggregate unconverted
and then outstanding principal amount of this Debenture at the rate of 8% per
annum, payable quarterly on March 1, June 1, September 1 and December 1,
beginning on the first such date after the Original Issue Date and on each
Conversion Date (as to that principal amount then being converted) and on the
Maturity Date (except that, if any such date is not a Business Day, then such
payment shall be due on the next succeeding Business Day) (each such date, an
"Interest Payment Date"), in cash or shares of Common Stock at the Interest
Conversion Rate, or a combination thereof; provided, however, payment in shares
of Common

<PAGE>

Stock may only occur if: (i) there is an effective Underlying Shares
Registration Statement pursuant to which the Holder is permitted to utilize the
prospectus thereunder to resell all of the shares of Common Stock to be issued
in lieu of cash (and the Company believes, in good faith, that such
effectiveness will continue uninterrupted for the foreseeable future), (ii) the
Common Stock is listed for trading on a Principal Market (and the Company
believes, in good faith, that trading of the Common Stock on a Principal Market
will continue uninterrupted for the foreseeable future), (iii) there is a
sufficient number of authorized but unissued and otherwise unreserved shares of
Common Stock for the issuance of all of the shares issuable pursuant to the
Transaction Documents, including the shares to be issued for interest in lieu of
cash and (iv) there is then existing no Event of Default or event which, with
the passage of time or the giving of notice, would constitute and Event of
Default, and (v) the issuance of such shares, when added to the shares issued or
issuable upon conversion of the Debentures in full and issued and issuable upon
exercise of the Warrants in full would violate the limitations set forth in
Section 4(a)(ii). Subject to the terms and conditions herein, the decision
whether to pay interest hereunder in shares of Common Stock or cash shall be at
the discretion of the Company. Not less than 20 Trading Days prior to each
Interest Payment Date, the Company shall provide the Holder with written notice
of its election to pay interest hereunder either in cash or shares of Common
Stock (the Company may indicate in such notice that the election contained in
such notice shall continue for later periods until revised). Within 20 Trading
Days prior to an Interest Payment Date, the Company's election (whether specific
to an Interest Payment Date or continuous) shall be irrevocable as to such
Interest Payment Date. Subject to the aforementioned conditions, failure to
timely provide such written notice shall be deemed an election by the Company to
pay the interest on such Interest Payment Date in cash. Interest shall be
calculated on the basis of a 360-day year and shall accrue daily commencing on
the Original Issue Date until payment in full of the principal sum, together
with all accrued and unpaid interest and other amounts which may become due
hereunder, has been made. Payment of interest in shares of Common Stock shall
otherwise occur pursuant to Section 4(b) and only for purposes of the payment of
interest in shares, the Interest Payment Date shall be deemed the Conversion
Date. Interest shall cease to accrue with respect to any principal amount
converted, provided that the Company in fact delivers the Underlying Shares
within the time period required by Section 4(b)(i). Interest hereunder will be
paid to the Person in whose name this Debenture is registered on the records of
the Company regarding registration and transfers of Debentures (the "Debenture
Register"). Except as otherwise provided herein, if at anytime the Company pays
interest partially in cash and partially in shares of Common Stock, then such
payment shall be distributed ratably among the Holders based upon the principal
amount of Debentures held by each Holder. All overdue accrued and unpaid
interest to be paid hereunder shall entail a late fee at the rate of 18% per
annum (or such lower maximum amount of interest permitted to be charged under
applicable law) ("Late Fee") which will accrue daily, from the date such
interest is due hereunder through and including the date of payment.
Notwithstanding anything to the contrary contained herein, if on any Interest
Payment Date the Company has elected to pay interest in Common Stock and is not
able to pay accrued interest in the form of Common Stock because it does not
then satisfy the conditions for payment in the form of Common Stock set forth
above, then, at the option of the Holder, the Company, in lieu of delivering
either shares of Common Stock pursuant to this

                                       2
<PAGE>

Section 4 or paying the regularly scheduled cash interest payment, shall
deliver, within three Trading Days of each applicable Interest Payment Date, an
amount in cash equal to the product of the number of shares of Common Stock
otherwise deliverable to the Holder in connection with the payment of interest
due such Interest Payment Date and the highest VWAP during the period commencing
on the Interest Payment Date and ending on the Trading Day prior to the date
such payment is made. EXCEPT AS SET FORTH IN SECTION 5, THE COMPANY MAY NOT
PREPAY ANY PORTION OF THE PRINCIPAL AMOUNT OF THIS DEBENTURE WITHOUT THE PRIOR
WRITTEN CONSENT OF THE HOLDER.

         This Debenture is subject to the following additional provisions:

         Section 1. This Debenture is exchangeable for an equal aggregate
principal amount of Debentures of different authorized denominations, as
requested by the Holder surrendering the same. No service charge will be made
for such registration of transfer or exchange. THIS DEBENTURE IS ALSO SUBJECT TO
THE TERMS AND CONDITIONS OF A SUBORDINATION AGREEMENT (THE "LASALLE
SUBORDINATION AGREEMENT") THAT THE HOLDER HAS SIGNED WITH LASALLE BUSINESS
CREDIT, LLC, THE COMPANY'S COMMERCIAL LENDER, ON ABOUT THE DATE HEREOF AND ANY
FUTURE SUBORDINATION AGREEMENTS THAT IT IS REQUIRED TO SIGN DURING THE TIME
PERIOD THAT THE COMPANY HAS ANY OBLIGATIONS UNDER THE TRANSACTION DOCUMENTS
(COLLECTIVELY, ANY OR ALL SUCH AGREEMENTS SHALL BE REFERRED TO AS THE
"SUBORDINATION AGREEMENT"). ANY INCONSISTENCIES BETWEEN THIS DEBENTURE AND THE
SUBORDINATION AGREEMENT WILL BE RESOLVED IN FAVOR OF THE TERMS OF THE
SUBORDINATION AGREEMENT.

         Section 2. This Debenture has been issued subject to certain investment
representations of the original Holder set forth in the Purchase Agreement and
may be transferred or exchanged only in compliance with the Purchase Agreement
and applicable federal and state securities laws and regulations. Prior to due
presentment to the Company for transfer of this Debenture, the Company and any
agent of the Company may treat the Person in whose name this Debenture is duly
registered on the Debenture Register as the owner hereof for the purpose of
receiving payment as herein provided and for all other purposes, whether or not
this Debenture is overdue, and neither the Company nor any such agent shall be
affected by notice to the contrary.

         Section 3. Events of Default.

                 (a) "Event of Default", wherever used herein, means any one of
         the following events (whatever the reason and whether it shall be
         voluntary or involuntary or effected by operation of law or pursuant to
         any judgment, decree or order of any court, or any order, rule or
         regulation of any administrative or governmental body):

                          (i) any default in the payment of the principal of,
                  interest (including Late Fees) on, or liquidated damages in
                  respect of, any Debentures, free of any claim of
                  subordination, as and when the same shall become due and
                  payable

                                       3
<PAGE>

                  (whether on a Conversion Date or the Maturity Date or
                  by acceleration or otherwise) which default is not cured, if
                  possible to cure, within 5 days of written notice of such
                  default sent by the Holder;

                          (ii) the Company shall fail to observe or perform any
                  other covenant, agreement or warranty contained in, or
                  otherwise commit any breach of any of the Transaction
                  Documents (other than a breach by the Company of its
                  obligations to deliver shares of Common Stock to the Holder
                  upon conversion or interest payment which breach is addressed
                  in clause (x) below) which is not cured, if possible to cure,
                  within 5 days of written notice of such default sent by the
                  Holder;

                          (iii) the Company or any of its subsidiaries shall
                  commence, or there shall be commenced against the Company or
                  any such subsidiary a case under any applicable bankruptcy or
                  insolvency laws as now or hereafter in effect or any successor
                  thereto, or the Company commences any other proceeding under
                  any reorganization, arrangement, adjustment of debt, relief of
                  debtors, dissolution, insolvency or liquidation or similar law
                  of any jurisdiction whether now or hereafter in effect
                  relating to the Company or any subsidiary thereof or there is
                  commenced against the Company or any subsidiary thereof any
                  such bankruptcy, insolvency or other proceeding which remains
                  undismissed for a period of 60 days; or the Company or any
                  subsidiary thereof is adjudicated insolvent or bankrupt; or
                  any order of relief or other order approving any such case or
                  proceeding is entered; or the Company or any subsidiary
                  thereof suffers any appointment of any custodian or the like
                  for it or any substantial part of its property which continues
                  undischarged or unstayed for a period of 60 days; or the
                  Company or any subsidiary thereof makes a general assignment
                  for the benefit of creditors; or the Company shall fail to
                  pay, or shall state that it is unable to pay, or shall be
                  unable to pay, its debts generally as they become due; or the
                  Company or any subsidiary thereof shall call a meeting of its
                  creditors with a view to arranging a composition, adjustment
                  or restructuring of its debts; or the Company or any
                  subsidiary thereof shall by any act or failure to act
                  expressly indicate its consent to, approval of or acquiescence
                  in any of the foregoing; or any corporate or other action is
                  taken by the Company or any subsidiary thereof for the purpose
                  of effecting any of the foregoing;

                          (iv) the Company shall default in any of its
                  obligations under any other Debenture or any mortgage, credit
                  agreement or other facility, indenture agreement, factoring
                  agreement or other instrument under which there may be issued,
                  or by which there may be secured or evidenced any indebtedness
                  for borrowed money or money due under any long term leasing or
                  factoring arrangement of the Company in an amount exceeding
                  $500,000, whether such indebtedness now exists or shall
                  hereafter be created and such default shall result

                                       4
<PAGE>

                  in such indebtedness becoming or being declared due and
                  payable prior to the date on which it would otherwise become
                  due and payable;

                          (v) the Common Stock shall not be eligible for
                  quotation on or quoted for trading on a Principal Market and
                  shall not again be eligible for and quoted or listed for
                  trading thereon within five Trading Days;

                          (vi) the Company shall agree to sell or dispose of all
                  or in excess of 51% of its assets in one or more transactions
                  (whether or not such sale would constitute a Change of Control
                  Transaction) or shall redeem or repurchase more than a de
                  minimis number of its outstanding shares of Common Stock or
                  other equity securities of the Company (other than redemptions
                  of Underlying Shares and repurchases of shares of Common Stock
                  or other equity securities of departing officers and directors
                  of the Company; provided no repurchase shall exceed $100,000
                  for any officer or director);

                          (vii) an Underlying Shares Registration Statement
                  shall not have been declared effective by the Commission on or
                  prior to the 180th calendar day after the Original Issue Date;

                          (viii) if, during the Effectiveness Period (as defined
                  in the Registration Rights Agreement), the effectiveness of
                  the Underlying Shares Registration Statement lapses for any
                  reason or the Holder shall not be permitted to resell
                  Registrable Securities (as defined in the Registration Rights
                  Agreement) under the Underlying Shares Registration Statement,
                  in either case, for more than 20 consecutive Trading Days or
                  30 non-consecutive Trading Days during any 12 month period;
                  provided, however, that in the event that the Company is
                  negotiating a merger, consolidation, acquisition or sale of
                  all or substantially all of its assets or a similar
                  transaction or other fundamental event and in the written
                  opinion of counsel to the Company, the Underlying Shares
                  Registration Statement, would be required to be amended to
                  include information concerning such transactions or the
                  parties thereto that is not available or may not be publicly
                  disclosed at the time, the Company shall be permitted an
                  additional 20 consecutive Trading Days during any 12 month
                  period relating to such an event;

                          (ix) an Event (as defined in the Registration Rights
                  Agreement) shall not have been cured to the satisfaction of
                  the Holder prior to the expiration of thirty days from the
                  Event Date (as defined in the Registration Rights Agreement)
                  relating thereto (other than an Event resulting from a failure
                  of an Underlying Shares Registration Statement to be declared
                  effective by the Commission on or prior to the Effectiveness
                  Date (as defined in the Registration Rights Agreement), which
                  shall be covered by Section 3(a)(vii));

                                       5
<PAGE>

                          (x) the Company shall fail for any reason to deliver
                  certificates to a Holder prior to the seventh Trading Day
                  after a Conversion Date pursuant to and in accordance with
                  Section 4(b) or the Company shall provide notice to the
                  Holder, including by way of public announcement, at any time,
                  of its intention not to comply with requests for conversions
                  of any Debentures in accordance with the terms hereof;

                           (xi) the Company shall fail for any reason to deliver
                  the payment in cash pursuant to a Buy-In (as defined herein)
                  within five days after notice thereof is delivered hereunder;
                  or

                           (xii) any Person shall breach the agreements
                  delivered to the initial Holders pursuant to Section 2.2(a)(v)
                  of the Purchase Agreement and the Company does not obtain
                  Shareholder Approval.

         b) If any Event of Default occurs and is continuing, the full principal
amount of this Debenture, together with interest and other amounts owing in
respect thereof, to the date of acceleration shall become at the Holder's
election, immediately due and payable in cash. The aggregate amount payable upon
an Event of Default shall be equal to the Mandatory Prepayment Amount. Interest
shall accrue on the Mandatory Prepayment Amount hereunder from the fifth (5th)
day after such amount is due (being the date of an Event of Default) through the
date of prepayment in full thereof in an amount equal to the Late Fee, to accrue
daily from the date such payment is due hereunder through and including the date
of payment. All Debentures for which the full prepayment price hereunder shall
have been paid in accordance herewith shall promptly be surrendered to or as
directed by the Company. The Holder need not provide and the Company hereby
waives any presentment, demand, protest or other notice of any kind, and the
Holder may immediately and without expiration of any grace period enforce any
and all of its rights and remedies hereunder and all other remedies available to
it under applicable law. Such declaration may be rescinded and annulled by
Holder at any time prior to payment hereunder and the Holder shall have all
rights as a Debenture holder until such time, if any, as the full payment under
this Section shall have been received by it. No such rescission or annulment
shall affect any subsequent Event of Default or impair any right consequent
thereon. All the remedies set forth in this paragraph are subject to the terms
and conditions of the Subordination Agreement.

         Section 4. Conversion.

        (a)  (i) At any time after the Closing Date, this Debenture shall be
convertible into shares of Common Stock at the option of the Holder, in whole or
in part at any time and from time to time (subject to the limitations on
conversion set forth in Section 4(a)(ii) hereof). The Holder shall effect
conversions by delivering to the Company the form of Notice of Conversion
attached hereto as Annex A (a

                                       6

<PAGE>

         "Notice of Conversion"), specifying therein the principal amount of
         Debentures to be converted and the date on which such conversion is to
         be effected (a "Conversion Date"). If no Conversion Date is specified
         in a Notice of Conversion, the Conversion Date shall be the date that
         such Notice of Conversion is provided hereunder. To effect conversions
         hereunder, the Holder shall not be required to physically surrender
         Debentures to the Company unless the entire principal amount of this
         Debenture plus all accrued and unpaid interest thereon has been so
         converted. Conversions hereunder shall have the effect of lowering the
         outstanding principal amount of this Debenture in an amount equal to
         the applicable conversion. The Holder and the Company shall maintain
         records showing the principal amount converted and the date of such
         conversions. The Company shall deliver any objection to any Notice of
         Conversion within 1 Business Day of receipt of such notice. In the
         event of any dispute or discrepancy, the records of the Holder shall be
         controlling and determinative in the absence of manifest error. The
         Holder and any assignee, by acceptance of this Debenture, acknowledge
         and agree that, by reason of the provisions of this paragraph,
         following conversion of a portion of this Debenture, the unpaid and
         unconverted principal amount of this Debenture may be less than the
         amount stated on the face hereof.

                  (ii) Conversion Limitations.

                           (A) Notwithstanding anything herein to the contrary,
                  if the Company has not obtained Shareholder Approval (as
                  defined below), if required by the applicable rules and
                  regulations of the Principal Market (or any successor entity),
                  then the Company may not issue upon conversion of the
                  Debentures, in the aggregate, in excess of (1) 19.999% of the
                  number of shares of Common Stock outstanding on the Trading
                  Day immediately preceding the Original Issue Date, (2) less
                  any shares of Common Stock issued as payment of interest or
                  upon exercise of the Warrants issued Holders of the Debentures
                  on the Original Issue Date pursuant to the Purchase Agreement
                  (such number of shares, the "Issuable Maximum"). Each Holder
                  shall be entitled to a portion of the Issuable Maximum equal
                  to the quotient obtained by dividing (x) the aggregate
                  principal amount of the Debenture(s) issued and sold to such
                  Holder on the Original Issue Date by (y) the aggregate
                  principal amount of all Debentures issued and sold by the
                  Company on the Original Issue Date. If any Holder shall no
                  longer hold the Debenture(s), then such Holder's remaining
                  portion of the Issuable Maximum shall be allocated pro-rata
                  among the remaining Holders. If on any Conversion Date: (1)
                  the applicable Set Price then in effect is such that the
                  shares issuable under this Debenture on any Conversion Date
                  together with the aggregate number of shares of Common Stock
                  that would then be issuable upon conversion in full of all

                                       7
<PAGE>

                  then outstanding Debentures would exceed the Issuable Maximum,
                  and (2) the Company's shareholders shall not have previously
                  approved the transactions contemplated by the Transaction
                  Documents, as may be required by the applicable rules and
                  regulations of the Principal Market (or any successor entity),
                  if any (the "Shareholder Approval"), then the Company shall
                  issue to the Holder requesting a conversion a number of shares
                  of Common Stock equal to such Holder's pro-rata portion (which
                  shall be calculated pursuant to the terms hereof) of the
                  Issuable Maximum and, with respect to the remainder of the
                  aggregate principal amount of the Debentures (including any
                  accrued interest) then held by such Holder for which a
                  conversion in accordance with the applicable conversion price
                  would result in an issuance of shares of Common Stock in
                  excess of such Holder's pro-rata portion (which shall be
                  calculated pursuant to the terms hereof) of the Issuable
                  Maximum (the "Excess Principal"), the Company shall be
                  prohibited from converting such Excess Principal, and shall
                  notify the Holder of the reason therefor. This Debenture shall
                  thereafter be unconvertible until and unless Shareholder
                  Approval is subsequently obtained or is otherwise not
                  required, but this Debenture shall otherwise remain in full
                  force and effect. The Company and the Holder understand and
                  agree that shares of Common Stock issued to and then held by
                  the Holder as a result of conversions of Debentures shall not
                  be entitled to cast votes on any resolution to obtain
                  Shareholder Approval pursuant hereto. Additionally, this
                  Debenture is subject to that certain letter agreement by and
                  among the initial Holders of the Debentures and the Company
                  relating to the restriction on the issuance of shares of
                  Common Stock until the Company obtains approval of the
                  transaction from the Principal Market.

                           (B) The Company shall not effect any conversion of
                  this Debenture, and the Holder shall not have the right to
                  convert any portion of this Debenture, pursuant to Section
                  4(a)(i), Section 5b) or otherwise, to the extent that after
                  giving effect to such conversion, the Holder (together with
                  the Holder's affiliates), as set forth on the applicable
                  Notice of Conversion, would beneficially own in excess of
                  4.99% of the number of shares of the Common Stock outstanding
                  immediately after giving effect to such conversion. For
                  purposes of the foregoing sentence, the number of shares of
                  Common Stock beneficially owned by the Holder and its
                  affiliates shall include the number of shares of Common Stock
                  issuable upon conversion of this Debenture with respect to
                  which the determination of such sentence is being made, but
                  shall exclude the number of shares of Common Stock which would
                  be issuable upon (A) conversion of the remaining, nonconverted
                  portion of this Debenture beneficially owned by the Holder or
                  any of its affiliates and (B) exercise or conversion of the
                  unexercised or nonconverted portion of any other securities of
                  the

                                       8
<PAGE>

                  Company (including, without limitation, any other Debentures
                  or the Warrants) subject to a limitation on conversion or
                  exercise analogous to the limitation contained herein
                  beneficially owned by the Holder or any of its affiliates.
                  Except as set forth in the preceding sentence, for purposes of
                  this Section 4(a)(ii), beneficial ownership shall be
                  calculated in accordance with Section 13(d) of the Exchange
                  Act. To the extent that the limitation contained in this
                  section applies, the determination of whether this Debenture
                  is convertible (in relation to other securities owned by the
                  Holder) and of which a portion of this Debenture is
                  convertible shall be in the sole discretion of such Holder. To
                  ensure compliance with this restriction, the Holder will be
                  deemed to represent to the Company each time it delivers a
                  Notice of Conversion that such Notice of Conversion has not
                  violated the restrictions set forth in this paragraph and the
                  Company shall have no obligation to verify or confirm the
                  accuracy of such determination. For purposes of this Section
                  4(a)(ii), in determining the number of outstanding shares of
                  Common Stock, the Holder may rely on the number of outstanding
                  shares of Common Stock as reflected in (x) the Company's most
                  recent Form 10-Q or Form 10-K, as the case may be, (y) a more
                  recent public announcement by the Company or (z) any other
                  notice by the Company or the Company's Transfer Agent setting
                  forth the number of shares of Common Stock outstanding. Upon
                  the written or oral request of the Holder, the Company shall
                  within two Trading Days confirm orally and in writing to the
                  Holder the number of shares of Common Stock then outstanding.
                  In any case, the number of outstanding shares of Common Stock
                  shall be determined after giving effect to the conversion or
                  exercise of securities of the Company, including this
                  Debenture, by the Holder or its affiliates since the date as
                  of which such number of outstanding shares of Common Stock was
                  reported. The provisions of this Section 4(a)(ii) may be
                  waived by the Holder upon, at the election of the Holder, not
                  less than 61 days' prior notice to the Company, and the
                  provisions of this Section 4(a)i) shall continue to apply
                  until such 61st day (or such later date, as determined by the
                  Holder, as may be specified in such notice of waiver).

                  (ii) Underlying Shares Issuable Upon Conversion of Principal
         Amount. The number of shares of Common Stock issuable upon a conversion
         shall be determined by the quotient obtained by dividing (x) the
         outstanding principal amount of this Debenture to be converted by (y)
         the Set Price.

         (b) (i) Not later than three Trading Days after any Conversion Date,
         the Company will deliver to the Holder a certificate or certificates
         representing the Underlying Shares which shall be free of restrictive
         legends and trading restrictions (other than those required by the
         Purchase Agreement) representing

                                       9

<PAGE>

         the number of shares of Common Stock being acquired upon the conversion
         of Debentures (including, if so timely elected by the Company, shares
         of Common Stock representing the payment of accrued interest) and (B) a
         bank check in the amount of accrued and unpaid interest (if the Company
         is required to pay accrued interest in cash). The Company shall, if
         available and if allowed under applicable securities laws, use its best
         efforts to deliver any certificate or certificates required to be
         delivered by the Company under this Section electronically through the
         Depository Trust Corporation or another established clearing
         corporation performing similar functions. If in the case of any Notice
         of Conversion such certificate or certificates are not delivered to or
         as directed by the applicable Holder by the fifth Trading Day after a
         Conversion Date, the Holder shall be entitled by written notice to the
         Company at any time on or before its receipt of such certificate or
         certificates thereafter, to rescind such conversion, in which event the
         Company shall immediately return the certificates representing the
         principal amount of Debentures tendered for conversion.

         (ii) Subject to the terms of the Subordination Agreement, if the
         Company fails for any reason to deliver to the Holder such certificate
         or certificates pursuant to Section 4(b)(i) by the third Trading Day
         after the Conversion Date, the Company shall pay to such Holder, in
         cash, as liquidated damages and not as a penalty, for each $5,000 of
         principal amount being converted, $50 per Trading Day (increasing to
         $100 per Trading Day after 3 Trading Days after such damages begin to
         accrue and increasing to $200 per Trading Day 6 Trading Days after such
         after such damages begin to accrue) for each Trading Day after such
         third Trading Day until such certificates are delivered. The Company's
         obligations to issue and deliver the Underlying Shares upon conversion
         of this Debenture in accordance with the terms hereof are absolute and
         unconditional, irrespective of any action or inaction by the Holder to
         enforce the same, any waiver or consent with respect to any provision
         hereof, the recovery of any judgment against any Person or any action
         to enforce the same, or any setoff, counterclaim, recoupment,
         limitation or termination, or any breach or alleged breach by the
         Holder or any other Person of any obligation to the Company or any
         violation or alleged violation of law by the Holder or any other
         person, and irrespective of any other circumstance which might
         otherwise limit such obligation of the Company to the Holder in
         connection with the issuance of such Underlying Shares; provided,
         however, such delivery shall not operate as a waiver by the Company of
         any such action the Company may have against the Holder. In the event a
         Holder of this Debenture shall elect to convert any or all of the
         outstanding principal amount hereof, the Company may not refuse
         conversion based on any claim that the Holder or any one associated or
         affiliated with the Holder of has been engaged in any violation of law,
         agreement or for any other reason, unless, an injunction from a court,
         on notice, restraining and or enjoining conversion of all or part of
         this Debenture shall have been sought and obtained and the Company
         posts a surety bond for the

                                       10

<PAGE>

         benefit of the Holder in the amount of 150% of the principal amount of
         this Debenture outstanding, which is subject to the injunction, which
         bond shall remain in effect until the completion of
         arbitration/litigation of the dispute and the proceeds of which shall
         be payable to such Holder to the extent it obtains judgment. In the
         absence of an injunction precluding the same, the Company shall issue
         Conversion Shares or, if applicable, cash, upon a properly noticed
         conversion. Subject to the terms of the Subordination Agreement,
         nothing herein shall limit a Holder's right to pursue actual damages or
         declare an Event of Default pursuant to Section 3 herein for the
         Company's failure to deliver Conversion Shares within the period
         specified herein and such Holder shall have the right to pursue all
         remedies available to it at law or in equity including, without
         limitation, a decree of specific performance and/or injunctive relief.
         Subject to the terms of the Subordination Agreement, the exercise of
         any such rights shall not prohibit the Holders from seeking to enforce
         damages pursuant to any other Section hereof or under applicable law.

         (iii) In addition to any other rights available to the Holder, if the
         Company fails for any reason to deliver to the Holder such certificate
         or certificates pursuant to Section 4(b)(i) by the third Trading Day
         after the Conversion Date, and if after such third Trading Day the
         Holder is required by its brokerage firm to purchase (in an open market
         transaction or otherwise) Common Stock to deliver in satisfaction of a
         sale by such Holder of the Underlying Shares which the Holder
         anticipated receiving upon such conversion (a "Buy-In"), then the
         Company shall, subject to the terms in the Subordination Agreement, (A)
         pay in cash to the Holder (in addition to any remedies available to or
         elected by the Holder) the amount by which (x) the Holder's total
         purchase price (including brokerage commissions, if any) for the Common
         Stock so purchased exceeds (y) the product of (1) the aggregate number
         of shares of Common Stock that such Holder anticipated receiving from
         the conversion at issue multiplied by (2) the actual sale price of the
         Common Stock at the time of the sale (including brokerage commissions,
         if any) giving rise to such purchase obligation and (B) at the option
         of the Holder, either reissue Debentures in principal amount equal to
         the principal amount of the attempted conversion or deliver to the
         Holder the number of shares of Common Stock that would have been issued
         had the Company timely complied with its delivery requirements under
         Section 4(b)(i). For example, if the Holder purchases Common Stock
         having a total purchase price of $11,000 to cover a Buy-In with respect
         to an attempted conversion of Debentures with respect to which the
         actual sale price of the Underlying Shares at the time of the sale
         (including brokerage commissions, if any) giving rise to such purchase
         obligation was a total of $10,000 under clause (A) of the immediately
         preceding sentence, the Company shall be required to pay the Holder
         $1,000. The Holder shall provide the Company written notice indicating
         the amounts payable to the Holder in respect of the Buy-In.
         Notwithstanding anything contained herein to the

                                       11
<PAGE>

         contrary, if a Holder requires the Company to make payment in respect
         of a Buy-In for the failure to timely deliver certificates hereunder
         and the Company timely pays in full such payment, the Company shall not
         be required to pay such Holder liquidated damages under Section
         4(b)(ii) in respect of the certificates resulting in such Buy-In.

         (c) (i) The conversion price in effect on any Conversion Date shall be
         equal to $3.85 (subject to adjustment herein)(the "Set Price").

         (ii) If the Company, at any time while the Debentures are outstanding:
         (A) shall pay a stock dividend or otherwise make a distribution or
         distributions on shares of its Common Stock or any other equity or
         equity equivalent securities payable in shares of Common Stock (which,
         for avoidance of doubt, shall not include any shares of Common Stock
         issued by the Company pursuant to this Debenture, including as interest
         thereon), (B) subdivide outstanding shares of Common Stock into a
         larger number of shares, (C) combine (including by way of reverse stock
         split) outstanding shares of Common Stock into a smaller number of
         shares, or (D) issue by reclassification of shares of the Common Stock
         any shares of capital stock of the Company, then the Set Price shall be
         multiplied by a fraction of which the numerator shall be the number of
         shares of Common Stock (excluding treasury shares, if any) outstanding
         before such event and of which the denominator shall be the number of
         shares of Common Stock outstanding after such event. Any adjustment
         made pursuant to this Section shall become effective immediately after
         the record date for the determination of stockholders entitled to
         receive such dividend or distribution and shall become effective
         immediately after the effective date in the case of a subdivision,
         combination or re-classification.


         (iii) If the Company or any subsidiary thereof, as applicable, at any
         time while Debentures are outstanding, shall offer, sell, grant any
         option to purchase or offer, sell or grant any right to reprice its
         securities, or otherwise dispose of or issue (or announce any offer,
         sale, grant or any option to purchase or other disposition) any Capital
         Shares or Capital Shares Equivalent entitling any Person to acquire
         shares of Common Stock, at an effective price per share less than the
         then Set Price ("Dilutive Issuance"), as adjusted hereunder (if the
         holder of the Capital Shares or Capital Shares Equivalent so issued
         shall at any time, whether by operation of purchase price adjustments,
         reset provisions, floating conversion, exercise or exchange prices or
         otherwise, or due to warrants, options or rights per share which is
         issued in connection with such issuance, be entitled to receive shares
         of Common Stock at an effective price per share which is less than the
         Set Price, such issuance shall be deemed to have occurred for less than
         the Set Price), then, (A) if such Dilutive Issuance occurs on or prior
         to the first anniversary of the Original Issue Date, the Set Price
         shall be reduced by an amount equal to 75% of the difference between
         the Set Price and the effective conversion, exchange or purchase price
         for such Capital Shares or Capital Shares Equivalents (including any
         reset provisions thereof) at issue and (B) if such Dilutive Issuance
         occurs after the first anniversary of the Original Issue Date, the Set
         Price shall be reduced by an amount equal to 50% of the difference
         between the Set Price and the effective conversion, exchange or

                                       12
<PAGE>

         purchase price for such Capital Shares or Capital Shares Equivalents
         (including any reset provisions thereof) at issue. Such adjustment
         shall be made whenever such Capital Shares or Capital Shares
         Equivalents are issued. The Company shall notify the Holder in writing,
         no later than the business day following the issuance of any Capital
         Shares or Capital Shares Equivalent subject to this section, indicating
         therein the applicable issuance price, or of applicable reset price,
         exchange price, conversion price and other pricing terms.

         (iv) If the Company, at any time while Debentures are outstanding,
         shall distribute to all holders of Common Stock (and not to Holders)
         evidences of its indebtedness or assets or rights or warrants to
         subscribe for or purchase any security, then in each such case the Set
         Price shall be determined by multiplying such price in effect
         immediately prior to the record date fixed for determination of
         stockholders entitled to receive such distribution by a fraction of
         which the denominator shall be the VWAP determined as of the record
         date mentioned above, and of which the numerator shall be such VWAP on
         such record date less the then fair market value at such record date of
         the portion of such assets or evidence of indebtedness so distributed
         applicable to one outstanding share of the Common Stock as determined
         by the Board of Directors in good faith. In either case the adjustments
         shall be described in a statement provided to the Holders of the
         portion of assets or evidences of indebtedness so distributed or such
         subscription rights applicable to one share of Common Stock. Such
         adjustment shall be made whenever any such distribution is made and
         shall become effective immediately after the record date mentioned
         above.

         (v) All calculations under this Section 4 shall be made to the nearest
         cent or the nearest 1/100th of a share, as the case may be. For
         purposes of this Section 4, the number of shares of Common Stock
         outstanding as of a given date shall be the sum of the number of shares
         of Common Stock (excluding treasury shares, if any) outstanding.

         (vi) Whenever the Set Price is adjusted pursuant to any of Section
         4(c)(ii) - (v), the Company shall promptly mail to each Holder a notice
         setting forth the Set Price after such adjustment and setting forth a
         brief statement of the facts requiring such adjustment. If the Company
         issues a variable rate security, despite the prohibition thereon in the
         Purchase Agreement, the Company shall be deemed to have issued Capital
         Shares or Capital Shares Equivalents at the lowest possible conversion
         or exercise price at which such securities may be converted or

                                       13
<PAGE>

         exercised in the case of a Variable Rate Transaction (as defined in the
         Purchase Agreement), or the lowest possible adjustment price in the
         case of an MFN Transaction (as defined in the Purchase Agreement).

         (vii) If (A) the Company shall declare a dividend (or any other
         distribution) on the Common Stock; (B) the Company shall declare a
         special nonrecurring cash dividend on or a redemption of the Common
         Stock; (C) the Company shall authorize the granting to all holders of
         the Common Stock rights or warrants to subscribe for or purchase any
         shares of capital stock of any class or of any rights; (D) the approval
         of any stockholders of the Company shall be required in connection with
         any reclassification of the Common Stock, any consolidation or merger
         to which the Company is a party, any sale or transfer of all or
         substantially all of the assets of the Company, of any compulsory share
         exchange whereby the Common Stock is converted into other securities,
         cash or property; (E) the Company shall authorize the voluntary or
         involuntary dissolution, liquidation or winding up of the affairs of
         the Company; then, in each case, the Company shall cause to be filed at
         each office or agency maintained for the purpose of conversion of the
         Debentures, and shall cause to be mailed to the Holders at their last
         addresses as they shall appear upon the stock books of the Company, at
         least 20 calendar days prior to the applicable record or effective date
         hereinafter specified, a notice stating (x) the date on which a record
         is to be taken for the purpose of such dividend, distribution,
         redemption, rights or warrants, or if a record is not to be taken, the
         date as of which the holders of the Common Stock of record to be
         entitled to such dividend, distributions, redemption, rights or
         warrants are to be determined or (y) the date on which such
         reclassification, consolidation, merger, sale, transfer or share
         exchange is expected to become effective or close, and the date as of
         which it is expected that holders of the Common Stock of record shall
         be entitled to exchange their shares of the Common Stock for
         securities, cash or other property deliverable upon such
         reclassification, consolidation, merger, sale, transfer or share
         exchange; provided, that the failure to mail such notice or any defect
         therein or in the mailing thereof shall not affect the validity of the
         corporate action required to be specified in such notice. Holders are
         entitled to convert Debentures during the 20-day period commencing the
         date of such notice to the effective date of the event triggering such
         notice.

         viii) If, at any time while this Debenture is outstanding, (A) the
         Company effects any merger or consolidation of the Company with or into
         another Person, (B) the Company effects any sale of all or
         substantially all of its assets in one or a series of related
         transactions, (C) any tender offer or exchange offer (whether by the
         Company or another Person) is completed pursuant to which holders of
         Common Stock are permitted to tender or exchange their shares for other
         securities, cash or property, or (D) the Company effects any
         reclassification of the Common Stock or any compulsory share exchange
         pursuant to which the

                                       14
<PAGE>

         Common Stock is effectively converted into or exchanged for other
         securities, cash or property (in any such case, a "Fundamental
         Transaction"), then upon any subsequent conversion of this Debenture,
         the Holder shall have the right to receive, for each Underlying Share
         that would have been issuable upon such conversion absent such
         Fundamental Transaction, the same kind and amount of securities, cash
         or property as it would have been entitled to receive upon the
         occurrence of such Fundamental Transaction if it had been, immediately
         prior to such Fundamental Transaction, the holder of one share of
         Common Stock (the "Alternate Consideration"). For purposes of any such
         conversion, the determination of the Set Price shall be appropriately
         adjusted to apply to such Alternate Consideration based on the amount
         of Alternate Consideration issuable in respect of one share of Common
         Stock in such Fundamental Transaction, and the Company shall apportion
         the Set Price among the Alternate Consideration in a reasonable manner
         reflecting the relative value of any different components of the
         Alternate Consideration. If holders of Common Stock are given any
         choice as to the securities, cash or property to be received in a
         Fundamental Transaction, then the Holder shall be given the same choice
         as to the Alternate Consideration it receives upon any conversion of
         this Debenture following such Fundamental Transaction. To the extent
         necessary to effectuate the foregoing provisions, any successor to the
         Company or surviving entity in such Fundamental Transaction shall issue
         to the Holder a new debenture consistent with the foregoing provisions
         and evidencing the Holder's right to convert such debenture into
         Alternate Consideration. The terms of any agreement pursuant to which a
         Fundamental Transaction is effected shall include terms requiring any
         such successor or surviving entity to comply with the provisions of
         this paragraph (c) and insuring that this Debenture (or any such
         replacement security) will be similarly adjusted upon any subsequent
         transaction analogous to a Fundamental Transaction. If any Fundamental
         Transaction constitutes or results in a Change of Control Transaction,
         then at the request of the Holder delivered before the 90th day after
         such Fundamental Transaction, the Company (or any such successor or
         surviving entity) will purchase the Debenture from the Holder for a
         purchase price, payable in cash within five Trading Days after such
         request (or, if later, on the effective date of the Fundamental
         Transaction), equal to the 100% of the remaining unconverted principal
         amount of this Debenture on the date of such request, plus all accrued
         and unpaid interest thereon, plus all other accrued and unpaid amounts
         due hereunder. Notwithstanding anything in this Debenture to the
         Contrary, if any Change of Control occurs, including a Fundamental
         Transaction that constitutes or results in a Change of Control
         Transaction, then at the request of the Holder delivered before the
         90th day after such Change of Control event, the Company (or any such
         successor or surviving entity) will purchase the Debenture from the
         Holder for a purchase price, payable in cash within five Trading Days
         after such request (or, if later, on the effective date of the Change
         of Control), equal to the 100% of the remaining unconverted principal
         amount of this

                                       15
<PAGE>

         Debenture on the date of such request, plus all accrued and unpaid
         interest thereon, plus all other accrued and unpaid amounts due
         hereunder.

         (ix) Notwithstanding the foregoing, no adjustment will be made under
         this paragraph (c) in respect of (A) the granting or issuance of shares
         of capital stock or of options to employees, officers, directors and
         key consultants of the Company pursuant to any stock option plan
         agreement or other compensation agreement duly adopted or approved by a
         majority of the non-employee members of the Board of Directors of the
         Company or a majority of the members of a committee of non-employee
         directors established for such purpose, (B) upon the exercise of this
         Debenture or any other Debenture of this series or of any other series
         or security issued by the Company in connection with the offer and sale
         of this Company's securities pursuant to the Purchase Agreement, or (C)
         upon the exercise of or conversion of any Capital Shares Equivalents,
         rights, options or warrants issued and outstanding on the Original
         Issue Date, provided such securities have not been amended since the
         date of the Purchase Agreement except as a result of the Purchase
         Agreement, (D) issuance of securities in connection with acquisitions,
         strategic investments, or strategic partnering arrangements, the
         primary purpose of which is not to raise capital, or (E) the granting
         of stock, stock options and/or warrants to an investment group in
         connection with the advancement of $1 million to the Company, which
         transaction is described in Item 13 of the Company's Annual Report on
         Form 10-K for the fiscal year ended March 31, 2003.


         (d) The Company covenants that it will at all times reserve and keep
available out of its authorized and unissued shares of Common Stock solely for
the purpose of issuance upon conversion of the Debentures and payment of
interest on the Debenture, each as herein provided, free from preemptive rights
or any other actual contingent purchase rights of persons other than the
Holders, not less than such number of shares of the Common Stock as shall
(subject to any additional requirements of the Company as to reservation of such
shares set forth in the Purchase Agreement) be issuable (taking into account the
adjustments and restrictions of Section 4(b)) upon the conversion of the
outstanding principal amount of the Debentures and payment of interest
hereunder. The Company covenants that all shares of Common Stock that shall be
so issuable shall, upon issue, be duly and validly authorized, issued and fully
paid, nonassessable and, if the Underlying Shares Registration Statement is then
effective under the Securities Act, registered for public sale in accordance
with such Underlying Shares Registration Statement.

         (e) Upon a conversion hereunder the Company shall not be required to
issue stock certificates representing fractions of shares of the Common Stock,
but may if otherwise permitted, make a cash payment in respect of any final
fraction of a share based on the VWAP at such time. If the Company elects not,
or is unable, to make such a

                                       16
<PAGE>

cash payment, the Holder shall be entitled to receive, in lieu of the final
fraction of a share, one whole share of Common Stock.

         (f) The issuance of certificates for shares of the Common Stock on
conversion of the Debentures shall be made without charge to the Holders thereof
for any documentary stamp or similar taxes that may be payable in respect of the
issue or delivery of such certificate, provided that the Company shall not be
required to pay any tax that may be payable in respect of any transfer involved
in the issuance and delivery of any such certificate upon conversion in a name
other than that of the Holder of such Debentures so converted and the Company
shall not be required to issue or deliver such certificates unless or until the
person or persons requesting the issuance thereof shall have paid to the Company
the amount of such tax or shall have established to the satisfaction of the
Company that such tax has been paid.

         (g) Any and all notices or other communications or deliveries to be
provided by the Holders hereunder, including, without limitation, any Notice of
Conversion, shall be in writing and delivered personally, by facsimile, sent by
a nationally recognized overnight courier service, addressed to the Company, at
the address set forth above, facsimile number (____) ___-_______, ATTN:
_____________ or such other address or facsimile number as the Company may
specify for such purposes by notice to the Holders delivered in accordance with
this Section. Any and all notices or other communications or deliveries to be
provided by the Company hereunder shall be in writing and delivered personally,
by facsimile, sent by a nationally recognized overnight courier service
addressed to each Holder at the facsimile telephone number or address of such
Holder appearing on the books of the Company, or if no such facsimile telephone
number or address appears, at the principal place of business of the Holder. Any
notice or other communication or deliveries hereunder shall be deemed given and
effective on the earliest of (i) the date of transmission, if such notice or
communication is delivered via facsimile at the facsimile telephone number
specified in this Section prior to 5:30 p.m. (New York City time), (ii) the date
after the date of transmission, if such notice or communication is delivered via
facsimile at the facsimile telephone number specified in this Section later than
5:30 p.m. (New York City time) on any date and earlier than 11:59 p.m. (New York
City time) on such date, (iii) the second Business Day following the date of
mailing, if sent by nationally recognized overnight courier service, or (iv)
upon actual receipt by the party to whom such notice is required to be given.

Section 5. Redemption.

         (a) Optional Redemption by the Company. If after the Effective Date
each of the Closing Prices for any 15 consecutive Trading Days (such period
commencing only after the Effective Price) exceeds the then Set Price by 200%,
the Company shall have the right to redeem no less than the entire principal
amount of this Debenture then held by the Holder, at a cash price equal to the
100% of the principal amount outstanding plus any

                                       17
<PAGE>

accrued but unpaid interest and fees owing thereon (the "Optional Redemption
Price"). The Company may only effect an Optional Redemption Notice if each of
the following shall be true: (i) the Company shall have duly honored all
conversions occurring by virtue of one or more Conversion Notices prior to the
Forced Conversion Date, (ii) there is an effective Underlying Shares
Registration Statement pursuant to which the Holder is permitted to utilize the
prospectus thereunder to resell all of the Underlying Shares issued to the
Holder and all of the Underlying Shares as are issuable to the Holder upon
conversion in full of this Debenture subject to the Forced Conversion Notice
(and the Company believes, in good faith, that such effectiveness will continue
uninterrupted for the foreseeable future), (iii) the Common Stock is listed for
trading on a Principal Market (and the Company believes, in good faith, that
trading of the Common Stock on a Principal Market will continue uninterrupted
for the foreseeable future), (iv) all liquidated damages and other amounts owing
in respect of the Debentures and Underlying Shares shall have been paid or will,
concurrently with the issuance of the Underlying Shares, be paid in cash; (v)
there is a sufficient number of authorized but unissued and otherwise unreserved
shares of Common Stock for the issuance of all the Underlying Shares as are
issuable to the Holder upon conversion in full of the Debentures subject to the
Forced Conversion Notice; (vi) no Event of Default nor any event that with the
passage of time would constitute an Event of Default has occurred and is
continuing; (vii) the issuance of such shares upon conversion of the Debentures
in full and issued and issuable upon exercise of the Warrants in full would
violate the limitations set forth in Section 4(a)(ii)and (viii) no public
announcement of a pending or proposed Change of Control Transaction or
Fundamental Transaction has occurred that has not been consummated. If any of
the foregoing conditions shall cease to be in effect during the period between
the Notice Date and the date the Optional Redemption Price is paid in full, then
the Holders subject to such redemption may elect, by written notice to the
Company given at any time after any of the foregoing conditions shall cease to
be in effect, to invalidate ab initio such redemption, notwithstanding anything
herein contained to the contrary. In any case, the Holders may convert any
portion of the outstanding principal amount of the Debentures subject to an
Optional Redemption Notice prior to the date that the Optional Redemption Price
is due and paid in full.

         (b) Redemption Procedure. The Optional Redemption Price is due on the
20th Trading Day following the Notice Date. If any portion of the Optional
Redemption Price shall not be paid by the Company by the date such payment is
due, interest shall accrue thereon at the rate of 18% per annum (or the maximum
rate permitted by applicable law, whichever is less) until such redemption price
plus all such interest is paid in full. In addition, if any portion of the
Optional Redemption Price remains unpaid after such date, the Holders subject to
such redemption may elect, by written notice to the Company given at any time
thereafter, to invalidate ab initio such redemption, notwithstanding anything
herein contained to the contrary. If a Holder elects to invalidate such
redemption the Company shall promptly, and, in any event, not later than 3
Trading Days

                                       18
<PAGE>

from receipt of such Holder's notice of such election, return to such Holder all
of the Debentures for which the Optional Redemption Price shall not have been
paid in full.

         Section 6. Definitions. For the purposes hereof, in addition to the
terms defined elsewhere in this Debenture: (a) capitalized terms not otherwise
defined herein have the meanings given to such terms in the Purchase Agreement,
and (b) the following terms shall have the following meanings:

                  "Business Day" means any day except Saturday, Sunday and any
         day which shall be a federal legal holiday in the United States or a
         day on which banking institutions in the State of New York are
         authorized or required by law or other government action to close.

                  "Change of Control Transaction" means the occurrence after the
         date hereof of any of (i) an acquisition after the date hereof by an
         individual or legal entity or "group" (as described in Rule 13d-5(b)(1)
         promulgated under the Exchange Act) of effective control (whether
         through legal or beneficial ownership of capital stock of the Company,
         by contract or otherwise) of in excess of 33% of the voting securities
         of the Company, or (ii) a replacement at one time or within a three
         year period of more than one-half of the members of the Company's board
         of directors which is not approved by a majority of those individuals
         who are members of the board of directors on the date hereof (or by
         those individuals who are serving as members of the board of directors
         on any date whose nomination to the board of directors was approved by
         a majority of the members of the board of directors who are members on
         the date hereof), or (iii) the execution by the Company of an agreement
         to which the Company is a party or by which it is bound, providing for
         any of the events set forth above in (i) or (ii).

                  "Commission" means the Securities and Exchange Commission.

                  "Common Stock" means the common stock, $0.001 par value per
         share, of the Company and stock of any other class into which such
         shares may hereafter have been reclassified or changed.

                  "Conversion Date" shall have the meaning set forth in Section
         4(a)(i) hereof.

                  "Exchange Act" means the Securities Exchange Act of 1934, as
         amended.

                  "Interest Conversion Rate" means the lesser of (i) the Set
         Price and (ii) 90% of the lesser of (a) the average of the 20 VWAPs
         immediately prior to the applicable Interest Payment Date or (b) the
         average of the 20 VWAPs immediately prior to the date the applicable
         interest payment shares are issued and delivered if after the Interest
         Payment Date.

                                       19
<PAGE>

                  "Late Fees" shall have the meaning set forth in the second
         paragraph to this Debenture.

                  "Mandatory Prepayment Amount" for any Debentures shall equal
         the sum of (i) the greater of: (A) 130% of the principal amount of
         Debentures to be prepaid, plus all accrued and unpaid interest thereon
         and all other accrued and unpaid amounts due hereunder, or (B) the
         principal amount of Debentures to be prepaid, plus all other accrued
         and unpaid interest hereon and other amounts due hereunder, divided by
         the Set Price on (x) the date the Mandatory Prepayment Amount is
         demanded or otherwise due or (y) the date the Mandatory Prepayment
         Amount is paid in full, whichever is less, multiplied by the VWAP on
         (x) the date the Mandatory Prepayment Amount is demanded or otherwise
         due or (y) the date the Mandatory Prepayment Amount is paid in full,
         whichever is greater, and (ii) all other amounts, costs, expenses and
         liquidated damages due in respect of such Debentures.

                  "Notice Date" shall have the meaning set forth in Section
         5(a).

                  "Optional Redemption Notice" shall have the meaning set forth
         in Section 5(a).

                  "Optional Redemption Price" shall have the meaning set forth
         in Section 5(a).

                  "Original Issue Date" shall mean the date of the first
         issuance of the Debentures regardless of the number of transfers of any
         Debenture and regardless of the number of instruments which may be
         issued to evidence such Debenture.

                  "Person" means a corporation, an association, a partnership,
         organization, a business, an individual, a government or political
         subdivision thereof or a governmental agency.

                  "Purchase Agreement" means the Securities Purchase Agreement,
         dated as of September 20, 2003, to which the Company and the original
         Holder are parties, as amended, modified or supplemented from time to
         time in accordance with its terms.

                  "Registration Rights Agreement" means the Registration Rights
         Agreement, dated as of the date of the Purchase Agreement, to which the
         Company and the original Holder are parties, as amended, modified or
         supplemented from time to time in accordance with its terms.

                  "Securities Act" means the Securities Act of 1933, as amended,
         and the rules and regulations promulgated thereunder.

                  "Set Price" shall have the meaning set forth in Section
         4(c)(i).

                                       20
<PAGE>

                  "Trading Day" means (a) a day on which the shares of Common
         Stock are traded on a Principal Market on which the shares of Common
         Stock are then listed or quoted, or (b) if the shares of Common Stock
         are not quoted on a Principal Market, a day on which the shares of
         Common Stock are quoted in the over-the-counter market as reported by
         the National Quotation Bureau Incorporated (or any similar organization
         or agency succeeding its functions of reporting prices); provided, that
         in the event that the shares of Common Stock are not listed or quoted
         as set forth in (a), (b) and (c) hereof, then Trading Day shall mean a
         Business Day.

                  "Transaction Documents" shall have the meaning set forth in
         the Purchase Agreement.

                  "Underlying Shares" means the shares of Common Stock issuable
         upon conversion of Debentures or as payment of interest in accordance
         with the terms hereof.

                  "Underlying Shares Registration Statement" means a
         registration statement meeting the requirements set forth in the
         Registration Rights Agreement, covering among other things the resale
         of the Underlying Shares and naming the Holder as a "selling
         stockholder" thereunder.

                  "VWAP" means, for any date, the price determined by the first
         of the following clauses that applies: (a) if the Common Stock is then
         listed or quoted on a Trading Market, the daily volume weighted average
         price of the Common Stock for such date (or the nearest preceding date)
         on the Trading Market on which the Common Stock is then listed or
         quoted as reported by Bloomberg Financial L.P. (based on a trading day
         from 9:30 a.m. Eastern Time to 4:02 p.m. Eastern Time); (b) if the
         Common Stock is not then listed or quoted on a Trading Market and if
         prices for the Common Stock are then quoted on the OTC Bulletin Board,
         the volume weighted average price of the Common Stock for such date (or
         the nearest preceding date) on the OTC Bulletin Board; (c) if the
         Common Stock is not then listed or quoted on the OTC Bulletin Board and
         if prices for the Common Stock are then reported in the "Pink Sheets"
         published by the National Quotation Bureau Incorporated (or a similar
         organization or agency succeeding to its functions of reporting
         prices), the most recent bid price per share of the Common Stock so
         reported; or (d) in all other cases, the fair market value of a share
         of Common Stock as determined by an independent appraiser selected in
         good faith by the Purchasers and reasonably acceptable to the Company.

         Section 7. Except as expressly provided herein and in the Subordination
Agreement, no provision of this Debenture shall alter or impair the obligation
of the Company, which is absolute and unconditional, to pay the principal of,
interest and liquidated damages (if any) on, this Debenture at the time, place,
and rate, and in the coin or currency, herein prescribed. This Debenture is a
direct debt obligation of the Company. This Debenture ranks pari passu with all
other Debentures now or hereafter issued under the terms set forth herein and is
subordination to

                                       21
<PAGE>

the Company's credit agreement with LaSalle Business Credit, Inc. which is
outstanding as of the date of this Debenture and any other senior secured credit
facilities that the Company may enter into after the date hereof with another
reputable commercial lender in place of such credit agreement. As long as this
Debenture is outstanding, the Company shall not and shall cause it subsidiaries
not to, without the consent of the Holder, (a) amend its certificate of
incorporation, bylaws or other charter documents so as to adversely affect any
rights of the Holder; (b) repay, repurchase or offer to repay, repurchase or
otherwise acquire more than a de minimis number of shares of its Common Stock or
other equity securities other than as to the Underlying Shares to the extent
permitted or required under the Transaction Documents or as otherwise permitted
by the Transaction Documents; or (c) enter into any agreement with respect to
any of the foregoing.

         Section 8. If this Debenture shall be mutilated, lost, stolen or
destroyed, the Company shall execute and deliver, in exchange and substitution
for and upon cancellation of a mutilated Debenture, or in lieu of or in
substitution for a lost, stolen or destroyed Debenture, a new Debenture for the
principal amount of this Debenture so mutilated, lost, stolen or destroyed but
only upon receipt of evidence of such loss, theft or destruction of such
Debenture, and of the ownership hereof, and indemnity, if requested, all
reasonably satisfactory to the Company.

         Section 9. So long as any portion of this Debenture is outstanding, the
Company will not and will not permit any of its subsidiaries to, directly or
indirectly, enter into, create, incur, assume or suffer to exist any
indebtedness of any kind, on or with respect to any of its property or assets
now owned or hereafter acquired or any interest therein or any income or profits
therefrom that is senior in any respect to the Company's obligations under the
Debentures without the prior consent of the Holder, which consent shall not be
unreasonably withheld.

         Section 10. All questions concerning the construction, validity,
enforcement and interpretation of this Debenture shall be governed by and
construed and enforced in accordance with the internal laws of the State of New
York, without regard to the principles of conflicts of law thereof. Each party
agrees that all legal proceedings concerning the interpretations, enforcement
and defense of the transactions contemplated by any of the Transaction Documents
(whether brought against a party hereto or its respective affiliates, directors,
officers, shareholders, employees or agents) shall be commenced in the state and
federal courts sitting in the City of New York, Borough of Manhattan (the "New
York Courts"). Each party hereto hereby irrevocably submits to the exclusive
jurisdiction of the New York Courts for the adjudication of any dispute
hereunder or in connection herewith or with any transaction contemplated hereby
or discussed herein (including with respect to the enforcement of any of the
Transaction Documents), and hereby irrevocably waives, and agrees not to assert
in any suit, action or proceeding, any claim that it is not personally subject
to the jurisdiction of any such court, or such New York Courts are improper or
inconvenient venue for such proceeding. Each party hereby irrevocably waives
personal service of process and consents to process being served in any such
suit, action or proceeding by mailing a copy thereof via registered or certified
mail or overnight delivery (with evidence of delivery) to such party at the
address in effect for notices to it under this Debenture and agrees that such
service shall constitute good and sufficient service

                                       22
<PAGE>

of process and notice thereof. Nothing contained herein shall be deemed to limit
in any way any right to serve process in any manner permitted by law. Each party
hereto hereby irrevocably waives, to the fullest extent permitted by applicable
law, any and all right to trial by jury in any legal proceeding arising out of
or relating to this Debenture or the transactions contemplated hereby. If either
party shall commence an action or proceeding to enforce any provisions of this
Debenture, then the prevailing party in such action or proceeding shall be
reimbursed by the other party for its attorneys fees and other costs and
expenses incurred with the investigation, preparation and prosecution of such
action or proceeding.

         Section 11. Any waiver by the Company or the Holder of a breach of any
provision of this Debenture shall not operate as or be construed to be a waiver
of any other breach of such provision or of any breach of any other provision of
this Debenture. The failure of the Company or the Holder to insist upon strict
adherence to any term of this Debenture on one or more occasions shall not be
considered a waiver or deprive that party of the right thereafter to insist upon
strict adherence to that term or any other term of this Debenture. Any waiver
must be in writing.

         Section 12. If any provision of this Debenture is invalid, illegal or
unenforceable, the balance of this Debenture shall remain in effect, and if any
provision is inapplicable to any person or circumstance, it shall nevertheless
remain applicable to all other persons and circumstances. If it shall be found
that any interest or other amount deemed interest due hereunder violates
applicable laws governing usury, the applicable rate of interest due hereunder
shall automatically be lowered to equal the maximum permitted rate of interest.
The Company covenants (to the extent that it may lawfully do so) that it shall
not at any time insist upon, plead, or in any manner whatsoever claim or take
the benefit or advantage of, any stay, extension or usury law or other law which
would prohibit or forgive the Company from paying all or any portion of the
principal of or interest on the Debentures as contemplated herein, wherever
enacted, now or at any time hereafter in force, or which may affect the
covenants or the performance of this indenture, and the Company (to the extent
it may lawfully do so) hereby expressly waives all benefits or advantage of any
such law, and covenants that it will not, by resort to any such law, hinder,
delay or impeded the execution of any power herein granted to the Holder, but
will suffer and permit the execution of every such as though no such law has
been enacted.

         Section 13. Whenever any payment or other obligation hereunder shall be
due on a day other than a Business Day, such payment shall be made on the next
succeeding Business Day.

                              *********************

                                       23
<PAGE>


         IN WITNESS WHEREOF, the Company has caused this Convertible Debenture
to be duly executed by a duly authorized officer as of the date first above
indicated.

                                    THE SINGING MACHINE COMPANY, INC.


                                    By:_________________________________________
                                        Name:
                                        Title:

                                       24
<PAGE>


                                     ANNEX A

                              NOTICE OF CONVERSION


The undersigned hereby elects to convert principal under the 8% Convertible
Debenture of The Singing Machine Company, Inc. (the "Company"), due on February
__, 2006, into shares of common stock, $____ par value per share (the "Common
Stock"), of the Company according to the conditions hereof, as of the date
written below. If shares are to be issued in the name of a person other than the
undersigned, the undersigned will pay all transfer taxes payable with respect
thereto and is delivering herewith such certificates and opinions as reasonably
requested by the Company in accordance therewith. No fee will be charged to the
holder for any conversion, except for such transfer taxes, if any.

By the delivery of this Notice of Conversion the undersigned represents and
warrants to the Company that its ownership of the Company's Common Stock does
not exceed the amounts determined in accordance with Section 13(d) of the
Exchange Act, specified under Section 4 of this Debenture.

The undersigned agrees to comply with the prospectus delivery requirements under
the applicable securities laws in connection with any transfer of the aforesaid
shares of Common Stock.

Conversion calculations:
                               Date to Effect Conversion:

                               Principal Amount of Debentures to be Converted:

                               Payment of Interest in Common Stock __ yes  __ no
                                        If yes,  $_____ of Interest  Accrued on
                                        Account of  Conversion at Issue.

                               Number of shares of Common Stock to be issued:


                               Signature:

                               Name:

                               Address:


                                       25
<PAGE>


                                   Schedule 1

                               CONVERSION SCHEDULE

8% Convertible Debentures due on February ___, 2006, in the aggregate principal
amount of $____________ issued by The Singing Machine Company, Inc. This
Conversion Schedule reflects conversions made under Section 4 of the above
referenced Debenture.

<TABLE>
<CAPTION>
                                     Dated:

=============================== ------------------------- ======================= ------------------------------

                                                           Aggregate Principal
                                                             Amount Remaining
      Date of Conversion                                      Subsequent to
(or for first entry, Original                                   Conversion
         Issue Date)              Amount of Conversion         (or original              Company Attest
                                                            Principal Amount)
=============================== ------------------------- ======================= ------------------------------


<S>                               <C>                      <C>                            <C>

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



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



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



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



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



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



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



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



=============================== ------------------------- ======================= ------------------------------
</TABLE>

                                       26







</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.4
<SEQUENCE>7
<FILENAME>purwarrant1.txt
<DESCRIPTION>COMMON STOCK PURCHASE WARRANT BLANK SHARES
<TEXT>

                                                                    EXHIBIT 10.4

NEITHER THIS SECURITY NOR THE SECURITIES INTO WHICH THIS SECURITY IS EXERCISABLE
HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE
SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN
AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE
SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO
SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE
COMPANY. THIS SECURITY AND THE SECURITIES ISSUABLE UPON EXERCISE OF THIS
SECURITY MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER
LOAN SECURED BY SUCH SECURITIES

                          COMMON STOCK PURCHASE WARRANT

                To Purchase __________ Shares of Common Stock of

                        THE SINGING MACHINE COMPANY, INC.

         THIS COMMON STOCK PURCHASE WARRANT CERTIFIES that, for value received,
_____________ (the "Holder"), is entitled, upon the terms and subject to the
limitations on exercise and the conditions hereinafter set forth, at any time on
or after September __, 2003 (the "Initial Exercise Date") and on or prior to the
close of business on the third anniversary of the Initial Exercise Date (the
"Termination Date") but not thereafter, to subscribe for and purchase from The
Singing Machine Company, Inc., a corporation incorporated in Delaware (the
"Company"), up to ____________ shares (the "Warrant Shares") of Common Stock,
par value $____ per share, of the Company (the "Common Stock"). The purchase
price of one share of Common Stock (the "Exercise Price") under this Warrant
shall be $4.025, subject to adjustment hereunder. CAPITALIZED TERMS USED AND NOT
OTHERWISE DEFINED HEREIN SHALL HAVE THE MEANINGS SET FORTH IN THAT CERTAIN
SECURITIES PURCHASE AGREEMENT (THE "PURCHASE AGREEMENT"), DATED SEPTEMBER 20,
2003, BETWEEN THE COMPANY AND THE PURCHASERS SIGNATORY THERETO.

<PAGE>


         1. Title to Warrant. Prior to the Termination Date and subject to
compliance with applicable laws and Section 7 of this Warrant, this Warrant and
all rights hereunder are transferable, in whole or in part, at the office or
agency of the Company by the Holder in person or by duly authorized attorney,
upon surrender of this Warrant together with the Assignment Form annexed hereto
properly endorsed. The transferee shall sign an investment letter in form and
substance reasonably satisfactory to the Company. This Warrant is also subject
to the terms and conditions of a subordination agreement (the "LaSalle
Subordination Agreement") that the Holder has signed with LaSalle Business
Credit, LLC, the Company's commercial lender, on about the date hereof and any
future subordination agreements that it is required to sign during the time
period that the Company has any obligations under the Transaction Documents
(collectively, any or all such agreements shall be referred to as the
"Subordination Agreement"). Any inconsistencies between this Warrant and the
Subordination Agreement will be resolved in favor of the terms of the
Subordination Agreement.

         2. Authorization of Warrant Shares. The Company represents and warrants
that all Warrant Shares which may be issued upon the exercise of the purchase
rights represented by this Warrant will, upon exercise of the purchase rights
represented by this Warrant, be duly authorized, validly issued, fully paid and
nonassessable and free from all taxes, liens and charges in respect of the issue
thereof (other than taxes in respect of any transfer occurring contemporaneously
with such issue).

         3. Exercise of Warrant.

                  (a) Exercise of the purchase rights represented by this
         Warrant may be made at any time or times on or after the Initial
         Exercise Date and on or before the Termination Date by delivery to the
         Company of a duly executed facsimile copy of the Notice of Exercise
         Form annexed hereto (or such other office or agency of the Company as
         it may designate by notice in writing to the registered Holder at the
         address of such Holder appearing on the books of the Company);
         provided, however, within 5 Trading Days of the date said Notice of
         Exercise is delivered to the Company, the Holder shall have surrendered
         this Warrant to the Company and the Company shall have received payment
         of the aggregate Exercise Price of the shares thereby purchased by wire
         transfer or cashier's check drawn on a United States bank. Certificates
         for shares purchased hereunder shall be delivered to the Holder within
         the earlier of (i) 5 Trading Days after the date on which the Notice of
         Exercise shall have been delivered by facsimile copy or (ii) 3 Trading
         Days from the delivery to the Company of the Notice of Exercise Form by
         facsimile copy, surrender of this Warrant and payment of the aggregate
         Exercise Price as set forth above ("Warrant Share Delivery Date");
         provided, however, in the event the Warrant is not surrendered or the
         aggregate Exercise Price is not received by the Company within 5
         Trading Days after the date on which the Notice of Exercise shall be
         delivered by facsimile copy, the Warrant Share Delivery Date shall be
         extended to the extent such 5 Trading Day period is exceeded. This
         Warrant shall be deemed to have been exercised on the date the Notice
         of Exercise is delivered to the Company by facsimile copy. The Warrant
         Shares shall be deemed to have been issued, and Holder or any other
         person so designated to be named therein shall be deemed to have become
         a

                                       2
<PAGE>

         holder of record of such shares for all purposes, as of the date the
         Warrant has been exercised by payment to the Company of the Exercise
         Price and all taxes required to be paid by the Holder, if any, pursuant
         to Section 5 prior to the issuance of such shares, have been paid. If
         the Company fails to deliver to the Holder a certificate or
         certificates representing the Warrant Shares pursuant to this Section
         3(a) by the Warrant Share Delivery Date, then the Holder will have the
         right to rescind such exercise. In addition to any other rights
         available to the Holder, if the Company fails to deliver to the Holder
         a certificate or certificates representing the Warrant Shares pursuant
         to an exercise on or before the Warrant Share Delivery Date, and if
         after such date the Holder is required by its broker to purchase (in an
         open market transaction or otherwise) shares of Common Stock to deliver
         in satisfaction of a sale by the Holder of the Warrant Shares which the
         Holder anticipated receiving upon such exercise (a "Buy-In"), then the
         Company shall, subject to the terms of the Subordination Agreement, (1)
         pay in cash to the Holder the amount by which (x) the Holder's total
         purchase price (including brokerage commissions, if any) for the shares
         of Common Stock so purchased exceeds (y) the amount obtained by
         multiplying (A) the number of Warrant Shares that the Company was
         required to deliver to the Holder in connection with the exercise at
         issue times (B) the price at which the sell order giving rise to such
         purchase obligation was executed, and (2) at the option of the Holder,
         either reinstate the portion of the Warrant and equivalent number of
         Warrant Shares for which such exercise was not honored or deliver to
         the Holder the number of shares of Common Stock that would have been
         issued had the Company timely complied with its exercise and delivery
         obligations hereunder. For example, if the Holder purchases Common
         Stock having a total purchase price of $11,000 to cover a Buy-In with
         respect to an attempted exercise of shares of Common Stock with an
         aggregate sale price giving rise to such purchase obligation of
         $10,000, under clause (1) of the immediately preceding sentence the
         Company shall be required to pay the Holder $1,000. The Holder shall
         provide the Company written notice indicating the amounts payable to
         the Holder in respect of the Buy-In, together with applicable
         confirmations and other evidence reasonably requested by the Company.
         Subject to the terms of the Subordination Agreement, nothing herein
         shall limit a Holder's right to pursue any other remedies available to
         it hereunder, at law or in equity including, without limitation, a
         decree of specific performance and/or injunctive relief with respect to
         the Company's failure to timely deliver certificates representing
         shares of Common Stock upon exercise of the Warrant as required
         pursuant to the terms hereof.

                  (b) If this Warrant shall have been exercised in part, the
         Company shall, at the time of delivery of the certificate or
         certificates representing Warrant Shares, deliver to Holder a new
         Warrant evidencing the rights of Holder to purchase the unpurchased
         Warrant Shares called for by this Warrant, which new Warrant shall in
         all other respects be identical with this Warrant.

                  (c) The Company shall not effect any exercise of this Warrant,
         and the Holder shall not have the right to exercise any portion of this
         Warrant, pursuant to Section 3(a) or otherwise, to the extent that
         after giving effect to such issuance after exercise, the Holder
         (together with the Holder's affiliates), as set forth on the applicable
         Notice of Exercise, would beneficially own in excess of 4.99% of the
         number of shares of the Common Stock outstanding immediately after
         giving effect to such issuance. For

                                       3
<PAGE>

         purposes of the foregoing sentence, the number of shares of Common
         Stock beneficially owned by the Holder and its affiliates shall include
         the number of shares of Common Stock issuable upon exercise of this
         Warrant with respect to which the determination of such sentence is
         being made, but shall exclude the number of shares of Common Stock
         which would be issuable upon (A) exercise of the remaining,
         nonexercised portion of this Warrant beneficially owned by the Holder
         or any of its affiliates and (B) exercise or conversion of the
         unexercised or nonconverted portion of any other securities of the
         Company (including, without limitation, any other Debentures or
         Warrants) subject to a limitation on conversion or exercise analogous
         to the limitation contained herein beneficially owned by the Holder or
         any of its affiliates. Except as set forth in the preceding sentence,
         for purposes of this Section 3(c), beneficial ownership shall be
         calculated in accordance with Section 13(d) of the Exchange Act. To the
         extent that the limitation contained in this Section 3(c) applies, the
         determination of whether this Warrant is exercisable (in relation to
         other securities owned by the Holder) and of which a portion of this
         Warrant is exercisable shall be in the sole discretion of such Holder,
         and the submission of a Notice of Exercise shall be deemed to be such
         Holder's determination of whether this Warrant is exercisable (in
         relation to other securities owned by such Holder) and of which portion
         of this Warrant is exercisable, in each case subject to such aggregate
         percentage limitation, and the Company shall have no obligation to
         verify or confirm the accuracy of such determination. For purposes of
         this Section 3(c), in determining the number of outstanding shares of
         Common Stock, the Holder may rely on the number of outstanding shares
         of Common Stock as reflected in (x) the Company's most recent Form 10-Q
         or Form 10-K, as the case may be, (y) a more recent public announcement
         by the Company or (z) any other notice by the Company or the Company's
         Transfer Agent setting forth the number of shares of Common Stock
         outstanding. Upon the written or oral request of the Holder, the
         Company shall within two Trading Days confirm orally and in writing to
         the Holder the number of shares of Common Stock then outstanding. In
         any case, the number of outstanding shares of Common Stock shall be
         determined after giving effect to the conversion or exercise of
         securities of the Company, including this Warrant, by the Holder or its
         affiliates since the date as of which such number of outstanding shares
         of Common Stock was reported. The provisions of this Section 3(c) may
         be waived by the Holder upon, at the election of the Holder, not less
         than 61 days' prior notice to the Company, and the provisions of this
         Section 3(c) shall continue to apply until such 61st day (or such later
         date, as determined by the Holder, as may be specified in such notice
         of waiver). Additionally, this Warrant is subject to that certain
         letter agreement by and among the initial Holders of the Debentures and
         the Company relating to the restriction on the issuance of shares of
         Common Stock until the Company obtains approval of the transaction from
         the Principal Market.

                  (d) If at any time after one year from the date of issuance of
         this Warrant there is no effective Registration Statement registering
         the resale of the Warrant Shares by the Holder, then this Warrant may
         also be exercised at such time by means of a "cashless exercise" in
         which the Holder shall be entitled to receive a certificate for the
         number of Warrant Shares equal to the quotient obtained by dividing
         [(A-B) (X)] by (A), where:

                                       4
<PAGE>

                  (A) = the VWAP on the Trading Day preceding the date of
                        such election;

                  (B) = the Exercise Price of the Warrants, as adjusted;
                        and

                  (X) = the number of Warrant Shares issuable upon exercise
                        of this Warrant in accordance with the terms of this
                        Warrant.

         4. No Fractional Shares or Scrip. No fractional shares or scrip
representing fractional shares shall be issued upon the exercise of this
Warrant. As to any fraction of a share which Holder would otherwise be entitled
to purchase upon such exercise, the Company shall pay a cash adjustment in
respect of such final fraction in an amount equal to such fraction multiplied by
the Exercise Price.

         5. Charges, Taxes and Expenses. Issuance of certificates for Warrant
Shares shall be made without charge to the Holder for any issue or transfer tax
or other incidental expense in respect of the issuance of such certificate, all
of which taxes and expenses shall be paid by the Company, and such certificates
shall be issued in the name of the Holder or in such name or names as may be
directed by the Holder; provided, however, that in the event certificates for
Warrant Shares are to be issued in a name other than the name of the Holder,
this Warrant when surrendered for exercise shall be accompanied by the
Assignment Form attached hereto duly executed by the Holder; and the Company may
require, as a condition thereto, the payment of a sum sufficient to reimburse it
for any transfer tax incidental thereto.

         6. Closing of Books. The Company will not close its stockholder books
or records in any manner which prevents the timely exercise of this Warrant,
pursuant to the terms hereof.

         7. Transfer, Division and Combination.

                  (a) Subject to compliance with any applicable securities laws
         and the conditions set forth in Sections 1 and 7(e) hereof and to the
         provisions of Section 4.1 of the Purchase Agreement, this Warrant and
         all rights hereunder are transferable, in whole or in part, upon
         surrender of this Warrant at the principal office of the Company,
         together with a written assignment of this Warrant substantially in the
         form attached hereto duly executed by the Holder or its agent or
         attorney and funds sufficient to pay any transfer taxes payable upon
         the making of such transfer. Upon such surrender and, if required, such
         payment, the Company shall execute and deliver a new Warrant or
         Warrants in the name of the assignee or assignees and in the
         denomination or denominations specified in such instrument of
         assignment, and shall issue to the assignor a new Warrant evidencing
         the portion of this Warrant not so assigned, and this Warrant shall
         promptly be cancelled. A Warrant, if properly assigned, may be
         exercised by a new holder for the purchase of Warrant Shares without
         having a new Warrant issued.

                  (b) This Warrant may be divided or combined with other
         Warrants upon presentation hereof at the aforesaid office of the
         Company, together with a written notice specifying the names and
         denominations in which new Warrants are to be issued, signed by the
         Holder or its agent or attorney. Subject to compliance with Section
         7(a), as to any

                                       5
<PAGE>

         transfer which may be involved in such division or combination, the
         Company shall execute and deliver a new Warrant or Warrants in exchange
         for the Warrant or Warrants to be divided or combined in accordance
         with such notice.

                  (c) The Company shall prepare, issue and deliver at its own
         expense (other than transfer taxes) the new Warrant or Warrants under
         this Section 7.

                  (d) The Company agrees to maintain, at its aforesaid office,
         books for the registration and the registration of transfer of the
         Warrants.

                  (e) If, at the time of the surrender of this Warrant in
         connection with any transfer of this Warrant, the transfer of this
         Warrant shall not be registered pursuant to an effective registration
         statement under the Securities Act and under applicable state
         securities or blue sky laws, the Company may require, as a condition of
         allowing such transfer (i) that the Holder or transferee of this
         Warrant, as the case may be, furnish to the Company a written opinion
         of counsel (which opinion shall be in form, substance and scope
         customary for opinions of counsel in comparable transactions) to the
         effect that such transfer may be made without registration under the
         Securities Act and under applicable state securities or blue sky laws,
         (ii) that the holder or transferee execute and deliver to the Company
         an investment letter in form and substance acceptable to the Company
         and (iii) that the transferee be an "accredited investor" as defined in
         Rule 501(a) promulgated under the Securities Act.

         8. No Rights as Shareholder until Exercise. This Warrant does not
entitle the Holder to any voting rights or other rights as a shareholder of the
Company prior to the exercise hereof. Upon the surrender of this Warrant and the
payment of the aggregate Exercise Price (or by means of a cashless exercise),
the Warrant Shares so purchased shall be and be deemed to be issued to such
Holder as the record owner of such shares as of the close of business on the
later of the date of such surrender or payment.

         9. Loss, Theft, Destruction or Mutilation of Warrant. The Company
covenants that upon receipt by the Company of evidence reasonably satisfactory
to it of the loss, theft, destruction or mutilation of this Warrant or any stock
certificate relating to the Warrant Shares, and in case of loss, theft or
destruction, of indemnity or security reasonably satisfactory to it (which, in
the case of the Warrant, shall not include the posting of any bond), and upon
surrender and cancellation of such Warrant or stock certificate, if mutilated,
the Company will make and deliver a new Warrant or stock certificate of like
tenor and dated as of such cancellation, in lieu of such Warrant or stock
certificate.

         10. Saturdays, Sundays, Holidays, etc. If the last or appointed day for
the taking of any action or the expiration of any right required or granted
herein shall be a Saturday, Sunday or a legal holiday, then such action may be
taken or such right may be exercised on the next succeeding day not a Saturday,
Sunday or legal holiday.

         11. Adjustments of Exercise Price and Number of Warrant Shares.

                                       6
<PAGE>

                  (a) Stock Splits, etc. The number and kind of securities
         purchasable upon the exercise of this Warrant and the Exercise Price
         shall be subject to adjustment from time to time upon the happening of
         any of the following. In case the Company shall (i) pay a dividend in
         shares of Common Stock or make a distribution in shares of Common Stock
         to holders of its outstanding Common Stock, (ii) subdivide its
         outstanding shares of Common Stock into a greater number of shares,
         (iii) combine its outstanding shares of Common Stock into a smaller
         number of shares of Common Stock, or (iv) issue any shares of its
         capital stock in a reclassification of the Common Stock, then the
         number of Warrant Shares purchasable upon exercise of this Warrant
         immediately prior thereto shall be adjusted so that the Holder shall be
         entitled to receive the kind and number of Warrant Shares or other
         securities of the Company which it would have owned or have been
         entitled to receive had such Warrant been exercised in advance thereof.
         Upon each such adjustment of the kind and number of Warrant Shares or
         other securities of the Company which are purchasable hereunder, the
         Holder shall thereafter be entitled to purchase the number of Warrant
         Shares or other securities resulting from such adjustment at an
         Exercise Price per Warrant Share or other security obtained by
         multiplying the Exercise Price in effect immediately prior to such
         adjustment by the number of Warrant Shares purchasable pursuant hereto
         immediately prior to such adjustment and dividing by the number of
         Warrant Shares or other securities of the Company resulting from such
         adjustment. An adjustment made pursuant to this paragraph shall become
         effective immediately after the effective date of such event
         retroactive to the record date, if any, for such event.

                  (b) Anti-Dilution Provisions. During the Exercise Period, the
         Exercise Price shall be subject to adjustment from time to time as
         provided in this Section 11(b). In the event that any adjustment of the
         Exercise Price as required herein results in a fraction of a cent, such
         Exercise Price shall be rounded up or down to the nearest cent.

                           (i) Adjustment of Exercise Price. If and whenever the
                  Company issues or sells, or in accordance with Section
                  11(b)(ii) hereof is deemed to have issued or sold, any shares
                  of Common Stock by means of Capital Shares Equivalents (as
                  defined in the Purchase Agreement) for an effective
                  consideration per share of less than the then Exercise Price
                  or for no consideration (such lower price, the "Base Share
                  Price" and such issuances collectively, a "Dilutive
                  Issuance"), then, the Exercise Price shall be reduced (A) if
                  such Dilutive Issuance occurs on or prior to the first
                  anniversary of the Initial Exercise Date, by an amount equal
                  to 75% of the difference between the then Exercise Price and
                  the Base Share Price and (B) if such Dilutive Issuance occurs
                  after the first anniversary of the Initial Exercise Date, by
                  an amount equal to 50% of the difference between the then
                  Exercise Price and the Base Share Price. Such adjustment shall
                  be made whenever such shares of Common Stock or Capital Shares
                  Equivalent are issued.

                           (ii) Effect on Exercise Price of Certain Events. For
                  purposes of determining the adjusted Exercise Price under
                  Section 11(b) hereof, the following will be applicable:

                                    (A) Issuance of Rights or Options. If the
                           Company in any manner issues or grants any warrants,
                           rights or options, whether or not

                                       7
<PAGE>


                           immediately exercisable, to subscribe for or to
                           purchase Common Stock or Capital Shares Equivalent
                           (such warrants, rights and options to purchase Common
                           Stock or Capital Shares Equivalent are hereinafter
                           referred to as "Options") and the effective price per
                           share for which Common Stock is issuable upon the
                           exercise of such Options is less than the Exercise
                           Price ("Below Base Price Options"), then the maximum
                           total number of shares of Common Stock issuable upon
                           the exercise of all such Below Base Price Options
                           (assuming full exercise, conversion or exchange of
                           Capital Shares Equivalent, if applicable) will, as of
                           the date of the issuance or grant of such Below Base
                           Price Options, be deemed to be outstanding and to
                           have been issued and sold by the Company for such
                           price per share and the maximum consideration payable
                           to the Company upon such exercise (assuming full
                           exercise, conversion or exchange of Capital Shares
                           Equivalent, if applicable) will be deemed to have
                           been received by the Company. For purposes of the
                           preceding sentence, the "effective price per share
                           for which Common Stock is issuable upon the exercise
                           of such Below Base Price Options" is determined by
                           dividing (i) the total amount, if any, received or
                           receivable by the Company as consideration for the
                           issuance or granting of all such Below Base Price
                           Options, plus the minimum aggregate amount of
                           additional consideration, if any, payable to the
                           Company upon the exercise of all such Below Base
                           Price Options, plus, in the case of Capital Shares
                           Equivalent issuable upon the exercise of such Below
                           Base Price Options, the minimum aggregate amount of
                           additional consideration payable upon the exercise,
                           conversion or exchange thereof at the time such
                           Capital Shares Equivalent first become exercisable,
                           convertible or exchangeable, by (ii) the maximum
                           total number of shares of Common Stock issuable upon
                           the exercise of all such Below Base Price Options
                           (assuming full conversion of Capital Shares
                           Equivalent, if applicable). No further adjustment to
                           the Exercise Price will be made upon the actual
                           issuance of such Common Stock upon the exercise of
                           such Below Base Price Options or upon the exercise,
                           conversion or exchange of Capital Shares Equivalent
                           issuable upon exercise of such Below Base Price
                           Options.

                                    (B) Issuance of Capital Shares Equivalent.
                           If the Company in any manner issues or sells any
                           Capital Shares Equivalent, whether or not immediately
                           convertible (other than where the same are issuable
                           upon the exercise of Options) and the effective price
                           per share for which Common Stock is issuable upon
                           such exercise, conversion or exchange is less than
                           the Exercise Price, then the maximum total number of
                           shares of Common Stock issuable upon the exercise,
                           conversion or exchange of all such Capital Shares
                           Equivalent will, as of the date of the issuance of
                           such Capital Shares Equivalent, be deemed to be
                           outstanding and to have been issued and sold by the
                           Company for such price per share and the maximum
                           consideration payable to the Company upon such
                           exercise (assuming full exercise, conversion or
                           exchange of Capital Shares

                                       8
<PAGE>

                           Equivalent, if applicable) will be deemed to have
                           been received by the Company. For the purposes of the
                           preceding sentence, the "effective price per share
                           for which Common Stock is issuable upon such
                           exercise, conversion or exchange" is determined by
                           dividing (i) the total amount, if any, received or
                           receivable by the Company as consideration for the
                           issuance or sale of all such Capital Shares
                           Equivalent, plus the minimum aggregate amount of
                           additional consideration, if any, payable to the
                           Company upon the exercise, conversion or exchange
                           thereof at the time such Capital Shares Equivalent
                           first become exercisable, convertible or
                           exchangeable, by (ii) the maximum total number of
                           shares of Common Stock issuable upon the exercise,
                           conversion or exchange of all such Capital Shares
                           Equivalent. No further adjustment to the Exercise
                           Price will be made upon the actual issuance of such
                           Common Stock upon exercise, conversion or exchange of
                           such Capital Shares Equivalent.

                                    (C) Change in Option Price or Conversion
                           Rate. If there is a change at any time in (i) the
                           amount of additional consideration payable to the
                           Company upon the exercise of any Options; (ii) the
                           amount of additional consideration, if any, payable
                           to the Company upon the exercise, conversion or
                           exchange of any Capital Shares Equivalent; or (iii)
                           the rate at which any Capital Shares Equivalent are
                           convertible into or exchangeable for Common Stock (in
                           each such case, other than under or by reason of
                           provisions designed to protect against dilution), the
                           Exercise Price in effect at the time of such change
                           will be readjusted to the Exercise Price which would
                           have been in effect at such time had such Options or
                           Capital Shares Equivalent still outstanding provided
                           for such changed additional consideration or changed
                           conversion rate, as the case may be, at the time
                           initially granted, issued or sold.

                                    (D) Calculation of Consideration Received.
                           If any Common Stock, Options or Capital Shares
                           Equivalent are issued, granted or sold for cash, the
                           consideration received therefor for purposes of this
                           Warrant will be the amount received by the Company
                           therefor, before deduction of reasonable commissions,
                           underwriting discounts or allowances or other
                           reasonable expenses paid or incurred by the Company
                           in connection with such issuance, grant or sale. In
                           case any Common Stock, Options or Capital Shares
                           Equivalent are issued or sold for a consideration
                           part or all of which shall be other than cash, the
                           amount of the consideration other than cash received
                           by the Company will be the fair market value of such
                           consideration, except where such consideration
                           consists of securities, in which case the amount of
                           consideration received by the Company will be the
                           fair market value (closing bid price, if traded on
                           any market) thereof as of the date of receipt. In
                           case any Common Stock, Options or Capital Shares
                           Equivalent are issued in connection with any merger
                           or consolidation in which the Company is the
                           surviving corporation, the amount of consideration
                           therefor will be deemed to be the

                                       9
<PAGE>

                           fair market value of such portion of the net assets
                           and business of the non-surviving corporation as is
                           attributable to such Common Stock, Options or Capital
                           Shares Equivalent, as the case may be. The fair
                           market value of any consideration other than cash or
                           securities will be determined in good faith by an
                           investment banker or other appropriate expert of
                           national reputation selected by the Company and
                           reasonably acceptable to the holder hereof, with the
                           costs of such appraisal to be borne by the Company.

                                    (E) Exceptions to Adjustment of Exercise
                           Price. Notwithstanding the foregoing, no adjustment
                           will be made under this Section 11(b) in respect of
                           (1) the granting of options to employees, officers,
                           directors and key consultants of the Company pursuant
                           to any stock option plan or other plan duly adopted
                           by a majority of the non-employee members of the
                           Board of Directors of the Company or a majority of
                           the members of a committee of non-employee directors
                           established for such purpose, or (2) upon the
                           exercise of the Debentures or any Debentures of this
                           series or of any other series or security issued by
                           the Company in connection with the offer and sale of
                           this Company's securities pursuant to the Purchase
                           Agreement, or (3) upon the exercise of or conversion
                           of any Capital Shares Equivalent or Options issued
                           and outstanding on the Original Issue Date, provided
                           that the securities have not been amended since the
                           date of the Purchase Agreement except as a result of
                           the Purchase Agreement, or (4) acquisitions or
                           strategic investments, the primary purpose of which
                           is not to raise capital, or (5) the granting of
                           stock, stock options and/or warrants to an investment
                           group in connection with the advancement of $1
                           million to the Company, which transaction is
                           described in Item 13 of the Company's Annual Report
                           on Form 10-K for the fiscal year ended March 31,
                           2003.

                           (iii) Minimum Adjustment of Exercise Price. No
                  adjustment of the Exercise Price shall be made in an amount of
                  less than 1% of the Exercise Price in effect at the time such
                  adjustment is otherwise required to be made, but any such
                  lesser adjustment shall be carried forward and shall be made
                  at the time and together with the next subsequent adjustment
                  which, together with any adjustments so carried forward, shall
                  amount to not less than 1% of such Exercise Price.

         12. Reorganization, Reclassification, Merger, Consolidation or
Disposition of Assets. In case the Company shall reorganize its capital,
reclassify its capital stock, consolidate or merge with or into another
corporation (where the Company is not the surviving corporation or where there
is a change in or distribution with respect to the Common Stock of the Company),
or sell, transfer or otherwise dispose of all or substantially all its property,
assets or business to another corporation and, pursuant to the terms of such
reorganization, reclassification, merger, consolidation or disposition of
assets, shares of common stock of the successor or acquiring corporation, or any
cash, shares of stock or other securities or property of any nature whatsoever

                                       10
<PAGE>

(including warrants or other subscription or purchase rights) in addition to or
in lieu of common stock of the successor or acquiring corporation ("Other
Property"), are to be received by or distributed to the holders of Common Stock
of the Company, then the Holder shall have the right thereafter to receive, at
the option of the Holder, (a) upon exercise of this Warrant, the number of
shares of Common Stock of the successor or acquiring corporation or of the
Company, if it is the surviving corporation, and Other Property receivable upon
or as a result of such reorganization, reclassification, merger, consolidation
or disposition of assets by a Holder of the number of shares of Common Stock for
which this Warrant is exercisable immediately prior to such event or (b) cash
equal to the value of this Warrant as determined in accordance with the
Black-Scholes option pricing formula. In case of any such reorganization,
reclassification, merger, consolidation or disposition of assets, the successor
or acquiring corporation (if other than the Company) shall expressly assume the
due and punctual observance and performance of each and every covenant and
condition of this Warrant to be performed and observed by the Company and all
the obligations and liabilities hereunder, subject to such modifications as may
be deemed appropriate (as determined in good faith by resolution of the Board of
Directors of the Company) in order to provide for adjustments of Warrant Shares
for which this Warrant is exercisable which shall be as nearly equivalent as
practicable to the adjustments provided for in this Section 12. For purposes of
this Section 12, "common stock of the successor or acquiring corporation" shall
include stock of such corporation of any class which is not preferred as to
dividends or assets over any other class of stock of such corporation and which
is not subject to redemption and shall also include any evidences of
indebtedness, shares of stock or other securities which are convertible into or
exchangeable for any such stock, either immediately or upon the arrival of a
specified date or the happening of a specified event and any warrants or other
rights to subscribe for or purchase any such stock. The foregoing provisions of
this Section 12 shall similarly apply to successive reorganizations,
reclassifications, mergers, consolidations or disposition of assets.

         13. Voluntary Adjustment by the Company. The Company may at any time
during the term of this Warrant reduce the then current Exercise Price to any
amount and for any period of time deemed appropriate by the Board of Directors
of the Company.

         14. Notice of Adjustment. Whenever the number of Warrant Shares or
number or kind of securities or other property purchasable upon the exercise of
this Warrant or the Exercise Price is adjusted, as herein provided, the Company
shall give notice thereof to the Holder, which notice shall state the number of
Warrant Shares (and other securities or property) purchasable upon the exercise
of this Warrant and the Exercise Price of such Warrant Shares (and other
securities or property) after such adjustment, setting forth a brief statement
of the facts requiring such adjustment and setting forth the computation by
which such adjustment was made.

         15. Notice of Corporate Action. If at any time:

                  (a) the Company shall take a record of the holders of its
         Common Stock for the purpose of entitling them to receive a dividend or
         other distribution, or any right to subscribe for or purchase any
         evidences of its indebtedness, any shares of stock of any class or any
         other securities or property, or to receive any other right, or

                                       11
<PAGE>

                  (b) there shall be any capital reorganization of the Company,
         any reclassification or recapitalization of the capital stock of the
         Company or any consolidation or merger of the Company with, or any
         sale, transfer or other disposition of all or substantially all the
         property, assets or business of the Company to, another corporation or,

                  (c) there shall be a voluntary or involuntary dissolution,
         liquidation or winding up of the Company;

then, in any one or more of such cases, the Company shall give to Holder (i) at
least 20 days' prior written notice of the date on which a record date shall be
selected for such dividend, distribution or right or for determining rights to
vote in respect of any such reorganization, reclassification, merger,
consolidation, sale, transfer, disposition, liquidation or winding up, and (ii)
in the case of any such reorganization, reclassification, merger, consolidation,
sale, transfer, disposition, dissolution, liquidation or winding up, at least 20
days' prior written notice of the date when the same shall take place. Such
notice in accordance with the foregoing clause also shall specify (i) the date
on which any such record is to be taken for the purpose of such dividend,
distribution or right, the date on which the holders of Common Stock shall be
entitled to any such dividend, distribution or right, and the amount and
character thereof, and (ii) the date on which any such reorganization,
reclassification, merger, consolidation, sale, transfer, disposition,
dissolution, liquidation or winding up is to take place and the time, if any
such time is to be fixed, as of which the holders of Common Stock shall be
entitled to exchange their Warrant Shares for securities or other property
deliverable upon such disposition, dissolution, liquidation or winding up. Each
such written notice shall be sufficiently given if addressed to Holder at the
last address of Holder appearing on the books of the Company and delivered in
accordance with Section 17(d).

         16. Authorized Shares. The Company covenants that during the period the
Warrant is outstanding, it will reserve from its authorized and unissued Common
Stock a sufficient number of shares to provide for the issuance of the Warrant
Shares upon the exercise of any purchase rights under this Warrant. The Company
further covenants that its issuance of this Warrant shall constitute full
authority to its officers who are charged with the duty of executing stock
certificates to execute and issue the necessary certificates for the Warrant
Shares upon the exercise of the purchase rights under this Warrant. The Company
will take all such reasonable action as may be necessary to assure that such
Warrant Shares may be issued as provided herein without violation of any
applicable law or regulation, or of any requirements of the Principal Market
upon which the Common Stock may be listed.

         Except and to the extent as waived or consented to by the Holder, the
Company shall not by any action, including, without limitation, amending its
certificate of incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms of this Warrant, but will at all times in good faith assist in the
carrying out of all such terms and in the taking of all such actions as may be
necessary or appropriate to protect the rights of Holder as set forth in this
Warrant against impairment. Without limiting the generality of the foregoing,
the Company will (a) not increase the par value of any Warrant Shares above the
amount payable therefor upon such exercise

                                       12
<PAGE>

immediately prior to such increase in par value, (b) take all such action as may
be necessary or appropriate in order that the Company may validly and legally
issue fully paid and nonassessable Warrant Shares upon the exercise of this
Warrant, and (c) use commercially reasonable efforts to obtain all such
authorizations, exemptions or consents from any public regulatory body having
jurisdiction thereof as may be necessary to enable the Company to perform its
obligations under this Warrant.

                  Before taking any action which would result in an adjustment
in the number of Warrant Shares for which this Warrant is exercisable or in the
Exercise Price, the Company shall obtain all such authorizations or exemptions
thereof, or consents thereto, as may be necessary from any public regulatory
body or bodies having jurisdiction thereof.

         17. Miscellaneous.

                  (a) Jurisdiction. This Warrant shall constitute a contract
         under the laws of New York, without regard to its conflict of law,
         principles or rules.

                  (b) Restrictions. The Holder acknowledges that the Warrant
         Shares acquired upon the exercise of this Warrant, if not registered,
         will have restrictions upon resale imposed by state and federal
         securities laws.

                  (c) Nonwaiver and Expenses. No course of dealing or any delay
         or failure to exercise any right hereunder on the part of Holder shall
         operate as a waiver of such right or otherwise prejudice Holder's
         rights, powers or remedies, notwithstanding all rights hereunder
         terminate on the Termination Date. If the Company willfully and
         knowingly fails to comply with any provision of this Warrant, which
         results in any material damages to the Holder, the Company shall pay to
         Holder such amounts as shall be sufficient to cover any costs and
         expenses including, but not limited to, reasonable attorneys' fees,
         including those of appellate proceedings, incurred by Holder in
         collecting any amounts due pursuant hereto or in otherwise enforcing
         any of its rights, powers or remedies hereunder.

                  (d) Notices. Any notice, request or other document required or
         permitted to be given or delivered to the Holder by the Company shall
         be delivered in accordance with the notice provisions of the Purchase
         Agreement.

                  (e) Limitation of Liability. No provision hereof, in the
         absence of any affirmative action by Holder to exercise this Warrant or
         purchase Warrant Shares, and no enumeration herein of the rights or
         privileges of Holder, shall give rise to any liability of Holder for
         the purchase price of any Common Stock or as a stockholder of the
         Company, whether such liability is asserted by the Company or by
         creditors of the Company.

                  (f) Remedies. Holder, in addition to being entitled to
         exercise all rights granted by law, including recovery of damages, will
         be entitled to specific performance of its rights under this Warrant.
         The Holder's ability to exercise any and all remedies contained herein
         is subject to the terms of the Subordination Agreement. The Company
         agrees that monetary damages would not be adequate compensation for any
         loss incurred

                                       13
<PAGE>

         by reason of a breach by it of the provisions of this Warrant and
         hereby agrees to waive the defense in any action for specific
         performance that a remedy at law would be adequate.

                  (g) Successors and Assigns. Subject to applicable securities
         laws, this Warrant and the rights and obligations evidenced hereby
         shall inure to the benefit of and be binding upon the successors of the
         Company and the successors and permitted assigns of Holder. The
         provisions of this Warrant are intended to be for the benefit of all
         Holders from time to time of this Warrant and shall be enforceable by
         any such Holder or holder of Warrant Shares.

                  (h) Amendment. This Warrant may be modified or amended or the
         provisions hereof waived with the written consent of the Company and
         the Holder.

                  (i) Severability. Wherever possible, each provision of this
         Warrant shall be interpreted in such manner as to be effective and
         valid under applicable law, but if any provision of this Warrant shall
         be prohibited by or invalid under applicable law, such provision shall
         be ineffective to the extent of such prohibition or invalidity, without
         invalidating the remainder of such provisions or the remaining
         provisions of this Warrant.

                  (j) Headings. The headings used in this Warrant are for the
         convenience of reference only and shall not, for any purpose, be deemed
         a part of this Warrant.

                              ********************

                                       14
<PAGE>


         IN WITNESS WHEREOF, the Company has caused this Warrant to be executed
by its officer thereunto duly authorized.


Dated:  September __, 2003
                                        THE SINGING MACHINE COMPANY, INC.



                                        By:_____________________________________
                                            Name:
                                            Title:

                                       15
<PAGE>

                               NOTICE OF EXERCISE

To:      THE SINGING MACHINE COMPANY, INC.

         (1) The undersigned hereby elects to purchase ________ Warrant Shares
of The Singing Machine Company, Inc. pursuant to the terms of the attached
Warrant (only if exercised in full), and tenders herewith payment of the
exercise price in full, together with all applicable transfer taxes, if any.

         (2) Payment shall take the form of (check applicable box):

                  [ ] in lawful money of the United States; or

                  [ ] the cancellation of such number of Warrant Shares as is
                  necessary, in accordance with the formula set forth in
                  subsection 3(d), to exercise this Warrant with respect to the
                  maximum number of Warrant Shares purchasable pursuant to the
                  cashless exercise procedure set forth in subsection 3(d).

         (3) Please issue a certificate or certificates representing said
Warrant Shares in the name of the undersigned or in such other name as is
specified below:

                  ________________________________________



The Warrant Shares shall be delivered to the following:

                  ________________________________________

                  ________________________________________

                  ________________________________________


         (4) Accredited Investor. The undersigned is an "accredited investor" as
defined in Regulation D promulgated under the Securities Act of 1933, as
amended.

                                 [PURCHASER]


                                 By: ______________________________
                                     Name:
                                     Title:

                                 Dated:  ________________________


                                       16
<PAGE>


                                 ASSIGNMENT FORM

                    (To assign the foregoing warrant, execute
                   this form and supply required information.
                 Do not use this form to exercise the warrant.)



         FOR VALUE RECEIVED, the foregoing Warrant and all rights evidenced
thereby are hereby assigned to


_______________________________________________ whose address is

_______________________________________________________________.



_______________________________________________________________

                                        Dated:  ______________, _______


                           Holder's Signature:  ___________________

                           Holder's Address:    ___________________

                                                ___________________


Signature Guaranteed:  ___________________________________________


NOTE: The signature to this Assignment Form must correspond with the name as it
appears on the face of the Warrant, without alteration or enlargement or any
change whatsoever, and must be guaranteed by a bank or trust company. Officers
of corporations and those acting in a fiduciary or other representative capacity
should file proper evidence of authority to assign the foregoing Warrant.


                                       17



</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.5
<SEQUENCE>8
<FILENAME>purwar2.txt
<DESCRIPTION>COMMON STOCK PURCHASE WARRANT 103896 SHARES
<TEXT>
                                                                    Exhibit 10.5

NEITHER THIS SECURITY NOR THE SECURITIES INTO WHICH THIS SECURITY IS EXERCISABLE
HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE
SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN
AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE
SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO
SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE
COMPANY. THIS SECURITY AND THE SECURITIES ISSUABLE UPON EXERCISE OF THIS
SECURITY MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER
LOAN SECURED BY SUCH SECURITIES

                          COMMON STOCK PURCHASE WARRANT

                  To Purchase 103,896 Shares of Common Stock of

                        THE SINGING MACHINE COMPANY, INC.

                  THIS COMMON STOCK PURCHASE WARRANT CERTIFIES that, for value
received, Roth Capital Partners, LLC (with any permitted assignee or successor,
the "Holder"), is entitled, upon the terms and subject to the limitations on
exercise and the conditions hereinafter set forth, at any time on or after
September 8, 2003 (the "Initial Exercise Date") and on or prior to the close of
business on the third anniversary of the Initial Exercise Date (the "Termination
Date") but not thereafter, to subscribe for and purchase from The Singing
Machine Company, Inc., a corporation incorporated in Delaware (the "Company"),
up to 103,896 shares (the "Warrant Shares") of Common Stock, par value $.01 per
share, of the Company (the "Common Stock"). The purchase price of one share of
Common Stock (the "Exercise Price") under this Warrant shall be $4.025, subject
to adjustment hereunder.

                                       1

<PAGE>


     1. Title to Warrant. Prior to the Termination Date and subject to
compliance with applicable laws and Section 7 of this Warrant, this Warrant and
all rights hereunder are transferable, in whole or in part, at the office or
agency of the Company by the Holder in person or by duly authorized attorney,
upon surrender of this Warrant together with the Assignment Form annexed hereto
properly endorsed. The transferee shall sign an investment letter in form and
substance reasonably satisfactory to the Company.

     2. Authorization of Warrant Shares. The Company represents and warrants
that all Warrant Shares which may be issued upon the exercise of the purchase
rights represented by this Warrant will, upon exercise of the purchase rights
represented by this Warrant, be duly authorized, validly issued, fully paid and
nonassessable and free from all taxes, liens and charges in respect of the issue
thereof (other than taxes in respect of any transfer occurring contemporaneously
with such issue).

     3. Exercise of Warrant.

               (a) Exercise of the purchase rights represented by this Warrant
may be made at any time or times on or after the Initial Exercise Date and on or
before the Termination Date by delivery to the Company of a duly executed
facsimile copy of the Notice of Exercise Form annexed hereto (or such other
office or agency of the Company as it may designate by notice in writing to the
registered Holder at the address of such Holder appearing on the books of the
Company); provided, however, within 5 Trading Days of the date said Notice of
Exercise is delivered to the Company, the Holder shall have surrendered this
Warrant to the Company and the Company shall have received payment of the
aggregate Exercise Price of the shares thereby purchased by wire transfer or
cashier's check drawn on a United States bank. Certificates for shares purchased
hereunder shall be delivered to the Holder within the earlier of (i) 5 Trading
Days after the date on which the Notice of Exercise shall have been delivered by
facsimile copy or (ii) 3 Trading Days from the delivery to the Company of the
Notice of Exercise Form by facsimile copy, surrender of this Warrant and payment
of the aggregate Exercise Price as set forth above ("Warrant Share Delivery
Date"); provided, however, in the event the Warrant is not surrendered or the
aggregate Exercise Price is not received by the Company within 5 Trading Days
after the date on which the Notice of Exercise shall be delivered by facsimile
copy, the Warrant Share Delivery Date shall be extended to the extent such 5
Trading Day period is exceeded (or alternatively, within three (3) Trading Days
after the date on which this Warrant shall have been exercised, the Company
shall at the Holder's election deliver the Warrant Shares to the Holder, if
eligible, via the Depository Trust Company's ("DTC") Deposit Withdrawal Agent
Commission ("DWAC") system via the DTC instructions provided to the Company in
the Notice of Exercise or otherwise in writing). This Warrant shall be deemed to
have been exercised on the date the Notice of Exercise is delivered to the
Company by facsimile copy. The Warrant Shares shall be deemed to have been
issued, and Holder or any other person so designated to be named therein shall
be deemed to have become a holder of record of such shares for all purposes, as
of the date the Warrant has been exercised by payment to the Company of the
Exercise Price and all taxes required to be paid by the Holder, if any, pursuant
to Section 5 prior to the issuance of such shares, have been paid. If the
Company fails to deliver to the Holder a certificate or certificates
representing the Warrant Shares pursuant to this Section 3(a) by the

                                       2
<PAGE>


Warrant Share Delivery Date, then the Holder will have the right to rescind such
exercise. In addition to any other rights available to the Holder, if the
Company fails to deliver to the Holder a certificate or certificates
representing the Warrant Shares pursuant to an exercise on or before the Warrant
Share Delivery Date, and if after such date the Holder is required by its broker
to purchase (in an open market transaction or otherwise) shares of Common Stock
to deliver in satisfaction of a sale by the Holder of the Warrant Shares which
the Holder anticipated receiving upon such exercise (a "Buy-In"), then the
Company shall (1) pay in cash to the Holder the amount by which (x) the Holder's
total purchase price (including brokerage commissions, if any) for the shares of
Common Stock so purchased exceeds (y) the amount obtained by multiplying (A) the
number of Warrant Shares that the Company was required to deliver to the Holder
in connection with the exercise at issue times (B) the price at which the sell
order giving rise to such purchase obligation was executed, and (2) at the
option of the Holder, either reinstate the portion of the Warrant and equivalent
number of Warrant Shares for which such exercise was not honored or deliver to
the Holder the number of shares of Common Stock that would have been issued had
the Company timely complied with its exercise and delivery obligations
hereunder. For example, if the Holder purchases Common Stock having a total
purchase price of $11,000 to cover a Buy-In with respect to an attempted
exercise of shares of Common Stock with an aggregate sale price giving rise to
such purchase obligation of $10,000, under clause (1) of the immediately
preceding sentence the Company shall be required to pay the Holder $1,000. The
Holder shall provide the Company written notice indicating the amounts payable
to the Holder in respect of the Buy-In, together with applicable confirmations
and other evidence reasonably requested by the Company. Nothing herein shall
limit a Holder's right to pursue any other remedies available to it hereunder,
at law or in equity including, without limitation, a decree of specific
performance and/or injunctive relief with respect to the Company's failure to
timely deliver certificates representing shares of Common Stock upon exercise of
the Warrant as required pursuant to the terms hereof. The Holder agrees that it
will have not right to exercise any remedies contained in this Agreement if the
Company is in default under the terms of its credit agreement with its primary
commercial lender or the payment of any amounts required herein will result in
the Company's failing to meet its financial requirements under its credit
agreement with its primary commercial lender.

               (b) If this Warrant shall have been exercised in part, the
          Company shall, at the time of delivery of the certificate or
          certificates representing Warrant Shares, deliver to Holder a new
          Warrant evidencing the rights of Holder to purchase the unpurchased
          Warrant Shares called for by this Warrant, which new Warrant shall in
          all other respects be identical with this Warrant.

               (c) The Company shall not effect any exercise of this Warrant,
          and the Holder shall not have the right to exercise any portion of
          this Warrant, pursuant to Section 3(a) or otherwise, to the extent
          that after giving effect to such issuance after exercise, the Holder
          (together with the Holder's affiliates), as set forth on the
          applicable Notice of Exercise, would beneficially own in excess of
          4.99% of the number of shares of the Common Stock outstanding
          immediately after giving effect to such issuance. For purposes of the
          foregoing sentence, the number of shares of Common Stock beneficially
          owned by the Holder and its affiliates shall include the number of
          shares of Common Stock issuable upon exercise of this Warrant with
          respect to which the determination of

                                       3
<PAGE>


          such sentence is being made, but shall exclude the number of shares of
          Common Stock which would be issuable upon (A) exercise of the
          remaining, nonexercised portion of this Warrant beneficially owned by
          the Holder or any of its affiliates and (B) exercise or conversion of
          the unexercised or nonconverted portion of any other securities of the
          Company (including, without limitation, any other Debentures or
          Warrants) subject to a limitation on conversion or exercise analogous
          to the limitation contained herein beneficially owned by the Holder or
          any of its affiliates. Except as set forth in the preceding sentence,
          for purposes of this Section 3(c), beneficial ownership shall be
          calculated in accordance with Section 13(d) of the Exchange Act. To
          the extent that the limitation contained in this Section 3(c) applies,
          the determination of whether this Warrant is exercisable (in relation
          to other securities owned by the Holder) and of which a portion of
          this Warrant is exercisable shall be in the sole discretion of such
          Holder, and the submission of a Notice of Exercise shall be deemed to
          be such Holder's determination of whether this Warrant is exercisable
          (in relation to other securities owned by such Holder) and of which
          portion of this Warrant is exercisable, in each case subject to such
          aggregate percentage limitation, and the Company shall have no
          obligation to verify or confirm the accuracy of such determination.
          For purposes of this Section 3(c), in determining the number of
          outstanding shares of Common Stock, the Holder may rely on the number
          of outstanding shares of Common Stock as reflected in (x) the
          Company's most recent Form 10-Q or Form 10-K, as the case may be, (y)
          a more recent public announcement by the Company or (z) any other
          notice by the Company or the Company's Transfer Agent setting forth
          the number of shares of Common Stock outstanding. Upon the written or
          oral request of the Holder, the Company shall within two Trading Days
          confirm orally and in writing to the Holder the number of shares of
          Common Stock then outstanding. In any case, the number of outstanding
          shares of Common Stock shall be determined after giving effect to the
          conversion or exercise of securities of the Company, including this
          Warrant, by the Holder or its affiliates since the date as of which
          such number of outstanding shares of Common Stock was reported. The
          provisions of this Section 3(c) may be waived by the Holder upon, at
          the election of the Holder, not less than 61 days' prior notice to the
          Company, and the provisions of this Section 3(c) shall continue to
          apply until such 61st day (or such later date, as determined by the
          Holder, as may be specified in such notice of waiver).

               (d) This Warrant may also be exercised at such time by means
          of a "cashless exercise" in which the Holder shall be entitled to
          receive a certificate for the number of Warrant Shares equal to the
          quotient obtained by dividing [(A-B) (X)] by (A), where:

            (A)  = the VWAP of the Common Stock on the Trading Day preceding
                   the date of such election;

            (B)  = the Exercise Price of the Warrants, as adjusted; and

            (X)  = the number of Warrant Shares issuable upon exercise of
                   this Warrant in accordance with the terms of this Warrant.

                                       4
<PAGE>

            "VWAP" means, for any date, the price determined by the first of
            the following clauses that applies: (a) the daily volume weighted
            average price of the Common Stock for such date (or the nearest
            preceding date) on the primary market or exchange on which the
            Common Stock is then listed or quoted as reported by Bloomberg
            Financial L.P. (based on a Trading Day from 9:30 a.m. Eastern
            Time to 4:00 p.m. Eastern Time); (b) if the Common Stock is not
            then listed or quoted on a market or exchange and if prices for
            the Common Stock are then quoted on the OTC Bulletin Board, the
            volume weighted average price of the Common Stock for such date
            (or the nearest preceding date) on the OTC Bulletin Board; (c) if
            the Common Stock is not then listed or quoted on the OTC Bulletin
            Board and if prices for the Common Stock are then reported in the
            "Pink Sheets" published by the National Quotation Bureau
            Incorporated (or a similar organization or agency succeeding to
            its functions of reporting prices), the average of the most
            recent bid and ask price per share of the Common Stock so
            reported; or (d) in all other cases, the fair market value of a
            share of Common Stock as determined by a nationally
            recognized-independent appraiser selected in good faith by
            Holder.


     4. No Fractional Shares or Scrip. No fractional shares or scrip
representing fractional shares shall be issued upon the exercise of this
Warrant. As to any fraction of a share which Holder would otherwise be entitled
to purchase upon such exercise, the Company shall pay a cash adjustment in
respect of such final fraction in an amount equal to such fraction multiplied by
the Exercise Price.

     5. Charges, Taxes and Expenses. Issuance of certificates for Warrant Shares
shall be made without charge to the Holder for any issue or transfer tax or
other incidental expense in respect of the issuance of such certificate, all of
which taxes and expenses shall be paid by the Company, and such certificates
shall be issued in the name of the Holder or in such name or names as may be
directed by the Holder; provided, however, that in the event certificates for
Warrant Shares are to be issued in a name other than the name of the Holder,
this Warrant when surrendered for exercise shall be accompanied by the
Assignment Form attached hereto duly executed by the Holder; and the Company may
require, as a condition thereto, the payment of a sum sufficient to reimburse it
for any transfer tax incidental thereto.

     6. Closing of Books. The Company will not close its stockholder books or
records in any manner which prevents the timely exercise of this Warrant,
pursuant to the terms hereof.

     7. Transfer, Division and Combination.

               (a) Subject to compliance with any applicable securities laws and
          the conditions set forth in Sections 1 and 7(e) hereof and to the
          provisions of Section 4.1 of the Purchase Agreement, this Warrant and
          all rights hereunder are transferable, in whole or in part, upon
          surrender of this Warrant at the principal office of the Company,
          together with a written assignment of this Warrant substantially in
          the form attached hereto duly executed by the Holder or its agent or
          attorney and funds sufficient to pay any transfer taxes payable upon
          the making of such transfer. Upon such surrender and, if required,

                                       5
<PAGE>

          such payment, the Company shall execute and deliver a new Warrant or
          Warrants in the name of the assignee or assignees and in the
          denomination or denominations specified in such instrument of
          assignment, and shall issue to the assignor a new Warrant evidencing
          the portion of this Warrant not so assigned, and this Warrant shall
          promptly be cancelled. A Warrant, if properly assigned, may be
          exercised by a new holder for the purchase of Warrant Shares without
          having a new Warrant issued.

               (b) This Warrant may be divided or combined with other Warrants
          upon presentation hereof at the aforesaid office of the Company,
          together with a written notice specifying the names and denominations
          in which new Warrants are to be issued, signed by the Holder or its
          agent or attorney. Subject to compliance with Section 7(a), as to any
          transfer which may be involved in such division or combination, the
          Company shall execute and deliver a new Warrant or Warrants in
          exchange for the Warrant or Warrants to be divided or combined in
          accordance with such notice.

               (c) The Company shall prepare, issue and deliver at its own
          expense (other than transfer taxes) the new Warrant or Warrants under
          this Section 7.

               (d) The Company agrees to maintain, at its aforesaid office,
          books for the registration and the registration of transfer of the
          Warrants.

               (e) If, at the time of the surrender of this Warrant in
          connection with any transfer of this Warrant, the transfer of this
          Warrant shall not be registered pursuant to an effective registration
          statement under the Securities Act and under applicable state
          securities or blue sky laws, the Company may require, as a condition
          of allowing such transfer (i) that the Holder or transferee of this
          Warrant, as the case may be, furnish to the Company a written opinion
          of counsel (which opinion shall be in form, substance and scope
          customary for opinions of counsel in comparable transactions) to the
          effect that such transfer may be made without registration under the
          Securities Act and under applicable state securities or blue sky laws,
          (ii) that the holder or transferee execute and deliver to the Company
          an investment letter in form and substance acceptable to the Company
          and (iii) that the transferee be an "accredited investor" as defined
          in Rule 501(a) promulgated under the Securities Act.

     8. No Rights as Shareholder until Exercise. This Warrant does not entitle
the Holder to any voting rights or other rights as a shareholder of the Company
prior to the exercise hereof. Upon the surrender of this Warrant and the payment
of the aggregate Exercise Price (or by means of a cashless exercise), the
Warrant Shares so purchased shall be and be deemed to be issued to such Holder
as the record owner of such shares as of the close of business on the later of
the date of such surrender or payment.

     9. Loss, Theft, Destruction or Mutilation of Warrant. The Company covenants
that upon receipt by the Company of evidence reasonably satisfactory to it of
the loss, theft, destruction or mutilation of this Warrant or any stock
certificate relating to the Warrant Shares, and in case of loss, theft or
destruction, of indemnity or security reasonably satisfactory to it (which, in
the case of the Warrant, shall not include the posting of any bond), and upon
surrender and cancellation of such Warrant or stock certificate, if mutilated,
the Company will make and

                                       6
<PAGE>

deliver a new Warrant or stock certificate of like tenor and dated as of such
cancellation, in lieu of such Warrant or stock certificate.

     10. Saturdays, Sundays, Holidays, etc. If the last or appointed day for the
taking of any action or the expiration of any right required or granted herein
shall be a Saturday, Sunday or a legal holiday, then such action may be taken or
such right may be exercised on the next succeeding day not a Saturday, Sunday or
legal holiday.

     11. Adjustments of Exercise Price and Number of Warrant Shares.

          (a) Stock Splits, etc. The number and kind of securities purchasable
     upon the exercise of this Warrant and the Exercise Price shall be subject
     to adjustment from time to time upon the happening of any of the following.
     In case the Company shall (i) pay a dividend in shares of Common Stock or
     make a distribution in shares of Common Stock to holders of its outstanding
     Common Stock, (ii) subdivide its outstanding shares of Common Stock into a
     greater number of shares, (iii) combine its outstanding shares of Common
     Stock into a smaller number of shares of Common Stock, or (iv) issue any
     shares of its capital stock in a reclassification of the Common Stock, then
     the number of Warrant Shares purchasable upon exercise of this Warrant
     immediately prior thereto shall be adjusted so that the Holder shall be
     entitled to receive the kind and number of Warrant Shares or other
     securities of the Company which it would have owned or have been entitled
     to receive had such Warrant been exercised in advance thereof. Upon each
     such adjustment of the kind and number of Warrant Shares or other
     securities of the Company which are purchasable hereunder, the Holder shall
     thereafter be entitled to purchase the number of Warrant Shares or other
     securities resulting from such adjustment at an Exercise Price per Warrant
     Share or other security obtained by multiplying the Exercise Price in
     effect immediately prior to such adjustment by the number of Warrant Shares
     purchasable pursuant hereto immediately prior to such adjustment and
     dividing by the number of Warrant Shares or other securities of the Company
     resulting from such adjustment. An adjustment made pursuant to this
     paragraph shall become effective immediately after the effective date of
     such event retroactive to the record date, if any, for such event.

          (b) Anti-Dilution Provisions. During the Exercise Period, the Exercise
     Price shall be subject to adjustment from time to time as provided in this
     Section 11(b). In the event that any adjustment of the Exercise Price as
     required herein results in a fraction of a cent, such Exercise Price shall
     be rounded up or down to the nearest cent.

               (i) Adjustment of Exercise Price. If and whenever the Company
          issues or sells, or in accordance with Section 11(b)(ii) hereof is
          deemed to have issued or sold, any shares of Common Stock by means of
          Capital Shares Equivalents (as defined in the Purchase Agreement) for
          an effective consideration per share of less than the then Exercise
          Price or for no consideration (such lower price, the "Base Share
          Price" and such issuances collectively, a "Dilutive Issuance"), then,
          the Exercise Price shall be reduced (A) if such Dilutive Issuance
          occurs on or prior to the first anniversary of the Initial Exercise

                                       7
<PAGE>

          Date, by an amount equal to 75% of the difference between the then
          Exercise Price and the Base Share Price and (B) if such Dilutive
          Issuance occurs after the first anniversary of the Initial Exercise
          Date, by an amount equal to 50% of the difference between the then
          Exercise Price and the Base Share Price. Such adjustment shall be made
          whenever such shares of Common Stock or Capital Shares Equivalent are
          issued.

               (ii) Effect on Exercise Price of Certain Events. For purposes of
          determining the adjusted Exercise Price under Section 11(b) hereof,
          the following will be applicable:

                    (A) Issuance of Rights or Options. If the Company in any
               manner issues or grants any warrants, rights or options, whether
               or not immediately exercisable, to subscribe for or to purchase
               Common Stock or Capital Shares Equivalent (such warrants, rights
               and options to purchase Common Stock or Capital Shares Equivalent
               are hereinafter referred to as "Options") and the effective price
               per share for which Common Stock is issuable upon the exercise of
               such Options is less than the Exercise Price ("Below Base Price
               Options"), then the maximum total number of shares of Common
               Stock issuable upon the exercise of all such Below Base Price
               Options (assuming full exercise, conversion or exchange of
               Capital Shares Equivalent, if applicable) will, as of the date of
               the issuance or grant of such Below Base Price Options, be deemed
               to be outstanding and to have been issued and sold by the Company
               for such price per share and the maximum consideration payable to
               the Company upon such exercise (assuming full exercise,
               conversion or exchange of Capital Shares Equivalent, if
               applicable) will be deemed to have been received by the Company.
               For purposes of the preceding sentence, the "effective price per
               share for which Common Stock is issuable upon the exercise of
               such Below Base Price Options" is determined by dividing (i) the
               total amount, if any, received or receivable by the Company as
               consideration for the issuance or granting of all such Below Base
               Price Options, plus the minimum aggregate amount of additional
               consideration, if any, payable to the Company upon the exercise
               of all such Below Base Price Options, plus, in the case of
               Capital Shares Equivalent issuable upon the exercise of such
               Below Base Price Options, the minimum aggregate amount of
               additional consideration payable upon the exercise, conversion or
               exchange thereof at the time such Capital Shares Equivalent first
               become exercisable, convertible or exchangeable, by (ii) the
               maximum total number of shares of Common Stock issuable upon the
               exercise of all such Below Base Price Options (assuming full
               conversion of Capital Shares Equivalent, if applicable). No
               further adjustment to the Exercise Price will be made upon the
               actual issuance of such Common Stock upon the exercise of such
               Below Base Price Options or upon the exercise, conversion or
               exchange of Capital Shares Equivalent issuable upon exercise of
               such Below Base Price Options.

                    (B) Issuance of Capital Shares Equivalent. If the Company in
               any manner issues or sells any Capital Shares Equivalent,

                                       8
<PAGE>

               whether or not immediately convertible (other than where the
               same are issuable upon the exercise of Options) and the effective
               price per share for which Common Stock is issuable upon such
               exercise, conversion or exchange is less than the Exercise Price,
               then the maximum total number of shares of Common Stock issuable
               upon the exercise, conversion or exchange of all such Capital
               Shares Equivalent will, as of the date of the issuance of such
               Capital Shares Equivalent, be deemed to be outstanding and to
               have been issued and sold by the Company for such price per share
               and the maximum consideration payable to the Company upon such
               exercise (assuming full exercise, conversion or exchange of
               Capital Shares Equivalent, if applicable) will be deemed to have
               been received by the Company. For the purposes of the preceding
               sentence, the "effective price per share for which Common Stock
               is issuable upon such exercise, conversion or exchange" is
               determined by dividing (i) the total amount, if any, received or
               receivable by the Company as consideration for the issuance or
               sale of all such Capital Shares Equivalent, plus the minimum
               aggregate amount of additional consideration, if any, payable to
               the Company upon the exercise, conversion or exchange thereof at
               the time such Capital Shares Equivalent first become exercisable,
               convertible or exchangeable, by (ii) the maximum total number of
               shares of Common Stock issuable upon the exercise, conversion or
               exchange of all such Capital Shares Equivalent. No further
               adjustment to the Exercise Price will be made upon the actual
               issuance of such Common Stock upon exercise, conversion or
               exchange of such Capital Shares Equivalent.

                    (C) Change in Option Price or Conversion Rate. If there is a
               change at any time in (i) the amount of additional consideration
               payable to the Company upon the exercise of any Options; (ii) the
               amount of additional consideration, if any, payable to the
               Company upon the exercise, conversion or exchange of any Capital
               Shares Equivalent; or (iii) the rate at which any Capital Shares
               Equivalent are convertible into or exchangeable for Common Stock
               (in each such case, other than under or by reason of provisions
               designed to protect against dilution), the Exercise Price in
               effect at the time of such change will be readjusted to the
               Exercise Price which would have been in effect at such time had
               such Options or Capital Shares Equivalent still outstanding
               provided for such changed additional consideration or changed
               conversion rate, as the case may be, at the time initially
               granted, issued or sold.

                    (D) Calculation of Consideration Received. If any Common
               Stock, Options or Capital Shares Equivalent are issued, granted
               or sold for cash, the consideration received therefor for
               purposes of this Warrant will be the amount received by the
               Company therefor, before deduction of reasonable commissions,
               underwriting discounts or allowances or other reasonable expenses
               paid or incurred by the Company in connection with such issuance,
               grant or sale. In case any Common

                                       9
<PAGE>

               Stock, Options or Capital Shares Equivalent are issued or sold
               for a consideration part or all of which shall be other than
               cash, the amount of the consideration other than cash received by
               the Company will be the fair market value of such consideration,
               except where such consideration consists of securities, in which
               case the amount of consideration received by the Company will be
               the fair market value (closing bid price, if traded on any
               market) thereof as of the date of receipt. In case any Common
               Stock, Options or Capital Shares Equivalent are issued in
               connection with any merger or consolidation in which the Company
               is the surviving corporation, the amount of consideration
               therefor will be deemed to be the fair market value of such
               portion of the net assets and business of the non-surviving
               corporation as is attributable to such Common Stock, Options or
               Capital Shares Equivalent, as the case may be. The fair market
               value of any consideration other than cash or securities will be
               determined in good faith by an investment banker or other
               appropriate expert of national reputation selected by the Company
               and reasonably acceptable to the holder hereof, with the costs of
               such appraisal to be borne by the Company.

                    (E) Exceptions to Adjustment of Exercise Price.
               Notwithstanding the foregoing, no adjustment will be made under
               this Section 11(b) in respect of (1) the granting of options to
               employees, officers, directors and key consultants of the Company
               pursuant to any stock option plan or other plan duly adopted by a
               majority of the non-employee members of the Board of Directors of
               the Company or a majority of the members of a committee of
               non-employee directors established for such purpose, or (2) upon
               the exercise of the Debentures or any Debentures of this series
               or of any other series or security issued by the Company in
               connection with the offer and sale of this Company's securities
               pursuant to the Purchase Agreement, or (3) upon the exercise of
               or conversion of any Capital Shares Equivalent or Options issued
               and outstanding on the Original Issue Date, provided that the
               securities have not been amended since the date of the Purchase
               Agreement except as a result of the Purchase Agreement, or (4)
               acquisitions or strategic investments, the primary purpose of
               which is not to raise capital, or (5) the granting of stock,
               stock options and/or warrants to an investment group in
               connection with the advancement of $1 million to the Company,
               which transaction is described in Item 13 of the Company's Annual
               Report on Form 10-K for the fiscal year ended March 31, 2003.

               (iii) Minimum Adjustment of Exercise Price. No adjustment of the
          Exercise Price shall be made in an amount of less than 1% of the
          Exercise Price in effect at the time such adjustment is otherwise
          required to be made, but any such lesser adjustment shall be carried
          forward and shall be made at the time and together with the next
          subsequent adjustment which, together with any

                                       10
<PAGE>

          adjustments so carried forward, shall amount to not less than 1% of
          such Exercise Price.

     12. Reorganization, Reclassification, Merger, Consolidation or Disposition
of Assets. In case the Company shall reorganize its capital, reclassify its
capital stock, consolidate or merge with or into another corporation (where the
Company is not the surviving corporation or where there is a change in or
distribution with respect to the Common Stock of the Company), or sell, transfer
or otherwise dispose of all or substantially all its property, assets or
business to another corporation and, pursuant to the terms of such
reorganization, reclassification, merger, consolidation or disposition of
assets, shares of common stock of the successor or acquiring corporation, or any
cash, shares of stock or other securities or property of any nature whatsoever
(including warrants or other subscription or purchase rights) in addition to or
in lieu of common stock of the successor or acquiring corporation ("Other
Property"), are to be received by or distributed to the holders of Common Stock
of the Company, then the Holder shall have the right thereafter to receive, at
the option of the Holder, (a) upon exercise of this Warrant, the number of
shares of Common Stock of the successor or acquiring corporation or of the
Company, if it is the surviving corporation, and Other Property receivable upon
or as a result of such reorganization, reclassification, merger, consolidation
or disposition of assets by a Holder of the number of shares of Common Stock for
which this Warrant is exercisable immediately prior to such event or (b) cash
equal to the value of this Warrant as determined in accordance with the
Black-Scholes option pricing formula. In case of any such reorganization,
reclassification, merger, consolidation or disposition of assets, the successor
or acquiring corporation (if other than the Company) shall expressly assume the
due and punctual observance and performance of each and every covenant and
condition of this Warrant to be performed and observed by the Company and all
the obligations and liabilities hereunder, subject to such modifications as may
be deemed appropriate (as determined in good faith by resolution of the Board of
Directors of the Company) in order to provide for adjustments of Warrant Shares
for which this Warrant is exercisable which shall be as nearly equivalent as
practicable to the adjustments provided for in this Section 12. For purposes of
this Section 12, "common stock of the successor or acquiring corporation" shall
include stock of such corporation of any class which is not preferred as to
dividends or assets over any other class of stock of such corporation and which
is not subject to redemption and shall also include any evidences of
indebtedness, shares of stock or other securities which are convertible into or
exchangeable for any such stock, either immediately or upon the arrival of a
specified date or the happening of a specified event and any warrants or other
rights to subscribe for or purchase any such stock. The foregoing provisions of
this Section 12 shall similarly apply to successive reorganizations,
reclassifications, mergers, consolidations or disposition of assets.

     13. Voluntary Adjustment by the Company. The Company may at any time during
the term of this Warrant reduce the then current Exercise Price to any amount
and for any period of time deemed appropriate by the Board of Directors of the
Company.

     14. Notice of Adjustment. Whenever the number of Warrant Shares or number
or kind of securities or other property purchasable upon the exercise of this
Warrant or the Exercise Price is adjusted, as herein provided, the Company shall
give notice thereof to the Holder, which notice shall state the number of
Warrant Shares (and other securities or property) purchasable upon the exercise
of this Warrant and the Exercise Price of such Warrant Shares (and other

                                       11
<PAGE>

securities or property) after such adjustment, setting forth a brief statement
of the facts requiring such adjustment and setting forth the computation by
which such adjustment was made.

     15. Notice of Corporate Action. If at any time:

          (a) the Company shall take a record of the holders of its Common Stock
     for the purpose of entitling them to receive a dividend or other
     distribution, or any right to subscribe for or purchase any evidences of
     its indebtedness, any shares of stock of any class or any other securities
     or property, or to receive any other right, or

          (b) there shall be any capital reorganization of the Company, any
     reclassification or recapitalization of the capital stock of the Company or
     any consolidation or merger of the Company with, or any sale, transfer or
     other disposition of all or substantially all the property, assets or
     business of the Company to, another corporation or,

          (c) there shall be a voluntary or involuntary dissolution, liquidation
     or winding up of the Company;

then, in any one or more of such cases, the Company shall give to Holder (i) at
least 20 days' prior written notice of the date on which a record date shall be
selected for such dividend, distribution or right or for determining rights to
vote in respect of any such reorganization, reclassification, merger,
consolidation, sale, transfer, disposition, liquidation or winding up, and (ii)
in the case of any such reorganization, reclassification, merger, consolidation,
sale, transfer, disposition, dissolution, liquidation or winding up, at least 20
days' prior written notice of the date when the same shall take place. Such
notice in accordance with the foregoing clause also shall specify (i) the date
on which any such record is to be taken for the purpose of such dividend,
distribution or right, the date on which the holders of Common Stock shall be
entitled to any such dividend, distribution or right, and the amount and
character thereof, and (ii) the date on which any such reorganization,
reclassification, merger, consolidation, sale, transfer, disposition,
dissolution, liquidation or winding up is to take place and the time, if any
such time is to be fixed, as of which the holders of Common Stock shall be
entitled to exchange their Warrant Shares for securities or other property
deliverable upon such disposition, dissolution, liquidation or winding up. Each
such written notice shall be sufficiently given if addressed to Holder at the
last address of Holder appearing on the books of the Company and delivered in
accordance with Section 17(d).

     16. Authorized Shares. The Company covenants that during the period the
Warrant is outstanding, it will reserve from its authorized and unissued Common
Stock a sufficient number of shares to provide for the issuance of the Warrant
Shares upon the exercise of any purchase rights under this Warrant. The Company
further covenants that its issuance of this Warrant shall constitute full
authority to its officers who are charged with the duty of executing stock
certificates to execute and issue the necessary certificates for the Warrant
Shares upon the exercise of the purchase rights under this Warrant. The Company
will take all such reasonable action as may be necessary to assure that such
Warrant Shares may be issued as provided herein without violation of any
applicable law or regulation, or of any requirements of the Principal Market
upon which the Common Stock may be listed.

                                       12
<PAGE>

     Except and to the extent as waived or consented to by the Holder, the
Company shall not by any action, including, without limitation, amending its
certificate of incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms of this Warrant, but will at all times in good faith assist in the
carrying out of all such terms and in the taking of all such actions as may be
necessary or appropriate to protect the rights of Holder as set forth in this
Warrant against impairment. Without limiting the generality of the foregoing,
the Company will (a) not increase the par value of any Warrant Shares above the
amount payable therefor upon such exercise immediately prior to such increase in
par value, (b) take all such action as may be necessary or appropriate in order
that the Company may validly and legally issue fully paid and nonassessable
Warrant Shares upon the exercise of this Warrant, and (c) use commercially
reasonable efforts to obtain all such authorizations, exemptions or consents
from any public regulatory body having jurisdiction thereof as may be necessary
to enable the Company to perform its obligations under this Warrant.

     Before taking any action which would result in an adjustment in the number
of Warrant Shares for which this Warrant is exercisable or in the Exercise
Price, the Company shall obtain all such authorizations or exemptions thereof,
or consents thereto, as may be necessary from any public regulatory body or
bodies having jurisdiction thereof.

     17. Miscellaneous.

          (a) Jurisdiction. This Warrant shall constitute a contract under the
     laws of California, without regard to its conflict of law, principles or
     rules. Venue shall be exclusively the county of San Diego, California.

          (b) Restrictions. The Holder acknowledges that the Warrant Shares
     acquired upon the exercise of this Warrant, if not registered, will have
     restrictions upon resale imposed by state and federal securities laws.

          (c) Nonwaiver and Expenses. No course of dealing or any delay or
     failure to exercise any right hereunder on the part of Holder shall operate
     as a waiver of such right or otherwise prejudice Holder's rights, powers or
     remedies, notwithstanding all rights hereunder terminate on the Termination
     Date. If the Company willfully and knowingly fails to comply with any
     provision of this Warrant, which results in any material damages to the
     Holder, the Company shall pay to Holder such amounts as shall be sufficient
     to cover any costs and expenses including, but not limited to, reasonable
     attorneys' fees, including those of appellate proceedings, incurred by
     Holder in collecting any amounts due pursuant hereto or in otherwise
     enforcing any of its rights, powers or remedies hereunder.

          (d) Notices. Any notice, request or other document required or
     permitted to be given or delivered to the Holder by the Company shall be
     delivered in accordance with the notice provisions of the Purchase
     Agreement.

                                       13
<PAGE>

          (e) Limitation of Liability. No provision hereof, in the absence of
     any affirmative action by Holder to exercise this Warrant or purchase
     Warrant Shares, and no enumeration herein of the rights or privileges of
     Holder, shall give rise to any liability of Holder for the purchase price
     of any Common Stock or as a stockholder of the Company, whether such
     liability is asserted by the Company or by creditors of the Company.

          (f) Remedies. Holder, in addition to being entitled to exercise all
     rights granted by law, including recovery of damages, will be entitled to
     specific performance of its rights under this Warrant. The Company agrees
     that monetary damages would not be adequate compensation for any loss
     incurred by reason of a breach by it of the provisions of this Warrant and
     hereby agrees to waive the defense in any action for specific performance
     that a remedy at law would be adequate.

          (g) Successors and Assigns. Subject to applicable securities laws,
     this Warrant and the rights and obligations evidenced hereby shall inure to
     the benefit of and be binding upon the successors of the Company and the
     successors and permitted assigns of Holder. The provisions of this Warrant
     are intended to be for the benefit of all Holders from time to time of this
     Warrant and shall be enforceable by any such Holder or holder of Warrant
     Shares.

          (h) Amendment. This Warrant may be modified or amended or the
     provisions hereof waived with the written consent of the Company and the
     Holder.

          (i) Severability. Wherever possible, each provision of this Warrant
     shall be interpreted in such manner as to be effective and valid under
     applicable law, but if any provision of this Warrant shall be prohibited by
     or invalid under applicable law, such provision shall be ineffective to the
     extent of such prohibition or invalidity, without invalidating the
     remainder of such provisions or the remaining provisions of this Warrant.

          (j) Headings. The headings used in this Warrant are for the
     convenience of reference only and shall not, for any purpose, be deemed a
     part of this Warrant.

          (k) Broker-Dealer Provision. To the extent this Warrant is being
     issued to a broker-dealer that is acting as a placement agent in the
     transaction in which it is being issued, any terms, restrictions or
     limitations required by the compensation rules of the National Association
     of Securities Dealers are incorporated by this reference herein.

                              ********************

                                       14
<PAGE>


     IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by
its officer thereunto duly authorized.

Dated:  September 8, 2003
                                          THE SINGING MACHINE COMPANY, INC.

                                          By: /s/ Yi Ping Chan
                                              ----------------
                                              Name: Yi Ping Chan
                                              Title: Chief Operating Officer

                                       15
<PAGE>

                               NOTICE OF EXERCISE

To:      THE SINGING MACHINE COMPANY, INC.

     (1) The undersigned hereby elects to purchase ________ Warrant Shares of
The Singing Machine Company, Inc. pursuant to the terms of the attached Warrant
(only if exercised in full), and tenders herewith payment of the exercise price
in full, together with all applicable transfer taxes, if any.

     (2) Payment shall take the form of (check applicable box):

          [ ] in lawful money of the United States; or

          [ ] the cancellation of such number of Warrant Shares as is
              necessary, in accordance with the formula set forth in subsection
              3(d), to exercise this Warrant with respect to the maximum number
              of Warrant Shares purchasable pursuant to the cashless exercise
              procedure set forth in subsection 3(d).

     (3) Please issue a certificate or certificates representing said Warrant
Shares in the name of the undersigned or in such other name as is specified
below:

         ________________________________________



The Warrant Shares shall be delivered to the following DTC account:

                  ________________________________________

                  ________________________________________

                  ________________________________________


     (4) Accredited Investor. The undersigned is an "accredited investor" as
defined in Regulation D promulgated under the Securities Act of 1933, as
amended.

                                         [PURCHASER]


                                          By: ______________________________
                                              Name:
                                              Title:

                                          Dated:  __________________________

<PAGE>


                                 ASSIGNMENT FORM

                    (To assign the foregoing warrant, execute
                   this form and supply required information.
                 Do not use this form to exercise the warrant.)

     FOR VALUE RECEIVED, the foregoing Warrant and all rights evidenced thereby
are hereby assigned to


_______________________________________________ whose address is

_______________________________________________________________.



_______________________________________________________________

                                           Dated:  ______________, _______


                           Holder's Signature:  _____________________________

                           Holder's Address:    _____________________________

                                                _____________________________



Signature Guaranteed:  ___________________________________________


NOTE: The signature to this Assignment Form must correspond with the name as it
appears on the face of the Warrant, without alteration or enlargement or any
change whatsoever, and must be guaranteed by a bank or trust company. Officers
of corporations and those acting in a fiduciary or other representative capacity
should file proper evidence of authority to assign the foregoing Warrant.



</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.6
<SEQUENCE>9
<FILENAME>registrationrightsagrmnt.txt
<DESCRIPTION>REGISTRATION RIGHTS AGREEMENT
<TEXT>

                                                                    EXHIBIT 10.6

                          REGISTRATION RIGHTS AGREEMENT

         This Registration Rights Agreement (this "Agreement") is made and
entered into as of August 20, 2003, among The Singing Machine Company, Inc., a
Delaware corporation (the "Company"), and the purchasers signatory hereto (each
such purchaser is a "Purchaser" and all such purchasers are, collectively, the
"Purchasers").

         This Agreement is made pursuant to the Securities Purchase Agreement,
dated as of the date hereof among the Company and the Purchasers (the "Purchase
Agreement"). This Agreement is also subject to the terms and conditions of a
subordination agreement (the "LaSalle Subordination Agreement") that the Holder
has signed with LaSalle Business Credit, LLC, the Company's commercial lender,
on about the date hereof and any future subordination agreements that it is
required to sign during the time period that the Company has any obligations
under the Transaction Documents (collectively, any or all such agreements shall
be referred to as the "Subordination Agreement"). Any inconsistencies between
this Agreement and the Subordination Agreement will be resolved in favor of the
terms of the Subordination Agreement.

         The Company and the Purchasers hereby agree as follows:

         1. Definitions

         CAPITALIZED TERMS USED AND NOT OTHERWISE DEFINED HEREIN THAT ARE
DEFINED IN THE PURCHASE AGREEMENT SHALL HAVE THE MEANINGS GIVEN SUCH TERMS IN
THE PURCHASE AGREEMENT. As used in this Agreement, the following terms shall
have the following meanings:

                  "Effectiveness Date" means, with respect to the initial
         Registration Statement required hereunder, the 90th calendar day
         following the Closing Date (150th calendar day following the Closing
         Date in the event of a "full review" of the Registration Statement by
         the Commission) and, with respect to any additional Registration
         Statements which may be required pursuant to Section 3(c), the 90th
         calendar day following the date on which the Company first knows, or
         reasonably should have known, that such additional Registration
         Statement is required hereunder; provided, however, in the event the
         Company is notified by the Commission that one of the above
         Registration Statements will not be reviewed or is no longer subject to
         further review and comments, the Effectiveness Date as to such
         Registration Statement shall be the fifth Trading Day following the
         date on which the Company is so notified if such date precedes the
         dates required above.

                  "Effectiveness Period" shall have the meaning set forth in
         Section 2(a).

                  "Filing Date" means, with respect to the initial Registration
         Atement required hereunder, the 30th day following the Closing Date
         and, with respect to any additional Registration Statements which may


                                       1
<PAGE>

         be required pursuant to Section 3(c), the 15th day following the date
         on which the Company first knows, or reasonably should have known that
         such additional Registration Statement is required hereunder.

                  "Holder" or "Holders" means the holder or holders, as the case
         may be, from time to time of Registrable Securities.

                  "Indemnified Party" shall have the meaning set forth in
         Section 5(c) hereof.

                  "Indemnifying Party" shall have the meaning set forth in
         Section 5(c) hereof.

                  "Losses" shall have the meaning set forth in Section 5(a).

                  "Proceeding" means an action, claim, suit, investigation or
         proceeding (including, without limitation, an investigation or partial
         proceeding, such as a deposition), whether commenced or threatened.

                  "Prospectus" means the prospectus included in a Registration
         Statement (including, without limitation, a prospectus that includes
         any information previously omitted from a prospectus filed as part of
         an effective registration statement in reliance upon Rule 430A
         promulgated under the Securities Act), as amended or supplemented by
         any prospectus supplement, with respect to the terms of the offering of
         any portion of the Registrable Securities covered by a Registration
         Statement, and all other amendments and supplements to the Prospectus,
         including post-effective amendments, and all material incorporated by
         reference or deemed to be incorporated by reference in such Prospectus.

                  "Registrable Securities" means (i) all of the shares of Common
         Stock issuable upon conversion in full of the Debentures, (ii) all
         shares issuable as interest on the Debentures assuming all interest
         payments are made in shares of Common Stock and the Debentures are held
         until maturity, (iii) all Warrant Shares, (iv) any securities issued or
         issuable upon any stock split, dividend or other distribution
         recapitalization or similar event with respect to the foregoing, (v)
         any additional share issuable in connection with any anti-dilution
         provisions in the Debentures and (vi) any shares of common stock
         issued, or issuable upon exercise of warrants issued, to Roth Capital
         Partners, LLC in connection with the consummation of the transactions
         contemplated by the Purchase Agreement.

                  "Registration Statement" means the registration statements
         required to be filed hereunder and any additional registration
         statements contemplated by Section 3(c), including (in each case) the
         Prospectus, amendments and supplements to such registration statement
         or Prospectus, including pre- and post-effective amendments, all
         exhibits thereto, and all material incorporated by reference or deemed
         to be incorporated by reference in such registration statement.

                                       2
<PAGE>

                  "Rule 415" means Rule 415 promulgated by the Commission
         pursuant to the Securities Act, as such Rule may be amended from time
         to time, or any similar rule or regulation hereafter adopted by the
         Commission having substantially the same purpose and effect as such
         Rule.

                  "Rule 424" means Rule 424 promulgated by the Commission
         pursuant to the Securities Act, as such Rule may be amended from time
         to time, or any similar rule or regulation hereafter adopted by the
         Commission having substantially the same purpose and effect as such
         Rule.

                  "Securities Act" means the Securities Act of 1933, as amended.

                  "Warrants" shall mean the Common Stock purchase warrants
         issued to the Purchasers pursuant to the Purchase Agreement.

                  "Warrant Shares" shall mean the shares of Common Stock
         issuable upon exercise of the Warrants.

         2. Shelf Registration

         (a) On or prior to each Filing Date, the Company shall prepare and file
with the Commission a "Shelf" Registration Statement covering the resale of 130%
of the Registrable Securities on such Filing Date for an offering to be made on
a continuous basis pursuant to Rule 415. The Registration Statement shall be on
Form S-3 (unless the Company is not then eligible to register for resale the
Registrable Securities on Form S-3, in which case such registration shall be on
another appropriate form in accordance herewith) and shall contain (unless
otherwise directed by the Holders) substantially the "Plan of Distribution"
attached hereto as Annex A. Subject to the terms of this Agreement, the Company
shall use its best efforts to cause the Registration Statement to be declared
effective under the Securities Act as promptly as possible after the filing
thereof, but in any event prior to the applicable Effectiveness Date, and shall
use its best efforts to keep such Registration Statement continuously effective
under the Securities Act until all Registrable Securities covered by such
Registration Statement have been sold or may be sold without volume restrictions
pursuant to Rule 144(k) as determined by the counsel to the Company pursuant to
a written opinion letter to such effect, addressed and acceptable to the
Company's transfer agent and the affected Holders (the "Effectiveness Period").
The Company shall immediately notify the Holders via facsimile of the
effectiveness of the Registration Statement on the same day that the Company
receives notification of the effectiveness from the Commission.

         (b) If: (i) a Registration Statement is not filed on or prior to its
Filing Date (if the Company files a Registration Statement without affording the
Holders the opportunity to review and comment on the same as required by Section
3(a), the Company shall not be deemed to have satisfied clause (i)), or (ii) the


                                       3
<PAGE>

Company fails to file with the Commission a request for acceleration in
accordance with Rule 461 promulgated under the Securities Act, within five
Trading Days of the date that the Company is notified (orally or in writing,
whichever is earlier) by the Commission that a Registration Statement will not
be "reviewed," or not subject to further review, or (iii) prior to its
Effectiveness Date, the Company fails to file a pre-effective amendment and
otherwise respond in writing to comments made by the Commission in respect of
such Registration Statement within 10 Trading Days after the receipt of comments
by or notice from the Commission that such amendment is required in order for a
Registration Statement to be declared effective, or (iv) a Registration
Statement filed or required to be filed hereunder is not declared effective by
the Commission by its Effectiveness Date, or (v) after the Effectiveness Date, a
Registration Statement ceases for any reason to remain continuously effective as
to all Registrable Securities for which it is required to be effective, or the
Holders are not permitted to utilize the Prospectus therein to resell such
Registrable Securities for 20 consecutive Trading Days or an aggregate of 30
Trading Days during any 12-month period (which need not be consecutive Trading
Days) (any such failure or breach being referred to as an "Event", and for
purposes of clause (i) or (iv) the date on which such Event occurs, or for
purposes of clause (ii) the date on which such five Trading Day period is
exceeded, or for purposes of clause (iii) the date which such 10 Trading Day
period is exceeded, or for purposes of clause (v) the date on which such 20 or
30 Trading Day period, as applicable, is exceeded being referred to as "Event
Date"), then, on each such Event Date and every monthly anniversary thereof
until the applicable Event is cured, the Company shall pay, subject to the terms
of the Subordination Agreement, to each Holder an amount in cash, as liquidated
damages and not as a penalty, equal to 2.0% per month, pro rata on a daily
basis, of (i) the Subscription Amount paid by such Holder pursuant to the
Purchase Agreement for Debentures then held by such Holder, and (ii) if the
Warrants are "in the money" and then held by the Holder, the value of any
outstanding Warrants (valued at the difference between the average of the VWAPs
during the applicable month and the Exercise Price multiplied by the number of
shares of Common Stock the Warrants are exercisable into). By way of example, if
a Holder at the time of an Event holds $500,000 principal amount of debentures
and such Holder's Warrants are in the money by $50,000, on average as calculated
above, at the time of such Event, the Company shall pay such Holder $11,000 at
such time and $11,000 per month (pro-rated if partial months) until such Event
no longer exists. If the Company fails to pay any liquidated damages pursuant to
this Section in full within seven days after the date payable, the Company will
pay, subject to the terms of the Subordination Agreement, interest thereon at a
rate of 18% per annum (or such lesser maximum amount that is permitted to be
paid by applicable law) to the Holder, accruing daily from the date such
liquidated damages are due until such amounts, plus all such interest thereon,
are paid in full. The liquidated damages pursuant to the terms hereof shall
apply on a pro-rata basis for any portion of a month prior to the cure of an
Event. All remedies are subject to the terms of the Subordination Agreement.

         3. Registration Procedures

         In connection with the Company's registration obligations hereunder,
the Company shall:

                                       4
<PAGE>

         (a) Not less than five Trading Days prior to the filing of each
Registration Statement or any related Prospectus or any amendment or supplement
thereto (including any document that would be incorporated or deemed to be
incorporated therein by reference), the Company shall, (i) furnish to each
Holder copies of all such documents proposed to be filed, which documents (other
than those incorporated or deemed to be incorporated by reference) will be
subject to the review of such Holders, and (ii) cause its officers and
directors, counsel and independent certified public accountants to respond to
such inquiries as shall be necessary, in the reasonable opinion of respective
counsel to conduct a reasonable investigation within the meaning of the
Securities Act. The Company shall not file the Registration Statement or any
such Prospectus or any amendments or supplements thereto to which the Holders of
a majority of the Registrable Securities shall reasonably and in good faith
object, provided, the Company is notified of such objection in writing no later
than 3 Trading Days after the Holders have been so furnished copies of such
documents.

         (b) (i) Prepare and file with the Commission such amendments, including
post-effective amendments, to a Registration Statement and the Prospectus used
in connection therewith as may be necessary to keep a Registration Statement
continuously effective as to the applicable Registrable Securities for the
Effectiveness Period and prepare and file with the Commission such additional
Registration Statements in order to register for resale under the Securities Act
all of the Registrable Securities; (ii) cause the related Prospectus to be
amended or supplemented by any required Prospectus supplement (subject to the
terms of this Agreement), and as so supplemented or amended to be filed pursuant
to Rule 424; (iii) respond as promptly as reasonably possible, and in any event
within 10 Trading Days, to any comments received from the Commission with
respect to a Registration Statement or any amendment thereto and as promptly as
reasonably possible provide the Holders true and complete copies of all
correspondence from and to the Commission relating to a Registration Statement;
and (iv) comply in all material respects with the provisions of the Securities
Act and the Exchange Act with respect to the disposition of all Registrable
Securities covered by a Registration Statement during the applicable period in
accordance (subject to the terms of this Agreement) with the intended methods of
disposition by the Holders thereof set forth in such Registration Statement as
so amended or in such Prospectus as so supplemented.

         (c) If during the Effectiveness Period, the number of Registrable
Securities at any time exceeds 85% of the number of shares of Common Stock then
registered in a Registration Statement, then the Company shall file as soon as
reasonably practicable but in any case prior to the applicable Filing Date, an
additional Registration Statement covering the resale by the Holders of not less
than 130% of the number of such Registrable Securities.

         (d) Notify the Holders of Registrable Securities to be sold (which
notice shall, pursuant to clauses (ii) through (vi) hereof, shall be accompanied
by an instruction to suspend the use of the Prospectus until the requisite
changes have been made) as promptly as reasonably possible (and, in the case of
(i)(A) below, not less than five Trading Days prior to such filing) and (if
requested by any such Person) confirm such notice in writing no later than one
Trading Day following the day (i)(A) when a Prospectus or any Prospectus


                                       5
<PAGE>

supplement or post-effective amendment to a Registration Statement is proposed
to be filed; (B) when the Commission notifies the Company whether there will be
a "review" of such Registration Statement and whenever the Commission comments
in writing on such Registration Statement (the Company shall provide true and
complete copies thereof and all written responses thereto to each of the
Holders); and (C) with respect to a Registration Statement or any post-effective
amendment, when the same has become effective; (ii) of any request by the
Commission or any other Federal or state governmental authority for amendments
or supplements to a Registration Statement or Prospectus or for additional
information; (iii) of the issuance by the Commission of any stop order
suspending the effectiveness of a Registration Statement covering any or all of
the Registrable Securities or the initiation of any Proceedings for that
purpose; (iv) of the receipt by the Company of any notification with respect to
the suspension of the qualification or exemption from qualification of any of
the Registrable Securities for sale in any jurisdiction, or the initiation or
threatening of any Proceeding for such purpose; (v) of the occurrence of any
event or passage of time that makes the financial statements included in a
Registration Statement ineligible for inclusion therein or any statement made in
a Registration Statement or Prospectus or any document incorporated or deemed to
be incorporated therein by reference untrue in any material respect or that
requires any revisions to a Registration Statement, Prospectus or other
documents so that, in the case of a Registration Statement or the Prospectus, as
the case may be, it will not contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading; and (vi) the occurrence or existence of any pending
corporate development with respect to the Company that the Company believes may
be material and that, in the determination of the Company, makes it not in the
best interest of the Company to allow continued availability or the Registration
Statement or Prospectus; provided that any and all of such information shall
remain confidential to each Holder until such information otherwise becomes
public, unless disclosure by a Holder is required by law; provided, further,
notwithstanding each Holder's agreement to keep such information confidential,
the Holders make no acknowledgement that any such information is material,
non-public information.

         (e) Promptly deliver to each Holder, without charge, as many copies of
the Prospectus or Prospectuses (including each form of prospectus) and each
amendment or supplement thereto as such Persons may reasonably request. Subject
to the terms of this Agreement, the Company hereby consents to the use of such
Prospectus and each amendment or supplement thereto by each of the selling
Holders in connection with the offering and sale of the Registrable Securities
covered by such Prospectus and any amendment or supplement thereto.

         (f) Use commercially reasonable efforts to register or qualify the
resale of such Registrable Securities as required under applicable securities or
Blue Sky laws of each State within the United States as any Holder requests in
writing, to keep each such registration or qualification (or exemption
therefrom) effective during the Effectiveness Period; provided, that the Company
shall not be required to qualify generally to do business in any jurisdiction
where it is not then so qualified or subject the Company to any material tax in
any such jurisdiction where it is not then so subject.

                                       6
<PAGE>

         (g) Cooperate with the Holders to facilitate the timely preparation and
delivery of certificates representing Registrable Securities to be delivered to
a transferee pursuant to a Registration Statement, which certificates shall be
free, to the extent permitted by the Purchase Agreement, of all restrictive
legends, and to enable such Registrable Securities to be in such denominations
and registered in such names as any such Holders may request.

         (h) Upon the occurrence of any event contemplated by this Section 3, as
promptly as reasonably possible under the circumstances taking into account the
Company's good faith assessment of any adverse consequences to the Company and
its stockholders of the premature disclosure of such eventt, prepare a
supplement or amendment, including a post-effective amendment, to a Registration
Statement or a supplement to the related Prospectus or any document incorporated
or deemed to be incorporated therein by reference, and file any other required
document so that, as thereafter delivered, neither a Registration Statement nor
such Prospectus will contain an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading. If the Company notifies the Holders in accordance with clauses
(ii) through (vi) of Section 3(d) above to suspend the use of the use of any
Prospectus until the requisite changes to such Prospectus have been made, or the
Company otherwise notifies the Holders of its election to suspend the
availability of a Registration Statement and Prospectus pursuant to clause (vi)
of Section 3(d), then the Holders shall suspend use of such Prospectus. The
Company will use its best efforts to ensure that the use of the Prospectus may
be resumed as promptly as is practicable, except that in the case of suspension
of the availability of a Registration Statement and Prospectus pursuant to
clause (vi) of Section 3(d), the Company shall not be required to take such
action until such time as it shall determine that the continued availability of
the Registration Statement and Prospectus is no longer not in the best interest
of the Company. Notwithstanding the Company's right to suspend the use of the
prospectus hereunder, the Company shall remain liable to the Holders pursuant to
Section 2(c) for any suspensions of the Registration Statement hereunder which
otherwise require payment thereunder.

         (i) Comply with all applicable rules and regulations of the Commission.

         (j) Use its best efforts to avoid the issuance of, or, if issued,
obtain the withdrawal of (i) any order suspending the effectiveness of a
Registration Statement, or (ii) any suspension of the qualification (or
exemption from qualification) of any of the Registrable Securities for sale in
any jurisdiction, at the earliest practicable moment.

         (k) The Company may require, at any time prior to the third Trading Day
prior to the Filing Date, each Holder to furnish to the Company a statement as
to the number of shares of Common Stock beneficially owned by such Holder and,


                                       7
<PAGE>

if requested by the Commission, the controlling person thereof, within three
Trading days of the Company's request. During any periods that the Company is
unable to meet its obligations hereunder with respect to the registration of the
Registrable Securities solely because any Holder fails to furnish such
information within three Trading Days of the Company's request, any liquidated
damages that are accruing at such time shall be tolled and any Event that may
otherwise occur solely because of such delay shall be suspended, until such
information is delivered to the Company.

         4. Registration Expenses. All fees and expenses incident to the
performance of or compliance with this Agreement by the Company shall be borne
by the Company whether or not any Registrable Securities are sold pursuant to
the Registration Statement. The fees and expenses referred to in the foregoing
sentence shall include, without limitation, (i) all registration and filing fees
(including, without limitation, fees and expenses (A) with respect to filings
required to be made with the Principal Market on which the Common Stock is then
listed for trading, and (B) in compliance with applicable state securities or
Blue Sky laws reasonably agreed to by the Company in writing (including, without
limitation, fees and disbursements of counsel for the Company in connection with
Blue Sky qualifications or exemptions of the Registrable Securities and
determination of the eligibility of the Registrable Securities for investment
under the laws of such jurisdictions as requested by the Holders), (ii) printing
expenses (including, without limitation, expenses of printing certificates for
Registrable Securities and of printing prospectuses requested by the Holders),
(iii) messenger, telephone and delivery expenses, (iv) fees and disbursements of
counsel for the Company, and (v) fees and expenses of all other Persons retained
by the Company in connection with the consummation of the transactions
contemplated by this Agreement. In addition, the Company shall be responsible
for all of its internal expenses incurred in connection with the consummation of
the transactions contemplated by this Agreement (including, without limitation,
all salaries and expenses of its officers and employees performing legal or
accounting duties), the expense of any annual audit and the fees and expenses
incurred in connection with the listing of the Registrable Securities on any
securities exchange as required hereunder. In no event shall the Company be
responsible for any broker or similar commissions or, except to the extent
provided for in the Transaction Documents, any legal fees or other costs of the
Holders.

         5. Indemnification

         (a) Indemnification by the Company. The Company shall, notwithstanding
any termination of this Agreement, indemnify and hold harmless each Holder, the
officers, directors, agents, brokers (including brokers who offer and sell
Registrable Securities as principal as a result of a pledge or any failure to
perform under a margin call of Common Stock), investment advisors and employees
of each of them, each Person who controls any such Holder (within the meaning of
Section 15 of the Securities Act or Section 20 of the Exchange Act) and the
officers, directors, agents and employees of each such controlling Person, to
the fullest extent permitted by applicable law, from and against any and all
losses, claims, damages, liabilities, costs (including, without limitation,
costs of preparation and reasonable attorneys' fees) and expenses (collectively,


                                       8
<PAGE>

"Losses"), as incurred, arising out of or relating to any untrue or alleged
untrue statement of a material fact contained in a Registration Statement, any
Prospectus or any form of prospectus or in any amendment or supplement thereto
or in any preliminary prospectus, or arising out of or relating to any omission
or alleged omission of a material fact required to be stated therein or
necessary to make the statements therein (in the case of any Prospectus or form
of prospectus or supplement thereto, in light of the circumstances under which
they were made) not misleading, except to the extent, but only to the extent,
that (1) such untrue statements or omissions or alleged untrue statements or
omissions are based upon information regarding such Holder furnished in writing
to the Company by such Holder expressly for use therein, or to the extent that
such information relates to such Holder or such Holder's proposed method of
distribution of Registrable Securities and was reviewed and expressly approved
in writing by such Holder expressly for use in a Registration Statement, such
Prospectus or such form of Prospectus or in any amendment or supplement thereto
or (2) in the case of an occurrence of an event of the type specified in Section
3(d)(ii)-(vi), the use by such Holder of an outdated or defective Prospectus
after the Company has notified such Holder in writing that the Prospectus is
outdated or defective and prior to the receipt by such Holder of the Advice
contemplated in Section 6(e). The Company shall notify the Holders promptly of
the institution, threat or assertion of any Proceeding arising from or in
connection with the transactions contemplated by this Agreement of which the
Company is aware.

         (b) Indemnification by Holders. Each Holder shall, severally and not
jointly, indemnify and hold harmless the Company, its directors, officers,
agents and employees, each Person who controls the Company (within the meaning
of Section 15 of the Securities Act and Section 20 of the Exchange Act), and the
directors, officers, agents or employees of such controlling Persons, to the
fullest extent permitted by applicable law, from and against all Losses (as
determined by a court of competent jurisdiction in a final judgment not subject
to appeal or review) arising out of or based upon any untrue statement of a
material fact contained in any Registration Statement, any Prospectus, or any
form of prospectus, or in any amendment or supplement thereto, or arising solely
out of or based solely upon: (i) such Holder's failure to comply with the
prospectus delivery requirements of the Securities Act or (ii) any omission of a
material fact required to be stated therein or necessary to make the statements
therein not misleading to the extent, but only to the extent, such untrue
statement or omission is contained in any information so furnished in writing by
such Holder to the Company specifically for inclusion in such Registration
Statement or such Prospectus or to the extent that (1) such untrue statements or
omissions are based upon information regarding such Holder furnished in writing
to the Company by such Holder expressly for use therein, or to the extent such
information relates to such Holder or such Holder's proposed method of
distribution of Registrable Securities and was reviewed and expressly approved
in writing by such Holder expressly for use in the Registration Statement, such
Prospectus or such form of Prospectus or in any amendment or supplement thereto


                                       9
<PAGE>

or (2) in the case of an occurrence of an event of the type specified in Section
3(d)(ii)-(vi), the use by such Holder of an outdated or defective Prospectus
after the Company has notified such Holder in writing that the Prospectus is
outdated or defective and prior to the receipt by such Holder of the Advice
contemplated in Section 6(e). In no event shall the liability of any selling
Holder hereunder be greater in amount than the dollar amount of the net proceeds
received by such Holder upon the sale of the Registrable Securities giving rise
to such indemnification obligation.

         (c) Conduct of Indemnification Proceedings. If any Proceeding shall be
brought or asserted against any Person entitled to indemnity hereunder (an
"Indemnified Party"), such Indemnified Party shall promptly notify the Person
from whom indemnity is sought (the "Indemnifying Party") in writing, and the
Indemnifying Party shall assume the defense thereof, including the employment of
counsel reasonably satisfactory to the Indemnified Party and the payment of all
fees and expenses incurred in connection with defense thereof; provided, that
the failure of any Indemnified Party to give such notice shall not relieve the
Indemnifying Party of its obligations or liabilities pursuant to this Agreement,
except (and only) to the extent that such failure shall have prejudiced the
Indemnifying Party.

         An Indemnified Party shall have the right to employ separate counsel in
any such Proceeding and to participate in the defense thereof, but the fees and
expenses of such counsel shall be at the expense of such Indemnified Party or
Parties unless: (1) the Indemnifying Party has agreed in writing to pay such
fees and expenses; or (2) the Indemnifying Party shall have failed promptly to
assume the defense of such Proceeding and to employ counsel reasonably
satisfactory to such Indemnified Party in any such Proceeding; or (3) the named
parties to any such Proceeding (including any impleaded parties) include both
such Indemnified Party and the Indemnifying Party, and such Indemnified Party
shall have been advised by counsel that a material conflict of interest is
likely to exist if the same counsel were to represent such Indemnified Party and
the Indemnifying Party (in which case, if such Indemnified Party notifies the
Indemnifying Party in writing that it elects to employ separate counsel at the
expense of the Indemnifying Party, the Indemnifying Party shall not have the
right to assume the defense thereof and the expense of one such counsel for each
Holder shall be at the expense of the Indemnifying Party). The Indemnifying
Party shall not be liable for any settlement of any such Proceeding effected
without its written consent, which consent shall not be unreasonably withheld.
No Indemnifying Party shall, without the prior written consent of the
Indemnified Party, effect any settlement of any pending Proceeding in respect of
which any Indemnified Party is a party, unless such settlement includes an
unconditional release of such Indemnified Party from all liability on claims
that are the subject matter of such Proceeding.

         Subject to the terms of this Agreement, all fees and expenses of the
Indemnified Party (including reasonable fees and expenses to the extent incurred
in connection with investigating or preparing to defend such Proceeding in a
manner not inconsistent with this Section) shall be paid to the Indemnified
Party, as incurred, within ten Trading Days of written notice thereof to the
Indemnifying Party (regardless of whether it is ultimately determined that an
Indemnified Party is not entitled to indemnification hereunder; provided, that
the Indemnifying Party may require such Indemnified Party to undertake to
reimburse all such fees and expenses to the extent it is finally judicially
determined that such Indemnified Party is not entitled to indemnification
hereunder).

                                       10
<PAGE>

         (d) Contribution. If a claim for indemnification under Section 5(a) or
5(b) is unavailable to an Indemnified Party (by reason of public policy or
otherwise), then each Indemnifying Party, in lieu of indemnifying such
Indemnified Party, shall contribute to the amount paid or payable by such
Indemnified Party as a result of such Losses, in such proportion as is
appropriate to reflect the relative fault of the Indemnifying Party and
Indemnified Party in connection with the actions, statements or omissions that
resulted in such Losses as well as any other relevant equitable considerations.
The relative fault of such Indemnifying Party and Indemnified Party shall be
determined by reference to, among other things, whether any action in question,
including any untrue or alleged untrue statement of a material fact or omission
or alleged omission of a material fact, has been taken or made by, or relates to
information supplied by, such Indemnifying Party or Indemnified Party, and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such action, statement or omission. The amount paid or
payable by a party as a result of any Losses shall be deemed to include, subject
to the limitations set forth in Section 5(c), any reasonable attorneys' or other
reasonable fees or expenses incurred by such party in connection with any
Proceeding to the extent such party would have been indemnified for such fees or
expenses if the indemnification provided for in this Section was available to
such party in accordance with its terms.

         The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 5(d) were determined by pro rata
allocation or by any other method of allocation that does not take into account
the equitable considerations referred to in the immediately preceding paragraph.
Notwithstanding the provisions of this Section 5(d), no Holder shall be required
to contribute, in the aggregate, any amount in excess of the amount by which the
proceeds actually received by such Holder from the sale of the Registrable
Securities subject to the Proceeding exceeds the amount of any damages that such
Holder has otherwise been required to pay by reason of such untrue or alleged
untrue statement or omission or alleged omission.

         The indemnity and contribution agreements contained in this Section are
in addition to any liability that the Indemnifying Parties may have to the
Indemnified Parties.

         6. Miscellaneous

         (a) Amendments and Waivers. The provisions of this Agreement, including
the provisions of this sentence, may not be amended, modified or supplemented,
and waivers or consents to departures from the provisions hereof may not be
given, unless the same shall be in writing and signed by the Company and all of
the Holders of the then outstanding Registrable Securities. Notwithstanding the
foregoing, a waiver or consent to depart from the provisions hereof with respect
to a matter that relates exclusively to the rights of Holders and that does not
directly or indirectly affect the rights of other Holders may be given by


                                       11
<PAGE>

Holders of all of the Registrable Securities to which such waiver or consent
relates; provided, however, that the provisions of this sentence may not be
amended, modified, or supplemented except in accordance with the provisions of
the immediately preceding sentence.

         (b) No Inconsistent Agreements. Neither the Company nor any of its
subsidiaries has entered, as of the date hereof, nor shall the Company or any of
its subsidiaries, on or after the date of this Agreement, enter into any
agreement with respect to its securities, that would have the effect of
impairing the rights granted to the Holders in this Agreement or otherwise
conflicts with the provisions hereof. Except as set forth on Schedule 6(b),
neither the Company nor any of its subsidiaries has previously entered into any
agreement granting any registration rights with respect to any of its securities
to any Person that have not been satisfied in full.

         (c) No Piggyback on Registrations. Except as set forth on Schedule 6(c)
attached hereto, neither the Company nor any of its security holders (other than
the Holders in such capacity pursuant hereto) may include securities of the
Company in the Registration Statement other than the Registrable Securities, and
the Company shall not after the date hereof enter into any agreement providing
any such right to add other securities onto the Registration Statement to any of
its security holders. The Company shall not file any other registration
statement, other than on Form S-8, until the initial Registration Statement
required hereunder is declared effective by the Commission, provided that this
Section 6(c) shall not prohibit the Company from filing amendments to
registration statements already filed.

         (d) Compliance. Each Holder covenants and agrees that it will comply
with the prospectus delivery requirements of the Securities Act as applicable to
it in connection with sales of Registrable Securities pursuant to the
Registration Statement.

         (e) Discontinued Disposition. Each Holder agrees by its acquisition of
such Registrable Securities that, upon receipt of a notice from the Company of
the occurrence of any event of the kind described in Sections 3(d)(ii), (iii) or
(vi), such Holder will forthwith discontinue disposition of such Registrable
Securities under a Registration Statement until such Holder's receipt of the
copies of the supplemented Prospectus and/or amended Registration Statement
contemplated by Section 3(h), or until it is advised in writing (the "Advice")
by the Company that the use of the applicable Prospectus may be resumed, and, in
either case, has received copies of any additional or supplemental filings that
are incorporated or deemed to be incorporated by reference in such Prospectus or
Registration Statement. The Company may provide appropriate stop orders to
enforce the provisions of this paragraph. The Company agrees and acknowledges
that any periods during which the Holder is required to discontinue the
disposition of the Registrable Securities hereunder shall be subject to the
provisions of Section 2(b).

         (f) Piggy-Back Registrations. If at any time during the Effectiveness
Period there is not an effective Registration Statement covering all of the
Registrable Securities and the Company shall determine to prepare and file with
the Commission a registration statement relating to an offering for its own


                                       12
<PAGE>

account or the account of others under the Securities Act of any of its equity
securities, other than on Form S-4 or Form S-8 (each as promulgated under the
Securities Act) or their then equivalents relating to equity securities to be
issued solely in connection with any acquisition of any entity or business or
equity securities issuable in connection with stock option or other employee
benefit plans, then the Company shall send to each Holder written notice of such
determination and, if within fifteen days after receipt of such notice, any such
Holder shall so request in writing, the Company shall include in such
registration statement all or any part of such Registrable Securities such
holder requests to be registered; provided, that, the Company shall not be
required to register any Registrable Securities pursuant to this Section 6(f)
that are eligible for resale pursuant to Rule 144(k) promulgated under the
Securities Act or that are the subject of a then effective Registration
Statement.

         (g) Notices. Any and all notices or other communications or deliveries
required or permitted to be provided hereunder shall be delivered as set forth
in the Purchase Agreement.

         (h) Successors and Assigns. This Agreement shall inure to the benefit
of and be binding upon the successors and permitted assigns of each of the
parties and shall inure to the benefit of each Holder. The Company may not
assign its rights or obligations hereunder without the prior written consent of
all of the Holders of the then-outstanding Registrable Securities. Each Holder
may assign their respective rights hereunder in the manner and to the Persons as
permitted under the Purchase Agreement.

         (i) Counterparts. This Agreement may be executed in any number of
counterparts, each of which when so executed shall be deemed to be an original
and, all of which taken together shall constitute one and the same Agreement. In
the event that any signature is delivered by facsimile transmission, such
signature shall create a valid binding obligation of the party executing (or on
whose behalf such signature is executed) the same with the same force and effect
as if such facsimile signature were the original thereof.

         (j) Governing Law. All questions concerning the construction, validity,
enforcement and interpretation of this Agreement shall be governed by and
construed and enforced in accordance with the internal laws of the State of New
York, without regard to the principles of conflicts of law thereof. Each party
hereby irrevocably submits to the exclusive jurisdiction of the state and
federal courts sitting in the City of New York, Borough of Manhattan, for the
adjudication of any dispute hereunder or in connection herewith or with any
transaction contemplated hereby or discussed herein, and hereby irrevocably
waives, and agrees not to assert in any suit, action or proceeding, any claim
that it is not personally subject to the jurisdiction of any such court, that
such suit, action or proceeding is improper. Each party hereby irrevocably
waives personal service of process and consents to process being served in any
such suit, action or proceeding by mailing a copy thereof to such party at the
address in effect for notices to it under this Agreement and agrees that such
service shall constitute good and sufficient service of process and notice
thereof. Nothing contained herein shall be deemed to limit in any way any right
to serve process in any manner permitted by law. Each party hereto hereby


                                       13
<PAGE>

irrevocably waives, to the fullest extent permitted by applicable law, any and
all right to trial by jury in any legal proceeding arising out of or relating to
this Agreement or the transactions contemplated hereby. If either party shall
commence a Proceeding to enforce any provisions of this Agreement, then the
prevailing party in such Proceeding shall be reimbursed by the other party for
its attorneys fees and other costs and expenses incurred with the investigation,
preparation and prosecution of such Proceeding.

         (k) Cumulative Remedies. The remedies provided herein are cumulative
and not exclusive of any remedies provided by law.

         (l) Severability. If any term, provision, covenant or restriction of
this Agreement is held by a court of competent jurisdiction to be invalid,
illegal, void or unenforceable, the remainder of the terms, provisions,
covenants and restrictions set forth herein shall remain in full force and
effect and shall in no way be affected, impaired or invalidated, and the parties
hereto shall use their reasonable efforts to find and employ an alternative
means to achieve the same or substantially the same result as that contemplated
by such term, provision, covenant or restriction. It is hereby stipulated and
declared to be the intention of the parties that they would have executed the
remaining terms, provisions, covenants and restrictions without including any of
such that may be hereafter declared invalid, illegal, void or unenforceable.

         (m) Headings. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.

         (n) Independent Nature of Purchasers' Obligations and Rights. The
obligations of each Purchaser hereunder is several and not joint with the
obligations of any other Purchaser hereunder, and no Purchaser shall be
responsible in any way for the performance of the obligations of any other
Purchaser hereunder. Nothing contained herein or in any other agreement or
document delivered at any closing, and no action taken by any Purchaser pursuant
hereto or thereto, shall be deemed to constitute the Purchasers as a
partnership, an association, a joint venture or any other kind of entity, or
create a presumption that the Purchasers are in any way acting in concert with
respect to such obligations or the transactions contemplated by this Agreement.
Each Purchaser shall be entitled to protect and enforce its rights, including
without limitation the rights arising out of this Agreement, and it shall not be
necessary for any other Purchaser to be joined as an additional party in any
proceeding for such purpose.

                              ********************


                                       14
<PAGE>

         IN WITNESS WHEREOF, the parties have executed this Registration Rights
Agreement as of the date first written above.


                                    THE SINGING MACHINE COMPANY, INC.


                                    By: /s/ Yi Ping Chan
                                        -------------------------------
                                        Name:  Yi Ping Chan
                                        Title: Chief Operating Officer

                       [SIGNATURE PAGE OF HOLDERS FOLLOWS]


                                       15
<PAGE>


                       [SIGNATURE PAGE OF HOLDERS TO RRA]


                                  OMICRON MASTER TRUST
                                  By: Omicron Capital L.P., as subadvisor
                                  By: Omicron Capital Inc., its general partner

                                  By: /s/ Bruce Bernstein
                                      ------------------------
                                      Name:Bruce Bernstein
                                      Title:   President


                       [SIGNATURE PAGE OF HOLDERS FOLLOWS]


                                       16
<PAGE>

                       [SIGNATURE PAGE OF HOLDERS TO RRA]

BRISTOL INVESTMENT FUND, LTD.


By:   /s/ Paul Kessler
      ------------------------
      Name:  Paul Kessler
      Title:    Director

                       [SIGNATURE PAGE OF HOLDERS FOLLOWS]


                                       17
<PAGE>

                       [SIGNATURE PAGE OF HOLDERS TO RRA]

ASCEND OFFSHORE FUND, LTD.


By:      /s/ Malcolm Fairbairn
         ----------------------------
         Name:  Malcolm Fairbairn
         Title:     Investment Manager

Subscription Amount: $478,000
- ------------------


ASCEND PARTNERS LP


By:        /s/ Malcolm Fairbairn
         ----------------------------
         Name:  Malcolm Fairbairn
         Title:    Managing Member

Subscription Amount: $58,200
- ------------------



ASCEND PARTNERS SAPIENT LP


By:       /s/ Malcolm Fairbairn
         ----------------------------
         Name:  Malcolm Fairbairn
         Title:    Managing Member


                       [SIGNATURE PAGE OF HOLDERS FOLLOWS]


                                       18
<PAGE>

                       [SIGNATURE PAGE OF HOLDERS TO RRA]


SF CAPITAL PARTNERS, LLC


By:   /s/ Brian H. Davidson
      ---------------------------
      Name:  Brian H. Davidson
      Title:    Authorized Signatory

                                       19
<PAGE>

                       [SIGNATURE PAGE OF HOLDERS TO RRA]


ROTH CAPITAL PARTNERS, LLC


By:   /s/
      ---------------------------
      Name:
      Title:

                                       20

<PAGE>

                              PLAN OF DISTRIBUTION
                              --------------------

         The selling stockholders and any of their pledgees, assignees and
successors-in-interest may, from time to time, sell any or all of their shares
of common stock on any stock exchange, market or trading facility on which the
shares are traded or in private transactions. These sales may be at fixed or
negotiated prices. The selling stockholders may use any one or more of the
following methods when selling shares:

         o        ordinary brokerage transactions and transactions in which the
                  broker-dealer solicits purchasers;

         o        block trades in which the broker-dealer will attempt to sell
                  the shares as agent but may position and resell a portion of
                  the block as principal to facilitate the transaction;

         o        purchases by a broker-dealer as principal and resale by the
                  broker-dealer for its account;

         o        an exchange distribution in accordance with the rules of the
                  applicable exchange;

         o        privately negotiated transactions;

         o        broker-dealers may agree with the selling stockholders to sell
                  a specified number of such shares at a stipulated price per
                  share;

         o        a combination of any such methods of sale; and

         o        any other method permitted pursuant to applicable law.

         The selling stockholders may also sell shares under Rule 144 under the
Securities Act, if available, rather than under this prospectus. Broker-dealers
engaged by the selling stockholders may arrange for other brokers-dealers to
participate in sales. Broker-dealers may receive commissions or discounts from
the selling stockholders (or, if any broker-dealer acts as agent for the
purchaser of shares, from the purchaser) in amounts to be negotiated. The
selling stockholders do not expect these commissions and discounts to exceed
what is customary in the types of transactions involved. Broker-dealers may
agree to sell a specified number of such shares at a stipulated price per share,
and, to the extent such broker-dealer is unable to do so acting as agent for us
or a selling shareholder, to purchase as principal any unsold shares at the
price required to fulfill the broker-dealer commitment. Broker-dealers who
acquire shares as principal may thereafter resell such shares from time to time
in transactions, which may involve block transactions and sales to and through
other broker-dealers, including transactions of the nature described above, in
the over-the-counter markets or otherwise at pries and on terms then prevailing
at the time of sale, at prices than related to the then-current market price or
in negotiated transactions. In connection with such resales, broker-dealers may
pay to or receive from the purchasers such shares commissions as described
above.

                                       21
<PAGE>

         The selling stockholder may from time to time pledge or grant a
security interest in some or all of the Shares or common stock or Warrant owned
by them and, if they default in the performance of their secured obligations,
the pledgees or secured parties may offer and sell the shares of common stock
from time to time under this prospectus, or under an amendment to this
prospectus under Rule 424(b)(3) or other applicable provision of the Securities
Act of 1933 amending the list of selling stockholders to include the pledgee,
transferee or other successors in interest as selling stockholders under this
prospectus.

         The selling stockholders also may transfer the shares of common stock
in other circumstances, in which case the transferees, pledgees or other
successors in interest will be the selling beneficial owners for purposes of
this prospectus.

         The selling stockholders and any broker-dealers or agents that are
involved in selling the shares may be deemed to be "underwriters" within the
meaning of the Securities Act in connection with such sales. In such event, any
commissions received by such broker-dealers or agents and any profit on the
resale of the shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act. The selling stockholders have
informed the Company that none of them have any agreement or understanding,
directly or indirectly, with any person to distribute the common stock.

         The Company is required to pay all fees and expenses incurred by the
Company incident to the registration of the shares. The Company has agreed to
indemnify the selling stockholders against certain losses, claims, damages and
liabilities, including liabilities under the Securities Act.


                                       22

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23.1
<SEQUENCE>10
<FILENAME>accountant-consent.txt
<DESCRIPTION>CONSENT OF ACCOUNTANTS
<TEXT>
                                                                    Exhibit 23.1






                             CONSENT OF INDEPENDENT
                          CERTIFIED PUBLIC ACCOUNTANTS



We have issued our report dated June 24, 2003 (except for Note 9, as to which
the date is July 8, 2003 and Note 15, as to which the date is July 10, 2003)
(which contains an explanatory paragraph relating to The Singing Machine
Company, Inc.'s ability to continue as a going concern as described in Note 2 of
the financial statements) accompanying the consolidated financial statements and
schedule of The Singing Machine Company, Inc. and subsidiary contained in the
Registration Statement and Prospectus. We consent to the use of the
aforementioned report in the Registration Statement and Prospectus and to the
use of our name as it appears under the caption "Experts."


/s/ GRANT THORNTON LLP


Miami, Florida
October 6, 2003






</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23.2
<SEQUENCE>11
<FILENAME>auditorsconsent.txt
<DESCRIPTION>INDEPENDENT AUDITORS CONSENT
<TEXT>
                                                                    Exhibit 23.2


                          Independent Auditors' Consent





We consent to the use of our report dated May 23, 2002 (except for Note 3 as to
which the date is July 14, 2003) on the consolidated financial statements of The
Singing Machine Company, Inc. for the years ended March 31, 2002 and 2001
included herein on the registration statement of The Singing Machine Company,
Inc. on Form S-1 and to the reference to our firm under the heading "Experts" in
the prospectus.




/s/ SALBERG & COMPANY, P.A.
Boca Raton, Florida
October 7, 2003


</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
-----END PRIVACY-ENHANCED MESSAGE-----
