-----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
Originator-Name: webmaster@www.sec.gov
Originator-Key-Asymmetric:
 MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen
 TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB
MIC-Info: RSA-MD5,RSA,
 HQOdY1N505C/9gEaEKI1CZIHpUqMYi9ELq9nDoQyLM8DtHrJFNUqrsbXVbppQzLc
 1DzxvmQ/tysf//Dp+c73cg==

<SEC-DOCUMENT>0001116502-04-000282.txt : 20040217
<SEC-HEADER>0001116502-04-000282.hdr.sgml : 20040216
<ACCEPTANCE-DATETIME>20040217170008
ACCESSION NUMBER:		0001116502-04-000282
CONFORMED SUBMISSION TYPE:	10-Q
PUBLIC DOCUMENT COUNT:		12
CONFORMED PERIOD OF REPORT:	20031231
FILED AS OF DATE:		20040217

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:		10-Q
		SEC ACT:		1934 Act
		SEC FILE NUMBER:	000-24968
		FILM NUMBER:		04609856

	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>10-Q
<SEQUENCE>1
<FILENAME>singingmachine-10q.txt
<DESCRIPTION>QUARTERLY REPORT
<TEXT>


                       SECURITIES AND EXCHANGE COMMISSION

                              WASHINGTON, DC 20549

                                    FORM 10-Q

                QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                For the quarterly period ended December 31, 2003

                                    0 - 24968
                                    ---------
                             Commission File Number

                        THE SINGING MACHINE COMPANY, INC.
                        ---------------------------------
        (Exact Name of Small Business Issuer as Specified in its Charter)



                 Delaware                                 95-3795478
                ----------                               ------------
         (State of Incorporation )                  (IRS Employer I.D. No.)

             6601 Lyons Road, Building A-7, Coconut Creek, FL 33073
             ------------------------------------------------------
                    (Address of principal executive offices )

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

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

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

Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes [X] No [ ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]

                      APPLICABLE ONLY TO CORPORATE ISSUERS

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

                                                    NUMBER OF SHARES
                  CLASS                     OUTSTANDING ON DECEMBER 31, 2003
      Common Stock, $0.01 par value                     8,752,320

<PAGE>


                THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY



                                      INDEX



                          PART I. FINANCIAL INFORMATION

Item 1.  Financial Statements:
                                                                        Page No.
                                                                        --------

         Consolidated Balance Sheets - December 31, 2003 (Unaudited)
         and March 31, 2003 ..............................................  3

         Consolidated Statements of Operations - Three and Nine months
         ended December 31, 2003 (unaudited) and 2002(Unaudited,restated).  4

         Consolidated Statements of Cash Flows - Nine months ended
         December 31, 2003(unaudited)and 2002 (Unaudited,restated)........  5

         Notes to Consolidated Financial Statements ......................  6

Item 2.  Management's Discussion and Analysis of Financial
         Condition and Results of Operations ............................. 13

Item 3.  Quantitative and Qualitative Disclosure About Market Risk ....... 27

Item 4.  Controls and Procedures ......................................... 27

                           PART II. OTHER INFORMATION

Item 1.  Legal Proceedings ............................................... 28

Item 2.  Changes in Securities ........................................... 29

Item 3.  Defaults Upon Senior Securities ................................. 30

Item 4.  Submission of Matters to a Vote of Security Holders ............. 30

Item 5.  Other Information ............................................... 30

Item 6.  Exhibits and Reports on Form 8-K ................................ 30

SIGNATURES ............................................................... 31


                                       2
<PAGE>


                THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
                         PART I - FINANCIAL INFORMATION

ITEM I. FINANCIAL STATEMENTS

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

                                                                          DECEMBER 31,        MARCH 31,
                                                                              2003              2003
                                                                          ------------      ------------
                                                                          (UNAUDITED)
                                     ASSETS
<S>                                                                       <C>               <C>
CURRENT ASSETS
Cash and cash equivalents                                                 $    235,958      $    268,265
Restricted Cash                                                                866,413           838,411
Accounts Receivable, less allowances of $816,235 and $405,759
  respectively                                                              14,729,176         5,762,944
Due from manufacturer                                                        1,112,200         1,091,871
Inventories, net                                                             8,029,371        25,194,346
Prepaid expense and other current assets                                     2,294,377         1,483,602
Deferred tax asset                                                                --           1,925,612
                                                                          ------------      ------------
     TOTAL CURRENT ASSETS                                                   27,267,495        36,565,051

PROPERTY AND EQUIPMENT, at cost less accumulated depreciation of
  $2,567,480 and $1,472,850 respectively                                     1,365,687         2,026,252
OTHER ASSETS
Other non-current assets                                                       970,464           343,991
                                                                          ------------      ------------
     TOTAL ASSETS                                                         $ 29,603,646      $ 38,935,294
                                                                          ============      ============
                      LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES
Bank overdraft                                                            $     85,236      $    316,646
Accounts payable                                                             5,331,470         8,486,009
Accrued expenses                                                             2,587,579         1,443,406
Subordinated debt-related parties                                            1,000,000           400,000
Revolving credit facilities                                                  7,115,114         6,782,824
Income taxes payable                                                         2,872,509         3,821,045
                                                                          ------------      ------------
    TOTAL CURRENT LIABILITIES                                               18,991,908        21,249,930
                                                                          ------------      ------------
LONG TERM LIABILITIES
Convertible debentures, net of unamortized discount of $3,046,000              954,210              --
                                                                          ------------      ------------
    TOTAL LIABILITIES                                                       19,946,118        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;
8,752,320 and 8,171,678 shares issued and outstanding                           87,523            81,717
Additional paid-in capital                                                  10,234,410         4,843,430
Retained earnings                                                             (664,405)       12,760,217
                                                                          ------------      ------------
    TOTAL SHAREHOLDERS' EQUITY                                               9,657,528        17,685,364
                                                                          ------------      ------------
    TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                            $ 29,603,646      $ 38,935,294
                                                                          ============      ============
</TABLE>

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


                                       3
<PAGE>

                THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)
<TABLE>
<CAPTION>

                                                       Three Months Ended                  Nine Months Ended
                                                          December 31,                        December 31,
                                                 ------------------------------      ------------------------------
                                                     2003              2002              2003              2002
                                                 ------------      ------------      ------------      ------------
                                                                   (as restated)                       (as restated)

<S>                                              <C>               <C>               <C>               <C>
NET SALES                                        $ 28,689,623      $ 45,659,446      $ 68,053,739      $ 81,915,443

COST OF SALES
  Cost of goods sold                               30,782,268        36,628,126        64,948,809        64,155,095
  Impairment of tooling                               508,480              --             508,480              --
                                                 ------------      ------------      ------------      ------------
GROSS PROFIT                                       (2,601,125)        9,031,320         2,596,449        17,760,348

OPERATING EXPENSES:
  Compensation                                      1,097,327         1,257,519         3,552,718         2,827,823
  Freight & handling                                  523,177           944,169         1,153,353         1,605,445
  Selling, general & administrative expenses        3,410,116         1,748,400         8,908,899         4,675,279
                                                 ------------      ------------      ------------      ------------

TOTAL OPERATING EXPENSES                            5,030,620         3,950,088        13,614,971         9,108,547
                                                 ------------      ------------      ------------      ------------
(LOSS) EARNINGS FROM OPERATIONS                    (7,631,744)        5,081,232       (11,018,521)        8,651,801

OTHER INCOME (EXPENSES):
  Other income                                         32,098            38,628           (50,882)          196,648
  Interest expense                                   (687,178)         (117,704)       (1,194,541)         (228,597)
  Interest income                                        --                --                --              11,943
                                                 ------------      ------------      ------------      ------------

NET OTHER (EXPENSES) INCOME                          (655,079)          (79,076)       (1,245,422)          (20,006)

NET (LOSS) EARNINGS BEFORE INCOME TAX              (8,286,825)        5,002,156       (12,263,944)        8,631,795

INCOME TAX EXPENSE                                  2,163,776         1,681,629         1,160,678         2,674,659
                                                 ------------      ------------      ------------      ------------
NET (LOSS) EARNINGS                              $(10,450,601)     $  3,320,527      $(13,424,622)     $  5,957,136
                                                 ============      ============      ============      ============

(LOSS) EARNINGS PER SHARE:
      Basic                                      $      (1.20)     $       0.41      $      (1.58)     $       0.74
      Diluted                                    $      (1.20)     $       0.37      $      (1.58)     $       0.67

WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT  SHARES OUTSTANDING:
      Basic                                         8,729,818         8,123,548         8,503,065         8,101,441
      Diluted                                       8,729,818         8,944,027         8,503,065         8,947,897

</TABLE>

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


                                       4
<PAGE>


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

                                                                             FOR THE NINE MONTHS ENDED
                                                                                    DECEMBER 31,
                                                                           ------------------------------
                                                                               2003              2002
                                                                           ------------      ------------
<S>                                                                        <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES                                                          (restated)
     Net (loss) earnings                                                   $(13,424,622)     $  7,475,119
     Adjustments to reconcile net (loss) earnings to net cash used in
       operating activities
     Depreciation and amortization                                            1,165,687           454,806
     Impairment of tooling                                                      508,480
     Provision for inventory                                                  4,996,685              --
     Provision for bad debt                                                     410,476              --
     Amortization of discount on convertible debentures                         444,584              --
     Stock compensation expense                                                 511,299              --
     Deferred tax benefit                                                     1,925,612           452,673
     Changes in assets and liabilities:
     (Increase) decrease in:
     Accounts Receivable                                                     (9,376,708)      (15,998,298)
     Due from manufacturer                                                      (20,329)         (264,908)
     Inventories                                                             12,168,290       (20,742,572)
     Prepaid Expenses and other assets                                         (858,011)       (1,218,091)
     Increase (decrease) in:
     Accounts payable                                                        (3,154,539)       11,203,268
     Accrued expenses                                                           653,540         3,705,878
     Income taxes payable                                                      (948,536)          572,254
                                                                           ------------      ------------
         Net Cash Used in Operating Activities                               (4,998,092)      (14,359,871)
                                                                           ------------      ------------
CASH FLOWS FROM INVESTING ACTIVITIES
     Purchase of property and equipment                                        (434,065)       (1,112,376)
                                                                           ------------      ------------
         Net cash used in Investing Activities                                 (434,065)       (1,112,376)
                                                                           ------------      ------------
CASH FLOWS FROM FINANCING ACTIVITIES
     Borrowings from revolving credit facilities                             27,777,630        37,612,713
     Repayments to revolving credit facilities                              (27,445,340)      (27,449,625)
     Proceeds from issuance of convertible debentures                         4,000,000              --
     Bank Overdraft                                                            (231,410)             --
     Restricted cash                                                            (28,002)           (3,640)
     Payment of financing fees related to convertible debentures               (255,000)             --
     Proceeds from subordinated debt-related parties, net                       600,000              --
     Proceeds from exercise of stock options and warrants                       981,972           155,579
                                                                           ------------      ------------
         Net cash provided by Financing Activities                            5,399,850        10,315,027
                                                                           ------------      ------------
DECREASE IN CASH AND CASH EQUIVALENTS                                           (32,307)       (5,157,220)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                268,265         5,520,147
                                                                           ------------      ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD                                 $    235,958      $    362,927
                                                                           ============      ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
CASH PAID FOR THE NINE MONTHS ENDED DECEMBER 31, 2003
     Interest                                                              $    591,817      $    228,597
                                                                           ============      ============
     Income Taxes                                                          $  1,388,102      $     73,207
                                                                           ============      ============
NON-CASH FINANCING ACTIVITIES
     Stock based compensation                                              $    511,299      $       --
                                                                           ============      ============
     Discounts for warrants issued in connection with and beneficial       $  3,494,274      $       --
     conversion feature of convertible debentures
                                                                           ============      ============
     Financing fees in connection with convertible debenture issuance,
     paid in stock and warrants                                                 409,527
                                                                           ============      ============
</TABLE>

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

                                       5
<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 International SMC (H.K.)
Ltd., its wholly-owned 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 December 31, 2003 are not necessarily indicative of the results that may
be expected for the remaining quarter 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.

                                 December 31, 2003       March 31, 2003
                                 -----------------       --------------

Finished goods                     $ 13,463,330           $ 27,807,763
Inventory in transit                  1,200,221              1,101,940
Provision for losses                 (6,634,180)            (3,715,357)
                                   ------------           ------------

Total Inventory                    $  8,029,371           $ 25,194,346
                                   ============           ============

Although management has taken a provision, which they estimate, based on recent
contacts with customers, to be a sufficient reserve for potential losses on
disposal of existing inventory, the Company's sales are highly seasonal and unit
sales and their related selling prices during peak seasons may not meet
expectations. Therefore, management's estimates could differ significantly from
actual outcome and have a material impact on future operations. The Company also
made the decision to discontinue certain models from their line. A reserve was
taken against the remaining inventories of these discontinued items to enable
the items to be sold through alternate sales arenas, such as through liquidation
facilities. Management believes that at September 30, 2003, there was not
sufficient evidence warranting an additional reserve against inventory at that
time, as the peak selling season had just begun and there were no indications
that the inventory would not be sold.

RECLASSIFICATIONS

         Certain prior period amounts have been reclassified to conform to the
current period 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, if any. 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
("Statement") No. 148, "Accounting for Stock-Based Compensation-Transition and
Disclosure, an amendment of Statement No. 123", "Accounting for Stock Based
Compensation", 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 Statement No. 123 had been
applied to options granted.

                                       6
<PAGE>

         Had compensation cost for the Company's stock-based compensation plan
been determined using the fair value method for awards under that plan, pursuant
to Statement No. 123, the Company's net (loss) earnings would have been changed
to the pro-forma amounts indicated below.

<TABLE>
<CAPTION>

                                                   FOR THE THREE MONTHS ENDED DECEMBER 31,    FOR THE NINE MONTHS ENDED DECEMBER 31,
                                                         2003                 2002                  2003                2002
                                                   ------------------  -------------------    -----------------  -------------------

<S>                                                    <C>                     <C>               <C>                     <C>
Net (loss) earnings                As reported         $(10,450,601)           $3,320,527        $(13,424,622)           $5,957,136
                                   Pro forma           $(10,653,283)           $3,291,655        $(14,032,668)           $5,870,518
Net (loss) earnings per share -    As reported               $(1.20)                $0.41              $(1.58)                $0.74
basic
                                   Pro forma                 $(1.22)                $0.41              $(1.65)                $0.72
Net (loss) earnings per share      As reported               $(1.20)                $0.37              $(1.58)                $0.67
- -diluted
                                   Pro forma                 $(1.22)                $0.37              $(1.65)                $0.66
</TABLE>

         For stock options and warrants issued to non-employees, the Company
applies the fair value method of accounting pursuant to Statement 123. Due to a
change in status of a former employee, an expense of $220,835 was charged to
compensation expense in August 2003.

         For financial statement disclosure purposes and for purposes of valuing
stock options and warrants issued to non-employees, 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 Statement No. 123 using
the following weighted-average assumptions:

           Third Quarter 2004:   expected dividend yield 0%, risk-free interest
                                 rate of 2.5%, volatility 110.05% and
                                 expected term of five years.
           Third Quarter 2003:   expected dividend yield 0%, risk-free interest
                                 rate of 6.8%, volatility 42% and expected
                                 term of two years.

RECENT ACCOUNTING PRONOUNCEMENTS

         Statement 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 Statement 133. Statement 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 provisions of Statement 149 did not have a material impact on the
Company's financial position or results of operations.

         Statement No. 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity" 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 for instruments entered into or modified after May 31, 2003. The
provisions of Statement 150 did not have a material impact on the Company's
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 (See Management Discussion and Analysis - Liquidity and Capital
Resources).

         On March 14, 2003, the Company was notified of its violation of the
tangible 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 August 19, 2003. Pursuant to this
fourteenth amendment the loan was extended until March 31, 2004 and the
condition of default was waived.

         As of December 31, 2003, the Company again violated the tangible net
worth and working capital covenants of the Agreement. As of January 31, 2004 the
loan was paid in full, the facility was terminated and the UCC filings were
released.

                                       7
<PAGE>

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

         In June 2003, management revised its position on taxation of the income
of International SMC (H.K.) Ltd., its wholly-owned subsidiary, by the United
States and by the Hong Kong tax authorities for the reasons stated below.

         With regard to taxation in Hong Kong, International SMC had previously
applied for a Hong Kong offshore claim income tax exemption based on the
locality of its profits. Management believed that the exemption would be
approved because the source of all profits of International SMC 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 (Section
956) allowing for such income to be indefinitely deferred and not taxed in the
United States until such income is repatriated, or brought back into the United
States as taxable income. It was expected that this income would remain in Hong
Kong. 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, relating to inventory
purchases, 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 and nine
months ended December 31, 2002 is to decrease net income by $576,060 and
$1,517,983, respectively. The net effect on net income per share is to decrease
net income per share basic and diluted by $0.07 and $0.06 for the quarter and
$0.18 and $0.17 for the nine months ended December 31, 2002.

NOTE 4 - IMPAIRMENT OF TOOLING

         Pursuant to Statement No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets", the Company recorded a loss on impairment of
tooling. In December 2003, and as a result of the Company's decision to
discontinue certain models, management estimated that the amounts recoverable on
certain tooling through future operations, on an undiscounted basis, were below
their book values. An expense of $508,480 was charged to operations for this
impairment.

NOTE 5 - PROVISION FOR INCOME TAX

          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 December 31, 2003,
the Company concluded that a valuation allowance was needed against all of the
Company's deferred tax assets, as it is not more likely than not that the
deferred taxes will be realized. For the three months ended December 31, 2003,
the Company recorded a tax provision of $2.2 million. This provision was created
because the valuation allowance established against the deferred tax asset
exceeded the amount of the benefit created from carrying back a portion of the
current period losses. The carry-back of the losses from the current period
resulted in an income tax receivable of $1.2 million, which is included in
prepaid and other current assets in the accompanying balance sheets.

         The Company's wholly-owned 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 2004, 2003, 2002, and 2001. For the nine months ended
December 31, 2003, a provision of $424,763 was recorded at the Hong Kong
statutory rate of 17.5%. Accrued Hong Kong taxes payable on the current and
prior earnings of the Company's Hong Kong subsidiary totaled $2.9 million at
December 31, 2003.

                                       8
<PAGE>

         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.

NOTE 6 - LOANS AND LETTERS OF CREDIT

CREDIT FACILITY

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

         o        Overdraft protection facilities
         o        Issuance and negotiation of letters of credit, 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, restricted cash on deposit with the lender and require that the Company
maintain a minimum tangible net worth. The maximum available credit under the
facilities is $5.5 million. The balance at December 31, 2003 and 2002 was
$4,640,728 and $0, respectively.

LOAN AND SECURITY AGREEMENT

         On April 26, 2001, the Company executed a Loan and Security Agreement
(the "Agreement") with a commercial lender (the "Lender"), which as amended on
August 19, 2003, was due to expire on March 31, 2004. At December 31, 2003 and
2002 the amount outstanding was $2,474,386 and $10,163,088, respectively. As of
January 31, 2004 the loan was paid in full, the facility was terminated and the
UCC filings were released.

SUBORDINATED DEBT

         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 loans are accruing interest at 9.5% per annum and paid quarterly. These
loans were originally scheduled to be paid back by October 31, 2003; however,
the notes have since been subordinated to the Company's credit facility and the
total amount outstanding of $1 million will not be repaid until either the
subordination is released by the Company's lender or the credit facility is
closed.

NOTE 7 - 8% CONVERTIBLE DEBENTURES WITH WARRANTS

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

         The Convertible Debentures are subordinated to the Company's Lender and
are convertible at the option of the holders into 1,038,962 Common Shares at the
conversion rates referred to below, subject to certain anti-dilution adjustment
provisions, at any time after the closing date. Each Convertible Debenture may
be convertible into common shares, at a conversion price of $3.85 per Common
Share. of the registration statement

         The Convertible Debentures are subordinated to the Company's Lender and
are convertible at the option of the holders into 1,038,962 Common Shares at the
conversion rates referred to below, subject to certain anti-dilution adjustment
provisions, at any time after the closing date. Each Convertible Debenture may
be convertible into common shares, representing an initial conversion price of
$3.85 per Common Share

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

         The Convertible Debentures bear interest at the stated rate of 8% per
annum. Interest is payable quarterly on March 1, June 1, September 1, and
December 1. The interest may be payable in cash, shares of Common Stock, or a
combination thereof subject to certain provisions and at the discretion of the
Company. On February 9, 2004 the stated rate of interest was raised to 8.5%.

                                       9
<PAGE>

         In accounting for this transaction, the Company allocated $1.2 million
of the proceeds to the estimated fair value of the stock purchase warrants and
$2.3 million as the estimated fair value of the beneficial conversion feature.
These amounts resulted in a discount in the convertible debentures of $3.5
million, which is being amortized over the life of the debt on a straight-line
basis to interest expense. Total amortization for the nine months ended December
31, 2003 was $444,584.

         In connection with the Convertible Debentures the Company paid
financing fees as follows: 103,896 stock purchase warrants, with a fair value of
$264,671, 28,571 shares of common stock with a fair value of $141,141, and cash
of $255,000. Total financing fees of $660,812 were recorded as deferred fees and
are being amortized over the term of the debentures on a straight-line basis.
The unamortized deferred fees are reported in other non-current assets in the
accompanying balance sheets.

NOTE 8 - COMMITMENTS AND CONTINGENCIES

LEGAL MATTERS

         CLASS ACTION. From July 2003 through August 2003, eight securities
class action lawsuits 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 Singing Machine's securities
during the various class action periods specified in the complaints. These
complaints have all been consolidated into one action styled Bielansky, et al.
v. Salberg & Co., et al., Case No. 03-80596-ZLOCH (the Shareholder Action).

         The complaints in the Shareholder Action allege violations of Section
10(b) and Section 20(a) of the Securities Exchange Act of 1934 and Rule 10(b)-5
promulgated there under. These complaints seek compensatory damages, attorney's
fees and injunctive relief.

         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 was
made on the board of directors for them to investigate the allegations or to
bring action. The Company is named as a nominal defendant in this case. This
case has been consolidated into the Shareholder Action identified above.

         This derivative 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 plaintiffs
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 court in the Shareholder Action has directed plaintiffs' counsel to
file one amended consolidated complaint no later than November 14, 2003.

         The Company intends to vigorously defend the Shareholder Action. 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.

         A second shareholder derivative suit was filed in October 2003, which
makes generally the same allegations. The second derivative suit has not been
served on the Company or on any of its current or former officers and directors.
This suit was transferred to the same judge to whom the Shareholder Action was
assigned and has been consolidated into the Shareholder Action.

         OTHER MATTERS. In August 2003, we were advised that the Securities and
Exchange Commission had commenced an informal inquiry of our company. We are
cooperating fully with the SEC staff. It appears that the investigation is
focused on the restatement of our audited financial statements for fiscal 2002
and 2001. We have been advised that an informal inquiry should not be regarded
as an indication by the SEC or its staff that any violations of law have
occurred or as a reflection upon any person or entity that may have been
involved in those transactions.

         The Company entered into a separation and release agreement with an
executive on December 19, 2003. The agreement provided for the individual to
receive $159,281 in settlement of the Company's contract. The amount has been
expensed as compensation at December 31, 2003.

         The Company entered into a settlement agreement with an investment
banker on November 17, 2003. Pursuant to this agreement, the Company will pay
the sum of $181,067 over a six month period and has issued to the investment
banker 40,151 shares of stock with a fair value of $94,355.

                                       10
<PAGE>

         The Company amended its convertible debenture agreements to increase
the interest rate to 8.5% effective as of February 9, 2004 and to grant warrants
to purchase an aggregate of 30,000 shares of the Company's common stock to the
debenture holders on a pro-rata basis. These concessions are in consideration of
the debenture holder's agreements to (i) enter into new subordination agreements
with the Company's new lender, (ii) to waive all liquidated damages due under
the transaction documents through July 1, 2004 and (iii) to extend the effective
date of the Form S-1 registration statement until July 1, 2004. The new warrants
have an exercise price equal to $1.52 per share, the fair market value of the
Company's common stock on February 9, 2004, the date of the grant. The fair
value of these warrants as calculated pursuant to Statement No. 123 is $30,981
and has been expensed as other operating expenses in the accompanying statements
of operations.

         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 9 - STOCKHOLDERS' EQUITY

COMMON STOCK ISSUANCES

         During the nine months ended December 31, 2003, the Company issued
580,642 shares of its common stock. Of these shares, 28,571 were issued in lieu
of a cash payment of commission and closing costs relating to the Convertible
Debentures. Certain executives received 63,420 shares of common stock in lieu of
a portion of their cash compensation and bonuses for fiscal 2004. The fair value
of this stock, $290,165 was charged to compensation expense. 40,151 shares of
stock were issued in lieu of a settlement with an investment banker, at an
estimated fair value of $94,355. The remaining 448,500 shares of stock issued
were through the exercise of vested stock options. There were no shares of
common stock issued in the nine months ended December 31, 2002.

EARNINGS PER SHARE

         In accordance with Statement 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:
<TABLE>
<CAPTION>

                                                     FOR THE THREE MONTHS ENDED         FOR THE NINE MONTHS ENDED
                                                            DECEMBER 31,                       DECEMBER 31,
                                                       2003              2002             2003              2002
                                                                    (as restated)                      (as restated)

<S>                                               <C>               <C>              <C>               <C>
Net (loss) income                                 $(10,450,601)     $  3,320,527     $(13,424,622)     $  5,957,136
Loss available to common shares                   $(10,450,601)     $  3,320,527     $(13,424,622)     $  5,957,136
Weighted average shares outstanding - basic          8,729,818         8,123,548        8,503,065         8,101,441
Weighted average shares outstanding - diluted        8,729,818         8,944,027        8,503,065         8,947,897
Loss per share - Basic                            $      (1.20)     $       0.41     $      (1.58)     $       0.74
                                                  ============      ============     ============      ============
Loss per share -Diluted                           $      (1.20)     $       0.37     $      (1.58)     $       0.67
                                                  ============      ============     ============      ============
</TABLE>

         For the three months and nine months ended December 31, 2003, 1,120,120
common stock equivalents were excluded from the calculation of diluted earnings
per share, as there was a net operating loss for the periods and their effects
would have been antidilutive. For the three months and nine months ended
December 31, 2002, 90,000 and 0 common stock equivalents were not included in
the computation of diluted earnings per share because their effect was
antidilutive.

         For the nine months ended December 31, 2003, there were 1,120,120
common stock options outstanding with exercise prices between $1.97 and $14.30.
In addition, there is a potential 1,038,962 shares that may be issued in
connection with the Convertible Debentures if certain conditions exist. (See
Note 7.)

                                       11
<PAGE>

NOTE 10 - 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 wholly-owned Subsidiary. Sales by geographic region for
the quarters ended December 31 were as follows:
<TABLE>
<CAPTION>

                                  FOR THE THREE MONTHS ENDED           FOR THE NINE MONTHS ENDED
                                         DECEMBER 31,                        DECEMBER 31,
                                    2003              2002              2003              2002
SALES:                         ------------      ------------      ------------      ------------
<S>                            <C>               <C>               <C>               <C>
United States                  $ 19,847,863      $ 41,028,985      $ 41,184,176      $ 72,402,914
Australia                           582,385           286,368           892,964           529,020
Canada                              307,182           706,476           832,007           733,801
Europe                            8,687,809         6,178,010        26,497,706        12,998,917
Other                               210,407            29,945           708,343           100,143
         Less:  Allowances         (946,023)       (2,570,338)       (2,061,457)       (3,243,907)
                               ------------      ------------      ------------      ------------
Consolidated Net Sales         $ 28,689,623      $ 45,659,446      $ 68,053,739      $ 83,520,888
                               ============      ============      ============      ============
</TABLE>

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

NOTE 11 - SUBSEQUENT EVENTS

On January 7, 2004, the Company entered into the fifth amendment of its
licensing agreement with MTV Networks. The amendment reduced the minimum royalty
guarantee for calendar 2003 from $1.5 million to $1.3 million. The amendment
also extended the expiration date of the original agreement to April 30, 2004,
with options to extend for an additional two periods until December 31, 2004 at
the discretion of MTV. In accordance with this amendment, each of the three
license periods contain minimum guarantee royalty payments of $100,000 each for
a total of $300,000 if all extensions are exercised Each of the minimum
guaranteed royalty payments is recoupable against sales throughout the calendar
year, unless the contract is cancelled.

On February 9, 2004, the Company entered into a factoring agreement with Milberg
Factors, Inc. ("Milberg") of New York City. The agreement allows the Company, at
the discretion of Milberg, to borrow against its outstanding receivables up to a
maximum of the lesser of $3.5 million or 80% of the purchase price. The Company
will pay .8% of gross receivables in fees and the average balance of the line
will be subject to interest on a monthly basis at prime plus .75% with a minimum
rate not to decrease below 4.75%. The agreement contains minimum aggregate
charges in any calendar year of $200,000, limits on incurring any additional
indebtedness and the Company must maintain tangible net worth and working
capital above $7.5 million. Millberg also received a security interest in all of
the Company's accounts receivable and inventory located in the United States and
a pledge of 66 2/3 of the stock of International SMC, our Hong Kong subsidiary.

                                       12
<PAGE>

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

         Certain statements contained in this Quarterly Report on Form 10- Q,
including without limitation, statements containing the words believes,
anticipates, estimates, expects, and words of similar import, constitute
forward-looking statements. You should not place undue reliance on these
forward-looking statements. Our actual results could differ materially from
those anticipated in these forward-looking statements for many reasons,
including the risks faced by us described below and elsewhere in this Quarterly
Report, and in other documents we file with the Securities and Exchange
Commission.

         Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect management's opinions only as of the
date hereof. We undertake no obligation to revise or publicly release the
results of any revision to these forward-looking statements.

OVERVIEW

         The Singing Machine Company, Inc., a Delaware corporation, and our
wholly-owned Hong Kong subsidiary International SMC HK Ltd. ("International
SMC"), (collectively, the "Company, "Singing Machine," "we" or "us") are
primarily engaged in the development, marketing, and sale of consumer karaoke
audio equipment, accessories, and musical recordings. The products are sold
directly to distributors and retail customers. Our electronic karaoke machines
and audio software products are marketed under The Singing Machine(C) trademark.

         Our products are sold throughout the United States, primarily through
department stores, lifestyle merchants, mass merchandisers, direct mail catalogs
and showrooms, music and record stores, national chains, specialty stores and
warehouse clubs. Our karaoke machines and karaoke software are currently sold in
such retail outlets as Best Buy, Circuit City, Costco, Radio Shack, Toys R Us,
Target and J.C. Penney.

         We had a net loss after estimated tax expense of $13,424,622 for the
nine month period ended December 31, 2003.

         As of December 31, 2003, we had 8,752,320 shares of our common stock
issued and outstanding. As of December 31, 2003, there were 1,651,159 common
stock options and warrants outstanding with exercise prices between $1.97 and
$14.30. In addition, we are obligated to issue 1,038,962 shares of our common
stock to the holders of our convertible debentures if they elect to convert
their debentures into common stock.

RESTATEMENT OF FINANCIAL STATEMENTS

         In June 2003, our management revised its position on taxation of the
income of International SMC (H.K.) Ltd., its Hong Kong subsidiary, by the United
States and by the Hong Kong tax authorities for the reasons stated below.

         With regard to taxation in Hong Kong, International SMC had previously
applied for a Hong Kong offshore claim income tax exemption based on the
locality of its profits in China. Management believed, based on advice from its
then auditors, that the exemption would be approved because the source of all
profits of International SMC 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 the
fiscal 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. In June 2003,
we revised our position on the taxation of the income of International SMC
because we received different advice from our new auditors. We dismissed our
former accountant on March 24, 2003 and engaged our new auditors effective as of
March 27, 2003.

         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 decided 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, we can claim United States foreign tax credits in
2002 for these Hong Kong taxes, which is reflected in the final restated
amounts.

                                       13
<PAGE>

         With regard to United States taxation of foreign income, in fiscal 2002
and 2003 we had taken the position that the foreign income of International SMC
qualified for a deferral under the Internal Revenue Code (Section 956) allowing
for such income to be indefinitely deferred and not taxed in the United States
until such income is repatriated, or brought back into the United States as
taxable income. The basis of this position was primarily due to the fact that
the amount of income in question was very low and fully repaid within a
reasonable time after year end. It was expected that this income would remain in
Hong Kong. Full disclosure of the amount and nature of the indefinite deferral
for the income of International SMC for fiscal year 2002 was reflected in the
income tax footnote of the consolidated financial statements for that year.
During fiscal 2002 and 2003, International SMC paid for inventory delivered to
the United States parent company, in the aggregate of approximately $10 million.
Our prior auditors advised us that the funds advanced by International SMC were
reimbursed by the United States parent company within a short enough time period
that a deemed dividend had not occurred. Our new auditors questioned this
treatment and management decided to restate the income tax expense to treat the
advances as deemed dividends. 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 $576,060 and $1,517,983 and decrease net income per share basic and diluted
by $0.07 and $0.07 for the quarter and $0.18 and $0.17 for the nine months ended
December 31, 2002.

THREE MONTHS ENDED DECEMBER 31, 2003 COMPARED TO THE THREE MONTHS ENDED DECEMBER
31, 2002

NET SALES

Net sales for the quarter ended December 31, 2003 decreased 37% percent to
$28,689,623 compared to $45,659,446 for the quarter ended December 31, 2002.
Sales in the United States declined 55.2%, or $24,391,452 from the quarter ended
December, 2002. These decreases are composed of decreases of machine sales of
57% or $15,974,640 from $27,891,528 in 2002 and music sales of 77% or $3,757,221
from $4,885,225 in 2002. Sales decreases were partially offset by a reduction in
advertising allowances of 70% or $2,124,315 from $3,070,338 in 2002 and a 35.9%
increase in international sales, from $7.2 million for the quarter ended
December 31, 2002 to $9.8 million for the quarter ended December 31, 2003.
Decreases in domestic machine sales of machines in the United States are
primarily attributable to an increase in competition at our large customers and
erosion of the average selling price per unit as compared to the same period in
2002. The decrease in music sales is attributable to the loss of placement of
our music at one major customer and a reduction of sales with two other major
retailers. Advertising allowances consist of co-operative advertising, marketing
development funds and specific advertising.

GROSS PROFIT

         Gross profit for the quarter ended December 31, 2003 was ($2,601,125)
or (8.3%) of net sales compared to $9,031,320 or 19.8% of net sales for the
quarter ended December 31, 2002. This decrease in gross profit can be attributed
to sales of our karaoke machines at lower prices and pricing pressure based on
increased competition. In addition, we took a reserve against the value of
inventory in the amount of $4,998,126 from historical cost for its anticipated
recovery value. Another factor in decreased gross profit is the shortfall on the
minimum royalty guarantee in our MTV license agreement. We expensed an
additional $609,000 in the quarter to cover this shortfall. We also wrote down
the remaining book value of dies associated with items that we are discontinuing
from our line in the amount of $508,480. We anticipate that the gross profit
percentage for the remainder of the fiscal year will remain below last year's.

OPERATING EXPENSES

         Operating expenses were $5,468,029 or 19.1% of net sales for the
quarter ended December 31, 2003 compared to operating expenses of $3,950,088 or
8.7% for the quarter ended December 31, 2002. The expenses increased over prior
year by $1.1 million. The primary factors that contributed to the increase in
operating expenses for the quarter ended December 31, 2003 are:

         (i)      Increased sales and music costs of $562,028 made up of
                  increased commissions of $257,456, increase in freight to
                  customers of $192,220, increased payroll and related costs of
                  $255,313 which are offset by decreases in advertising and
                  public relations of $92,394, reduced handling charges of
                  $27,116 and other decreases totaling $23,451 primarily made up
                  of decreases in showroom rent and sales expenses.

         (ii)     Increases in expenses at the wholly-owned Hong Kong subsidiary
                  totaling $554,588 which is primarily comprised of increases in
                  depreciation of newly acquired assets of $109,588, $392,000
                  for the recognition of bad debts and the remaining increases
                  of $53,000 is primarily bank charges and development expenses.

                                       14
<PAGE>

         (iii)    Increased in SG&A of the Florida Operations of $189,571 which
                  is primarily attributable to increases in accounting of
                  $66,541, amortization of loan costs $48,704, bad debt expense
                  $249,512, legal costs $90,964, and consulting fees of $117,981
                  which were offset by decreases in payroll and related costs of
                  $296,592, and other decreases totaling $87,539 consisting of
                  primarily insurance, travel and outside computer services.

         (iv)     Decreases in warehousing expenses offset the above increases
                  by $174,017 which was consisted of reductions in payroll and
                  related costs of $219,408, lower packaging and warehouse
                  expenses totaling $62,359 which were offset by increased rent
                  paid to store the additional inventory carried forward from
                  fiscal 2003 of $86,302, and other increases totaling $21,449
                  which was primarily additional repairs and maintenance.

OTHER EXPENSES

         Net other expenses were $655,079 for the quarter ended December 31,
2003 compared with net expenses of $79,076 at December 31, 2002. Our interest
expense increase significantly to $687,178 in the quarter ended December 31,
2003 compared to interest expense of $117,704 in the quarter ended December 31,
2002. Our increased interest expense was due to the increased use of our credit
facility at a higher interest rate than the prior year and the amortization of
deferred fees and discounts associated with our convertible debentures.

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 December 31, 2003,
the Company concluded that a valuation allowance was needed against all of the
Company's deferred tax assets, as it is not more likely than not that the
deferred taxes will be realized. For the three months ended December 31, 2003,
the Company recorded a tax provision of $2.2 million. This occurred because the
valuation allowance established against the deferred tax asset exceeded the
amount of the benefit created from carrying back a portion of the current period
losses. The carry-back of the losses from the current period resulted in an
income tax receivable of $1.2 million, which is included in prepaid and other
current assets in the accompanying balance sheets. The Company has now exhausted
its ability to carry back any further losses and therefore will not be able to
recognize tax benefits on future losses including its expected fourth quarter
loss.

         The Company's wholly-owned 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 2004, 2003, 2002, and 2001. For the nine months ended
December 31, 2003, a provision of $424,763 was recorded at the Hong Kong
statutory rate of 17.5%. Current Hong Kong taxes payable on the earnings of the
Company's Hong Kong subsidiary totaled $2.9 million at December 31, 2003.

         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.

NET LOSS (EARNINGS)

         As a result of the forgoing, our net loss for the three months ended
December 31, 2003 was $10,450,601 as compared with net income of $3,320,527 for
the three months ended December 31, 2002.

NINE MONTHS ENDED DECEMBER 31, 2003 COMPARED TO THE NINE MONTHS ENDED DECEMBER
31, 2002

NET SALES

         Net sales for the nine months ended December 31, 2003 decreased 16.9%
to $68,053,739 as compared to $81,915,443 for the nine months ended December 31,
2002. Sales to International customers increased $14.6 million over the same
period in the prior year, as sales in the United States decreased $33.7 million.
New customers and increased purchases by existing customers contributed to the
increase in the European market. Our sales in the United States decreased
primarily because of the increased competition in this market. Approximately
$5.6 million of this decrease is from the music sector of our business. We lost
one significant customer and had reduced sales in two other major retailers. A
portion of the decreased sales in the United States can be attributed to
advertising allowances accrued for customers. Advertising allowances consist of
co-operative advertising, marketing development funds and specific advertising.
These allowances are variable and are negotiated every year and since there is
no separate and identifiable benefit to the company, such amounts are recorded
as a reduction of sales.

                                       15
<PAGE>

GROSS PROFIT

         Gross profit for the nine months ended December 31, 2003 was $2,596,449
or 3.8% of sales as compared to $17,760,348 or 21.7% of sales for the nine
months ended December 31, 2002.

         The decrease in gross profit during the nine months ended December 31,
2003 is a result of:

         -        Competitive pricing pressure on machine pricing

         -        Sales of excess inventory at significantly reduces prices

         -        A 31% decline in the sales of higher margin music

         -        A reserve against the value of inventory on hand at December
                  31, in the amount of $4,998,126 for our anticipated recovery
                  value

         -        An impairment charge for tools in the amount of $508,480

         -        Increased sales from International SMC to international and
                  domestic customers. These sales usually carry lower gross
                  margins, as the customer pays for the ocean freight and
                  clearance of the goods.

         -        Increased expense of the guaranteed minimum royalty on our MTV
                  license of $998,000.

Even though we have taken a reserve that we believe is sufficient to cover any
losses against the value of inventory, there can be no assurance that we will be
able to recover its remaining value through sales of the products. Any
additional reduction that may be necessary may have a material impact in future
periods. As we continue to reduce the amount of inventory in our warehouses, we
anticipate gross margins to remain low.

OPERATING EXPENSES

         Operating Expenses increased over the same period in the prior year to
$13.6 million from $11.5 million. The primary reasons for the increase in
operating expenses are as follows:

         i)       Increases in total cash and stock compensation of $724,895

         ii)      Increases in bad debt expense and at the wholly-owned Hong
                  Kong subsidiary of $392,000

         iii)     Increases with respect to the need to warehouse the excess
                  inventory carried over from March 2003 totaling $492,119

         iv)      Increases paid to legal, accounting fees totaling $626,185

         v)       Increased costs related to the amendments required to secure
                  the financing from LaSalle and related consulting costs
                  totaling $432,223

         vi)      Increases in bad debts for the domestic operations
                  attributable to the KB Toys and FAO bankruptcy filings of
                  $263,289

         vii)     Increase in charitable contributions, insurance and fixing
                  fees associated with the production of music and customer
                  service totaling $304,134

         viii)    Offset by a decrease to direct advertising $697,119 and
                  decreases in freight to customers of $452,092

OTHER EXPENSES

         Other expenses were $1,245,424 for the nine months ended December 31,
2003 compared to net other expenses of $20,006 at December 31, 2002. Our
interest expense increased by $965,944 during the nine months ended December 31,
2003 compared to interest expense in the same period of the prior year. Our
interest expense increased due to the increased use of our credit facility at a
higher interest rate than the prior year, as well as the amortization of
deferred expenses associated with the convertible debentures. The remaining
$259,474 is attributable to other miscellaneous expenses such as exchange
differences.

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 December 31, 2003,
the Company concluded that a valuation allowance was needed against all of the
Company's deferred tax assets, as it is not more likely than not that the
deferred taxes will be realized. For the nine months ended December 31, 2003,
the Company recorded a tax provision of $1.2 million. This occurred because the
valuation allowance established against the deferred tax asset exceeded the

                                       16
<PAGE>

amount of the benefit created from carrying back a portion of the current period
losses. The carry-back of the losses from the current period resulted in an
income tax receivable of $1.2 million, which is included in prepaid and other
current assets in the accompanying balance sheets. The Company has now exhausted
its ability to carry back any further losses and therefore will not be able to
recognize tax benefits on future losses including its expected fourth quarter
loss.

         The Company's wholly-owned 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 2004, 2003, 2002, and 2001. For the nine months ended
December 31, 2003, a provision of $424,763 was recorded at the Hong Kong
statutory rate of 17.5%. Current Hong Kong taxes payable on the earnings of the
Company's Hong Kong subsidiary totaled $2.9 million at December 31, 2003.

         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.

NET LOSS (EARNINGS)

         As a result of the forgoing, our net loss for the nine months ended
December 31, 2003 was $13,424,622 compared with net income of $5,957,136 for the
nine months ended December 31, 2002.

LIQUIDITY AND CAPITAL RESOURCES

         At December 31, 2003, we had cash on hand of $235,958 and a bank
overdraft of $85,236 compared to cash on hand of $268,265 and a bank overdraft
of $316,646 at March 31, 2003. Our current assets consist predominantly of
accounts receivable and inventory. Our accounts receivable increased to
$14,729,176 for the nine months ended December 31, 2003 due to the amount of
sales that occurred in November and December, as well as some customer terms
which exceed 45 days.

         Our inventory has been steadily decreasing since March 31, 2003, as we
are shipping goods to our customers. As of December 31, 2003, we had $8 million
in inventory, net of a provision for loss of $6,195,197 compared to $25 million
as of March 31, 2003.

         Our current liabilities decreased to $18,911,314 as of December 31,
2003, compared to $21,249,930 at March 31, 2003. Current liabilities consist of
accounts payable of $5,329,648, accrued expenses of $2,587,567, accrual for
income taxes of $2,872,509, subordinated debt of $1 million, bank overdraft of
$85,136 and the revolving credit facilities of $7,109,622.

         Approximately $2.7 million or 51% of our accounts payable are due to
two factories in China. This amount is aged beyond the terms originally set by
the factories.. We have been in contact with these factories regarding these
amounts and they have not pursued any means of collection. We intend to enter
into payment plans with these factories, but cannot ensure that this will occur.
If these factories pursue any claims against us, it could have a material effect
on our operations. The remainder of accounts payable of $2.6 million are within
terms set by our vendors.

         During fiscal 2003, we had a credit facility with LaSalle Business
Credit, LLC. Under this agreement, LaSalle advanced up funds to us based on our
eligible accounts receivable and inventory. The loan was secured by a first lien
on all of present and future assets, except specific tooling located in China.
During fiscal 2004, the maximum amount that we were permitted to borrow under
the credit facility was $7.5 million.

         Because we had minimal liquidity and had defaulted under our credit
agreement with LaSalle, we received a going concern paragraph from our
independent certified public accountants for our audited financial statements
for fiscal 2003. On March 14, 2003, we were notified by LaSalle that we were in
violation of the tangible net worth covenant in our credit facility and were
declared in default. LaSalle amended the credit facility on August 19, 2003 in a
fourteenth amendment, which extended the loan until March 31, 2004 and the
condition of default was waived. On December 31, 2003, we violated the tangible
net worth requirement and working capital requirement of our credit facility.

         On January 31, 2004, we paid this loan in full, terminated this credit
facility and LaSalle released its security interest in our assets.

         On February 9, 2004, we executed a factoring agreement with Milberg
Factors, Inc. Pursuant to the agreement, Milberg, at its discretion, will
advance the Company the lesser of 80% of our accounts receivable or $3.5
million. All receivables submitted to Milberg are subject to a fee equal to 0.8%
of the gross invoice value. The average monthly balance of the line will incur
interest at a rate of prime plus .75%. Other terms of the agreement include
minimum fees of $200,000 per calendar year, $7.5 million tangible net worth and
$7.5 million working capital. To secure these advances, Milberg received a
security interest in all of our accounts receivable and inventory located in the
United States and a pledge of 66 2/3% of the stock in International SMC (HK)
Ltd, our wholly-owned subsidiary. This agreement is effective for an initial
term of two years, with successive automatic renewals unless either party gives
notice of termination.

         Although this credit line is not equivalent to our previous lines, we
believe that advances under this credit facility, as well as collection of our
outstanding accounts receivable, will allow us enough available cash flow to
continue operations until August 2004 and prepare for the upcoming fiscal year.
We have been receiving collections of accounts receivable since the termination
of our LaSalle agreement, which have served as working capital and enabled us to
pay our obligations.

         In order to further increase our liquidity, we are selling our excess
inventory and reducing our cost structure. As of February 11, 2004, we have
orders on hand of about $2.5 million and had already shipped over $1.0 million,
which is ahead of our projected target for most of the old inventory. Our goal
is to sell $3 to $4 million of old inventory by March 31, 2004. However, we can
not provide you with any assurances that we will be able to sell this inventory.

                                       17
<PAGE>

We have taken several steps to decrease our costs. Since June 2003, we have had
two rounds of lay-offs at our company. In January 2004, our senior executive
officers agreed to take 20% salary reductions and other employees also agreed to
salary reductions. Additionally, we have also subleased some of our warehouse
space in California and Florida and hope to sublease out more. As our plans are
put into place we should see reductions of our overhead expenses by more than
20% of last years amounts.

         We do not intend to enter into any additional material commitments for
the Company in the near future. We will be incurring only normal course of
business expenses such as: rent, utilities, salaries and related expenses,
accounting, legal, bank charges, interest, office supplies, and other expenses
that may become necessary as they relate to repairs and maintenance of our
leased facilities and computer equipment. We will also incur expenses for any
outstanding operating leases that are currently in place (see commitment table
below).

         We intend to finance our business in fiscal 2005 through:

         (i)      Continued support from our Chinese factories in financing our
                  purchases and entering into agreements for payment of old
                  receivables;

         (ii)     Selling the remainder of our inventory on hand;

         (iii)    Continuing to reduce costs;

         (iv)     Using our credit facility with Milberg Factors; and

         (v)      Utilizing credit facilities that are available to our
                  wholly-owned subsidiary to finance all direct shipments.

         In order to reduce the need to maintain inventory in United States
locations in fiscal 2005, we intend to generate a larger share of our total
sales through FOB sales from our wholly-owned subsidiary. These sales are
shipped directly to our customers from the ports in China and are primarily
backed by letters of credit. The customers take title to the merchandise at
their consolidators in China and are responsible for their shipment, duty,
clearance and freight charges to their locations. We will also assist our
customers in the forecasting and management of their inventories of our product.

         If we need additional financing during our peak selling season, we
intend to approach Milberg. If Milberg is not willing to provide us with
additional financing, we will need to seek additional capital from other
sources. However, we can not assure that we will be able to obtain additional
financing or that the terms will be acceptable to us. If we need to obtain
additional financing and fail to do so, it may have a material adverse effect on
our ability to meet our financial obligations and continue to operate.

Debt and Contractual Obligations

         Our commitments for debt and other contractual arrangements are
summarized as follows:
<TABLE>
<CAPTION>

                                                                             Years ending March 31,
                                                       -------------------------------------------------------------------
                                            Total          2004          2005          2006          2007         2008
                                        -------------- -------------- ------------ -------------- ------------ -----------
<S>                                        <C>            <C>            <C>             <C>       <C>           <C>
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
Revolving Credit Facilities                $7,115,114     $7,115,114           --             --           --          --
Convertible Debentures                     $4,000,000             --           --     $4,000,000           --          --
</TABLE>

         Merchandise license guarantee reflects amounts that we are obligated to
pay as guaranteed royalties under our various license agreements. In fiscal
2003, we had guaranteed minimum royalty payments under our license agreements
with MTV Networks, Nickelodeon, Hard Rock Academy and Motown (Universal Music).
In fiscal 2004, we have guaranteed minimum royalty payments under the license
agreement with MTV and Motown (Universal Music).

         We have leases for property in Rancho Dominguez and Compton California,
as well as in Coconut Creek, Florida. We have equipment leases for forklifts and
copy machines. Our revolving credit facility represents our credit facility with
LaSalle Business Credit, LLC, which was terminated as of January 31, 2004.

         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 1,038,962 shares of common stock at
$3.85 per share, subject to adjustment in certain situations. We also issued an
aggregate of 457,143 warrants to the investors. The exercise price of the
warrants is $4.025 per share and the warrants expire on September 7, 2006. We
have an obligation to register the shares of common stock underlying the
debenture and warrants and filed a registration statement on Form S-1 to
register the shares on October 9, 2003.

         Effective as of February 9, 2004, we amended the convertible debenture
agreements to increase the interest rate to 8.5% per annum effective as of
February 9, 2004, and grants warrants to purchase an aggregate of 30,000 shares
of the Company's common stock to the debenture holders on a pro-rata basis.
These concessions were in consideration of the debenture holder's agreements to
(i)enter into new subordination agreements with the Company's new lender,
Milberg Factors, (ii) to waive all liquidated damages due under the convertible
debentures and related transaction documents through July 1, 2004 and (iii) to
extend the effective date of the Form S-1 registration statement until July 1,
2004. The new warrants have an exercise price equal to $1.52 per share, the fair
market value of the Company's common stock on February 9, 2004, the date of the
grant.

Sources and uses of Cash

         Cash flows used in operating activities were $4,998,092 for the nine
months ended December 31, 2003. Cash flows were used in operating activities
primarily due to increases in accounts receivable in the amount of $9.4 million,
decreases in accounts payable of $3.2 million and decreases in existing
inventory of $12.2 million, as well as the loss for the period and other
non-cash expenses such as the tooling impairment and provision for inventory
losses.

         Cash used in investing activities for the nine months ended December
31, 2003 was $434,065. Cash used in investing activities resulted from the
purchase of fixed assets in the amount of $434,065. 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 three years.

                                       18
<PAGE>

         Cash flows provided by financing activities were $5,399,851 for the
nine months ended December 31, 2003. This consisted of proceeds from the
exercise of options in the amount of $981,972. We also issued convertible
debentures with detachable stock purchase warrants. This transaction resulted in
a gross increase in cash of $4 million. We received subordinated debt from
related parties of $1 million in July of 2003 and paid $400,000 to a director
who had previously loaned money to our Company on a short term basis. The
remainder of cash provided from financing activities was provided by net
repayments on the credit line at LaSalle National Bank in the amount of
$4,308,438 and borrowings on the credit lines in Hong Kong in the amount of
$4,640,728 to fund ongoing operations.

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, our operations have been seasonal, with the highest net
sales occurring in the second and third quarters (reflecting increased orders
for equipment and music merchandise during the Christmas selling months) and to
a lesser extent the first and fourth quarters of the fiscal year. Sales in our
fiscal second and third quarter, combined, accounted for approximately 85% of
net sales in fiscal 2003, 81% of net sales in fiscal 2002 and 75% of net sales
in fiscal 2001.

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

INFLATION

         Inflation has not had a significant impact on our operations. We have
historically passed any price increases on to its customers since prices charged
by us 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. Our management
believes that a high degree of judgment or complexity is involved in the
following areas:

         Reserves on Inventories. We establish 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 our 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 December
31, 2003, the Company concluded that a valuation allowance was needed against
all of the Company's deferred tax assets, as it is not more likely than not that
the deferred taxes will be realized. For the nine months ended December 31,
2003, the Company recorded a tax provision of $1.2 million. This occurred
because the valuation allowance established against the deferred tax asset
exceeded the amount of the benefit created from carrying back a portion of the
current period losses. The carry-back of the losses from the current period
resulted in an income tax receivable of $1.2 million, which is included in
prepaid and other current assets in the accompanying balance sheets. The Company
has now exhausted its ability to carry back any further losses and therefore
will not be able to recognize tax benefits on future losses including its
expected fourth quarter loss.

         The Company's wholly-owned 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 2004, 2003, 2002, and 2001. For the nine months ended
December 31, 2003, a provision of $424,763 was recorded at the Hong Kong
statutory rate of 17.5%. Current Hong Kong taxes payable on the earnings of the
Company's Hong Kong subsidiary totaled $2.9 million at December 31, 2003.

                                       19
<PAGE>

         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.

         Collectibility of Accounts Receivable. Our allowance for doubtful
accounts is based on management's estimates of the creditworthiness of its
customers, current economic conditions and historical experience, 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 our Company, this allowance may need to be significantly
increased, which would have a negative impact on operations.

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

RISK FACTORS THAT MAY AFFECT FUTURE RESULTS AND MARKET PRICE OF STOCK

RISKS RELATED TO THE COMPANY'S BUSINESS AND OPERATIONS

WE HAVE SIGNIFICANT WORKING CAPITAL NEEDS AND IF WE ARE UNABLE TO OBTAIN
ADDITIONAL FINANCING, WHEN NEEDED, WE MAY NOT HAVE SUFFICIENT CASH FLOW TO RUN
OUR BUSINESS

         As of February 13, 2004, our cash on hand is limited. During the next
three months, we plan on financing our working capital needs from the collection
of accounts receivable and using the funds that are advanced to us by Milberg
under our factoring agreement. We also plan on selling our remaining inventory
on hand. If these sources do not provide us with adequate financing, we may try
to seek financing from a third party; however, we will have to obtain consent
from Mlberg prior to obtaining any other financing. If we are not able to obtain
adequate financing, when needed, it will have a material adverse effect on our
cash flow and our ability to run our business. If we have a severe shortage of
working capital, we may not be able to continue our business operations and may
be required to file a petition for bankruptcy under Chapter 11 of the U.S.
Bankruptcy Code or enter into some liquidation or reorganization proceeding.

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

         As of February 9, 2004, our cash position is limited. We are not able
to pay all of our creditors on a timely basis. We are not current on
approximately $2.7 million of outstanding accounts payable, which represents
accounts payable to factories in China. If we are not able to pay our current
debts as they become due, we may be deemed to be insolvent and we may go out of
business.

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 then-existing default under our credit agreement with
LaSalle Business Credit raised substantial doubt about our ability to continue
as a going concern.

         We paid our loan with LaSalle in full effective as of January 31, 2004
and terminated the agreement. We will replaced the LaSalle credit facility by
entering into a factoring agreement with Milberg Factors, Inc., effective as of
February 9, 2004. Pursuant to the agreement, Milberg, at its discretion, will
advance the Company with the lesser of 80% of our eligible accounts receivable
or $3.5 million. We do not know if this factoring agreement will provide us with
sufficient capital. If the agreement with Milberg does not provide sufficient
capital or that we are unable to obtain additional financing, we may have a
liquidity problem and this would affect our ability to continue our business
operations.

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

         We rely on a few large customers to provide a substantial portion of
our revenues. As a percentage of total revenues, our net sales to our five
largest customers during the fiscal period ended March 31, 2003, 2002 and 2001
were approximately 67%, 77% and 87% respectively. In fiscal 2003, three major

                                       20
<PAGE>

customers accounted for 21%, 17% and 15% of our net sales. We do not have
long-term contractual arrangements with any of our customers and they can cancel
their orders at any time prior to delivery. A substantial reduction in or
termination of orders from any of our largest customers would decrease our
revenues, profitability and cash flow.

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

         In February 2002, one of our largest customers, Best Buy returned
approximately $2.75 million in karaoke products to us that it had not been able
to sell during the Christmas season. Best Buy kept this inventory in its retail
stores, but converted the sales to consignment sales. Although we were not
contractually obligated to accept this return of the karaoke products, we did
this because we valued our relationship with Best Buy. Because we are dependent
upon a few large customers, we are subject to the risk that any of these
customers may elect to return unsold karaoke products to us in the future. If
any of our customers were to return karaoke products to us, it would reduce our
revenues and profitability.

WE ARE SUBJECT TO PRESSURE FROM OUR CUSTOMERS RELATING TO PRICE REDUCTIONS,
FINANCIAL INCENTIVES AND OTHER RISKS THAT FORCE US TO BEAR THE RISKS AND COSTS
OF CARRYING INVENTORY, AND IF WE ARE PRESSURED TO MAKE THESE CONCESSIONS TO OUR
CUSTOMERS, IT WILL REDUCE OUR REVENUES AND PROFITABILITY

         Because there is intense competition in the karaoke industry, we are
subject to pricing pressure from our customers. Many of our customers have
demanded that we lower our prices or they will buy our competitor's products. If
we do not meet our customer's demands for lower prices, we will not sell as many
karaoke products. In the nine months ended December 31, 2003, our sales to
customers in the United States decreased because of increased competition and
the increased amount of inventory that we had on hand, which was sole near or
below cost. We are also subject to the risk that our customers might demand
certain financial incentives, such as large advertising or cooperative
advertising allowances, which effectively reduce our selling prices.
Additionally, many of our customers place orders with us several months prior to
the holiday season, but they schedule delivery two or three weeks before the
holiday season begins. As such, we are subject to the risks and costs of
carrying inventory during the time period between the placement of the order and
the delivery date, which reduces our cash flow.

OUR GROSS PROFIT MARGINS HAVE DECREASED OVER THE PAST YEAR AND WE EXPECT THE
TREND TO CONTINUE

         Over the past year, our gross profit margins have decreased. In the
nine months ended December 31, 2003, our gross profit margin was 4.6% compared
to 21.7% in the nine months ended December 31, 2002 and for the three months
ended December 31, 2003 and 2002, our gross margin was (9.1%) and 19.8%,
respectively. This decline resulted from price competition and a shift in
customer orders from our parent company in the United States to our Hong Kong
subsidiary, International SMC. International SMC delivers our karaoke products
to customers directly from our manufacturer's factories in China and therefore
does not provide logistics, handling, warehousing and just in time inventory
support, which services are provided by our parent company in the United States.
Accordingly, the average sales price per unit realized by International SMC is
significantly lower than that of our parent company in the United States. We
expect further price competition and a continuing shift of sales volume to
International SMC. Accordingly, we expect that our gross profit margin will
decrease in fiscal 2004.

OUR SENIOR CORPORATE MANAGEMENT TEAM IS NEW TO THE SINGING MACHINE AND IS
REQUIRED TO DEVOTE SIGNIFICANT ATTENTION TO OUR FINANCING AGREEMENTS AND
SETTLING OUR CLASS ACTION LAWSUITS.

         Beginning on May 2, 2003, through the present date, we have had two
Chief Executive Officers and a Chief Operating Officer resign. Additionally,
four out of the five directors serving on our Board on May 2, 2003 have resigned
since that date. We hired a new Chief Operating Officer, Yi Ping Chan on March
31, 2003 and appointed two new directors, Bernard Appel and Richard Ekstract, on
October 31, 2003. We are in the process of searching for a new Chief Executive
Officer. It will take some time for our new management and our new board of
directors to learn about our business and to develop strong working
relationships with each other and our employees. In particular, coordination
between various divisions of our company have not been systematized and morale
has suffered as a consequence. Our new senior corporate management's ability to
complete this process has been and continues to be hindered by the time that it
needs to devote to other pressing business matters. New management needs to
spend significant time on restructuring our financing agreements and overseeing
legal matters, such as our class action lawsuit. We cannot assure you that this
major restructuring of our board of directors and senior management and the
accompanying distractions, in this environment, will not adversely affect our
results of operations.

                                       21
<PAGE>

THE SEC IS CONDUCTING AN INFORMAL INVESTIGATION OF THE COMPANY AND IF WE HAVE
DONE SOMETHING ILLEGAL, WE WILL BE SUBJECT TO FINES, PENALTIES AND OTHER
SANCTIONS BY THE SEC

         In August 2003, we were advised that the SEC had commenced an informal
investigation of our company. It appears that the investigation is focused on
the restatement of our financial statements in fiscal 2002 and 2001; however,
the SEC may be reviewing other issues as well. If the SEC finds that our company
has not fully complied with all applicable federal securities laws, we could be
subject to fines, penalties and other sanctions imposed by the SEC.

WE ARE NAMED AS A DEFENDANT IN A CLASS ACTION LAWSUIT RELATING TO THE
RESTATEMENT OF OUR FINANCIAL STATEMENTS FOR FISCAL 2002 AND FISCAL 2001, WHICH
IF DETERMINED ADVERSELY TO US, COULD RESULT IN THE IMPOSITION OF DAMAGES AGAINST
US AND HARM OUR BUSINESS AND FINANCIAL CONDITION

         We are named as a defendant in a class action lawsuit which arose from
the restatement of our financial statements for fiscal 2002 and 2001. In this
lawsuit, the plaintiffs allege that our executive officers and our company
violated Section 10(b) and Section 20(a) of the Securities Exchange Act of 1934
and Rule 10(b)-5. The plaintiffs seek compensatory damages, attorney's fees and
injunctive relief. While the specific factual allegations vary slightly in each
case, the complaints generally allege that our officers falsely represented the
Company's financial results during the relevant class periods. As of December
31, 2003, we had incurred approximately $125,000 of legal fees to defend the
class action lawsuit and it has significantly diverted the attention of our
management team. There can be no assurance that we will be able to settle this
litigation on acceptable terms or obtain a favorable resolution in court if we
do not settle this matter. If a significant monetary judgment is rendered
against us, we are not certain that we will have the ability to pay such a
judgment. Any losses resulting from these claims could adversely affect our
profitability and cash flow.

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

         Our license with MTV Networks is important to our business. We
generated $30,884,344 or 32.3% of our net sales from products sold under the MTV
license in fiscal 2003. During the nine months ended December 31, 2003, we
generated only $8.3 million or 12.2% of our net sales under this MTV license
agreement. Our MTV license was extended until April 30, 2004 with options for
MTV to renew for two additional periods through December 31, 2004; however, MTV
can terminate the license agreement for certain reasons over the course of the
calendar year 2004. If we were to lose our MTV license, it would have an effect
on our revenues and net income.

WE EXPERIENCE DIFFICULTY FORECASTING THE DEMAND FOR OUR KARAOKE PRODUCTS

         Because of our reliance on manufacturers in Asia for our machine
production, our production lead times range from one to four months. Therefore,
we must commit to production in advance of customers orders. It is difficult to
forecast customer demand because we do not have any scientific or quantitative
method to predict this demand. Our forecasting is based on management's general
expectations about customer demand, the general strength of the retail market
and management's historical experiences. As of December 31, 2003, we had $14.2
million in inventory against which a $6.2 million reserve has been taken.. We
will attempt to liquidate this inventory over the next six months. However, if
we are unable to sell this inventory, our revenues, cash flow and profitability
will be reduced.

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

         Sales of consumer electronics and toy products in the retail channel
are highly seasonal, with a majority of retail sales occurring during the period
from September through December in anticipation of the holiday season, which
includes Christmas. A substantial majority of our sales occur during the second
quarter ended September 30 and the third quarter 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. Our sales would be disproportionately adversely affected by
terrorist attacks, military engagements or other extraordinary events that
negatively affect the retail environment or consumer buying patterns.

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

         Our major competitors for karaoke machines and related products are
Craig 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 Compass, Pocket
Songs, Sybersound, UAV and Sound Choice. We believe that competition for karaoke
music is based primarily on popularity of song titles, price, reputation, and
delivery times. To the extent that we lower prices to attempt to enhance or
retain market share, we may adversely impact our operating margins. Conversely,
if we opt not to match competitor's price reductions we may lose market share,
resulting in decreased volume and revenue. To the extent our leading competitors
reduce prices on their karaoke machines and music, we must remain flexible to

                                       22
<PAGE>

reduce our prices. If we are forced to reduce our prices, it will result in
lower margins and reduced profitability. 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.

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

         The karaoke industry is characterized by rapid technological change,
frequent new product introductions and enhancements and ongoing customer demands
for greater performance. In addition, the average selling price of any karaoke
machine has historically decreased over its life, and we expect that trend to
continue. As a result, our products may not be competitive if we fail to
introduce new products or product enhancements that meet evolving customer
demands. The development of new products is complex, and we may not be able to
complete development in a timely manner, or at all. During the past twelve
years, Edward Steele, our former Chief Executive Officer, oversaw new product
development. Mr. Steele will be retiring from our company on February 28, 2004
and we have not yet identified a successor who will oversee new product
development. To introduce products on a timely basis, we must:

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

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

         -        transition our products to new manufacturing process
                  technologies;

         -        identify emerging technological trends in our target markets;

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

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

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

We believe that we will need to continue to enhance our karaoke machines and
develop new machines to keep pace with competitive and technological
developments and to achieve market acceptance for our products.

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

         We rely principally on four contract ocean carriers to ship virtually
all of the products that we import to our warehouse facilities in Compton and
Rancho Dominguez, 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 prevent or delay
our customers' receipt of inventory. If we our customers do not receive their
inventory on a timely basis, they may cancel their orders or return products to
us. Consequently, our revenues and net income would be reduced.

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

         We are dependent upon six 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, foreign currency fluctuations,
limitations on the repatriation of earnings and political instability, which
could have an adverse impact on our business. Furthermore, we have limited
control over the manufacturing processes themselves. As a result, any
difficulties encountered by our third-party manufacturers that result in product
defects, production delays, cost overruns or the inability to fulfill orders on
a timely basis could adversely affect our revenues, profitability and cash flow.

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

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

                                       23
<PAGE>

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

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

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

         Over the past two years, we have received notices from three music
publishers who have alleged that we did not have the proper copyright licenses
to sell certain songs included in our CD+G's. We have settled all of these
copyright infringement issues with these publishers. If we discover that we do
not have the proper copyright licenses for any other songs that are included in
our CD+G's and cassettes, we will be subject to additional liability under the
federal copyright laws, which could include settlements with the music
publishers and payment of monetary damages.

WE MAY BE INFRINGING UPON THE COPYRIGHTS OF THIRD PARTIES AND IF WE ARE DOING
SO, OUR PROFITABILITY WILL BE REDUCED

         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
and may result in a fine or damages being assessed against our company.

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

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

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

         We sell products to retailers, including department stores, lifestyle
merchants, direct mail retailers, which are catalogs and showrooms, national
chains, specialty stores, and warehouse clubs. Some of these retailers, such as
K-Mart, FAO Schwarz and KB Toys, have engaged in leveraged buyouts or
transactions in which they incurred a significant amount of debt, and operated
under the protection of bankruptcy laws. As of February 4, 2004, we are aware of
only two customers, FAO Schwarz and KB Toys, which are operating under the
protection of bankruptcy laws. In fiscal 2003, FAO Schwarz and KB Toys
represented less than 1% of our revenues and we expect that revenues from this
account will be less than 2% of our revenues in fiscal 2004. 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 result in bad debt expense to us and have a material adverse
effect on our revenues and future profitability.

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

         A significant amount of our merchandise is shipped to our customers
from one of our 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
substantially decrease our revenues and profitability.

                                       24
<PAGE>

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 occurs and we do not have a sufficient level
of inventory, a strike or work slow-down would result in increased costs to us
and may reduce our profitability.

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

         From December 1, 2002 through December 1, 2003, our common stock has
traded between a high of $13.10 and a low of $2.15. During this period, we have
restated our earnings, lost senior executives and Board members, had liquidity
problems and defaulted on our line of credit with LaSalle. Our stock price may
continue to be volatile based on similar or other adverse developments in our
business. In addition, the stock market periodically experiences significant
adverse price and volume fluctuations which may be unrelated to the operating
performance of particular companies.

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

         During the past year, a number of investors have held a short position
in our common stock. Based on reports received from ViWes InvestInfo, the ratio
for the number of shares short compared to the daily average volume in our stock
as of the dates was as follows:

                            Shares          Average Daily
         Month*             Short           Volume                     Ratio
         ------             -----           ------                     -----

         8/03              437,590             53,721                   8.15
         7/03              423,623            167,066                   2.54
         6/03              600,440             68,480                   8.77
         5/03              606,841             30,280                  20.04
         4/03              584,510             27,359                  21.36
         3/03              584,185             22,195                  26.32

*Monthly data as of settlement on the 15th of each month.

The anticipated downward pressure on our stock price due to actual or
anticipated sales of our stock by some institutions or individuals who engage in
short sales of our common stock could cause our stock price to decline.
Additionally, if our stock price declines, it may be more difficult for us to
raise capital.

OUR OBLIGATION TO MAKE SEVERANCE PAYMENTS COULD PREVENT OR DELAY TAKEOVERS

         Our employment agreements with Yi Ping Chan, April Green, Jack Dromgold
and John Dahl require us, under certain conditions, to make substantial
severance payments to them if they resign after a change of control. As of
September 30, 2003, Mr. Chan, Ms. Green, Mr. Dromgold and Mr. Dahl are entitled
to severance payments of $250,000, $73,600, $135,000 and $75,000, respectively.
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.

RISKS ASSOCIATED WITH OUR CAPITAL STRUCTURE

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

         As of December 31, 2003, there were outstanding stock options to
purchase an aggregate of 1,120,120 shares of common stock at exercise prices
ranging from $1.97 to $14.00 per share, not all of which are immediately
exercisable. The weighted average exercise price of the outstanding stock
options is approximately $4.81 per share. As of December 31, 2003, there were
outstanding immediately exercisable warrants to purchase an aggregate of 561,039
shares of our common stock. 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. To the extent that the aforementioned
convertible securities are exercised or converted, dilution to our stockholders
will occur.

                                       25
<PAGE>

THE $4 MILLION PRIVATE PLACEMENT THAT WE CLOSED IN SEPTEMBER 2003 WILL AFFECT
OUR ABILITY TO RAISE CAPITAL IN THE FUTURE

         On September 8, 2003, we closed a private offering in which we issued
$4 million of convertible debentures and stock purchase warrants to six
institutional investors. As part of this investment, we agreed to several
limitations on our corporate actions, some of which limit our ability to raise
financing in the future. If we enter into any financing transactions during the
one year period after the registration statement, of which this Prospectus is a
part, is effective we need to offer the institutional investors the right to
participate in such offering in an amount equal to the greater of (a) the
principal amount of the debentures currently outstanding or (b) 50% of the
financing offered to the outside investment group. For example, if we offer to
sell $10 million worth of our securities to an outside investment group, the
institutional investors will have the right to purchase up to $5 million of the
offering. This right may affect our ability to attract other investors if we
require external financing to remain in operations. Furthermore, for a period of
90 days after the effective date of the registration statement, we cannot sell
any securities.

         Additionally, we can not:

         -        sell any of our securities in any transactions where the
                  exercise price is adjusted based on the trading price of our
                  common stock at any time after the initial issuance of such
                  securities.

         -        sell any securities which grant investors the right to receive
                  additional shares based on any future transaction on terms
                  more favorable than those granted to the investor in the
                  initial offering

         These limitations are in place until the earlier of February 20, 2006
or the date on which all the debentures are converted into equity.

IF WE SELL ANY OF OUR SECURITIES AT A PRICE LOWER THAN $3.85 PER SHARE, THE
CONVERSION PRICE OF OUR DEBENTURES AT $3.85 PER SHARE WILL BE REDUCED AND THERE
WILL BE ADDITIONAL DILUTION TO OUR SHAREHOLDERS

         Given that our common stock is trading at a price of $2.22 per share as
of December 2, 2003, it is possible that we may need to sell additional
securities for capital at a price lower than $3.85 per share. If we sell any
securities at a price lower than $3.85 per share, the conversion price of our
debentures currently set at $3.85 per share will be reduced and there will be
more dilution to our shareholders if and when the debentures are converted into
shares of our common stock. If we issue or sell any securities at a price less
than $3.85 per share prior to September 8, 2004, the set price of the debentures
will be reduced by an amount equal to 75% of the difference between the set
price and the effective purchase price for the shares If such dilutive issuances
occur after September 8, 2004 but before the earlier of February 20, 2006 or
when all the debentures are converted into shares of our common stock, the set
price will be reduced by an amount equal to 50% of the difference between the
set price and effective purchase price of such shares. So, if we sold 1 million
shares of our common stock on December 1, 2003 for a price of $2.85 per share,
the set price of the debentures would be reduced by $1.22 to $2.63 and the
aggregate number of shares of our common stock that would be issued upon
conversion of the debentures would be increased from 1,038,963 shares to
3,278,689 shares.

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

         As of December 31, 2003, there were 8,756,318 shares of our common
stock outstanding. Of these shares, approximately 5,954,796 shares are eligible
for sale under Rule 144. We have filed two registration statements registering
an aggregate 3,794,250 of shares of our common stock (a registration statement
on Form S-8 to registering the sale of 1,844,250 shares underlying options
granted under our 1994 Stock Option Plan and a registration statement on Form
S-8 to register 1,950,000 shares of our common stock underlying options granted
under our Year 2001 Stock Option Plan). An additional registration statement on
Form S-1, of which this Prospectus is a part, was filed in October 2003,
registering an aggregate of 2,795,465 shares of our common stock. The market
price of our common stock could drop due to the sale of large number of shares
of our common stock, such as the shares sold pursuant to the registration
statements or under Rule 144, or the perception that these sales could occur.

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

         Our Certificate of Incorporation authorizes the issuance of 18,900,000
shares of common stock. As of December 31, 2003, we had 8,756,318 shares of
common stock issued and outstanding and an aggregate of 1,580,439 shares
issuable under our outstanding options and warrants. We also have an obligation
to issue up to 1,038,962 shares upon conversion of our debentures and have
reserved 207,791 additional shares for interest payment on the debentures. As
such, our Board of Directors has the power, without stockholder approval, to
issue up to 7,423,561 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

                                       26
<PAGE>

reduction of the book value or market price of our outstanding common stock.
Issuance of additional shares will reduce the proportionate ownership and voting
power of our then existing stockholders.

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

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

         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.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         Market risk represents the risk of loss that may impact our financial
position, results of operations or cash flows due to adverse changes in
financial and commodity market prices and interest rates. We are exposed to
market risk in the areas of changes in United States and international borrowing
rates and changes in foreign currency exchange rates. In addition, we are
exposed to market risk in certain geographic areas that have experienced or
remain vulnerable to an economic downturn, such as China. We purchase
substantially all our inventory from companies in China, and, therefore, we are
subject to the risk that such suppliers will be unable to provide inventory at
competitive prices. While we believe that, if such an event were to occur we
would be able to find alternative sources of inventory at competitive prices, we
cannot assure you that we would be able to do so. These exposures are directly
related to our normal operating and funding activities. Historically and as of
December 31, 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 2.5% per annum
("current interest rate"). As of December 31, 2003, our outstanding balance
under our credit facility was $2,474,386 and we are accruing interest at the
prime plus 2.5% per annum. This loan was paid in full on January 30, 2004. 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. On
September 8, 2003, we issued convertible notes in the amount of $4 million with
a fixed interest rate of 8% per annum.

FOREIGN CURRENCY RISK:

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

ITEM 4. CONTROLS AND PROCEDURES

         Under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer, we
conducted an evaluation (the "Evaluation") of the effectiveness of the design
and operation of our disclosure controls and procedures, as defined in Rules
13a-14(c) and 15d-15(c) under the Securities Exchange Act of 1934, within 90
days of the filing date of this report (the "Evaluation Date"). Based on this

                                       27
<PAGE>

Evaluation, our principal executive officer and principal financial officer
concluded that our disclosure controls and procedures are effective in timely
alerting them to material information required to be included in our periodic
SEC reports. It should be noted that the design of any system of controls is
based in part upon certain assumptions about the likelihood of future events,
and there can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions, regardless of how remote.

         In addition, we reviewed our internal controls, and there have been no
significant changes in our internal controls or in other factors that could
significantly affect those controls subsequent to the date of their last
evaluation.

                           PART II - OTHER INFORMATION


ITEM 1. LEGAL PROCEEDINGS

         From July 2003 through August 2003, eight 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. These
complaints have all been consolidated into one action styled Bielansky, et al.
v. Salberg & Co., et al., Case No. 03-80596-ZLOCH (the Shareholder Action).

         The complaints in the Shareholder Action allege violations of Section
10(b) and Section 20(a) of the Securities Exchange Act of 1934 and Rule 10(b)-5
promulgated there under. These 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.

         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 was
made on the board of directors for them to investigate the allegations or to
bring action. The Company is named as a nominal defendant in this case. This
case has been consolidated into the Shareholder Action identified above. The
derivative 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 court in the Shareholder Action has directed plaintiffs' counsel to
file one amended consolidated complaint no later than November 14, 2003. The
Company intends to vigorously defend the Shareholder Action. 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.

         A second shareholder derivative suit was filed in October 2003, which
makes generally the same allegations. The second derivative suit has not been
served on the Company or on any of its current or former officers and directors.
This suit has been transferred to the same judge to whom the Shareholder Action
has been assigned and has likewise been consolidated into the Shareholder
Action.

         In August 2003, we were advised that the Securities and Exchange
Commission had commenced an informal inquiry of our company. We are cooperating
fully with the SEC staff. It appears that the investigation is focused on the
restatement of our audited financial statements for fiscal 2002 and 2001. We
have been advised that an informal inquiry should not be regarded as an
indication by the SEC or its staff that any violations of law have occurred or
as a reflection upon any person or entity that may have been involved in those
transactions.

         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 compensation that was payable to them under our
investment banking agreement with them. We have entered into a settlement
agreement with AG Edwards, whereby we agreed to pay $181,067 over a six month
period and to issue them 40,151 shares of stock. These shares will be registered
by the form S-1 currently under amendment.

                                       28
<PAGE>

ITEM 2. CHANGES IN SECURITIES

(a) Not Applicable.

(b) Not Applicable.

(c) On December 19, 2003, we issued an aggregate of 221,920 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.

         NAME                   NUMBER OF OPTIONS  EXERCISE PRICE
         ----                   -----------------  --------------

         Frank Abell                  1,320          $   1.97
         Josef Bauer                  2,740          $   1.97
         Dan Becherer                 4,910          $   1.97
         Almina Brady-Dykes           1,320          $   1.97
         Pam Broyles                    500          $   1.97
         Elizabeth Canela               660          $   1.97
         Yi Ping Chan                52,800          $   1.97
         Belinda Cheung                 110          $   1.97
         Jeffrey Chiu                   220          $   1.97
         Brian Cino                     660          $   1.97
         John Dahl                   50,000          $   1.97
         April Green                  4,380          $   1.97
         Alicia Haskamp              24,600          $   1.97
         Jeff Ho                      5,000          $   1.97
         Michelle Ho                  5,660          $   1.97
         Wilson Ho                      220          $   1.97
         Irene Ko                       660          $   1.97
         Rose Labadessa               5,000          $   1.97
         Bill Lau                     5,990          $   1.97
         Doral Lee                    5,660          $   1.97
         Nataly Lessard               1,320          $   1.97
         Marian McElligott            3,290          $   1.97
         Alyssa Malamud               1,000          $   1.97
         Bernardo Melo                4,000          $   1.97
         Rick Ng                        110          $   1.97
         Dennis Norden                8,000          $   1.97
         Cathy Novello                  880          $   1.97
         Jennifer O'Kuhn                440          $   1.97
         Jorge Otaegui                  440          $   1.97
         John Petko                   1,500          $   1.97
         Terri Phillips                 660          $   1.97
         Melody Rawski                1,100          $   1.97
         Evelyn Romero                  500          $   1.97
         Kristi Ronyak                1,000          $   1.97
         Rafael Ros                   1,200          $   1.97
         Stacy Sethman                1,100          $   1.97
         Edward Steele               10,000          $   1.97
         John Steele                 12,200          $   1.97
         Nicolas Venegas                440          $   1.97
         Ho Man Yeung                   110          $   1.97
         Yen Yu                         220          $   1.97


On November 20, 2003, 40,151 shares of stock were issued to AG Edwards in
settlement of a disagreement on the terms of an investment banking agreement.
This stock was valued at $89,354, its market price on the date of grant. We
issued these shares to the AG Edwards & Sons, Inc. in reliance upon Section 4(2)
of the Securities Act, because it was knowledgeable, sophisticated and had
access to comprehensive information about us.

(d) Not applicable.


                                       29
<PAGE>

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.


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

Not applicable.


ITEM 5. OTHER INFORMATION

Not applicable.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(A) EXHIBITS

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

10.1        Factoring Agreement dated February 9, 2004 between Milberg Factors,
            Inc. and the Company.*
10.2        Security Agreement for Goods and Chattels dated February 9, 2004
            between Milberg Factors, Inc. and the Company.*
10.3        Security Agreement for Inventory dated February 9, 2004 between
            Milberg Factors, Inc. and the Company.*
10.4        Second Amendment to the Transaction Documents dated February 9, 2004
            between Omicron Master Trust, SF Capital Partners, Ltd, Bristol
            Investment Fund, Ltd., Ascend Offshore Fund, ltd., Ascend Partners,
            LP, Ascend Partners Sapient L.P. and the Company.*
10.5        Amendment to Domestic Licensing Agreement dated November 15, 2002
            between the Company and MTV Networks, a division of Viacom
            International, Inc.*
10.6        Fifth Amendment to Domestic Licensing Agreement dated December 23,
            2003 between the Company and MTV Networks, a division of Viacom
            International, Inc. (portions of this Exhibit 10.6 have been omitted
            pursuant to a request for confidential treatment filed with the
            Securities and Exchange Commission).*
10.7        Sales Agreement effective as of December 9, 2003 between the Company
            and CPP Belwin, Inc. and its affiliates (portions of this Exhibit
            10.7 have been omitted pursuant to a request for confidential
            treatment filed with the Securities and Exchange Commission).*
31.1        Certification of Yi Ping Chan, Chief Executive Officer and Chief
            Operating Officer of The Singing Machine Company, Inc., Pursuant to
            Rule 13a-14(a) under the Securities Exchange Act of 1934.*
31.2        Certification of April Green, Chief Financial Officer of The Singing
            Machine Company, Inc., Pursuant to Rule 13a-14(a) under the
            Securities Exchange Act of 1934.*
32.1        Certification of Yi Ping Chan, Chief Executive Officer and Chief
            Operating Officer of The Singing Machine Company, Inc., Pursuant to
            18 U.S.C. Section 1350.*
32.2        Certification of April Green, Chief Financial Officer of The Singing
            Machine Company, Inc., Pursuant to 18 U.S.C. Section 1350.*
_________
*Filed herewith

(B) REPORTS ON FORM 8-K

During the three months ended December 31, 2003, we filed one Form 8-K. On
November 7, 2003, we filed a Form 8-K announcing our financial results for the
six months ended September 30, 2003.

                                       30
<PAGE>

                                   SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

                        THE SINGING MACHINE COMPANY, INC.

                             DATED FEBRUARY 17, 2004





                    By: /s/ April J. Green
                    -------------------------------------------
                    April J. Green
                    Chief Financial Officer
                    (On behalf of Registrant and
                    Chief Accounting Officer)



                             DATED FEBRUARY 17, 2004





                    By: /s/ Yi Ping Chan
                    -------------------------------------------
                    Yi Ping Chan
                    Chief Executive Officer
                    (On behalf of Registrant and
                    Principal Executive Officer)


                                       31
<PAGE>

                                    EXHIBITS


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

10.1        Factoring Agreement dated February 9, 2004 between Milberg Factors,
            Inc. and the Company.
10.2        Security Agreement for Goods and Chattels dated February 9, 2004
            between Milberg Factors, Inc. and the Company.
10.3        Security Agreement for Inventory dated February 9, 2004 between
            Milberg Factors, Inc. and the Company.
10.4        Second Amendment to the Transaction Documents dated February 9, 2004
            between Omicron Master Trust, SF Capital Partners, Ltd, Bristol
            Investment Fund, Ltd., Ascend Offshore Fund, ltd., Ascend Partners,
            LP, Ascend Partners Sapient L.P. and the Company.
10.5        Amendment to Domestic Licensing Agreement dated November 15, 2002
            between the Company and MTV Networks, a division of Viacom
            International, Inc.
10.6        Fifth Amendment to Domestic Licensing Agreement dated December 23,
            2003 between the Company and MTV Networks, a division of Viacom
            International, Inc. (portions of this Exhibit 10.6 have been omitted
            pursuant to a request for confidential treatment filed with the
            Securities and Exchange Commission).
10.7        Sales Agreement effective as of December 9, 2003 between the Company
            and CPP Belwin, Inc. and its affiliates (portions of this Exhibit
            10.7 have been omitted pursuant to a request for confidential
            treatment filed with the Securities and Exchange Commission).
31.1        Certification of Yi Ping Chan, Chief Executive Officer and Chief
            Operating Officer of The Singing Machine Company, Inc., Pursuant to
            Rule 13a-14(a) under the Securities Exchange Act of 1934.
31.2        Certification of April Green, Chief Financial Officer of The Singing
            Machine Company, Inc., Pursuant to Rule 13a-14(a) under the
            Securities Exchange Act of 1934.
32.1        Certification of Yi Ping Chan, Chief Executive Officer and Chief
            Operating Officer of The Singing Machine Company, Inc., Pursuant to
            18 U.S.C. Section 1350.
32.2        Certification of April Green, Chief Financial Officer of The Singing
            Machine Company, Inc., Pursuant to 18 U.S.C. Section 1350.

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.1
<SEQUENCE>3
<FILENAME>factoringagreement.txt
<DESCRIPTION>FACTORING AGREEMENT
<TEXT>
                                                                    Exhibit 10.1

                               FACTORING AGREEMENT

MILBERG FACTORS, INC.
99 Park Avenue
New York, NY 10016

Gentlemen:

         We propose the following agreement with you, effective as of February
9, 2004 wherein we agree to retain you as our sole factor in accordance with the
terms, provisions and conditions as hereinafter stated:

         1. The undersigned, hereby sells, assigns, transfers and sets over to
you as absolute owner and you hereby agree to purchase from the undersigned,
without recourse to the undersigned to the extent expressly set forth below, all
Receivables now or hereafter owned by us which are acceptable to you. You hereby
agree to assume the risk of loss resulting from a customer's nonpayment of an
approved Receivable due to the customer's financial inability at maturity to pay
such Receivable (including financial inability to pay arising out of the filing
of a bankruptcy or insolvency proceeding in respect of such customer). You shall
not be responsible, however, for nonpayment due to any reason other than such
inability to pay. The term "Receivables" means and includes all accounts,
accounts receivable, notes, bills, acceptances and any and all other forms of
obligations owing to us, whether secured or unsecured, all proceeds thereof and
all of our rights to any merchandise which is represented thereby (delivered or
undelivered), including all of our rights of stoppage in transit, replevin and
reclamation as an unpaid vendor or lienor. You shall be privileged to enjoy all
of the rights and remedies of the seller of such goods and shall be and become
subrogated to all guaranties, collateral and other rights possessed by us or due
to come into our hands, but you shall not be liable in any manner for exercising
or refusing to exercise any rights thereby bestowed. From time to time we shall
provide you with schedules describing all Receivables created or acquired by us
and shall execute and deliver to you at your offices in the City of New York
written assignments of such Receivables to you and shall furnish at the same
time copies of customers' invoices or the equivalent, together with original
shipping or delivery receipts for all merchandise sold and/or all notes, bills,
acceptances or other evidences of customer indebtedness duly endorsed in blank
by us, and any other information or documents you may call upon us from time to
time to submit, all in form satisfactory to you. Receivables not approved by you
as provided below in whole or in part (including any Receivables outstanding on
the date hereof) shall bear the factoring charge described below, and are hereby
assigned to you with full recourse to the undersigned to the extent and in the
respects not so approved.

         2. The amounts and terms of each sale to our customers shall be
submitted to you for your credit approval in writing and no sales or deliveries
shall be made without such written approval, which may be withdrawn at any time
before delivery, but in no event shall you have any credit risk on any
Receivable, whether or not approved by you, if the net face amount of such
Receivable is less than $150.00, or the invoice evidences charges for samples
supplied to our customer. Your factoring charge, due and payable at time of
purchase, shall be eighty one hundredths of one percent (0.80%) of the gross
amount of said Receivables, less any trade and cash discounts to customers
(which shall be computed on the shortest terms where optional terms are given);
but in no event shall your factoring charge on any invoice evidencing a
Receivable purchased hereunder be less than five dollars. You agree, however, to
reduce this minimum invoice charge to one dollar per invoice during any month in
which we transmit substantially all factored invoices to you electronically. In
the event that the terms of any of our sales exceeds 60 days, you shall receive
as to such sales an additional 1/4 of one percent for each additional 30 days,
or portion thereof, of extended terms or additional dating. In addition, with
prior written notice to us, you may from time to time impose a surcharge with
respect to Receivables from customers who are debtors-in-possession under the
Federal Bankruptcy Code, other high-risk customers or customers located outside
the United States. The purchase price of Receivables accepted by you is to be
the net face amount thereof less your factoring charge. The term "net face
amount" means the gross amount of Receivables, less trade and cash discounts

                                       1
<PAGE>

to customers (which shall be computed on the shortest terms where optional terms
are given) and credits and allowances to customers of any nature. After purchase
of Receivables by you, a discount, credit or allowance may be claimed solely by
the customer and the customer and the undersigned will not issue or grant any
discounts, credits or allowances to a customer without your prior consent. At
the time of purchase of Receivables and periodically thereafter, you may in your
sole and absolute discretion make advances to us and/or arrange for the issuance
of letters of credit for our benefit which advances and letters of credit, in
the aggregate and at anytime outstanding, will not exceed the lesser of (i)
$3,500,000 (the "Maximum Revolving Amount"), or (ii) eighty percent (80%) of
the purchase price, and you will credit to our account the balance of said
purchase price less any monies remitted, paid or otherwise advanced by you for
our account and less returns, trade and cash discounts, credits or allowances of
any nature at anytime issued, owed, granted or outstanding, upon the respective
collection of such Receivables, after adding thereto five (5) banking days to
cover mailing time, delays in remittances and clearance of checks, or, in the
case of approved Receivables, upon their respective uncollectability because of
the customer's financial inability at maturity to pay same. Notwithstanding the
foregoing, it is understood that you may, at our request, from time to time
advance a sum that is more or less than the sum determined by the application of
the above percentage of the purchase price and may, in fact, make advances in
excess of the Maximum Revolving Amount but you are under no obligation to do so;
all advances in excess of the aforesaid percentage, less all applicable
deductions, charges, chargebacks and reserves, and all advances in excess of the
Maximum Revolving Amount, are repayable on demand. Amounts taken by customers
for anticipation shall be charged to our account by you. The minimum aggregate
factoring charges payable under this Agreement for each contract year hereof
shall be two hundred thousand dollars ($200,000), which, to the extent of any
deficiency, shall be chargeable to our account with you on a monthly basis
(i.e., to the extent the monthly factoring charge is less than $16,666.66, the
deficiency shall be chargeable to our account). You shall be entitled to hold
all sums and all property of the undersigned at any time to our credit or in
your possession, or upon or in which you have a lien or security interest, as
security for all of our obligations at any time owing to you and to each
corporation which is at any time your parent, affiliate, subsidiary or a
co-subsidiary of your parent. Such obligations shall include, without
limitation, all obligations to you hereunder and all obligations for purchases
made by the undersigned from any other client factored or financed by you or by
any such parent, affiliate, subsidiary or co-subsidiary, whether under this
agreement or otherwise, no matter how or when arising and whether due or to
become due, and you shall have the right to charge to our account the amount of
all such obligations and pay over such amounts to such parent, affiliate,
subsidiary or co-subsidiary. Recourse to security shall not at any time be
required, and we shall at all times remain liable to you and such parent,
affiliate, subsidiary or co-subsidiary on demand for all loans and advances
(including any advances in excess of the net face amount of Receivables) to or
for our account and for all of our other obligations to you. You may at your
option reserve an amount of past sales (the "Reserve"), and revise said Reserve
from time to time, if in your sole judgment it is necessary to cover possible
returns of merchandise, deductions or other claims or setoffs made by customers.

         3. Subject to the provisions of this Agreement, upon our request, you
shall remit (and at any time in your sole discretion you may remit) any money
standing to our credit on your books in excess of the Reserve. You may charge to
our account interest on any monies remitted or otherwise advanced by you or
charged to our account hereunder (the "Advances") before the collection of
Receivables or in the case of approved Receivables, before their respective
uncollectability because of the customer's financial inability at maturity to
pay same as above described, at a rate three-quarters of one percent (.75%) per
annum above the highest publicly announced "reference", "prime" or "base"
interest rate of JPMorgan Chase Bank or The Bank of New York (the "Prime Rate"),
(which is now four percent (4%) per annum) computed on the basis of a 360 day
year (the "Effective Rate"); provided, however, that interest on Advances which
are in excess of eighty percent (80%) of the net face amount of outstanding
Receivables purchased hereunder, less the Reserve, disputed accounts and
unapproved Receivables will bear interest at a rate one percent (1%) per annum
in excess of the Effective Rate. Said Effective Rate shall be increased or
decreased effective the first day of the month following any month in which
there is an increase or decrease in the Prime Rate, such increase or decrease to
be in an amount equal to the increase or decrease in such Prime Rate; provided,
however, that in no event shall such Effective Rate be decreased below the rate
of four and three quarters percent (4.75%) per annum. Such interest is due and
payable at the close of each month. You

                                       2
<PAGE>

will account to us monthly and each monthly accounting will be fully binding
upon us unless we give you written notice of exceptions within sixty (60) days
from its date.

         4. We warrant and agree as to each such Receivable that at the time of
the sale or assignment thereof to you hereunder and at all times thereafter: it
will be a bona fide existing obligation created by the absolute sale and
delivery of merchandise or the rendition of services to customers in the
ordinary course of business and will be paid and performed according to the
terms provided therein; all documents delivered to you in connection therewith
are genuine; it will be enforceable against all parties thereto without credit,
defense, offset or counterclaim, real or claimed, whether arising out of the
transaction creating such Receivable or otherwise; and it will be free and clear
of liens and encumbrances. We further warrant and agree as to each such
Receivable that at the time of the sale or assignment thereof to you hereunder
we will have good title thereto and good right to sell, assign, transfer and set
over such Receivable to you. All invoices to customers shall state plainly on
the face thereof that the accounts receivable represented by such invoices have
been assigned and are payable only to you. You may prepare and mail all
customers' invoices, and billings of such customers' invoices by whomsoever done
shall constitute an assignment to you of the Receivables represented thereby
whether or not the undersigned executes any other specific instrument of
assignment. We hereby further warrant and agree that the customer in each
instance has received and will accept the merchandise sold or the services
rendered and the invoice therefor without dispute or claim in any respect
whatsoever, including, without limitation, disputes as to price, terms or
quality and defenses based on force majeure. We will notify you promptly of and
shall at our own cost and expense settle all disputes and claims and will pay
you promptly the amount of the Receivables affected thereby, as well as the
amount of any unapproved Receivable if unpaid at its due date. If you so elect
you are to have and are hereby granted the right and option at all times to
settle, compromise, adjust or litigate all disputes or claims directly with the
customer or other complainant upon such terms and conditions as you deem
advisable, and also the right to take possession of and to sell or cause to be
sold without notice any returned merchandise, at such prices, to such purchasers
and upon such terms as you deem advisable, and in any case to charge the
deficiencies, costs and expenses thereof (including attorneys' fees) to us. In
addition to all other rights hereunder, you may charge against our account the
full net face amount of any Receivable where there is such dispute, defense,
offset, claim and/or counterclaim (regardless of the extent or nature thereof or
whether arising out of the transaction creating such Receivable or otherwise) or
where the customer fails or refuses to pay the amount due for any reason other
than the customer's financial inability at maturity to pay, or if any unapproved
Receivable is unpaid at its due date, but such chargeback shall not be deemed a
re-assignment thereof, and title to such Receivable shall remain in you until
such Receivable is fully paid, settled or discharged. If monies are due and
owing from a customer for both credit-approved and non credit-approved
Receivables, any payments or recoveries received on such Receivables will be
applied first to any credit-approved Receivables. We hereby agree to indemnify
and hold you harmless against and in respect of any and all liability, loss or
expense (including attorneys' fees) arising out of or relating to any breach of
warranty or covenant on our part. Any merchandise which is returned by customers
or otherwise recovered shall be set aside, marked in your name and held by us as
your trustee. We exonerate you from any liability for any loss, depreciation or
other damage to Receivables unless caused by your willful and malicious act. We
agree to execute such further instruments as may be required or permitted by any
law relating to notices of or affidavits in connection with assignments of
accounts receivable and to cooperate with you in the filing or recording and
renewal thereof. As additional security for all of our obligations to you, as
hereinabove defined, the undersigned hereby grants you a continuing security
interest in all Accounts, General Intangibles and Contract Rights (as said terms
are defined in Article 9 of the Uniform Commercial Code) now existing or
hereafter acquired by us and all proceeds thereof. Each sale of Receivables
hereunder shall constitute and be a transaction separate from and independent of
each other, but all such transactions shall be subject to and governed by each
and every of the terms, provisions and conditions of this agreement. During the
term of this agreement we shall not sell, negotiate, pledge or assign or grant
any security interest in any Receivables, Accounts, General Intangibles,
Contract Rights or inventory to any one other than you without your prior
consent, nor shall we grant or permit to exist without your prior consent any
mortgage, pledge, security interest, encumbrance or lien of any kind upon any of
our property, except liens for taxes not yet due, liens incidental to our
business which were not incurred in connection with the borrowing of

                                       3
<PAGE>

money or obtaining of advances or credit and which do not in the aggregate
materially detract from the value of our assets or impair the use thereof in the
operation of our business. We authorize you to file such financing statements
under the Uniform Commercial Code as you may deem necessary or advisable to
perfect the security interests we have granted to you under or in connection
with this Agreement or otherwise. We appoint Stephen R. Murphy or any other
person whom you may designate as our attorney with power: to endorse our name on
any checks, notes, acceptances, money orders, drafts or other forms of payment
or security that may come in your possession; to sign our name on any invoice or
bill of lading relating to any Receivable, on drafts against customers, on
schedules of assignment of Receivables, on notices of assignment and public
records, on verification of accounts and on notice to customers; to notify the
post office authorities to change the address for delivery of our mail to an
address designated by you; to receive, open and dispose of all mail addressed to
us; to send requests for verification of accounts to customers; and to do all
other things you deem necessary to carry out this Agreement. We hereby ratify
and approve all acts of the attorney and neither you nor the attorney will be
liable for any acts of commission or omission, nor for any error of judgment or
mistake of fact or law. This power, being coupled with an interest, is
irrevocable so long as any Receivable sold to you remains unpaid or any money
remains due to you from us. We shall immediately place notations upon our books
of account to disclose the assignment of all Receivables, accounts, general
intangibles and contract rights to you.

         5. The undersigned will repay upon demand all our obligations to you
and in addition thereto all costs and expenses, including without limitation
reasonable attorneys' fees, incurred to obtain or enforce payment of any
obligation of the undersigned to you, or in the prosecution or defense of any
action or proceeding either against you or us concerning any matter arising out
of or relating to this Agreement, the Receivables, any collateral pledged in
your favor and/or any of our obligations to you, including, without limitation,
to defend successfully, in whole or in part, any and all actions or proceedings
brought by the undersigned. In addition, we agree to reimburse you for the
amount of all filing and search fees, reasonable attorneys' fees, costs and
expenses incurred by you in connection with the negotiation, preparation,
closing, administration and enforcement of this agreement and any ancillary
documents issued in connection herewith and modifications and additions to any
of them. We shall also pay your customary charges for all services performed by
you for us at our request and all banking facility charges incurred in
connection with the opening and operation of our account with you, and we shall
also pay you your customary charges for any field examination, collateral
analysis or other business analysis, the need for which is determined by you,
plus all costs and disbursements incurred by you in the performance of such
examinations or analysis. If any remittances are made directly to us, we shall
hold the same as your property and immediately deliver them to you in their
original form. We hereby waive presentment and protest of any instrument and
notice thereof, notice of default and any other notices to which we might
otherwise be entitled. All sales of Receivables to you by us shall be deemed to
include all of our right, title and interest to all of our books, records, files
and all other data and documents relating to each Receivable. If any tax by any
governmental authority is imposed on any transaction between us, or in respect
to sales or the merchandise affected by such sales, which you are or may be
required to withhold or pay, we agree to indemnify and hold you harmless in
respect of such taxes, and we will repay you the amount of any such taxes, which
may be charged to our account.

         6. We warrant that we are solvent and will so remain during the terms
of this Agreement. We agree to furnish to you year-end financial statements
certified by our regularly employed Certified Public Accountant, such unaudited
financial statements and financial information as you shall reasonably request,
copies of each filing made by us with the Securities and Exchange Commission
(including, without limitation, Forms 10-Q, 10-K and 8-K, and all registration
statements) and each press release issued by us, within two business days of
such filing or issuance, and, on each anniversary hereof, a list of our 5% or
greater shareholders, officers and directors. We hereby represent, warrant and
covenant to you that: (a) the execution, delivery and performance of this
Agreement, any supplements hereto and all related documents, the sale of
Receivables hereunder, the borrowing of loans and advances hereunder and
thereunder, if any, and the grants of security interests hereunder and
thereunder, do not and will not (i) violate in any material respect the
provisions of any applicable law, statute, rule, regulation, order or decree to
which we are subject, (ii) conflict with, result in a breach of, or constitute a
default under, our certificate of incorporation

                                       4
<PAGE>

or by-laws, or, in any material respect, any indenture, agreement or other
instrument to which we are a party, or by which we or any of our property may be
bound, or (iii) result in the creation or imposition of any security interest,
mortgage, pledge or other lien upon any property now owned or hereafter acquired
by us, other than the security interests granted to you hereunder; (b) the
operation of our business is and will remain in compliance in all material
respects with all applicable laws including all applicable environmental laws
and regulations and all applicable state and federal laws and regulations; (c)
based upon the Employee Retirement Income Security Act of 1974 ("ERISA") and the
regulations and published interpretations thereunder (i) we have not engaged in
any Prohibited Transactions as defined in Section 406 of ERISA and Section 4975
of the Internal Revenue Code, as amended, (ii) we have met all applicable
minimum funding requirements under Section 302 of ERISA in respect of our plans,
(iii) we have no knowledge of any event or occurrence which would cause the
Pension Benefit Guaranty Corporation to institute proceedings under Title IV of
ERISA to terminate any employee benefit plan(s), (iv) we have no fiduciary
responsibility for investments with respect to any plan existing for the benefit
of persons other than our employees and (v) we have not withdrawn, completely or
partially, from any multiemployer pension plan so as to incur liability under
the Multiemployer Pension Plan Amendments Act of 1980; (d) we are a corporation
duly incorporated, validly existing and in good standing under the laws of the
state of our incorporation and are and will remain duly licensed and qualified
to do business and are in good standing in all other states wherein the nature
of our business makes licensing or qualification as a foreign corporation
necessary and wherein the failure to be so licensed or qualified could have a
material adverse effect on our condition, business or operations; (e) except as
disclosed on Schedule A hereto, there are no pending or threatened
investigations, actions or proceedings before or by any court, governmental
department, commission, board, bureau or administrative agency which if
adversely determined would materially affect our condition, business or
operations; (f) we own and have good and marketable title to all of the
Receivables, goods and chattels and other assets real and personal in which a
lien or security interest is given to you under your security agreements free
and clear of all liens, charges and encumbrances; (g) except as disclosed on
Schedule A hereto, we have filed all material tax returns and paid all material
United States federal, state and local taxes, and non-U.S. taxes, other than
taxes not yet due or which may hereafter be paid without penalty, and have no
knowledge of any deficiency or additional assessment in connection therewith not
provided for on our books, and will continue to do so during the term hereof;
(h) we are (i) in compliance with, and (ii) have procured and are now in
possession of, all material licenses or permits required by any applicable
United States federal, state or local or non-U.S. law or regulation for the
operation of our business in each jurisdiction wherein we are now conducting or
propose to conduct business; (i) we are not in default in the payment of the
principal of or interest on any indebtedness for borrowed money or, in any
material respect, under any instrument or agreement under and subject to which
any indebtedness for borrowed money has been issued and no event has occurred
under the provisions of any such instrument or agreement which with or without
the lapse of time or the giving of notice, or both, constitutes or would
constitute an event of default thereunder; (j) we will promptly inform you of:
(i) the commencement of all proceedings and investigations by or before any
governmental or nongovernmental body and all actions and proceedings in any
court or before any arbitrator against or in any way concerning any of our
properties, assets or business, which might singly or in the aggregate, have a
materially adverse effect on us, (ii) any amendment of our certificate of
incorporation or by-laws, (iii) any change in our business, assets, liabilities,
financial condition, results of operations or business prospects which has had
or might have any materially adverse effect on us, (iv) any default or Event of
Default hereunder or any event which with the passage of time or giving of
notice or both would constitute a default or Event of Default, (v) any default
or any event which with the passage of time or giving of notice or both would
constitute a default under any agreement for the payment of money to which we
are a party or by which we or any of our properties may be bound or which would
have a material adverse effect on our business, operations, property or
financial condition, (vi) any change in the location of our places of business,
and (vii) any change in our corporate name; (k) all financial projections
prepared by us or at our direction and delivered to you will represent, at the
time of delivery to you, our best estimate of our future financial performance
and will be based upon assumptions which are valid in light of the then current
business conditions; (l) all balance sheet and income statements which have been
delivered to you fairly, accurately and properly state our financial condition
and there has been no material adverse change in our financial condition as
reflected in such statements since the date of the latest thereof and such
statements do not fail to disclose any fact or facts which might materially and

                                       5
<PAGE>

adversely affect our financial condition; (m) we will not hereafter incur
indebtedness for borrowed money, except to you and except for indebtedness
incurred by our Hong Kong subsidiary, International SMC (HK) Limited, in an
aggregate amount not to exceed $5,000,000, provided that we shall not incur any
liability in respect thereof, whether by guarantee or otherwise; (n) we will not
guarantee or endorse the obligations of any person, firm or corporation, except
in the ordinary course of business, enter into any merger or consolidation, or
purchase or otherwise acquire the stock or any material obligations or assets of
any person, firm, corporation or other enterprise; (o) Yi Ping Chan will not
cease to be our Chief Operating Officer, and Josef A. Bauer will not cease to be
a director and significant shareholder; (p) we will not pay any management fees
or make any similar payments or declare any dividends, except dividends payable
exclusively in our stock, or redeem any of our stock or make any other payments
in respect of our stock that are the equivalent to dividends or stock redemption
payments, to any shareholder or affiliate as long as any debts and obligations
hereunder remain outstanding without your express prior written consent; and (q)
we will not issue any guarantees of the obligations of any third person or
entity as long as any debts and obligations hereunder remain outstanding,
without your express prior written consent.

         7. This Agreement shall be governed by and interpreted in accordance
with the laws of the State of New York applicable to contracts to be performed
wholly within the State of New York and shall have an initial term of two years
from its effective date and thereafter shall be automatically renewed for
successive periods of two years unless terminated by either you or us at the
conclusion of its initial term or any renewal term by giving the other at least
sixty (60) days prior written notice. If the aggregate purchase price of
approved Receivables you credit to our account in any contract year as a result
of their respective uncollectability because of the customer's financial
inability at maturity to pay same (net of recoveries thereon) exceeds
one-hundred percent (100%) of the aggregate factoring charges (i.e.,
commissions) posted to our account with respect to such contract year, then you
shall have the option to extend the term of this Agreement for an additional one
(1) year period beyond the expiration of the term during which such event
occurs. As so extended, the renewal and termination provisions of this paragraph
will continue to apply. You will endeavor to give us timely written notice of
such extension, but your failure to do so will not constitute a breach of, or
otherwise impair your ability to extend, this Agreement. The mailing of a
registered or certified letter of notice addressed by one party to the other at
its usual address shall constitute sufficient notice which shall be effective
for the purposes set forth therein on the appropriate date specified in such
letter.

Notwithstanding the foregoing, you may terminate this Agreement, without notice,
upon the occurrence of any one or more of the following events (an "Event of
Default"): (a) default in the payment or performance, when due or payable, of
any payment required under this Agreement or under any future agreement or
supplement with you or under any agreement to which we are a party with third
parties; (b) any warranty, representation, or other statement made or furnished
to you by us or on our behalf or by any guarantor of our obligations hereunder
or in connection herewith or in any instrument furnished in compliance with or
in reference to this Agreement proves to have been false or misleading in any
material respect when made or furnished or becomes false in any material
respect; (c) we fail or neglect to perform, keep or observe any term, provision,
condition, covenant, warranty or representation contained in this Agreement or
in any other agreement between us or any rider or supplement which is required
to be performed, kept or observed by us; (d) any statement, report, financial
statement, or certificate made or delivered by us, or by any of our officers,
employees or agents, to you or filed with the Securities and Exchange Commission
is not true and correct in any material respect; (e) the imposition of a lien or
encumbrance on any of our assets, including the Receivables, or the making of
any levy, seizure, or attachment on all or any of our assets, including the
Receivables; (f) any material adverse change in our financial condition or the
financial condition of any guarantor of our obligations hereunder; (g) we or any
guarantor of our obligations hereunder become insolvent, or unable to meet our
debts as they mature, or fail, suspend or go out of business or a case is
commenced under the Bankruptcy Code or an order for relief in a case under the
Bankruptcy Code is entered with respect to us or any such guarantor, or a
custodian or receiver (or other court designee performing the functions of a
receiver) is appointed for or takes possession of either our or any such
guarantor's assets or affairs; (h) we or any guarantor of our obligations
hereunder cease to conduct our business as now conducted or are enjoined,
restrained or in any

                                       6
<PAGE>

way prevented by court, governmental or administrative order from conducting all
or any material part of our business affairs; (i) a notice of any lien, levy or
assessment is filed of record with respect to all or any of our assets by the
United States, or any department, agency or instrumentality thereof, or by any
state, county, municipal or other governmental agency, including, without
limitation, the Pension Benefit Guaranty Corporation, or if any taxes or debts
owing at any time or times hereafter to any one of them becomes a lien or
encumbrance upon any of the Receivables or any of our other assets and the same
is not released within thirty (30) days after the same becomes a lien or
encumbrance; (j) you shall in good faith deem yourself insecure or unsafe; (k)
any guaranty given you with respect to our obligations is limited or terminated
or otherwise deemed unenforceable or invalid; (1) death of a guarantor of our
obligations hereunder or in connection herewith which guaranty is not replaced
by a guarantor, acceptable to you in your sole discretion; (m) we shall fail to
pay our taxes when due unless such taxes are being contested in good faith by
appropriate proceeding and with respect to which adequate reserves have been
provided on our books; (n) should there be a sale or transfer of all or
substantially all of our assets or any material change in our shareholdings; (o)
should our Tangible Net Worth (as customarily defined under GAAP) be less than
$7,500,000; or (p) should our Working Capital (as customarily defined under
GAAP) be less than $7,500,000. Upon the effective date of termination for
whatever reason, all moneys chargeable to our account under this Agreement shall
be immediately due and payable without further notice or demand. Notwithstanding
termination, until all your rights and all our obligations hereunder (including
without limitation the payment in full of all moneys chargeable to our account
under this Agreement and the provision of an indemnity as provided in the last
sentence of this Agreement) have been fully satisfied, (i) we shall continue to
assign to you and grant you a security interest in all Receivables then existing
or thereafter arising, shall not factor or assign Receivables, or grant a
security interest therein, to any other person or entity, shall state on the
face of all invoices that the Accounts Receivable represented by such invoices
have been assigned and are payable only to you, and shall immediately deliver
any remittances to you in their original form, (ii) all of our obligations and
all of your rights and powers with respect to Receivables then existing or
thereafter arising, with respect to other security then existing or thereafter
arising or acquired, and with respect to transactions or events occurring prior
to the effective date of such termination shall be unaffected and unimpaired by
such termination, and (iii) all of our representations, warranties, covenants
and agreements and all other provisions binding upon us contained herein shall
survive and continue in full force and effect, and shall be fully operative.

         8. Failure by you to exercise any right, remedy or option under this
Agreement or delay by you in exercising the same will not operate as a waiver;
no waiver or consent by you will be effective unless it is in writing and then
only to the extent specifically stated. This Agreement cannot be changed or
terminated other than by a writing signed by the party to be charged, is our
entire contract, and is for the benefit of and binding upon the parties hereto
and their respective successors and assigns, heirs, executors, administrators
and personal representatives. Your rights and remedies under this agreement will
be cumulative and not exclusive of any other right or remedy which you may have.
Both parties agree that all actions and proceedings directly or indirectly
relating to this Agreement will be litigated exclusively in the federal or state
courts located in the County and State of New York and that such courts are
convenient forums and both parties submit to the personal jurisdiction of such
courts. BOTH YOU AND WE WAIVE ALL RIGHT TO A TRIAL BY JURY IN ANY LITIGATION
RELATING TO TRANSACTIONS UNDER THIS AGREEMENT, SUPPLEMENTS HERETO AND ANY
RELATED AGREEMENTS, AND WE AGREE NOT TO ASSERT ANY COUNTERCLAIM OF ANY NATURE IN
SUCH LITIGATION. In the event that you cease to act as factor for us hereunder,
we agree to furnish to you an indemnity satisfactory to you against any item
which could be charged to us under the terms hereof which may in

                                       7
<PAGE>

your sole and absolute discretion include the retention of any property held by
you or the holding by you without interest from the date of termination of any
balance standing to our credit, as security for our obligations hereunder.

                  Attest:                Very truly yours,

                                         THE SINGING MACHINE COMPANY, INC.


/s/ April Green                          By: /s/ Yi Ping Chan
- -------------------------                    ------------------------------
                                            Yi Ping Chan, Interim CEO & COO

                  (Seal)                 Date:  February 9, 2004

                                         Address: 6601 Lyons Road, Building A-7
                                                  Coconut Creek, FL 33073


                  Attest:
                                         Accepted at New York, N.Y.

                                         MILBERG FACTORS, INC.


/s/ Stephen R. Murphy                    By: /s/ Daniel R. Milberg
- -------------------------                    -------------------------
Stephen R. Murphy,                           Daniel R. Milberg,
Senior Vice President,                       Senior Vice President
Secretary & Treasurer

                  (Seal)



                                       8
<PAGE>

                                   Schedule A
                                   ----------

Section 6(e) and 6(g)


                                       9

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.2
<SEQUENCE>4
<FILENAME>goodsandchattels.txt
<DESCRIPTION>SECURITY AGREEMENT
<TEXT>
                                                                    Exhibit 10.2

                     SECURITY AGREEMENT--GOODS AND CHATTELS

To:      MILBERG FACTORS, INC.
         99 Park Avenue
         New York, NY 10016

Gentlemen:

        1. To secure the payment of all debts, liabilities, obligations,
covenants and duties owing by us to you under that certain Factoring Agreement
bearing the effective date of February 9, 2004 as well as to secure the payment
in full of the other Obligations referred to herein, we hereby grant to you a
continuing security interest in all goods and general intangibles (as defined in
Article 9 of the Uniform Commercial Code) whether now owned or hereafter
acquired by us and wherever located, all replacements and substitutions therefor
or accessions thereto and all proceeds thereof, including, without limitation,
the machinery and equipment described in the annexed Schedule "A" (all herein
referred to collectively as "Collateral"). Inventory is specifically excluded
from the Collateral.

        2. The term "Obligations" as used herein shall mean and include the
indebtedness owing by us to you as hereinabove specifically set forth and also
any and all other loans, advances, extensions of credit, endorsements,
guaranties, benefits or financial accommodations heretofore or hereafter made,
granted or extended by you to us or which you have or will become obligated to
make, grant or extend to or for our account and any and all interest,
commissions, obligations, liabilities, indebtedness, charges or expenses
heretofore or hereafter chargeable against us or owing by us to you or upon
which we may be or have become liable as endorser and guarantor and any and all
renewals or extensions of any of the foregoing, no matter how or when arising,
direct or indirect, absolute or contingent, liquidated or unliquidated, and
whether under any present or future agreement or instrument between us or
otherwise and the amount due upon any notes or other obligations given to or
received by you for or on account of any of the foregoing and the performance
and fulfillment by us of all of the terms, conditions, promises, covenants,
provisions and warranties contained in this Security Agreement and any note or
notes secured hereby or in any present or future agreement or instrument between
us.

        3. Unless expressly limited by the provisions of paragraph "1", your
security interest granted and created in the Collateral shall extend and attach
to the entire Collateral whether the same constitutes personal property or
fixtures, including, without limitation, to all dyes, jigs, tools, benches,
tables, substitutions, accretions, component parts, replacements thereof and
additions thereto, as well as to all accessories, motors, engines, auxiliary
parts used in connection with or attached to the Collateral and any packing
material in which the Collateral may be contained. We shall furnish you from
time to time upon request with written statements and schedules identifying and
describing the Collateral and any additions thereto and substitutions thereof in
such detail as you may require.

        4. We hereby warrant and covenant to you that:
(a) the Collateral is presently located at

         6601 Lyons Road, Building A-7, Coconut Creek, FL 33073
         303 West Artesia Blvd., Compton, CA 90220
         1975 Charles Willard Street, Rancho Dominguez, CA 90220

and we will notify you promptly of any new location where Collateral may be
located;


(b) we are the lawful owner of the Collateral free from any adverse lien,
security or encumbrance whatsoever and have the sole right to grant a security
interest therein and will defend the Collateral against all claims and demands
of all persons;

(c) we will keep the Collateral free and clear of all attachments, levies,
taxes, liens, security interests and encumbrances of every kind and nature;

                                       1
<PAGE>

(d) we will at our own cost and expense keep the Collateral in good state of
repair and will not waste or destroy the same or any part thereof;

(e) we will not without your prior written consent, sell, exchange, lease or
otherwise dispose of the Collateral or any of our rights therein or permit any
lien or security interest to attach to same, except that created by this
Agreement;

(f) we will insure the Collateral in your name against loss or damage by fire,
theft, burglary, pilferage, loss in transit and such other hazards as you shall
specify in amounts and under policies by insurers acceptable to you and all
premiums thereon shall be paid by us and the policies delivered to you. If we
fail to do so, you may procure such insurance and charge the cost to our
account;

(g) we will not permit any Collateral to be removed from its present location
without your prior written consent, and we will at all times allow you or your
representatives free access to and the right of inspection of the Collateral;

(h) we shall comply in all material respects with the terms and conditions of
any leases covering the premises wherein the Collateral is located and any
orders, ordinances, laws or statutes of any city, state, or governmental
department having jurisdiction with respect to such premises or the conduct of
business thereon, and, when requested by you, we will execute any written
instruments and do any other acts necessary to effectuate more fully the
purposes and provisions of this Agreement;

(i) if any of the Collateral is or in your opinion may become part of any real
estate, we will obtain and deliver to you a written waiver by the record owner
and any mortgagees of said real estate of all interest in the Collateral and a
written subordination by any person who has a lien on said real estate which is
or may be superior to the security interest granted hereby;

(j) we will not permit anything to be done that may impair or lessen in any
material respect the value of any Collateral or the security intended to be
afforded by this Agreement;

(k) we will indemnify and save you harmless from all loss, costs, damage,
liability or expense, including reasonable attorneys' fees, that you may sustain
or incur to enforce payment, performance, or fulfillment of any of the debts or
obligations secured hereby or in the enforcement of this Agreement and the
priority thereof or in the prosecution or defense of any action or proceeding
either against you or us concerning any matter growing out of or in connection
with this Agreement and/or any of the Obligations secured hereby and/or any of
the Collateral; and

(1) the execution of this Agreement has been duly approved by the undersigned in
any manner required by law.

         5. We shall be in default under this Agreement upon the happening of
any of the following events or conditions:

(a) we shall fail to pay when due or punctually perform any of the Obligations;

(b) any covenant, warranty, representation or statement made or furnished to you
by us or on our behalf was false in any material respect when made or furnished;

(c) the loss, theft, substantial damage, destruction, sale or encumbrance to or
of any of the Collateral or the making of any levy, seizure or attachment
thereof or thereon;

(d) we shall become insolvent, cease operations, dissolve, terminate our
business existence, make an assignment for the benefit of creditors, suffer the
appointment of a receiver, trustee, liquidator or custodian of all or any part
of our property;

(e) any proceedings under any bankruptcy or insolvency law shall be commenced by
or against us or any guarantor or endorser of the Obligations; or

(f) any guarantor or endorser of the Obligations shall die, make an assignment
for the benefit of creditors, or suffer the appointment of a receiver of any
part of such guarantor's or endorser's property.

        6. Upon any such default and at any time thereafter, you may declare all
Obligations secured hereby immediately due and payable and you shall have the
remedies of the secured party provided in the Uniform Commercial Code, and in
addition, those provided by other provisions of law and in this Agreement. You
will at all

                                       2
<PAGE>

times have the right to take possession of the Collateral and to maintain

such possession on our premises or to remove the Collateral or any part thereof
to such other premises as you may desire. Upon your request, we shall assemble
the Collateral and make it available to you at a place designated by you. If any
notification of intended disposition of any Collateral is required by law, such
notification, if mailed, shall be deemed properly and reasonably given if mailed
at least five days before such disposition, postage prepaid, addressed to us
either at our address shown herein or at any address appearing on your records
for us. Any proceeds of any disposition of any of the Collateral shall be
applied by you to the payment of all expenses in connection with the sale of the
Collateral, including reasonable attorneys' fees and other legal expenses and
disbursements and the reasonable expense of retaking, holding, preparing for
sale, sale, and the like, and any balance of such proceeds may be applied by you
toward the payment of the Obligations secured hereby in such order of
application as you may elect, and we shall be liable for any deficiency.

        7. If we default in the performance or fulfillment of any of the terms,
conditions, promises, covenants, provisions or warranties on our part to be
performed or fulfilled under or pursuant to this Agreement, you may at your
option without waiving your right to enforce this Agreement according to its
terms, immediately or at any time thereafter and without notice to us, perform
or fulfill the same or cause the performance or fulfillment of the same for our
account and at our sole cost and expense, and the cost and expense thereof
(including reasonable attorneys' fees) shall be added to the Obligations secured
hereby and shall be payable on demand with interest thereon at the rate charged
upon the Obligations secured hereby, but not in excess of that permitted by law.

         8. No delay or failure on your part in exercising any right, privilege
or option hereunder shall operate as a waiver of such or of any other right,
privilege, remedy or option, and no waiver whatever shall be valid unless in
writing, signed by you and then only to the extent therein set forth, and no
waiver by you of any default shall operate as a waiver of any other default or
of the same default on a future occasion. Your books and records containing
entries with respect to the Obligations secured hereby shall be admissible in
evidence in any action or proceeding, shall be binding upon us for the purpose
of establishing the items therein set forth and shall constitute prima facie
proof thereof. You shall have the right to enforce any one or more of the
remedies available to you, successively, alternately or concurrently. We agree
to join with you in executing financing statements or other instruments pursuant
to the Uniform Commercial Code in form satisfactory to you and in executing such
other documents or instruments as may be required or deemed necessary by you for
purposes of affecting or continuing your security interest in the collateral.

        9. This Agreement cannot be terminated orally. All of the rights,
remedies, options, privileges and elections given to you hereunder shall enure
to the benefit of your successors and assigns. The term "you" as herein used
shall include your company, any parent of your company, any of your subsidiaries
and any co-subsidiaries of your parent, whether now existing or hereafter
created or acquired, and all of the terms, conditions, promises, covenants,
provisions and warranties of this Agreement shall enure to the benefit of and
shall bind the representatives, successors and assigns of each of us and them.

                  Attest:                   Very truly yours,

                                            THE SINGING MACHINE COMPANY, INC.


/s/ April Green                             By: /s/ Yi Ping Chan
- -----------------------                         ------------------------------
                                               Yi Ping Chan, Interim CEO & COO

                  (Seal)                    Dated:  February 9, 2004

                                            Accepted at New York, N.Y.

                  Attest:                   on February 9, 2004

                                            MILBERG FACTORS, INC.


/s/ Stephen R. Murphy                       By: /s/ Daniel R. Milberg
- ------------------------                        -------------------------
Stephen R. Murphy,                              Daniel R. Milberg,
Senior Vice President,                          Senior Vice President
Secretary & Treasurer

                  (Seal)


                                       3

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.3
<SEQUENCE>5
<FILENAME>securityinterestininventory.txt
<DESCRIPTION>SECURITY INTEREST IN INVENTORY
<TEXT>
                                                                    Exhibit 10.3

                  SECURITY INTEREST IN INVENTORY UNDER UNIFORM
                     COMMERCIAL CODE SUPPLEMENT TO FINANCING
                              OR FACTORING CONTRACT

To:  Milberg Factors, Inc.
     99 Park Avenue
     New York, NY 10016


Gentlemen:

         This is a supplement to our Factoring Agreement with you bearing the
effective date of February 9, 2004. It is hereby incorporated therein, shall
have a term concurrent therewith and is deemed in all respects a part thereof.

         1. In addition to your other security, we hereby grant you a continuing
security interest under the Uniform Commercial Code in all Inventory now and
hereafter owned by us. The term "Inventory" means and includes all merchandise
intended for sale by us and all raw materials, goods in process, finished goods,
materials and supplies of every nature used or useable in connection with the
manufacture, packing, shipping, advertising or sale of such merchandise, all of
which may be described generally (but without limitation) as:

   Karaoke machines, CD plus graphics, audiocassette tapes, recorded music and
         all products incidental to the manufacture and shipping thereof

We warrant that all Inventory is and will be owned by us, free of all other
liens, encumbrances and security interests.

         2. Your security interests in the Inventory shall continue through all
stages of manufacture and shall, without further act, attach to goods in
process, to the finished goods, to the accounts receivable or other proceeds
resulting from the sale or other disposition thereof and to all such Inventory
as may be returned to us by customers.

         3. The Inventory shall be security for all Advances made pursuant to
the Factoring Agreement and/or loans and advances to the undersigned under the
Factoring Agreement, as originally existing and as hereby and at any time
heretofore or hereafter supplemented or amended as well as for all other loans
and advances to us or for our account by you or your subsidiaries and for all
commissions, obligations, indebtedness, interest, charges and expenses
chargeable to our account or due from us from time to time, however arising, and
whether or not evidenced by notes or other instruments. Until all such
obligations have been paid in full, your security interest in the Inventory and
all proceeds thereof, shall continue in full force and effect and you will at
all times have the right to take possession of the Inventory and to maintain
such possession on our premises or to remove the Inventory or any part thereof
to such other places as you may desire. If you exercise your right to take
possession of the Inventory, we shall, upon your demand, assemble the Inventory
and make it available to you at a place reasonably convenient to you. In
addition, with respect to all Inventory as well as all Receivables and other
security, you shall be entitled to all of the rights and remedies set forth in
the Factoring Agreement and all of the rights provided by the Uniform Commercial
Code.

         4. Upon our request, you may make Advances to us prior to our sale of
Inventory. Any such Advances will be made at your sole discretion, will be
charged by you to our account and will bear interest payable in the manner and
at the rate specified in the Factoring Agreement. All such Advances shall be

                                       1
<PAGE>

payable by us on demand and recourse to the security therefor will not be
required at any time. Their amounts and the relation thereof to the value of the
Inventory will be determined by you alone.

         5. Except for sales made in the regular course of our business, we
shall not sell, encumber or dispose of or permit the sale, encumbrance or
disposal of any Inventory without your prior written consent. As sales are made
in the regular course of business, we shall, in accordance with the provisions
of the Factoring Agreement, immediately execute and deliver to you schedules and
assignments of all Receivables created thereby. If sales are made for cash, we
shall immediately deliver to you the identical checks, cash or other forms of
payment which we receive. All payments received by you on account of cash sales
of Inventory as well as on account of Receivables will be credited to our
account in accordance with the provisions of the Factoring Agreement.

         6. We shall perform any and all steps requested by you to perfect your
security interest in the Inventory, such as leasing warehouses to you, placing
and maintaining signs, appointing custodians, executing and filing financing or
continuation statements in form and substance satisfactory to you, maintaining
stock records and transferring Inventory to warehouses. If any Inventory remains
in the possession or control of any of our agents or processors, we shall notify
such agents or processors of your security interest therein, and upon request,
instruct them to hold all such Inventory for your account and subject to your
instructions. A physical listing of all Inventory, wherever located, shall be
taken by us at least annually, and a copy of each such physical listing shall be
supplied to you. A perpetual inventory shall be maintained by us by location and
product, and a copy of such perpetual inventory shall be supplied to you monthly
and at such other times as you may request. You may examine and inspect the
Inventory at any time.

         7. We shall have the Inventory insured in your name against loss or
damage by fire, theft, burglary, pilferage, loss in transportation and such
other hazards as you shall specify, by insurers, in amounts and under policies
acceptable to you, and all premiums thereon shall be paid by us and the policies
delivered to you. If we fail to do so, you may procure such insurance and charge
the cost to us.

                  Attest:                   Very truly yours,

                                            THE SINGING MACHINE COMPANY, INC.


/s/ April Green                             By: /s/ Yi Ping Chan
- ------------------------                        ------------------------------
                                               Yi Ping Chan, Interim CEO & COO

                  (Seal)                    Dated:  February 9, 2004

                                            Accepted at New York, N.Y.

                  Attest:                   on February 9, 2004

                                            MILBERG FACTORS, INC.


/s/ Stephen R. Murphy                       By: /s/ Daniel R. Milberg
- ------------------------                        -------------------------
Stephen R. Murphy,                              Daniel R. Milberg,
Senior Vice President,                          Senior Vice President
Secretary & Treasurer

                  (Seal)

                                       2

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.4
<SEQUENCE>6
<FILENAME>amend2-transaction104.txt
<DESCRIPTION>SECOND AMENDMENT
<TEXT>
                                                                    EXHIBIT 10.4


                        THE SINGING MACHINE COMPANY, INC.
                          6601 Lyons Road, Building A-7
                          Coconut Creek, Florida 33073


                                February 9, 2004
Omicron Master Trust
SF Capital Partners, Ltd.
Bristol Investment Fund, Ltd.
Ascend Offshore Fund, Ltd.
Ascend Partners LP
Ascend Partners Sapient LP

         RE: SECOND AMENDMENT TO THE TRANSACTION DOCUMENTS ("AMENDMENT")
             -----------------------------------------------------------

Dear Sirs:

         Reference is made to that certain Securities Purchase Agreement
("Purchase Agreement") dated August 20, 2003 entered into by and among The
Singing Machine Company, Inc. (the "Company") and each of 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 Company wishes to enter into a factoring agreement ("Factoring
Agreement") with Milberg Factors, Inc. and Milberg has requested that each
Purchaser sign certain subordination agreements ("Subordination Agreements") and
agree to certain other changes in the Transaction Documents, set forth herein,
as a condition to entering into the Factoring Agreement. In consideration for
entering into the Subordination Agreements with Milberg Factors, Inc. and the
granting of an aggregate of 30,000 warrants ("New Warrants") pro-rata to the
Purchasers and increasing the interest rate of the Debentures from 8.0% per
annum to 8.5% per annum, effective immediately, the Purchasers agree to the
following: (i) they will waive any and all liquidated damages and other damages
that have accrued under the Transaction Documents on or prior to the date of
this Agreement and that they hereby waive their claim to any liquidated damages
and other damages that may accrue between the date of this Amendment and July 1,
2004 (except those damages set forth in the next sentence), (ii) that the
Transaction Documents are amended so that the total amount of liquidated damages
and other damages that the Purchasers, as a group, will be able to collect under
the Transaction Documents while the Factoring Agreement with Milberg Factors is
in effect, which includes without limitation, the Registration Rights Agreement,
the Debentures and the Warrants, is limited to $150,000 in the aggregate during
a Company's fiscal year, provided that any and all liquidated damages or other
damages exceeding the $150,000 pay-out allowed during each fiscal year will
continue to accrue and will be immediately due and payable, in their entirety,
after the Factoring Agreement is terminated. The limitation on the waiver of
liquidated damages and other damages (a) set forth in subsection (ii) of the
preceding sentence shall not apply to liquidated damages set forth in Section
4(b)(ii) and (iii) of the Debentures and Section 3(a) of the Warrant Agreements
and (b) any damages arising because the stock certificates are not issued
without restrictive legends, provided that such removal is permitted by
applicable law.

         The New Warrants shall be in the form of the warrants issued pursuant
to the Purchase Agreement and will have an exercise price equal to the lesser of
the closing bid price on the date hereof and the closing bid price on their date
of issuance, will be immediately exercisable and will expire on January __,
2007. The Registration Rights Agreement is hereby amended to include in the
definition of Registrable Securities the shares issuable upon exercise of the
New Warrants and the other changes set forth in the preceding paragraph. The

<PAGE>

increase in the interest rate from 8.0% to 8.5% shall be effective immediately
without any other action required by the Company or such Purchaser. Each
Debenture and Warrant shall be deemed to be automatically amended to reflect the
changes set forth herein and no new Debentures will be issued to reflect such
increase in the interest rate or other changes set forth herein. Except that,
each such agreeing Purchaser shall have the right to exchange their existing
Debenture for a new Debenture with the increase in interest rate and the other
changes set forth herein hereunder reflected accordingly. Any other relevant
Transaction Documents shall be amended to reflect the changes agreed to herein.

         The Company acknowledges and agrees that no consideration other than
the consideration set forth herein has been or shall be offered or paid to any
other person to obtain a Purchaser's agreement to enter into the Subordination
Agreement. The first sentence of this paragraph is intended to treat for the
Company the Purchasers as a class and shall not in any way be construed as the
Purchasers acting in concert or as a group with respect to the purchase,
disposition or voting of Securities or otherwise. For clarification purposes,
each Purchaser's agreement to the terms hereunder constitutes a separate right
granted to each Purchaser by the Company and negotiated separately by each
Purchaser.

         Except as expressly amended hereby, the Purchase Agreement, the
Debentures, the Warrants, the Registration Rights Agreement and any other
Transaction Documents are ratified and confirmed by the parties hereto and
remain in full force and effect in accordance with the terms hereof. Unless
stated to the contrary herein, this Amendment shall be governed by the
provisions contained in the Purchase Agreement and all amendments to the
Purchase Agreement.

         This Amendment 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 Amendment. 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 9th day of February 2004:


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 Signatory


Bristol Investment Fund, Ltd.                Ascend Offshore Fund, Ltd.
By: /s/ Paul Kesslor                         By: /s/ Malcolm Fairbain
Name: Paul Kesslor                           Name: Malcom Fairbain
Title: Director                              Title: Managing Member

Ascend Partners LP                           Ascend Partners Sapient LP
By: /s/ Malcolm Fairbain                     By: /s/ Malcolm Fairbain
Name:Malcolm Fairbain                        Name: Malcolm Fairbain
Title: Managing Member                       Title:  Managing Member


                                       2

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.5
<SEQUENCE>7
<FILENAME>mtv-amend3.txt
<DESCRIPTION>AMENDED AGREEMENT
<TEXT>
                                                                    Exhibit 10.5

MTV NETWORKS
A VIACOM COMPANY


November 15, 2002

Terry Marco
Director of Marketing
The Singing Machine Company
6601 Lyons Road, Bldg. A-7
Coconut Creek, FL 33073

Dear Ms. Marco:

Reference is made to the Merchandise License Agreement dated November 1, 2000,
as amended January 1, 2002, by and between MTV Networks, a division of Viacom
International Inc. ("MTVN") and The Singing Machine Company, Inc. ("Licensee")
with respect to the licensing of the MTV: Music Television name, trademark and
logo in connection with certain song compilations for use in connection with a
"Karaoke" machine (the "Agreement"). Capitalized terms used without definition
herein shall have the respective definitions set forth in the Agreement.

Notwithstanding anything to the contrary contained in the Agreement, MTVN and
Licensee hereby agree that the "Basic Provisions" section of the Agreement
shall be amended as follows, including the Additional Terms and Conditions
section as indicated in Paragraph 3 below:

1.   "Licensed Territory", add the following:

     Australia

2.   "Guaranteed Minimum Royalty", add the following:

     In consideration for the additional rights granted hereunder to Licensee,
     Licensee shall pay to MTVN, an additional Guaranteed Minimum royalty of
     Five Thousand United States Dollars (US$5,000)(the "Australia Guaranteed
     Minimum Royalty") payable upon Licensee's execution of this Amendment.
     Licensee shall report sales of Licensed Products in Australia separately
     from those royalties earned in the United States, its territories and
     possessions, utilizing the attached Royalty Report form. In addition, it is
     understood and agreed that Licensee shall not have the right to cross
     collateralize royalties earned in respect of sale of the Licensed Products
     between territories (e.g. royalties earned in the United States, its
     territories and possessions may not be applied against royalties earned in
     Australia, and vice versa). The Australia Guaranteed Minimum Royalty is a
     one-time payment and the Licensee shall not have any obligation to make
     additional payments for the right to sell the Licensed Productu8s currently
     granted under the Agreement in Australia, other than royalties due MTVN in
     respect of sale of the Licensed Products in Australia.

3.   Article 4, Quality Samples, Approvals, and Manufactures, subparagraph (d),
     add the following:

     With respect to Australia only, concurrently with the initial shipment of
     Licensed Product, Licensee shall send 4 product samples of Music Product
     (as defined in the Agreement) and 2 product samples of MTV Karaoke Machines

<PAGE>

     (as defined in the Agreement) directly to Miriam Wermelt, Manager,
     International Consumer Products, 1515 Broadway, New York, NY 10036, 47th
     floor and 2 of each Licensed Product each subsequent year of the License
     Term.

Nothing contained herein shall be deemed a waiver of any of MTVN's rights and
remedies, with respect to the performance of the Agreement at law or equity, all
of which are expressly reserved, nor shall anything contained herein relieve
Licensee of its obligations set forth in the Agreement.

Except as otherwise herein amended, the Agreement is hereby ratified and
confirmed in all respects.

Please indicate your acceptance of the foregoing by signing in the space
provided below.

                                        Very truly yours,
ACCEPTED AND AGREED TO:

                                        MTV NETWORKS, a division of
The Singing Machine Company, Inc.       Viacom International Inc.

By: /s/ John Klecha                     By: /s/ Kathleen Hricik
    ---------------------------             -----------------------------
Name: John Klecha                       Name: Kathleen Hnak
Title: President & COO                  Title: EVP International Program
                                               Enterprises
Date: 11/26/02                          Date:


<PAGE>

                                   Exhibit A
                          MTV NETWORKS ROYALTY REPORT

Licensee: _____________________
Property: _____________________
Reporting Period: _____________
<TABLE>
<CAPTION>

- ------------- ----------- ---------- -------- ------------- --------- ---------- ----------- ------------
Product         Design #    Retail     Unit    Quantity of    Total    Royalty    Royalty     Deductions
Description                 Account    Price   Units Sold     Sales      Rate       Due
- ------------- ----------- ---------- -------- ------------- --------- ---------- ----------- ------------
<S>            <C>         <C>        <C>      <C>          <C>        <C>       <C>         <C>

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

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

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

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

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

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

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

- ------------- ----------- ---------- -------- ------------- --------- ---------- ----------- ------------
                            Totals:
                                               ------------ ---------               -------- ------------

</TABLE>

Total Royalty Due:_______________

Less Deductions: ________________
Less Advance Paid
(or balance forward):____________

Balance Forward:_________________  or Amount Due:______________

I hereby certify that the above information is true and accurate:

Signature:_______________________________
Print Name:______________________________
Title:___________________________________

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.6
<SEQUENCE>8
<FILENAME>mtvn-amend5.txt
<DESCRIPTION>AMENDMENT 5 TO MTVN
<TEXT>
                                                                    Exhibit 10.6

                                                 [LOGO FOR MUSIC TELEVISION MTV]

mtv: music television
1515 broadway /
new york / ny / 10036-5797

January 7, 2004

Ms. Rose L. Labadessa
Corporate Legal Manager & Music Licensing Coordinator
The Singing Machine Company, Inc.
Business & Legal Affairs
6601 Lyons Road
Building A-7
Coconut Creek, FL 33073

Re: Fifth Amendment to MTVN Domestic Merchandise License Agreement.
    ---------------------------------------------------------------

Dear Rose:

Enclosed for your files is a fully executed copy of the above-mentioned
amendment by and between The Singing Machine Company, Inc. and MTV Networks, a
division of Viacom International Inc.

Please feel free to contact me at the below number should you have any
questions.

Sincerely,

/s/ Hillary Cohen
Director
MTV Business & Legal Affairs
Phone: 212-846-6758
Fax:   212-8461922
Email-hillary.cohen@mtvstaff.com

Via Express Mail.
- -----------------
cc: G. Bolan, G. Cheeks, T. Connolly, H. Eskenazi, T. Hernandez, A. Green
(Singing Machine), G. Legrand, B. Matthews, V.O'toole, L. Silfen, H. Reyes,
P. White and M. Wermelt.

Enclosure(1)

<PAGE>

                                                         As of December 23, 2003

Mr. Yi Ping Chan, Interim CEO and COO
The Singing Machine Company, Inc.
6601 Lyons Road, Bldg. A-7
Coconut Creek, FL 33073

Re:  Fifth Amendment to MTVN Domestic Merchandise License Agreement.
- --------------------------------------------------------------------

Dear Mr. Chan:

Reference is made to the agreement dated the 1 St day of November, 2000, as
amended January 1, 2002; November 13, 2002, November 15, 2002 and February 26,
2003 by and between MTV Networks, a division of Viacom International Inc.,
("MTVN") and The Singing Machine Company, Inc. ("Licensee") with respect to the
"MTV: Music Television" name, trademark and logo (the "Licensed Property") (the
"Agreement"). Capitalized terms used without definition herein shall have the
respective definitions set forth in the Agreement.

Effective as of the date hereof, MTVN and Licensee hereby agree that the
Agreement shall be amended as follows:

1. The notices information for Licensee contained in Article 16 of the
Additional Terms and Conditions of the Agreement shall be deleted in its
entirety and replaced with the following:

 "If to Licensee:
 ----------------

The Singing Machine Company, Inc.
Attention: Mr. Yi Ping Chan, Interim CEO & COO
6601 Lyons Road, Building A-7
Coconut Creek, FL 33073
Telephone: 954-596-1000
Telecopy: 954-596-2000"

2. Paragraph 2 of the Second Amendment to the MTVN Domestic Merchandise License
Agreement dated November 13, 2002 shall be deleted in its entirety and replaced
with the following:

"2. (a) In addition to (and not in lieu of) the Guaranteed Minimum Royalty of
$686,250 payable pursuant to the Agreement, receipt of which is hereby
acknowledged, Licensee shall pay MTVN an additional Guaranteed Minimum Royalty
of $1,300,000.

     (b) The Guaranteed Minimum Royalty, due MTVN pursuant to Section 2(a) above
shall be payable as follows:

<PAGE>


     (i)  $500,000 on or before December 27, 2002, receipt of which is hereby
          acknowledged;
     (ii) $333,334 on or before June 1, 2003, receipt of which is hereby
          acknowledged;
     (iii)$333,333 on or before September 1, 2003, receipt of which is hereby
          acknowledged; and
     (iv) $133,333 on or before December i, 2003, receipt of which is hereby
          acknowledged.

     (c)  It is acknowledged and agreed that the changes made in Section 2(a)
          and Section 2(b) above shall have no impact on the Australian
          Guaranteed Minimum Royalty of $5000 pursuant to the amendment dated
          November 15, 2002.

3. The definition of "Term" contained in the Basic Provisions of the Agreement
is hereby deleted in its entirety and replaced with the following:

"The 'INITIAL TERM' of this Agreement shall commence on November 1, 2000 and
continue through December 31, 2003."

4.   (a) The Initial Term of the Agreement shall be extended for a period of
four months from January 1, 2004 through April 30, 2004 (the "First Renewal
Term).

     (b) MTVN shall have two separate, independent options to renew the Term (as
hereafter defined) of the Agreement, in its sole discretion (each a "Renewal
Option") for:

     (i)  a second four month term, from May 1, 2004 through August 31, 2004
          (the "Second Renewal Term"); and

     (ii) a third four month term, from September 1, 2004 through December 31,
          2004 (the "Third Renewal Term") (Section 4(b)(i) and Section 4(b)(ii)
          each, a "Renewal Term")

     (The Initial Term and the First Renewal Term and the Second Renewal Term,
     if any, and Third Renewal Term, if any, collectively, the "Term")

A Renewal Option may be exercised by MTVN providing notice to Licensee not later
than 15 days prior to the expiration of Term of the Agreement.

5.   (a) In consideration of the First Renewal Term, Licensee shall pay MTVN an
additional Guaranteed Minimum Royalty in the amount of $100,000 which shall be
payable on January 5, 2004. Notwithstanding anything to the contrary contained
in the Agreement, if Licensee fails to pay MTVN the $100,000 on January 5, 2004,
MTVN shall have the right, in its sole discretion, to terminate the Agreement
immediately upon notice to Licensee.

     (b) Provided that MTVN exercises its Renewal Option for either the Second
Renewal Term or the Third Renewal Term, Licensee shall pay MTVN an additional
Guaranteed Minimum Royalty in the amount of $100,000 for each such Renewal Term
(for a maximum of $200,000), payable to MTVN on the first day of each such
Renewal Term (i.e., $100,000 on May 1, 2004 for the Second Renewal Term and
$100,000 on September 1, 2004 for the Third Renewal Term). Notwithstanding
anything to the contrary contained in the Agreement, if Licensee fails to make
payment of the $100,000 due on the first


                                        2
<PAGE>


day of a Renewal Term, MTVN shall have the right, in its sole discretion, to
terminate the Agreement immediately upon notice to Licensee.

6. The following shall be added to the definition of "Royalty Rate" contained in
the Basic Provisions of the Agreement:

     "The Royalty Rate on sales of all Licensed Products sold on or after
January 1, 2004 shall be as follows:

     (a)  *% of Net Sales (as defined in the Additional Terms and Conditions of
          the Agreement) for the Music Products and the Duet Microphones; and

     (b)  *% of Net Sales (as defined in the Additional Terms and Conditions of
          the Agreement) for the MTV Karaoke Machines.

7. Royalties from the sale of Licensed Products sold during (a) the First
Renewal Term (i. e., January 1, 2004 through April 30, 2004) and (b) the Second
Renewal Term, if any, and the Third Renewal Term, if any, shall be recoupable
solely against the Guaranteed Minimum Royalty payments due and paid on or after
January 1, 2004 with no carryover of any unrecouped Guaranteed Minimum Royalty
amounts paid through December 31, 2003. Any unearned sums from the $100,000
Guaranteed Minimum Royalty payable for the First Renewal Term shall carry over
and be recoupable from sales of the Licensed Products made during the Second
Renewal Term, if any. Additionally any unearned sums from the $200,000
Guaranteed Minimum Royalty payable from the First Renewal Term and the Second
Renewal Term shall carry over and be recoupable from sales of the Licensed
Products made during the Third Renewal Term, if any.

8. As of January 1, 2004, Licensee shall (a) have the right to manufacture,
distribute, sell or advertise solely the MTV Karaoke Machines described (i) in
Section 7 of the definition of "Licensed Products" contained in the Basic
Provisions, the Model SMVG 600, and (ii) in Paragraph 9 below, the Model 988
Karaoke Machine and (b) solely have the right to sell off existing inventory of
all other Licensed Products.

9. The following shall be added as an MTV Karaoke Machine in the definition of
"Licensed Products" contained in the Basic Provisions of the Agreement:

"One version of a Karaoke hardware machine branded with the Licensed Property
which (a) enables the end-user to play the Music Products and the Sampler Music
Products and participate in Karaoke activities, (b) includes a viewing monitor
to view the lyrics of the songs, (c) has a front load, one CD&G changer, (d)
includes a video camera feature that (i) is permanently attached to the top of
the Karaoke machine and manufactured as part of the Karaoke machine hardware as
a whole, (ii) needs to be manually adjusted by the end-user to record the
end-user's performance, (iii) is not an individual piece of hardware separate
and apart from the Karaoke machine and is not able to be detached from the
Karaoke machine for use independent of the Karaoke machine and {iv} does not
contain the technical functionality to allow it to operate as a stand alone
video camera, and (e) includes a built-in speakersystem) (the "Model 988 Karaoke
Machine").
__________
* The confidential portion has been so omitted pursuant to a request for
confidential treatment and has been filed separately with the Securities and
Exchange Commission.

                                        3

<PAGE>


The technical spec sheet for the Model 988 Karaoke Machine is attached hereto
and incorporated into Attachment A of the Agreement.

10.  Licensee acknowledges and agrees that the Model 988 Karaoke Machine as
described herein and any Karaoke machine with a podium stand feature shall be
exclusively branded with the Licensed Property. In no event shall Licensee
produce and/or sell a Karaoke machine with said podium feature on behalf of
itself (e.g., a Singing Machine branded Karaoke machine) or on behalf of any
other third party licensor. For the avoidance of doubt, the right of exclusivity
contained in this Paragraph 10 shall remain in full force and effect during the
Term of the Agreement and shall be null and void upon termination or expiration
of the Agreement.

11.  The Presentation Date to Licensee's Retailers for the Model 988 Karaoke
Machine shall be January 8, 2004 at the Consumer Electronics Show ("CES"). If
the Model 988 Karaoke Machine does not receive a favorable response from
customers at CES, and Licensee decides not to manufacture and sell the Model 988
Karaoke Machine, then Licensee shall have the right to present designs for the
development of a new Karaoke machine to be branded with the Licensed Property
for MTVN's approval, which approval may be withheld in MTVN's sole discretion.

12.  The Initial Ship Date to Licensee's Retailer for the Model 988 Karaoke
Machine shall be July 1, 2004 or such other date as mutually agreed upon by the
MTVN and Licensee.

13.  The first four lines of Section 13fc) of the Additional Terms and
Conditions of the Agreement shall be deleted in their entirety and replaced with
the following:

"Upon the expiration of this Agreement, provided that Licensee is not in default
at the time of expiration and provided further that MTVN has exercised a Renewal
Option for the Third Renewal Term (i. e., the Term of the Agreement has been
extended through December 31, 2004), Licensee may continue to sell the Licensed
Products, previously manufactured and on hand, on a non-exclusive basis during a
period of 90 days thereafter, subject to all of the terms and conditions
contained in this Agreement; provided, however, that:".

Except as otherwise herein amended, the Agreement is hereby ratified and
confirmed in all respects.

                                       4
<PAGE>


Please indicate your acceptance of the foregoing by signing in the space
provided below.

                               Very truly yours,


                               MTV Networks, a division of
                               Viacom International Inc.



                               By: /s/ Heidi Eskenazi
                                   --------------------------------
                               Name: Heidi Eskenazi
                               Title: V.P. Licensing, Merchandising
                               & Interactive, MTV





ACCEPTED AND AGREED TO:
THE SINGING MACHINE COMPANY, INC.




BY: /s/ Yi Ping Chan
    ----------------------------
Name: Yi Ping Chan
Title: Interim CEO & COO



cc: G. Boland; T. Connolly; H.P. Eskenazi; T. Hernandez; A. Green (Singing
Machine); G. Legrand; B. Matthews; V. O'toole; L. Silfen; M. Wermelt; and P.
White

                                       5

<PAGE>
                                  Attachment A

                             Product Specification
                              of STVG-988 Maestro

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.7
<SEQUENCE>9
<FILENAME>wbp-salesagrmnt.txt
<DESCRIPTION>WBP SALES AGREEMENT
<TEXT>

                                                                    EXHIBIT 10.7

                                 SALES AGREEMENT

         This Sales Agreement (this "Agreement"), effective as of December 9,
2003 (the "Effective Date"), is made by and between The Singing Machine Inc., a
Delaware corporation ("SMC"), and CPP Belwin, Inc., a Delaware Corporation and
its Affiliates (collectively, "WPB").

         WHEREAS, SMC has produced karaoke software, in compact disk ("CDG")
format (such CDG's are collectively referred to as the "Catalogue" and
individually as a "Title"); and

         WHEREAS, SMC has requested WBP to market the Titles; and

         WHEREAS, WBP is willing to market the Titles subject to the terms of
this Agreement.

         NOW, THEREFORE, in consideration of the above premises SMC and WBP
agree as follows:

                                   ARTICLE I -

                                   DEFINITIONS

         1.1 In addition to those terms set forth above, the terms listed below
shall have the following meanings for the purpose of this Agreement:

         "Advertising Allowance" means sums agreed upon by the parties to be
used to promote the sale of Licensed Products including, but not limited to
cooperative advertising costs and market development funds.

         "Affiliate" means a corporation, partnership (limited or general),
limited liability company, joint venture, association, trust, or any other
unincorporated organization or entity owned in whole or in part by or under
common control with a party to this Agreement.

         "Change of Control" shall include any change of control directly or
indirectly of WBP whether such change of control is by merger, consolidation,
sale or transfer of assets or equity, assignment, transfer, combination, joint
venture, management contract, assimilation, attribution or amalgamation of any
kind whatsoever.

         "Claim" means any claim, action, suit, litigation, investigation,
inquiry, review or proceeding.

         "Confidential Information" means all information furnished by a party
(the "Providing Party") to the other party (the "Receiving Party") that is
designated as confidential, whether or not a trade secret, including but not
limited to any business plans, any information regarding the Providing Party's
marketing, structural or strategic plans, or any other analyses, compilations,
studies or other documents whether prepared for or given to the Receiving Party
or prepared by or for directors, officers, employees, agents or representatives
of the Providing Party or any affiliate thereof (including without limitation
accountants, attorneys and financial advisors) (Representatives").

                                       1

<PAGE>

         "Copyright Office" means the Copyright Office of the Library of
Congress of the United Stated of America.

         "CDG" means a compact disk with graphics containing the contents of a
Title.

         "Distribution Fee" means that percentage of Net Sales Receipts set
forth on Exhibit C.

         "Effective Date" means December 9, 2004.

         "Intellectual Property" means all patents, trademarks, trade names,
logos, service marks, service names, copyrights, and applications therefore, and
license or other rights in respect thereof used in connection with the Catalogue
and any of the Titles and whether or not SMC's or any other Person's.

         "Judgment" means any judgment, decree, writ, injunction, ruling or
order.

         "Legal Expenses" means any and all fees, costs and expenses of any kind
reasonably incurred by a Person and its counsel in investigating, preparing for,
defending against or providing evidence, producing documents or taking other
action with respect to, any threatened or asserted Claim including but not
limited to fees, costs and expenses of counsel at pre-trail, trail and appellate
levels.

         "Licensed Products" means CDG's and Other Formats containing the
contents of any of the Titles set forth on Exhibit A.

         "Licensed Property" means the Mark, the Logo and all Intellectual
     Property and Technology.

         "Logo" means those certain logos set forth on Exhibit B attached hereto
and hereby made a part hereof and all other logos of SMC registered with the
Copyright Office or non-U.S. registration authorities or used by SMC as common
law marks or their equivalent.

         "Mark" means those certain trademarks and service marks set forth on
Exhibit C attached hereto and hereby made a part hereof and all other marks of
any type or nature of SMC registered with the Copyright Office or non-U.S.
registration authorities or used by SMC as common law marks or their equivalent.

         "Net Proceeds" means Net Sales Receipts actually received by WBP, less
the Distribution Fee, the Reserve Amount, the Advertising Allowance, is any, and
less any other payments due to WBP hereunder.

         "Net Reserves" means the Reserve Amount retained by WBP for a
particular month less the amount of money required to repay any Licensed
Products returned by WBP Account and Non-WBP Account customers during that month
and less any sums anticipated to be due WBP by reason of any indemnity
obligations of SMC.

         "Net Reserve Month" means the third month prior to the month before the
month in which the payment of Net Reserves are to be made. For example, on March
15, 2004, WBP will

                                       2
<PAGE>

be required to pay the amount of Net Reserves due to SMC for the month of
December, 2003 (December being the third month before February, the month before
the payment is being made).

         "Net Sales Receipts" means gross revenue from the sale of Licensed
Products less sales tax, VAT (or its equivalent) and other taxes in the nature
of sales taxes and freight costs, if any.

         "Non-WBP Accounts" means those accounts to which Licensed Products are
sold directly by SMC. A true and complete list of Non-WBP Accounts is set forth
on Exhibit D.

         "Other Formats" means any format other than CDG, whether now known or
hereafter invented or discovered.

         "Person" means and includes an individual, corporation, partnership
(limited or general), joint venture, association, trust, any other
unincorporated organization or entity and a governmental entity or any
department or agency thereto.

         "Remaining Inventory" means those Licensed Products that make up the
inventory of WBP at the date of termination of this Agreement.

         "Reserve Amount" means a sum equal to twenty five (25%) percent of Net
Sales Receipts reserved as set forth in Section 5.2 of this Agreement to cover
the returns of Licensed Products and indemnity sums due or payable to WBP.

         "Security Interest" means any security interest, pledge, lien, charge,
claim, option, equity, right, restriction on transfer or encumbrance of any
nature whatsoever.

         "SMC Agreement" means any agreement between SMC and any Person
including but not limited to all security agreements, pledges, other security
instruments, agreements, contracts, leases, licenses, franchises, obligations,
instruments or other commitments, arrangements or understandings of any kind,
whether written or oral, binding or nonbonding, to which SMC is a party and
which include in any part the Catalogue or by which SMC or any of the Catalogue
may be bound or affected.

         "Tax" and "Taxes" means all taxes, fees, levies or other assessments,
including but not limited to income, excise, property, sales, franchise,
withholding, value added, social security and unemployment taxes imposed by the
United States, any state, county, local or foreign government, or any
subdivision or agency thereof or taxing authority therein, and any interest,
penalties or additions to tax relating to such taxes, charges, fees, levies or
other assessments.

         "Technology" means trade secrets, proprietary information, inventions,
know-how, processes and procedures owned by SMC, licensed to WBP and used in
connection with the Catalogue and any of the Titles.

         "Termination Date" means the date upon which this Agreement is
scheduled to terminate, whether it is scheduled to terminate at the end of the
initial term of this Agreement or at the end of any subsequent renewal term.

                                       3
<PAGE>

         "Territory" means the United States of America and Canada and their
respective territories and possessions as well as U.S. Military Exchanges
throughout the entire world.

         "WBP Accounts" means those accounts to which Licensed Products are
sold other than Non-WBP Accounts.

         "WBP Indemnified Parties" means WBP, its directors, officers,
shareholders, employees and Affiliates and their respective directors, officers,
shareholders and employees.

                                  ARTICLE II -

                                     LICENSE

         2.1 Grant. SMC grants to WBP an exclusive right and license to: (i)
promote, market and sell the Licensed Products within the Territory; and (ii)
use the Licensed Property in or on any product container, product literature,
product advertisement or other method that may be used to distribute, promote,
advertise and sell the Licensed Products within the Territory. SMC will
cooperate with WBP and use its best efforts to assist and facilitate the
promotion, sale, distribution and marketing of Licensed Products, including
without limitation, referring sales "leads" to WBP within the Territory.

         2.2 Internet Rights Included. The rights licensed to WBP hereunder
shall include and not be limited to anything that pertains to the Internet,
INTERNIC, the World Wide Web, any web site, Domain name, Domain registration, or
any other computer related or Internet related or derived source or system. To
the extent that SMC maintains a web site, SMC shall maintain a link to a
designated web site of WMP upon which the Licensed Products shall be available
for sale. Such link shall be exclusive for products of similar character.

         2.3 Sublicense Rights. WBP shall have the right to sublicense the
     rights licensed to it hereunder and to subcontract the sale, promotion,
     marketing and distribution of all or any portion of any of the Licensed
     Products.

         2.4 Code Programs. Additional discount programs are offered on behalf
of WBP to retail and wholesale customers otherwise known as "Code Programs".
Code Programs may include additional discounts or dating for a specific period
of time. SMC may elect, upon notice to WBP, to participate in WEA's Code
Programs or any of them. WBP shall not offer Licensed Products under any Code
Program without the prior consent of SMC.

                                  ARTICLE III -

                              DUTIES OF THE PARTIES

         3.1 SMC Obligations. SMC shall deliver, at its sole cost, risk and
expense, Licensed Products in such quantities as EBP shall request and in all
cases sufficient to meet market demand to WBP's warehouse, F.O.B. such
warehouses. Each warehouse shall be delivered a complete range of all Licensed
Products. SMC shall also provide SBP with a suggested retail price list for the
Licensed Products as agreed upon by the parties. SMC shall provide promotional
copies as requested by WBP but shall not be obligated to provide more than 200

                                       4
<PAGE>

copies of each Title. Each promotional copy shall be marked as such and shall
not be sold by WBP. SMC shall consult with WBP and approve all advertising
sufficiently in advance to permit WBP to carry out a marketing campaign in form
and substance similar to other WBP and Affiliate marketing campaigns. SMC shall
pay the cost of all advertising. With the prior written consent of WBP which may
be withheld in the sold discretion of WBP, the cost of advertising may be paid
from the Net Sales Receipts. To the extent that Advertising Allowances are paid
from Net Sales Receipts, such Advertising Allowances shall be deducted from Net
Sales Proceeds after the payment to WBP of Distribution Fees and SMC Serviced
Account Distribution Fees.

         3.2 Duties of WBP. WBP shall use reasonable commercial efforts to
promote, market and sell the Licensed Products to WBP Accounts at a price agreed
upon between WBP and SMC. WBP's marketing efforts shall include attendance at
those trade shows and conventions it elects to attend, meetings with WBP
Accounts, direct mail such as mailings to Licensed Product dealers, preparation
and mailing of catalogues, and placement and promotion of the Licensed Products
on www.songexpress.com and any business to business intranet site that it may
maintain. WBP shall provide locations for the warehousing of Licensed Products
in sufficient quantities to meet market demand. The present warehouse locations
are 15800 N.W. 48th Avenue, Miami, Florida, and 948 Meridian Lake Dr., Bldg F,
Aurora, Illinois. WBP may change the locations for warehousing the Licensed
Products on twenty-one (21) days notice to SMC. WBP shall provide order
fulfillment services from its warehouses. In addition, WBP shall provide (i)
record keeping of all sales and returns and (ii) inventory control in accordance
with industry standard practice. WBP shall also use reasonable commercial
efforts to collect all sums due from sales of the Licensed Products. In the
event that WBP engages outside collection agents, it shall advance such fees and
any costs associated therewith and shall thereafter recover such costs and fees
from Net Receipts prior to the payment of sums due to SMC.

                                  ARTICLE IV -

                              TERM AND TERMINATION

         4.1 Term. The term of this Agreement (the "Term") shall commence on the
Effective Date and shall terminate two years from the Effective Date unless it
is earlier terminated as provided in Sections 4.2 or 4.3 below. Any party may
terminate this Agreement as of a Termination Date by notice to the other party
received by the other party no later than 180 days prior to the Termination Date
(the "Expiration Notice"). Upon notice from WBP no earlier than 180 days prior
to the Termination Date and provided that SMC has not timely delivered to WBP an
Expiration Notice, the term of this Agreement shall be extended for an
additional period of two years upon the same terms and conditions as set forth
herein.

         4.2 Termination by SMC. This Agreement may be terminated prior to the
Termination Date in the event of a default by EBP as more specifically set forth
in Article IX below.

         4.3 Termination by WBP. This Agreement may be terminated at any time
prior to the Termination Date upon thirty (30) days prior written notice from
WBP to SMC or in the event of a default by SMC as more specifically set forth in
Article IX below.

                                       5
<PAGE>

         4.4 Sales Post-Termination. Upon termination of this Agreement, WBP
shall have the right to deliver Licensed Products to the WBP Accounts and the
Non-WBP Accounts that have placed orders prior to such termination.

         4.5 Post Termination Obligations. Termination of this Agreement shall
not relieve any party of any obligation or liability accrued hereunder prior to
such termination, not affect or impair the rights of any party arising under
this Agreement prior to such termination, except as expressly provided herein.
After the termination of this Agreement, subject to WBP's rights to deliver
Licensed Products to WBP Accounts and Non-WBP Accounts, WBP shall deliver the
Remaining Inventory to SMC, at the cost and expense of SMC. WBP shall also cease
to use the Licensed Property and shall turn over to SMC all promotional
materials that contain the Licensed Property.

                                   ARTILE V -

                                    PAYMENTS

         5.1 Net Proceeds. WBP shall pay the Net Proceeds to SMC monthly
beginning on January 15, 2004 and continuing each month thereafter on the 15th
day following the end of each month, in arrears. With such payment, SBP shall
provide a monthly repost detailing the sales, Reserve Amounts and Net Proceeds
payable for the previous month (the "Monthly Report"). In the event that for any
reason a payment is not due for any month, WBP shall nevertheless provide a
Monthly Report for such month.

         5.2 Reserve Amount. WBP shall retain the amount of twenty five (25%)
percent of all Net Sales Receipts as the Reserve Amount. Beginning on March 15,
2004 and the fifteenth of each month thereafter, WBP shall pay to SMC, along
with the Net Proceeds, the amount of Net Reserves due to SMC for the Net Reserve
Month. On the 15th day of the third month following the month during which this
Agreement terminates, WBP shall pay the final amount of Net Reserves to SMC.

         5.3 Set Off. All sums payable to SMC shall be subject to set off by
SBO for sums due to WBP as set forth in Articles X and XI below.

         5.4 WBP Books of Account. WBP shall maintain and keep (at its principal
place of business or such other place as shall be disclosed to SMC and its sole
expense) accurate books of account and record covering all matters and
transactions relating to this Agreement. SMC and its duly authorized
representative(s) shall have the right at its sole expense, upon reasonable
notice during WBP's regular business hours and in a manner reasonably calculated
to avoid disruption of the business of WBP being carried on at such location, no
more than twice in any calendar year, to examine and copy and otherwise audit
said books of accounts, records with respect to this Agreement. WBP shall
maintain and keep all such books of account and records available for at least
two (2) years after expiration or earlier termination of this Agreement.

                                       6
<PAGE>

                                  ARTICLE VI -

                             REPRESENTATIONS OF SMC

         6.1 SMC represents and warrants to WBP as follows:

               a. Organization and Good Standing. SMC is a corporation duly
         organized, validly existing an din good standing under the laws of the
         State of Florida and has the corporate power and authority to own the
         Licensed Property, the Catalogue and each Title contained within it,
         and to carry on its business as now being conducted.

               b. Authority, Approvals and Consents. SMC has the corporate power
         and authority to enter into this Agreement and to perform its
         obligations hereunder. The execution, delivery and performance of this
         Agreement and the consummation of the transactions contemplated hereby
         have been duly authorized and approved by the Board of Directors of
         SMC and no other corporate proceedings on the part of SMC are
         necessary to authorize and approve this Agreement and the transactions
         contemplated hereby. This Agreement has been duly executed and
         delivered by, and constitutes a valid and binding obligation of, SMC,
         enforceable against SMC in accordance with its terms (except as
         enforceability may be limited by applicable bankruptcy, insolvency,
         reorganization, moratorium or similar laws affecting creditors' rights
         generally or by the principles governing the availability of equitable
         remedies). The execution, delivery and performance of this Agreement
         by SMC and the consummation of the transactions contemplated hereby do
         not and will not:

                    (i) contravene any provisions of the Certificate of
               Incorporation of By-Laws of SMC;

                    (ii) conflict with, result in a breach of any provision of,
               constitute a default under, result in the modification or
               cancellation of, or give rise to any right of termination or
               acceleration in respect of, any SMC Agreement or require any
               consent or waiver of, or release of Security Interest by, any
               Person;

                    (iii) result in the creation of any Security Interest upon,
               or any Person obtaining any right to acquire, any properties,
               assets or rights or SMC.

               c. Absence of Liabilities. SMC has no liabilities of any nature
         whatsoever (whether known or unknown, due or to become due, accrued,
         absolute, contingent or otherwise) that would result in a Security
         Interest on all or any portion of the Catalogue including, without
         limitation, any liabilities for Taxes or liabilities for unpaid fees
         or royalties to any Person providing goods or services in connection
         with any of the Titles.

               d. Legal Matters. On the date of this Agreement, (i) there are
         no Claims pending against, or, to the best knowledge of SMC threatened
         against of affecting, SMC, or any of its properties or rights before or
         by any court, arbitrator, panel, agency or other governmental,
         administrative or judicial entity and (ii) SMC is not subject to any
         Judgment.

                                       7
<PAGE>

               e. Ownership. SMC has good and marketable title to the Catalogue
         free and clear of all rights of other Persons.

               f. Intellectual Property; Technology. SMC owns or has valid,
         binding and enforceable rights to use all Intellectual Property and
         Technology, without any conflict with the rights of others and will at
         all times during the Term own or have valid, binding and enforceable
         rights to use all Intellectual Property and Technology, without any
         conflict with the rights of others. SMC is the sole and exclusive
         owner of or has the right to use the Licensed Property subject to no
         interference or other contest proceeding. SMC has not received any
         notice from any other person pertaining to or challenging the right of
         SMC to won or use, as applicable, any part of the Licensed Property.
         SMC has not granted any outstanding licenses or other rights, and has
         no obligations to grant licenses or other rights in or to, any of the
         Licensed Property. No Claims have been made by SMC of any violation or
         infringement by others of the rights of SMC with respect to any
         Licensed Property, and SMC knows of no basis for the making of any
         such claim. SMC has not violated or infringed any intellectual
         property or technology rights (including but not limited to trade
         secrets) of any other Person related to the Catalogue or any Title.

               g. Brokers. Neither SMC, nor any director, officer or employee
         thereof, has employed any broker or finder of has incurred or will
         incur any broker's, finder's or similar fees, commissions or expense,
         in each case in connection with the transactions contemplated by this
         Agreement.

               h. Disclosure. SMC has not made any material misrepresentation to
         WBP relating to this Agreement or the Catalogue nor has SMC omitted to
         state to WBP any material fact relating to this Agreement or the
         Catalogue which is necessary in order to make the information given by
         or on behalf of SMC to WBP not misleading or which, if disclosed,
         would reasonably affect the decision of a Person who is considering
         licensing the Catalogue or any Title.

                                  ARTICLE VII -

                             REPRESENTATIONS OF WBP

         7.1 WBP represents and warrants to SMC as follows:

               a. Organization and Good Standing. WBP is a limited liability
         company duly organized, validly existing and in good standing under
         the laws of the State of Florida and has the corporate power and
         authority to license the Licensed Property and to carry on its
         business as not being conducted.

               b. Authority, Approvals and Consents. WBP has the corporate power
         and authority to enter into this Agreement and to perform its
         obligations hereunder. The execution, delivery and performance of this
         Agreement and the consummation of the transactions contemplated hereby
         have been duly authorizes and approved by all necessary corporate
         action. This Agreement has been duly executed and delivered by, and
         constitutes a valid and binding obligation of, WBP, enforceable
         against WBO in accordance with its terms (except as enforceability may
         be limited by applicable bankruptcy, insolvency, reorganization,
         moratorium or similar laws affecting creditors' rights generally or by
         the principles governing the availability of equitable remedies).

                                       8
<PAGE>

               c. Brokers. Neither the WBP, not any manager, officer or employee
         thereof, has employed any broker or finder or has incurred or will
         incur any broker's, finder's or similar fees, commissions or expenses,
         in each case in connection with the transactions contemplated by this
         Agreement.

                                 ARTICLE VIII -

                                 CONFIDENTIALITY

         8.1 Confidentiality. WBP and SMC agree that any Confidential
Information disclosed by a Providing Party to the Receiving Party pursuant to
this Agreement shall be maintained in strict confidence and each will use all
reasonable diligence to prevent disclosure except to necessary personnel and to
Affiliated and consultants who agree to be bound by this confidentiality
provision. SMC further agrees that the Technology shall be maintained in strict
confidence and that it will use all reasonable diligence to prevent disclosure
except to necessary personnel, Affiliated and consultants, who agree to be bound
by this confidentiality provision. WBP's and SMC's obligations under this
confidentiality provision shall remain in effect for the Term and a period of
one (1) year thereafter. WBP and SMC shall not have any obligation of
confidentiality with respect to information that:

               a. is in the public domain by use and/or publication at the time
         of its receipt from the disclosing party; or

               b. is developed independently of information received from the
         disclosing party; or

               c. was already in the recipient's possession prior to receipt
         from disclosing party; or

               d. is properly obtained by recipient from a third party with a
         valid legal right to disclose such information and such third party is
         not under a confidentiality obligation to the disclosing party.

         Upon termination of this Agreement, all confidential information
provided by each party (each, a "Disclosing Party") to the other (each, a
"Receiving Party") shall be promptly returned by the Receiving Party to the
Disclosing Party.

                                  ARTICLE IX -

                                     DEFAULT

         9.1 WBP events of Default. Each of the following will constitute a "WBP
Event of Default" under this License provided that SMC first gives written
notice thereof to WBP:

               a. Failure to timely pay sums due to SMC within ten (10) business
         days following written notice of such failure;

                                       9
<PAGE>

               b. Failure to perform any material term, covenant, provision,
         warranty, or undertaking in this Agreement unless WBP has promptly
         commenced and continues diligent efforts to remedy the default within
         thirty (30) days following written notice thereof. If the remedy
         requires additional time in excess of the 30 day cure period, WBP
         shall have such additional time as is reasonably necessary to cure
         same.

               c. If any representation of WBP under this Agreement is false
         when made or becomes false at any time during the Term.

               d. If WBP files a voluntary petition under any bankruptcy,
         reorganization, or insolvency law of any jurisdiction;

               e. If WBP consents to or applies for the appointment of a
         trustee, receiver, custodian, or similar official for itself or for
         all or substantially all its assets or a trustee, receiver, custodian,
         or similar official is appointed to take possession of all or
         substantially all of WBP's assets and the order of appointment is not
         dismissed or stayed within 60 days after appointment;

               f. If WBP makes any assignment for the benefit of creditors, or
         other arrangement or composition under any laws for the benefit of
         insolvent persons; an order for relief is entered against WBP under
         any bankruptcy, reorganization, or insolvency law of any jurisdiction
         and such order is not dismissed or stayed within 60 days after its
         entry; or any case, proceeding, or other action seeking such order
         remains undismissed for 60 days after its filing; or any writ of
         attachment, garnishment, or execution is levied against all of
         substantially all of WBP's asset; or all or substantially all of WBP's
         assets become subject to any attachment, garnishment, execution, or
         other judicial seizure, and the same is not satisfied, removed,
         released, or bonded within 60 days after the date the writ was levied
         or the date of the attachment, garnishment, execution, or other
         judicial seizure.

         9.2 Remedies for WBP Event of Default. Upon a WBP Event of Default, SMC
shall be entitled to the following remedies:

               a. If WBP is in default on any payment due under this Agreement,
         the amount in arrears will bear interest from the date of the default
         until the amount is paid in full, at a rate equal to the maximum rate
         allowed by Florida law.

               b. SMC may terminate this Agreement, and such termination will be
         without prejudice to any other rights or claims SMC may have against
         WBP.

               c. SMC may seek specific performance and injunctive relief,
         including, without limitations, temporary or preliminary injunctive
         relief.

         9.3 SMC Events of Default. Each of the following will constitute a "SMC
Event of Default" under this License provided that WBP first gives written
notice thereof to SMC:

               a. Failure to perform any material term, covenant, provision,
         warranty, or undertaking in this Agreement unless SMC has promptly
         commenced and continues diligent efforts to remedy the default within
         thirty (30) days following written notice

                                       10
<PAGE>

         thereof. If the remedy requires additional time in excess of the 30
         day cure period, SMC shall have such additional time as is reasonably
         necessary to cure same.

               b. If any representation of SMC under this Agreement is false
         when made or becomes false at any time during the Term.

               c. If SMC files a voluntary petition under any bankruptcy,
         reorganization, or insolvency law of any jurisdiction;

               d. If SMC consents to or applies for appointment of a trustee,
         receiver, custodian, or similar official for itself or for all or
         substantially all its assets or a trustee, receiver, custodian, or
         similar official is appointed to take possession of all or
         substantially all of SMC's assets and the order of appointment is not
         dismisses or stayed within 60 days after appointment;

               e. If SMC makes any assignment for the benefit of creditors,
         or other arrangement or composition under any laws for the benefit of
         insolvent persons; an order for relief is entered against SMC under any
         bankruptcy, reorganization, or insolvency law of any jurisdiction and
         such order is not dismisses or stayed within 60 days after its entry;
         or any case, proceeding, or other action seeking such order remains
         undismissed for 60 days after its filing; or any writ of attachment,
         garnishment, or execution is levied against all or substantially all of
         SMC's assets; or all or substantially all of SMC's assets become
         subject to any attachment, garnishment, execution, or other judicial
         seizure, and the same is not satisfied, removed, released, or bonded
         within 60 days after the date the writ was levied or the date of the
         attachment, garnishment, execution, or other judicial seizure.

         9.4 Remedies for SMC Event of Default. Upon a SMC Event to Default, WBP
shall be entitled to the following remedies:

               a. If SMC is in default on any payment due under this Agreement,
         the amount in arrears will bear interest from the date of the default
         until the amount is paid in full, at a rate equal to the maximum rate
         allowed by Florida law.

               b. WBP may terminate this Agreement, and such termination will be
         without prejudice to any other rights or claims WBP may have against
         SMC.

               c. WBP may seek specific performance and injunctive relief,
         including, without limitation, temporary or preliminary injunctive
         relief.

         9.5 Rights of WBP. In the event that a SMC Event of Default results
from SMC's cessation of or failure to actively conduct its primary business
operations, the liquidation or seizure of its assets, any bankruptcy or
insolvency, an assignment for the benefit of creditors, or its failure to own or
control the Licensed Property, then WBP shall have the right, in addition to all
other remedies, to the ownership of the Licensed Property for no additional
consideration. In such event, SMC shall execute such documents as shall be
required to transfer to and fully vest the Licensed Property and the Catalogue
in WBP.

                                       11
<PAGE>

                                   ARTICLE X -

                              INFRINGEMENT ACTIONS

         10.1 Infringement Actions. If either party hereto learns of a possible
infringement of the Licensed Property or asserted against either party as a
result of the Licensed Property, such party shall inform the other party hereto
promptly in writing of such possible infringement and provide the other party
with any available evidence thereof, to the extent in such party's possession or
control.

         10.2 SMC Obligation to Protect the Licensed Property and the WBP
Indemnified Parties. During the Term, SMC shall (i) prosecute any lawsuits,
legal actions or other proceedings which, in the opinion of WBP, are necessary
or advisable to protect the Licensed Property from infringements, and (ii)
protect, indemnify and defend the WBP Indemnified Parties in the event that any
claim, lawsuit, legal action or other proceeding is made or instituted against
WBP as a result of its sales of Licensed Products. Notwithstanding the
foregoing, SMC shall not be required to indemnify and defend the WBP Indemnified
Parties in connection with the illegal or grossly negligent actions of the WBP
Indemnified Parties. The cost and expense of defending and indemnifying the WBP
Indemnified Parties and of prosecuting lawsuits, legal actions or other
proceedings in connection with alleged infringements shall be paid by SMC. In
furtherance of such right, WBP hereby agrees that SMC may include WBP as a party
plaintiff in any such suit, without expense to WBP, and WBP undertakes to
furnish any documentary evidence or evidentiary materials which SMC may
reasonably require for the purpose of terminating such infringements.

         10.3 WBP Right to Protect the Licensed Property and the WBP Indemnified
Parties. If within six (6) months after having been notified of any alleged
infringement of the Licensed Property, SMC shall have been unsuccessful in
persuading the alleged infringer to desist and shall not have brought and shall
not be diligently prosecuting an infringement action, or if SMC shall notify WBP
at any time prior thereto of its intention not to bring suit against any alleged
infringer, then, and in those events only, WBP shall have the right, but shall
not be obligated, to prosecute at its own expense such infringement of the
Licensed Property and WBP may, for such purposes, use the name of SMC as party
plaintiff. SMC shall bear all costs and expenses of any such suit. If within ten
(10) days of being notified of any claim or demand against any WBP Indemnified
Party, SMC shall not have formally and actually undertaken the defense of such
WBP Indemnified Party or if SMC shall at any time thereafter discontinue its
defense of such WBP Indemnified Party, WBP shall have the right to defend the
WBP Indemnified Party at the expense of SMC.

         10.4 Cooperation. In any infringement suit to protect the Licensed
Property or to indemnify any Person pursuant to this Agreement, WBP shall, at
the request and expense of SMC, cooperate in all respects and, to the extent
possible, have its employees testify when requested and make available relevant
records, papers, information, samples, specimens, and the like.

         10.5 Escrow of Funds. In the event that any suit is brought by any
third party alleging that any of the Licensed Property infringes any
Intellectual Property of any other Person, or if a

                                       12
<PAGE>

claim or demand is brought against any WBP Indemnified Party (collectively, an
"Indemnifiable Matter"), at the option of WBP, the sums payable to SMC with
respect to the sale of the Licensed Products (the "Escrowed Funds") may be held
in escrow by WBP to the extent of the costs and expenses reasonably anticipated
by WBP to be incurred including but not limited to Legal Expenses and potential
damages for such Indemnifiable Matter. The expenses incurred by WBP in
connection with the Indemnifiable Matter shall be paid to WBP on a monthly basis
upon the submission of invoices for such expenses and the balance of the
Escrowed Funds shall remain in escrow pending the outcome of the Indemnifiable
Matter. Upon the conclusion of the Indemnifiable Matter, the applicable amount
of Escrowed Funds shall be remitted first, to WBP to the extent of its remaining
costs and expenses including but not limited to the Legal Expenses and then to
the claimant if the claimant is awarded damages or if a settlement is agreed
upon by SMC with the claimant that requires the payment of sums to the claimant.
The balance of Escrowed Funds shall then be paid to SMC. The Escrowed Funds
shall not bear interest and WBP shall have no obligation to invest the Escrowed
Funds. In the event of a dispute over all or any portion of the Escrowed Funds,
WBP may initiate an action in the nature of interpleader and deposit the portion
of the Escrowed Funds that is in dispute with the court having jurisdiction over
such interpleader action. In any action in which the Escrowed Funds are
interpled, WBP, upon depositing the Escrowed Funds with a court, shall be
released from further liability, but shall be entitled to assert all claims to
which it may be entitled. WBP shall not be liable, except for its own gross
negligence or willful misconduct in connection with the Escrowed Funds. WBP
shall be entitle to rely upon any order, judgment, certification, demand,
notice, instrument or other writing delivered to it hereunder without being
required to determine the authenticity or the correctness of any fact stated
therein or the propriety or validity or the service thereof. WBP may act in
reliance upon any instrument or signature believed by it to be genuine and may
assume that any person purporting to give receipt or advice or make any
statement or execute any document in connection with the provisions hereof has
been duly authorized to do so.

         10.6 Additional Provisions. The provisions of Section 11.2 c. (i)-(iv)
shall govern the defense and settlement of any Indemnifiable Matter.

                                  ARTICLE XI -

                          SURVIVAL AN DINDEMNIFICATION

         11.1 Survival. All representations and warranties of the parties shall
survive the termination of this Agreement for a period of five years; provided,
however, that (i) to the extent any breach of a representation or warranty
involved any Tax matters, such representation and warranty and any related
indemnity obligation shall survive until the expiration of the applicable
statute of limitations relating to any such Tax matter.

         11.2 Indemnification. The parties shall indemnify each other as set
forth below:

               a. In addition to its indemnification obligations set forth in
         Article X, SMC shall (i) indemnify and hold harmless WBP from any and
         all losses, damages, liabilities and Claims arising out of, based upon
         or resulting from any inaccuracy as of the date hereof of any
         representation or warranty of SMC which is contained in or made

                                       13
<PAGE>

         pursuant to this Agreement or any breach by SMC of any of its
         obligation contained in or made pursuant to this Agreement and (ii)
         reimburse WBP for any and all fees, costs and expenses of any kind
         related thereto (including, without limitation, any and all Legal
         Expenses).

               b. WBP shall (i) indemnify and hold harmless SMC from any and all
         losses, damages, liabilities and Claims arising out of, based upon or
         resulting from any inaccuracy as of the date hereof of any
         representation or warranty of WBP which is contained in or made
         pursuant to this Agreement or any breach by WBP of any of its
         obligations contained in or made pursuant to this Agreement and (ii)
         reimburse SMC for any and all fees, costs and expenses of any kind
         related thereto (including, without limitation, any and all Legal
         Expenses).

               c. Promptly after receipt by any person entitle to
         indemnification under this Section 11.2 (an "Indemnified Party") of
         notice of the commencement of any action in respect of which the
         Indemnified Party will seek indemnification hereunder, the Indemnified
         Party shall notify each person that is obligated to provide usch
         indemnification (an "Indemnified Party") thereof in writing, but any
         failure to so notify the Indemnifying Party shall not relieve it from
         any liability that it may have to the Indemnified Party other than
         under this Article XI. The Indemnifying Party shall be entitle to
         participate in the defense of such action and, provided that within 15
         days after receipt of such written notice the Indemnifying Party
         confirms in writing its responsibility therefore and reasonably
         demonstrates that it will be able to pay the full amount of potential
         liability in connection with any such claim, to assume control of such
         defense with counsel reasonably satisfactory to such Indemnified
         Party; provided, however, that:

                    (i) the Indemnified Party shall be entitle to participate in
               the defense of such claim and to employ counsel at its own
               expense to assist in the handling of such claim;

                    (ii) the Indemnifying Party shall obtain the prior written
               approval of the Indemnified Party before entering into any
               settlement of such claim or ceasing to defend against such claim,
               if pursuant to or as a result of such settlement or cessation,
               injunctive or other equitable relief would be imposed against the
               Indemnified Party;

                    (iii) no Indemnifying Party shall consent to the entry of
               any judgment or enter into any settlement that does not include
               as an unconditional term thereof the giving by each claimant or
               plaintiff to each Indemnified Party of a release from all
               liability in respect of such claim; and

                    (iv) the Indemnifying Party shall not be entitled to control
               (but shall be entitle to participate at its own expense in the
               defense of), and the Indemnified Party shall be entitle to have
               sole control over, the defense or settlement of (A) any claim to
               the extent the claim seeks an order, injunction or other
               equitable relief against the Indemnified Party which, if
               successful, could materially interfere with the business,
               operations, assets, condition (financial or otherwise) or

                                       14
<PAGE>

               otherwise, or prospects of the Indemnified Party or (B) any claim
               relating to Taxes.

               After written notice by the Indemnifying Party to the Indemnified
               Party of its election to assume control of the defense of any
               such action, the Indemnifying Party shall not be liable to such
               Indemnified Party hereunder for any Legal Expenses subsequently
               incurred by such Indemnified Party in connection with the defense
               thereof other than reasonable costs of investigation and of
               liaison counsel for the Indemnified Party. If the Indemnifying
               Party does not assume control of the defense of such claim as
               provided in this Section 11.2 (c), the Indemnified Party shall
               have the right to defend such claim in such manner as it may deem
               appropriate at the cost and expense of the Indemnifying Party,
               and the Indemnifying Party will promptly reimburse the
               Indemnified Party therefore in accordance with this Section 11.2.
               The reimbursement of fees, costs and expenses required by this
               Section 11.2 shall be made by periodic payments during the course
               of the investigation or defense, as and when bills are received
               or expense incurred.

               d. In the event that the Indemnifying Party shall be obligated to
         indemnify the Indemnified Party pursuant to this Article XI, the
         Indemnifying Party shall, upon payment of such indemnity in full, be
         subrogated to all rights of the Indemnified Party with respect to the
         claims to which such indemnification relates.

               e. Any claim by WBP for indemnification may be applied against
         any payment thereafter due to SMC under this Agreement, by means of
         setoff, reduction or otherwise. The rights of WBP under this
         subsection (e) are in addition to such other rights and remedies which
         WBP may have under this Agreement or otherwise.

         11.3 Survival. SMC's obligations under Article X and this Article XI
shall survive the termination of this Agreement.

                                  ARTICLE XII -

                          GENERAL TERMS AND CONDITIONS

         12.1 Notices. All notices or other communications required or permitted
hereunder shall be in writing and shall be deemed to have been duly given (i) if
physically delivered, (ii) if transmitted by fax or other similar means, with
subsequent oral confirmation, or (iii) three (3) business days after having been
transmitted to a third party providing delivery services in the ordinary course
of business which guarantees delivery on the next business day after such
transmittal (e.g., via Federal Express) all of which notices or other
communications shall be addressed to the recipient as follows:

                                       15
<PAGE>

         If to WBP:      CPP Belwin, Inc.
                         15800 N.W. 48th Avenue
                         Miami, Florida 33014
                         ATTN: Fred S. Anton, Chief Executive Officer
                         Telecopy Number: (305) 621-1094

         With a courtesy copy to:   Carlton Fields P.A.
                         100 SE 2nd Street
                         40th Floor
                         Miami, Florida 33131
                         ATTN: Andrew J. Markus, Esq.

         If to SMC:      The Singing Machine, Inc.
                         6601 Lyons Road
                         Building A-7
                         Coconut Creek, Florida 33073
                         ATTN: Rose L. Labadessa, Corporate Legal Manager
                         Telecopy Number: (954) 596-2000

or such other addressees and telecopy numbers as either Party shall hereafter
furnish to the other Party.

         12.2 Modifications. This Agreement may not be amended, changed,
modified or rescinded except in writing signed by a duly authorized
representative of each party hereto.

         12.3 Captions; Gender, Number. Section and other heading shave been
inserted for convenience of reference only an dare not a part of nor intended to
govern, limit or aid in the construction of any term or provision hereof. All
words used in this Agreement will be construed to be of such gender or number as
the circumstances require. Unless otherwise expressly provided, the word
"including" does not limit the preceding words or terms.

         12.4 Dispute Resolution and Arbitration. Any dispute, controversy or
claim arising out of or relating to this Agreement shall be settled by binding
arbitration conducted by the American Arbitration Association ("AAA") in
accordance with AAA Commercial Arbitration Rule and Procedures (the "Rules").
The arbitration shall be heard by three arbitrators to be selected in accordance
with the Rules, in Miami-Dade County, Florida. Judgment upon any award rendered
may be entered in any court having jurisdiction thereof. Within 7 calendar days
after appointment the arbitrators shall set the hearing date, which shall be
within 90 days after the filing date of the demand for arbitration unless a
later date is required for good cause shown and shall order a mutual exchange of
what they determine to be relevant documents and the dates thereafter for the
taking of up to a maximum of 5 depositions by each party to last no more than 2
days in aggregate for each party. Both SMC and WBP waive the right, if any, to
obtain any award for exemplary or punitive damages or any other amount for the
purpose of imposing a penalty from the other in any arbitration or judicial
proceeding or other adjudication arising out of or with respect to this
Agreement, or any breach hereof, including any claim that this

                                       16
<PAGE>

Agreement, or any part hereof, is invalid, illegal or otherwise voidable or
void. In addition to all other relief, the arbitrator shall have the power to
award reasonable attorneys' fees to the prevailing party. The arbitrators shall
make their award no later than 7 calendar days after the close of evidence of
the submission of final briefs, whichever occurs later. The obligations herein
to arbitrate shall not prevent any party from seeking temporary restraining
orders, preliminary injunctions or other procedures in a court of competent
jurisdiction to obtain interim relief when deemed necessary by such party and
court to preserve the status quo or prevent irreparable injury pending
resolution by arbitration of the actual dispute or to seek a remedy specifically
provided for in this Agreement. All parties hereto acknowledge and agree that
the state and federal courts of the State of Florida are courts of competent
jurisdiction for purposes of this paragraph and do hereby submit to the
jurisdiction of the appropriate court in the State of Florida to which the
matter is first submitted by a party for enforcement of any arbitration award or
to obtain any such interim relief as herein provided.

         12.5 Governing Law; Jurisdiction. This Agreement shall be governed by
and construed and enforced in accordance with the laws of the State of Florida
without regard to its choice of law rules or similar principle which would refer
to and apply the substantive laws of another jurisdiction, and applicable
international conventions and treaties.

         12.6 Waiver. The failure of either party to exercise any right or
option arising out of a breach of this Agreement shall not be deemed a waiver of
any right or option with respect to any subsequent or different breach, or a
consent to the continuance of any existing breach.

         12.7 Specific Performance. In addition to such other remedies as may be
available under applicable law, the parties acknowledge that the remedies of
specific performance and/or injunctive relief shall be available and proper in
the event either party fails or refuses to perform its duties or fulfill its
covenants hereunder.

         12.8 Successors and Assignment. The rights and obligations under this
Agreement may not be assigned or otherwise transferred by either party without
the prior written consent of the other party, which consent shall not be
unreasonably withheld or delayed.; provided, however, that WBP may make an
assignment to an Affiliate without the consent of SMC (provided that WBP is not
relieved of its liability hereunder). WBP agrees to provide SMC notice of any
such assignment. Any attempted assignment or transfer in contravention of this
provision will be null and void. This Agreement shall be binding upon and inure
to the benefit of the parties hereto and their successors and permitted assigns.

         12.9 Change of Control. Notwithstanding Section 13.8 above, a Change of
Control shall not be considered an assignment or transfer of any rights or
obligations of WBP hereunder. In the event of a Change of Control, at the option
of WBP or any successor to WBP, this Agreement may be terminated upon notice to
SMC.

         12.10 Entire Agreement. This Agreement (including the Exhibits and
Schedules to this Agreement which are, by this reference, incorporated herein),
constitutes the entire agreement and understanding of the parties with respect
to the subject matter of this Agreement and supersedes all prior agreements and
understandings of the parties with respect to the subject matter of this
Agreement.

                                       17
<PAGE>

         12.11 Counterparts. This Agreement may be executed in two or more
counterparts, all of which will be considered one and the same agreement and
each of which will be deemed an original.

         12.12 Severability. If any one or more of the provisions of this
Agreement is held to be invalid, illegal or unenforceable, the validity,
legality or enforceability of the remaining provisions of this Agreement will
not be affected thereby, and Sellers and Buyer will use their reasonable efforts
to substitute one or more valid, legal and enforceable provisions which insofar
as practicable implement the purposes and intent hereof. To the extent permitted
by applicable law, each party waives any provision of law which renders any
provision of this Agreement invalid, illegal, or unenforceable in any respect.

         12.13 Beneficiaries. This Agreement shall not confer upon any other
Person any rights or remedies hereunder.

         12.14 Expenses. Each of the parties hereto shall pay its own fees and
expenses (including the fees of any attorneys, accountants, investment bankers
or others engaged by such party) in connection with this Agreement and the
transactions contemplated hereby whether or not the transactions contemplated
hereby are consummated.

         12.15 Further Assurances. The parties agree (a) to furnish upon request
to each other such further information, (b) to execute and deliver to each other
such other documents, and (c) to do such other acts and all things as the other
party may reasonably request for the purpose of carrying out the intent of this
Agreement and the documents referred to this Agreement.

         12.16 No Partnership. The parties hereby acknowledge that it is not
their intention under this Agreement to create between themselves a partnership,
joint venture, tenancy-in-common, joint tenancy, co-ownership, franchise, or
agency relationship. Accordingly, notwithstanding any expressions or provisions
contained herein, nothing in this Agreement shall be construed or deemed to
create, or to express an intent to create, a partnership, joint venture,
tenancy-in-common, joint tenancy, co-ownership, franchise, or agency
relationship of any kind or nature whatsoever between the parties hereto.

         12.17 No Presumption. The parties have participated jointly in the
negotiation and drafting of this Agreement. In the event of any ambiguity or
question of intent or interpretation arises, this Agreement shall be construed
as if drafted jointly by both parties, and no presumption or burden of proof
shall arise favoring or disfavoring any party by virtue of the authorship of any
of the provisions of this Agreement.

                                       18
<PAGE>

         IN WITNESS WHEREOF, the parties have caused this Sale Agreement to be
executed in their respective corporate names by their respective officers
thereunto duly authorized.

                            CPP Belwin, Inc., a Delaware corporation

                            By: /s/ Fred S. Anton
                                -----------------
                            Name: FRED S. ANTON
                                  ---------------
                            Title: CEO
                                  ---------------

                            The Singing Machine Inc., a Delaware corporation


                            By: /s/ Yi Ping Chan
                                ----------------
                            Name: Yi Ping Chan
                            Title: Interim CEO and COO

                                       19
<PAGE>



                                    EXHIBIT A
                                    ---------
                                      LOGO
                                      ----

                             (To be supplied by SMC)


                                       20
<PAGE>

                                    EXHIBIT B
                                    ---------

                                      MARK
                                      ----

                             (To be supplied by SMC)


                                       21
<PAGE>

                                    EXHIBIT C
                                    ---------

                                DISTRIBUTION FEE
                                ----------------

The Distribution Fee payable to WBP for all WBP Accounts shall be * (*%)
percent of Net Sales Receipts. The Distribution Fee for Non-WBP Accounts shall
be * (*%) percent of Net Sales Receipts (the "SMC Serviced Account
Distribution Fee"). SMC Services Account Distribution Fee shall be applicable to
all shipments of products of any type or description made on or after the
Effective Date regardless of when the purchase order was entered.

___________

* The confidential portion has been so omitted pursuant to a request for
confidential treatment and has been filed separately with the Securities and
Exchange Commission.


                                       22
<PAGE>

                                    EXHIBIT D
                                    ---------

                                NON-WBP ACCOUNTS
                                ----------------

The following are Non-WBP Accounts.

*

___________

* The confidential portion has been so omitted pursuant to a request for
confidential treatment and has been filed separately with the Securities and
Exchange Commission.

                                       23



</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-31.1
<SEQUENCE>10
<FILENAME>certification-311.txt
<DESCRIPTION>CERTIFICATION
<TEXT>


                                                                    EXHIBIT 31.1

                                 CERTIFICATIONS

I, Yi Ping Chan, certify that:

1. I have reviewed this Form 10-Q of The Singing Machine Company, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;

4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;

(b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and

(c) Disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.





                 /s/ Yi Ping Chan
 -------------------------------------------------
                   Yi Ping Chan
Chief Executive Office and Chief Operating Officer
           (Principal Executive Officer)



Date: February 17, 2004



</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-31.2
<SEQUENCE>11
<FILENAME>certification-312.txt
<DESCRIPTION>CERTIFICATION
<TEXT>

                                                                    EXHIBIT 31.2

                                 CERTIFICATIONS

I, April Green, certify that:

1. I have reviewed this Form 10-Q of The Singing Machine Company, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;

4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;

(b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and

(c) Disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.





       /s/ April Green
- -----------------------------
         April Green
   Chief Financial Officer
(Principal Financial Officer)



Date: February 17, 2004


</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-32.1
<SEQUENCE>12
<FILENAME>certification-321.txt
<DESCRIPTION>CERTIFICATION
<TEXT>


                                                                    EXHIBIT 32.1

               Certification Pursuant to 18 U.S.C. Section 1350,
      as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Quarterly Report of The Singing Machine Company, Inc.
(the "Company") on Form 10-Q for the period ended December 31, 2003 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
I, Yi Ping Chan, Chief Executive Officer and Chief Operating Officer of the
Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and result of operations of the Company.





Date: February 17, 2004                          /s/ Yi Ping Chan
                                                 -------------------------------
                                                 Yi Ping Chan
                                                 Chief Executive Officer and
                                                 Chief Operating Officer
                                                 (Principal Executive Officer)


</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-32.2
<SEQUENCE>13
<FILENAME>certification-322.txt
<DESCRIPTION>CERTIFICATION
<TEXT>


                                                                    EXHIBIT 32.2

               Certification Pursuant to 18 U.S.C. Section 1350,
      as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Quarterly Report of The Singing Machine Company, Inc.
(the "Company") on Form 10-Q for the period ended December 31, 2003 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
I, April J Green, Chief Financial Officer of the Company, certify, pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and result of operations of the Company.





Date: February 17, 2004                          /s/ April J Green
                                                 -------------------------------
                                                 April J Green
                                                 Chief Financial Officer
                                                 (Principal Financial Officer)












</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
-----END PRIVACY-ENHANCED MESSAGE-----
