10-K/A 1 v154143_10ka.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K/A
(Amendment #1)
(Mark one)

R | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
| For the fiscal year ended March 31, 2009
| OR
£ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
| For the transition period from _________ to ___________

Commission file number 000-24968
THE SINGING MACHINE COMPANY, INC.
(Exact name of registrant as specified in its charter)

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

6601 LYONS ROAD, BUILDING A-7, COCONUT CREEK, FL 33073
(Address of principal executive offices)
(954) 596-1000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: Common Stock, $.01 Par Value Per Share
NYSE Amex Equities
(Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act. Yes £ No R
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes £ No R
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes R No £
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).Yes £ No £
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. £
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company,” in Rule 12b-2 of the Exchange Act).:
Large accelerated filer £ Accelerated filer £ Non-accelerated filer 0 Smaller reporting company R
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act) Yes £ No R
As of September 30, 2008, the aggregate market value of the issued and outstanding common stock held by non-affiliates of the registrant, based upon the closing price of the common stock as quoted on the NYSE Amex Equities of $0.19 was approximately $2,588,653.86 (based on 13,624,494 shares outstanding to non-affiliates). For purposes of the above statement only, all directors, executive officers and 10% shareholders are assumed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for any other purpose.
Number of shares of common stock outstanding as of June 15, 2009 was 37,449,432.
DOCUMENTS INCORPORATED BY REFERENCE – None
1

TABLE OF CONTENTS

Part II
Item 8. | Financial Statements and Supplementary Data | 3
Part III
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 3
PART IV
Item 15. | Exhibits, Financial Statement Schedules | 5

2

EXPLANATORY NOTE
The Singing Machine Company, Inc. (“Company,” “Singing Machine,” “we,” “us,” or, “our”) is filing this Amendment No. 1 (the “Form 10-K/A”) to its annual report previously filed on Form 10-K with the SEC on June 29, 2009: (i) to revise Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters to revise the percentage owned by koncepts International Limited; (ii) to amend erroneous dates caused by clerical error contained within the “Report of Independent Registered Public Accounting Firm” in Item 8. Financial Statements and Supplementary Data; and (iii) to include two omitted exhibits in the Exhibit Index within Item 15. Exhibits and Financial Statement Schedules. Pursuant to Rule 12b-15 under the Securities Exchange Act of 1934, as a result of this amended report, the certifications pursuant to Section 302 and Section 906 of the Sarbanes-Oxley Act of 2002, filed and furnished, respectively, as exhibits to the Form 10-K have been re-executed and re-filed as of the date of this Form 10-K/A and are included as exhibits hereto.
PART II
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplemental data required pursuant to this Item 8 are included in this Form 10-K/A, as a separate section commencing on page F-1 and are incorporated herein by reference.
PART III
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth as of June 15, 2009, certain information concerning beneficial ownership of our common stock by:

· | all directors of the Singing Machine,

· | all named executive officers of the Singing Machine; and

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

Security ownership is based on 37,449,432 shares of our common stock issued and outstanding. In computing the number and percentage of shares beneficially owned by a person, shares of common stock subject to convertible securities and options currently convertible or exercisable, or convertible or exercisable within 60 days of June 15, 2009, are counted as outstanding, but these shares are not counted as outstanding for computing the percentage ownership of any other person.
As used herein, the term beneficial ownership with respect to a security is defined by Rule 13d-3 under the Securities Exchange Act of 1934 as consisting of sole or shared voting power (including the power to vote or direct the vote) and/or sole or shared investment power (including the power to dispose or direct the disposition of) with respect to the security through any contract, arrangement, understanding, relationship or otherwise, including a right to acquire such power(s) during the next 60 days. Unless otherwise noted below, and subject to applicable property laws, to our knowledge each person has sole investment and sole voting power over the shares shown as beneficially owned by them. Unless otherwise noted, the principal address of each of the directors and officers listed below is c/o The Singing Machine Company, Inc., 6601 Lyons Road, Building A-7, Coconut Creek, FL 33073.
3

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

Name and Address of Beneficial Owner |  | Amount and Nature of Beneficial Ownership of Common Stock |  |  | Percent of Outstanding Shares of Common Stock |
Security Ownership of Management: |  |  |  |  |  |
Anton Handal (1) |  |  | 750,000 |  |  |  | 2.0 | %
Lionel Marquis |  |  | - |  |  |  | * |
Bernardo Melo (2) |  |  | 60,500 |  |  |  | * |
Bernard Appel (3) |  |  | 119,578 |  |  |  | * |
Harvey Judkowitz (3) |  |  | 129,578 |  |  |  | * |
Carol Lau (3) |  |  | 26,130 |  |  |  | * |
Yat Tung Lau (3) |  |  | 26,130 |  |  |  | * |
Peter Hon (3) |  |  | 26,130 |  |  |  | * |
Stewart Merkin (3) |  |  | 97,231 |  |  |  | * |
Officers & Directors as a Group (9 persons) |  |  | 1,235,277 |  |  |  | 3.3 | %
Security Ownership of Certain Beneficial Owners: |  |  |  |  |  |  |  |
koncepts International Limited (4) |  |  | 19,932,679 |  |  |  | 51.5 | %
Arts Electronics Ltd. (5) |  |  | 3,745,917 |  |  |  | 10.0 | %
Gentle Boss Investments Ltd (6) |  |  | 2,100,000 |  |  |  | 5.6 | %

* Less than 1%
(1) Includes an option granted to Mr. Handal from koncepts International Limited to purchase 750,000 stock warrants of the Singing Machine held by koncepts International Limited, with an exercise price of $0.35 per share and is exercisable within 60 days of June 15, 2009. Excludes options to purchase 300,000 shares of common stock, which are not exercisable within 60 days of June 15, 2009.
(2) Includes stock options to purchase 60,500 shares of common stock, which is exercisable within 60 days of June 15, 2009.
(3) Includes as to the person indicated, the following outstanding stock options to purchase shares of the Company’s Common Stock issued under the 1994 and 2001 Stock Option Plans, which will be vested and exercisable within 60 days of June 15, 2009: 100,000 options held by Bernard Appel; 100,000 options held by Harvey Judkowitz, 80,000 options held by Stewart Merkin, and 20,000 options held by each of Carol Lau, Peter Hon, and Yat-Tung Lau.
(4) Includes a common stock purchase warrant to purchase 1,250,000 shares of common stock, which is exercisable within 60 days of June 15, 2009. The address for koncepts International Limited is 5/F Shing Dao Industrial Bldg, 232 Aberdeen Main Road, Aberdeen China.
(5) The address for Arts Electronics Ltd. is Room 101, Fo Tan Ind CTR 1/F, 26-28 Au Pui Wan, Fo Tan, Shatin N.T. Hong Kong.
(6) The address for Gentle Boss Investments Ltd. is Unit 6, 9/F, Tower B, 55 Hoi Yuen Road, Kwun Tong, Kowloon Hong Kong.
EQUITY COMPENSATION PLANS AND 401(K) PLAN
We have two stock option plans: our Amended and Restated 1994 Management Stock Option Plan ("1994 Plan") and our Year 2001 Stock Option Plan ("Year 2001 Plan"). Both the 1994 Plan and the Year 2001 Plan provide for the granting of incentive stock options and non-qualified stock options to our employees, officers, directors and consultants. As of March 31, 2009, we had 5,550 options issued and outstanding under our 1994 Plan and 1,127,665 options were issued and outstanding under our Year 2001 Plan.
4

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

PLAN CATEGORY |  | NUMBER OF SECURITIES TO BE ISSUED UPON EXERCISE OF OUTSTANDING OPTIONS, WARRANTS AND RIGHTS |  |  | WEIGHTED-AVERAGE EXERCISE PRICE OF OUTSTANDING OPTIONS, WARRANTS AND RIGHTS |  |  | NUMBER OF SECURITIES REMAINING AVAILABLE FOR FUTURE ISSUANCE UNDER EQUITY COMPENSATION PLANS (EXCLUDING SECURITIES IN COLUMN (A)) |
Equity Compensation Plans approved by Security Holders |  |  | 1,133,215 |  |  | $ | .58 |  |  |  | 727,320 |
Equity Compensation Plans Not approved by Security Holders |  |  | 0 |  |  | $ | 0 |  |  |  | 0 |

PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) 1. The following financial statements for The Singing Machine Company, Inc. and Subsidiaries are filed as a part of this report:
Consolidated Balance Sheets— March 31, 2009 and 2008
Consolidated Statements of Operations—Years ended March 31, 2009, 2008 and 2007.
Consolidated Statements of Shareholders' (deficit) Equity—Years ended March 31, 2009, 2008 and 2007.
Consolidated Statements of Cash Flows—Years ended March 31, 2009, 2008 and 2007.
2. Notes to Consolidated Financial Statements
Schedules are omitted because of the absence of conditions under which they are required or because the information is included in the financial statements or notes thereto.
(b) Exhibits.

Exhibit No. | Description

3.1 Certificate of Incorporation of the Singing Machine filed with the Delaware Secretary of State on February 15, 1994 and amendments through April 15, 1999 (incorporated by reference to Exhibit 3.1 in the Singing Machine's registration statement on Form SB-2 filed with the SEC on March 7, 2000).
3.2 Certificate of Amendment of the Singing Machine filed with the Delaware Secretary of State on September 29, 2000 (incorporated by reference to Exhibit 3.1 in the Singing Machine's Quarterly Report on Form 10-QSB for the period ended September 30, 1999 filed with the SEC on November 14, 2000).
3.3 Certificates of Correction filed with the Delaware Secretary of State on March 29 and 30, 2001 correcting the Amendment to our Certificate of Incorporation dated April 20, 1998 (incorporated by reference to Exhibit 3.11 in the Singing Machine's registration statement on Form SB-2 filed with the SEC on April 11, 2000).
3.4 Amended By-Laws of the Singing Machine Singing Machine (incorporated by reference to Exhibit 3.14 in the Singing Machine's Annual Report on Form 10-KSB for the year ended March 31, 2001 filed with the SEC on June 29, 2001).
4.1 Form of Certificate Evidencing Shares of Common Stock (incorporated by reference to Exhibit 3.3. of the Singing Machine's registration statement on Form SB-2 filed with the SEC on March 7, 2000). File No. 333-57722)
10.1 Factoring Agreement dated February 9, 2004 between Milberg Factors, Inc. and the Singing Machine. (incorporated by reference to Exhibit 10.1 in the Singing Machine's Quarterly Report on Form 10-Q filed with the SEC on February 17, 2004, File No. 000-24968).
10.2 Security Agreement for Goods and Chattels dated February 9, 2004 between Milberg Factors, Inc. and the Singing Machine. incorporated by reference to Exhibit 10.2 in the Singing Machine's Quarterly Report on Form 10-Q filed with the SEC on February 17, 2004, File No. 000-24968).
10.3 Security Agreement for Inventory dated February 9, 2004 between Milberg Factors, Inc. and the Singing Machine (incorporated by reference to Exhibit 10.3 in the Singing Machine's Quarterly Report on Form 10-Q filed with the SEC on February 17, 2004, File No. 000-24968).
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10.4 Second Amendment to the Transaction Documents dated February 9, 2004 between Omicron Master Trust, SF Capital Partners, Ltd, Bristol Investment Fund, Ltd., Ascend Offshore Fund, ltd., Ascend Partners, LP, Ascend Partners Sapient L.P. and the Singing Machine (incorporated by reference to Exhibit 10.4 in the Singing Machine's Quarterly Report on Form 10-Q filed with the SEC on February 17, 2004, File No. 000-24968).
10.5 Form of Subordination Agreement executed by institutional Investors. (Incorporated by reference to Exhibit 10.18 of the Singing Machine's Amendment No. 1 to its registration statement on Form S-1 filed with SEC on April, 2004)
10.6 Employment Agreement dated February 27, 2004 between the Singing Machine and Eddie Steele. (incorporated by reference to the Singing Machine's Annual Report on Form 10-K for the fiscal year ended March 31, 2005)
10.7 Employment Agreement dated May 2, 2003 between the Singing Machine and Yi Ping Chan. (incorporated by reference to Exhibit 10.20 of the Singing Machine's Annual Report on Form 10-KSB/A filed with the SEC on July 23, 2003, File No. 000-24968). +
10.8 Separation and Release Agreement effective as of May 2, 2003 between the Singing Machine and John Klecha (incorporated by reference to Exhibit 10.1 of the Singing Machine's Annual Report on Form 8-K filed with the SEC on July 17, 2003, File No. 000-24968).
10.9 Separation and Release Agreement effective as of April 9, 2004 between the Singing Machine and April Green. (incorporated by reference to the Singing Machine's Annual Report on Form 10-K for the fiscal year ended March 31, 2005)
10.10 Separation and Release Agreement dated December 16,2003 between the Singing Machine and Jack Dromgold. (incorporated by reference to the Singing Machine's Annual Report on Form 10-K for the fiscal year ended March 31, 2005)
10.11 Separation and Release Agreement effective as of April 12, 2004 between the Singing Machine and John Dahl. (incorporated by reference to the Singing Machine's Annual Report on Form 10-K for the fiscal year ended March 31, 2005)
10.12 Industrial Lease dated March 1, 2002, by and between AMP Properties, L.P. and the Singing Machine for warehouse space in Compton, California (incorporated by reference to Exhibit 10.20 of the Singing Machine's Annual Report on Form 10-KSB/A filed with the SEC on July 23, 2002, File No. 000-24968).
10.13 Amended and Restated 1994 Management Stock Option Plan (incorporated by reference to Exhibit 10.6 to the Singing Machine's registration statement on Form SB-2 filed with the SEC on March 28, 2001, File No. 333-59684).
10.14 Year 2001 Stock Option Plan (incorporated by reference to Exhibit 10.1 of the Singing Machine's registration statement on Form S-8 filed with the SEC on September 13, 2002, File No. 333-99543).
10.15 Securities Purchase Agreement dated as of August 20, 2003 by and among the Singing Machine and Omicron Master Trust, SF Capital Partners, Ltd., Bristol Investment Fund, Ltd., Ascend Offshore Fund, Ltd., Ascend Partners, LP and Ascend Partners Sapient, LP (collectively, the "Investors") (filed as Exhibit 10.1 to the Singing Machine's Registration Statement filed with the SEC on October 9, 2003, File No. 333-109574).
10.16 Amendment dated September 5, 2003 to Securities Purchase Agreement between the Singing Machine and the Investors (filed as Exhibit 10.2 to the Singing Machine's Registration Statement filed with the SEC on October 9, 2003, File No. 333-109574).
10.17 Form of Debenture Agreement issued by the Singing Machine to each of the Investors (filed as Exhibit 10.3 to the Singing Machine's Registration Statement filed with the SEC on October 9, 2003, File No. 333-109574).
10.18 Form of Warrant Agreement issued by the Singing Machine to the Investors (filed as Exhibit 10.4 to the Singing Machine's Registration Statement filed with the SEC on October 9, 2003, File No. 333-109574).
10.19 Warrant Agreement between the Singing Machine and Roth Capital Partners, LLC (filed as Exhibit 10.5 to the Singing Machine's Registration Statement filed with the SEC on October 9, 2003, File No. 333-109574).
10.20 Registration Rights Agreement between the Singing Machine and each of the Investors and Roth Capital Partners, LLC (filed as Exhibit 10.5 to the Singing Machine's Registration Statement filed with the SEC on October 9, 2003, File No. 333-109574).
10.21 Domestic Merchandise License Agreement dated November 1, 2000 between MTV Networks, a division of Viacom International, Inc. and the Singing Machine (incorporated by reference to Exhibit 10.3 of the Singing Machine's Quarterly Report on Form 10-Q for the quarter ended December 31, 2002, filed with the SEC on February 14, 2003, File No. 000-24968).
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10.22 Amendment dated January 1, 2002 to Domestic Merchandise License Agreement between MTV Networks, a division of Viacom International, Inc. and the Singing Machine (incorporated by reference to Exhibit 10.4 of the Singing Machine's Quarterly Report on Form 10-Q for the quarter ended December 31, 2002, filed with the SEC on February 14, 2003, File No. 0000-24968).
10.23 Second Amendment as of November 13, 2002 to Domestic Merchandise License Agreement between MTV Networks, a division of Viacom International, Inc. and the Singing Machine (incorporated by reference to Exhibit 10.5 of the Singing Machine's Quarterly Report on Form 10-Q for the quarter ended December 31, 2002, filed with the SEC on February 2003, File No. 000-24968).
10.24 Third Amendment as of February 26, 2003 to Domestic Merchandise License Agreement between MTV Networks, a division of Viacom International, Inc. and the Singing Machine (incorporated by reference to Exhibit 10.10 of the Singing Machine's Annual Report on Form 10-K for the fiscal year ended March 31, 2003, filed with the SEC on July 17, 2003, File No. 000-24968).
10.25 Amendment to Domestic Licensing Agreement dated November 15, 2002 between the Singing Machine and MTV Networks, a division of Viacom International, Inc. (incorporated by reference to Exhibit 10.5 in the Singing Machine's Quarterly Report on Form 10-Q filed with the SEC on February 17, 2004, File No. 000-24968).
10.26 Fifth Amendment to Domestic Licensing Agreement dated December 23, 2003 between the Singing Machine and MTV Networks, a division of Viacom International, Inc. (incorporated by reference to Exhibit 10.6 in the Singing Machine's Quarterly Report on Form 10-Q filed with the SEC on February 17, 2004, File No. 000-24968).
10.27 Sales Agreement effective as of December 9, 2003 between the Singing Machine and CPP Belwin, Inc. and its affiliates (incorporated by reference to Exhibit 10.7 in the Singing Machine's Quarterly Report on Form 10-Q filed with the SEC on February 17, 2004, File No. 000-24968).
10.28 Distribution Agreement dated April 1, 2003 between the Singing Machine and Arbiter Group, PLC. (incorporated by reference to the Singing Machine's Annual Report on Form 10-K for the fiscal year ended March 31, 2005)
10.29 Loan Agreements dated August 13, 2003 in the aggregate amount of $1 million between the Company and each of Josef Bauer, Howard Moore & Helen Moore Living Trust, Maureen G. LaRoche and Yi Ping Chan. (incorporated by reference to the Singing Machine's Annual Report on Form 10-K for the fiscal year ended March 31, 2005)
10.30 Letter dated March 4, 2003 from Jay Bauer to the Singing Machine regarding a $400,000 loan. (incorporated by reference to the Singing Machine's Annual Report on Form 10-K for the fiscal year ended March 31, 2005)
10.31 Securities Purchase Agreement dated February 21, 2007, by and between The Singing Machine Company, Inc. and koncepts International Limited. (incorporated by reference to the Singing Machine’s Current Report on Form 8-K filed with the SEC on February 27, 2007)
10.32 Registration Rights Agreement dated February 21, 2007, by and between The Singing Machine Company, Inc. and koncepts International Limited. (incorporated by reference to the Singing Machine’s Current Report on Form 8-K filed with the SEC on February 27, 2007)
10.33 One Year Stock Purchase Warrant of The Singing Machine Company, Inc. dated February 21, 2007. (incorporated by reference to the Singing Machine’s Current Report on Form 8-K filed with the SEC on February 27, 2007)
10.34 Three Year Stock Purchase Warrant of The Singing Machine Company, Inc. dated February 21, 2007. (incorporated by reference to the Singing Machine’s Current Report on Form 8-K filed with the SEC on February 27, 2007)
10.35 Four Year Stock Purchase Warrant of The Singing Machine Company, Inc. dated February 21, 2007. (incorporated by reference to the Singing Machine’s Current Report on Form 8-K filed with the SEC on February 27, 2007)
10.36 Bridge Loan Agreement dated March 8, 2007, by and between The Singing Machine Company, Inc. and Ever Solid Limited. (incorporated by reference to the Singing Machine’s Current Report on Form 8-K filed with the SEC on March 14, 2007)
10.37 Collateral Security Agreement dated March 8, 2007, by and between The Singing Machine Company, Inc. and Ever Solid Limited. (incorporated by reference to the Singing Machine’s Current Report on Form 8-K filed with the SEC on March 14, 2007)
10.38 Bridge Note of The Singing Machine Company, Inc. dated March 8, 2007. (incorporated by reference to the Singing Machine’s Current Report on Form 8-K filed with the SEC on March 14, 2007)
10.39 Settlement Agreement and Release dated as of March 5, 2007 by and among The Singing Machine Company, Inc. and the holders of the Company’s $4,000,000 principal amount 8% Convertible Debentures. (incorporated by reference to the Singing Machine’s Current Report on Form 8-K filed with the SEC on March 14, 2007)
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10.40 Settlement Agreement dated April 27, 2007, by and between The Singing Machine Company, Inc. and Abacus Advisors Group LLC. (incorporated by reference to the Singing Machine’s Current Report on Form 8-K filed with the SEC on May 3, 2007)
10.41 Amendment to lease for executive offices dated April 3, 2008 by and between The Singing Machine Company, Inc. and Lyons Corporate Park, LLLP. (incorporated by reference to the Singing Machine’s Annual Report on Form 10-K filed with the SEC on June 29, 2009)
10.42 Lease for City of Industry, CA warehouse by and between The Singing Machine Company, Inc. and Sun-Yin USA, Inc. (incorporated by reference to the Singing Machine’s Annual Report on Form 10-K filed with the SEC on June 29, 2009)
10.43 Cosmo employee management agreement dated May 23, 2008 by and among The Singing Machine Company, Inc. and Cosmo Communications Corporation. (incorporated by reference to the Singing Machine’s Annual Report on Form 10-K filed with the SEC on June 29, 2009)
10.44 Logistics Agreement dated May 23, 2008 by and among The Singing Machine Company, Inc. and Starlite Consumer Electronics (USA), Inc., Cosmo Communications Corp. (incorporated by reference to the Singing Machine’s Annual Report on Form 10-K filed with the SEC on June 29, 2009)
10.45 DBS Banking Facility Agreement dated August 28, 2008 by and among The Singing Machine Company, Inc. and SMC (Comercial Offshore De Macau) Limitada. (incorporated by reference to the Singing Machine’s Annual Report on Form 10-K filed with the SEC on June 29, 2009)
10.46 BB&T Factoring and Security Agreement dated September 19, 2008 by and among The Singing Machine Company, Inc. and Branch Banking and Trust Company. (incorporated by reference to the Singing Machine’s Annual Report on Form 10-K filed with the SEC on June 29, 2009)
10.47 Assignment of Factoring Proceeds and Intercreditor Agreement dated September 19, 2008 by and among The Singing Machine Company, Inc., SMC (Comercial Offshore De Macau) Limitada, Branch Banking and Trust Company, and DBS Bank (Hong Kong) Limited. (incorporated by reference to the Singing Machine’s Annual Report on Form 10-K filed with the SEC on June 29, 2009)
10.48 Hang Seng Bank Banking Facility dated February 12, 2008 by and among SMC (Comercial Offshore De Macau) Limitada and Hang Seng Bank. (incorporated by reference to the Singing Machine’s Annual Report on Form 10-K filed with the SEC on June 29, 2009)
10.49 Licensing Agreement dated May 10, 2006 by and among The Singing Machine Company, Inc. and MGA Entertainment, Inc. *
10.50 Licensing Agreement dated November 21, 2006 by and among The Singing Machine Company, Inc. and MGA Entertainment, Inc. *
31.1 Certification of Anton Handal, Chief Executive Officer, pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.*
31.2 Certification of Carol Lau, Chief Financial Officer, pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.*
32.1 Certifying Statement of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act.*
32.2 Certifying Statement of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act.*
* Filed herewith
+ Compensatory plan or arrangement.
8

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

Date: July 7, 2009 | By: | /s/ Anton H. Handal
| Anton H. Handal
| Chief Executive Officer

9

THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARIES
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS

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

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
The Singing Machine Company, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of The Singing Machine Company, Inc. and Subsidiaries (the “Company”) as of March 31, 2009 and 2008, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the years in the three year period ended March 31, 2009. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of March 31, 2009 and 2008, and the results of its operations and its cash flows for each of the years in the three year period ended March 31, 2009, in conformity with accounting principles generally accepted in the United States of America.
We have also audited Schedule II of the Company for the years ended March 31, 2009, 2008, 2007. In our opinion, this schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information therein.
/s/ Berkovits & Company, LLP.
Fort Lauderdale, Florida
June 26, 2009
F-2

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

|  | March 31, 2009 |  |  | March 31, 2008 |
Assets |  |  |  |  |  |
Current Assets |  |  |  |  |  |
Cash |  | $ | 957,163 |  |  | $ | 447,816 |
Accounts receivable, net of allowances of $261,980 and $120,899, respectively |  |  | 972,345 |  |  |  | 1,961,721 |
Due from factor |  |  | 73,854 |  |  |  | 131,451 |
Inventories,net |  |  | 4,729,667 |  |  |  | 3,514,984 |
Prepaid expenses and other current assets |  |  | 526,563 |  |  |  | 412,552 |
Total Current Assets |  |  | 7,259,592 |  |  |  | 6,468,524 |
Property and Equipment, net |  |  | 886,770 |  |  |  | 598,280 |
Other Non-Current Assets |  |  | 179,362 |  |  |  | 169,362 |
Total Assets |  | $ | 8,325,724 |  |  | $ | 7,236,166 |
Liabilities and Shareholders' Equity |  |  |  |  |  |  |  |
Current Liabilities |  |  |  |  |  |  |  |
Accounts payable |  | $ | 2,588,769 |  |  | $ | 1,145,150 |
Due to related parties - net |  |  | 1,498,391 |  |  |  | 616,732 |
Accrued expenses |  |  | 422,260 |  |  |  | 409,415 |
Current portion of long-term financing obligation |  |  | 18,186 |  |  |  | - |
Customer credits on account |  |  | 908,449 |  |  |  | 778,993 |
Deferred gross profit on estimated returns |  |  | 288,039 |  |  |  | 217,812 |
Total Current Liabilities |  |  | 5,724,094 |  |  |  | 3,168,102 |
Long-term financing obligation, less current portion |  |  | 22,733 |  |  |  | - |
Total Liabilities |  |  | 5,746,827 |  |  |  | 3,168,102 |
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; 100,000,000 shares authorized; 37,449,432 and 31,758,400 shares issued and outstanding |  |  | 374,494 |  |  |  | 317,584 |
Additional paid-in capital |  |  | 19,075,750 |  |  |  | 18,430,612 |
Accumulated deficit |  |  | (16,871,347 | ) |  |  | (14,680,132 | )
Total Shareholders' Equity |  |  | 2,578,897 |  |  |  | 4,068,064 |
Total Liabilities and Shareholders' Equity |  | $ | 8,325,724 |  |  | $ | 7,236,166 |

The accompanying notes are an integral part of these consolidated financial statements.
F-3

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

|  | For the Years Ended |
|  | March 31, 2009 |  |  | March 31, 2008 |  |  | March 31, 2007 |
Net Sales |  | $ | 31,780,709 |  |  | $ | 34,067,871 |  |  | $ | 26,732,144 |
Cost of Goods Sold |  |  | 25,836,586 |  |  |  | 26,389,070 |  |  |  | 20,616,541 |
Gross Profit |  |  | 5,944,123 |  |  |  | 7,678,801 |  |  |  | 6,115,603 |
Operating Expenses |  |  |  |  |  |  |  |  |  |  |  |
Selling expenses |  |  | 3,160,950 |  |  |  | 2,931,416 |  |  |  | 2,308,959 |
General and administrative expenses |  |  | 4,346,627 |  |  |  | 4,279,728 |  |  |  | 4,952,254 |
Depreciation and amortization |  |  | 459,354 |  |  |  | 311,273 |  |  |  | 556,051 |
Total Operating Expenses |  |  | 7,966,931 |  |  |  | 7,522,417 |  |  |  | 7,817,264 |
(Loss) Income from Operations |  |  | (2,022,808 | ) |  |  | 156,384 |  |  |  | (1,701,661 | )
Other Expenses |  |  |  |  |  |  |  |  |  |  |  |
(Loss) Gain on sale of subsidiary and other assets |  |  | - |  |  |  | (27,654 | ) |  |  | 29,028 |
Interest expense |  |  | (131,755 | ) |  |  | (127,018 | ) |  |  | (42,355 | )
|  |  |  |  |  |  |  |  |  |  | - |
Net Other Expenses |  |  | (131,755 | ) |  |  | (154,672 | ) |  |  | (13,327 | )
(Loss) Income before provision for income taxes |  |  | (2,154,563 | ) |  |  | 1,712 |  |  |  | (1,714,988 | )
(Provision) reversal of provision for income taxes |  |  | (36,652 | ) |  |  | - |  |  |  | 2,453,576 |
Net (Loss) Income |  | $ | (2,191,215 | ) |  | $ | 1,712 |  |  | $ | 738,588 |
(Loss) Income per Common Share |  |  |  |  |  |  |  |  |  |  |  |
Basic |  | $ | (0.067 | ) |  | $ | 0.000 |  |  | $ | 0.035 |
Diluted |  | $ | (0.067 | ) |  | $ | 0.000 |  |  | $ | 0.030 |
Weighted Average Common and Common |  |  |  |  |  |  |  |  |  |  |  |
Equivalent Shares: |  |  |  |  |  |  |  |  |  |  |  |
Basic |  |  | 32,712,191 |  |  |  | 29,925,952 |  |  |  | 21,145,003 |
Diluted |  |  | 32,712,191 |  |  |  | 30,910,424 |  |  |  | 24,753,864 |

The accompanying notes are an integral part of these consolidated financial statements.
F-4

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

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

The accompanying notes are an integral part of these consolidated financial statements.
F-5

THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT)

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

F-6

THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
OVERVIEW
The Singing Machine Company, Inc., a Delaware corporation (the "Company," “SMC”, "The Singing Machine", “we” or “us”), and wholly-owned subsidiaries SMC (Comercial Offshore De Macau) Limitada (“Macau Subsidiary”), SMC Logistics, Inc. (“SMC-L”), SMC-Music, Inc.(“SMC-M”), and Singing Machine Holdings Ltd. (a B.V.I. company) are primarily engaged in the development, marketing, and sale of consumer karaoke audio equipment, accessories, musical instruments and musical recordings. The products are sold directly to distributors and retail customers.
The preparation of The Singing Machine's financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and revenues and expenses during the period. Future events and their effects cannot be determined with absolute certainty; therefore, the determination of estimates requires the exercise of judgment. Actual results inevitably will differ from those estimates, and such differences may be material to the Company's financial statements. Management evaluates its estimates and assumptions continually. These estimates and assumptions are based on historical experience and other factors that are believed to be reasonable under the circumstances.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of the Company, Macau Subsidiary, SMC-L, SMC-M and The Singing Machine Holdings Ltd. (a B.V.I. company). All inter-company accounts and transactions have been eliminated in consolidation for all periods presented.
USE OF ESTIMATES The Singing Machine makes estimates and assumptions in the ordinary course of business relating to sales returns and allowances, warranty reserves, inventory reserves and reserves for promotional incentives that affect the reported amounts of assets and liabilities and of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Historically, past changes to these estimates have not had a material impact on the Company's financial condition. However, circumstances could change which may alter future expectations.
COLLECTIBILITY OF ACCOUNTS RECEIVABLE The Singing Machine's allowance for doubtful accounts is based on management's estimates of the creditworthiness of its customers, current economic conditions and historical information, and, in the opinion of management, is believed to be an amount sufficient to respond to normal business conditions. Management sets 100% allowance for customers in bankruptcy and other allowances based upon historical collection experience. Should business conditions deteriorate or any major customer default on its obligations to the Company, this allowance may need to be significantly increased, which would have a negative impact on operations.
ACCOUNTS RECEIVABLE FACTORING. The Company’s factoring facility only finances non-recourse accounts receivable. Such receivables are considered to have been sold in accordance with FASB 140 Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities. Accordingly, advances received pursuant to the factoring facility have been netted against the accounts receivable on the accompanying Balance Sheet.
FOREIGN CURRENCY TRANSLATION
The functional currency of the Macau Subsidiary is the Hong Kong dollar. The financial statements of the subsidiaries are translated to U.S. dollars using year-end rates of exchange for assets and liabilities, and average rates of exchange for the year for revenues, costs, and expenses. Net gains and losses resulting from foreign exchange transactions and translations were not material during the periods presented.
CONCENTRATION OF CREDIT RISK
The Company maintains cash balances in foreign financial institutions. The insured amounts at foreign financial institutions at March 31, 2009 and March 31, 2008 are $666,643 and $407,376, respectively. At times the Company maintains cash in United States bank accounts that are in excess of the Federal Deposit Insurance Corporation (“FDIC”) insured amounts of up to $250,000. As of March 31, 2009 and March 31, 2008 the amounts uninsured in United States banks was an additional $1,438 and $0 respectively.
F-7

INVENTORY
Inventories are comprised of electronic karaoke equipment, accessories, electronic musical instruments, electronic toys and compact discs and are stated at the lower of cost or market, as determined using the first in, first out method. The Singing Machine reduces inventory on hand to its net realizable value on an item-by-item basis when it is apparent that the expected realizable value of an inventory item falls below its original cost. A charge to cost of sales results when the estimated net realizable value of specific inventory items declines below cost. Management regularly reviews the Company's investment in inventories for such declines in value.
REVENUE RECOGNITION
Revenue from the sale of equipment, accessories, and musical recordings are recognized upon the later of: (a) the time of shipment or (b) when title passes to the customers and all significant contractual obligations have been satisfied and collection of the resulting receivable is reasonably assured. Revenues from sales of consigned inventory are recognized upon sale of the product by the consignee. Net sales are comprised of gross sales net of actual and estimated future returns, discounts and volume rebates. The total returns represent 9.4%, 8.6%, and 13.4% of the gross sales for the twelve months ended March 31, 2009, 2008, and 2007, respectively.
STOCK BASED COMPENSATION
The Company began to apply the provisions of SFAS No. 123 (revised 2004), Share-Based Payments ("SFAS 123 (R)"), starting on January 1, 2006. SFAS 123 (R) which became effective after June 15, 2005, replaces SFAS No. 123, Accounting for Stock-Based Compensation, and supersedes Accounting Principles Board Opinion ("APB") No. 25, Accounting for Stock Issued to Employees. SFAS 123 (R) requires all share-based payments to employees including grants of employee stock options, be measured at fair value and expensed in the consolidated statement of operations over the service period (generally the vesting period). Upon adoption, the Company transitioned to SFAS 123 (R) using the modified prospective application, whereby compensation cost is only recognized in the consolidated statements of operations beginning with the first period that SFAS 123 (R) is effective and thereafter, with prior periods' stock-based compensation still presented on a pro forma basis. Under the modified prospective approach, the provisions of SFAS 123 (R) are to be applied to new employee awards and to employee awards modified, repurchased, or cancelled after the required effective date. Additionally, compensation cost for the portion of employee awards for which the requisite service has not been rendered that are outstanding as of the required effective date shall be recognized as the requisite service is rendered on or after the required effective date. The compensation cost for that portion of employee awards shall be based on the grant-date fair value of those awards as calculated for either recognition or pro-forma disclosures under SFAS 123. The Company continues to use the Black-Scholes option valuation model to value stock options. As a result of the adoption of SFAS 123 (R), for the years ended March 31, 2009, 2008 and 2007, , the stock option expense was $17,825, $24,010 and $182,369, respectively. Employee stock option compensation expense in fiscal years 2009, 2008 and 2007 includes the estimated fair value of options granted, amortized on a straight-line basis over the requisite service period for the entire portion of the award.
The fair value of each option grant was estimated on the date of the grant using the Black-Scholes option-pricing model with the assumptions outlined below. The expected volatility is based upon historical volatility of our stock and other contributing factors. The expected term is based upon observation of actual time elapsed between date of grant and exercise of options for all employees. Previously such assumptions were determined based on historical data.

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

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

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

ADVERTISING
Costs incurred for producing and publishing advertising of the Company, are charged to operations as incurred. The Company has entered into cooperative advertising agreements with its major customers that specifically indicated that the customer has to spend the cooperative advertising fund upon the occurrence of mutually agreed events. The percentage of the cooperative advertising allowance ranges from 2% to 8% of the purchase. The customers have to advertise the Company's products in the customer's catalog, local newspaper and other advertising media. The customer must submit the proof of the performance (such as a copy of the advertising showing the Company’s products) to the Company to request for the allowance. The customer does not have the ability to spend the allowance at their discretion. The Company believes that the identifiable benefit from the cooperative advertising program and the fair value of the advertising benefit is equal or greater than the cooperative advertising expense. Advertising expense for the years ended March 31, 2009, 2008 and 2007 was $475,167, $470,671 and $212,362, respectively.
RESEARCH AND DEVELOPMENT COSTS
All research and development costs are charged to results of operations as incurred. These expenses are shown as a component of selling, general and administrative expenses in the consolidated statements of operations. For the years ended March 31, 2009, 2008 and 2007, these amounts totaled $51,634, $22,491 and $104,218, respectively.
F-8

FAIR VALUE OF FINANCIAL INSTRUMENTS, FINANCIAL ASSETS AND LIABILITIES AND MEASUREMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires disclosures of information about the fair value of certain financial instruments for which it is practicable to estimate that value. For purposes of this disclosure, the fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation.
The carrying amounts of the Company's short-term financial instruments, including accounts receivable, due from factors, accounts payable, loan-related party, customer credits on account, subordinated debt-related parties and accrued expenses approximates fair value due to the relatively short period to maturity for these instruments.
SFAS No. 157, “Fair Value Measurements” defines fair value, establishes a framework for measuring fair value in accounting principles generally accepted in the United States, and expands disclosures about fair value measurements. It does not require any new fair value measurements. This Statement clarifies that the exchange price is the price in an orderly transaction between market participants to sell the asset or transfer the liability in the market in which the reporting entity would transact for the asset or liability, that is, the principal or most advantageous market for the asset or liability. We adopted the provisions of SFAS 157 for financial assets and liabilities in the fourth quarter of fiscal 2009. The adoption of SFAS 157 did not have a material impact on our consolidated financial statements.
SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” permits entities to choose to measure many financial instruments and certain other items at fair value. This statement allows companies the opportunity to reduce volatility in reported earnings by measuring assets and liabilities differently without requiring the application of complex hedging accounting provisions. We adopted the provisions of SFAS 159 for financial assets and liabilities in the fourth quarter of fiscal 2009. The adoption of SFAS 159 did not have an impact on our consolidated financial statements.
RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform to the current period presentation.
INCOME TAXES The Company follows Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes" ("SFAS No. 109"). Under the asset and liability method of SFAS No. 109, deferred tax assets and liabilities are recognized for the future tax consequences attributed to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax base. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under SFAS No. 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. If it is more likely than not that some portion of a deferred tax asset will not be realized, a valuation allowance is recognized.
Significant management judgment is required in developing The Singing Machine's provision for income taxes, including the determination of foreign tax liabilities, deferred tax assets and liabilities and any valuation allowances that might be required against the deferred tax assets. Management evaluates its ability to realize its deferred tax assets on a quarterly basis and adjusts its valuation allowance when it believes that it is more likely that the asset will not be realized.
As of March 31, 2009 and March 31, 2008, The Singing Machine had gross deferred tax assets of approximately $3.1 million and $2.5 million, respectively, against which the Company recorded valuation allowances totaling approximately $3.1 million+ and $2.5 million, respectively.
On April 1, 2007 we adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”). FIN 48 clarifies the requirements of SFAS No. 109, Accounting for Income Taxes, relating to the recognition of income tax benefits. FIN 48 provides a two-step approach to recognizing and measuring tax benefits when the benefits’ realization is uncertain. The first step is to determine whether the benefit is to be recognized; the second step is to determine the amount to be recognized:

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

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

The adoption of FIN 48 had no impact on these consolidated financial statements.
LONG-LIVED ASSETS
The Company reviews long-lived assets for impairment whenever circumstances and situations change such that there is an indication that the carrying amounts may not be recoverable. If the undiscounted future cash flows attributable to the related assets are less than the carrying amount, the carrying amounts are reduced to fair value and an impairment loss is recognized in accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets."
F-9

PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated depreciation and amortization. Expenditures for repairs and maintenance are charged to expense as incurred. Depreciation is provided for in amounts sufficient to relate the cost of depreciable assets to their estimated useful lives using accelerated and straight-line methods.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with maturities of three months or less at the time of purchase to be cash equivalents. Cash and cash equivalent balances at March 31, 2009 and March 31, 2008 were $957,163 and $447,816, respectively.
SHIPPING AND HANDLING COSTS
Shipping and handling costs are classified as a component of selling expenses and those billed to customers are recorded as a reduction of expense in the statement of operations.
RECENT ACCOUNTING PRONOUNCEMENTS
SFAS 165
In May 2009, the FASB issued SFAS No. 165, Subsequent Events (“FSAB 165”). The purpose of SFAS 165 is to establish a general standard of accounting for the disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The statement outlines the following:

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

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

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

FSAB 165 is effective for interim and annual periods ending after June 15, 2009. FSAB 165 is not expected to have a material impact on our consolidated financial statements.
SFAS 160
In December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements”. SFAS 160 establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. SFAS 160 also establishes disclosure requirements to identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS No. 160 is effective for fiscal years beginning on or after December 15, 2008. We do not expect the implementation of this standard to have a material impact on our consolidated financial statements.
NOTE 3 - INVENTORIES
Inventories are comprised of the following components:

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

Inventory consigned to a distribution center at March 31, 2009 and March 31, 2008 were $352,214 and $372,012, respectively.
F-10

NOTE 4 - ACCOUNTS RECEIVABLE FACTORING AGREEMENT
On August 28, 2008, the Company executed a three-party Banking Facility agreement between the Company’s wholly owned subsidiary SMC (Commercial Offshore De Macau) Limitada (“Borrower”), DBS Bank (Hong Kong) Limited (“Lender”) and Branch Banking and Trust Company (“BB&T” or “New Factor”). The agreement is comprised of three facilities including a maximum of $7.0 million on 80% of qualified accounts receivable, a maximum letter of credit facility of $4.0 million for accounts payable financing and a maximum of $2.0 million for the negotiation of export bills under letter of credit.
According to the factoring facility, BB&T will serve as the correspondent factor for the Lender and does not advance funds to the Company directly. The Company assigns the proceeds from customers to the Lender and the Lender advances funds to the Borrower. The maximum amount for the advance is approximately $7.0 million or 80% of the qualified accounts receivable, which ever is higher. The New Factor assumes credit risk on approved accounts (factor risk accounts). For non-approved accounts, the Company will assume the credit risk (client risk accounts). The factoring fees will be .675% of the gross invoice for both client risk (recourse) and factor risk (non-recourse) accounts. As of March 31, 2009 there was a total of $2,030,317 of open accounts receivable assigned to the New Factor. The Company assumed credit risk (recourse) in the amount of $382,140. Credit risk on the remaining factor assigned receivables in the amount of $1,648,177 was assumed by the New Factor (non-recourse). This agreement is effective October 16, 2008 and replaces the previous four-party agreement between the Company, Starlight Marketing Limited (a related party), Standard Chartered Bank (Hong Kong), Limited and CIT. As of March 31, 2009 and March 31, 2008 the outstanding amount due from BB&T was $70,538 and $0 respectively. The amounts represent excess of customer payments received by BB&T that had yet to be transferred to DBS bank. As of March 31, 2009 and March 31, 2008 the outstanding amount under the factoring facility with DBS Bank was $799,112 and $0 respectively. This amount represents advances made by the Bank on non-recourse receivables and have been offset against accounts receivable in the accompanying consolidated balance sheet. The terms of the agreement are more particularly described in Note 8.
Prior to 2008 the Company executed an agreement with The CIT Group/Commercial Services, Inc. (“CIT”) on August 13, 2007 to factor its receivables. CIT assumed the credit risk on approved accounts (factor risk accounts). For non-approved accounts, the Company assumed the credit risk (client risk accounts). The factoring fees, for the client risk accounts, were .3% of the gross invoice. For the factor risk accounts, the fees were .55% of the gross invoice. The annual minimum charge was $24,000. CIT did not advance funds to the Company directly. On October 26, 2007, the Company entered into a four- party agreement with CIT(“Previous Factor”), Standard Chartered Bank (Hong Kong), Limited (“Lender”) and Starlight Marketing Limited (“Borrower”), a related party. According to the agreement, the Company assigned the proceeds from customers to the Lender, the Lender advanced the loans to the Borrower. The Borrower then directed the advance to the Company. Both the Borrower and the Company guaranteed the repayment of the advance. The maximum amount for the advance was approximately $4.5 million or 85% of the qualified accounts receivable, which ever was higher. As of March 31, 2009 and March 31, 2008 the outstanding amount due from CIT for customer payments in excess of advances made to the Company was $3,318 and $131,451, respectively.. The factoring agreement with CIT expired in August 2008 and the Company gave 60 days written notice to terminate the agreement. CIT will continue to collect all open invoices assigned to it and remit the proceeds to the Company upon collection.
NOTE 5 - PROPERTY AND EQUIPMENT
A summary of property and equipment is as follows:

|  | USEFUL |  |  | MARCH 31, |  |  | MARCH 31, |
|  | LIFE |  |  | 2009 |  |  | 2008 |
Computer and office equipment |  | 5 years |  |  | $ | 652,235 |  |  | $ | 520,182 |
Furniture and fixtures |  | 5-7 years |  |  |  | 220,315 |  |  |  | 216,120 |
Leasehold improvement |  |  |  | * |  |  | 153,993 |  |  |  | 156,614 |
Warehouse equipment |  | 7 years |  |  |  | 86,599 |  |  |  | - |
Molds and tooling |  | 3 years |  |  |  | 1,552,465 |  |  |  | 1,032,970 |
|  |  |  |  |  |  | 2,665,607 |  |  |  | 1,925,886 |
Less: Accumulated depreciation and amortization |  |  |  | (1,778,837 | ) |  |  | (1,327,606 | )
|  |  |  |  |  | $ | 886,770 |  |  | $ | 598,280 |

* Shorter of remaining term of lease or useful life
Depreciation and amortization for fiscal years ended 2009, 2008, and 2007 was $459,354, $311,273, and $556,051, respectively.
NOTE 6 – DUE TO RELATED PARTIES, NET
As of March 31, 2009 the Company had $1,498,391 due to related parties consisting primarily of trade payables for karaoke hardware to Starlight Marketing Macao Commercial Offshore Ltd in the amount of $1,580,601, offset by net accounts receivable of $61,060 from other Starlight Group affiliates and trade receivables of $21,150 from Cosmo Communications Corp.
F-11

As of March 31, 2008 we had $616,732 due to related parties. This consisted of an interest bearing loan payable of $642,587 to Starlight Marketing Limited, an $18,000 payable to Starlight Marketing Development Limited, and net accounts payable of $38,751 to Starlight affiliates. These amounts were reduced by a non-interest bearing receivable from Cosmo Communications Corp. for $82,607.
.
NOTE 7 - CUSTOMER CREDITS ON ACCOUNT
Customer credits on account represent customers that have received credits in excess of their accounts receivable balance. These balances were reclassified for financial statement purposes as current liabilities until paid or applied to future purchases.
NOTE 8 – FINANCING
On February 12, 2008 the Macau Subsidiary entered into a Banking Facilities agreement with Heng Seng Bank Limited (“Bank”). Under the terms of the agreement, the Macau Subsidiary has access to $5,100,000 in total facilities including $500,000 for payment of goods financed under the bank’s letters of credit, $3,000,000 for negotiation of discrepant documents presented under export letters of credit and a factoring facility to a maximum of $1,600,000. Interest on open balances is due and payable monthly at a rate of 2% per annum above LIBOR (London Interbank Offered Rate). The note is collateralized by a promissory note from the Macau Subsidiary of $5.8 million and an unlimited written guarantee from the Company. There were no amounts due to the Bank as of March 31, 2009 and March 31, 2008 respectively.
On July 16, 2008 SMC-L entered into a financing arrangement with Westover Financial, Inc. for the purchase of four forklifts for the California logistics operations. The terms of the agreement required an initial payment of $18,691 and 36 monthly payments of $1,516 with effective interest rate of 18.6%. As of March 31, 2009 the remaining amount due on this obligation was $40,919 of which $18,186 is due within the next twelve months and the remaining $22,733 due after one year.
On August 28, 2008, the Company executed a three-party Banking Facility agreement between the Macau Subsidiary (“Borrower”), DBS Bank (Hong Kong) Limited (“Lender”) and BB&T (“Factor”). The agreement provides for credit facilities to a maximum of $13.0 million consisting of the following:

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

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

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

Interest on letter of credit facilities and discounting charges on accounts receivable advances will be charged at a rate of 1.5% per annum over LIBOR (London Interbank Offered Rate). The credit facility is secured with corporate guarantees from the Company as well as a $2.0 million guarantee from Starlight International Holdings Limited, a related party. BB&T will serve as the correspondent factor for the Lender for the Company’s qualified North American accounts receivable. BB&T does not advance funds to the Company directly. The Company assigns the proceeds from customers to the Lender and the Lender advances funds to the Borrower. The combined factoring fees will be .675% of the gross invoice for all factored accounts. This agreement is effective October 16, 2008 and replaces the previous four-party agreement between the Company, Starlight Marketing Limited (a related party), Standard Chartered Bank (Hong Kong), Limited and CIT. As of March 31, 2009 and March 31, 2008 the outstanding amount due from BB&T was $70,538 and $0 respectively. The amounts represent excess of customer payments received by BB&T that had yet to be transferred to DBS bank. As of March 31, 2009, March 31, 2008 and March 31, 2007 the outstanding amount due to DBS Bank was $799,112, $0, and $0 respectively pursuant to the factoring facility. The amount has been offset against accounts receivable in the accompanying consolidated balance sheet.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
LEGAL MATTERS
SYBERSOUND RECORDS, INC. V. UAV CORPORATION; MADACY ENTERTAINMENT L.P., AUDIO STREAM, INC., TOP TUNES, INC., SINGING MACHINE, INC., BCI ECLIPSE COMPANY, LLC, AMOS ALTER, DAVID ALTER, EDWARD GOETZ, DENNIS NORDEN, FRANK ROBERTSON, DOUGLAS VOGT AND RICHARD VOGT (UNITED STATES DISTRICT COURT FOR THE CENTRAL DISTRICT OF CALIFORNIA, CV05-5861 JFW); (UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT (USCA DOCKET NO. 06-55221)
The federal court action filed on August 11, 2005 alleged violation of the Copyright Act and the Lanham Act by the defendants, and claims for unfair competition under California law. Sybersound was joined in the complaint by several publisher owners of musical compositions who alleged copyright infringement against all the defendants except The Singing Machine Company, Inc. On November 7, 2005, the district court ordered the publisher plaintiffs’ copyright claims severed from the case. The Singing Machine Company, Inc. is not a party to the severed cases.
In September 2005, the defendants, including The Singing Machine Company, Inc., filed multiple motions to dismiss the original complaint. In October 2005, Sybersound filed a motion for summary judgment. On January 6, 2006, the court granted the motions of the defendants and denied the plaintiff’s motion, thereby dismissing the case against the defendants, including The Singing Machine Company, Inc., with prejudice. The plaintiff, Sybersound thereafter appealed the decision to the Ninth Circuit Court of Appeals.
F-12

On February 27, 2008 the Ninth Circuit Court of Appeals affirmed the dismissal against The Singing Machine Company, Inc. and dismissed all claims against the Company with prejudice. Sybersound had until July 10, 2008 to file a Petition with the United States Supreme Court to appeal that decision. Sybersound did not elect to file a Petition, therefore the above captioned lawsuit is concluded.
The Company is also subject to various other legal proceedings and other claims that arise in the ordinary course of business. In the opinion of management, the amount of ultimate liability, if any, in excess of applicable insurance coverage, is not likely to have a material effect on the financial condition, results of operations or liquidity of the Company. However, as the outcome of litigation or other legal claims is difficult to predict, significant changes in the range of possible loss could occur, which could have a material impact on the Company's operations.
INCOME TAXES
In a letter dated July 21, 2008 the Internal Revenue Service (IRS) notified the former foreign Subsidiary of an unpaid tax balance on Income Tax Return of a Foreign Corporation (Form 1120-F) for the period ending March 31, 2003 for International SMC (HK) Limited “ISMC (HK)”, a former subsidiary. According to the notice ISMC (HK) has an unpaid balance due in the amount of $241,639 that includes an interest assessment of $74,125. ISMC (HK) was sold in its entirety by the Company on September 25, 2006 to a British Virgin Islands company (“Purchaser”). The sale and purchase agreement with the Purchaser of ISMC (HK) specifies that the Purchaser would ultimately be responsible for any liabilities, including tax matters. On June 3, 2009 the IRS filed a federal tax lien in the amount of approximately $170,000 against ISMC (HK) under ISMC (HK)’s federal Tax ID. Management sought independent legal counsel to assess the potential liability, if any, on the Company. In a memorandum from independent counsel, the conclusion based on the facts presented was that the IRS would not prevail against the Company for collection of the ISMC (HK) income tax liability based on:

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

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

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

Based on the conclusion reached in the legal memorandum, management does not believe that the Company will have any further liability with regards to this issue.
LEASES
The Company has entered into various operating lease agreements for office and warehouse facilities in Coconut Creek, Florida, City of Industry, California and Macau. The leases expire at varying dates. Rent expense for the years ended March 31, 2009, 2008 and 2007 was $961,226, $201,270 and $409,608, respectively.
In addition, the Company maintains various warehouse equipment and computer equipment operating leases.
Future minimum lease payments under property and equipment leases with terms exceeding one year as of March 31, 2009 are as follows:

|  | Property Leases |  |  | Equipment Leases |
For period ending |  |  |  |  |  |
2010 |  | $ | 782,410 |  |  | $ | 9,747 |
2011 |  |  | 645,929 |  |  |  | 5,807 |
2012 |  |  | 665,307 |  |  |  | - |
2013 |  |  | 226,193 |  |  |  | - |
2014 and beyond |  |  | - |  |  |  | - |
|  | $ | 2,319,839 |  |  | $ | 15,554 |

The above property lease payments are gross payments which are not net of supplemental sublease fees we receive. During fiscal years 2009, 2008 and 2007 the Company received fees of approximately $45,000, $543,000 and $414,000 respectively, for sublease of warehouse space and warehousing services provided to affiliated entities out of its California warehouse.
Such fees have been offset against rent expense in the consolidated statements of operations.
LICENSE AGREEMENTS
On May 10, 2006, we entered into a two-year license agreement with MGA Entertainment, Inc. to produce and distribute a variety of karaoke products based on MGA's BRATZ™ franchise, one of the world's leading toy lines and girls' lifestyle brands, in North America, Europe and Australia. These karaoke products include a TFT DVD karaoke system, sing-a-long cassette players, deluxe microphones, electronic keyboards and an electronic drum. The license agreement contains a minimum guarantee payment term.
F-13

On November 21, 2006 we also entered into a three-year license agreement with MGA Entertainment, Inc. to produce and distribute a variety of consumer electronic products based on MGA's BRATZ™ franchise, one of the world's leading toy lines and girls' lifestyle brands, in North America, New Zealand, Chile and Australia. These consumer electronic products include boom boxes, clock radios and portable DVDs. The license agreement contains a minimum guarantee payment term.
As of March 31, 2009 the total amount due to MGA Entertainment, Inc. was $438,394. This amount includes $196,394 of additional royalties due and is included in accrued expenses on the accompanying consolidated balance sheet. In addition the Company owes MGA Entertainment, Inc. $242,000 for guaranteed minimum advances due by December 31,2008. This amount has not been included in the consolidated financial statements since it would be considered a “gross-up” of the balance sheet. The amounts due have not been paid due to an ongoing lawsuit between Mattel Inc. and MGA Entertainment Inc. wherein Mattel has legally challenged MGA’s trademark rights to the BRATZ™ franchise.
NYSE AMEX STATUS
On September 16, 2008, the Company received notice from AMEX indicating that the Company was below certain requirements of AMEX’s continued listing standards as of June 30, 2008. Specifically, shareholders’ equity was less than $4,000,000 and there were losses from continuing operations in three of its four most recent fiscal years, as set forth in Section 1003(a)(ii) of AMEX’s Company Guide. In response, the Company submitted a timely plan of compliance to AMEX (the “Plan”). In a letter dated December 12, 2008 from AMEX, the Company was officially notified that AMEX had accepted the Company’s Plan and that the Company had until March 31, 2009 to complete the Plan and regain compliance with Section 1003(a)(ii) of AMEX’s Company Guide. AMEX Staff advised the Company that it would be subject to periodic review by AMEX during the extension period and that failure to make progress consistent with the Company’s Plan could result in delisting. Also in that same letter dated December 12, 2008, AMEX Staff notified the Company that it deemed the Company’s common stock selling price as too low. AMEX informed the Company that it must address its low selling price by June 12, 2009 in order to remain in compliance with AMEX Company Guide Section 1003(f)(v).
In April 2009, the Company notified AMEX that it would not be able to meet its goals set forth in the prior Plan. In particular, the Company notified AMEX that it would not be in compliance with AMEX’s listing requirement of shareholders’ equity of $4,000,000 as of the end of the fiscal year ended March 31, 2009. The Company submitted a second revised plan (“Revised Plan”) to AMEX to request more time and to show that it could regain compliance by March 31, 2010. AMEX reviewed the Revised Plan and notified the Company on June 22, 2009 that the Company was still not in compliance with Section 1003(a)(ii) due to the Company having shareholders’ equity of less than $4,000,000. AMEX also indicated that the Company was subject to Section 1002(b) of the AMEX Company Guide as a result of its depressed selling price per share, which the Company had not remedied by the June 12, 2009 deadline. The AMEX Staff additionally stated that in reaching its decision it considered that the Company has failed to meet minimum listing standards on repeated occasions. Consequently, AMEX stated that it had concluded that it is appropriate to initiate immediate delisting proceedings at this time. The Company has until June 29, 2009 to formally appeal AMEX’s decision, after which time the AMEX Staff’s determination will become final. At that time, the AMEX Staff will suspend trading in the Company’s securities and file an application with the SEC to strike the Company’s common stock from listing and registration on AMEX in accordance with Section 12 of the Exchange Act and the rules promulgated thereunder. Our board of directors has decided at this time that it is not in the best interest of the Company and its shareholders to expend the financial resources necessary to appeal the decision and continue to be listed on AMEX, particularly in light of the fact that the Company’s appeal would likely have little chance of success.
Once the AMEX delists our securities from trading on its exchange, we could face significant material adverse consequences, including:
• a limited availability of market quotations for our securities;
• a reduced liquidity with respect to our securities;
• a determination that our common stock is a “penny stock” which will require brokers trading in our common stock to adhere to more stringent rules, possibly resulting in a reduced level of trading activity in the secondary trading market for our common stock; and
• a decreased ability to issue additional securities or obtain additional financing in the future.
NOTE 10 - SHAREHOLDERS’ EQUITY
COMMON STOCK ISSUANCES
During the years ended March 31, 2009, 2008, and 2007, the Company issued the following common stock shares:
2009:
During the fiscal year ended March 31, 2009 the Company issued 5,691,032 shares of its common stock.
On March 25, 2009, the Company issued 2,267,220 shares of common stock to Arts Electronics, Ltd for $226,722 ($0.10 per share) to offset a trade payable.
On March 25, 2009, the Company issued 2,450,000 shares of common stock to koncepts International Limited for $245,000 ($0.10 per share) to offset a trade payable.
F-14

On October 9, 2008 the Company issued 33,336 shares of common stock to our Board of Directors at $0.45 per share, pursuant to our annual director compensation plan.
On April 1, 2008 the Company issued 940,476 shares of common stock to Starlight Industrial Holdings, Ltd. for $197,500 ($.21 per share) to offset a trade payable.
2008:
During the year ended March 31, 2008, the Company issued 162,677 shares of common stock to various employees, as well as directors, at prices ranging from $.32 per share to $.93 per share pursuant to employee stock option agreements.
On March 12, 2008, the Company issued 952,381 shares of common stock to Arts Electronics for $200,000 ($0.21 per share) as payment for a trade payable.
On September 28, 2007, the Company issued 857,143 shares of common stock to koncept International Limited, a subsidiary of Starlight for $300,000 ($.35 per share) as payment for certain payables owed by the Company to Starlight Marketing Macao.
On April 16, 2007, 2,500,000 warrants at $0.233 were exercised by koncept International Limited, a subsidiary of Starlight, and the Company received a total of $582,500.
2007:
On October 3, 2006, the Company sold 1,380,000 shares of common stock to Gentle Boss Investments LTD. for $600,300 ($.435 per share).
On October 3, 2006, the Company sold 920,000 shares of common stock to Timemate Industries Limited for $400,200 ($.435 per share).
On September 27, 2006, the Company issued 39,065 shares of common stock to members of the Board of Directors for services provided to the Company for fiscal year 2006, valued at $12,501, which is included in the selling, general, and administrative expenses for the years ended December 31, 2006.
On June 25, 2006, the Company issued 12,875,536 shares of common stock to koncept International Limited, a subsidiary of Starlight for a $3 million investment ($.233 per share).
EARNINGS PER SHARE
In accordance with SFAS No. 128, "Earnings per Share", basic (loss) earnings per share are computed by dividing the net (loss) earnings for the year by the weighted average number of common shares outstanding. Diluted earnings per share is computed by dividing net earnings for the year by the weighted average number of common shares outstanding including the effect of common stock equivalents.
For the years ended March 31, 2009, 2008 and 2007, common stock equivalents to purchase 3,209,965, 2,544,824 and 1,973,446 shares of stock, respectively, were not included in the computation of diluted earnings per share because the exercise prices were greater than the average market price of the Company’s common stock for the period.
STOCK OPTIONS
On June 1, 2001, the Board of Directors approved the 2001 Stock Option Plan (`Plan"), which replaced the 1994 Stock Option Plan, as amended, (the "1994 Plan"). The Plan was developed to provide a means whereby directors and selected employees, officers, consultants, and advisors of the Company may be granted incentive or non-qualified stock options to purchase common stock of the Company. As of March 31, 2009, the Plan is authorized to grant options up to an aggregate of 1,950,000 shares of the Company's common stock and up to 300,000 shares for any one individual grant in any fiscal year. As of March 31, 2009, the Company had 389,820 options available to be granted under the 2001 Plan. As of March 31, 2009, the Company had 337,500 options available to be granted under the 1994 Plan.
The Company adopted SFAS 123(R) for the reporting periods ending after June 15, 2005 and thereafter has recognized the fair value of the stock option as part of the selling, general and administration expense. Accordingly, no compensation cost has been recognized for options issued under the Plan in periods prior to June 15, 2005. A summary of stock option activity for each of the years presented is summarized below.
F-15

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

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

Range of Exercise Price |  | Number Outstanding at March 31, 2009 |  |  | Weighted Average Remaining Contractural Life |  |  | Weighted Average Exercise Price |  |  | Number Exercisable at March 31, 2009 |  |  | Weighted Average Exercise Price |
$0.11-$0.77 |  |  | 988,485 |  |  |  | 7.08 |  |  | $ | 0.33 |  |  |  | 568,485 |  |  |  | 0.48 |
$0.93 - $1.97 |  |  | 120,180 |  |  |  | 6.58 |  |  | $ | 1.20 |  |  |  | 116,930 |  |  | $ | 1.20 |
$2.04-$5.60 |  |  | 5,550 |  |  |  | 1.43 |  |  | $ | 2.04 |  |  |  | 5,550 |  |  | $ | 2.04 |
$7.20-$9.00 |  |  | 19,000 |  |  |  | 3.86 |  |  | $ | 9.00 |  |  |  | 19,000 |  |  | $ | 9.00 |
|  |  | 1,133,215 |  |  |  |  |  |  |  |  |  |  |  | 709,965 |  |  |  |  |

Prior to April 1, 2005, in accordance with SFAS No. 123, for options issued to employees, the Company applies the intrinsic value method of APB Opinion No. 25 and related interpretations in accounting for options issued.
STOCK WARRANTS
As of March 31, 2009, the Company had a total of 1,250,000 stock purchase warrants outstanding. The exercise price of these warrants is $0.35 with an expiration date of February 21, 2010.
NOTE 11 - INCOME TAXES
The Company files separate tax returns in the United States and in Macau. The Macau Subsidiary has received approval from the Macau government to operate its business as a Macau Offshore Company (MOC), and is exempt from the Macau income tax. For the fiscal years ended March 31, 2009, 2008 and 2007, the Macau Subsidiary recorded no tax provision. The Company has now exhausted its ability to carry back any further losses and therefore will only be able to recognize tax benefits to the extent that it has future taxable income.
Due to the change of control of the Company, the net operating loss carry over is subject to the IRS Section 382 limitation. As of March 31, 2009, 2008 and 2007, The Singing Machine had net deferred tax assets of approximately $3.1 million, $2.5 million, and $2.7 million, respectively, against which the Company recorded valuation allowances totaling approximately $3.1 million, $2.5 million, and $2.7 million, respectively.
FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”) was issued to clarify the requirements of SFAS No. 109, Accounting for Income Taxes, relating to the recognition of income tax benefits. FIN 48 provides a two-step approach to recognizing and measuring tax benefits when the benefits’ realization is uncertain. The first step is to determine whether the benefit is to be recognized; the second step is to determine the amount to be recognized:

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

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

We adopted FIN-48 on April 1, 2007 and it has had no impact on the financial statements.
In 2007, as a consequence of the ISMC divestiture, and based on the opinion of the Hong Kong tax counsel, as well as “hold harmless” representations from the present shareholders of ISMC, the Company reversed the previously recorded provision of Hong Kong tax of approximately $2,453,000. Such reversal has been presented in the income tax section of the accompanying statements of operations.
The income tax expense (benefit) for federal, foreign, and state income taxes in the consolidated statement of operations consisted of the following components for 2009, 2008, and 2007:
F-16

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

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

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

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

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

The tax effects of temporary differences that give rise to significant portions of deferred tax assets and liabilities are as follows:
F-17

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

At March 31, 2009, the Company has federal tax net operating loss carry forwards in the amount of approximately $4.8 million, which expire beginning in the year 2023. In addition, state tax net operating loss carry forwards in the amount of approximately $6.6 million expire beginning in 2013. The Company is no longer subject to income tax examinations for fiscal years before 2006.
NOTE 12 - SEGMENT INFORMATION
The Company operates in one segment and maintains its records accordingly. The majority of sales to customers outside of the United States are made by the Macau Subsidiary and Hong Kong Subsidiary, until its date of sale. Sales by geographic region for the period presented are as follows:

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

The geographic area of sales is based primarily on the location where the product is delivered.
NOTE 13 - EMPLOYEE BENEFIT PLANS
The Company has a 401(k) plan for its employees to which the Company makes contributions at rates dependent on the level of each employee's contributions. Contributions made by the Company are limited to the maximum allowable for federal income tax purposes. The amounts charged to operations for contributions to this plan and administrative costs during the years ended March 31, 2009, 2008, and 2007 totaled $17,825, $21,674and $39,460, respectively. The amounts are included as a component of general and administrative expense in the accompanying Consolidated Statements of Operations. The Company does not provide any post employment benefits to retirees.
NOTE 14 - CONCENTRATIONS OF CREDIT RISK, CUSTOMERS, AND SUPPLIERS
The Company derives a majority of its revenues from retailers of products in the United States. Financial instruments, which potentially subject the Company to concentrations of credit risk, consist of accounts receivable. The Company's allowance for doubtful accounts is based upon management's estimates and historical experience and reflects the fact that accounts receivable are concentrated with several large customers whose credit worthiness have been evaluated by management. At March 31, 2009, 82% of accounts receivable were due from two customers in North America and one in Europe. Accounts receivable from customers that individually owed over 10% of total accounts receivable was 55% 15% and 11% at March 31, 2009. Accounts receivable from customers that individually owed over 10% of total accounts receivable was 31% and 29% at March 31, 2008. The Company performs ongoing credit evaluations of its customers.
F-18

Revenues derived from five customers in 2009, 2008, and 2007 were 61%, 62% and 58% of total revenues, respectively. Revenues derived from top three customers in 2009, 2008 and 2007 as percentage of the total revenue were 21%, 18% and 10%; 22%, 11% and 11%; and 24%, 16% and 10%, respectively. The loss of any of these customers can have an adverse impact on the financial position of the Company.
Net sales derived from the Hong Kong and Macau Subsidiaries aggregated $17.1 million in 2009, $17.3 million in 2008 and $16.2 million in 2007.
The Company is dependent upon foreign companies for the manufacture of all of its electronic products. The Company's arrangements with manufacturers are subject to the risk of doing business abroad, such as import duties, trade restrictions, work stoppages, foreign currency fluctuations, political instability, and other factors, which could have an adverse impact on its business. The Company believes that the loss of any one or more of their suppliers would not have a long-term material adverse effect because other manufacturers with whom the Company does business would be able to increase production to fulfill their requirements. However, the loss of certain suppliers in the short-term could adversely affect business until alternative supply arrangements are secured.
During fiscal years 2009, 2008, and 2007, manufacturers in the People's Republic of China ("China") accounted for approximately 99%, 99% and 98%; respectively of the Company's total product purchases, including all of the Company's hardware purchases.
The Company is primary relying on DBS Bank to finance its accounts receivable. The loss of the factoring facility might have an adverse effect on its business.
NOTE 15 - QUARTERLY FINANCIAL DATA - UNAUDITED
The following financial information reflects all normal recurring adjustments that are, in the opinion of management, necessary for a fair statement of the results of the interim periods. The quarterly unaudited results for the years 2009, 2008, and 2007 are set forth in the following table:

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

NOTE 16 – GAIN FROM DISPOSAL OF ASSETS
During fiscal 2007, the Company sold its Hong Kong subsidiary to a non-related third party and recognized a gain of $20,078. The Company also recognized a gain of $8,950 from the sale of old tools during 2007.
F-19

NOTE 17 – RELATED PARTY TRANSACTIONS
TRADE
On May 23, 2008, SMC Logistics entered into a service and logistics agreement with affiliates Starlight Consumer Electronics (USA), Inc. and Cosmo Communications Corp. to provide logistics, fulfillment, and warehousing services for Starlight and Cosmo’s domestic sales. The Agreement generated approximately $.8 million dollars for fiscal year 2009 and is expected to generate $1.1M for fiscal year 2010.
The Company purchased products from Starlight Marketing Macao, a subsidiary of Starlight International Holding Ltd. The purchases from Starlight for the fiscal year ended March 31, 2009 and 2008 were $10,170,825 and $5,775,074, respectively. In addition, the Company also purchased molds and tooling from Starlight in the amount of $235,000 and $126,282 in fiscals 2009 and 2008, respectively, which are included in Property and Equipment in the accompanying Consolidated Balance Sheets.
On August 1, 2006, the Company entered into a service agreement with Starlight Electronics Co., Ltd, a subsidiary of Starlight International Holding Ltd, to provide shipping and engineering service to the Company at a charge of $25,000 per month. This amount increased to $29,000 per month effective July 1, 2008 however, due to a decrease in services provided to the Company in fiscal 2009 the service charge was temporarily reduced for a period of time. For the fiscal year ended March 31, 2009 and 2008, this service charge was $261,000 and $200,000 per annum respectively and is included in the general and administrative expenses in the accompanying Consolidated Statements of Operations.
In addition, on October 1, 2006 the Company entered into a warehouse services agreement with Starlight Industrial Holding LTD, to provide them with warehousing services at the Company’s California warehouse at a monthly service charge of $26,000. In May 2008, that amount was increased to $39,000 per month. This amount was used to offset logistics expenses for the warehouse and is shown in the accompanying Consolidated Statements of Operations as a component of general and administrative expenses.
SUPPLEMENTAL DATA
SCHEDULE II

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

F-20