Table of Contents

** **

 

** **

**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION****WASHINGTON,D.C.  20549**

 

**FORM 10-K**

 
| **x**      | ** ** | **ANNUAL REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**     |
|------------|------------|----------------------------------------------------------------------------------------------------|
| ** ** | ** ** | ** **                                                                                         |
| ** ** | ** ** | **For the fiscal year ended  June 30, 2008**                                                  |
| ** ** | ** ** | ** **                                                                                         |
| **OR**     |
| ** ** | ** ** | ** **                                                                                         |
| **o**      | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**COMMISSIONFILE NUMBER 0-3295**

 

**KOSSCORPORATION**(Exact name ofregistrant as specified in its charter)

 

| **Delaware**                                                    | ** ** | **391168275**                         |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State  or other jurisdiction of incorporation or organization) |       | (I.R.S.  Employer Identification No.) |
|                                                            |       |                                  |
| **4129 North Port Washington Avenue, Milwaukee,  Wisconsin**    | ** ** | **53212**                             |
| (Address of principal executive offices                         |       | (Zip Code)                            |

 

Registrant’s telephonenumber, including area code: **(414) 964-5000**

 

Securities registeredpursuant to Section 12(b) of the Act:

 

| **Title  of Each Class** | ** ** | **Name  of Each Exchange on Which Registered** |
|--------------------------|------------|------------------------------------------------|
| NONE                     |       | NONE                                           |

 

Securities registeredpursuant to Section 12(g) of the Act:

 

**CommonStock, $0.005 par value (voting)**(Title of class)

 

Indicate by check mark ifthe registrant is a well-known seasoned issuer, as defined in Rule 405 ofthe Securities Act.        Yes o   No x

 

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 or Section 15(d) ofthe Act.      Yes o   No x

 

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

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form 10-K.    x

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company.  See the definitions of “large acceleratedfiler,” “accelerated filer” and “smaller reporting company”  in Rule 12b-2 of the Exchange Act.  (Check one):

 
| Large accelerated filer                        | o      |   | Accelerated filer         | o      |
|------------------------------------------------|--------|--------|---------------------------|--------|
| Non-accelerated filer                          | x      |   | Smaller reporting company | o      |
| (Do not check if a smaller  reporting company) |   |   |                      |   |

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).        Yes o No x

 

The aggregate market valueof the common voting stock held by nonaffiliates of the registrant as of December 31,2007 was approximately $12,829,380****(basedon the $17.81 per share closing price of the Company’s common stock as reportedon the NASDAQ Stock Market on December 31, 2007).  In determining who are affiliates of theCompany for purposes of this computation, it is assumed that directors,officers, and any persons who held on December 31, 2007 more than 5% ofthe issued and outstanding common stock of the Company are “affiliates” of theCompany.  The characterization of suchdirectors, officers, and other persons as affiliates is for purposes of thiscomputation only and should not be construed as a determination or admissionfor any other purpose that any of such persons are, in fact, affiliates of theCompany.

 

On August 1, 2008,3,695,351 shares of voting common stock were outstanding.

 

DocumentsIncorporated by Reference

 

Part III of this Form 10-Kincorporates by reference information from Koss Corporation’s Proxy Statementfor its 2008 Annual Meeting of Stockholders filed with the Commission underRegulation 14A within 120 days of the end of the fiscal year covered by this Form 10-K.

 

 

 

----

Tableof Contents

 

**PART I**

 

**ITEM 1.                  BUSINESS.**

 

**GENERAL**

 

As used herein, the term “Company”means Koss Corporation and its consolidated subsidiaries, unless the contextotherwise requires.  The Company wasincorporated in Delaware in 1971.

 

The Company operates in theaudio/video industry segment of the home entertainment industry through itsdesign, manufacture and sale of stereo headphones and related accessoryproducts.  The Company reports itsfinances as a single reporting segment, as the Company’s principal businessline is the design, manufacture, and sale of stereo headphones and relatedaccessories.  The percentage of totalrevenues related to this central business line over the past three fiscal****years was 100% for each year.

 

The Company’s products aresold through audio specialty stores, the Internet, direct mail catalogs,regional department store chains, discount department stores, militaryexchanges, prisons, and national retailers under the “Koss” name and duallabel.  The Company also sells productsto distributors for resale to school systems, and directly to othermanufactures for inclusion with their own products.  The Company has more than 300 domesticdealers and its products are carried in approximately 13,400 domestic retailoutlets.  International markets areserved by domestic sales representatives and a sales office in Switzerlandwhich utilizes independent distributors in several foreign countries.  The Company has two subsidiaries:  Bi-Audio and Koss Classics.

 

Ninety-five percent of theCompany’s products are stereo headphones for listening to music.  The products are not significantlydifferentiated by channel or application with the exception of products sold toschool systems, which sometimes include a microphone.  Sales in this application represent between2% and 3% of the Company’s revenue. There are no other product line differentiations other than the qualityof the sound produced by the stereo headphone itself, which is highlysubjective.  The business could also beclassified by distribution channel. Consumers purchase more than 98% of the Koss stereophone range ofproduct through some form of retail channel or reseller.

 

Management believes that ithas sources of raw materials that are adequate for its needs.

 

No employment orcompensation agreement exists between the Company and its dealers.  The Company has several independentmanufacturer’s representatives for distribution.  The Company typically signs one yearcontracts with these manufacturer’s representatives.  These agreements are seldom renewed inwriting.  The sales from these agreementsaccounted for approximately 2% of the Company’s total revenue in 2008.  Specifically, the Company has a manufacturer’srepresentative agreement with a firm in Detroit to work exclusively in theautomotive arena.  The automotiverepresentative was paid 3% for all business in this area in 2008, and will bepaid 2% thereafter.  The Company’sremaining agreements with distributors, past or present, pertain todistribution arrangements in foreign countries. The arrangements with foreign distributors do not contemplate that theCompany pays any compensation other than any profit the distributors make upontheir sale of the Company’s products. The Company has the right to terminate these agreements with foreigndistributors without cause.

 

**INTELLECTUALPROPERTY**

 

John Koss has beenrecognized for creating the stereophone industry with the first SP3 stereophonein 1958.  The Company regularly appliesfor registration of its trademarks in many countries around the world in whichit does business, and over the years the Company has had numerous trademarksregistered

 

2

----

Tableof Contents

 

and patents issued incountries in North America, South America, Asia, Europe, Africa, andAustralia.  The Company currently has 424trademarks registered in 81 countries around the world and patents in 27countries.  The Company has trademarks toprotect the brand name, Koss, and its logo on its products.  These trademarks are maintained throughoutthe countries in which the Company sells its products.  The Company also holds many design patentsthat protect the unique visual appearance of some of its products.  These trademarks and patents are important todifferentiate the Company from its competitors. Certain of the Company’s trademarks are of material value and importanceto the conduct of its business.  TheCompany considers protection of its proprietary developments important;however, the Company’s business is not, in the opinion of management, materiallydependent upon any single trademark or patent. During the fiscal year ended June 30, 2008, the Company took stepsto update and monitor its patents and trademarks to protect its intellectualproperty around the world.

 

See Part II, Item 7 — “MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS”herein for information relating to the Company’s license agreements.

 

**SEASONALITY**

 

Although retail sales ofconsumer electronics have typically been higher during the holiday season,stereophones have also seen increased interest as gift items over theyears.  Management of the Companybelieves that its business and industry segment are no longer seasonal asevidenced by the fact that 52% of sales occurred in the first six months of thefiscal year ended June 30, 2008, and 48% of sales occurred in the lattersix months of that fiscal year. Management believes that the reason for this level performance of salesto retailers is related to the fact that stereo headphones have become replacementitems for portable electronic products. Therefore upgrades and replacements appear to have as much interest overthe course of the year as gifts of stereophones during the holiday season.

 

**WORKINGCAPITAL AND BACKLOG**

 

The Company’s working capitalneeds do not differ substantially from those of its competitors in the industryand generally reflect the need to carry significant amounts of inventory tomeet delivery requirements of its customers. From time to time, although rarely, the Company may extend payment termsto its dealers for a special promotion. For instance, the Company has in the past offered a 90-120 day paymentperiod for certain customers, such as computer retailers and office supplystores.  Based on historical trends,management does not expect these practices to have any material effect on netsales or net income.  The Company’sbacklog of orders as of June 30, 2008 is not deemed material in relationto net sales during fiscal 2008.

 

**CUSTOMERS**

 

The Company markets a lineof products used by consumers to listen to music, DVD’s in vehicles, soundbytes on computer systems, and other audio related media.  The Company distributes these productsthrough retail channels in the U.S. and independent distributors throughout therest of the world.  The Company marketsits products to approximately 15,000 retailers and distributors worldwide.  During 2008, the Company’s sales to itslargest single customer, Wal-Mart Stores, Inc., were approximately 17% oftotal gross sales.  The Company is dependentupon its ability to retain a base of retailers and distributors to sell theCompany’s line of products.  Loss ofretailers and distributors means loss of product placement.  The Company has broad distribution acrossmany channels including specialty stores, mass merchants, electronics stores,and computer retailers.  Managementbelieves that any loss of revenues would be partially offset by a correspondingdecrease, on a percentage basis, in expenses, thereby partially reducing theimpact on the Company’s operating income. The five largest customers of

 

3

----

Tableof Contents

 

the Company (includingWal-Mart) accounted for approximately 46%, 48% and 47% of total sales in 2008,2007 and 2006, respectively.

 

**COMPETITION**

 

The Company focuses on theheadphone industry.  The acquisition ofADDAX Sound Company in 2003, renamed Bi-Audio, expands the Company’s investmentinto additional categories of headsets, headphones, and stereophones.  In the stereophone market, the Companycompetes directly with approximately five major competitors, several of whichare large and diversified and have greater total assets and resources than theCompany.  The Company’s single productfocus is unique in the marketplace.  Theextent to which retailers view the Company as an innovative vendor of highquality headphone products, and a provider of excellent after sales customerservice, is the extent to which the Company maintains a competitiveadvantage.  The Company relies upon itsunique sound, quality workmanship, brand identification, engineering skills,and customer service to maintain its competitive position.

 

**RESEARCHAND DEVELOPMENT**

 

The amount spent onengineering and research activities relating to the development of new productsor the improvement of existing products was $981,000 during fiscal year 2008 ascompared with $233,000 during fiscal year 2007 and $320,000 during fiscal year2006.  These activities were conducted byboth Company personnel and outside consultants.

 

**ENVIRONMENTALMATTERS**

 

The Company believes that ithas materially complied with all currently existing federal, state and localstatutes and regulations regarding environmental standards and occupationalsafety and health matters to which it is subject.  During fiscal years 2008, 2007 and 2006, theamounts incurred in complying with federal, state and local statutes andregulations pertaining to environmental standards and occupational safety andhealth laws and regulations did not materially affect the Company’s earnings orfinancial condition.

 

**EMPLOYEES**

 

As of June 30, 2008,the Company employed 76 people.  TheCompany also utilizes temporary personnel to meet seasonal production demands.

 

**FOREIGNSALES**

 

International markets areserviced through manufacturer’s representatives or independent distributorswith products produced in the United States and overseas.  Our products are sold in countries in thefollowing regions: Western and Eastern Europe, Scandinavia, The Middle East,Africa, Asia, South America, Latin America, the Caribbean, and Mexico.  The Company sells products in the Canadianmarket directly to retailers, and also through a distributor who servicessmaller specialty accounts.

 

In the opinion ofmanagement, the Company’s competitive position and risks relating to theconduct of its business in such markets are comparable to the domesticmarket.  In addition, the governments offoreign nations may elect to erect trade barriers on imports.  The creation of additional such barrierswould reduce the Company’s revenue and profit. In addition, any fluctuations in currency exchange rates could affectthe pricing of the Company’s products and divert customers who might choose topurchase lower-priced, less profitable products, and could affect overalldemand for the Company’s products.  Forfurther

 

4

----

Tableof Contents

 

information, see Part II,Item 7 and Note 11 to the consolidated financial statements accompanying this Form 10-K.

 

The Company maintains asmall sales office in Switzerland to service the international exportmarketplace.  The Company is aware of nomaterial risks in maintaining this operation. Loss of this office would result in a transfer of sales and marketingresponsibility.  The Company sells itsproducts to independent distributors in countries and regions outside theUnited States, including Europe, the Middle East, Africa, Asia, South America,Latin America, the Caribbean, and Mexico. The Company sells products in the Canadian market directly to retailers,and also through a distributor who services smaller specialty accounts.  During the last three fiscal years, net salesof all Koss products, were distributed as follows:

 
| ** **             | ** ** | **2008**   | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|------------------------|------------|------------|------------|------------|------------|------------|------------|
| From U.S.              |       | $          | 27,800,730 |       | $          | 27,783,812 |       | $ | 35,663,139 |   |
| From foreign countries |       | 19,142,563 |       | 18,418,046 |       | 15,228,498 |       |
| Total Sales            |       | $          | 46,943,293 |       | $          | 46,201,858 |       | $ | 50,891,637 |   |

 

In addition to manufacturingfacilities in the United States, the Company uses contract manufacturingfacilities in the Peoples Republic of China, Taiwan, and South Korea.  These independent supplier entities are distantfrom the Company, which means that we are at risk of business interruptions dueto natural disasters, war, disease, and government intervention through tariffsor trade restrictions that are of less concern domestically.  The Company maintains finished goodsinventory in its U.S. facility to mitigate this risk.  Finished goods inventory is stocked at anaverage of approximately 90 days demand per item.  Recovery of a single facility through areplacement of supplier in the event of a disaster or suspension of supplycould take 120 days.  The Companybelieves that it could restore production of its top eighteen selling models(which represent 75% of the Company’s sales revenue) within one year.  The Company is also at risk if the traderestrictions are introduced on its products based upon country of origin.  In addition, most increases in tariffs andfreight charges would not be acceptable to pass along to the Company’scustomers and would directly impact the Company’s profits.  Finally, an additional area of concern forthe Company is with the continuing “War on Terror” and the most recentdevelopments in North Korea, Iran, and Lebanon. Three of our largest distributors outside the U.S. have alreadyexperienced a general tightening of the availability of credit in recentmonths, which we believe to be partly a result of certain of these externalconcerns.

 

**AVAILABLEINFORMATION**

 

Our internet website ishttp://www.koss.com.  The Company makesavailable free of charge through its internet website the Company’s annualreport on Form 10-K, quarterly reports on Form 10-Q, current reportson Form 8-K, Proxy Statements and all amendments to those reports as soonas reasonably practicable after they are electronically filed with (orfurnished to) the Securities and Exchange Commission (SEC).  These reports and other information regardingthe Company are also available on the SEC’s internet website athttp://www.sec.gov.

 

**ITEM 1A.               RISKFACTORS.**

 

Investing in our commonstock involves a high degree of risk. Any of the following risks could have amaterial adverse effect on our financial condition, liquidity, and results ofoperations or prospects, financial or otherwise.

 

5

----

Tableof Contents

 

**REDUCTIONIN PRESENT LEVELS OF CASH FLOW COULD ADVERSELY AFFECT THE COMPANY’S BUSINESS**

 

The Company’s primary sourceof liquidity over the past 12 months has been operating cash flows.  The Company’s future cash flows fromoperations (on both a short term and long term basis) are dependent upon, butnot limited to:

 
| · |   | the Company’s ability to  attract new customers that will sell the Company’s products and pay for them;                                                                                                                                               |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| · |   | the Company’s ability to  retain the Company’s existing customers at the level of sales previously  produced;                                                                                                                                         |
| · |   | the volume of sales for  these customers;                                                                                                                                                                                                                       |
| · |   | the loss of business of  one or more primary customers;                                                                                                                                                                                                         |
| · |   | changes in types of  products that the customers purchase in their sales mix;                                                                                                                                                                                   |
| · |   | the volume of royalty  income paid to the Company by its licensees based upon the terms of each  royalty agreement, including the inability to negotiate favorable royalty  arrangements and renew current arrangements with certain existing favorable  terms; |
| · |   | poor or deteriorating  economic conditions which would directly impact the ability of the Company’s  customers to remain in business and pay for their products on a timely basis;                                                                         |
| · |   | management’s ability to  hold the line on any requests for increases in material or labor cost  increases; and                                                                                                                                             |
| · |   | the ability to collect in  full and in a timely manner, amounts due to the Company.                                                                                                                                                                             |

 

In addition, as noted above,the Company’s cash flow is also dependent, to some extent, upon the ability tomaintain operating margins.  If therewere a general downturn in economic conditions or other events that caused theCompany’s customers to turn to lower-priced, lower-margin products, the Company’scash flow and profitability could be materially and adversely affected.

 

**FAILURE TOATTRACT AND RETAIN CUSTOMERS TO SELL THE COMPANY’S PRODUCTS COULD ADVERSELYAFFECT SALES VOLUME AND FUTURE PROFITABILITY**

 

The Company markets a lineof products used by consumers to listen to music.  The Company distributes these productsthrough retail channels in the U.S. and independent distributors throughout therest of the world.  The Company is dependentupon the Company’s ability to retain an existing base of customers to sell theCompany’s line of products.  Loss ofcustomers means loss of product placement. The Company has broad distribution across many channels includingspecialty stores, mass merchants, electronics stores and computerretailers.  Since distribution is broadlybased, any loss of a customer directly translates into a reduction in salesvolume which can only be replaced by replacing a similar number ofrepresentative retail outlets.  Theinability of the Company’s sales and marketing staff to obtain new distributionoutlets translates into a lack of future growth and possibly a setback in salesvolumes when loss of current customers occur. For example, the loss of a customer representing 10% of the Company’sbusiness would translate into a reduction in revenues of up to 10% based uponthe point through the fiscal year that the customer was lost.  Attracting a new customer during the courseof a fiscal year could have a positive impact or simply replace an accountwhich has been lost.  In addition, acustomer can decide to make a change in the models that it decides to offer forsale.  Such changes can take placearbitrarily throughout the course of a year which can cause reductions in salesrevenues in proportion to the number of retail outlets that the storerepresents in the market.  The Companymay not be able to maintain customers or model selections and thereforeexperience a reduction in its sales revenue until a model is restored to themix or a customer is replaced by a new customer.  A reduction in sales volume would cause areduction in

 

6

----

Tableof Contents

 

profitability.  The Company’s failure to retain existingcustomers, obtain new customers or develop new product lines that customerswould choose to offer to consumers could significantly affect the Company’sfuture profitability.  The loss ofbusiness of one or more principal customers or a change in the sales volumefrom a particular customer could have a material adverse effect on the Company’ssales volume and profitability.

 

**SHIFT INCUSTOMER SPECIFICATIONS TO LOWER PRICED ITEMS CAN REDUCE PROFIT MARGINSNEGATIVELY IMPACTING PROFITABILITY**

 

The Company sells a line ofproducts with a suggested retail price ranging from less than $10 to$1,000.  The gross margin for each ofthese models is unique in terms of percentages. The price range of the products also produces a different level ofactual dollar contribution per unit.  Forexample a product with a gross margin contribution of 50% might yield a $5.00contribution for one item, while another item may feature a 30% gross marginwhich could yield $50.00.  The Companyfinds the low priced portion of the market most competitive and therefore mostsubject to pressure on gross margin percentages, which tends to lower profitcontributions.  Retail preference forlower priced items can reduce profit margins and contributions.  The risk is that a shift in retail customerspecifications toward lower priced items can lead to lower gross margins andlower profit contributions per unit of sale. Due to the range of products that the Company sells, the product salesmix can produce a variation in terms of a range of profit margins.  Some customers sell a limited range ofproducts that yield lower profit margins than others.  Most notably, the budget priced headphonesegment of the market below $10.00 retail which is distributed through computerstores, office supply stores, and mass market retailers tend to yield thelowest gross margins.  An increase inbusiness with these types of accounts, if coupled with a simultaneous reductionin sales to customers with higher gross margins would reduce profit margins andprofitability.

 

**POORECONOMIC CONDITIONS CAN RESTRICT OR LIMIT PRODUCT PLACEMENT, SALES ANDREPLENISHMENT WHICH COULD DECREASE PROFITS**

 

Deteriorating or weakeconomic conditions, or a forecast for the same, can trigger changes ininventory stocking at retail.  This mayin turn lead to a reduction in model offerings and to out of stocksituations.  If a retail customer of theCompany does not have adequate stocks of the Company’s products to offer forsale in a retail store, consumers may choose another competitive modelinstead.  Customers operating retailstores anticipate future sales demands and inventory products accordingly.  Whenever a general economic slowdown occurs,at both the domestic or foreign level, sales volume levels and re-orderschange.  These changes directly impactthe Company’s sales and profitability. The Company is not in a position to determine how it will be affected bythese circumstances, how extensive the effects may be, or for how long theCompany may be impacted by these circumstances. The Company’s customers respond to changes in economic conditions andany adverse changes in economic conditions can therefore restrict productplacement, availability, sales, replenishment and ultimatelyprofitability.  These conditions existdomestically and internationally.

 

**MANAGEMENTIS SUBJECT TO DECISIONS MADE OUTSIDE ITS CONTROL WHICH COULD DIRECTLY AFFECTFUTURE PROFITABILITY**

 

Retail customers determinewhich products they will stock for resale. The Company competes with other manufacturers to secure shelf space inretail stores for the Company’s products. During the course of a year, changes in the customers’ managementpersonnel can ultimately lead to changes in the stock assortment offered toconsumers.  These changes are oftenarbitrary.  In addition to changes inpersonnel within the Company’s customers, it is also possible that a strategicdecision can be made by a retail customer to consolidate vendors, or todiscontinue certain product categories altogether.  In these instances, the Company’s managementteam may not able to convince customers to reverse such

 

7

----

Tableof Contents

 

decisions.  The Company’s management team is also engagedin the effective procurement, assembly, and manufacture of products.  The ability to negotiate with suppliers,maintain productivity, and hold the line on cost increases can be subjected topressures outside the control of management. For example, increases in fuel costs can increase rates of freight.  Increases of this nature can seldom beavoided and the Company may not be able to pass such increases along to itscustomers.  Management’s effectivecontrol of the manufacturing processes will have a direct impact on the Company’sfuture profitability.  The Companyregularly makes decisions that affect production schedules, shipping schedules,employee levels, and inventory levels. The Company’s ability to make effective decisions in managing theseareas has a direct effect on future profitability.

 

**ACCOUNTSRECEIVABLE AMOUNTS DUE FROM OUR CUSTOMERS CAN BE LOST AS A RESULT OF CUSTOMERBANKRUPTCY, OPERATIONAL DIFFICULTY, OR FAILURE TO PAY, NEGATIVELY IMPACTINGFUTURE PROFITABILITY**

 

The Company has significantaccounts receivable or other amounts due from the Company’s customers.  The accounts receivable balance at the end ofthe last four quarters averaged approximately $9 million.  Terms of payment for customers generallyrange from cash in advance to net 90 day credit terms.  These credit arrangements are negotiated atunspecified and irregular intervals.  Thelargest customers generate the largest receivable balances.  If a customer develops operational difficultyit is not uncommon to temporarily suspend payment to vendors.  The Company is subject to this risk in theretail marketplace.  From time to time acustomer may develop severe operating losses which can lead to abankruptcy.  In these cases, the Companymay lose most of the outstanding balance due. Occasionally, the Company has been current with a customer at the timesuch an event occurs.  The more materialrisk is that of losing the revenue of the customer which might be more onerousthan losing the current outstanding accounts receivable.  In addition, many companies that will insureaccounts receivables will not do so for the Company’s largest mass marketcustomers.  An example of such a loss wasKMART Corporation.  The Company recordeda loss of approximately $500,000 of which $44,000 was repaid in 2007, $37,000in 2005 and $312,000 in 2004, when KMART filed for re-organization.  KMART was current with the Company at thetime that KMART filed Chapter 11 bankruptcy in January of 2002.  The Company continued to supply KMART duringits post petition re-organization and continues to supply the customerprofitably today.  The risk is that theCompany derives most of the Company’s sales revenue and profits from sellingproducts to retailers for resale to consumers. The failure of the Company’s customers to pay in full amounts due to theCompany could negatively affect future profitability.

 

**COMPANYPROFITS CAN SUFFER FROM INTERRUPTIONS IN SUPPLY CHAIN**

 

The Company uses contractmanufacturing facilities in Mainland China, Taiwan, and South Korea.  These independent supplier entities aredistant from the Company which means that the Company is at risk of businessinterruptions due to natural disaster, war, disease, and government interventionthrough tariffs or trade restrictions that are of less concerndomestically.  An additional area ofconcern for the Company is with the continuing “War on Terror” and the mostrecent developments in North Korea, Iran, and Lebanon.  Three of our largest distributors outside theU.S. have already experienced a general tightening of the availability ofcredit in recent months, which we believe to be partly a result of certain ofthese external concerns.  Therefore, ifthere are any interruptions in the supply chain for any of these reasons, thiscould directly impact the Company’s profits in a negative way.  The Company is also at risk if traderestrictions are imposed on the Company’s products based upon country oforigin.  In addition, any increase in tariffsand freight charges may not be acceptable to pass along to the Company’scustomers and could directly impact the Company’s profits.

 

**FLUCTUATIONSIN CURRENCY EXCHANGE RATES COULD AFFECT PRICING OF PRODUCTS AND CAUSE CUSTOMERSTO PURCHASE LOWER-PRICED, LESS**

 

8

----

Table of Contents

 

**PROFITABLEPRODUCTS AND COULD AFFECT OVERALL DEMAND FOR THE COMPANY’S PRODUCTS**

 

The Company receives amaterial portion of its revenue and profits from business in Canada andEurope.  To the extent that value of theU.S. dollar increases relative to currencies in those jurisdictions, itincreases the cost of the Company’s products in those jurisdictions, whichcould create negative pressure on the overall demand for the Company’sproducts.  The Company gets paid from itsinternational customers in U.S. dollars. To the extent that increased prices arising from currency fluctuationsdecrease the overall demand for the Company’s products and the Company’s salesor motivate customers to purchase lower-priced, lower profit products, theCompany’s revenues, profits, and cash flows could be adversely affected.

 

**COMPANYPROFITS CAN SUFFER FROM INCREASING MANUFACTURING COSTS IN CHINA AS A RESULT OFINCREASED WAGES AND WAGE TAXES**

 

The company uses contractmanufacturing facilities in Mainland China. An increase in the cost of labor or taxes on wages in China may lead toan increase in the cost of goods manufactured in China.  The cost of labor and wage taxes haveincreased in China which means that the Company is at risk of highermanufacturing coasts associated with goods manufactured in China.  Additionally, in response to inflationaryconcerns, wages in certain provinces in China have recently increased and maycontinue to do so in the future. Significant increases in wages or wage taxes paid by contractmanufacturing facilities may increase the cost of goods manufactured in Chinawhich could have a material adverse effect on the Company’s profit margins andprofitability.

 

**THE COMPANYUSES THIRD PARTY CARRIERS TO SHIP OUR PRODUCTS WHICH MAY PASS ON INCREASESIN TRANSPORTAION-RELATED FUEL COST TO THE COMPAN Y WHICH CAN REDUCE PROFITMARGINS NEGTIVELY IMPACTING PROFITABILITY**

 

The Company uses numerousthird party carriers to ship product, both domestically andinternationally.  If the price of fuelcontinues to increase and the carriers choose to pass on these increase to theCompany, our freight costs may increase. As a result, the Company’s freight cost is impacted by changes in fuelprices.  Fuel prices affect freight coststo both our customer’s location and our distribution center.  Increase in fuel prices and surcharges andother factors have increased and may continue to increase freight costs in thefuture.  This inflationary pressure ofhigher fuel costs and continued increase in transportation-related fuel costscould have a material adverse effect on the Company’s profit margins andprofitability.

 

**CONSISTENCYOF THE COMPANY’S BUSINESS WITH SEVERAL U.S. RETAILERS**

 

The Company is particularlyconcerned about the consistency of business with several U.S. retailers for thecoming year.  The recent increases ininterest rates may again cause U.S. retailers to sharply curtail inventoryincreases in advance of this year’s holiday season.  The Company has already seen someconsolidation in product lines, and item elimination, or reductions at severalbig box retailers this past spring.  TheCompany also recognizes the struggle that many of the Company’s automobilecustomers have been reporting in the news, and the potential impact that areduction in automobile unit sales might have upon our rear seat entertainmentproducts’ for the automotive market in the coming fiscal year.

 

**ITEM 1B.               UNRESOLVEDSTAFF COMMENTS.**

 

None.

 

9

----

Table of Contents

 

**ITEM 2.                  PROPERTIES.**

 

The Company leases its mainplant and offices in Milwaukee, Wisconsin from its Chairman, John C. Koss.  On August 15, 2007, the lease was renewedfor a period of five years, and is being accounted for as an operatinglease.  The lease extension maintainedthe rent at a fixed rate of $380,000 per year. At anytime during this period the Company has the option to renew thelease for an additional five years for the period commencing July 1, 2013and ending June 30, 2018 under the same terms and conditions.  The lease is on terms no less favorable tothe Company than those that could be obtained from an independent party.  The Company is responsible for all propertymaintenance, insurance, taxes, and other normal expenses related toownership.  All facilities are in goodrepair and, in the opinion of management, are suitable and adequate for theCompany’s business purposes.

 

**ITEM 3.                  LEGALPROCEEDINGS.**

 

From time to time theCompany is involved in routine litigation; however, neither the Company nor itssubsidiaries are subject to any material legal proceedings in management’sopinion.

 

**ITEM 4.                  SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS.**

 

No matters were submitted toa vote of stockholders during the fourth quarter of the fiscal year ended June 30,2008.

 

**PART II**

 

**ITEM 5.                  MARKETFOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUERPURCHASES OF EQUITY SECURITIES.**

 

**MARKETINFORMATION ON COMMON STOCK**

 

The Company’s common stockis traded on The Nasdaq Stock Market under the trading symbol KOSS.  There were approximately 593 record holdersof the Company’s common stock as of August 1, 2008.  This number does not include individualparticipants in security position listings. The quarterly high and low sale prices of the Company’s common stock forthe last two fiscal years as well as dividends declared are shown below.

 
| ** **              | ** ** | ** ** | ** ** | ** ** | ** ** | **Per Share** | ** ** |
|-------------------------|------------|------------|------------|------------|------------|--------------------|------------|
| **Quarter Ended**  | ** ** | **High**   | ** ** | **Low**    | ** ** | **Dividend**       | ** ** |
| September 30, 2006 |       | $          | 25.00      |       | $          | 18.70              |       | $ | 0.13 |   |
| December 31, 2006  |       | $          | 24.89      |       | $          | 18.90              |       | $ | 0.13 |   |
| March 31, 2007     |       | $          | 23.86      |       | $          | 20.35              |       | $ | 0.13 |   |
| June 30, 2007      |       | $          | 20.56      |       | $          | 18.55              |       | $ | 0.13 |   |
| September 30, 2007 |       | $          | 22.18      |       | $          | 18.58              |       | $ | 0.13 |   |
| December 31, 2007  |       | $          | 20.39      |       | $          | 17.50              |       | $ | 1.13 |   |
| March 31, 2008     |       | $          | 19.88      |       | $          | 16.69              |       | $ | 0.13 |   |
| June 30, 2008      |       | $          | 17.94      |       | $          | 15.51              |       | $ | 0.13 |   |

 

The Company’s stockholdersare entitled to receive dividends as may be declared by the Board of Directorsand paid out of funds legally available therefore.  The Company began paying dividends for thequarter ended September 30, 2002 and has paid a dividend for each quartersince, including the last fiscal quarter ended June 30, 2008.  On June 16, 2008, the Company announcedits quarterly dividend of $0.13

 

10

----

Table of Contents

 

per share for stockholdersof record on June 30, 2008.  Thedividend was distributed on or around July 15, 2008.  Although the Company anticipates it willcontinue to pay a quarterly dividend, the decision to pay dividends and theamount of such dividends are within the sole discretion of the Board ofDirectors, who meet quarterly.  Thedecision to pay dividends will depend on the Company’s operating results,financial condition, tax considerations, alternative uses for such funds, andother factors the Board of Directors deem relevant, and there can be noassurance that dividends will be paid in the future.

 

**COMPANYREPURCHASES OF EQUITY SECURITIES**

 
| **Period (2008)**     | ** ** | **Total  Number  of Shares  Purchased** | ** ** | **Average  Price Paid  per Share** | ** ** | **Total Number of  Shares Purchased as  Part of Publicly  Announced Plan (1)** | ** ** | **Approximate Dollar Value of  Shares Available under  Repurchase Plan** | ** ** |
|----------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------|------------|
| April 1-April 30 |       | —                                       |       | $                                            | 0.00       |                                                                                                                   | —     |                                                                                                   | $          | 2,184,133 |   |
| May 1-May 31     |       | 753                                          |       | $                                            | 16.00      |                                                                                                                   | 753        |                                                                                                   | $          | 2,172,082 |   |
| June 1-June 30   |       | 161                                          |       | $                                            | 16.00      |                                                                                                                   | 161        |                                                                                                   | $          | 2,169,506 |   |

 

----

(1)  In April of1995, the Board of Directors approved a stock repurchase program authorizingthe Company to purchase from time to time up to $2,000,000 of its common stockfor its own account.  Subsequently, theBoard of Directors periodically has approved increases in the stock repurchaseprogram.  As of June 30, 2008, themost recently approved increase was for additional purchases of $2,000,000,which occurred in October of 2006, for an aggregate maximum of$45,500,000, of which $43,330,494 had been expended through June 30, 2008.

 

**ITEM 6.                  SELECTEDFINANCIAL DATA.**

 
| ** **                                            | ** ** | **June 30, 2008** | ** ** | **June 30, 2007** | ** ** | **June 30, 2006** | ** ** | **June 30, 2005** | ** ** | **June 30, 2004** | ** ** |
|-------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|-----------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Net sales                                             |       | $                           | 46,943,293 |                        | $          | 46,201,858                  |       | $                           | 50,891,637 |                        | $          | 40,286,691 |   | $ | 40,493,211 |   |
|                                                  |       |                        |       |                        |       |                        |       |                        |       |                        |       |
| Income before cumulative effect of  accounting change |       | $                           | 4,494,289  |                        | $          | 5,156,520                   |       | $                           | 6,222,191  |                        | $          | 4,493,827 |   | $ | 5,448,147 |   |
| Accounting change                                     |       | —                      |       | —                      |       | —                      |       | —                      |       | (75,875                     | )          |
| Net income                                            |       | $                           | 4,494,289  |                        | $          | 5,156,520                   |       | $                           | 6,222,191  |                        | $          | 4,493,827 |   | $ | 5,372,272 |   |
|                                                  |       |                        |       |                        |       |                        |       |                        |       |                        |       |
| Basic earnings per common share:                      |       |                        |       |                        |       |                        |       |                        |       |                        |       |
| Before cumulative effect of accounting  change        |       | $                           | 1.22       |                        | $          | 1.40                        |       | $                           | 1.68       |                        | $          | 1.21 |   | $ | 1.45 |   |
| Accounting change                                     |       | —                      |       | —                      |       | —                      |       | —                      |       | (0.02                       | )          |
| Basic earnings per common share                       |       | $                           | 1.22       |                        | $          | 1.40                        |       | $                           | 1.68       |                        | $          | 1.21 |   | $ | 1.43 |   |
|                                                  |       |                        |       |                        |       |                        |       |                        |       |                        |       |
| Diluted earnings per common share:                    |       |                        |       |                        |       |                        |       |                        |       |                        |       |
| Before cumulative effect of accounting  change        |       | $                           | 1.22       |                        | $          | 1.38                        |       | $                           | 1.63       |                        | $          | 1.14 |   | $ | 1.39 |   |
| Accounting change                                     |       | —                      |       | —                      |       | —                      |       | —                      |       | (0.02                       | )          |
| Diluted earnings per common share                     |       | $                           | 1.22       |                        | $          | 1.38                        |       | $                           | 1.63       |                        | $          | 1.14 |   | $ | 1.37 |   |
|                                                  |       |                        |       |                        |       |                        |       |                        |       |                        |       |
| Total assets                                          |       | $                           | 29,977,007 |                        | $          | 29,173,543                  |       | $                           | 31,441,613 |                        | $          | 9,241,491 |   | $ | 25,679,556 |   |
|                                                  |       |                        |       |                        |       |                        |       |                        |       |                        |       |
| Contingently redeemable common stock                  |       | —                      |       | —                      |       | —                      |       | —                      |       | —                      |       |
|                                                  |       |                        |       |                        |       |                        |       |                        |       |                        |       |
| Cash dividends per common share                       |       | $                           | 1.52       |                        | $          | 0.52                        |       | $                           | 1.52       |                        | $          | 0.52 |   | $ | 0.52 |   |

 

11

----

Tableof Contents

 

See Part II, Item 7 - “MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS” and ConsolidatedFinancial Statements and Notes to the Consolidated Financial Statements formore information relating to Selected Financial Data.

 

**ITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS.**

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

During fiscal year 2008,cash provided by operations was $5,337,129, and during fiscal year 2007, cashprovided by operations was $4,907,186. Working capital was $18,547,574 at June 30, 2008 and $19,740,406 atJune 30, 2007.  The net decrease inworking capital of $1,192,832 from June 30, 2007 represents primarily thenet change in accounts receivable, income taxes receivable, accounts payableand dividends payable offset by cash, inventories, deferred income taxes,accrued liabilities and income taxes payable.

 

Capital expenditures for newproperty and equipment (including production tooling) were $1,179,344,$426,070, and $921,807, in fiscal years 2008, 2007, and 2006, respectively. Depreciationcharges totaled $961,605, $973,802, and $955,166, for the same fiscalyears.  Budgeted capital expenditures forfiscal year 2009 are approximately $380,000. The Company expects to generate sufficient funds through operations tofund these expenditures.

 

Stockholders’ investmentdecreased to $23,217,435 at June 30, 2008 from $23,929,624 at June 30,2007.  The decrease reflects the neteffect of net income, dividends declared, purchase of common stock, exercise ofstock options and compensation expense recorded for vested stock optionsgranted under SFAS No. 123(R).  On June 16,2008, the Company declared a quarterly cash dividend of $0.13 per share, for anaggregate of $480,395 payable on July 15, 2008 to stockholders of recordon June 30, 2008, which is recorded as dividends payable.

 

The Company’s creditfacility matures on November 1, 2008. This unsecured credit facility provides for borrowings up to a maximumof $10,000,000.  The Company can use thiscredit facility for working capital purposes or for the purchase of its owncommon stock pursuant to the Company’s stock repurchase program.  Borrowings under this credit facility bearinterest at the bank’s prime rate, or LIBOR plus 1.25%.  This credit facility includes certainfinancial covenants that require the Company to maintain a minimum tangible networth and specified current, interest coverage, and leverage ratios.  The maximum leverage of the Company, whichconsists of the ratio of its total liabilities to its tangible net worth, mustnot exceed 1.50 to 1.0.  The tangible networth of the Company must not fall below $12.5 million at any time.  The fixed charge ratio of the Company, whichconsists of the ratio of its earnings before interest, income taxes,depreciation, amortization, and other non-cash charges to its total interestexpense, must not be less than 2.10 to 1.0. The current ratio of the Company, which is the ratio of its currentassets to its current liabilities, must exceed 2.50 to 1.0.  The Company has been and is well within theserequirements.  The Company uses itscredit facility from time to time, although there was no utilization of thiscredit facility at June 30, 2008, June 30, 2007, or June 30,2006.

 

In April of 1995, theBoard of Directors approved a stock repurchase program authorizing the Companyto purchase from time to time up to $2,000,000 of its common stock for its ownaccount.  Subsequently, the Board ofDirectors periodically has approved increases of between $1,000,000 to$2,000,000 in the stock repurchase program. As of June 30, 2008, the most recently approved increase was foradditional

 

12

----

Table of Contents

 

purchases of $2,000,000,which occurred in October of 2006, for an aggregate maximum of$45,500,000, of which $43,330,494 had been expended through June 30,2008.  The Company intends to effect allstock purchases either on the open market or through privately negotiatedtransactions, and intends to finance all stock purchases through its own cashflow or by borrowing for such purchases. The Company will continue to repurchase its shares from the market whenthe board determines the shares to be undervalued.  The Company may elect to use the purchase ofthese shares to minimize the dilutive effects to its stockholders when theCompany’s stock is used in acquisitions as consideration.  The Company has no immediate plans to make anacquisition at this time.

 

For fiscal year 2008, theCompany purchased 63,726 shares of its common stock at an average net price of$20.14 per share, for a total purchase price of $1,283,413.  As of June 30, 2008 the Company’s Boardof Directors has authorized the repurchase by the Company of up to $2,000,000in Company common stock at the discretion of the Chief Executive Officer of theCompany.

 

From the commencement of theCompany’s stock repurchase program through June 30, 2008, the Company haspurchased a total of 5,470,104 shares for a total gross purchase price of$52,725,254 (representing an average gross purchase price of $9.64 per share)and a total net purchase price of $41,901,511 (representing an average netpurchase price of $7.66 per share).  Thedifference between the total gross purchase price and the total net purchaseprice is the result of the Company purchasing from certain employees shares ofthe Company’s stock acquired by such employees pursuant to the Company’s stockoption program.  In determining thedollar amount available for additional purchases under the stock repurchaseprogram, the Company uses the total net purchase price paid by the Company forall stock purchases, as authorized by the Board of Directors.

 

**2008RESULTS OF OPERATIONS COMPARED WITH 2007**

 

Net sales for 2008 were$46,943,293 compared with $46,201,858 in 2007, an increase of $741,435 or2%.  The sales increase for the fiscalyear is linked primarily to a 1% increase in domestic sales, and a gain ofsales in Europe which increased 3% from 2007. Gross profit, as a percentage ofnet sales, was $17,791,502 or 38% in 2008 compared with $17,916,877 or 39% in2007.

 

Selling, general, andadministrative expenses for 2008 were $10,792,064 compared with $10,066,385 in2007. This increase was primarily due to research and development expenses inthe year.  The Company believes theseexpenses will be initiatives as investments in our future.

 

Income from operations was$6,999,438 in 2008 compared with $7,850,492 in 2007, a decrease of $851,054 or11%.  Interest income was $119,464 in2008 compared with $169,227 in 2007. This decrease was primarily due to spending on new product developmentand a contribution to the Susan G. Komen Foundation for over $350,000 to helpfind a cure for breast cancer.  Thespecial contribution was based on the creation and sale of two pink stereophonemodels to raise awareness and research dollars to find a cure for breastcancer.

 

Royalty income was $291,667in 2008 compared with $324,996 in 2007, a decrease of 10%. The decrease inroyalty income for the twelve month period was primarily a result of lowersales by the Company’s primary licensee.

 

The provision for incometaxes was $2,916,280 and $3,188,195 in 2008 and 2007, respectively.  The effective tax rate was 39% in 2008 and38% in 2007.

 

13

----

Table of Contents

 

**2007RESULTS OF OPERATIONS COMPARED WITH 2006**

 

Net sales for 2007 were$46,201,858 compared with $50,891,637 in 2006, a decrease of $4,689,779 or9%.  The sales decline for the fiscalyear 2007 was linked primarily to U.S. car manufactures who reduced productionof their models which feature our rear seat entertainment wireless stereophonesas part of the car’s original equipment. This loss was offset by a gain ofsales in Europe which increased 27% from 2006. Gross profit, as a percentage ofnet sales, was $17,916,877 or 39% in 2007 compared with $19,796,260 or 39% in2006.

 

Selling, general, andadministrative expenses for 2007 were $10,066,385 compared with $10,063,871 in 2006.

 

Income from operations was$7,850,492 in 2007 compared with $9,732,389 in 2006, a decrease of 19%.  Interest income was $169,227 in 2007 comparedwith $169,047 in 2006.  The decrease inincome from operations is due to the decline in net sales in 2007 compared to2006.

 

Royalty income was $324,996in 2007 compared with $341,918 in 2006, a decrease of 5%. The decrease inroyalty income for the twelve month period was primarily a result of lowersales by the Company’s primary licensee.

 

The provision for incometaxes was $3,188,195 and $4,021,163 in 2007 and 2006, respectively.  The effective tax rate was 38% in 2007 and39% in 2006.

 

**OFF-BALANCESHEET ARRANGEMENTS**

 

The Company has no “off-balancesheet” arrangements.

 

**DISCLOSUREABOUT CONTRACTUAL OBLIGATIONS**

 

The Company has thefollowing long term lease obligations as of June 30, 2008:

 
| ** **                       | ** ** | **Obligations Due by Period (in thousands)** | ** ** |
|----------------------------------|------------|-----------------------------------------------------------------------|------------|
| **Contractual Obligations** | ** ** | **Total**                                                             | ** ** | **Less than 1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **More than 5  years** | ** ** |
| Operating Lease Obligations      |       | $                                                                     | 2,660      |   | $ | 380 |   | $ | 1,140 |   | $ | 760 |   | $ | 380 |   |
|                                  |            |                                                                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**DISCLOSUREABOUT CERTAIN TRADING ACTIVITIES THAT INCLUDE NON-EXCHANGE TRADED CONTRACTSACCOUNTED FOR AT FAIR VALUE**

 

The Company does not haveany trading activities that include non-exchange traded contracts accounted forat fair value.

 

**DISCLOSUREABOUT EFFECTS OF TRANSACTIONS WITH RELATED AND CERTAIN OTHER PARTIES**

 

The Company has an agreementwith its Chairman, John C. Koss, in the event of his death, at the requestof the executor of his estate, to repurchase his Company common stock from hisestate.  The repurchase

 

14

----

Table of Contents

 

price is 95% of the fairmarket value of the common stock on the date that notice to repurchase isprovided to the Company.  The totalnumber of shares to be repurchased will be sufficient to provide proceeds whichare the lesser of $2,500,000 or the amount of estate taxes and administrativeexpenses incurred by the Chairman’s estate. The Company may elect to pay the purchase price in cash or may elect topay cash equal to 25% of the total amount due and to execute a promissory notefor the balance, payable over four years, at the prime rate of interest.  The Company maintains a $1,150,000 lifeinsurance policy to fund a substantial portion of this obligation.

 

In 1991, the Board ofDirectors agreed to continue the Chairman’s current base salary in the event hebecomes disabled prior to age 70.  Afterage 70, he shall receive his current base salary for the remainder of his life,whether he becomes disabled or not.  TheChairman has turned 70.  These paymentsbegin upon the Chairman’s retirement, and since the Chairman has not retired,he is not currently receiving any of these payments under thisarrangement.  The Company had a deferredcompensation liability of $400,000 recorded as of June 30, 2008 and June 30,2007 for this arrangement.

 

The Company leases its mainplant and offices in Milwaukee, Wisconsin from its Chairman.  On May 28, 2003, the lease was renewedfor a period of five years, and is being accounted for as an operatinglease.  The lease extension maintainedthe rent at a fixed rate of $380,000 per year. At anytime during this period the Company has the option to renew thelease for an additional five years for the period commencing July 1, 2008and ending June 30, 2013 under the same terms and conditions.  In the opinion of the independent directorsof the Board, the lease is on terms no less favorable to the Company than thosethat could be obtained from an independent party.  The Company is responsible for all propertymaintenance, insurance, taxes, and other normal expenses related to ownershipof the property.

 

**DISCLOSUREABOUT CRITICAL ACCOUNTING POLICIES**

 

The Company’s more criticalaccounting policies include revenue recognition, royalty income, and the use ofestimates (which inherently involve judgment and uncertainties) in valuinginventory and accounts receivable.

 

Revenue Recognition

 

The Company recognizesrevenue when all of the following criteria are met:  persuasive evidence of an arrangement exists;delivery has occurred (either FOB shipping point or delivery taken at theCompany’s dock); the seller’s price to the buyer is fixed and determinable(pricing is finalized through the purchase order); and collectibility isreasonably assured.  These criteria aregenerally satisfied and the Company recognizes revenue upon shipment.  The Company also offers certain of itscustomers the right to return products that do not meet the standards agreedwith the customer.  The Companycontinuously monitors such product returns and while such returns havehistorically been minimal, the Company cannot guarantee that they will continueto experience the same return rates that they have experienced in thepast.  Any significant increase inproduct quality failure rates and the resulting credit returns could have amaterial adverse impact on the Company’s operating results for the period orperiods in which such returns materialize.

 

The Company provides forcertain sales incentives, which include sales rebates.  The Company records a provision for estimatedincentives based upon the incentives offered to customers on product relatedsales in the same period as the related revenues are recorded.  The Company also records a provision forestimated sales returns and allowances on product related sales in the sameperiod as the related revenues are recorded. These estimates are based on historical sales returns, analysis ofcredit memo data and other known factors. If the historical data the Company uses to calculate these estimatesdoes not properly reflect future returns, adjustments may be required in futureperiods.

 

15

----

Table of Contents

 

Products sold are covered bya lifetime warranty.  The Company accruesa warranty reserve for estimated costs to provide warranty services.  The Company’s estimate of costs to serviceits warranty obligations is based on historical experience and expectation offuture conditions.  To the extent theCompany experiences increased warranty claim activity or increased costsassociated with servicing those claims, its warranty accrual will increaseaccordingly and result in decreased gross profit.

 

Royalty Income

 

The Company’s net income isaffected by the levels of royalty income generated in any given period.  Royalty income is recognized when earned underthe terms of the Company’s license agreements. These agreements require minimum annual royalty payments.  The Company currently has one royaltyagreement, which expires in 2010.  Theinability of the Company to negotiate favorable royalty arrangements and renewcurrent agreements could have a material adverse impact on the Company’sresults for the period.  Based upon thefavorable relationships the Company has with the parties under these licenseagreements, termination, non-renewal or a renegotiation toward more unfavorableterms under the current agreements is not considered likely.

 

Accounts Receivable

 

The Company performs ongoingcredit evaluations of its customers and adjusts credit limits based uponpayment history and the customer’s current credit worthiness, as determined bythe review of the customer’s current credit information.  The Company continuously monitors collectionsand payments from customers and maintains a provision for estimated creditlosses based upon the Company’s historical experience and any specific customercollection issues that have been identified. The Company values accounts receivable net of an allowance foruncollectible accounts.  The allowance iscalculated based upon the Company’s evaluation of specific customer accountswhere the Company has information that the customer may have an inability tomeet its financial obligations (bankruptcy, etc.).  In these cases, the Company uses itsjudgment, based on the best available facts and circumstances, and records aspecific reserve for that customer against amounts due to reduce the receivableto the amount that is expected to be collected. These specific reserves are re-evaluated and adjusted as additionalinformation is received that impacts the amount reserved.  However, the ultimate collectibility of areceivable is dependent upon the financial condition of an individual customer,which could change rapidly and without warning.

 

Inventories

 

The Company values itsinventories at the lower of cost or market. Cost is determined using the last-in, first-out (“LIFO”) method.  As of June 30, 2008, approximately 99%of the Company’s inventory was valued using LIFO.  Valuing inventories at the lower of cost ormarket requires the use of estimates and judgment.  Our customers may cancel their orders orchange purchase volumes.  Any of these,or certain additional actions, could create excess inventory levels, whichwould impact the valuation of our inventories. The Company continues to use the same techniques to value inventory ashave been used in the past.  Any actionstaken by our customers that could impact the value of our inventory areconsidered when determining the lower of cost or market valuations.  The Company regularly reviews inventoryquantities on hand and records a provision for excess and obsolete inventorybased primarily on our estimated forecast of product demand and productionrequirements for the next twelve months. If the Company is not able to achieve its expectations of the netrealizable value of the inventory at its current value, the Company would haveto adjust its reserves accordingly.

 

16

----

Table of Contents

 

**RECENTLYISSUED FINANCIAL ACCOUNTING PRONOUNCEMENTS**

 

In June 2006, theFinancial Accounting Standards Board (“FASB”) issued Interpretation No. 48,“Accounting for Uncertainty in Income Taxes” (“FIN 48”).  FIN 48 clarifies the accounting foruncertainty in income taxes recognized in financial statements in accordancewith SFAS No. 109, “Accounting for Income Taxes.”  This interpretation is effective for fiscalyears beginning after December 15, 2006.

 

On July 1, 2007, theCompany adopted FIN 48, which prescribes a two-step process for the financialstatement measurement and recognition of a tax position taken or expected to betaken in a tax return. The first step involves the determination of whether itis more likely than not (greater than 50% likelihood) that a tax position willbe sustained upon examination, based on the technical merits of the position.The second step requires that any tax position that meets themore-likely-than-not recognition threshold be measured and recognized in thefinancial statements at the largest amount of benefit that is greater than 50%likely of being realized upon ultimate settlement. FIN 48 also providesguidance on the accounting for related interest and penalties, financialstatement classification and disclosure. The cumulative effect of applying FIN No. 48was to be reported as an adjustment to the opening balance of retained earningsin the period of adoption. The adoption of FIN 48 by the Company on July 1,2007 had no impact on the Company’s opening balance of retained earnings. The adoptionof FIN 48 did not have a material impact on our Consolidated FinancialStatements and, at this time, we do not expect FIN 48 to have a material impacton our Consolidated Financial Statements in the future. In the U.S., theCompany’s federal income tax returns through 2005 are settled, and the incometax returns for years after 2005 are open.

 

**ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.**

 

In management’s opinion, theCompany does not engage in any material market risk sensitive activities anddoes not have any market risk sensitive instruments, other than the Company’scommercial credit facility used for working capital purposes and stockrepurchases.

 

**ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.**

 

**MANAGEMENT’SREPORT**

 

The consolidated financialstatements and related financial information included in this report are theresponsibility of management as to preparation, presentation andreliability.  Management believes thatthe financial statements have been prepared in conformity with accountingprinciples generally accepted in the United States of America appropriate underthe circumstances and necessarily include amounts that are based on bestestimates and judgments.  The Companymaintains a system of internal control to provide reasonable assurance thatassets are safeguarded and that the books and records reflect the authorizedtransactions of the Company.  Oversightof management’s financial reporting and internal accounting controlresponsibilities is exercised by the Board of Directors, through an AuditCommittee that is comprised solely of independent directors.  The Audit Committee is also responsible forthe selection and appointment of the independent auditors and reviews the scopeof their audit and their findings.  Theindependent auditors have direct access to the Audit Committee, without thepresence of management representatives, to discuss the scope and the results oftheir audit work.

 

Consolidated financialstatements of the Company at June 30, 2008 and 2007 and for each of thethree years in the period ended June 30, 2008 and the notes thereto, andthe report of independent auditors thereon are set forth on pages 22 to 36.

 

17

----

Table of Contents

 

Selected unaudited quarterlyfinancial data is as follows:

 
| ** **                         | ** ** | **Quarter** | ** ** |
|------------------------------------|------------|-------------|------------|
| **2008**                           | ** ** | **First**   | ** ** | **Second** | ** ** | **Third** | ** ** | **Fourth** | ** ** |
| Net sales                          |       | $           | 12,637,606 |   | $ | 12,099,397 |   | $ | 10,003,648 |   | $ | 12,202,642 |   |
| Gross profit                       |       | 4,791,980   |       | 4,324,375 |   | 3,565,124 |   | 5,110,023 |   |
| Net income                         |       | 1,335,674   |       | 1,246,552 |   | 647,997 |   | 1,264,066 |   |
|                               |       |        |       |   |   |   |   |   |   |
| Basic earnings per common share:   |       | $           | 0.36       |   | $ | 0.34 |   | $ | 0.18 |   | $ | 0.34 |   |
|                               |       |        |       |   |   |   |   |   |   |
| Diluted earnings per common share: |       | $           | 0.36       |   | $ | 0.34 |   | $ | 0.18 |   | $ | 0.34 |   |

 
| ** **                         | ** ** | **Quarter** | ** ** |
|------------------------------------|------------|-------------|------------|
| **2007**                           | ** ** | **First**   | ** ** | **Second** | ** ** | **Third** | ** ** | **Fourth** | ** ** |
| Net sales                          |       | $           | 13,325,099 |   | $ | 12,222,584 |   | $ | 9,601,291 |   | $ | 11,052,884 |   |
| Gross profit                       |       | 5,595,544   |       | 4,410,565 |   | 3,602,568 |   | 4,308,200 |   |
| Net income                         |       | 1,693,680   |       | 1,283,758 |   | 753,134 |   | 1,425,948 |   |
|                               |       |        |       |   |   |   |   |   |   |
| Basic earnings per common share:   |       | $           | 0.46       |   | $ | 0.35 |   | $ | 0.20 |   | $ | 0.39 |   |
|                               |       |        |       |   |   |   |   |   |   |
| Diluted earnings per common share: |       | $           | 0.45       |   | $ | 0.34 |   | $ | 0.20 |   | $ | 0.38 |   |

 

----

(1)          Due to the use of weighted-average sharesoutstanding each quarter for computing earnings per share, the sum of thequarterly per share amounts may not equal the per share amount for the year.

 

**ITEM 9.CHANGES IN AND DISAGREEMENTS WITH AUDITORS ON ACCOUNTING AND FINANCIALDISCLOSURE.**

 

None.

 

**ITEM 9A(T).Controls and Procedures.**

 

(a)                                  *Evaluation of DisclosureControls and Procedures*.  The Company maintains a system of disclosurecontrols and procedures that are designed to provide reasonable assurance thatinformation, which is required to be timely disclosed, is accumulated andcommunicated to management in a timely fashion. A control system, no matter how well conceived and operated, can provideonly reasonable, not absolute, assurance that the objectives of the controlsystem are met.  The Company, under thesupervision and with the participation of the Company’s management, includingthe Company’s Chief Executive Officer/Chief Financial Officer, after evaluatingthe effectiveness of the Company’s disclosure controls and procedures (asdefined in Rules 13a-15(e) and 15(d)-15(e) of the SecuritiesExchange Act of 1934, as amended (the “Exchange Act)) as of the end of theperiod covered by this report, has concluded that the Company’s disclosurecontrols and procedures are effective to provide reasonable assurance thatinformation required to be disclosed by the Company in the reports that itfiles or submits under the Exchange Act is accumulated and communicated to theCompany’s management, including the Company’s Chief Executive Officer/ChiefFinancial Officer, as appropriate to allow timely decisions regarding requireddisclosure and are effective to provide reasonable assurance that

 

18

----

Table of Contents

 

such information isrecorded, processed, summarized, and reported within the time periods specifiedin the SEC’s rules and forms.

 

(b)                                 *Changes in InternalControls*.  The Company’s management, including its ChiefExecutive Officer/Chief Financial Officer, is responsible for establishing andmaintaining adequate internal control of financial reporting (as defined inExchange Act Rules 13a-15(f) and 15d-15(f)) and designing suchinternal control to provide reasonable assurances regarding the reliability offinancial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles.

 

Management conducted itsevaluation of the effectiveness of its internal control over financial reportingbased on the framework in “Internal Control-Integrated Framework” issued by theCommittee of Sponsoring Organizations of the Treadway Commission (“COSO”) as ofJune 20, 2008.  Based on thisassessment, the Company’s management, including its Chief ExecutiveOfficer/Chief Financial Officer, believes that as of June 30, 2008, theCompany’s internal control over financial reporting was effective based on thecriteria set forth by COSO in “internal Control-Integrated Framework.”  However, because of the inherent limitationsin all control systems, no evaluation of controls can provide absoluteassurance that all control issues and instances of fraud, if any, within theCompany have been detected.

 

This annual report does notinclude an attestation report of the Company’s registered public accountingfirm regarding internal control over financial reporting.  Management’s report was not subject toattestation by the Company’s registered public accounting firm pursuant totemporary rules of the Securities and Exchange Commission that permit theCompany to provide only management’s report in this Form 10-K.

 

There were no changes in theCompany’s internal control over financial reporting that occurred during theCompany’s most recent fiscal quarter that have materially affected, or arereasonably likely to materially affect, the Company’s internal control overfinancial reporting.

 

ITEM9B. OTHER INFORMATION.

 

None.

 

**PART III**

 

**ITEM 10.DIRECTORS, EXECUTIVE OFFICERS OF THE REGISTRANT, AND CORPORTATE GOVERNANCE.**

 

Information relating to thedirectors of Koss Corporation is incorporated herein by reference from the “ELECTIONOF DIRECTORS” Sections on “Information As To Nominees,” “Board Committees,” “Independenceof the Board,” “Code of Ethics,” “Executive Officers,” and “BeneficialOwnership of Company Securities” contained in the Koss Corporation ProxyStatement for its 2008 Annual Meeting of Stockholders (the “2008 ProxyStatement”), which 2008 Proxy Statement will be filed within 120 days of theend of the fiscal year covered by this Report pursuant to General Instruction G(3) ofForm 10-K.

 

19

----

Table of Contents

 

**ITEM 11.EXECUTIVE COMPENSATION.**

 

Information relating toexecutive compensation is incorporated herein by reference from the “ELECTIONOF DIRECTORS” sections of the 2008 Proxy Statement.

 

**ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIALOWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.**

 

Information relating to thesecurity ownership of certain beneficial owners and management is incorporatedherein by reference from the “ELECTION OF DIRECTORS — Beneficial Ownership ofCompany Securities” section of the 2008 Proxy Statement.

 

**EquityCompensation Plan Information. **The table set forth below provides certaininformation with respect to the Company’s equity compensation plans as of theend of the most recently completed fiscal year ended June 30, 2008, underwhich equity securities of the Company are authorized for issuance.

 

**EquityCompensation Plan Information Table**

 
| **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  reflected in column (a))** | ** ** |
|-----------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                      | ** ** | **(a)**                                                                                                                                          | ** ** | **(b)**                                                                                                 | ** ** | **(c)**                                                                                                                                                                                                          | ** ** |
| **Equity compensation plans approved by  security holders**     |       | 561,654                                                                                                                                          |       | $                                                                                                       | 21.49      |                                                                                                                                                                                                             | 898,475    |   |
| **Equity compensation plans not approved by  security holders** |       | Not applicable                                                                                                                                   |       | Not applicable                                                                                          |       | Not applicable                                                                                                                                                                                                   |       |
| **Total**                                                       |       | 561,654                                                                                                                                          |       | $                                                                                                       | 21.49      |                                                                                                                                                                                                             | 898,475    |   |

 

**ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE.**

 

Information relating torelated transactions is incorporated herein by reference from the “ELECTION OFDIRECTORS”               sections of the2008 Proxy Statements on “Independence of the Board” and “Related Transactions.”

 

**ITEM 14.PRINCIPAL ACCOUNTANT FEES AND SERVICES.**

 

Information relating to theprincipal accountant fees and services is incorporated herein by reference fromthe “RATIFICATION OF APPOINTMENT OF INDEPENDENT ACCOUNTANTS” section of the2008 Proxy Statement.

 

20

----

Tableof Contents

 

**PART IV**

 

**ITEM 15.EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.**

 

The following documents arefiled as part of this report:

 

1.             Financial Statements

 

Thefollowing consolidated financial statements of Koss Corporation are set forthon pages 23 to 36:

 
| Report  of Independent Registered Public Accounting Firm                                                          | 22 |
|-------------------------------------------------------------------------------------------------------------------|----|
| Consolidated  Statements of Income for the Years Ended June 30, 2008, 2007, and 2006                         | 23 |
| Consolidated  Balance Sheets as of June 30, 2008 and 2007                                                    | 24 |
| Consolidated  Statements of Cash Flows for the Years Ended June 30, 2008, 2007, and  2006                    | 25 |
| Consolidated  Statements of Stockholders’ Investment for the Years Ended June 30,  2008, 2007, and 2006 | 26 |
| Notes  to Consolidated Financial Statements                                                                       | 27 |

 

2.             Financial Statement Schedules

 

All schedules have beenomitted because the information is not applicable, is not material or becausethe information required is included in the financial statements or the notesthereto.

 

3.             Exhibits Filed

 

SeeExhibit Index attached hereto.

 

21

----

Tableof Contents

 

REPORT OF INDEPENDENTREGISTERED PUBLIC ACCOUNTING FIRM

 

Board of Directors andStockholders

Koss Corporation

 

We have audited theaccompanying consolidated balance sheets of Koss Corporation (a DelawareCorporation) and subsidiaries as of June 30, 2008 and 2007, and therelated consolidated statements of income, stockholders’ investment, and cashflows for each of the three years in the period ended June 30, 2008.  These financial statements are theresponsibility of the Company’s management. Our responsibility is to express an opinion on these financialstatements based on our audits.

 

We conducted our audits inaccordance with the standards of the Public Company Accounting Oversight Board(United States).  Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whetherthe financial statements are free of material misstatement.  The Company is not required to have, nor werewe engaged to perform an audit of its internal control over financialreporting.  Our audit includedconsideration of internal control over financial reporting as a basis fordesigning audit procedures that are appropriate in the circumstances, but notfor the purpose of expressing an opinion on the effectiveness of the Company’sinternal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements, assessing theaccounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation.  We believe that our audits provide areasonable basis for our opinion.

 

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of Koss Corporation and subsidiariesas of June 30, 2008 and 2007, and the results of their operations andtheir cash flows for each of the three years in the period ended June 30,2008 in conformity with accounting principles generally accepted in the UnitedStates of America.

 

GRANT THORNTON LLP

Milwaukee, Wisconsin

August 22, 2008

 

22

----

Tableof Contents

 

KOSS CORPORATION

CONSOLIDATED STATEMENTS OFINCOME

 
| **Year Ended June 30,**        | ** ** | **2008**   | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|-----------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| Net sales                                     |       | $          | 46,943,293 |       | $          | 46,201,858 |       | $ | 50,891,637 |   |
| Cost of goods sold                            |       | 29,151,791 |       | 28,284,981 |       | 31,095,377 |       |
| Gross profit                                  |       | 17,791,502 |       | 17,916,877 |       | 19,796,260 |       |
| Selling, general, and administrative  expense |       | 10,792,064 |       | 10,066,385 |       | 10,063,871 |       |
| Income from operations                        |       | 6,999,438  |       | 7,850,492  |       | 9,732,389  |       |
| Other income (expense):                       |       |       |       |       |       |       |       |
| Royalty income                                |       | 291,667    |       | 324,996    |       | 341,918    |       |
| Interest income                               |       | 119,464    |       | 169,227    |       | 169,047    |       |
| Interest expense                              |       | —     |       | —     |       | —     |       |
| Income before income tax provision            |       | 7,410,569  |       | 8,344,715  |       | 10,243,354 |       |
| Provision for income taxes                    |       | 2,916,280  |       | 3,188,195  |       | 4,021,163  |       |
| Net income                                    |       | $          | 4,494,289  |       | $          | 5,156,520  |       | $ | 6,222,191 |   |
| Earnings per common share:                    |       |       |       |       |       |       |       |
| Basic                                         |       | $          | 1.22       |       | $          | 1.40       |       | $ | 1.68 |   |
| Diluted                                       |       | $          | 1.22       |       | $          | 1.38       |       | $ | 1.63 |   |
|                                          |       |       |       |       |       |       |       |
| Dividends per common share                    |       | $          | 1.52       |       | $          | 0.52       |       | $ | 1.52 |   |

 

The accompanying notes arean integral part of these consolidated financial statements.

 

23

----

Tableof Contents

 

KOSS CORPORATION

CONSOLIDATED BALANCE SHEETS

 
| **As of June 30,**                                                                                                  | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| ASSETS                                                                                                                             |       |       |       |       |       |
| Current Assets:                                                                                                                    |       |       |       |       |       |
| Cash                                                                                                                               |       | $          | 3,322,873  |       | $          | 4,187,682 |   |
| Accounts receivable, less allowances of  $900,704 and $958,868, respectively                                                       |       | 10,148,646 |       | 7,938,913  |       |
| Inventories                                                                                                                        |       | 9,374,344  |       | 9,923,544  |       |
| Prepaid expenses                                                                                                                   |       | 504,806    |       | 403,983    |       |
| Deferred income taxes                                                                                                              |       | 783,995    |       | 1,124,799  |       |
| Income taxes receivable                                                                                                            |       | —     |       | 291,251    |       |
| Total current assets                                                                                                               |       | 24,134,664 |       | 23,870,172 |       |
| Equipment and Leasehold Improvements, at  cost:                                                                                    |       |       |       |       |       |
| Leasehold improvements                                                                                                             |       | 1,766,842  |       | 1,748,816  |       |
| Machinery, equipment, furniture, and  fixtures                                                                                     |       | 2,488,657  |       | 2,464,050  |       |
| Tools, dies, molds, and patterns                                                                                                   |       | 9,605,720  |       | 11,656,951 |       |
|                                                                                                                               |       | 13,861,219 |       | 15,869,817 |       |
| Less—accumulated depreciation                                                                                                 |       | 11,114,852 |       | 13,302,678 |       |
|                                                                                                                               |       | 2,746,367  |       | 2,567,139  |       |
| Deferred Income Taxes                                                                                                              |       | 1,066,853  |       | 423,928    |       |
| Other Assets                                                                                                                       |       | 2,029,123  |       | 2,312,304  |       |
|                                                                                                                               |       | $          | 29,977,007 |       | $          | 29,173,543 |   |
|                                                                                                                               |       |       |       |       |       |
| LIABILITIES AND STOCKHOLDERS’ INVESTMENT                                                                                      |       |       |       |       |       |
| Current Liabilities:                                                                                                               |       |       |       |       |       |
| Accounts payable                                                                                                                   |       | $          | 2,950,721  |       | $          | 1,371,152 |   |
| Accrued liabilities                                                                                                                |       | 1,808,467  |       | 2,282,155  |       |
| Dividends payable                                                                                                                  |       | 480,395    |       | 476,459    |       |
| Income taxes payable                                                                                                               |       | 347,507    |       | —     |       |
| Total current liabilities                                                                                                          |       | 5,587,090  |       | 4,129,766  |       |
| Deferred Compensation                                                                                                              |       | 1,047,482  |       | 989,153    |       |
| Derivative Liability                                                                                                               |       | 125,000    |       | 125,000    |       |
| Stockholders’ Investment:                                                                                                     |       |       |       |       |       |
| Common stock, $0.005 par value, authorized  8,500,000 shares; issued and outstanding 3,695,351 and 3,665,069 shares,  respectively |       | 1,649,408  |       | 1,104,200  |       |
| Retained earnings                                                                                                                  |       | 21,568,027 |       | 22,825,424 |       |
| Total Stockholders’ Investment                                                                                                |       | 23,217,435 |       | 23,929,624 |       |
|                                                                                                                               |       | $          | 29,977,007 |       | $          | 29,173,543 |   |

 

The accompanying notes arean integral part of these consolidated financial statements.

 

24

----

Tableof Contents

 

KOSS CORPORATION

CONSOLIDATED STATEMENTS OFCASH FLOWS

 
| **Year Ended June 30,**                                             | ** ** | **2008**   | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
|                                                                               |       |       |       |       |       |       |       |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                              |       |       |       |       |       |       |       |
| Net income                                                                         |       | $          | 4,494,289  |       | $          | 5,156,520  |       | $ | 6,222,191 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |       |       |       |       |       |       |       |
| Allowance for doubtful accounts                                                    |       | (58,164    | )          | (222,491   | )          | 572,688    |       |
| (Gain) loss on disposal                                                            |       | (149,775   | )          | —     |       | 116        |       |
| Depreciation and amortization                                                      |       | 961,605    |       | 973,802    |       | 955,166    |       |
| Stock compensation expense                                                         |       | 545,052    |       | 562,680    |       | 523,194    |       |
| Deferred income taxes                                                              |       | (302,121   | )          | 489,643    |       | (864,999   | )          |
| Cash surrender value                                                               |       | (193,533   | )          | (181,787   | )          | (169,181   | )          |
| Deferred compensation                                                              |       | 58,329     |       | (3,677     | )          | 31,665     |       |
| Net changes in operating assets and liabilities  (see note 8)                      |       | (18,553    | )          | (1,867,504 | )          | (1,444,503 | )          |
| Net cash provided by operating activities                                          |       | 5,337,129  |       | 4,907,186  |       | 5,826,337  |       |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                              |       |       |       |       |       |       |       |
| Sale of investments                                                                |       | 25,000     |       | 250,000    |       | —     |       |
| Proceeds from sale of certain Bi-Audio  assets                                     |       | 700,000    |       | —     |       | —     |       |
| Acquisition of equipment and leasehold  improvements                               |       | (1,179,344 | )          | (426,070   | )          | (921,807   | )          |
| Net cash used in investing activities                                              |       | (454,344   | )          | (176,070   | )          | (921,807   | )          |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                              |       |       |       |       |       |       |       |
| Tax benefit of non-qualified stock options                                         |       | (286,200   | )          | 288,630    |       | 691,660    |       |
| Dividends paid to stockholders                                                     |       | (5,591,850 | )          | (5,641,556 | )          | (1,932,483 | )          |
| Purchase of common stock                                                           |       | (1,283,413 | )          | (1,837,655 | )          | (6,605,451 | )          |
| Exercise of stock options                                                          |       | 1,413,869  |       | 500,566    |       | 3,869,626  |       |
| Net cash used in financing activities                                              |       | (5,747,594 | )          | (6,690,014 | )          | (3,976,648 | )          |
| Net (decrease) increase in cash                                                    |       | (864,809   | )          | (1,958,898 | )          | 927,882    |       |
| Cash at beginning of period                                                        |       | 4,187,682  |       | 6,146,580  |       | 5,218,698  |       |
| Cash at end of period                                                              |       | $          | 3,322,873  |       | $          | 4,187,682  |       | $ | 6,146,580 |   |

 

The accompanying notes arean integral part of these consolidated financial statements.

 

25

----

Tableof Contents

 

KOSS CORPORATION

CONSOLIDATED STATEMENTS OFSTOCKHOLDERS’ INVESTMENT

 
| ** **                                | ** ** | **Common Stock** | ** ** | **Retained** | ** ** |
|-------------------------------------------|------------|-----------------------|------------|--------------|------------|
| ** **                                | ** ** | **Shares**            | ** ** | **Amount**   | ** ** | **Earnings** | ** ** |
| Balance, June 30, 2005               |       | 3,745,525             |       | $            | 18,728     |   | $ | 22,102,514 |   |
| Net income                                |       | —                |       | —       |       | 6,222,191 |   |
| Dividends declared                        |       | —                |       | —       |       | (5,648,156 | ) |
| Stock compensation expense                |       | —                |       | 523,194      |       | — |   |
| Exercise of stock options                 |       | 220,906               |       | 1,104        |       | 4,561,426 |   |
| Purchase and retirement of treasury stock |       | (248,857              | )          | (1,244       | )          | (6,605,451 | ) |
| Balance, June 30, 2006               |       | 3,717,574             |       | 541,782      |       | 20,632,524 |   |
| Net income                                |       | —                |       | —       |       | 5,156,520 |   |
| Dividends declared                        |       | —                |       | —       |       | (1,915,424 | ) |
| Stock compensation expense                |       | —                |       | 562,680      |       | — |   |
| Tax impact of stock options               |       | —                |       | —       |       | 288,631 |   |
| Exercise of stock options                 |       | 30,932                |       | 155          |       | 500,411 |   |
| Purchase and retirement of treasury stock |       | (83,437               | )          | (417         | )          | (1,837,238 | ) |
| Balance, June 30, 2007               |       | 3,665,069             |       | 1,104,200    |       | 22,825,424 |   |
| Net income                                |       | —                |       | —       |       | 4,494,289 |   |
| Dividends declared                        |       | —                |       | —       |       | (5,595,786 | ) |
| Stock compensation expense                |       | —                |       | 545,052      |       | — |   |
| Tax impact of stock options               |       | —                |       | —       |       | (286,356 | ) |
| Exercise of stock options                 |       | 94,008                |       | 470          |       | 1,413,869 |   |
| Purchase and retirement of treasury stock |       | (63,726               | )          | (314         | )          | (1,283,413 | ) |
| Balance, June 30, 2008               |       | 3,695,351             |       | $            | 1,649,408  |   | $ | 21,568,027 |   |

 

The accompanying notes arean integral part of these consolidated financial statements.

 

26

----

Tableof Contents

 

KOSS CORPORATION

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS

 

1.                                       ACCOUNTING POLICIES

 

NATURE OF BUSINESS—TheCompany reports its finances as a single reporting segment, as the Company’sprincipal business line is the design, manufacture, and sale of stereoheadphones and related accessories.  Thepercentage of total revenues related to this central business line over thepast three fiscal****years was 100%for each year.  The Company leases itsmain plant and offices in Milwaukee, Wisconsin. In addition, the Company has more than 300 domestic dealers and itsproducts are carried in approximately 13,400 domestic retail outlets.  International markets are served by domesticsales representatives and a sales office in Switzerland which utilizes independentdistributors in several foreign countries. The Company has two subsidiaries: Bi-Audio and Koss Classics. During the fourth quarter the Company soldcertain assets of Bi-Audio to a third party for $700,000 in cash.  A gain of approximately $150,000 wasrecognized on the sale of these assets

 

CONCENTRATION OF CREDITRISK—The Company operates in the audio/video industry segment of the homeentertainment industry through its design, manufacture, and sale of stereoheadphones and related accessory products. The Company’s products are sold through audio specialty stores, theInternet, direct mail catalogs, regional department store chains, militaryexchanges, and national retailers under the “Koss” name and dual label.  The Company grants credit to its domestic andinternational customers based on the extension of credit from 30 to 90 days,depending on the customer.  Collection isdependent on the retailing industry economy. International customers outside of Canada are sold on a cash againstdocuments or letter of credit basis. Approximately 31% and 27% of the Company’s accounts receivable at June 30,2008 and 2007, respectively, were foreign receivables.

 

BASIS OF CONSOLIDATION—Theconsolidated financial statements include the accounts of the Company and itssubsidiaries, Bi-Audio and Koss Classics, both of which are wholly-ownedsubsidiaries.  All significantintercompany accounts and transactions have been eliminated.

 

REVENUE RECOGNITION—Revenueis recognized by the Company when all of the following criteria are met:  persuasive evidence of an arrangement exists;delivery has occurred (either FOB shipping point or delivery taken at theCompany’s dock); the seller’s price to the buyer is fixed and determinable(pricing is finalized through the purchase order); and collectibility isreasonably assured.  These criteria aregenerally satisfied upon shipment of the Company’s products.  The Company may offer slotting fees,cooperative advertising programs and sales discounts from time to time and theestimated costs for these items are accrued for at the time revenue isrecognized.  These amounts are recordedas a reduction to sales.

 

ROYALTY INCOME—The Companyrecognizes royalty income when earned under the terms of its license agreement,which expires in 2010.  This agreementrequires minimum annual royalty payments. Royalty income owed to the Company is calculated by the licensee andthen verified by the Company.  Royaltypayments are calculated based upon predetermined percentages of net sales ofthe licensed products or based upon minimum annual royalty payments, as setforth in the Company’s license agreements. Royalty income is booked monthly, on an accrual basis, and the amountthat the Company accrues is the monthly equivalent of the minimum royaltypayment.  When the royalty payments arereceived each quarter, the Company then reduces the accounts receivableaccordingly.

 

RECEIVABLES—Receivablesconsist of trade receivables due from customers.  The Company evaluates collectibility ofreceivables based on a number of factors. An allowance for doubtful accounts is recorded

 

27

----

Table of Contents

 

for significant past duereceivable balances based on a review of the past due item, general economicconditions and the industry as a whole. Changes in the allowance for doubtful accounts are as follows:

 
| **Year  Ended   June 30,** | ** ** | **Balance,  Beginning of Year** | ** ** | **Provision Charged to  Expense** | ** ** | **Accounts  Written off*** | ** ** | **Balance at  End Year** | ** ** |
|--------------------------------------|------------|-------------------------------------------|------------|---------------------------------------------|------------|---------------------------------|------------|------------------------------------|------------|
| 2008                                 |       | $                                         | 958,868    |                                        | $          | —                          |       | $                                  | 58,164     |   | $ | 900,704 |   |
| 2007                                 |       | 1,181,359                                 |       | (76,955                                     | )          | 299,446                         |       | 958,868                            |       |
| 2006                                 |       | 608,671                                   |       | (596,563                                    | )          | 23,875                          |       | 1,181,359                          |       |
|                                      |            |                                           |            |                                             |            |                                 |            |                                    |            |  |  |  |  |

 

----

*Represents charges againstthe allowance, net of recoveries.

 

INVENTORIES—As of June 30,2008, approximately 99% of the Company’s inventory was valued at the lower oflast-in, first-out (LIFO) cost or market. If the first-in, first-out (FIFO) method of inventory accounting hadbeen used by the Company for inventories valued at LIFO, inventories would havebeen $1,218,866 and $1,258,954 higher than reported at June 30, 2008 and2007, respectively.  The Company did notmaintain any work-in-process inventories at June 30, 2008 and June 30,2007.

 

The components ofinventories at June 30 are as follows:

 
| ** **     | ** ** | **2008**  | ** ** | **2007**  | ** ** |
|----------------|------------|-----------|------------|-----------|------------|
| Raw materials  |       | $         | 3,722,062  |      | $          | 2,759,437 |   |
| Finished goods |       | 5,652,282 |       | 7,164,107 |       |
| Total          |       | $         | 9,374,344  |      | $          | 9,923,544 |   |

 

DISTRIBUTION NETWORK—TheCompany includes inbound freight charges, purchasing and receiving costs,inspection costs, warehousing costs, internal transfer costs, and other costsof distribution in the “cost of goods sold” line item.

 

EQUIPMENT AND LEASEHOLDIMPROVEMENTS—Depreciation is provided on a straight-line basis over theestimated useful life of the asset as follows:

 
| Leasehold improvements                        |   | 10-15  years |
|-----------------------------------------------|--------|--------------|
| Machinery, equipment, furniture, and fixtures |   | 3-10  years  |
| Tools,  dies, molds, and patterns             |   | 4-5 years    |

 

RESEARCH ANDDEVELOPMENT—Research and development expenditures charged to operationsamounted to approximately $981,000 in 2008, $233,000 in 2007, and $320,000 in2006.

 

SHIPPING AND HANDLING FEESAND COSTS—Shipping and handling fees charged to customers are included in netsales, and shipping and handling costs incurred by the Company are included incost of goods sold within the accompanying consolidated statements of income.

 

ADVERTISINGCOSTS—Advertising costs included within selling, general, and administrativeexpenses in the accompanying consolidated statements of income were $228,000 in2008, $570,000 in 2007, and $80,000 in 2006. Such costs are expensed as incurred.

 

28

----

Table of Contents

 

INVESTMENTS—Included in “OtherAssets” of $2,029,123 in 2008 and $2,312,304 in 2007, is approximately $100,000of Israel government bonds with maturity dates ranging from October 2008to July 2009.  Securities areclassified as held-to-maturity when the Company has the positive intent andability to hold the securities to maturity. Held-to-maturity securities are stated at cost, adjusted foramortization of premiums and discounts to maturity.

 

FAIR VALUE OF FINANCIALINSTRUMENTS—Cash, accounts receivable, and accounts payable recorded in theconsolidated balance sheets approximate fair value based on the short maturityof these instruments.

 

USE OF ESTIMATES—Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements, and the reported amounts of revenues and expenses during thereporting period.  Actual results coulddiffer from those estimates.

 

NEW ACCOUNTINGPRONOUNCEMENTS—In June 2006, the Financial Accounting Standards Board (“FASB”)issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”(“FIN 48”).  FIN 48 clarifies the accountingfor uncertainty in income taxes recognized in financial statements inaccordance with SFAS No. 109, “Accounting for Income Taxes.”  This interpretation is effective for fiscalyears beginning after December 15, 2006.

 

On July 1, 2007, theCompany adopted FIN 48, which prescribes a two-step process for the financialstatement measurement and recognition of a tax position taken or expected to betaken in a tax return. The first step involves the determination of whether itis more likely than not (greater than 50% likelihood) that a tax position willbe sustained upon examination, based on the technical merits of the position.The second step requires that any tax position that meets themore-likely-than-not recognition threshold be measured and recognized in thefinancial statements at the largest amount of benefit that is greater than 50%likely of being realized upon ultimate settlement. FIN 48 also providesguidance on the accounting for related interest and penalties, financialstatement classification and disclosure. The cumulative effect of applying FIN48 was to be reported as an adjustment to the opening balance of retainedearnings in the period of adoption. The adoption of FIN 48 by the Company on July 1,2007 had no impact on the Company’s opening balance of retained earnings. Theadoption of FIN 48 did not have a material impact on our Consolidated FinancialStatements and, at this time, we do not expect FIN 48 to have a material impacton our Consolidated Financial Statements in the future. The Company’s federalincome tax returns through 2005 are settled, and the income tax returns foryears after 2005 are open.  Interest andpenalties associated with income taxes are reflected in the income taxprovision.  Currently, the Company has nointerest or penalties recognized to date.

 

RECLASSIFICATIONS—Certainamounts in the prior year financial statements have been reclassified toconform to current year presentation.

 

STOCK-BASED COMPENSATION—TheCompany has a stock-based employee compensation plan, which is described morefully in Note 4.  The Company accountsfor stock-based compensation in accordance with Statement of FinancialAccounting Standards (“SFAS”) No. 123(R), “Share Based Payments.”  Under the fair value recognition provisionsof this statement, share-based compensation cost is measured at the grant datebased on the fair value of the award and is recognized as expense over thevesting period.  Determining the fairvalue of share-based awards at the grant date requires judgment, includingestimating future volatility of the Company’s stock, the amount of share-basedawards that are expected to be forfeited and the expected term of awardsgranted.  The Company estimates the fairvalue of stock options granted using the Black-Scholes option valuationmodel.  The fair value of all awards is

 

29

----

Table of Contents

 

amortized on a straight-line basis over the vesting periods.  The expected term of awards granted representthe period of time they are expected to be outstanding.  The Company determines the expected termbased on historical experience with similar awards, giving consideration to thecontractual terms and vesting schedules. The Company estimates the expected volatility of its common stock at thedate of grant based on the historical volatility of its common stock.  The volatility factor used in theBlack-Scholes option valuation model is based on the Company’s historical stockprices over the most recent period commensurate with the estimated expectedterm of the awards.  The risk-freeinterest rate used in the Black-Scholes option valuation model is based on theimplied yield currently available on U.S. Treasury zero-coupon issues with aremaining term commensurate with the expected term of the awards.  Pre-vesting option forfeitures are estimatedusing historical actual forfeitures. Stock-based compensation is recorded only for those options expected tovest.  If actual results differ significantlyfrom these estimates, stock-based compensation expense and the Company’sresults of operations could be materially impacted.

 

2.                                       EARNINGS PER COMMON AND COMMON EQUIVALENTSHARE

 

Basic earnings per share arecomputed based on the weighted average number of common sharesoutstanding.  The weighted-average numberof common shares outstanding for the fiscal years ended June 30, 2008,2007, and 2006, were 3,684,256, 3,688,348, and 3,710,975, respectively.  When dilutive, stock options are included inearnings per share as share equivalents using the treasury stock method.  Common stock equivalents of 11,213, 59,055,and 112,873, related to stock option grants were included in the computation ofthe weighted-average number of shares outstanding for diluted earnings pershare for the fiscal years ended June 30, 2008, 2007, and 2006,respectively.

 

3.                                       CREDIT FACILITY

 

The Company amended itsexisting credit facility in November 2003, extending the maturity date ofthe unsecured line of credit to November 1, 2008.  This credit facility provides for borrowingsup to a maximum of $10,000,000.  TheCompany can use this credit facility for working capital purposes or for thepurchase of its own common stock pursuant to the Company’s stock repurchaseprogram.  Borrowings under this creditfacility bear interest at the bank’s prime rate, or LIBOR plus 1.25%.  This credit facility includes certainfinancial covenants, which require the Company to maintain a minimum tangiblenet worth, and specified current, interest coverage, and leverage ratios.  There were no borrowings under this credit facilityat June 30, 2008 or 2007.

 

4.                                       STOCK OPTIONS AND STOCK PURCHASE AGREEMENTS

 

In 1990, pursuant to therecommendation of the Board of Directors, the stockholders ratified thecreation of the Company’s 1990 Flexible Incentive Plan (the “1990 Plan”).  The 1990 Plan is administered by a committeeof the Board of Directors and provides for granting of various stock-basedawards including stock options to eligible participants, primarily officers andcertain key employees.  A total of225,000 shares of common stock were available in the first year of the Plan’sexistence.  Each year thereafteradditional shares equal to 0.25% of the shares outstanding as of the first dayof the applicable fiscal year were reserved for issuance pursuant to the 1990Plan.  On July 22, 1992, the Boardof Directors authorized the reservation of an additional 250,000 shares for the1990 Plan, which was approved by the stockholders.  In 1993, the Board of Directors authorizedthe reservation of an additional 300,000 shares for the 1990 Plan, which wasapproved by the stockholders.  In 1997,the Board of Directors authorized the reservation of an additional 300,000shares for the 1990 Plan, which was approved by the stockholders.  In 2001, the Board of Directors authorizedthe reservation of an additional 300,000 shares for the 1990 Plan, which wasalso approved by the stockholders.  As ofJuly 31, 2008, there are 898,475 options available for future grants.  Options vest over a four or five year periodfrom the date of grant, with a maximum term of five to ten years.

 

30

----

Table of Contents

 

During December 2004,the Financial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards (“SFAS”) No. 123(R), “Shared-Based Payments” (“SFAS No. 123(R)”),which changed the accounting for equity compensation programs. Under SFAS No. 123R,companies that award share-based payments to employees, including stockoptions, must recognize the expense of these awards in the financial statementsat the time the employees receive the awards. As allowed by SFAS No. 123(R) andSFAS 148, the Company elected to follow APB Opinion No. 25 (“APB 25”) inaccounting for its stock option plan until the effective date of SFAS No. 123R.The accounting as provided by SFAS No. 123R was effective for the Companybeginning July 1, 2005. The adoption of SFAS No. 123(R)’s fair valuemethod had an impact on the Company’s results of operations, although it didnot have an impact on the overall financial position. The impact on cash flowsfrom operations was not material.

 

The fair value of each stockoption grant was estimated as of the date of grant using the Black-Scholespricing model.  The resultingcompensation cost for fixed awards with graded vesting schedules is amortizedon a straight-line basis over the vesting period for the entire award.  The expected term of awards granted isdetermined based on historical experience with similar awards, givingconsideration to the expected term and vesting schedules.  The expected volatility is determined basedon the Company’s historical stock prices over the most recent periodcommensurate with the expected term of the award.  The risk-free interest rate is based on U.S.Treasury zero-coupon issues with a remaining term commensurate with theexpected term of the award.  Expectedpre-vesting option forfeitures are based on historical data.

 

As of June 30, 2008,there was approximately $1,177,000 of total unrecognized compensation costrelated to stock options granted under the plan.  This cost is expected to be recognized over aweighted average period of 2.03 years. Total unrecognized compensation cost will be adjusted for any futurechanges in estimated and actual forfeitures.

 

Cash received from stockoption exercises was approximately $1,414,000, $501,000 and $3,870,000 during2008, 2007 and 2006, respectively. The income tax benefits from stock optionexercises was approximately ($287,000), $289,000, and $692,000 during 2008,2007 and 2006, respectively.

 

The fair value of eachoption granted is estimated on the date of grant using the Black-Scholesoption-pricing model with the following weighted-average assumptions:

 
| ** **                      | ** ** | **2008**  | ** ** | **2007**  | ** ** | **2006**   | ** ** |
|---------------------------------|------------|-----------|------------|-----------|------------|------------|------------|
| Expected stock price volatility |       | 35.00     | %          | 35.00     | %          | 35.00      | %          |
| Risk free interest rate         |       | 2.90      | %          | 4.60      | %          | 3.69       | %          |
| Expected dividend yield         |       | 2.27      | %          | 2.27      | %          | 2.27       | %          |
| Expected forfeitures            |       | 1.50      | %          | 1.50      | %          | 1.50       | %          |
| Expected life of options        |       | 4.7 years |       | 4.6 years |       | 4.21 years |       |

 

31

----

Table of Contents

 

The following tableidentifies options granted, exercised, cancelled, or available for exercisepursuant to the above mentioned Plan:

 
| ** **                                | ** ** | ** **         | ** ** | **Range of Exercise** | ** **   | **Weighted**            | ** ** |
|-------------------------------------------|------------|--------------------|------------|---------------------------------|--------------|-------------------------|------------|
| ** **                                | ** ** | **Number of** | ** ** | **Prices per**             | ** **   | **Average**             | ** ** |
| ** **                                | ** ** | **Shares**         | ** ** | **Share**                       | ** **   | **Exercise Price** | ** ** |
| Shares under option at June 30, 2005 |       | 765,000            |       | $                               | 5.10-$24.21  |                    | $          | 18.87 |   |
| Granted                                   |       | 135,000            |       | $                               | 17.38-$28.80 |                    | $          | 24.21 |   |
| Forfeited                                 |       | (87,500            | )          | $                               | 15.75-$22.01 |                    | $          | 18.82 |   |
| Exercised                                 |       | (220,906           | )          | $                               | 4.42-$22.01  |                    | $          | 17.52 |   |
| Shares under option at June 30, 2006 |       | 591,594            |       | $                               | 5.38-$28.80  |                    | $          | 20.60 |   |
| Granted                                   |       | 80,000             |       | $                               | 19.47-$21.42 |                    | $          | 20.93 |   |
| Forfeited                                 |       | (55,000            | )          | $                               | 18.48        |                    | $          | 18.48 |   |
| Exercised                                 |       | (30,932            | )          | $                               | 5.42-$16.80  |                    | $          | 16.18 |   |
| Shares under option at June 30, 2007 |       | 585,662            |       | $                               | 5.38-$28.80  |                    | $          | 21.08 |   |
| Granted                                   |       | 110,000            |       | $                               | 15.51-$17.06 |                    | $          | 16.78 |   |
| Forfeited                                 |       | (40,000            | )          | $                               | 17.32        |                    | $          | 17.32 |   |
| Exercised                                 |       | (94,008            | )          | $                               | 5.38-$17.38  |                    | $          | 15.04 |   |
| Shares under option at June 30, 2008 |       | 561,654            |       | $                               | 15.51-$28.80 |                    | $          | 21.49 |   |

 

The range of options as of June 30,2008 is as follows:

 
| **Range of  Exercise Prices** | ** ** | **Number of Options  Outstanding/Exercisable** | ** ** | **Weighted Average Exercise  Price Outstanding/Exercisable** | ** ** | **Weighted Average  Remaining  Contractual Life (In Years)** | ** ** |
|-----------------------------------------|------------|----------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| $15.51 -  $19.47                        |       | 219,654 / 76,904                                         |       | $17.37 / $17.57                                                             |       | 5.0                                                                              |       |
| $21.42 -  $28.80                        |       | 342,000 / 239,000                                        |       | $24.14 / $24.11                                                             |       | 3.2                                                                              |       |
|                                    |       | 561,654 / 315,904                                        |       | $21.49 / $22.52                                                             |       |                                                                             |       |

 

Options granted at a pricegreater than the market value on the date of grant included above total 110,000options at weighted-average exercise price of $16.78 in 2008, 80,000 options atweighted-average exercise price of $20.93 in 2007, 135,000 options at weighted-averageexercise price of $24.21 in 2006.

 

The Company has an agreementwith its Chairman, John C. Koss, in the event of his death, at the request ofthe executor of his estate, to repurchase his Company common stock from hisestate.  The Company does not have theright to require the estate to sell stock to the Company.  As such, this arrangement is accounted for asa written put option with the fair value of the put option recorded as aderivative liability.

 

The fair value of thewritten put option at June 30, 2008 and 2007 was $125,000.  The repurchase price is 95% of the fairmarket value of the common stock on the date that notice to repurchase isprovided to the Company.  The totalnumber of shares to be repurchased will be sufficient to provide proceeds whichare the lesser of $2,500,000 or the amount of estate taxes and administrativeexpenses incurred by the Chairman’s estate. The Company may elect to pay the purchase price in cash or may elect topay cash equal to 25% of the total amount due and to execute a promissory notefor the balance, payable over four years, at the prime rate of interest.  The Company maintains a $1,150,000 lifeinsurance policy to fund a substantial portion of this obligation.

 

In April of 1995, theBoard of Directors approved a stock repurchase program authorizing the Companyto purchase from time to time up to $2,000,000 of its common stock for its ownaccount.  Subsequently, the Board ofDirectors periodically has approved increases in the stock repurchase program.  As of June 30, 2008, the most recentlyapproved increase was for additional purchases of $2,000,000, which occurred inOctober of 2006, for an aggregate maximum of $45,500,000, of which$43,330,494 had been expended through June 30, 2008. The Company repurchased63,723 shares for $1,283,413 in 2008, 83,437 shares for $1,837,655 in 2007, and248,857 shares for $6,605,451 in 2006.

 

32

----

Table of Contents

 

5.                                       INCOME TAXES

 

The Company utilizes theliability method of accounting for income taxes.  The liability method measures the expectedincome tax impact of future taxable income and deductions implicit in theconsolidated balance sheets.  Theprovision for income taxes in 2008, 2007, and 2006 consists of the following:

 
| **Year Ended June 30,** | ** ** | **2008** | ** ** | **2007** | ** ** | **2006**  | ** ** |
|----------------------------------------|------------|----------|------------|----------|------------|-----------|------------|
| Current:                               |       |     |       |     |       |      |       |
| Federal                                |       | $        | 2,884,452  |     | $          | 2,210,552 |       | $ | 3,843,000 |   |
| State                                  |       | 333,949  |       | 488,000  |       | 650,000   |       |
| Deferred                               |       | (302,121 | )          | 489,643  |       | (471,837  | )          |
|                                   |       | $        | 2,916,280  |     | $          | 3,188,195 |       | $ | 4,021,163 |   |

 

The 2008, 2007, and 2006 taxprovision results in an effective rate different than the federal statutoryrate due to the following:

 
| **Year Ended June 30,** | ** ** | **2008** | ** ** | **2007** | ** ** | **2006**  | ** ** |
|----------------------------------------|------------|----------|------------|----------|------------|-----------|------------|
| Federal income tax at statutory rate   |       | $        | 2,572,070  |     | $          | 2,837,203 |       | $ | 3,487,523 |   |
| State income taxes, net of federal tax |       |     |       |     |       |      |       |
| Benefit                                |       | 319,913  |       | 283,163  |       | 592,732   |       |
| Other                                  |       | 24,297   |       | 67,829   |       | (59,092   | )          |
| Total provision for income taxes       |       | $        | 2,916,280  |     | $          | 3,188,195 |       | $ | 4,021,163 |   |

 

Temporary differences whichgive rise to deferred income tax assets and liabilities at June 30include:

 
| ** **                           | ** ** | **2008**  | ** ** | **2007**  | ** ** |
|--------------------------------------|------------|-----------|------------|-----------|------------|
| Deferred Income Tax Assets:          |       |      |       |      |       |
| Deferred compensation                |       | $         | 388,000    |      | $          | 157,000 |   |
| Accrued expenses and reserves        |       | 386,000   |       | 680,000   |       |
| SFAS No. 123(R) expense    |       | 603,000   |       | 426,000   |       |
| Package design and trademarks        |       | 123,000   |       | 231,000   |       |
| Other                                |       | 488,000   |       | 244,000   |       |
|                                 |       | 1,988,000 |       | 1,738,000 |       |
| Deferred Income Tax Liabilities:     |       |      |       |      |       |
| Equipment and leasehold improvements |       | (111,000  | )          | (189,000  | )          |
| Other                                |       | (26,000   | )          | —    |       |
| Net deferred income tax asset        |       | $         | 1,851,000  |      | $          | 1,549,000 |   |

 

Deferred taxassets as presented on the consolidated balance sheets: 

 
|                          |   | **2008**  | ** ** | **2007** | ** ** |
|-------------------------------|--------|-----------|------------|----------|------------|
| Current deferred tax assets   |   | $         | 784,000    |     | $          | 1,125,000 |   |
| Long-term deferred tax assets |   | 1,067,000 |       | 424,000  |       |
| Net deferred tax assets       |   | $         | 1,851,000  |     | $          | 1,549,000 |   |

 

Deferred income tax balancesreflect the effects of temporary differences between the tax bases of assetsand liabilities and their carrying amounts. These differences are stated at enacted tax rates expected to be ineffect when taxes are actually paid or recovered.  The recognition of these deferred taxbalances will be realized through normal recurring operations and as such theCompany has recorded the full value of such expected benefits.

 

33

----

Table of Contents

 

6.             INTANGIBLE ASSETS

 

A summary of intangiblesincluded in other assets in the accompanying consolidated balance sheets as of June 30,2008 and 2007 and their respective estimated useful lives are as follows:

 
| ** **                    | ** ** | **2008** | ** ** | **2007** | ** ** | **Estimated useful  lives** | ** ** |
|-------------------------------|------------|----------|------------|----------|------------|----------------------------------|------------|
|                          |       |     |       |     |       |                             |       |
| Patents                       |       | $        | —     |     | $          | 710,291                          |       | 10 years |   |
| Customer lists and other      |       | 188,811  |       | 188,811  |       | 10 years                         |       |
|                          |       | 188,811  |       | 899,102  |       |                             |       |
| Less accumulated amortization |       | (188,811 | )          | (449,102 | )          |                             |       |
|                          |       | $        | —     |     | $          | 450,000                          |       |   |   |

 

As discussed in Note 1,certain assets of Bi-Audio were sold including the patent previously reflectedin other assets.

 

7.                                       ACCRUED LIABILITIES

 

Accrued liabilities at June 30consist of the following:

 
| ** **                                        | ** ** | **2008** | ** ** | **2007**  | ** ** |
|---------------------------------------------------|------------|----------|------------|-----------|------------|
| Employee compensation                             |       | $        | 308,118    |      | $          | 309,749 |   |
| Cooperative advertising and promotion  allowances |       | 740,064  |       | 1,318,871 |       |
| Payroll taxes and other employee benefits         |       | 175,281  |       | 177,538   |       |
| Other                                             |       | 585,004  |       | 475,997   |       |
|                                              |       | $        | 1,808,467  |      | $          | 2,282,155 |   |

 

8.                                       ADDITIONAL CASH FLOW INFORMATION

 

The net changes in cash as aresult of changes in operating assets and liabilities consist of the following:

 
| ** **          | ** ** | **2008**  | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|---------------------|------------|-----------|------------|------------|------------|------------|------------|
| Accounts receivable |       | $         | (2,151,569 | )          | $          | (896,570   | )          | $ | 1,371,428 |   |
| Inventories         |       | 489,200   |       | 599,061    |       | (2,926,802 | )          |
| Prepaid expenses    |       | (100,823  | )          | 14,835     |       | 711,121    |       |
| Income taxes        |       | 638,758   |       | (1,218,779 | )          | 234,990    |       |
| Accounts payable    |       | 1,579,569 |       | (499,104   | )          | (1,142,480 | )          |
| Accrued liabilities |       | (473,688  | )          | 133,053    |       | 307,240    |       |
| Net change          |       | $         | (18,533    | )          | $          | (1,867,504 | )          | $ | (1,444,503 | ) |

 
| ** **                         | ** ** | **2008** | ** ** | **2007** | ** ** | **2006**  | ** ** |
|------------------------------------|------------|----------|------------|----------|------------|-----------|------------|
| Net cash paid during the year for: |       |     |       |     |       |      |       |
| Interest                           |       | $        | —     |     | $          | —    |       | $ | — |   |
| Income taxes                       |       | $        | 2,215,285  |     | $          | 3,688,000 |       | $ | 3,905,000 |   |

 

34

----

Table of Contents

 

9.                                       EMPLOYEE BENEFIT PLANS

 

Substantially all domesticemployees are participants in the Company’s Employee Stock Ownership Plan andTrust under which an annual contribution in either cash or common stock may bemade at the discretion of the Board of Directors.  The expense recorded for such contributionsapproximated $100,000 in 2008, $59,000 in 2007, and $50,000 in 2006.

 

The Company maintains aretirement savings plan under Section 401(k) of the Internal RevenueCode.  This plan covers all employees ofthe Company who have completed one full fiscal quarter of service.  Matching contributions can be made at the discretionof the Board of Directors.  For calendaryears 2006, 2005, and 2004, the matching contribution was 100% of employeecontributions to the plan, not to exceed 10% of the employee’s annualcompensation.  Vesting of Companycontributions occurs immediately.  Companycontributions were approximately $374,000, $327,000, and $354,000 during 2008,2007, and 2006.

 

10.                                 DEFERRED COMPENSATION

 

TheCompany has deferred compensation agreements with a former and current officer.

 

The Board of Directors hasentered into an agreement to continue the Chairman’s current base salary forthe remainder of his life.  Thesepayments begin upon the Chairman’s retirement, and since the Chairman has notretired, he is not currently receiving any of these payments under thisarrangement.  The Company has a deferredcompensation liability of $400,000 recorded as of June 30, 2008 and 2007.

 

The Board of Directors hasapproved a supplemental retirement plan with an officer that calls for annualcash compensation following retirement from the Company in an amount equal to2% of base salary multiplied by the number of years of service to theCompany.  The retirement payments are tobe paid monthly to the officer until his death and then to his surviving spousemonthly until her death.  The Company hasa deferred compensation liability of $647,482 and $589,152 recorded as of June 30,2008 and 2007, respectively.

 

11.                                 INDUSTRY SEGMENT INFORMATION, FOREIGN SALESAND SIGNIFICANT CUSTOMERS

 

The Company has one line ofbusiness—the design, manufacture, and sale of stereophones and relatedaccessories.

 

The Company’s export salesamounted to $21,578,824, during 2008, $20,108,725 during 2007, and $15,228,498during 2006.

 

Sales during 2008, 2007 and2006 to the Company’s five largest customers represented approximately 46%, 48%and 47% of the Company’s total sales, respectively.  Included in these percentages, sales to asingle customer represented approximately 17%, 14%, and 13%, of the Company’stotal sales during 2008, 2007, and 2006, respectively.  These customers generally are large, nationalretailers.

 

12.                                 COMMITMENTS AND CONTINGENCIES

 

The Company leases its mainplant and offices in Milwaukee, Wisconsin from its Chairman.  On May 28, 2003, the lease was renewedfor a period of five years, and is being accounted for as an operatinglease.  The lease extension maintainedthe rent at a fixed rate of $380,000 per year. At anytime during this period the Company has the option to renew thelease for an additional five years for the period

 

35

----

Table of Contents

 

commencing July 1, 2008and ending June 30, 2013 under the same terms and conditions.  The lease is on terms no less favorable tothe Company than those that could be obtained from an independent party.  The Company is responsible for all propertymaintenance, insurance, taxes, and other normal expenses related to ownership.  Total rent expense, which includes thislease, approximated $416,000 in 2008, $416,000 in 2007, and $416,000 in 2006.

 

**CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS**

 

This Annual Report on Form 10-Kcontains forward-looking statements within the meaning of that term in thePrivate Securities Litigation Reform Act of 1995 (the “Act”) (Section 27Aof the Securities Act of 1933 and Section 21E of the Securities ExchangeAct of 1934).  Additional written or oralforward-looking statements may be made by the Company from time to time infilings with the Securities Exchange Commission, press releases, orotherwise.  Statements contained in this Form 10-Kthat are not historical facts are forward-looking statements made pursuant tothe safe harbor provisions of the Act. Forward-looking statements may include, but are not limited to,projections of revenue, income or loss and capital expenditures, statementsregarding future operations, anticipated financing needs, compliance withfinancial covenants in loan agreements, plans for acquisitions or sales ofassets or businesses, plans relating to products or services of the Company,assessments of materiality, predictions of future events, the effects ofpending and possible litigation, and assumptions relating to the foregoing.  In addition, when used in this Form 10-K,the words “anticipates,” “believes,” or “estimates,” “expects,” “intends,” “plans”and variations thereof and similar expressions are intended to identifyforward-looking statements.

 

Forward-looking statementsare inherently subject to risks and uncertainties, some of which cannot bepredicted or quantified based on current expectations.  Consequently, future events and actualresults could differ materially from those set forth in, contemplated by, or underlyingthe forward-looking statements contained in this Form 10-K, or in otherCompany filings, press releases, or otherwise. In addition to the factors discussed in this Form 10-K, otherfactors that could contribute to or cause such differences include, but are notlimited to, developments in any one or more of the following areas:  future fluctuations in economic conditions,the receptivity of consumers to new consumer electronics technologies, the rateand consumer acceptance of new product introductions, competition, pricing, thenumber and nature of customers and their product orders, production by thirdparty vendors, foreign manufacturing, sourcing, and sales (including foreigngovernment regulation, trade, and importation concerns), borrowing costs,changes in tax rates, pending or threatened litigation and investigations, andother risk factors which may be detailed from time to time in the Company’sSecurities and Exchange Commission filings.

 

Readers are cautioned not toplace undue reliance on any forward-looking statements contained herein, whichspeak only as of the date hereof.  TheCompany undertakes no obligation to publicly release the result of anyrevisions to these forward-looking statements that may be made to reflectevents or circumstances after the date hereof or to reflect the occurrence ofunexpected events.

 

36

----

Tableof Contents

 

SIGNATURES

 

Pursuant to the requirementsof Section 13 or 15(d) of the Securities Exchange Act of 1934, theRegistrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 
| KOSS CORPORATION |                          |   |
|------------------|-------------------------------|--------|
|             |                          |   |   |
| By:    |  /s/ Michael J. Koss     |   | Dated: August 25,  2008 |
|             | Michael J. Koss               |   |   |
|             | Vice Chairman                 |   |   |
|             | President                     |   |   |
|             | Chief Executive Officer       |   |   |
|             | Chief Operating Officer  and  |   |   |
|             | Chief Financial Officer       |   |   |
|             |                          |   |   |
| By:    |  /s/ Sujata Sachdeva     |   | Dated: August 25,  2008 |
|             | Sujata Sachdeva               |   |   |
|             | Vice President - Finance      |   |   |
|             | Principal Accounting  Officer |   |   |
|             | Secretary                     |   |   |

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, this report has been signed below bythe following persons on behalf of the Registrant and in the capacitiesindicated on August 25, 2008.

 

 
|  /s/ John C. Koss         |   |  /s/ Michael J. Koss |
|--------------------------------|--------|---------------------------|
| John C. Koss, Director         |   | Michael J. Koss, Director |
|                           |   |                      |
|                           |   |                      |
|  /s/ Lawrence S. Mattson  |   |                      |
| Lawrence S. Mattson,  Director |   |                      |
|                           |   |                      |
|                           |   |                      |
|  /s/ Thomas L. Doerr      |   |                      |
| Thomas L. Doerr, Director      |   |                      |

 

The signatures of the abovedirectors constitute a majority of the Board of Directors of Koss Corporation.

 

37

----

Tableof Contents

 

EXHIBITINDEX

 
| **Exhibit No.** | ** ** | **Exhibit Description**                                                                                                                                                                                                                                                        |
|----------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                                                                                                                                                |
| 3.1                  |       | Certificate of  Incorporation of Koss Corporation. Filed as Exhibit 3.1 to the Company’s  Annual Report on Form 10-K for the year ended June 30, 1996 and  incorporated herein by reference.                                                                    |
|                 |       |                                                                                                                                                                                                                                                                                |
| 3.2                  |       | By-Laws of Koss  Corporation, as in effect on September 25, 1996. Filed as  Exhibit 3.2 to the Company’s Annual Report on Form 10-K for the  year ended June 30, 1996 and incorporated herein by reference.                                                |
|                 |       |                                                                                                                                                                                                                                                                                |
| 10.1                 |       | Death Benefit Agreement  with John C. Koss. Filed as Exhibit 10.4 to the Company’s Annual Report  on Form 10-K for the year ended June 30, 1996 and incorporated  herein by reference.                                                                          |
|                 |       |                                                                                                                                                                                                                                                                                |
| 10.2                 |       | Stock Purchase Agreement  with John C. Koss. Filed as Exhibit 10.5 to the Company’s Annual Report  on Form 10-K for the year ended June 30, 1996 and incorporated  herein by reference.                                                                         |
|                 |       |                                                                                                                                                                                                                                                                                |
| 10.3                 |       | Salary Continuation  Resolution for John C . Koss. Filed as Exhibit 10.6 to the Company’s  Annual Report on Form 10-K for the year ended June 30, 1996 and  incorporated herein by reference.                                                                   |
|                 |       |                                                                                                                                                                                                                                                                                |
| 10.4                 |       | 1983 Incentive Stock  Option Plan. Filed as Exhibit 10.7 to the Company’s Annual Report on  Form 10-K for the year ended June 30, 1996 and incorporated herein  by reference.                                                                                   |
|                 |       |                                                                                                                                                                                                                                                                                |
| 10.5                 |       | Assignment of Lease to  John C. Koss. Filed as Exhibit 10.7 to the Company’s Annual Report on  Form 10-K for the year ended June 30, 1988 and incorporated herein  by reference.                                                                                |
|                 |       |                                                                                                                                                                                                                                                                                |
| 10.6                 |       | Addendum to Lease. Filed  as Exhibit 10.8 to the Company’s Annual Report on Form 10-K for the  year ended June 30, 1988 and incorporated herein by reference.                                                                                                   |
|                 |       |                                                                                                                                                                                                                                                                                |
| 10.7                 |       | Amendment to Lease. Filed  as Exhibit 10.22 to the Company’s Annual Report on Form 10-K for  the year ended June 30, 2000 and incorporated herein by reference.                                                                                                 |
|                 |       |                                                                                                                                                                                                                                                                                |
| 10.8                 |       | Partial Assignment,  Termination and Modification of Lease. Filed as Exhibit 10.25 to the  Company’s Annual Report on Form 10-K for the year ended June 30,  2001 and incorporated herein by reference.                                                         |
|                 |       |                                                                                                                                                                                                                                                                                |
| 10.9                 |       | Restated Lease. Filed as  Exhibit 10.26 to the Company’s Annual Report on Form 10-K for the  year ended June 30, 2001 and incorporated herein by reference.                                                                                                     |
|                 |       |                                                                                                                                                                                                                                                                                |
| 10.10                |       | 1990 Flexible Incentive  Plan. Filed as Exhibit 25 to the Company’s Annual Report on  Form 10-K for the year ended June 30, 1990 and incorporated herein  by reference.                                                                                         |
|                 |       |                                                                                                                                                                                                                                                                                |
| 10.11                |       | Consent of Directors  (Supplemental Executive Retirement Plan for Michael J. Koss dated  March 7, 1997). Filed as Exhibit 10.2 to the Company’s Quarterly  Report on Form 10-Q for the quarter ended March 31, 1997 and  incorporated herein by reference. |
|                 |       |                                                                                                                                                                                                                                                                                |
| 10.12                |       | Loan  Agreement, effective as of February 17, 1995. Filed as Exhibit 10  to the Company’s                                                                                                                                                                            |

 

38

----

Table of Contents

 
|   |   | Quarterly  Report on Form 10-Q for the quarter ended March 31, 1995 and  incorporated herein by reference.                                                                                                                                                                                                                    |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                    |
| 10.13  |   | Amendment to Loan  Agreement dated June 15, 1995, effective as of February 17, 1995.  Filed as Exhibit 10.13 to the Company’s Annual Report on Form 10-K  for the year ended June 30, 1995 and incorporated herein by reference.                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                    |
| 10.14  |   | Amendment to Loan  Agreement dated April 29, 1999. Filed as Exhibit 10.14 to the  Company’s Annual Report on Form 10-K for the year ended June 30,  1999 and incorporated herein by reference.                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                    |
| 10.15  |   | Amendment to Loan  Agreement dated December 15, 1999. Filed as Exhibit 10.15 to the  Company’s Annual Report on Form 10-K for the year ended June 30,  2000 and incorporated herein by reference.                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                    |
| 10.16  |   | Amendment to Loan  Agreement dated October 10, 2001. Filed as Exhibit 10.16 to the  Company’s Quarterly Report on Form 10-Q for the quarter ended  December 31, 2001 and incorporated herein by reference.                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                    |
| 10.17  |   | License Agreement dated  June 30, 1998 between Koss Corporation and Logitech Electronics Inc.  (including Addendum to License Agreement dated June 30, 1998). Filed as  Exhibit 10.18 to the Company’s Annual Report on Form 10-K for the  year ended June 30, 1998 and incorporated herein by reference. |
|   |   |                                                                                                                                                                                                                                                                                                                                    |
| 10.18  |   | Amendment and Extension  Agreement between Koss Corporation and Logitech Electronics Inc. dated  May 1, 2001. Filed as Exhibit 10.3 to the Company’s Quarterly  Report on Form 10-Q for the quarter ended March 31, 2001 and  incorporated herein by reference.                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                    |
| 10.19  |   | License Agreement dated  June 30, 2003 between Koss Corporation and Sonigem Products, Inc.  Filed as Exhibit 10.19 to the Company’s Annual Report on Form 10-K  for the year ended June 30, 2005 and incorporated herein by reference.                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                    |
| 10.20  |   | Amendment to License  Agreement dated August 1, 2005, between Koss Corporation and Sonigem  Products, Inc. Filed as Exhibit 10.20 to the Company’s Annual  Report on Form 10-K for the year ended June 30, 2005 and  incorporated herein by reference.                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                    |
| 14     |   | Koss Corporation Code of  Ethics. Filed as Exhibit 14 to the Company’s Annual Report on  Form 10-K for the year ended June 30, 2004 and incorporated herein  by reference.                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                    |
| 21     |   | List of Subsidiaries of  Koss Corporation*                                                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                    |
| 23.1   |   | Consent of Grant Thornton  LLP*                                                                                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                    |
| 31     |   | Rule 13a-14(a)/15d-14(a) Certification  of Chief Executive Officer/Chief Financial Officer*                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                    |
| 32     |   | Section 1350  Certification of Chief Executive Officer/Chief Financial Officer**                                                                                                                                                                                                                                                   |

 

----

| *  |   | Filed herewith     |
|----|--------|--------------------|
| ** |   | Furnished herewith |

 

39

----