**UNITED STATESSECURITIES AND EXCHANGE COMMISSION****WASHINGTON, D.C. 20549**

**FORM 10-K**

**x****                             ****ANNUAL REPORT PURSUANT TO SECTION13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

**For the fiscal year ended June 30, 2006**

**OR**

**o****                                ****TRANSITION REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

**COMMISSION FILE NUMBER 0-3295**

**KOSS CORPORATION******(Exact nameof registrant 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’stelephone number, including area code:   **(414) 964-5000**

Securities registered pursuant to Section 12(b) of theAct:
| **Title  of Each Class** | ** ** | **Name of Each Exchange on Which Registered** |
|--------------------------|------------|-----------------------------------------------|
| NONE                     |       | NONE                                          |

Securities registered pursuant to Section 12(g) of theAct:

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

Indicate by checkmark if the registrant is a well-known seasoned issuer, as defined in Rule 405of the Securities Act. Yes o   No x

Indicate by checkmark if the registrant is not required to file reports pursuant to Section 13or Section 15(d) of the Act. Yes o   No x

Indicate by checkmark whether the registrant: (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the Registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days. Yes x  No o

Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-Kis not contained 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 thisForm 10-K.     x

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer andlarge accelerated filer” in Rule 12b-2 of the Exchange Act.  (Check one):
| Large accelerated filer | o | Accelerated filer | o | Non-accelerated filer | x |
|-------------------------|---|-------------------|---|-----------------------|---|

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 marketvalue of the common voting stock held by nonaffiliates of the registrant as ofDecember 30, 2005 was approximately $17,347,994****(based on the $26.14 per share closing price of the Company’scommon stock as reported on the NASDAQ Stock Market on December 30, 2005).  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, 2005 more than 5% of theissued 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 25, 2006,3,706,842 shares of voting common stock were outstanding.

Documents Incorporated byReference

Part III of this Form 10-K incorporates by referenceinformation from Koss Corporation’s Proxy Statement for its 2006 Annual Meetingof Stockholders filed with the Commission under Regulation 14A within 120 daysof the end of the fiscal year covered by this Form 10-K.

 

----

**TABLE OF CONTENTS**
| PART I                                               |                                                                                                      |
|------------------------------------------------------|-----------------------------------------------------------------------------------------------------------|
|                                                 | Item 1.  BUSINESS                                                                                    |   |
|                                                 | Item 1A. RISK  FACTORS                                                                                    |   |
|                                                 | Item  1B. UNRESOLVED STAFF COMMENTS                                                                       |   |
|                                                 | Item 2.  PROPERTIES                                                                                  |   |
|                                                 | Item 3.  LEGAL PROCEEDINGS                                                                           |   |
|                                                 | Item 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                         |   |
| PART II                                              |                                                                                                      |
|                                                 | Item 5.  MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS                  |   |
|                                                 | Item 6. SELECTED FINANCIAL DATA                                                                      |   |
|                                                 | Item 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF  OPERATIONS |   |
|                                                 | Item 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                 |   |
|                                                 | Item 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                                 |   |
|                                                 | Item 9.  CHANGES IN AND DISAGREEMENTS WITH AUDITORS ON ACCOUNTING AND FINANCIAL  DISCLOSURE          |   |
|                                                 | Item 9A. Controls and Procedures                                                                     |   |
| PART III                                             |                                                                                                      |
|                                                 | Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE  REGISTRANT                                         |   |
|                                                 | Item 11. EXECUTIVE COMPENSATION                                                                      |   |
|                                                 | Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL  OWNERS AND MANAGEMENT                             |   |
|                                                 | Item 13. CERTAIN RELATIONSHIPS AND RELATED  TRANSACTIONS                                             |   |
|                                                 | Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES                                                           |   |
| PART IV                                              |                                                                                                      |
|                                                 | Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES                                                     |   |
| SIGNATURES                                           |                                                                                                      |
| EXHIBIT INDEX                                        |                                                                                                      |
| List of Subsidiaries                                 |                                                                                                      |
| Consent of Independent Registered Public Accountants |                                                                                                      |
| Certification of CEO and CFO                         |                                                                                                      |
| Certification of CEO and CFO                         |                                                                                                      |

 

2

----

**PART I**

**ITEM 1.****    ****BUSINESS.**

**GENERAL**

As used herein, the term “Company” means KossCorporation and its consolidated subsidiaries, unless the context otherwiserequires.  The Company was incorporatedin Delaware in 1971.

The Company operates in the audio/video industrysegment of the home entertainment industry through its design, manufacture andsale of stereo headphones and related accessory products.  The Company reports its finances as a singlereporting segment, as the Company’s principal business line is the design,manufacture, and sale of stereo headphones and related accessories.  The percentage of total revenues related tothis central business line over the past three fiscal****years was 100% for each year.

The Company’s products are sold through audiospecialty stores, the Internet, direct mail catalogs, regional department storechains, discount department stores, military exchanges, prisons, and nationalretailers under the “Koss” name and dual label. The Company also sells products to distributors for resale to schoolsystems, and directly to other manufactures for inclusion with their ownproducts.  The Company has more than 351domestic dealers and its products are carried in approximately 24,500 domesticretail outlets.  International marketsare served by domestic sales representatives and a sales office in Switzerlandwhich utilizes independent distributors in several foreign countries.  The Company has 2 subsidiaries:  Bi-Audio and Koss Classics.

Ninety five percent of the Company’s products arestereo headphones for listening to music. The products are not significantly differentiated by channel or applicationwith the exception of products sold to school systems, which sometimes includea microphone.  Sales in this applicationrepresent between 2% and 3% of the Company’s revenue.  There are no other product linedifferentiations other than the quality of the sound produced by the stereoheadphone itself, which is highly subjective. The business could also be classified by distribution channel.  Consumers purchase more than 98% of the Kossstereophone range of product through some form of retail channel or reseller.

Management believes that it has sources of rawmaterials that are adequate for its needs.

No employment or compensation agreement exists betweenthe Company and its dealers.  Although,the Company has several independent manufacturer’s representatives fordistribution.  The Company typicallysigns one year contracts with these manufacturer’s representatives.  These agreements are seldom renewed inwriting.  The sales from these agreementsaccounted for approximately 13% of the Company’s total revenue in 2006.  Specifically, the Company has a manufacturer’srepresentative agreement with a firm in Detroit to work exclusively in theautomotive arena.  The automotiverepresentative was paid 4% for all business in this area in 2006, and will bepaid 3% in 2007 and 2% thereafter.  TheCompany’s remaining 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 been recognized for creating thestereophone industry with the first SP3 stereophone in 1958.  The Company regularly applies forregistration of its trademarks in many countries around the world in which itdoes business, and over the years the Company has had numerous trademarksregistered and patents issued in countries in North America, South America,Asia, Europe, Africa, and Australia.

3

----

The Company currently has 407 trademarks registered in82 countries around the world and patents in 26 countries.  The Company has trademarks to protect thebrand name, Koss, and its logo on its products. These trademarks are maintained throughout the countries in which theCompany sells its products.  The Companyalso holds many design patents that protect the unique visual appearance ofsome of its products.  These trademarksand patents are important to differentiate the Company from itscompetitors.  Certain of the Company’strademarks are of material value and importance to the conduct of itsbusiness.  The Company considers protectionof its proprietary developments important; however, the Company’s business isnot, in the opinion of management, materially dependent upon any singletrademark or patent.  During the fiscalyear ended June 30, 2006, the Company took steps to update and monitor itspatents and trademarks to protect its intellectual property 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 53% of sales occurred in the first six months of thefiscal year ended June 30, 2006, and 47% of sales occurred in the latter sixmonths of that fiscal year.  Managementbelieves that the reason for this level performance of sales to retailers isrelated to the fact that stereo headphones have become replacement items forportable electronic products.  Thereforeupgrades and replacements appear to have as much interest over the course ofthe year as gifts of stereophones during the holiday season.

**WORKINGCAPITAL AND BACKLOG**

The Company’s workingcapital needs do not differ substantially from those of its competitors in theindustry and generally reflect the need to carry significant amounts ofinventory to meet delivery requirements of its customers.  From time to time, although rarely, theCompany may extend payment terms to its dealers for a special promotion.  For instance, the Company has in the pastoffered a 90-120 day payment period for certain customers, such as computerretailers and office supply stores. Based on historical trends, management does not expect these practicesto have any material effect on net sales or net income.  The Company’s current backlog of orders is notdeemed material in relation to net sales during fiscal 2006.

**CUSTOMERS**

The Company markets aline of 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 25,000 retailers and distributors worldwide.  During 2006, the Company’s sales to its largestsingle customer, Wal-Mart Stores Inc., were approximately 13% of total grosssales.  The Company is dependent upon itsability to retain a base of retailers and distributors to sell the Company’sline of products.  Loss of retailers anddistributors means loss of product placement. The Company has broad distribution across many channels includingspecialty stores, mass merchants, electronics stores, and computerretailers.  Management believes that anyloss of Wal-Mart’s revenues would be partially offset by a correspondingdecrease, on a percentage basis, in expenses,

4

----

thereby partiallyreducing the impact on the Company’s operating income.  The five largest customers of the Company(including Wal-Mart) accounted for approximately 47%, 42% and 43% of totalsales in 2006, 2005 and 2004.

**COMPETITION**

The Company focuses onthe headphone industry.  The acquisitionof ADDAX in 2003, renamed Bi-Audio, expands the Company’s investment intoadditional 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 $320,000 during fiscal 2006 ascompared with $173,000 during fiscal 2005 and $125,000 during fiscal 2004.  These activities were conducted by bothCompany personnel and outside consultants.

**ENVIRONMENTALMATTERS**

The Company believes that it has materially complied with all currentlyexisting federal, state and local statutes and regulations regardingenvironmental standards and occupational safety and health matters to which itis subject.  During fiscal 2006, 2005 and2004, the amounts incurred in complying with federal, state and local statutesand regulations pertaining to environmental standards and occupational safetyand health laws and regulations did not materially affect the Company’searnings or financial condition.

**EMPLOYEES**

As of June 30, 2006, theCompany employed 115 people.  The Companyalso 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 overall demandfor the Company’s products.  For further

5

----

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

The Company maintains asmall sales office in Switzerland to service the international export marketplace.  The Company is aware of no material risks inmaintaining this operation.  Loss of thisoffice would result in a transfer of sales and marketing responsibility.  The Company sells its products to independentdistributors in countries and regions outside the United States, includingEurope, the Middle East, Africa, Asia, South America, Latin America, theCaribbean, and Mexico.  The Company sellsproducts in the Canadian market directly to retailers, and also through adistributor who services smaller specialty accounts.  During the last three fiscal years, net salesof all Koss products, were distributed as follows:
| ** **             | ** ** | **2006**   | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|------------------------|------------|------------|------------|------------|------------|------------|------------|
| From U.S.              |       | $          | 35,663,139 |       | $          | 28,881,750 |       | $ | 33,484,763 |   |
| From foreign countries |       | 15,228,498 |       | 11,404,941 |       | 7,008,448  |       |
| Total Sales            |       | $          | 50,891,637 |       | $          | 40,286,691 |       | $ | 40,493,211 |   |

 

In addition tomanufacturing facilities in the United States, the Company uses contractmanufacturing facilities in the Peoples Republic of China, Taiwan, and SouthKorea.  These independent supplierentities are distant from the Company, which means that we are at risk ofbusiness interruptions due to natural disasters, war, disease, and governmentintervention through tariffs or trade restrictions that are of less concerndomestically.  The Company maintainsfinished goods inventory 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 twelve selling models(which represent 75% of the Company’s sales revenue) within 1 year.  The Company is also at risk if the trade restrictionsare 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.

**AVAILABLE INFORMATION**

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 reports on Form8-K, Proxy Statements and all amendments to those reports as soon as reasonablypracticable after they are electronically filed with (or furnished to) theSecurities and Exchange Commission (SEC). These reports and other information regarding the Company are alsoavailable on the SEC’s internet website at http://www.sec.gov.

**ITEM1A.               RISK FACTORS**

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.

6

----

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

The Company’s primarysource of liquidity over the past twelve months has been operating cashflows.  The Company’s future cash flowsfrom operations (on both a short term and long term basis) are dependent upon,but not limited to:

·                                          the Company’s ability to attract new customers thatwill sell the Company’s products and pay for them,

·                                          the Company’s ability to retain the Company’s existingcustomers 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 customerspurchase in their sales mix,

·                                          the volume of royalty income paid to the Company byits licensees based upon the terms of each royalty agreement, including theinability to negotiate favorable royalty arrangements and renew currentarrangements with certain existing favorable terms,

·                                          poor or deteriorating economic conditions which woulddirectly impact the ability of the Company’s customers to remain in businessand pay for their products on a timely basis,

·                                          management’s ability to hold the line on any requestsfor increases in material or labor cost increases, and

·                                          the ability to collect in full and in atimely 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.

**FAILURETO ATTRACT 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 isdependent upon the Company’s ability to retain an existing base of customers tosell the Company’s line of products. Loss of customers means loss of product placement.  The Company has broad distribution acrossmany channels including specialty stores, mass merchants, electronics storesand computer retailers.  Sincedistribution is broadly based, any loss of a customer directly translates intoa reduction in sales volume which can only be replaced by replacing a similarnumber of representative retail outlets. The inability of the Company’s sales and marketing staff to obtain newdistribution outlets translates into a lack of future growth and possibly asetback in sales volumes when loss of current customers occur.  For example, the loss of a customerrepresenting 10% of the Company’s business would translate into a reduction inrevenues of up to 10% based upon the point through the fiscal year that thecustomer was lost.  Attracting a newcustomer during the course of a fiscal year could have a positive impact orsimply replace an account which has been lost. In addition, a customer can decide to make a change in the models thatit decides to offer for sale.  Suchchanges can take place arbitrarily throughout the course of a year which cancause reductions in sales revenues in proportion to the number of retailoutlets that the store represents in the market.  The Company may not be able to maintaincustomers or model selections and therefore experience a reduction in its salesrevenue until a model is restored to the mix or a customer is replaced by a newcustomer.  A reduction in sales volumewould cause a reduction in

7

----

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 lineof products 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 stock situations.  If a retail customer of the Company does nothave adequate stocks of the Company’s products to offer for sale in a retailstore, consumers may choose another competitive model instead.  Customers operating retail stores anticipatefuture 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 customersdetermine which products they will stock for resale.  The Company competes with other manufacturersto secure shelf space in retail stores for the Company’s products.  During the course of a year, changes in thecustomers’ management personnel can ultimately lead to changes in the stockassortment offered to consumers.  Thesechanges are often arbitrary.  In additionto changes in personnel within the Company’s customers, it is also possiblethat a strategic decision can be made by a retail customer to consolidatevendors, or to discontinue certain product categories altogether.  In these instances, the Company’s managementteam may not able to convince customers to reverse such

8

----

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 hassignificant accounts receivable or other amounts due from the Company’scustomers.  The accounts receivablebalance at the end of the last four quarters averaged approximately $8million.  Terms of payment for customersgenerally range 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 a bankruptcy.  In these cases, the Company may lose most ofthe outstanding balance due.  Occasionally,the Company has been current with a customer at the time such an eventoccurs.  The more material risk is that oflosing the revenue of the customer which might be more onerous than losing thecurrent outstanding accounts receivable. In addition, many companies that will insure accounts receivables willnot do so for the Company’s largest mass market customers.  An example of such a loss was KMARTCorporation.  The Company recorded a lossof approximately $500,000 of which $37,000 was repaid in 2005 and $312,000 in2004, when KMART filed for re-organization. KMART was current with the Company at the time that KMART filed Chapter11 bankruptcy in January of 2002.  TheCompany continued to supply KMART during its post petition re-organization andcontinues to supply the customer profitably today.  The risk is that the Company derives most ofthe Company’s sales revenue and profits from selling products to retailers forresale to consumers.  The failure of theCompany’s customers to pay in full amounts due to the Company could negativelyaffect 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 governmentintervention through 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 intariffs and freight charges may not be acceptable to pass along to the Company’scustomers and could directly impact the Company’s profits.

9

----

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

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

TheCompany is particularly concerned about the consistency of business withseveral U.S. retailers for the coming year. The recent increases in interest rates may again cause U.S. retailers tosharply curtail inventory increases in advance of this year’s holidayseason.  The Company has already seensome consolidation in product lines, and item elimination, or reductions atseveral big box retailers this past spring. The Company 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.               UNRESOLVED STAFF COMMENTS.**

 

None.

**ITEM 2.                  PROPERTIES.**

 

The Company leases itsmain plant and offices in Milwaukee, Wisconsin from its Chairman, John C.Koss.  On May 28, 2003, the lease wasrenewed for 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, 2008 andending 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 toownership.  All facilities are in goodrepair and, in the opinion of management, are suitable and adequate for theCompany’s business purposes.

**ITEM 3.                  LEGAL PROCEEDINGS.**

 

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.                  SUBMISSION OF MATTERS TO AVOTE OF SECURITY HOLDERS.**

 

No matters were submittedto a vote of stockholders during the fourth quarter of the fiscal year endedJune 30, 2006.

10

----

**PARTII**

**ITEM 5.                  MARKET FOR REGISTRANT’S COMMONEQUITY AND RELATED STOCKHOLDER MATTERS.**

 

**MARKET INFORMATION ON COMMONSTOCK**

The Company’s commonstock is traded on The Nasdaq Stock Market under the trading symbol KOSS.  There were approximately 727 record holdersof the Company’s common stock as of August 1, 2006.  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,  2004    |       | $          | 23.96      |       | $          | 20.00              |       | $ | 0.13 |   |
| December 31,  2004     |       | $          | 23.00      |       | $          | 18.15              |       | $ | 0.13 |   |
| March 31, 2005         |       | $          | 21.45      |       | $          | 18.25              |       | $ | 0.13 |   |
| June 30, 2005          |       | $          | 20.76      |       | $          | 16.80              |       | $ | 0.13 |   |
| September 30,  2005    |       | $          | 18.30      |       | $          | 17.00              |       | $ | 0.13 |   |
| December 31,  2005     |       | $          | 26.45      |       | $          | 17.25              |       | $ | 0.13 |   |
| March 31, 2006         |       | $          | 29.95      |       | $          | 24.25              |       | $ | 0.13 |   |
| June 30, 2006          |       | $          | 28.00      |       | $          | 24.00              |       | $ | 1.13 |   |

 

The Company’sstockholders are entitled to receive dividends as may be declared by the Boardof Directors and 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, 2006.  On May 9, 2006, the Company announced itsquarterly dividend of $0.13 and a special dividend of $1.00 per share forstockholders of record on June 30, 2006. The special dividend was distributed on or around July 15, 2006.  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 (2006)** | ** ** | **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       |       | 4,900                                            |       | $                                            | 27.80      |                                                                                                                   | 4,900      |                                                                                                   | $          | 800,429 |   |
| May 1-May 31           |       | 11,290                                           |       | $                                            | 25.94      |                                                                                                                   | 11,290     |                                                                                                   | $          | 506,112 |   |
| June 1-June 30         |       | 4,074                                            |       | $                                            | 25.00      |                                                                                                                   | 4,074      |                                                                                                   | $          | 403,536 |   |

 

----

(1)  In April of 1995, the Board of Directorsapproved a stock repurchase program authorizing the Company to purchase fromtime to time up to $2,000,000 of its common stock for its own account.  Subsequently, the Board of Directorsperiodically has approved increases in the stock repurchase program.  As of June 30, 2006, the most recentlyapproved increase was for additional purchases of $2,000,000, which occurred inJanuary of 2006, for an aggregate maximum of $42,500,000, of which $42,096,464had been expended through June 30, 2006.

11

----

**ITEM6. SELECTED FINANCIAL DATA.**
| ** **                                            | ** ** | **June 30, 2006** | ** ** | **June 30, 2005** | ** ** | **June 30, 2004** | ** ** | **June 30, 2003** | ** ** | **June 30, 2002** | ** ** |
|-------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|-----------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Net sales                                             |       | $                           | 50,891,637 |                        | $          | 40,286,691                  |       | $                           | 40,493,211 |                        | $          | 33,802,634 |   | $ | 36,571,303 |   |
| Income before  cumulative effect of accounting change |       | $                           | 6,222,191  |                        | $          | 4,493,827                   |       | $                           | 5,448,147  |                        | $          | 4,169,411 |   | $ | 5,041,343 |   |
| Net income                                            |       | $                           | 6,222,191  |                        | $          | 4,493,827                   |       | $                           | 5,372,272  |                        | $          | 4,169,411 |   | $ | 5,041,343 |   |
|                                                  |       |                        |       |                        |       |                        |       |                        |       |                        |       |
| Basic earnings per  common share:                     |       |                        |       |                        |       |                        |       |                        |       |                        |       |
| Before  cumulative effect of accounting change        |       | $                           | 1.68       |                        | $          | 1.21                        |       | $                           | 1.45       |                        | $          | 1.14 |   | $ | 1.36 |   |
| Accounting  change                                    |       | —                      |       | $                           | —     |                        | $          | (0.02                       | )          | —                      |       | — |   |
| Basic earnings  per common share                      |       | $                           | 1.68       |                        | $          | 1.21                        |       | $                           | 1.43       |                        | $          | 1.14 |   | $ | 1.36 |   |
|                                                  |       |                        |       |                        |       |                        |       |                        |       |                        |       |
| Diluted earnings per  common share:                   |       |                        |       |                        |       |                        |       |                        |       |                        |       |
| Before  cumulative effect of accounting change        |       | $                           | 1.63       |                        | $          | 1.14                        |       | $                           | 1.39       |                        | $          | 1.08 |   | $ | 1.28 |   |
| Accounting  change                                    |       | —                      |       | —                      |       | $                           | (0.02      | )                           | —     |                        | —     |   |
| Diluted earnings  per common share                    |       | $                           | 1.63       |                        | $          | 1.14                        |       | $                           | 1.37       |                        | $          | 1.08 |   | $ | 1.28 |   |
|                                                  |       |                        |       |                        |       |                        |       |                        |       |                        |       |
| Total assets                                          |       | $                           | 31,441,613 |                        | $          | 29,241,491                  |       | $                           | 25,679,556 |                        | $          | 23,786,818 |   | $ | 20,326,134 |   |
|                                                  |       |                        |       |                        |       |                        |       |                        |       |                        |       |
| Contingently redeemable  common stock                 |       | —                      |       | —                      |       | __                          |       | $                           | 1,490,000  |                        | $          | 1,490,000 |   |
|                                                  |       |                        |       |                        |       |                        |       |                        |       |                        |       |
| Cash dividends per common share                       |       | $                           | 1.52       |                        | $          | 0.52                        |       | $                           | 0.52       |                        | $          | 0.52 |   | — |   |

 

SeePart II, Item 7 - “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF OPERATIONS” and Consolidated Financial Statements and Notes tothe Consolidated Financial Statements for more information relating to SelectedFinancial Data.

**ITEM7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS.**

**LIQUIDITYAND CAPITAL RESOURCES**

During fiscal 2006, cashprovided by operations was $5,826,337, and during fiscal 2005, cash provided byoperations was $7,740,647.  Workingcapital was $16,123,925 at June 30, 2006 and $17,532,194 at June 30, 2005.  The net decrease in working capital of$1,408,269 from June 30, 2005 represents primarily the net effect of decreasesin accounts receivable, prepaid expenses, and accounts payable offset byincreases in cash, inventories, deferred income taxes, accrued liabilities,dividends payable and income taxes payable.

12

----

Capital expenditures fornew property and equipment (including production tooling) were $921,807,$1,170,494, and $1,344,169, in fiscal 2006, 2005, and 2004, respectively.  Depreciation charges totaled $877,843,$816,857, and $590,414, for the same fiscal years.  Budgeted capital expenditures for fiscal 2007are approximately $1,900,000.  TheCompany expects to generate sufficient funds through operations to fund theseexpenditures.

Stockholders’ investmentdecreased to $21,174,306 at June 30, 2006 from $22,121,242 at June 30,2005.  The decrease reflects the neteffect of net income, dividends declared, purchase of common stock, exercise ofstock options and compensation expense recorded for vested stock options grantedunder SFAS No. 123(R).  On June 15, 2006,the Company declared a quarterly cash dividend of $0.13 and a special dividendof $1.00 per share, for an aggregate of $4,202,591 payable on July 15, 2006 tostockholders of record on June 30, 2006, which is recorded as dividendspayable.

The Company’s creditfacility matures on November 1, 2006. 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 1.75%.  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, 2006, June 30, 2005, or June 30, 2004.

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 $2,000,000in the stock repurchase program.  As of June 30, 2006, the most recentlyapproved increase was for additional purchases of $2,000,000, which occurred inJanuary of 2006, for an aggregate maximum of $42,500,000, of which $42,096,464had been expended through June 30, 2006. The Company intends to effect all stock purchases either on the openmarket or through privately negotiated transactions, and intends to finance allstock purchases through its own cash flow or by borrowing for suchpurchases.  The Company will continue torepurchase its shares from the market when the board determines the shares tobe undervalued.  The Company may elect touse the purchase of these shares to minimize the dilutive effects to itsstockholders when the Company’s stock is used in acquisitions as consideration.  The Company has no immediate plans to make anacquisition at this time.

For fiscal 2006, theCompany purchased 248,857 shares of its common stock at an average net price of$26.54 per share, for a total purchase price of $6,605,451.  As of June 30, 2006, the Company’s Board ofDirectors has authorized the repurchase by the Company of up to $403,536 inCompany common stock at the discretion of the Chief Executive Officer of theCompany.

From the commencement ofthe Company’s stock repurchase program through June 30, 2006, the Company haspurchased a total of 5,322,941 shares for a total gross purchase price of$49,604,186 (representing an average gross purchase price of $9.32 per share)and a total net purchase price of $39,257,484 (representing an average netpurchase price of $7.38 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

13

----

stock optionprogram.  In determining the dollaramount available for additional purchases under the stock repurchase program,the Company uses the total net purchase price paid by the Company for all stockpurchases, as authorized by the Board of Directors.

**2006RESULTS OF OPERATIONS COMPARED WITH 2005**

Net sales for 2006 were$50,891,637 compared with $40,286,691 in 2005, an increase of $10,604,946 or26%.  The record sales performance infiscal year 2006 can be traced to improvements in Company sales to manyaccounts, but most notably the Company made important increases in sales to theautomotive industry for use in rear seat entertainment systems.  These wireless stereophones utilize aninfrared transmission system to beam music from the car radio, CD player, videosystem, or even TV game unit to passengers during trips across town, or acrosscountry.  In addition, another area ofsignificant improvement came in Europe which increased sales revenues by 43%during fiscal year 2006 complementing increases of 82% in 2005 and 72% in2004.  We believe that there areopportunities for growth for the Company in other regions of the world aswell.  Gross profit, as a percentage ofnet sales, was $19,796,260 or 39% in 2006 compared with $15,069,931 or 37% in2005.  The increase is primarily due tothe Company experiencing a more profitable model mix.

Selling, general, andadministrative expenses for 2006 were $10,063,871 compared with $8,544,383 in2005, an increase of $1,519,488 or 17.7%. The increase was primarily a result of the Company experiencing higherlegal fees related to the Company updating and monitoring its patents andtrademarks to protect its intellectual property around the world.

Income from operationswas $9,732,389 in 2006 compared with $6,525,548 in 2005, an increase of49%.  Interest income was $169,047 in2006 compared with $64,795 in 2005, an increase of 161%.  Interest income fluctuates in relation tocash balances on hand throughout the year and fluctuations in interest ratesearned.

Royalty income was$341,918 in 2006 compared with $805,485 in 2005, a decrease of 57.6%. The decrease inroyalty income for the twelve month period was primarily a result of theterminated license agreement with Jiangsu Electronics Industries Limited(Jiangsu).  Effective November 23, 2004,the Company terminated the License Agreement dated November 15, 1991, assubsequently amended, between the Company and Jiangsu (the “Jiangsu LicenseAgreement”).  As a result of thetermination, other than Jiangsu’s post-termination right to sellCompany-approved licensed products, as set forth in the Jiangsu LicenseAgreement, Jiangsu no longer has the right to use certain Company trademarks inconnection with the manufacture, marketing and distribution of Jiangsu’sproducts under the Jiangsu License Agreement.

EffectiveJune 30, 2003, the Company entered into a License Agreement (the “LicenseAgreement”) with Sonigem Products, Inc. (“Sonigem”) of Ontario, Canada wherebythe Company licensed to Sonigem the right to sell video and communicationsproducts under the Koss brand name.  ThisLicense Agreement covers Canada, requiring royalty payments by Sonigem throughJune 30, 2010, subject to certain minimum annual royalty amounts.  To further enhance the relationship betweenthe Company and Sonigem, on June 30, 2005, the Company announced the extensionof its licensing agreement for electronics products with Sonigem.  The Amendment to the License Agreement withSonigem was effective August 1, 2005 (the “Amendment”).  The Amendment provides Sonigem with theexclusive right and license to use certain Company trademarks in Canada inconnection with the manufacture, production, distribution and sale of anincreased number of licensed products, with the prior approval of theCompany.  In consideration for theseincreased rights, the Amendment also provides for increased minimum royaltypayments payable to the Company, which partially offset the previouslydiscussed reductions in royalty income from the terminated Jiangsu LicenseAgreement.

14

----

The provision for incometaxes was $4,021,163 and $2,902,001 in 2006 and 2005, respectively.  The effective tax rate was 39% in 2006 and39% in 2005.

**2005RESULTS OF OPERATIONS COMPARED WITH 2004**

Net sales for 2005 were$40,286,691 compared with $40,493,211 in 2004, a decrease of $206,520 or lessthan 1%.  This was due to the Companyexperiencing a decline in segments of its domestic retail sales , which waspartially offset by growth in segments of Europe where shipments were up 82% forthe fiscal year.  Gross profit, as apercentage of net sales, was $15,069,931 or 37% in 2005 compared with$15,961,953 or 40% in 2004.  The decreaseis primarily due to the Company experiencing higher freight costs on incomingshipments of supplies.

Selling, general, andadministrative expenses for 2005 were $8,544,383 compared with $8,089,765 in2004, an increase of $454,618 or 6%.  Theincrease was a result of the Company experiencing higher marketing expenses associatedwith  participation in the ConsumerElectronics Show held in January 2005.

Income from operationswas $7,395,828 in 2005 compared with $8,965,177 in 2004, a decrease of21%.  Interest income was $64,795 in 2005compared with $22,311 in 2004, an increase of 191%.  Interest income fluctuates in relation tocash balances on hand throughout the year and fluctuations in interest ratesearned.

Royalty income was$805,485 in 2005 compared with $1,071,638 in 2004, a decrease of 25%.  The decrease in royalty income was primarilya result of the Company terminating a License Agreement with JiangsuElectronics Industries Limited (Jiangsu). Effective November 23, 2004 the Company terminated the License Agreementdated November 15, 1991, as subsequently amended, between the Company andJiangsu.  As a result of the termination,other than Jiangsu’s post-termination right to sell Company-approved licensedproducts, as set forth in the License Agreement, Jiangsu no longer has theright to use certain Company trademarks in connection with the manufacture, marketingand distribution of Jiangsu’s products under this license agreement.

Effective June 30, 2003,the Company entered into a License Agreement (the “License Agreement”) withSonigem Products, Inc. (“Sonigem”) of Ontario, Canada whereby the Company licensedto Sonigem the right to sell video and communications products under the Kossbrand name.  This License Agreementcovers Canada, requiring royalty payments by Sonigem through June 30, 2010,subject to certain minimum annual royalty amounts.  To further enhance the relationship betweenthe Company and Sonigem, on June 30, 2005, the Company announced the extensionof its licensing agreement for electronics products with Sonigem.  The Amendment to the License Agreement withSonigem was effective August 1, 2005 (the “Amendment”).  The Amendment provides Sonigem with theexclusive right and license to use certain Company trademarks in Canada inconnection with the manufacture, production, distribution and sale of anincreased number of licensed products, with the prior approval of theCompany.  In consideration for theseincreased rights, the Amendment also provides for increased minimum royaltypayments payable to the Company, which partially offset the previously discussedreductions in royalty income.

The provision for incometaxes was $2,902,001 and $3,517,030 in 2005 and 2004, respectively.  The effective tax rate was 39% in 2005 and39% in 2004.

**OFF-BALANCESHEET FINANCING**

The Company has no “off-balancesheet” financing arrangements.

15

----

**DISCLOSUREABOUT CONTRACTUAL OBLIGATIONS**

TheCompany has the following long term lease obligations as of June 30, 2006:
| ** **                       | ** ** | **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     |       | $                                                                     | 3,420      |   | $ | 380 |   | $ | 1,140 |   | $ | 1,140 |   | $ | 760 |   |
|                                  |            |                                                                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**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**

TheCompany has an agreement with its Chairman, John C. Koss, in the event ofhis death, at the request of the executor of his estate, to repurchase hisCompany common stock from his estate. The repurchase price is 95% of the fair market value of the common stockon the date that notice to repurchase is provided to the Company.  The total number of shares to be repurchasedwill be sufficient to provide proceeds which are the lesser of $2,500,000 orthe amount of estate taxes and administrative expenses incurred by the Chairman’sestate.  The Company may elect to pay thepurchase price in cash or may elect to pay cash equal to 25% of the totalamount due and to execute a promissory note for the balance, payable over fouryears, at the prime rate of interest. The Company maintains a $1,150,000 life insurance policy to fund asubstantial 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  $400,000recorded as of June 30, 2006, and $400,000 as of June 30, 2005 for thisarrangement.

The Company leases itsmain plant and offices in Milwaukee, Wisconsin from its Chairman.  On May 28, 2003, the lease was renewed for aperiod of five years, and is being accounted for as an operating lease.  The lease extension maintained the rent at afixed rate of $380,000 per year.  Atanytime during this period the Company has the option to renew the lease for anadditional five years for the period commencing July 1, 2008 and ending June30, 2013 under the same terms and conditions. In the opinion of the independent directors of the Board, the lease ison terms no less favorable to the Company than those that could be obtainedfrom an independent party.  The Companyis responsible for all property maintenance, insurance, taxes, and other normalexpenses related to ownership of the property.

**DISCLOSUREABOUT CRITICAL ACCOUNTING POLICIES**

The Company’s morecritical accounting policies include revenue recognition, royalty income, andthe use of estimates (which inherently involve judgment and uncertainties) invaluing inventory and accounts receivable.

16

----

RevenueRecognition

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.

Products sold are coveredby a lifetime warranty.  The Companyaccrues a warranty reserve for estimated costs to provide warrantyservices.  The Company’s estimate ofcosts to service its warranty obligations is based on historical experience andexpectation of future conditions.  To theextent the Company experiences increased warranty claim activity or increasedcosts associated with servicing those claims, its warranty accrual willincrease accordingly and result in decreased gross profit.

Royalty Income

The Company’s net incomeis significantly affected by the levels of royalty income generated in anygiven period.  Royalty income isrecognized when earned under the terms of the Company’s licenseagreements.  These agreements requireminimum annual royalty payments.  TheCompany currently has one royalty agreement, which expires in 2010.  The inability of the Company to negotiatefavorable royalty arrangements and renew current agreements could have amaterial adverse impact on the Company’s results for the period.  Based upon the favorable relationships theCompany has with the parties under these license agreements, termination,non-renewal or a renegotiation toward more unfavorable terms under the currentagreements is not considered likely.

Accounts Receivable

The Company performsongoing credit evaluations of its customers and adjusts credit limits basedupon payment history and the customer’s current credit worthiness, asdetermined by the 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

17

----

expected to becollected.  These specific reserves arere-evaluated and adjusted as additional information is received that impactsthe amount reserved.  However, theultimate collectibility of a receivable is dependent upon the financialcondition of an individual customer, which could change rapidly and withoutwarning.

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, 2006, approximately 96% of theCompany’s inventory was valued using LIFO. Valuing inventories at the lower of cost or market requires the use ofestimates and judgment.  Our customers maycancel their orders or change purchase volumes. Any of these, or certain additional actions, could create excessinventory levels, which would impact the valuation of our inventories.  The Company continues to use the sametechniques to value inventory as have been used in the past.  Any actions taken by our customers that couldimpact the value of our inventory are considered when determining the lower ofcost or market valuations.  The Companyregularly reviews inventory quantities on hand and records a provision forexcess and obsolete inventory based primarily on our estimated forecast ofproduct demand and production requirements for the next twelve months.  If the Company is not able to achieve itsexpectations of the net realizable value of the inventory at its current value,the Company would have to adjust its reserves accordingly.

**RECENTLYISSUED FINANCIAL ACCOUNTING PRONOUNCEMENTS**

InJune 2006, the Financial Accounting Standards Board (“FASB”) issuedInterpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN48).  FIN 48 clarifies the accounting foruncertainty in income taxes recognized in financial statements in accordancewith SFAS No. 109, “Accounting for Income Taxes.”  This interpretation prescribes a recognitionthreshold and measurement attribute of tax positions taken or expected to betaken on a tax return.  ThisInterpretation is effective for fiscal years beginning after December 15,2006.  We are currently evaluating theimpact FIN 48 will have on our financial position or results of operations.

**ITEM7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.**

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

**ITEM8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.**

**MANAGEMENT’SREPORT**

The consolidatedfinancial statements and related financial information included in this reportare the responsibility 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

18

----

findings.  The independent auditors have direct accessto the Audit Committee, without the presence of management representatives, todiscuss the scope and the results of their audit work.

Consolidated financialstatements of the Company at June 30, 2006 and 2005 and for each of thequarters in the period ended June 30, 2006 and the notes thereto, and thereport of independent auditors thereon are set forth on pages 23 to 37.

Selected unauditedquarterly financial data is as follows:
| ** **                         | ** ** | **Quarter** | ** ** |
|------------------------------------|------------|-------------|------------|
| **2006**                           | ** ** | **First**   | ** ** | **Second** | ** ** | **Third** | ** ** | **Fourth** | ** ** |
| Net sales                          |       | $           | 11,949,841 |   | $ | 15,435,597 |   | $ | 13,222,496 |   | $ | 10,283,703 |   |
| Gross profit                       |       | 4,674,879   |       | 6,038,570 |   | 4,955,538 |   | 4,127,273 |   |
| Net income                         |       | 1,441,218   |       | 2,031,246 |   | 1,500,118 |   | 1,249,609 |   |
|                               |       |        |       |   |   |   |   |   |   |
| Basic earnings per  common share:  |       | $           | 0.39       |   | $ | 0.55 |   | $ | 0.43 |   | $ | 0.34 |   |
|                               |       |        |       |   |   |   |   |   |   |
| Diluted earnings per common share: |       | $           | 0.38       |   | $ | 0.53 |   | $ | 0.40 |   | $ | 0.33 |   |

 
| ** **                         | ** ** | **Quarter** | ** ** |
|------------------------------------|------------|-------------|------------|
| **2005**                           | ** ** | **First**   | ** ** | **Second** | ** ** | **Third** | ** ** | **Fourth** | ** ** |
| Net sales                          |       | $           | 8,972,580  |   | $ | 10,225,079 |   | $ | 9,772,686 |   | $ | 11,316,346 |   |
| Gross profit                       |       | 3,422,973   |       | 3,958,618 |   | 3,613,481 |   | 4,074,859 |   |
| Net income                         |       | 889,911     |       | 1,219,442 |   | 885,976 |   | 1,498,498 |   |
|                               |       |        |       |   |   |   |   |   |   |
| Basic earnings per  common share:  |       | $           | 0.24       |   | $ | 0.33 |   | $ | 0.24 |   | $ | 0.40 |   |
|                               |       |        |       |   |   |   |   |   |   |
| Diluted earnings per common share: |       | $           | 0.23       |   | $ | 0.31 |   | $ | 0.23 |   | $ | 0.39 |   |

 

----

(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 AUDITORSON ACCOUNTING AND FINANCIAL DISCLOSURE.**

 

None.

**ITEM9A. Controls and Procedures.**

(a)                                  *Evaluation ofDisclosure Controls and Procedures*.  The Companymaintains a system of disclosure controls and procedures that are designed toprovide reasonable assurance that information, which is required to be timelydisclosed, is accumulated and communicated to management in a timelyfashion.  A control system, no matter howwell conceived and operated, can provide only reasonable, not absolute,assurance that the objectives of the control system are met.  The Company, under the supervision and withthe participation of the Company’s management, including the Company’s ChiefExecutive Officer/Chief Financial Officer, after evaluating the effectivenessof the Company’s disclosure controls and procedures (as defined in Rules13a-15(e) and 15(d)-15(e) of the Securities Exchange Act of 1934, as amended(the “Exchange Act)) as of the end of the period covered by this report, haveconcluded that the Company’s disclosure controls and procedures are effectiveto provide reasonable assurance that

19

----

informationrequired to be disclosed by the Company in the reports that it files or submitsunder the Exchange Act is accumulated and communicated to the Company’smanagement, including its principal executive officer and principal financialofficer, as appropriate to allow timely decisions regarding required disclosureand are effective to provide reasonable assurance that 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 internal control over financialreporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) isdesigned to provide reasonable assurances regarding the reliability offinancial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles.  There were no changes in the Company’sinternal control over financial reporting that occurred during the Company’smost recent fiscal quarter that have materially affected, or are reasonablylikely to materially affect, the Company’s internal control over financialreporting.  However, because of theinherent limitations in all control systems, no evaluation of controls canprovide absolute assurance that all control issues and instances of fraud, ifany, within the Company have been detected.

**PARTIII**

**ITEM10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.**

Information relating tothe directors of Koss Corporation is incorporated herein by reference from the “ELECTIONOF DIRECTORS” Sections on “Information As To Nominees,” “Beneficial Ownershipof Company Securities” and the “Executive Officers” contained in the KossCorporation Proxy Statement for its 2006 Annual Meeting of Stockholders (the “2006Proxy Statement”), which 2006 Proxy Statement was filed within 120 days of theend of the fiscal year covered by this Report pursuant to General InstructionG(3) of Form 10-K.

**ITEM11. EXECUTIVE COMPENSATION.**

Information relating toexecutive compensation is incorporated herein by reference from the “ELECTIONOF DIRECTORS — Executive Compensation and Related Matters” and “COMPENSATIONCOMMITTEE REPORT ON EXECUTIVE COMPENSATION” sections of the 2006 ProxyStatement.

**ITEM12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.**

Information relating tothe security ownership of certain beneficial owners and management isincorporated herein by reference from the “ELECTION OF DIRECTORS — BeneficialOwnership of Company Securities” section of the 2006 Proxy Statement.

20

----

**EquityCompensation Plan Information. **Thetable set forth below provides certain information with respect to the Company’sequity compensation plans as of the end of the most recently completed fiscalyear ended June 30, 2006, under which equity securities of the Company areauthorized 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**     |       | 591,594                                                                                                                                          |       | $                                                                                                       | 20.60      |                                                                                                                                                                                                             | 850,078    |   |
| **Equity compensation plans not  approved by security holders** |       | Not applicable                                                                                                                                   |       | Not applicable                                                                                          |       | Not applicable                                                                                                                                                                                                   |       |
| **Total**                                                       |       | 591,594                                                                                                                                          |       | $                                                                                                       | 20.60      |                                                                                                                                                                                                             | 850,078    |   |

 

**ITEM13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.**

Information relating torelated transactions is incorporated herein by reference from the “ELECTION OFDIRECTORS — Executive Compensation and Related Matters” and “ELECTION OFDIRECTORS — Related Transactions” sections of the 2006 Proxy Statement.

**ITEM14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.**

Informationrelating to the principle accountant fees and services is incorporated hereinby reference from the “RATIFICATION OF APPOINTMENT OF INDEPENDENT ACCOUNTANTS”section of the 2006 Proxy Statement.

21

----

**PART IV**

**ITEM15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.**

The following documentsare filed as part of this report:

1.                                       Financial Statements
| The following consolidated  financial statements of Koss Corporation are set forth on pages 24 to 27:        |   |
|--------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                         |   |
| Report of Independent Registered Public Accounting  Firm                                                     |   |
| Consolidated  Statements of Income for the Years Ended June 30, 2006, 2005, and 2004                         |   |
| Consolidated  Balance Sheets as of June 30, 2006 and 2005                                                    |   |
| Consolidated  Statements of Cash Flows for the Years Ended June 30, 2006, 2005, and  2004               |   |
| Consolidated  Statements of Stockholders’ Investment for the Years Ended June 30, 2006,  2005, and 2004 |   |
| Notes  to Consolidated Financial Statements                                                                  |   |

 

2.                                       Financial Statement Schedules

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

3.                                       Exhibits Filed

See Exhibit Indexattached hereto.

22

----

REPORT OF INDEPENDENT REGISTERED PUBLICACCOUNTING FIRM

Tothe Board of Directors and StockholdersKOSS CORPORATION

We have audited the accompanying consolidated balance sheets of KOSSCORPORATION and subsidiaries as of June 30, 2006 and 2005, and the relatedconsolidated statements of income, stockholders’ investment, and cash flows forthe three years ended June 30, 2006. These financial statements are the responsibility of the Company’smanagement.  Our responsibility is toexpress an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the PublicCompany Accounting Oversight Board (United States).  Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. The Company is not required to have, nor were we engaged to perform anaudit of its internal control over financial reporting.  Our audit included consideration of internalcontrol over financial reporting as a basis for designing audit procedures thatare appropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Company’s internal control over financialreporting.  Accordingly, we express nosuch opinion.  An audit also includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements, assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement position.  We believethat our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements present fairly,in all material respects, the financial position of KOSS CORPORATION andsubsidiaries as of June 30, 2006 and 2005, and the results of their operationsand their cash flows for the three years ended June 30, 2006 in conformity withaccounting principles generally accepted in the United States of America.

As discussed innotes 1 and 4 to the consolidated financial statements, the Company adopted Statementof Financial Accounting Standards No. 123(R), “Share-Based Payments,” effectiveJuly 1, 2005.

GRANTTHORNTON LLPMilwaukee, WisconsinAugust 30, 2006

23

----

KOSS CORPORATIONCONSOLIDATED STATEMENTS OF INCOME
| **Year Ended June 30,**                                                       | ** ** | **2006**   | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|----------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| Net sales                                                                                    |       | $          | 50,891,637 |       | $          | 40,286,691 |       | $ | 40,493,211 |   |
| Cost of goods sold                                                                           |       | 31,095,377 |       | 25,216,760 |       | 24,531,258 |       |
| Gross profit                                                                                 |       | 19,796,260 |       | 15,069,931 |       | 15,961,953 |       |
| Selling, general, and administrative  expense                                                |       | 10,063,871 |       | 8,544,383  |       | 8,089,765  |       |
| Income from operations                                                                       |       | 9,732,389  |       | 6,525,548  |       | 7,872,188  |       |
| Other income (expense):                                                                      |       |       |       |       |       |       |       |
| Royalty income                                                                               |       | 341,918    |       | 805,485    |       | 1,071,638  |       |
| Interest income                                                                              |       | 169,047    |       | 64,795     |       | 22,311     |       |
| Interest expense                                                                             |       | —     |       | —     |       | (960       | )          |
| Income before income  tax provision and cumulative effect of change in accounting principles |       | 10,243,354 |       | 7,395,828  |       | 8,965,177  |       |
| Provision for income  taxes                                                                  |       | 4,021,163  |       | 2,902,001  |       | 3,517,030  |       |
| Income before  cumulative effect of change in accounting principles                          |       | 6,222,191  |       | 4,493,827  |       | 5,448,147  |       |
| Cumulative effect of  change in accounting principles (net of tax effect of $49,125)         |       | —     |       | —     |       | (75,875    | )          |
| Net income                                                                                   |       | $          | 6,222,191  |       | $          | 4,493,827  |       | $ | 5,372,272 |   |
| Basic earnings per  common share:                                                            |       |       |       |       |       |       |       |
| Before  cumulative effect of accounting change                                               |       | $          | 1.68       |       | $          | 1.21       |       | $ | 1.45 |   |
| Accounting  change                                                                           |       | —     |       | —     |       | (0.02      | )          |
| Basic earnings  per common share                                                             |       | 1.68       |       | 1.21       |       | 1.43       |       |
|                                                                                         |       |       |       |       |       |       |       |
| Diluted earnings per  common share:                                                          |       |       |       |       |       |       |       |
| Before  cumulative effect of accounting change                                               |       | $          | 1.63       |       | $          | 1.14       |       | $ | 1.39 |   |
| Accounting  change                                                                           |       | —     |       | —     |       | (0.02      | )          |
| Diluted earnings  per common share                                                           |       | 1.63       |       | 1.14       |       | 1.37       |       |
| Dividends per common  share                                                                  |       | $          | 1.52       |       | $          | 0.52       |       | $ | 0.52 |   |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

24

----

KOSS CORPORATIONCONSOLIDATED BALANCE SHEETS
| **As of June 30,**                                                                                                  | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| ASSETS                                                                                                                             |       |       |       |       |       |
| Current Assets:                                                                                                                    |       |       |       |       |       |
| Cash                                                                                                                               |       | $          | 6,146,580  |       | $          | 5,218,698 |   |
| Accounts  receivable, less allowances of $1,181,359 and $608,671, respectively                                                     |       | 6,819,852  |       | 8,763,968  |       |
| Inventories                                                                                                                        |       | 10,522,605 |       | 7,595,803  |       |
| Prepaid expenses                                                                                                                   |       | 418,818    |       | 1,129,939  |       |
| Deferred income  taxes                                                                                                             |       | 1,365,547  |       | 857,840    |       |
| Total current  assets                                                                                                              |       | 25,273,402 |       | 23,566,248 |       |
| Equipment and Leasehold  Improvements, at cost:                                                                                    |       |       |       |       |       |
| Leasehold  improvements                                                                                                            |       | 1,706,484  |       | 1,662,506  |       |
| Machinery,  equipment, furniture, and fixtures                                                                                     |       | 3,444,111  |       | 5,068,368  |       |
| Tools, dies,  molds, and patterns                                                                                                  |       | 11,898,074 |       | 11,198,723 |       |
|                                                                                                                               |       | 17,048,669 |       | 17,929,597 |       |
| Less—accumulated  depreciation                                                                                                |       | 14,011,121 |       | 14,935,897 |       |
|                                                                                                                               |       | 3,037,548  |       | 2,993,700  |       |
| Deferred Income Taxes                                                                                                              |       | 672,823    |       | 315,531    |       |
| Other Assets                                                                                                                       |       | 2,457,840  |       | 2,365,982  |       |
|                                                                                                                               |       | $          | 31,441,613 |       | $          | 29,241,461 |   |
|                                                                                                                               |       |       |       |       |       |
| LIABILITIES AND  STOCKHOLDERS’ INVESTMENT                                                                                     |       |       |       |       |       |
| Current Liabilities:                                                                                                               |       |       |       |       |       |
| Accounts payable                                                                                                                   |       | $          | 1,870,256  |       | $          | 3,012,736 |   |
| Accrued  liabilities                                                                                                               |       | 2,149,102  |       | 1,841,862  |       |
| Dividends  payable                                                                                                                 |       | 4,202,591  |       | 486,918    |       |
| Income taxes  payable                                                                                                              |       | 927,528    |       | 692,538    |       |
| Total current  liabilities                                                                                                         |       | 9,149,477  |       | 6,034,054  |       |
| Deferred Compensation                                                                                                              |       | 992,830    |       | 961,165    |       |
| Derivative Liability                                                                                                               |       | 125,000    |       | 125,000    |       |
| Stockholders’  Investment:                                                                                                    |       |       |       |       |       |
| Common stock,  $0.005 par value, authorized 8,500,000 shares; issued and outstanding  3,717,574 and 3,745,525 shares, respectively |       | 541,782    |       | 18,728     |       |
| Retained  earnings                                                                                                                 |       | 20,632,524 |       | 22,102,514 |       |
| Total stockholders’  investment                                                                                               |       | 21,174,306 |       | 22,121,242 |       |
|                                                                                                                               |       | $          | 31,441,613 |       | $          | 29,241,461 |   |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

25

----

KOSS CORPORATIONCONSOLIDATED STATEMENTS OF CASH FLOWS
| **Year Ended June 30,**                                             | ** ** | **2006**   | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
|                                                                               |       |       |       |       |       |       |       |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                             |       |       |       |       |       |       |       |
| Net income                                                                         |       | $          | 6,222,191  |       | $          | 4,493,827  |       | $ | 5,372,272 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |       |       |       |       |       |       |
| Allowance for doubtful  accounts                                                   |       | 572,688    |       | 155,324    |       | 236,694    |       |
| Loss on disposal                                                                   |       | 116        |       | —     |       | —     |       |
| Depreciation and  amortization                                                     |       | 955,166    |       | 1,103,951  |       | 660,805    |       |
| Stock compensation  expense                                                        |       | 523,194    |       | —     |       | —     |       |
| Deferred income taxes                                                              |       | (864,999   | )          | (61,875    | )          | 91,504     |       |
| Cash surrender value                                                               |       | (169,181   | )          | (177,641   | )          | —     |       |
| Deferred compensation                                                              |       | 31,665     |       | (24,100    | )          | (28,902    | )          |
| Net changes in  operating assets and liabilities                                   |       | (1,444,503 | )          | 2,251,161  |       | (2,160,704 | )          |
| Net cash provided by  operating activities                                         |       | 5,826,337  |       | 7,740,647  |       | 4,171,669  |       |
| CASH  FLOWS FROM INVESTING ACTIVITIES:                                             |       |       |       |       |       |       |       |
| Acquisition of  equipment and leasehold improvements                               |       | (921,807   | )          | (1,170,494 | )          | (1,344,169 | )          |
| Net cash used in  investing activities                                             |       | (921,807   | )          | (1,170,494 | )          | (1,344,169 | )          |
| CASH  FLOWS FROM FINANCING ACTIVITIES:                                             |       |       |       |       |       |       |       |
| Tax benefit of  non-qualified stock options                                        |       | 691,660    |       | 104,749    |       | 330,019    |       |
| Increase in dividends  payable                                                     |       | 3,715,673  |       | —     |       | —     |       |
| Dividends paid                                                                     |       | (5,648,156 | )          | (1,926,938 | )          | (1,959,563 | )          |
| Purchase of common  stock                                                          |       | (6,605,451 | )          | (2,217,371 | )          | (1,004,068 | )          |
| Exercise of stock  options                                                         |       | 3,869,626  |       | 577,188    |       | 359,925    |       |
| Net cash used in  financing activities                                             |       | (3,976,648 | )          | (3,462,372 | )          | (2,273,687 | )          |
| Net (decrease) increase  in cash                                                   |       | 927,882    |       | 3,107,781  |       | 553,813    |       |
| Cash at beginning of  period                                                       |       | 5,218,698  |       | 2,110,917  |       | 1,557,104  |       |
| Cash at end of period                                                              |       | $          | 6,146,580  |       | $          | 5,218,698  |       | $ | 2,110,917 |   |

 

The accompanying notesare an integral part of these consolidated financial statements.

26

----

KOSS CORPORATIONCONSOLIDATED STATEMENTS OF STOCKHOLDERS’ INVESTMENT
| ** **                                 | ** ** | **Common Stock** | ** ** | **Retained  Earnings** | ** ** |
|--------------------------------------------|------------|-----------------------|------------|------------------------|------------|
| ** **                                 | ** ** | **Shares**            | ** ** | **Amount**             | ** ** | ** ** |
| Balance, June 30, 2003                     |       | 3,760,429             |       | $                      | 18,802     |   | $ | 17,972,400 |   |
| Net income                                 |       | —                |       | —                 |       | 5,372,272 |   |
| Dividends  declared                        |       | —                |       | —                 |       | (1,959,563 | ) |
| Exercise of  stock options                 |       | 60,000                |       | 300                    |       | 689,644 |   |
| Purchase and  retirement of treasury stock |       | (50,654               | )          | (253                   | )          | (1,003,815 | ) |
| Balance, June 30, 2004                     |       | 3,769,775             |       | 18,849                 |       | 21,070,938 |   |
| Net income                                 |       | —                |       | —                 |       | 4,493,827 |   |
| Dividends  declared                        |       | —                |       | —                 |       | (1,926,938 | ) |
| Exercise of  stock options                 |       | 75,000                |       | 375                    |       | 681,562 |   |
| Purchase and  retirement of treasury stock |       | (99,250               | )          | (496                   | )          | (2,216,875 | ) |
| 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 |   |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

27

----

KOSS CORPORATIONNOTES TO CONSOLIDATED FINANCIAL 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 351 domestic dealers and itsproducts are carried in approximately 24,500 domestic retail outlets.  International markets are served by domesticsales representatives and a sales office in Switzerland which utilizesindependent distributors in several foreign countries.  The Company has two subsidiaries:  Bi-Audio and Koss Classics.

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 has more than 351 domesticdealers and its products are carried in approximately 24,500 domestic retailoutlets.  International markets areserved by domestic sales representatives and a sales office in Switzerland,which utilizes independent distributors in several foreign countries.  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 19% and 21% of the Company’s accounts receivable at June30, 2006 and 2005, respectively, were foreign receivables.

BASIS OFCONSOLIDATION—The consolidated financial statements include the accounts of theCompany and its subsidiaries, Bi-Audio and Koss Classics, both of which arewholly-owned subsidiaries.  Allsignificant intercompany accounts and transactions have been eliminated.

REVENUERECOGNITION—Revenue is recognized by the Company when all of the followingcriteria are met:  persuasive evidence ofan arrangement exists; delivery has occurred (either FOB shipping point ordelivery taken at the Company’s dock); the seller’s price to the buyer is fixedand determinable (pricing is finalized through the purchase order); andcollectibility is reasonably assured. These criteria are generally satisfied upon shipment of the Company’sproducts.  The Company may offer slottingfees, cooperative advertising programs and sales discounts from time to timeand the estimated costs for these items are accrued for at the time revenue isrecognized.  These amounts are recordedas a reduction to sales.

ROYALTY INCOME—TheCompany recognizes royalty income when earned under the terms of its licenseagreement, which expires in 2010.  Thisagreement requires minimum annual royalty payments.  Royalty income owed to the Company iscalculated by the licensee and then verified by the Company.  Royalty payments are calculated based uponpredetermined percentages of net sales of the licensed products or based uponminimum annual royalty payments, as set forth in the Company’s licenseagreements.  Royalty income is bookedmonthly, on an accrual basis, and the amount that the Company accrues is themonthly equivalent of the minimum royalty payment.  When the royalty payments are received eachquarter, the Company then reduces the accounts receivable accordingly.

INVENTORIES—As of June30, 2006, approximately 96% of the Company’s inventory was valued at the lowerof last-in, first-out (LIFO) cost or market. If the first-in, first-out (FIFO) method of inventory

28

----

accounting had been usedby the Company for inventories valued at LIFO, inventories would have been$1,291,737 and $873,393 higher than reported at June 30, 2006 and 2005,respectively.  The Company did notmaintain any work-in-process inventories at June 30, 2006 and June 30, 2005.

The components ofinventories at June 30 are as follows:
|                | ** ** | **2006**  | ** ** | **2005**  | ** ** |
|----------------|------------|-----------|------------|-----------|------------|
| Raw materials  |       | $         | 3,865,243  |      | $          | 3,254,155 |   |
| Finished goods |       | 6,657,362 |       | 4,341,648 |       |
| Total          |       | $         | 10,522,605 |      | $          | 7,595,803 |   |

 

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 $320,000 in 2006, $173,000 in 2005, and $125,000 in2004.

SHIPPING AND HANDLINGFEES AND COSTS—Shipping and handling fees charged to customers are included innet sales, and shipping and handling costs incurred by the Company are includedin cost of goods sold within the accompanying consolidated statements ofincome.

ADVERTISINGCOSTS—Advertising costs included within selling, general, and administrativeexpenses in the accompanying statements of income were $80,000 in 2006, $46,000in 2005, and $76,000 in 2004.  Such costsare expensed as incurred.

INVESTMENTS—Included in “OtherAssets” of $2,457,840 in 2006 and $2,365,982 in 2005, is approximately $375,000of Israel government bonds with maturity dates ranging from April 2005 to July2009.  Securities are classified asheld-to-maturity when the Company has the positive intent and ability to holdthe securities to maturity.  Held-to-maturitysecurities are stated at cost, adjusted for amortization of premiums anddiscounts 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 makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements, and the reported amounts of revenues and expensesduring the reporting period.  Actualresults could differ from those estimates.

NEW ACCOUNTINGPRONOUNCEMENTS—In June 2006, the Financial Accounting StandardsBoard (“FASB”) issued Interpretation No. 48, “Accounting for Uncertainty inIncome Taxes” (FIN 48).  FIN 48 clarifiesthe accounting for uncertainty in income taxes recognized in financialstatements in accordance with SFAS No. 109, “Accounting for Income Taxes.”  This interpretation prescribes a recognitionthreshold and measurement attribute of tax positions taken or expected to betaken on a tax return.  ThisInterpretation is effective for fiscal years beginning after December 15,2006.  The Company is currentlyevaluating the impact FIN 48 will have on our financial position or results ofoperations.

29

----

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

STOCK-BASED COMPENSATION—At June 30,2006, the Company has a stock-based employee compensation plan, which isdescribed more fully in Note 4.  TheCompany accounts for stock-based compensation in accordance with Statement ofFinancial Accounting 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 valuation model.  The fair value of all awards is amortized ona straight-line basis over the vesting periods. The expected term of awards granted represent the period of time theyare expected to be outstanding.  TheCompany determines the expected term based on historical experience withsimilar awards, giving consideration to the contractual terms and vestingschedules.  The Company estimates theexpected volatility of its common stock at the date of grant based on thehistorical volatility of its common stock. The volatility factor used in the Black-Scholes option valuation modelis based on the Company’s historical stock prices over the most recent periodcommensurate with the estimated expected term of the awards.  The risk-free interest rate used in theBlack-Scholes option valuation model is based on the implied yield currentlyavailable on U.S. Treasury zero-coupon issues with a remaining termcommensurate 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 differsignificantly from these estimates, stock-based compensation expense and theCompany’s results of operations could be materially impacted.

2.                                       EARNINGS PER COMMON AND COMMON EQUIVALENTSHARE

Basic earnings per shareare computed based on the weighted average number of common sharesoutstanding.  The weighted-average numberof common shares outstanding for the fiscal years ended June 30, 2006, 2005,and 2004, were 3,710,975, 3,711,821, and 3,769,033, respectively.  When dilutive, stock options are included inearnings per share as share equivalents using the treasury stock method.  Common stock equivalents of 112,873, 226,787,and 158,657 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, 2006, 2005, and 2004, respectively.

3.                                       CREDIT FACILITY

The Company amended itsexisting credit facility in November 2003, extending the maturity date of theunsecured line of credit to November 1, 2006. This credit facility provides for borrowings up to a maximum of$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 1.75%.  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 creditfacility at June 30, 2006 or 2005.

4.                                       STOCK OPTIONS AND STOCK PURCHASEAGREEMENTS

In 1990, pursuant to the recommendation of the Boardof Directors, the stockholders ratified the creation of the Company’s 1990Flexible Incentive Plan (the “1990 Plan”). The 1990 Plan is administered by a

30

----

committee of the Board of Directors and provides forgranting of various stock-based awards including stock options to eligibleparticipants, primarily officers and certain key employees.  A total of 225,000 shares of common stockwere available in the first year of the Plan’s existence.  Each year thereafter additional shares equalto 0.25% of the shares outstanding as of the first day of the applicable fiscalyear were reserved for issuance pursuant to the 1990 Plan.  On July 22, 1992, the Board of Directorsauthorized the reservation of an additional 250,000 shares for the 1990 Plan,which was approved by the stockholders. In 1993, the Board of Directors authorized the reservation of anadditional 300,000 shares for the 1990 Plan, which was approved by thestockholders.  In 1997, the Board ofDirectors authorized the reservation of an additional 300,000 shares for the1990 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.  Optionsvest over a four or five year period from the date of grant, with a maximumterm of five to ten years.

During December 2004, the Financial AccountingStandards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”)No. 123(R), “Shared-Based Payments” (“SFAS No. 123(R)”), which changed theaccounting for equity compensation programs. Under SFAS No. 123(R), companiesthat award share-based payments to employees, including stock options, mustbegin to recognize the expense of these awards in the financial statements atthe 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. 123(R).The accounting as provided by SFAS No. 123(R) was effective for the Companybeginning July 1, 2005, which was the beginning of the Company’s currentfiscal year. The adoption of SFAS No. 123(R)’s fair value method has an impacton the Company’s results of operations, although it does not have an impact onthe overall financial position. The impact on cash flows from operations is notmaterial.

The effect of applying the expense recognitionprovisions of SFAS No. 123(R) for stock option grants in 2006 decreased incomebefore income tax provisions by approximately $523,000, decreased net income byapproximately $319,000 and decreased basic and diluted earnings per share by$0.09 and $0.08, respectively.

Prior to the adoption of SFAS No. 123(R), all taxbenefits resulting from the exercise of stock options were presented asoperating cash inflows in the consolidated statements of cash flows.  SFAS No. 123(R) requires the benefits of taxdeductions in excess of the compensation cost recognized for those options tobe classified as financing cash flows rather than operating cash flows, on aprospective basis.  The impact of thischange on the 2006 consolidated statements of cash flows was not material.

The fair value of each stock option grant was estimatedas of the date of grant using the Black-Scholes pricing model.  The resulting compensation cost for fixedawards with graded vesting schedules is amortized on a straight-line basis overthe vesting period for the entire award. The expected term of awards granted is determined based on historicalexperience with similar awards, giving consideration to the expected term andvesting schedules.  The expectedvolatility is determined based on the Company’s historical stock prices overthe most recent period commensurate 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, 2006, there was approximately$1,513,000 of total unrecognized compensation cost related to stock optionsgranted under the plan.  This cost isexpected to be recognized over a weighted average period of 2.2 years.  Total unrecognized compensation cost will beadjusted for any future changes in estimated and actual forfeitures.

31

----

Cash received from stock option exercises during fiscal 2006 wasapproximately $3,870,000.  The income taxbenefits from stock option exercises during 2006 was approximately $692,000.

Priorto fiscal 2006, the Company accounted for the stock based compensation planusing the intrinsic value method. Accordingly, no compensation cost related to this plan was chargedagainst earning during 2005 or 2004.  Hadcompensation cost for this plan been determined using the fair value methodrather than the intrinsic value method, the pro forma impact on earnings pershare would have been as follows:

 
| Year Ended June 30,                                                                                            | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Net income, as reported                                                                                                       |       | $        | 4,493,827  |     | $          | 5,372,272 |   |
| Add: Total stock-based  employee compensation recorded                                                                        |       | 104,749  |       | 330,019  |       |
| Deduct: Total  stock-based employee compensation expense determined under fair value based  method for all awards outstanding |       | 341,192  |       | 531,403  |       |
| Pro forma net income                                                                                                          |       | $        | 4,257,384  |     | $          | 5,170,888 |   |
| Earnings per share:                                                                                                           |       |     |       |     |       |
| Basic-as  reported                                                                                                            |       | $        | 1.21       |     | $          | 1.43 |   |
| Basic-pro forma                                                                                                               |       | $        | 1.15       |     | $          | 1.37 |   |
| Diluted-as  reported                                                                                                          |       | $        | 1.14       |     | $          | 1.37 |   |
| Diluted-pro forma                                                                                                             |       | $        | 1.08       |     | $          | 1.32 |   |

 

The fair value of each option granted is estimated on the date of grantusing the Black-Scholes option-pricing model with the followingweighted-average assumptions:

 
|                                  | ** ** | **2006**   | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|----------------------------------|------------|------------|------------|------------|------------|------------|------------|
| Expected stock  price volatility |       | 35.00      | %          | 35.00      | %          | 35.00      | %          |
| Risk free  interest rate         |       | 3.69       | %          | 3.69       | %          | 3.69       | %          |
| Expected  dividend yield         |       | 2.27       | %          | 2.27       | %          | 2.27       | %          |
| Expected  forfeitures            |       | 1.50       | %          | NA         |       | NA         |       |
| Expected life of  options        |       | 4.21 years |       | 4.21 years |       | 5.21 years |       |

 

The following table identifies options granted, exercised, cancelled,or available for exercise pursuant to the above mentioned Plan:

 
| ** **                            | ** ** | ** **         | ** ** | **Range of Exercise** | ** **    | **Weighted**            | ** ** |
|---------------------------------------|------------|--------------------|------------|---------------------------------|---------------|-------------------------|------------|
| ** **                            | ** ** | **Number of** | ** ** | **Prices per**             | ** **    | **Average**             | ** ** |
| ** **                            | ** ** | **Shares**         | ** ** | **Share**                       | ** **    | **Exercise Price** | ** ** |
| Shares under option at  June 30, 2003 |       | 650,000            |       | $                               | 5.10-$18.48   |                    | $          | 14.75 |   |
| Granted                               |       | 250,000            |       | $                               | 22.01-$24.21  |                    | $          | 23.15 |   |
| Exercised                             |       | (15,000            | )          | $                               | 5.38-$6.73    |                    | $          | 6.23 |   |
| Settled                               |       | (45,000            | )          | $                               | 5.92          |                    | $          | 5.92 |   |
| Shares under option at  June 30, 2004 |       | 840,000            |       | $                               | 5.10-$24.21   |                    | $          | 17.88 |   |
| Granted                               |       | —             |       | —                          |          | —                  |       |
| Exercised                             |       | (75,000            | )          | $                               | 6.73-$16.80   |                    | $          | 7.69 |   |
| Settled                               |       | —             |       | —                          |          | —                  |       |
| 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 |   |
| Settled                               |       | —             |       | —                          |          | —                  |       |
| Shares under option at June 30, 2006  |       | 591,594            |       | $                               | 5.38 - $28.80 |                    | $          | 20.60 |   |

 

32

----

The range of options as of June 30, 2006 isas follows:

 
| ** **      | ** ** | **Number of Options** | ** ** | **Weighted Average Exercise** | ** ** | **Weighted Average  Remaining**           | ** ** |
|-----------------|------------|---------------------------------|------------|-----------------------------------------|------------|------------------------------------------------|------------|
| ** **      | ** ** | **Outstanding/Exercisable**     | ** ** | **Price Outstanding/Exercisable**  | ** ** | **Contractual Life (In Years)** | ** ** |
| $5.38 - $6.73   |       | 18,461  / 18,461                |       | $6.11 / $6.11                           |       | 3.5                                            |       |
| $15.75 - $19.12 |       | 291,133  / 198,633              |       | $17.49 / $17.34                         |       | 4.3                                            |       |
| $22.01 - $28.80 |       | 282,000  / 89,000               |       | $24.76 / $23.62                         |       | 5.2                                            |       |
|            |       | 591,594 / 306,094               |       | $20.60 / $18.94                         |       |                                           |       |

 

Options granted at a price greater than the market value on the date ofgrant included above total 135,000 at weighted-average exercise price of $24.21in 2006, none in 2005, and 250,000 at a weighted-average exercise price of$23.15 in 2004.

The Company has an agreement with its Chairman, John C. Koss, in theevent of his death, at the request of the executor of his estate, to repurchasehis Company common stock from his estate. The Company does not have the right to require the estate to sell stockto the Company.  As such, thisarrangement is accounted for as a written put option with the fair value of theput option recorded as a derivative liability.

The fair value of the option at June 30, 2006 and 2005 was$125,000.  The repurchase price is 95% ofthe fair market value of the common stock on the date that notice to repurchaseis provided 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.

5.                                       INCOME TAXES

The Company utilizes the liability method ofaccounting for income taxes.  Theliability method measures the expected income tax impact of future taxableincome and deductions implicit in the consolidated balance sheets.  The provision for income taxes in 2006, 2005,and 2004 consists of the following:
| Year Ended June 30, | ** ** | **2006** | ** ** | **2005** | ** ** | **2004**  | ** ** |
|------------------------------------|------------|----------|------------|----------|------------|-----------|------------|
| Current:                           |       |     |       |     |       |      |       |
| Federal                            |       | $        | 3,843,000  |     | $          | 2,527,001 |       | $ | 2,888,401 |   |
| State                              |       | 650,000  |       | 486,000  |       | 488,000   |       |
| Deferred                           |       | (471,837 | )          | (111,000 | )          | 140,629   |       |
|                               |       | $        | 4,021,163  |     | $          | 2,902,001 |       | $ | 3,517,030 |   |

 

33

----

The 2006, 2005, and 2004 tax provision results in an effective ratedifferent than the federal statutory rate due to the following:

 
| Year Ended June 30,               | ** ** | **2006** | ** ** | **2005** | ** ** | **2004**  | ** ** |
|--------------------------------------------------|------------|----------|------------|----------|------------|-----------|------------|
| Federal income tax at  statutory rate            |       | $        | 3,487,523  |     | $          | 2,514,582 |       | $ | 3,048,160 |   |
| State income taxes, net  of federal tax  benefit |       | 592,732  |       | 354,247  |       | 371,531   |       |
| Other                                            |       | (59,092  | )          | 33,172   |       | 97,339    |       |
| Total provision for income taxes                 |       | $        | 4,021,163  |     | $          | 2,902,001 |       | $ | 3,517,030 |   |

 

Temporary differenceswhich give rise to deferred income tax assets and liabilities at June 30include:
|                                       | ** ** | **2006**  | ** ** | **2005** | ** ** |
|---------------------------------------|------------|-----------|------------|----------|------------|
| Deferred Income Tax  Assets:          |       |      |       |     |       |
| Deferred  compensation                |       | $         | 157,000    |     | $          | 157,000 |   |
| Accrued expenses  and reserves        |       | 1,213,000 |       | 859,000  |       |
| SFAS No. 123(R)  expense              |       | 205,000   |       | —   |       |
| Package design  and trademarks        |       | 247,000   |       | 251,000  |       |
| Other                                 |       | 437,000   |       | 46,000   |       |
|                                  |       | $         | 2,259,000  |     | $          | 1,313,000 |   |
| Deferred Income Tax  Liabilities:     |       |      |       |     |       |
| Royalties  receivable/deferred        |       | —    |       | —   |       |
| Equipment and  leasehold improvements |       | (221,000  | )          | (140,000 | )          |
| Net deferred income tax asset         |       | $         | 2,038,000  |     | $          | 1,173,000 |   |

 

6.             INTANGIBLE ASSETS

A summary of intangibles included in other assets in the accompanyingconsolidated balance sheets as of June 30, 2006 and 2005 and their respectiveestimated useful lives are as follows:

 
|                                | ** ** | **2006** | ** ** | **2005** | ** ** | **Estimated useful  lives** | ** ** |
|--------------------------------|------------|----------|------------|----------|------------|----------------------------------|------------|
|                           |       |     |       |     |       |                             |       |
| Patents                        |       | $        | 710,291    |     | $          | 710,291                          |       | 10  years |   |
| Customer lists  and other      |       | 188,811  |       | 188,811  |       | 10  years                        |       |
|                           |       | 899,102  |       | 899,102  |       |                             |       |
| Less accumulated  amortization |       | (371,779 | )          | (294,456 | )          |                             |       |
|                           |       | $        | 527,323    |     | $          | 604,646                          |       |   |   |

 

7.                                       ACCRUED LIABILITIES

Accrued liabilities atJune 30 consist of the following:
|                                                   | ** ** | **2006**  | ** ** | **2005** | ** ** |
|---------------------------------------------------|------------|-----------|------------|----------|------------|
| Employee compensation                             |       | $         | 444,215    |     | $          | 411,294 |   |
| Cooperative advertising  and promotion allowances |       | 1,207,332 |       | 870,378  |       |
| Payroll taxes and other  employee benefits        |       | 169,318   |       | 169,377  |       |
| Other                                             |       | 328,237   |       | 390,813  |       |
|                                              |       | $         | 2,149,102  |     | $          | 1,841,862 |   |

 

34

----

8.                                       ADDITIONALCASH FLOW INFORMATION

 

The net changes in cashas a result of changes in operating assets and liabilities consist of thefollowing:
|                                    | ** ** | **2006**   | ** ** | **2005**  | ** ** | **2004**   | ** ** |
|------------------------------------|------------|------------|------------|-----------|------------|------------|------------|
| Accounts receivable                |       | $          | 1,371,428  |      | $          | 420,799    |       | $ | (881,232 | ) |
| Inventories                        |       | (2,926,802 | )          | (280,444  | )          | 18,413     |       |
| Prepaid expenses and  other assets |       | 711,121    |       | (443,744  | )          | (302,811   | )          |
| Income taxes                       |       | 234,990    |       | 506,548   |       | 367,861    |       |
| Accounts payable                   |       | (1,142,480 | )          | 1,963,330 |       | (1,744,144 | )          |
| Accrued liabilities                |       | 307,240    |       | 84,672    |       | 381,209    |       |
| Net change                         |       | $          | (1,444,503 | )         | $          | 2,251,161  |       | $ | (2,160,704 | ) |

 
|                                     | ** ** | **2006** | ** ** | **2005** | ** ** | **2004**  | ** ** |
|-------------------------------------|------------|----------|------------|----------|------------|-----------|------------|
| Net cash paid during  the year for: |       |     |       |     |       |      |       |
| Interest                            |       | $        | —     |     | $          | —    |       | $ | 960 |   |
| Income taxes                        |       | $        | 3,905,000  |     | $          | 1,388,822 |       | $ | 2,872,155 |   |

 

9.                                       EMPLOYEE BENEFIT PLANS

Substantially all domestic employees are participantsin the Company’s Employee Stock Ownership Plan and Trust under which an annualcontribution in either cash or common stock may be made at the discretion ofthe Board of Directors.  The expenserecorded for such contributions approximated $50,000 in 2006, $54,000 in 2005,and $-0- in 2004.

The Company maintains a retirement savings plan underSection 401(k) of the Internal Revenue Code. This plan covers all employees of the Company who have completed onefull fiscal quarter of service.  Matchingcontributions can be made at the discretion of the Board of Directors.  For calendar years 2006, 2005, and 2004, thematching contribution was 100% of employee contributions to the plan, not toexceed 10% of the employee’s annual compensation.  Vesting of Company contributions occursimmediately.  Company contributions wereapproximately $354,000, $307,000, and $269,000 during 2006, 2005, and 2004,respectively.

10.                                 DEFERRED COMPENSATION

The Company has deferred compensation agreements witha former and current officer.

The Board ofDirectors has entered into an agreement to continue the Chairman’s current basesalary for the remainder of his life. These payments begin upon the Chairman’s retirement, and since theChairman has not retired, he is not currently receiving any of these paymentsunder this arrangement.  The Company hasa deferred compensation liability of $400,000 and $400,000 recorded as of June30, 2006 and 2005, respectively.

The Board ofDirectors has approved a supplemental retirement plan with an officer thatcalls for annual cash compensation following retirement from the Company in anamount equal to 2% of base salary multiplied by the number of years of serviceto the Company.  The retirement paymentsare to be paid monthly to the officer until his death and then to his survivingspouse monthly until her death.  TheCompany has a deferred compensation liability of $592,831 and $561,165 recordedas of June 30, 2006 and 2005, respectively.

35

----

11.                                 INDUSTRY SEGMENT INFORMATION, FOREIGNSALES AND SIGNIFICANT CUSTOMERS

The Company has one line of business—the design,manufacture, and sale of stereophones and related accessories.

The Company’s export sales amounted to $15,228,498during 2006, $11,404,941 during 2005, and $7,008,448 during 2004.

Sales during 2006, 2005and 2004 to the Company’s five largest customers represented approximately 47%,42% and 43% of the Company’s total sales, respectively.  Included in these percentages, sales to asingle customer represented approximately 13%, 15%, and 19% of the Company’stotal sales during 2006, 2005, and 2004, respectively.  These customers generally are large, nationalretailers.

12.                                 COMMITMENTS AND CONTINGENCIES

The Company leases its main plant and offices inMilwaukee, Wisconsin from its Chairman. On May 28, 2003, the lease was renewed for a period of five years, andis being accounted for as an operating lease. The lease extension maintained the rent at a fixed rate of $380,000 peryear.  At anytime during this period theCompany has the option to renew the lease for an additional five years for theperiod commencing July 1, 2008 and ending June 30, 2013 under the same termsand conditions.  The lease is on terms noless favorable to the Company than those that could be obtained from anindependent party.  The Company isresponsible for all property maintenance, insurance, taxes, and other normalexpenses related to ownership.  Totalrent expense, which includes this lease, approximated $416,000 in 2006,$416,000 in 2005, and $416,000 in 2004.

13.                                 SUPPLEMENTARY INFORMATION

Changes in the allowance for doubtful accounts for2006, 2005, and 2004 are summarized as follows:

| Year  Ending | ** ** | **Balance at Beginning  Of Period** | ** ** | **Charges Against/  (Credits To) Income** | ** ** | **Deductions*** | ** ** | **Balance at End of  Period** | ** ** |
|--------------|------------|----------------------------------------------------|------------|----------------------------------------------------------|------------|-----------------|------------|----------------------------------------------|------------|
| 2006         |       | $                                                  | 608,671    |                                                     | $          | (596,563        | )          | $                                            | 23,875     |   | $ | 1,181,359 |   |
| 2005         |       | $                                                  | 738,995    |                                                     | $          | (227,193        | )          | $                                            | 357,517    |   | $ | 608,671 |   |
| 2004         |       | $                                                  | 975,689    |                                                     | $          | (237,938        | )          | $                                            | 1,244      |   | $ | 738,995 |   |

 

----

*Represents charges against the allowance, net ofrecoveries.

14.           SUBSEQUENTEVENTS

Subsequent to the year ended June 30 2006, in July of2006, the Board of Directors approved the increase for additional purchases of$1,000,000 under the Company’s stock repurchase program, for an aggregatemaximum of $43,500,000.

36

----

**CAUTIONARY STATEMENTREGARDING FORWARD-LOOKING STATEMENTS**

This Annual Report on Form 10-K containsforward-looking statements within the meaning of that term in the PrivateSecurities Litigation Reform Act of 1995 (the “Act”) (Section 27A of theSecurities Act of 1933 and Section 21E of the Securities Exchange Act of1934).  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 thisForm 10-K that are not historical facts are forward-looking statements madepursuant to the safe harbor provisions of the Act.  Forward-looking statements may include, butare not limited to, projections of revenue, income or loss and capitalexpenditures, statements regarding future operations, anticipated financingneeds, compliance with financial covenants in loan agreements, plans foracquisitions or sales of assets or businesses, plans relating to products orservices of the Company, assessments of materiality, predictions of futureevents, the effects of pending and possible litigation, and assumptionsrelating 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 expressionsare intended to identify forward-looking statements.

Forward-looking statements are inherently subject torisks and uncertainties, some of which cannot be predicted or quantified basedon current expectations.  Consequently,future events and actual results could differ materially from those set forthin, contemplated by, or underlying the forward-looking statements contained inthis Form 10-K, or in other Company filings, press releases, or otherwise.  In addition to the factors discussed in thisForm 10-K, other factors that could contribute to or cause such differencesinclude, but are not limited to, developments in any one or more of the followingareas:  future fluctuations in economicconditions, the receptivity of consumers to new consumer electronicstechnologies, the rate and consumer acceptance of new product introductions,competition, pricing, the number and nature of customers and their productorders, production by third party vendors, foreign manufacturing, sourcing, andsales (including foreign government regulation, trade, and importationconcerns), borrowing costs, changes in tax rates, pending or threatenedlitigation and investigations, and other risk factors which may be detailedfrom time to time in the Company’s Securities and Exchange Commission filings.

Readers are cautioned not to place undue reliance onany forward-looking statements contained herein, which speak only as of thedate hereof.  The Company undertakes noobligation to publicly release the result of any revisions to theseforward-looking statements that may be made to reflect events or circumstancesafter the date hereof or to reflect the occurrence of unexpected events.

37

----

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) ofthe Securities Exchange Act of 1934, the Registrant has duly caused this reportto be signed on its behalf by the undersigned, thereunto duly authorized.
| KOSS CORPORATION |                         |
|------------------|------------------------------|
|             |                         |   |
| By:              | /s/ Michael J. Koss          |   | Dated: September 6, 2006 |
|             | Michael J. Koss,             |   |
|             | Vice Chairman                |   |
|             | President                    |   |
|             | Chief Executive Officer      |   |
|             | Chief Operating Officer and  |   |
|             | Chief Financial Officer      |   |
|             |                         |   |
| By:              | /s/ Sujata Sachdeva          |   | Dated: September 6, 2006 |
|             | Sujata Sachdeva,             |   |
|             | Vice President - Finance     |   |
|             | Principal Accounting Officer |   |
|             | Secretary                    |   |

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, this report has been signed below by the followingpersons on behalf of the Registrant and in the capacities indicated onSeptember 6, 2006:
| /s/ John C. Koss              |                      | /s/ Michael J. Koss |
|-------------------------------|---------------------------|---------------------|
| John C. Koss, Director        | Michael J. Koss, Director |
|                          |                      |
| /s/ John J. Stollenwerk       |                      | /s/ Thomas L. Doerr |
| John J. Stollenwerk, Director | Thomas L. Doerr, Director |
|                          |                      |
| /s/ Lawrence S. Mattson       |                      |                |
| Lawrence S. Mattson, Director |                      |

 

The signatures of the above directors constitute amajority of the Board of Directors of Koss Corporation.

38

----

**OFFICERSAND SENIOR MANAGEMENT**

John C. KossChairman of the Board

Michael J. KossVice ChairmanPresidentChief Executive OfficerChief Operating OfficerChief Financial Officer

John C. Koss, Jr.Vice President-Sales

Sujata SachdevaVice President-Finance/Secretary

Lenore LillieVice President-Operations

Cheryl MikeVice President-Human Resources/Customer Relations

Declan HanleyVice President-International Sales

**ANNUALMEETING**

October 11, 2006 — 9:00a.m.Milwaukee River Hilton Inn4700 N. Port Washington Rd.Milwaukee, WI  53212

**INDEPENDENTAUDITORS**

Grant Thornton LLPMilwaukee, Wisconsin

**LEGALCOUNSEL**

Hughes & Luce, LLP.Dallas, Texas

**DIRECTORS**

John C. KossChairman of the BoardKoss Corporation

Thomas L. DoerrPresidentDoerr Corporation

Michael J. KossVice Chairman, PresidentC.E.O. C.O.O., C.F.O.Koss Corporation

Lawrence S. MattsonRetired PresidentOster Company

John J. StollenwerkPresidentAllen-Edmonds Shoe Corporation

**TRANSFERAGENT**

Questions regardingchange of address, stock transfer, lost certificate, or information on aparticular account should be directed in writing to:

American Stock Transfer & Trust Company59 Maiden LaneNew York, NY  10038

Shareholders Toll-free:  1-800-937-5449

39

----

EXHIBIT INDEX
| 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                                                                                                                                                                  |

 

40

----

 
|        |   | 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 |

 

41

----