##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-K
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended June 30, 2005
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 COMMISSION FILE NUMBER 0-3295
 KOSS CORPORATION
  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)
 (414) 964-5000
  Title of Each Class
    
    Name of Each Exchange on Which RegisteredNONE
    
    NONE
  Common Stock, $0.005 par value (voting)
  þ o
 þ
 o þ
 o þ




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Documents Incorporated by Reference
  2




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TABLE OF CONTENTS  PART IItem 1. BUSINESSItem 2. PROPERTIESItem 3. LEGAL PROCEEDINGSItem 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSPART IIItem 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERSItem 6. SELECTED FINANCIAL DATAItem 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSItem 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKItem 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAItem 9. CHANGES IN AND DISAGREEMENTS WITH AUDITORS ON ACCOUNTING AND FINANCIAL DISCLOSUREItem 9A. Controls and ProceduresPART IIIItem 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTItem 11. EXECUTIVE COMPENSATIONItem 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENTItem 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONSITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICESPART IVItem 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-KSIGNATURESEXHIBIT INDEXLicense AgreementAmendment to License AgreementList of SubsidiariesConsent of Grant Thornton LLPConsent of PricewaterhouseCoopers LLPCertification of CEO and CFOCertification of CEO and CFO    Table of Contents  
 PART I
 
 Item 1. BUSINESS.
 GENERAL
    2005
    
    2004
    
    2003Stereophones
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
       3




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2005
    
    2004
    
    2003Percentage of RevenueDerived from the Export of
Koss Products
    
    
    28
    %
    
    
    15.7
    %
    
    
    12.5
    %
     INTELLECTUAL PROPERTY
  4




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SEASONALITY
  WORKING CAPITAL AND BACKLOG
  CUSTOMERS
  COMPETITION
  5




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RESEARCH AND DEVELOPMENT
  ENVIRONMENTAL MATTERS
  EMPLOYEES
  FOREIGN SALES
    6




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AVAILABLE INFORMATION
 http://www.koss.com http://www.sec.gov
 
 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.
 MARKET INFORMATION ON COMMON STOCK
  7




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Per ShareQuarter Ended
    
    High
    
    
    Low
    
    
    DividendSeptember 30, 2003
    
    $
    20.50
    
    
    $
    17.50
    
    
    $
    0.13December 31, 2003
    
    $
    20.70
    
    
    $
    16.25
    
    
    $
    0.13March 31, 2004
    
    $
    26.50
    
    
    $
    19.50
    
    
    $
    0.13June 30, 2004
    
    $
    26.00
    
    
    $
    20.38
    
    
    $
    0.13September 30, 2004
    
    $
    23.96
    
    
    $
    20.00
    
    
    $
    0.13December 31, 2004
    
    $
    23.00
    
    
    $
    18.15
    
    
    $
    0.13March 31, 2005
    
    $
    21.45
    
    
    $
    18.25
    
    
    $
    0.13June 30, 2005
    
    $
    20.76
    
    
    $
    16.80
    
    
    $
    0.13
   COMPANY REPURCHASES OF EQUITY SECURITIES
 Total Number of
    
    
    Approximate DollarTotal # of
    
    
    Average
    
    
    Shares Purchased as
    
    
    Value ofShares
    
    
    Price Paid
    
    
    Part of Publicly
    
    
    Shares Available underPeriod (2005)
    
    Purchased
    
    
    per Share
    
    
    Announced Plan (1)
    
    
    Repurchase PlanApril 1April 30
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    2,244,421May 1May 31
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    2,244,421June 1June 30
    
    
    5,000
    
    
    $
    17.25
    
    
    
    5,000
    
    
    $
    2,158,171
   8




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Item 6. SELECTED FINANCIAL DATA.
 June 30, 2005
    
    
    June 30, 2004
    
    
    June 30, 2003
    
    
    June 30, 2002
    
    
    June 30, 2001Net sales
    
    $
    40,286,691
    
    
    $
    40,493,211
    
    
    $
    33,802,634
    
    
    $
    36,571,303
    
    
    $
    38,609,335Income before cumulative effect
of accounting change
    
    $
    4,493,827
    
    
    $
    5,448,147
    
    
    $
    4,169,411
    
    
    $
    5,041,343
    
    
    $
    5,687,521Net income
    
    $
    4,493,827
    
    
    $
    5,372,272
    
    
    $
    4,169,411
    
    
    $
    5,041,343
    
    
    $
    5,687,521Basic earnings per common share:Before cumulative effect
of accounting change
    
    $
    1.21
    
    
    $
    1.45
    
    
    $
    1.14
    
    
    $
    1.36
    
    
    $
    1.35Accounting change
    
    
    
    
    
    $
    (0.02
    )
    
    
    
    
    
    
    
    
    
    
    Basic earnings per
common share
    
    $
    1.21
    
    
    $
    1.43
    
    
    $
    1.14
    
    
    $
    1.36
    
    
    $
    1.35Diluted earnings per common
share:Before cumulative effect
of accounting change
    
    $
    1.14
    
    
    $
    1.39
    
    
    $
    1.08
    
    
    $
    1.28
    
    
    $
    1.28Accounting change
    
    
    
    
    
    $
    (0.02
    )
    
    
    
    
    
    
    
    
    
    
    Diluted earnings per
common share
    
    $
    1.14
    
    
    $
    1.37
    
    
    $
    1.08
    
    
    $
    1.28
    
    
    $
    1.35Total assets
    
    $
    29,241,461
    
    
    $
    25,679,556
    
    
    $
    23,786,818
    
    
    $
    20,326,134
    
    
    $
    21,496,328Contingently redeemable
common stock
    
    
    
    
    
    
    
    
    
    $
    1,490,000
    
    
    $
    1,490,000
    
    
    $
    1,490,000Cash dividends per
common share
    
    $
    0.52
    
    
    $
    0.52
    
    
    $
    0.52
    
    
    
    
    
    
    
    
  9




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Item 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
 LIQUIDITY AND CAPITAL RESOURCES
      10




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2005 RESULTS OF OPERATIONS COMPARED WITH 2004
       11




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2004 RESULTS OF OPERATIONS COMPARED WITH 2003
        12




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OFF-BALANCE SHEET FINANCING
  DISCLOSURE ABOUT CONTRACTUAL OBLIGATIONS
  Obligations Due by Period (in thousands)More thanContractual Obligations
    
    Total
    
    
    Less than 1 year
    
    
    1-3 years
    
    
    3-5 years
    
    
    5 yearsOperating Lease
Obligations
    
    $
    3,420
    
    
    $
    380
    
    
    $
    1,140
    
    
    $
    1,900
    
    
    
    
 DISCLOSURE ABOUT CERTAIN TRADING ACTIVITIES THAT INCLUDE NON-EXCHANGE TRADED CONTRACTS
ACCOUNTED FOR AT FAIR VALUE
  DISCLOSURE ABOUT EFFECTS OF TRANSACTIONS WITH RELATED AND CERTAIN OTHER PARTIES
     13




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DISCLOSURE ABOUT CRITICAL ACCOUNTING POLICIES
          14




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RECENTLY ISSUED FINANCIAL ACCOUNTING PRONOUNCEMENTS
    15




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RISK FACTORS
  REDUCTION IN PRESENT LEVELS OF CASH FLOW COULD ADVERSELY AFFECT THE COMPANYS BUSINESS
  
    
    the Companys ability to attract new customers that will sell the Companys
products and pay for them,
    
    the Companys ability to retain the Companys existing customers at the level of
sales previously produced,
    
    the volume of sales for these customers,
    
    the loss of business of one or more primary customers,
    
    changes in types of products that the customers purchase in their sales mix,
    
    the volume of royalty income paid to the Company by its licensees based upon the
terms of each royalty agreement, including the inability to negotiate favorable
royalty arrangements and renew current arrangements with certain existing favorable
terms,
    
    poor or deteriorating economic conditions which would directly impact the
ability of the Companys customers to remain in business and pay for their products
on a timely basis,
    
    managements ability to hold the line on any requests for increases in material
or labor cost increases, and
    
    the ability to collect in full and in a timely manner, amounts due to the
Company.
  16




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FAILURE TO ATTRACT AND RETAIN CUSTOMERS TO SELL THE COMPANYS PRODUCTS COULD ADVERSELY AFFECT SALES
VOLUME AND FUTURE PROFITABILITY
  SHIFT IN CUSTOMER SPECIFICATIONS TO LOWER PRICED ITEMS CAN REDUCE PROFIT MARGINS NEGATIVELY
IMPACTING PROFITABILITY
  17




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POOR ECONOMIC CONDITIONS CAN RESTRICT OR LIMIT PRODUCT PLACEMENT, SALES AND REPLENISHMENT WHICH
COULD DECREASE PROFITS
  MANAGEMENT IS SUBJECT TO DECISIONS MADE OUTSIDE ITS CONTROL WHICH COULD DIRECTLY AFFECT FUTURE
PROFITABILITY
  ACCOUNTS RECEIVABLE AMOUNTS DUE FROM OUR CUSTOMERS CAN BE LOST AS A RESULT OF CUSTOMER BANKRUPTCY,
OPERATIONAL DIFFICULTY, OR FAILURE TO PAY NEGATIVELY IMPACTING FUTURE PROFITABILITY
  18




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COMPANY PROFITS CAN SUFFER FROM INTERRUPTIONS IN SUPPLY CHAIN
  FLUCTUATIONS IN CURRENCY EXCHANGE RATES COULD AFFECT PRICING OF PRODUCTS AND CAUSE CUSTOMERS TO
PURCHASE LOWER-PRICED, LESS PROFITABLE PRODUCTS
  
 Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
  
 Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
 MANAGEMENTS REPORT
  19




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Quarter2005
    
    First
    
    
    Second
    
    
    Third
    
    
    FourthNet sales
    
    $
    8,972,580
    
    
    $
    10,225,079
    
    
    $
    9,772,686
    
    
    $
    11,316,346Gross profit
    
    
    3,422,973
    
    
    
    3,958,618
    
    
    
    3,613,481
    
    
    
    4,074,859Net income
    
    
    889,911
    
    
    
    1,219,442
    
    
    
    885,976
    
    
    
    1,498,498Basic earnings per common share:
    
    $
    0.24
    
    
    $
    0.33
    
    
    $
    0.24
    
    
    $
    0.40Diluted earnings per common share:
    
    $
    0.23
    
    
    $
    0.31
    
    
    $
    0.23
    
    
    $
    0.39
 Quarter2004
    
    First
    
    
    Second
    
    
    Third
    
    
    FourthNet sales
    
    $
    9,164,691
    
    
    $
    9,839,572
    
    
    $
    10,547,180
    
    
    $
    10,941,768Gross profit
    
    
    3,497,645
    
    
    
    3,742,000
    
    
    
    4,247,511
    
    
    
    4,474,797Income before cumulative effect of
accounting change
    
    
    1,020,504
    
    
    
    1,295,476
    
    
    
    1,157,816
    
    
    
    1,974,351Net income
    
    
    944,629
    
    
    
    1,295,476
    
    
    
    1,157,816
    
    
    
    1,974,351Basic earnings per common share:Before cumulative effect of accounting
change
    
    $
    0.27
    
    
    $
    0.34
    
    
    $
    0.31
    
    
    $
    0.52Accounting change
    
    
    (0.02
    )
    
    
    
    
    
    
    
    
    
    
    Basic earnings per common share (1)
    
    
    0.25
    
    
    
    0.34
    
    
    
    0.31
    
    
    
    0.52Diluted earnings per common share:Before cumulative effect of accounting
change
    
    $
    0.26
    
    
    $
    0.33
    
    
    $
    0.29
    
    
    $
    0.50Accounting change
    
    
    (0.02
    )
    
    
    
    
    
    
    
    
    
    
    Diluted earnings per common share (1)
    
    
    0.24
    
    
    
    0.33
    
    
    
    0.29
    
    
    
    0.50
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(1)
    
    Due to the use of weighted-average shares outstanding each quarter for computing
earnings per share, the sum of the quarterly per share amounts may not equal the per share
amount for the year. 
 Item 9. CHANGES IN AND DISAGREEMENTS WITH AUDITORS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
   
 Item 9A. Controls and Procedures.
 (a)
    
    Evaluation of Disclosure Controls and Procedures. The Company maintains a system of
disclosure controls and procedures that are designed to provide reasonable assurance that
information, which is required to be timely disclosed, is accumulated and communicated to
management in a timely fashion. A control system, no matter how well 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 with the participation of the Companys
management, including the Companys Chief Executive Officer/Chief Financial Officer, after
evaluating the effectiveness of the Companys disclosure controls and procedures (as defined
in Rules 13a-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, have concluded that the
Companys disclosure controls and procedures are effective to provide reasonable assurance
that information required to be disclosed by the Company in the reports that it files or
submits under the Exchange Act is accumulated and communicated to the Companys management,
including its principal executive officer and principal financial officer, as appropriate to
allow timely decisions regarding required disclosure and are effective to provide reasonable
assurance that such information is recorded, processed, summarized, and reported within the
time periods specified in the SECs rules and forms.
 (b)
    
    Changes in Internal Controls. The Companys internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) is designed to provide reasonable
assurances regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles.
There were no changes in the Companys internal control over financial reporting that occurred
during the Companys most recent fiscal quarter that have materially affected, or are
reasonably likely to materially affect, the Companys internal control over financial
reporting. However, because of the inherent limitations in all control systems, no evaluation
of controls can provide
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absolute assurance that all control issues and instances of fraud, if any, within the
Company have been detected.
 
 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.
  22




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Equity Compensation Plan Information.
 Equity Compensation Plan Information Table
 Number of securitiesNumber of securities
    
    
    Weighted-average
    
    
    remaining available forto be issued upon
    
    
    exercise price of
    
    
    future issuance underexercise of
    
    
    outstanding
    
    
    equity compensation plansoutstanding options,
    
    
    options, warrants
    
    
    (excluding securitieswarrants and rights
    
    and rights
    
    reflected in column (a))Plan
category
    
    (a)
    
    (b)
    
    (c)Equity compensation
plans approved by
security holders
    
    
    765,000
    
    
    $
    18.87
    
    
    
    667,308Equity compensation
plans not approved
by security holders
    
    Not applicable
    
    Not applicable
    
    Not applicableTotal
    
    
    765,000
    
    
    $
    18.87
    
    
    
    667,308
 
 Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
  
 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
  23




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PART IV
 
 Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
  1. Financial StatementsThe following consolidated financial statements of Koss
Corporation are set forth on pages 25 to 29:Reports of Independent Registered Public Accounting Firms
    
    
    25Consolidated Statements of Income for the Years Ended
June 30, 2005, 2004, and 2003
    
    
    27Consolidated Balance Sheets as of June 30, 2005 and 2004
    
    
    28Consolidated Statements of Cash Flows for the Years
Ended June 30, 2005, 2004, and 2003
    
    
    29Consolidated Statements of Stockholders Investment for
the Years Ended June 30, 2005, 2004, and 2003
    
    
    30Notes to Consolidated Financial Statements
    
    
    312. Financial Statement SchedulesAll schedules have been omitted because the information is not applicable or is not
material or because the information required is included in the financial statements
or the notes thereto.3. Exhibits FiledSee Exhibit Index attached hereto.
 24




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
         25




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
   
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Year Ended June 30,
    
    2005
    
    
    2004
    
    
    2003Net sales
    
    $
    40,286,691
    
    
    $
    40,493,211
    
    
    $
    33,802,634Cost of goods sold
    
    
    25,216,760
    
    
    
    24,531,258
    
    
    
    19,954,595Gross profit
    
    
    15,069,931
    
    
    
    15,961,953
    
    
    
    13,848,039Selling, general, and
administrative expense
    
    
    8,544,383
    
    
    
    8,089,765
    
    
    
    7,737,030Income from operations
    
    
    6,525,548
    
    
    
    7,872,188
    
    
    
    6,111,009Other income (expense):Royalty income
    
    
    805,485
    
    
    
    1,071,638
    
    
    
    755,364Interest income
    
    
    64,795
    
    
    
    22,311
    
    
    
    12,711Interest expense
    
    
    
    
    
    
    (960
    )
    
    
    (14,572
    )Income before income tax provision and
cumulative effect of change in
accounting principles
    
    
    7,395,828
    
    
    
    8,965,177
    
    
    
    6,864,512Provision for income taxes (Note 5)
    
    
    2,902,001
    
    
    
    3,517,030
    
    
    
    2,695,101Income before cumulative effect of
change in accounting principles
    
    
    4,493,827
    
    
    
    5,448,147
    
    
    
    4,169,411Cumulative effect of change in
accounting principles (net of tax
effect of $49,125)
    
    
    
    
    
    
    (75,875
    )
    
    
    Net income
    
    $
    4,493,827
    
    
    $
    5,372,272
    
    
    $
    4,169,411Basic earnings per common share:Before cumulative effect of
accounting change
    
    $
    1.21
    
    
    $
    1.45
    
    
    $
    1.14Accounting change
    
    
    
    
    
    
    (0.02
    )
    
    
    Basic earnings per common share
    
    
    1.21
    
    
    
    1.43
    
    
    
    1.14Diluted earnings per common share:Before cumulative effect of
accounting change
    
    $
    1.14
    
    
    $
    1.39
    
    
    $
    1.08Accounting change
    
    
    
    
    
    
    (0.02
    )
    
    
    Diluted earnings per common share
    
    
    1.14
    
    
    
    1.37
    
    
    
    1.08Dividends per common share
    
    $
    0.52
    
    
    $
    0.52
    
    
    $
    0.52
  27




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As of June 30,
    
    2005
    
    
    2004ASSETSCurrent Assets:Cash
    
    $
    5,218,698
    
    
    $
    2,110,917Accounts receivable, less allowances of $583,671
and 738,995, respectively (Note 13)
    
    
    8,763,968
    
    
    
    9,340,091Inventories
    
    
    7,595,803
    
    
    
    7,315,359Prepaid expenses
    
    
    1,129,939
    
    
    
    659,135Deferred income taxes (Note 5)
    
    
    857,840
    
    
    
    861,236Total current assets
    
    
    23,566,248
    
    
    
    20,286,738Equipment and Leasehold Improvements, at cost:Leasehold improvements
    
    
    1,662,506
    
    
    
    1,163,318Machinery, equipment, furniture, and fixtures
    
    
    5,068,368
    
    
    
    4,956,821Tools, dies, molds, and patterns
    
    
    11,198,723
    
    
    
    11,013,04217,929,597
    
    
    
    17,133,181Lessaccumulated depreciation
    
    
    14,935,897
    
    
    
    14,435,8682,993,700
    
    
    
    2,697,313Deferred Income Taxes (Note 5)
    
    
    315,531
    
    
    
    250,260Other Assets
    
    
    2,365,982
    
    
    
    2,445,245$
    29,241,461
    
    
    $
    25,679,556LIABILITIES AND STOCKHOLDERS INVESTMENTCurrent Liabilities:Accounts payable
    
    $
    3,012,736
    
    
    $
    1,049,406Accrued liabilities (Note 7)
    
    
    1,841,862
    
    
    
    1,754,038Dividends payable
    
    
    486,918
    
    
    
    490,070Income taxes payable
    
    
    692,538
    
    
    
    185,990Total current liabilities
    
    
    6,034,054
    
    
    
    3,479,504Deferred Compensation
    
    
    961,165
    
    
    
    985,265Derivative Liability
    
    
    125,000
    
    
    
    125,000Stockholders Investment:Common stock, $0.005 par value, authorized
8,500,000 shares; issued and outstanding
3,745,525 and 3,769,429 shares, respectively
    
    
    18,728
    
    
    
    18,849Retained earnings
    
    
    22,102,514
    
    
    
    21,070,938Total stockholders investment
    
    
    22,121,242
    
    
    
    21,089,787$
    29,241,461
    
    
    $
    25,679,556
  28




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Year Ended June 30,
    
    2005
    
    
    2004
    
    
    2003CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    4,493,827
    
    
    $
    5,372,272
    
    
    $
    4,169,411Adjustments to reconcile net income to net cash
provided by operating activities:Allowance for doubtful accounts
    
    
    155,324
    
    
    
    236,694
    
    
    
    198,846Depreciation and amortization
    
    
    1,043,951
    
    
    
    660,805
    
    
    
    584,761Deferred income taxes
    
    
    (61,875
    )
    
    
    91,504
    
    
    
    24,000Tax benefit of non-qualified stock options
    
    
    104,749
    
    
    
    330,019
    
    
    
    Deferred compensation
    
    
    (24,100
    )
    
    
    (28,902
    )
    
    
    (105,744
    )Net changes in operating assets and
liabilities (Note 8)
    
    
    2,251,161
    
    
    
    (2,160,704
    )
    
    
    (2,074,658
    )Net cash provided by operating activities
    
    
    7,963,037
    
    
    
    4,501,688
    
    
    
    2,796,616CASH FLOWS FROM INVESTING ACTIVITIES:Acquisition of ADDAX, net of cash acquired
    
    
    
    
    
    
    
    
    
    
    8,648Acquisition of equipment and leasehold improvements
    
    
    (1,170,494
    )
    
    
    (1,344,169
    )
    
    
    (627,567
    )Net change in cash surrender value of
insurance and long-term investments
    
    
    (177,641
    )
    
    
    
    
    
    
    Net cash used in investing activities
    
    
    (1,288,135
    )
    
    
    (1,344,169
    )
    
    
    (618,919
    )CASH FLOWS FROM FINANCING ACTIVITIES:Dividends
    
    
    (1,926,938
    )
    
    
    (1,959,563
    )
    
    
    (1,866,782
    )Purchase of common stock
    
    
    (2,217,371
    )
    
    
    (1,004,068
    )
    
    
    (340,000
    )Exercise of stock options
    
    
    577,188
    
    
    
    359,925
    
    
    
    533,825Net cash used in financing activities
    
    
    (3,567,121
    )
    
    
    (2,603,706
    )
    
    
    (1,672,957
    )Net increase in cash
    
    
    3,107,781
    
    
    
    553,813
    
    
    
    504,740Cash at beginning of year
    
    
    2,110,917
    
    
    
    1,557,104
    
    
    
    1,052,364Cash at end of year
    
    $
    5,218,698
    
    
    $
    2,110,917
    
    
    $
    1,557,104
  29




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##### Table of Contents



Common Stock
    
    
    RetainedShares
    
    
    Amount
    
    
    EarningsBalance, June 30, 2002
    
    
    3,670,554
    
    
    $
    18,353
    
    
    $
    15,207,181Net income
    
    
    
    
    
    
    
    
    
    
    4,169,411Dividends declared
    
    
    
    
    
    
    
    
    
    
    (1,915,172
    )Common stock issued in conjunction with
the acquisition of ADDAX
    
    
    19,875
    
    
    
    99
    
    
    
    317,504Exercise of stock options
    
    
    90,000
    
    
    
    450
    
    
    
    533,376Purchase and retirement of treasury stock
    
    
    (20,000
    )
    
    
    (100
    )
    
    
    (339,900
    )Balance, June 30, 2003
    
    
    3,760,429
    
    
    
    18,802
    
    
    
    17,972,400Net income
    
    
    
    
    
    
    
    
    
    
    5,372,272Dividends declared
    
    
    
    
    
    
    
    
    
    
    (1,959,563
    )Exercise of stock options
    
    
    60,000
    
    
    
    300
    
    
    
    689,644Purchase and retirement of treasury stock
    
    
    (50,654
    )
    
    
    (253
    )
    
    
    (1,003,815
    )Balance, June 30, 2004
    
    
    3,769,775
    
    
    
    18,849
    
    
    
    21,070,938Net income
    
    
    
    
    
    
    
    
    
    
    4,493,827Dividends declared
    
    
    
    
    
    
    
    
    
    
    (1,926,938
    )Exercise of stock options
    
    
    75,000
    
    
    
    375
    
    
    
    681,562Purchase and retirement of treasury stock
    
    
    (99,250
    )
    
    
    (496
    )
    
    
    (2,216,875
    )Balance, June 30, 2005
    
    
    3,745,525
    
    
    $
    18,728
    
    
    $
    22,102,514
  30




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31




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##### Table of Contents



2005
    
    
    2004Raw materials
    
    $
    3,254,155
    
    
    $
    1,630,651Finished goods
    
    
    4,341,648
    
    
    
    5,684,708Total
    
    $
    7,595,803
    
    
    $
    7,315,359
   Leasehold improvements
    
    10-15 yearsMachinery, equipment, furniture, and fixtures
    
    3-10 yearsTools, dies, molds, and patterns
    
    4-5 years
       32




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##### Table of Contents



Accounting for Stock Issued to
Employees Accounting for Stock-Based Compensation
 Year Ended June 30,
    
    2005
    
    
    2004
    
    
    2003Net income, as reported
    
    $
    4,493,827
    
    
    $
    5,372,272
    
    
    $
    4,169,411Add: Total stock-based
employee compensation recorded
    
    
    104,749
    
    
    
    330,019
    
    
    
    351,764Deduct: Total stock-based
employee compensation expense
determined under fair value
based method for all awards
outstanding
    
    
    341,192
    
    
    
    531,403
    
    
    
    447,679Pro forma net income
    
    $
    4,257,114
    
    
    $
    5,170,888
    
    
    $
    4,073,496Earnings per share:Basicas reported
    
    $
    1.21
    
    
    $
    1.43
    
    
    $
    1.14Basicpro forma
    
    $
    1.15
    
    
    $
    1.37
    
    
    $
    1.11Dilutedas reported
    
    $
    1.14
    
    
    $
    1.37
    
    
    $
    1.08Dilutedpro forma
    
    $
    1.08
    
    
    $
    1.32
    
    
    $
    1.06
   33




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##### Table of Contents



Range of Exercise
    
    
    WeightedNumber of
    
    
    Prices per
    
    
    AverageShares
    
    
    Share
    
    
    Exercise PriceShares under option
at June 30, 2002
    
    
    607,500
    
    
    $
    5.10$18.48
    
    
    $
    12.20Granted
    
    
    180,000
    
    
    $
    15.75$17.32
    
    
    $
    16.62Exercised
    
    
    (90,000
    )
    
    $
    5.38$6.73
    
    
    $
    5.97Settled
    
    
    (47,500
    )
    
    $
    5.38$6.73
    
    
    $
    5.97Shares under option
at June 30, 2003
    
    
    650,000
    
    
    $
    5.10$18.48
    
    
    $
    14.75Granted
    
    
    250,000
    
    
    $
    22.01$24.21
    
    
    $
    23.15Exercised
    
    
    (15,000
    )
    
    $
    5.38$6.73
    
    
    $
    6.23Settled
    
    
    (45,000
    )
    
    $
    5.92
    
    
    $
    5.92Shares under option
at June 30, 2004
    
    
    840,000
    
    
    $
    5.10$24.21
    
    
    $
    17.88Granted
    
    
    
    
    
    
    
    
    
    
    Exercised
    
    
    (75,000
    )
    
    $
    6.73$16.80
    
    
    $
    7.69Settled
    
    
    
    
    
    
    
    
    
    
    Shares under option
at June 30, 2005
    
    
    765,000
    
    
    $
    5.10$24.21
    
    
    $
    18.87
  34




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##### Table of Contents



Weighted AverageNumber of Options
    
    
    Weighted Average Exercise
    
    
    RemainingOutstanding/Exercisable
    
    
    Price Outstanding/Exercisable
    
    
    Contractual Life (In Years)$  5.10
 $  6.73
    
    
    27,500 / 27,500
    
    
    $
    5.97 / $5.97
    
    
    
    4.1$15.75  $18.48
    
    
    487,500 / 360,625
    
    
    $
    17.41 / $17.55
    
    
    
    4.0$22.01  $24.21
    
    
    250,000 / 62,500
    
    
    $
    23.15 / $23.15
    
    
    
    6.4$
    18.87 / $17.62
   2005
    
    
    2004
    
    
    2003Expected stock price volatility
    
    
    35.00
    %
    
    
    35.00
    %
    
    
    43.40
    %Risk free interest rate
    
    
    3.69
    %
    
    
    3.69
    %
    
    
    2.84
    %Expected dividend yield
    
    
    2.27
    %
    
    
    2.27
    %
    
    
    3.30
    %Expected life of options
    
    
    4.21
    years
    
    
    5.21
    years
    
    
    5.33
    years
    Year Ended June 30,
    
    2005
    
    
    2004
    
    
    2003Current:Federal
    
    $
    2,527,001
    
    
    $
    2,888,401
    
    
    $
    2,170,101State
    
    
    486,000
    
    
    
    488,000
    
    
    
    501,000Deferred
    
    
    (111,000
    )
    
    
    140,629
    
    
    
    24,000$
    2,902,001
    
    
    $
    3,517,030
    
    
    $
    2,695,101
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##### Table of Contents



Year Ended June 30,
    
    2005
    
    
    2004
    
    
    2003Federal income tax at statutory rate
    
    $
    2,514,582
    
    
    $
    3,048,160
    
    
    $
    2,333,934State income taxes, net of federal tax
Benefit
    
    
    354,247
    
    
    
    371,531
    
    
    
    331,000Other
    
    
    33,172
    
    
    
    97,339
    
    
    
    30,167Total provision for income taxes
    
    $
    2,902,001
    
    
    $
    3,517,030
    
    
    $
    2,695,101
  2005
    
    
    2004Deferred Income Tax Assets:Deferred compensation
    
    $
    157,000
    
    
    $
    204,000Accrued expenses and reserves
    
    
    859,000
    
    
    
    660,000Package design and trademarks
    
    
    251,000
    
    
    
    188,000Other
    
    
    48,000
    
    
    
    99,0001,315,000
    
    
    
    1,151,000Deferred Income Tax Liabilities:Royalties receivable/deferred
    
    
    
    
    
    
    Equipment and leasehold improvements
    
    
    (140,000
    )
    
    
    (40,000
    )Net deferred income tax asset
    
    $
    1,175,000
    
    
    $
    1,111,000
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##### Table of Contents



Estimated useful2005
    
    
    2004
    
    
    livesPatents
    
    $
    710,291
    
    
    $
    710,291
    
    
    15 yearsCustomer lists and other
    
    
    188,811
    
    
    
    188,811
    
    
    15 years899,102
    
    
    
    899,102Less accumulated
amortization
    
    
    294,456
    
    
    
    97,552$
    604,646
    
    
    $
    801,550
   2005
    
    
    2004Employee compensation
    
    $
    411,294
    
    
    $
    538,605Cooperative advertising and
promotion allowances
    
    
    870,378
    
    
    
    674,713Payroll taxes and other employee
benefits
    
    
    169,377
    
    
    
    203,913Other
    
    
    390,813
    
    
    
    336,807$
    1,841,862
    
    
    $
    1,754,038
   2005
    
    
    2004
    
    
    2003Accounts receivable
    
    $
    420,799
    
    
    $
    (881,232
    )
    
    $
    (153,589
    )Inventories
    
    
    (280,444
    )
    
    
    18,413
    
    
    
    (854,186
    )Prepaid expenses and other assets
    
    
    (443,744
    )
    
    
    (302,811
    )
    
    
    (102,554
    )Income taxes
    
    
    506,548
    
    
    
    367,861
    
    
    
    (662,538
    )Accounts payable
    
    
    1,963,330
    
    
    
    (1,744,144
    )
    
    
    939,234Accrued liabilities
    
    
    84,672
    
    
    
    381,209
    
    
    
    (1,241,025
    )Net change
    
    $
    2,251,161
    
    
    $
    (2,160,704
    )
    
    $
    (2,074,658
    )
 2005
    
    
    2004
    
    
    2003Net cash paid during the year for:Interest
    
    $
    
    
    
    $
    960
    
    
    $
    14,572Income taxes
    
    $
    1,388,822
    
    
    $
    2,872,155
    
    
    $
    3,332,091
 37




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38




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##### Table of Contents



Year
    
    Balance at Beginning
    
    
    Charges Against/
    
    
    
    
    
    
    Balance at End ofEnding
    
    Of Period
    
    
    (Credits To) Income
    
    
    Deductions*
    
    
    Period2005
    
    $
    738,995
    
    
    $
    (202,193
    )
    
    $
    357,517
    
    
    $
    583,6712004
    
    $
    975,689
    
    
    $
    (237,938
    )
    
    $
    1,244
    
    
    $
    738,9952003
    
    $
    801,055
    
    
    $
    198,846
    
    
    $
    (24,212
    )
    
    $
    975,689
 
 *Represents charges against the allowance, net of recoveries.  CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
   39




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40




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##### Table of Contents



KOSS CORPORATIONBy:
    
    /s/ Michael J. Koss
    
    Dated: September 28, 2005Michael J. Koss,Vice ChairmanPresidentChief Executive OfficerChief Operating Officer andChief Financial OfficerBy:
    
    /s/ Sujata Sachdeva
    
    Dated: September 28, 2005Sujata Sachdeva,Vice President  FinancePrincipal Accounting Officer
Secretary
  /s/ John C. Koss
    
    /s/ Michael J. KossJohn C. Koss, Director
    
    Michael J. Koss, Director/s/ Martin F. Stein
    
    /s/ John J. StollenwerkMartin F. Stein, Director
    
    John J. Stollenwerk, Director/s/ Thomas L. Doerr
    
    /s/ Lawrence S. MattsonThomas L. Doerr, Director
    
    Lawrence S. Mattson, Director
  41




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##### Table of Contents



OFFICERS AND SENIOR MANAGEMENT
 
 
 
 
 
 
 
 
 ANNUAL MEETING
 
 INDEPENDENT AUDITORS
 
 LEGAL COUNSEL
 
 DIRECTORS
 
 42




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##### Table of Contents



TRANSFER AGENT
  
 
 43




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##### Table of Contents



Exhibit No.
    
    Exhibit Description3.1
    
    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.
 44




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##### Table of Contents



Exhibit No.
    
    Exhibit Description10.12
    
    Loan Agreement, effective as of February 17, 1995. Filed as Exhibit 10 to the
Companys 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. *10.20
    
    Amendment to License Agreement dated August 1, 2005, between Koss Corporation
and Sonigem Products, Inc. *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 *23.2
    
    Consent of PricewaterhouseCoopers 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
 45