**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C.  20549**

**Form 10-Q**

| **x**      |   | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|------------|--------|-----------------------------------------------------------------------------------------------|
| ** ** |   | ** **                                                                                    |
| ** ** |   | **for the  quarterly period ended March 31, 2007**                                            |
| ** ** |   | ** **                                                                                    |
| ** ** |   | **OR**                                                                                        |
| ** ** |   | ** **                                                                                    |
| **o**      |   | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**Commission File Number 0-3295**

**KOSSCORPORATION**

(ExactName of Registrant as Specified in its Charter)

| **A DELAWARE CORPORATION**                                   |   | **39-1168275**                        |
|--------------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of                             |   | (I.R.S. Employer  Identification No.) |
| incorporation or  organization)                              |   |                                  |
|                                                         |   |                                  |
| **4129  North Port Washington Avenue, Milwaukee, Wisconsin** |   | **53212**                             |
| (Address of  principal executive offices)                    |   | (Zip Code)                            |

 

Registrant’stelephone number, including area code:      **(414) 964-5000**

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 whether the registrant is a large accelerated filer, an accelerated filer,or a non-accelerated filer.  Seedefinition of “accelerated filer and large accelerated filer” in Rule 12b-2 ofthe Exchange Act.  (Check one):
| Large accelerated filer | o | Accelerated filer | o | Non-accelerated filer | x |
|-------------------------|---|-------------------|---|-----------------------|---|

 

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act.).

YES   o       NO    x

At May 1, 2007, therewere 3,675,726 shares outstanding of the registrant’s common stock, $0.005 parvalue per share.

 

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KOSS CORPORATION ANDSUBSIDIARIES

FORM 10-Q

March 31, 2007

INDEX
| ** ** | ** ** | ** **            | **Page** |
|------------|------------|-----------------------|----------|
| PART I     |       | FINANCIAL INFORMATION |     |
|       |       |                  |     |   |   |
|       |       | Item 1                |     | Financial Statements |   |
|       |       |                  |     |   |   |
|       |       |                  |     | Condensed  Consolidated Balance Sheets   March 31, 2007 (Unaudited) and June 30, 2006 | 3 |
|       |       |                  |     |   |   |
|       |       |                  |     | Condensed  Consolidated Statements of Income   Three months and nine months ended   March 31, 2007 and 2006 (Unaudited) | 4 |
|       |       |                  |     |   | 5 |
|       |       |                  |     | Condensed Consolidated Statements of Cash Flows   Nine months ended March 31, 2007 and 2006   (Unaudited) |   |
|       |       |                  |     |   |   |
|       |       |                  |     | Notes to Condensed Consolidated Financial   Statements March 31, 2007   (Unaudited) | 6-8 |
|       |       |                  |     |   |   |
|       |       | Item 2                |     | Management’s  Discussion and Analysis of   Financial Condition and Results of Operations | 8-10 |
|       |       |                  |     |   |   |
|       |       | Item 3                |     | Quantitative  and Qualitative Disclosures   About Market Risk | 11 |
|       |       |                  |     |   |   |
|       |       | Item 4                |     | Controls and Procedures | 12 |
|       |       |                  |     |   |   |
| PART II    |       | OTHER INFORMATION     |     |
|       |       |                  |     |   |   |
|       |       | Item  1A              |     | Risk  Factors | 12 |
|       |       | Item 2                |     | Unregistered  Sales of Equity Securities and Use of Proceeds | 12 |
|       |       | Item 6                |     | Exhibits | 16 |

 

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**PART IFINANCIAL INFORMATION**

**Item 1.    Financial Statements.**

KOSS CORPORATIONAND SUBSIDIARIES

##### CONDENSED CONSOLIDATED BALANCE SHEETS

| ** **                                     | ** ** | **(Unaudited)  March 31, 2007** | ** ** | **June 30, 2006** | ** ** |
|------------------------------------------------|------------|-------------------------------------------|------------|-----------------------------|------------|
| ASSETS                                         |       |                                      |       |                        |       |
| Current Assets:                                |       |                                      |       |                        |       |
| Cash                                           |       | $                                         | 5,776,830  |                        | $          | 6,146,580 |   |
| Accounts Receivable                            |       | 6,107,330                                 |       | 6,819,852                   |       |
| Inventories                                    |       | 9,512,725                                 |       | 10,522,605                  |       |
| Other current  assets                          |       | 2,003,941                                 |       | 1,784,365                   |       |
| Total current  assets                          |       | 23,400,826                                |       | 25,273,402                  |       |
|                                           |       |                                      |       |                        |       |
| Property and  equipment, net                   |       | 2,539,927                                 |       | 3,037,548                   |       |
| Deferred income  taxes                         |       | 672,823                                   |       | 672,823                     |       |
| Other assets                                   |       | 2,249,848                                 |       | 2,457,840                   |       |
|                                           |       | $                                         | 28,863,424 |                        | $          | 31,441,613 |   |
|                                           |       |                                      |       |                        |       |
| LIABILITIES AND  STOCKHOLDERS’ INVESTMENT |       |                                      |       |                        |       |
| Current  liabilities:                          |       |                                      |       |                        |       |
| Accounts payable                               |       | $                                         | 983,582    |                        | $          | 1,870,256 |   |
| Accrued  liabilities                           |       | 2,246,115                                 |       | 2,149,102                   |       |
| Income taxes                                   |       | 1,151,800                                 |       | 927,528                     |       |
| Dividends  payable                             |       | 478,067                                   |       | 4,202,591                   |       |
| Total current  liabilities                     |       | 4,859,564                                 |       | 9,149,477                   |       |
|                                           |       |                                      |       |                        |       |
| Deferred  compensation                         |       | 1,082,830                                 |       | 992,830                     |       |
| Derivative  liability                          |       | 125,000                                   |       | 125,000                     |       |
| Stockholders’  investment                 |       | 22,796,030                                |       | 21,174,306                  |       |
|                                           |       | $                                         | 28,863,424 |                        | $          | 31,441,613 |   |

 

See accompanyingnotes to the condensed consolidated financial statements.

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KOSS CORPORATIONAND SUBSIDIARIES

CONDENSEDCONSOLIDATED STATEMENTS OF INCOME

(Unaudited)
| ** **                                  | ** ** | **Three Months** | ** ** | **Nine Months** | ** ** |
|---------------------------------------------|------------|-----------------------|------------|----------------------|------------|
| **Period Ended March 31**    | ** ** | **2007**              | ** ** | **2006**             | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net Sales                                   |       | $                     | 9,601,291  |                 | $          | 13,222,496 |   | $ | 35,148,974 |   | $ | 40,607,934 |   |
| Cost of goods  sold                         |       | 5,998,723             |       | 8,266,958            |       | 21,540,297 |   | 24,938,947 |   |
| Gross Profit                                |       | 3,602,568             |       | 4,955,538            |       | 13,608,677 |   | 15,668,987 |   |
| Selling general  and administrative expense |       | 2,494,886             |       | 2,615,295            |       | 7,849,596 |   | 7,912,696 |   |
| Income from  operations                     |       | 1,107,682             |       | 2,340,243            |       | 5,759,081 |   | 7,756,291 |   |
| Other income  (expense)                     |       |                  |       |                 |       |   |   |   |   |
| Royalty income                              |       | 81,249                |       | 75,000               |       | 243,747 |   | 276,918 |   |
| Interest income                             |       | 45,842                |       | 44,191               |       | 112,991 |   | 119,661 |   |
| Interest expense                            |       | —                |       | —               |       | — |   | — |   |
|                                        |       |                  |       |                 |       |   |   |   |   |
| Income before  income tax provision         |       | 1,234,773             |       | 2,459,434            |       | 6,115,819 |   | 8,152,870 |   |
| Provision for  income taxes                 |       | 481,639               |       | 959,316              |       | 2,385,247 |   | 3,180,288 |   |
| Net Income                                  |       | $                     | 753,134    |                 | $          | 1,500,118 |   | $ | 3,730,572 |   | $ | 4,972,582 |   |
| Earnings per  common share:                 |       |                  |       |                 |       |   |   |   |   |
| Basic                                       |       | $                     | 0.20       |                 | $          | 0.43 |   | $ | 1.01 |   | $ | 1.36 |   |
| Diluted                                     |       | $                     | 0.20       |                 | $          | 0.40 |   | $ | 0.99 |   | $ | 1.32 |   |
| Dividends per common  share                 |       | $                     | 0.13       |                 | $          | 0.13 |   | $ | 0.39 |   | $ | 0.39 |   |

 

See accompanyingnotes to the condensed consolidated financial statements.

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KOSS CORPORATIONAND SUBSIDIARIES

CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)
| **Nine Months Ended March 31,**                                | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
|                                                                               |       |       |       |       |       |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                             |       |       |       |       |       |
| Net income                                                                         |       | $          | 3,730,572  |       | $          | 4,972,582 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities: |       |       |       |       |       |
| Depreciation and amortization                                                      |       | 849,246    |       | 755,706    |       |
| Net changes in operating assets and liabilities                                    |       | (2,116,103 | )          | (842,738   | )          |
|                                                                               |       |       |       |       |       |
| Net cash provided by operating activities                                          |       | 2,463,715  |       | 4,885,550  |       |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                             |       |       |       |       |       |
| Acquisition of equipment                                                           |       | (297,016   | )          | (795,358   | )          |
|                                                                               |       |       |       |       |       |
| Net cash used in investing activities                                              |       | (297,016   | )          | (795,358   | )          |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                             |       |       |       |       |       |
| Dividends declared                                                                 |       | (478,067   | )          | (479,392   | )          |
| Dividends paid                                                                     |       | (964,198   | )          | (966,173   | )          |
| Purchase of common stock                                                           |       | (1,594,750 | )          | (6,071,210 | )          |
| Exercise of stock options                                                          |       | 500,566    |       | 3,071,970  |       |
|                                                                               |       |       |       |       |       |
| Net cash used in financing activities                                              |       | (2,536,449 | )          | (4,444,805 | )          |
| Net decrease in  cash                                                              |       | (369,750   | )          | (354,613   | )          |
| Cash at  beginning of period                                                       |       | 6,146,580  |       | 5,218,698  |       |
|                                                                               |       |       |       |       |       |
| Cash at end of period                                                              |       | $          | 5,776,830  |       | $          | 4,864,085 |   |

 

See accompanyingnotes to the condensed consolidated financial statements.

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KOSS CORPORATION ANDSUBSIDIARIES

NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2007

(Unaudited)

1.             CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS

The financial statementspresented herein are based on interim amounts. In the opinion of management,all adjustments (consisting of normal recurring accruals) necessary to presentfairly the financial position, results of operations and cash flows at March31, 2007 and for all periods presented have been made. All significantintercompany transactions have been eliminated. The income from operations forthe quarter and nine months ended March 31, 2007 is not necessarily indicativeof the operating results for the full year.

Certain information andfootnote disclosures normally included in financial statements prepared inaccordance with accounting principles generally accepted in the United Statesof America have been condensed or omitted. It is suggested that these condensedconsolidated financial statements be read in conjunction with the financialstatements and notes thereto included in the Registrant’s June 30, 2006 AnnualReport on Form 10-K.

2.                                       EARNINGSPER COMMON SHARE

Basic earnings per common share are computed based onthe weighted average number of common shares outstanding. The weighted averagenumber of common shares outstanding for the quarters ending March 31, 2007 and2006 were 3,678,289 and 3,528,124, respectively. For the nine months endedMarch 31, 2007 and 2006, the weighted average number of common sharesoutstanding was 3,693,152 and 3,753,223, respectively when dilutive, stockoptions are included as share equivalents using the treasury stock method. Commonstock equivalents of 58,348 and 195,574 related to stock option grants wereincluded in the computation of the average number of shares outstanding fordiluted earnings per common share for the quarters ended March 31, 2007 and2006, respectively. Common stock equivalents of 66,783 and 105,957 related to stock option grantswere included in the computation of the average number of shares outstandingfor diluted earnings per common share for the nine months ended March 31, 2007and 2006, respectively.

3.                                       INVENTORIES

                                                Theclassification of inventories is as follows:
|                                    | ** ** | **March 31, 2007** | ** ** | **June 30, 2006** | ** ** |
|------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Raw materials and work  in process |       | $                            | 2,830,279  |                        | $          | 4,388,680 |   |
| Finished goods                     |       | 8,057,689                    |       | 7,509,168                   |       |
|                               |       | 10,887,968                   |       | 11,897,848                  |       |
| LIFO reserve                       |       | (1,375,243                   | )          | (1,375,243                  | )          |
|                               |       | $                            | 9,512,725  |                        | $          | 10,522,605 |   |

 

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4.                                       STOCKPURCHASE AGREEMENT

The Company has an agreement with itsChairman, John C. Koss, to, at the request of the executor of the estate,repurchase Company common stock from his estate in the event of his death. TheCompany does not have the right to require the estate to sell stock to theCompany. As such, this arrangement is accounted for as a written put optionwith the fair value of the put option recorded as a derivative liability. Thefair value of the option at March 31, 2007 was $125,000. The repurchase priceis 95% of the fair market value of the common stock on the date that notice, ifthe estate elects, to repurchase is provided to the Company. Under theagreement, the total number of shares to be repurchased will be sufficient toprovide proceeds which are the lesser of $2,500,000 or the amount of estatetaxes and administrative expenses incurred by the Chairman’s estate. TheCompany may elect to pay the purchase price in cash or may elect to pay cashequal to 25% of the total amount due and to execute a promissory note for thebalance, payable over four years, at the prime rate of interest. The Companymaintains a $1,150,000 life insurance policy to fund a substantial portion ofthis obligation. At March 31, 2007 and June 30, 2006, $125,000 has beenclassified as a derivative liability on the Company’s financial statements.

5.             DIVIDENDSDECLARED

On March 14, 2007,the Company declared a quarterly cash dividends of $0.13 per share forstockholders of record on March 30, 2007 to be paid April 13, 2007. Suchdividends payable have been recorded at March 31, 2007.

6.                                       STOCK-BASEDCOMPENSATION

In 1990, pursuant to therecommendation of the Board of Directors, the stockholders ratified thecreation of the Company’s 1990 Flexible Incentive Plan (the “1990 Plan”). The1990 Plan is administered by a committee of the Board of Directors and providesfor the granting of various stock-based awards including stock options toeligible participants, primarily officers and certain key employees. A total of225,000 shares of common stock were available in the first year of the Plan’sexistence. Each year thereafter additional shares equal to .25% of the sharesoutstanding as of the first day of the applicable fiscal year were reserved forissuance 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 Directorsauthorized the reservation of an additional 300,000 shares for the 1990 Plan,which was approved by the stockholders. In 1997, the Board of Directorsauthorized the reservation of an additional 300,000 shares for the 1990 Plan,which was approved by the stockholders. In 2001, the Board of Directorsauthorized the reservation of an additional 300,000 shares for the 1990 Plan,which was also approved by the stockholders. Options generally vest over fouror five years, with a maximum term of five to ten years.

The Company accounts for stockoptions and restricted stock issued under the plan in accordance with Statementof Accounting Standards (‘SFAS’) No. 123 (R), “Share Based Payments”. The fairvalue of each stock option grant was estimated as of the date of grant usingthe 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 fair value of each restrictedstock grant was based on the market price of the underlying common stock as ofthe date of grant. The resulting compensation cost is amortized on astraight-line basis over the vesting period.

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A summary of stockoption activity under the plan for the nine****monthsended March 31, 2007 is as follows:
| ** **              | ** ** | **Number of Shares   (in thousands)** | ** ** | **Range of Exercise Price  Per Share** | ** ** | **Average  Exercise Price** | ** ** |
|-------------------------|------------|-----------------------------------------------------------|------------|------------------------------------------------------------|------------|----------------------------------|------------|
| Balance, June 30, 2006  |       | 591,594                                                   |       | $5.38-$28.80                                               |       | $                                | 20.60      |   |
| Granted                 |       | —                                                    |       | —                                                     |       | —                           |       |
| Exercised               |       | (30,932                                                   | )          | $5.42-$16.80                                               |       | $                                | 16.18      |   |
| Expired                 |       | —                                                    |       | —                                                     |       | —                           |       |
| Forfeited               |       | —                                                    |       | —                                                     |       | —                           |       |
| Balance, March 31, 2007 |       | 560,662                                                   |       | $5.38-$28.80                                               |       | $                                | 20.84      |   |

 

 
| ** **    | ** ** | **Number of Options  Outstanding/Exercisable** | ** ** | **Weighted Average Exercise   Price Outstanding/Exercisable** | ** ** | **Weighted Average  Remaining Contractual  Life (Years)** | ** ** |
|---------------|------------|----------------------------------------------------------|------------|-----------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------|------------|
| $5.38-$6.73   |       | 17,500  / 17,500                                         |       | $6.15 / $6.15                                                                     |       | 2.7                                                                      |       |
| $15.75-$19.12 |       | 261,162  / 181,412                                       |       | $17.60 / $17.56                                                                   |       | 2.6                                                                      |       |
| $22.01-$28.80 |       | 282,000  / 89,000                                        |       | $24.76 / $23.62                                                                   |       | 4.3                                                                      |       |
|          |       | 560,662 / 287,912                                        |       | $20.84 / $18.74                                                                   |       |                                                                     |       |

 

As of March 31, 2007,there was $1,113,226 of total unrecognized compensation cost related to stockoptions granted under the plan. This cost is expected to be recognized over aweighted average period of 1.82 years. Total unrecognized compensation costwill be adjusted for any future changes in estimated and actual forfeitures.

**Item 2.    Management’s Discussion and Analysis ofFinancial Condition and Results of Operations.**

FinancialCondition, Liquidity and Capital Resources

Cashprovided by operating activities during the nine months ended March 31, 2007amounted to $3,746,210. This was a result of net income for the period adjustedfor changes in operating assets and liabilities, which arose primarily out ofincreases in other current assets, offset by the increases in accruedliabilities and income taxes payable.

Capitalexpenditures for new equipment (including production tooling) were $297,016 forthe nine months ended March 31, 2007. Capital expenditures for fiscal year 2007are expected to be approximately $600,000. The Company expects to generatesufficient funds through operations to fund these expenditures.

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Stockholders’investment increased to $22,796,030 at March 31, 2007, from $21,174,306 at June30, 2006. The increase reflects net income offset by (i) the effect of stockoptions exercised, (ii) the purchase and retirement of common stock and (iii)dividends declared and paid.

TheCompany amended its existing credit facility in November 2006, extending thematurity date of the unsecured line of credit to November 1, 2007. This creditfacility provides for borrowings up to a maximum of $10,000,000. The Companycan use this credit facility for working capital purposes or for the purchaseof its own common stock pursuant to the Company’s common stock repurchaseprogram. Borrowings under this credit facility bear interest at the bank’sprime rate, or LIBOR plus 1.75%. This credit facility includes financialcovenants that require the Company to maintain a minimum tangible net worth andspecified current, interest coverage and leverage ratios. The Company uses itscredit facility from time to time, although there was no utilization of thiscredit facility at March 31, 2007 or June 30, 2006. The Company did not utilizethe credit facility for the nine months ended March 31, 2007.

InApril of 1995, the Board of Directors approved a stock repurchase programauthorizing the Company to purchase from time to time up to $2,000,000 of itscommon stock for its own account. Subsequently, the Board of Directorsperiodically has approved increases in the stock repurchase program. The mostrecent increase was for an additional $2,000,000 in October 2006, for a maximumof $45,500,000. The Company intends to effectuate all stock purchases either onthe open market or through privately negotiated transactions, and intends tofinance all stock purchases through its own cash flow or by borrowing for suchpurchases.

Forthe quarter ended March 31, 2007, the Company purchased 4,979 shares of itscommon stock at an average net price of $20.97 per share, for a total netpurchase price of $104,429. For the nine months ended March 31, 2007, theCompany purchased 71,068 shares of its common stock at an average net price of$22.43 per share, for a total net purchase price of $1,594,750.

Fromthe commencement of the Company’s stock repurchase program through March 31,2007, the Company has purchased a total of 5,394,009 shares for a total grosspurchase price of $51,198,937, (representing an average gross purchase price of$9.49 per share) and a total net purchase price of $40,375,194 (representing anaverage net purchase price of $7.48 per share). The difference between thetotal gross purchase price and the total net purchase price is the result ofthe Company receiving from employees cash acquired from such employees pursuantto the Company’s stock option program. In determining the dollar amountavailable for additional purchases under the stock repurchase program, theCompany uses the total net purchase price by the Company for all stockpurchases, as authorized by the Board of Directors.

TheCompany also has an Employee Stock Ownership Plan and Trust (“ESOP”) pursuantto which shares of the Company’s common stock are purchased by the ESOP forallocation to the accounts of ESOP participants. During the quarter ended March31, 2007, the Company contributed $49,693 to the ESOP for the purchase of 2,282shares of the Company’s common stock from the ESOP at an average price of$21.77 per share for a total purchase price of $49,693 which was effective asof January 16, 2007.

Results of Operations

Netsales for the quarter ended March 31, 2007 fell 27% to $9,601,291 from$13,222,196 for the same period in 2006. Net sales for the nine months endedMarch 31, 2007 were $35,148,974 down 13% compared with $40,607,934 during thesame nine months one year ago. The decrease was primarily attributable to reductions in shipments ofstereo headphones to automotive companies to include with the production oftheir cars. Since the production of specific automobile models that includerear seat entertainment systems that make use of our products appears to havebeen reduced, the Company has experienced a corresponding reduction in orders.Also, orders for the Company’s products from box

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retailers continued to decline primarily due tomodel reductions which occurred during the fourth quarter of the Company’sprior fiscal year. In addition, sales in export markets throughout Europe andSouth America declined by 18% during the quarter ended March 31, 2007.

Grossprofit as a percent of net sales was 38% for the quarter ended March 31, 2007up 1% from the same period in the prior year. For both nine month periods endedMarch 31, 2007 and 2006, the gross profit percentage was 39% and 39%respectively.

Selling,general and administrative expenses for the quarter ended March 31, 2007 were$2,494,886 or 26% of net sales, compared to $2,615,295 or 20% of net sales forthe same period in 2006. For the nine month period ended March 31, 2007, theseexpenses were $7,849,596 or 22% of net sales, compared to $7,912,696 or 19% ofnet sales, for the same period in 2006.

Forthe third quarter ended March 31, 2007, income from operations was $1,107,682 versus$2,340,243 for the same period in the prior year, a 53% change. Income fromoperations for the nine months ended March 31, 2007 was $5,759,081 as comparedto $7,756,291 for the same period in 2006, a 26% change. Income from operationsdecreased primarily as a result of decreased net sales for the quarter and ninemonths ended March 31, 2007.

Net income decreased by 50%, from $1,500,118 to$753,134 for the same three months. Net income decreased by 25% from $4,972,582to $3,730,572 for the same nine months ending March 31, 2006. Net incomedecreased primarily as a result of decreased net sales for the quarter and ninemonths ended March 31, 2007.

Royalty income for thequarter ended March 31, 2007 was $81,249, compared to $75,000 for the quarterended March 31, 2006. For the nine month period ended March 31, 2007,royalty income was $243,747 compared to $276,918 for the period ending March 31, 2006.The decrease in royalty income was primarily a result of lower sales from theCompany’s primary licensee.

Interest income for the quarter was $45,842 as compared to $44,191 forthe same quarter in 2006. For the nine month period interest income was$112,991 compared to $119,661. Interest income fluctuates in relation to cashbalances on hand throughout the year and fluctuations in interest rates earned,and cash on hand was generally higher during the quarter, due to increasedsales.

The provision for incometaxes for the quarter ended March 31, 2007, was $481,639 compared with $959,316for the same period last year. For the nine months ended March 31, 2007, theprovision for income taxes was $2,385,247 compared with $3,180,288 for the sameperiod last year. The effective tax rate was 39% for each of the quarters.

Off-Balance SheetArrangements

The Company has nooff-balance sheet arrangements.

Recently IssuedFinancial Accounting Pronouncements

In June 2006, theFinancial Accounting Standards Board (“FASB”) issued Interpretation No. 48, “Accountingfor Uncertainty in Income Taxes” (FIN 48). FIN48 clarifies the accounting foruncertainty in income taxes recognized in financial statements in accordancewith SFAS No. 109, “Accounting for Income Taxes.” This interpretationprescribes a recognition threshold and measurement attribute of tax positionstaken or expected to be taken on a tax return. This Interpretation is effectivefor fiscal years

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beginning after December15, 2006. We are currently evaluating the impact FIN 48 will have on ourfinancial position or results of operation.

In September 2006,the Securities and Exchange Commission staff issued Staff Accounting Bulletin(SAB) No. 106, “*Financial Statements – Concerning theEffects of Prior Year Misstatements when Quantifying Misstatements in CurrentYear Financial Statements*”. SAB No. 108 requires analysis ofmisstatements using both an income statement (rollover) approach and a balancesheet (iron curtain) approach in assessing materiality and provides for aone-time cumulative effect transition adjustment. SAB No. 108 will be effectivefor us at the end of our current fiscal year. The adoption of SAB No. 108 isnot expected to have a significant impact on our consolidated results ofoperations, financial position or cash flow.

In September 2006,the Financial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards No. 157, “*Fair Value Measurements*”(“SFAS 157”). SFAS 157 addresses how companies should measure fair value whenthey are required to use a fair value measure for recognition and disclosurepurposes under generally accepted accounting principles. SFAS 157 will requirethe fair value of an asset or liability to be based on a market based measurewhich will reflect the credit risk of the company. SFAS 157 will also requireexpanded disclosure requirements which will include the methods and assumptionsused to measure fair value and the effect of fair value measures on earnings. SFAS157 will be applied prospectively and will be effective for fiscal yearsbeginning after November 15, 2007 and to interim periods within those fiscalyears. SFAS 157 is applicable for us at the beginning of our fiscal year endedJune 30, 2009. We are currently assessing the impact SFAS 157 will have on ourconsolidated financial statements.

In February 2007,the FASB issued SFAS No. 159, “*The Fair Value Option forFinancial Assets and Financial Liabilities*” (“SFAS 159”). SFAS 159would allows companies an irrevocable election to measure certain financialassets and liabilities at fair value, with unrealized gains and losses on theelected items recognized in earnings at each reporting period. The fair valueoption may only be elected at the time of initial recognition of a financialasset or financial liability or upon the occurrence of certain specifiedevents. The election is applied on an instrument by instrument basis, with afew exceptions, and is applied only to entire instruments and not portions ofinstruments. SFAS 159 also provides expanded disclosure requirements regardingthe effects of electing the fair value option on the financial statements. SFAS159 is effective prospectively for fiscal years beginning after November 15,2007. We are currently evaluating SFAS 159 and have not yet determined thefinancial assets and liabilities, if any, for which the fair value option wouldbe elected or the potential impact on the consolidated financial statements, ifsuch election were made.

**Item 3. Quantitativeand Qualitative Disclosures About Market Risk.**

In management’s opinion, the Company does not engagein any material risk sensitive activities and does not have any market risksensitive instruments, other than the Company’s commercial credit facility usedfor working capital purposes and stock repurchases as disclosed in the “FinancialCondition, Liquidity

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and Capital Resources” section of “Management’sDiscussion and Analysis of Financial Conditions and Results of Operations,”above.

###### **Item 4.****    Controlsand Procedures.**

(a)                                  *Evaluation of DisclosureControls and Procedures*. TheCompany maintains a system of disclosure controls and procedures that aredesigned to provide reasonable assurance that information, which is required tobe timely disclosed, is accumulated and communicated to management in a timelyfashion. A control system, no matter how well conceived and operated, canprovide only reasonable, not absolute, assurance that the objectives of thecontrol system are met. The Company, under the supervision and with theparticipation 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, hasconcluded that the Company’s disclosure controls and procedures are effectiveto provide reasonable assurance that information required to be disclosed bythe Company in the reports that it files or submits under the Exchange Act isaccumulated and communicated to the Company’s management, including itsprincipal executive officer and principal financial officer, as appropriate toallow timely decisions regarding required disclosure and are effective toprovide reasonable assurance that such information is recorded, processed,summarized and reported within the time periods specified in the SEC’s rulesand forms.

(b)                                 *Changes in InternalControls*. The Company’sinternal control over financial reporting (as defined in Exchange Act Rules13a-15(f) and 15d-15(f)) is designed to provide reasonable assurances regardingthe reliability of financial reporting and the preparation of financialstatements for external purposes in accordance with generally acceptedaccounting principles. There were no changes in the Company’s internal controlover financial reporting that occurred during the Company’s most recent fiscalquarter that have materially affected, or are reasonably likely to materiallyaffect, the Company’s internal control over financial reporting. However,because of the inherent limitations in all control systems, no evaluation ofcontrols can provide absolute assurance that all control issues and instancesof fraud, if any, within the Company have been detected.

**PART IIOTHER INFORMATION**

**Item 1A**                                                     RiskFactors

In addition to the other information set forth in this report, youshould carefully consider the risk factors discussed in our Annual Report onForm 10-K for the year ended June 30, 2006, which could materially affect ourbusiness, financial condition or future results. The risks described in ourAnnual Report on Form 10-K are not the only risks facing our Company. Additionalrisk and uncertainties not currently known to us or that we currently deem tobe immaterial also may materially adversely affect our business, financialcondition and/or operating results.

**Item 2****                                                              UnregisteredSales of Equity Securities and Use of Proceeds**

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The following table presents information with respect to purchases ofcommon stock of the Company made during the three months ended March 31, 2007,by the Company.

**COMPANY REPURCHASES OF EQUITY SECURITIES**
| **Period (2007)**         | ** ** | **Total # 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** | ** ** |
|--------------------------------|------------|---------------------------------------------------------|------------|----------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------|------------|
|                           |       |                                                    |       |                                         |       |                                                                                                                               |       |                                                                                                         |       |
| January 1 – January 31    |       | 0                                                       |       | $                                            | 0.00       |                                                                                                                               | 0          |                                                                                                         | $          | 2,413,715 |   |
|                           |       |                                                    |       |                                         |       |                                                                                                                               |       |                                                                                                         |       |
| February 1 – February  28 |       | 4,050                                                   |       | $                                            | 21.31      |                                                                                                                               | 4,050      |                                                                                                         | $          | 2,328,523 |   |
|                           |       |                                                    |       |                                         |       |                                                                                                                               |       |                                                                                                         |       |
| March 1 – March 31        |       | 929                                                     |       | $                                            | 20.74      |                                                                                                                               | 929        |                                                                                                         | $          | 2,309,277 |   |

 

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(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 Directors periodically has approved increases in the stockrepurchase program. The most recent increase was for an additional $2,000,000in October 2006, for a maximum of $45,500,000.

**Item 3**                                                              **Defaults Upon Senior Securities**

None.

**Item 4**                                                              **Submission of Matters to a Vote of Security Holders**

None.

**Item 5****                                                              OtherInformation**

None.

**Item 6****                                                              Exhibits**

 See Exhibit Index attached hereto.

**CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS**

This Form 10-Qcontains forward-looking statements within the meaning of that term in thePrivate Securities Litigation Reform Act of 1995 (the “Act”) (Section 27A ofthe Securities Act of 1933 and Section 21E of the Securities Exchange Act of1934). Additional written or oral forward-looking statements may be made by theCompany from time to time in filings with the Securities Exchange Commission,press releases, or otherwise. Statements contained in this Form 10-Q that arenot historical facts are forward-looking statements made pursuant to the safeharbor provisions of the Act. Forward-

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looking statementsmay include, but are not limited to, projections of revenue, income or loss andcapital expenditures, statements regarding future operations, anticipatedfinancing needs, compliance with financial covenants in loan agreements, plansfor acquisitions or sales of assets or businesses, plans relating to productsor services 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-Q, the words “anticipates,”“believes,” “estimates,” “expects,” “intends,” “plans,” “forecasts” andvariations thereof and similar expressions are intended to identifyforward-looking statements.

Forward-lookingstatements are inherently subject to risks and uncertainties, some of whichcannot be predicted or quantified based on 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-Q, or in other Company filings, press releases, or otherwise. Inaddition to the factors discussed in this Form 10-Q, other factors that couldcontribute to or cause such differences include, but are not limited to,developments in any one or more of the following areas: future fluctuations ineconomic conditions, 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 threatened litigationand investigations, and other risk factors which may be detailed from time totime in the Company’s Securities and Exchange Commission filings.

Readersare cautioned not to place undue reliance on any forward-looking statementscontained herein, which speak only as of the date hereof. The Companyundertakes no obligation to publicly release the result of any revisions tothese forward-looking statements that may be made to reflect events orcircumstances after the date hereof or to reflect the occurrence of unexpectedevents.

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Signatures

Pursuantto the requirements of the Securities and Exchange Act of 1934, the registranthas duly caused this report to be signed on its behalf by the undersignedthereunto duly authorized.
|        | KOSS CORPORATION              |
|--------|-------------------------------|
|   |                          |
|   |                          |
|   | Date:                         | May 11, 2007 |   | /s/   Michael J. Koss |   |
|   |                          |   | Michael J. Koss |
|   | Vice Chairman,  President,    |
|   | Chief Executive  Officer,     |
|   | Chief Financial  Officer      |
|   |                          |
|   |                          |
|   | Date:                         | May 11, 2007 |   | /s/   Sue Sachdeva |   |
|   | Sue Sachdeva                  |
|   | Vice  President—Finance, |
|   | Secretary                     |
|        |                               |  |  |  |  |  |

 

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

 

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|        |   |                                                                                                                                                                                                                                                                                                           |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.12  |   | 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. 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.                                                     |
|   |   |                                                                                                                                                                                                                                                                                                           |
| 31.1   |   | Rule 13a-14(a)/15d-14(a) Certification of Chief  Executive Officer/Chief Financial Officer *                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                           |
| 32.1   |   | Section 1350 Certification of Chief Executive  Officer/Chief Financial Officer **                                                                                                                                                                                                                              |

 

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

 

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