** **

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C.  20549**

**Form 10-Q**

**x**                              QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

**                                               **for the quarterly period ended December31, 2006

**OR**

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d)

**OFTHE SECURITIES EXCHANGE ACT OF 1934**

**CommissionFile Number 0-3295**

**KOSS CORPORATION**

(Exact Name ofRegistrant as Specified in its Charter)
| **A DELAWARE CORPORATION**                                                   | **39-1168275**                        |   |
|------------------------------------------------------------------------------|---------------------------------------|--------|
| (State or other jurisdiction of incorporation or  organization)              | (I.R.S. Employer  Identification No.) |   |
|                                                                         |                                  |   |
| **4129 North Port Washington Avenue, Milwaukee,  Wisconsin**                 | **53212**                             |   |
| (Address of principal executive offices)                                     | (Zip Code)                            |   |
|                                                                         |                                  |   |
| Registrant’s  telephone 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 February 5,2007, there were 3,713,222 shares outstanding of the registrant’s common stock,$0.005 par value per share.

 

 

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KOSS CORPORATION ANDSUBSIDIARIES

FORM 10-Q

December 31, 2006

INDEX
| PART I     |       | FINANCIAL  INFORMATION | Page       |
|------------|------------|------------------------|------------|
| ** ** | ** ** | ** **             | ** ** |
|       |       | Item 1                 |       | Financial Statements |   |
|       |       |                   |       |   |   |
|       |       |                   |       | Condensed  Consolidated Balance Sheets |   |
|       |       |                   |       | December  31, 2006 (Unaudited) and June 30, 2006 | 3 |
|       |       |                   |       |   |   |
|       |       |                   |       | Condensed  Consolidated Statements of Income (Unaudited) |   |
|       |       |                   |       | Three  months and six months ended |   |
|       |       |                   |       | December  31, 2006 and 2005 | 4 |
|       |       |                   |       |   |   |
|       |       |                   |       | Condensed Consolidated Statements of Cash |   |
|       |       |                   |       | Flows (Unaudited) |   |
|       |       |                   |       | Six months ended December 31, 2006 and 2005 | 5 |
|       |       |                   |       |   |   |
|       |       |                   |       | Notes to  Condensed Consolidated Financial |   |
|       |       |                   |       | Statements  (Unaudited) December 31, 2006 | 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 | 10 |
|       |       |                   |       |   |   |
|       |       | Item 4                 |       | Controls and  Procedures | 10-11 |
|       |       |                   |       |   |   |
| PART II    |       | OTHER  INFORMATION     |       |
|       |       |                   |       |   |   |
|       |       | Item 1A                |       | Risk  Factors | 11 |
|       |       |                   |       |   |   |
|       |       | Item 2                 |       | Unregistered  Sales of Equity Securities and Use of Proceeds | 11-12 |
|       |       |                   |       |   |   |
|       |       | Item 6                 |       | Exhibits | 12 |
|            |            |                        |            |  |  |  |

 

2

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**PART I****FINANCIAL INFORMATION**

**Item 1.    Financial Statements.**

KOSS CORPORATIONAND SUBSIDIARIES

CONDENCED CONSOLIDATED BALANCE SHEETS
| ** **                                     | ** ** | **(Unaudited)**                                                        | ** ** | ** **                                                             | ** ** |
|------------------------------------------------|------------|------------------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|
| ** **                                     | ** ** | **December 31, 2006**                                        | ** ** | **June 30, 2006**                                            | ** ** |
| ASSETS                                         |       |                                                                   |       |                                                                   |       |
| Current Assets:                                |       |                                                                   |       |                                                                   |       |
| Cash                                           |       | $          4,342,041 |       | $          6,146,580 |       |
| Accounts  Receivable                           |       | 6,773,652                                                              |       | 6,819,852                                                              |       |
| Inventories                                    |       | 9,990,187                                                              |       | 10,522,605                                                             |       |
| Other current  assets                          |       | 2,349,355                                                              |       | 1,784,365                                                              |       |
| Total current  assets                          |       | 23,455,235                                                             |       | 25,273,402                                                             |       |
|                                           |       |                                                                   |       |                                                                   |       |
| Property and  equipment, net                   |       | 2,674,260                                                              |       | 3,037,548                                                              |       |
| Deferred income  taxes                         |       | 672,823                                                                |       | 672,823                                                                |       |
| Other assets                                   |       | 2,269,178                                                              |       | 2,457,840                                                              |       |
|                                           |       | $        29,071,496            |       | $        31,441,613            |       |
|                                           |       |                                                                   |       |                                                                   |       |
| LIABILITIES AND  STOCKHOLDERS’ INVESTMENT |       |                                                                   |       |                                                                   |       |
| Current  liabilities:                          |       |                                                                   |       |                                                                   |       |
| Accounts payable                               |       | $          1,324,865 |       | $          1,870,256 |       |
| Accrued  liabilities                           |       | 2,742,228                                                              |       | 2,149,102                                                              |       |
| Income taxes                                   |       | 863,136                                                                |       | 927,528                                                                |       |
| Dividends  payable                             |       | 482,719                                                                |       | 4,202,591                                                              |       |
| Total current  liabilities                     |       | 5,412,948                                                              |       | 9,149,477                                                              |       |
|                                           |       |                                                                   |       |                                                                   |       |
| Deferred  compensation                         |       | 1,052,831                                                              |       | 992,830                                                                |       |
| Derivative  liability                          |       | 125,000                                                                |       | 125,000                                                                |       |
| Stockholders’  investment                 |       | 22,480,717                                                             |       | 21,174,306                                                             |       |
|                                           |       | $        29,071,496            |       | $        31,441,613            |       |

 

See accompanyingnotes to the condensed consolidated financial statements.

3

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KOSS CORPORATIONAND SUBSIDIARIES

CONDENSEDCONSOLIDATED STATEMENTS OF INCOME

(Unaudited)
| ** **                                  | ** ** | **Three Months**                                                               | ** ** | **Six Months**                                                                 | ** ** |
|---------------------------------------------|------------|-------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------|------------|
| **Period Ended December 31** | ** ** | **2006**                                                                            | ** ** | **2005**                                                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net Sales                                   |       | $  12,222,584                                                             |       | $  15,435,597                                                             |       | $  25,547,683 |   | $  27,385,438 |   |
| Cost of goods  sold                         |       | 7,812,019                                                                           |       | 9,397,027                                                                           |       | 15,541,574 |   | 16,671,989 |   |
| Gross Profit                                |       | 4,410,565                                                                           |       | 6,038,570                                                                           |       | 10,006,109 |   | 10,713,449 |   |
| Selling general  and administrative expense |       | 2,421,909                                                                           |       | 2,849,784                                                                           |       | 5,354,710 |   | 5,297,401 |   |
| Income from  operations                     |       | 1,988,656                                                                           |       | 3,188,786                                                                           |       | 4,651,399 |   | 5,416,048 |   |
| Other income  (expense)                     |       |                                                                                |       |                                                                                |       |   |   |   |   |
| Royalty income                              |       | 81,249                                                                              |       | 100,307                                                                             |       | 162,498 |   | 201,918 |   |
| Interest income                             |       | 34,611                                                                              |       | 40,825                                                                              |       | 67,149 |   | 75,470 |   |
| Interest expense                            |       | 0                                                                                   |       | 0                                                                                   |       | 0 |   | 0 |   |
|                                        |       |                                                                                |       |                                                                                |       |   |   |   |   |
| Income before  income tax provision         |       | 2,104,516                                                                           |       | 3,329,918                                                                           |       | 4,881,046 |   | 5,693,436 |   |
| Provision for  income taxes                 |       | 820,758                                                                             |       | 1,298,672                                                                           |       | 1,903,608 |   | 2,220,972 |   |
| Net Income                                  |       | $    1,283,758                                                  |       | $    2,031,246                                                  |       | $    2,977,438 |   | $    3,472,464 |   |
| Earnings per  common share:                 |       |                                                                                |       |                                                                                |       |   |   |   |   |
| Basic                                       |       | $             0.35 |       | $             0.55 |       | $             0.80 |   | $             0.93 |   |
| Diluted                                     |       | $             0.34 |       | $             0.53 |       | $             0.79 |   | $             0.92 |   |
| Dividends per common  share                 |       | $             0.13 |       | $             0.13 |       | $             0.26 |   | $             0.26 |   |

 

See accompanyingnotes to the condensed consolidated financial statements.

4

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KOSS CORPORATIONAND SUBSIDIARIES

CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)
| **Six Months Ended December 31,**                              | ** ** | **2006**                                       | ** ** | **2005**                                       | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                                                         | ** ** | ** **                                     | ** ** | ** **                                     | ** ** |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                             |       |                                           |       |                                           |       |
| Net income                                                                         |       | $      2,977,438 |       | $      3,472,464 |       |
| Adjustments to reconcile net income to net cash  provided by operating activities: |       |                                           |       |                                           |       |
| Depreciation and amortization                                                      |       | 566,164                                        |       | 503,061                                        |       |
| Net changes in operating assets and liabilities                                    |       | (1,922,696                                     | )          | (1,459,645                                     | )          |
| Net cash provided by operating activities                                          |       | 1,620,906                                      |       | 2,515,880                                      |       |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                             |       |                                           |       |                                           |       |
| Acquisition of equipment                                                           |       | (164,214                                       | )          | (697,675                                       | )          |
| Net cash used in investing activities                                              |       | (164,214                                       | )          | (697,675                                       | )          |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                             |       |                                           |       |                                           |       |
| Dividends declared                                                                 |       | (482,719                                       | )          | (479,385                                       | )          |
| Dividends paid                                                                     |       | (481,479                                       | )          | (486,788                                       | )          |
| Purchase of common stock                                                           |       | (1,490,322                                     | )          | (1,231,427                                     | )          |
| Exercise of stock options                                                          |       | 500,566                                        |       | —                                         |       |
| Net cash used in financing activities                                              |       | (1,953,954                                     | )          | (2,197,600                                     | )          |
| Net decrease in  cash                                                              |       | (497,262                                       | )          | (379,395                                       | )          |
| Cash at  beginning of period                                                       |       | 4,839,303                                      |       | 5,218,698                                      |       |
| Cash at end of period                                                              |       | $      4,342,041 |       | $      4,839,303 |       |

 

See accompanyingnotes to the condensed consolidated financial statements.

5

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KOSS CORPORATION ANDSUBSIDIARIES

NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2006

(Unaudited)

1.             CONDENSED CONSOLIDATED FINANCIALSTATEMENTS

The financial statementspresented herein are based on interim amounts. In the opinion of management, all adjustments (consisting of normalrecurring accruals) necessary to present fairly the financial position, resultsof operations and cash flows at December 31, 2006 and for all periods presentedhave been made. All significant intercompany transactions have been eliminated.The income from operations for the quarter and six months ended December 31,2006 is not necessarily indicative of 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 condensed consolidated financial statementsbe read in conjunction with the financial statements and notes thereto includedin the Registrant’s June 30, 2006 Annual Report 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 average number of common sharesoutstanding for the quarters ending December 31, 2006 and 2005 were 3,690,760and 3,696,796, respectively.  For the sixmonths ended December 31, 2006 and 2005, weighted average number of commonshares outstanding were 3,700,348 and 3,716,337, respectively.  When dilutive, stock options are included asshare equivalents using the treasury stock method.  Common stock equivalents of 78,172 and 124,450 related to stockoption grants were included in the computation of the average number of sharesoutstanding for diluted earnings per common share for the quarters endedDecember 31, 2006 and 2005, respectively. Common stock equivalents of 71,332 and 72,180 related to stock option grants were included in thecomputation of the average number of shares outstanding for diluted earningsper common share for the six months ended December 31, 2006 and 2005,respectively.

3.                                       INVENTORIES

The classification ofinventories is as follows:

 

|                                    | ** ** | **December 31, 2006** | ** ** | **June 30, 2006** | ** ** |
|------------------------------------|------------|---------------------------------|------------|-----------------------------|------------|
| Raw materials  and work in process |       | $                               | 3,397,494  |                        | $          | 4,388,680 |   |
| Finished goods                     |       | 7,967,936                       |       | 7,509,168                   |       |
|                               |       | 11,365,430                      |       | 11,897,848                  |       |
| LIFO reserve                       |       | (1,375,243                      | )          | (1,375,243                  | )          |
|                               |       | $                               | 9,990,187  |                        | $          | 10,522,605 |   |

 

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.  The Company does not have the right torequire the estate to sell stock to the Company.

6

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As such, this arrangement is accounted foras a written put option with the fair value of the put option recorded as aderivative liability.  The fair value ofthe option at December 31, 2006 was $125,000. The repurchase price is 95% of the fair market value of the common stockon the date that notice, if the estate elects, to repurchase is provided to theCompany.  Under the agreement, the totalnumber of shares to be repurchased will be sufficient to provide proceeds whichare the lesser of $2,500,000 or the amount of estate taxes and administrativeexpenses incurred by the Chairman’s estate. The Company may elect to pay thepurchase price in cash or may elect to pay cash equal to 25% of the totalamount due and to execute a promissory note for the balance, payable over fouryears, at the prime rate of interest. The Company maintains a $1,150,000 life insurance policy to fund asubstantial portion of this obligation. At December 31, 2006 and June 30, 2006, $125,000 has been classified asa derivative liability on the Company’s financial statements.

5.             DIVIDENDSDECLARED

On December 14,2006, the Company declared a quarterly cash dividend of $0.13 per share forstockholders of record on December 29, 2006 to be paid January 15, 2007.  Such dividend payable has been recorded atDecember 31, 2006.

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”).  The 1990 Plan is administered by a committeeof the Board of Directors and provides for the granting of various stock-basedawards including stock options to eligible participants, primarily officers andcertain key employees.  A total of225,000 shares of common stock were available in the first year of the Plan’sexistence.  Each year thereafteradditional shares equal to 25% of the shares outstanding as of the first day ofthe applicable fiscal year were reserved for issuance pursuant to the 1990Plan.  On July 22, 1992, the Board ofDirectors authorized the reservation of an additional 250,000 shares for the1990 Plan, which was approved by the stockholders.  In 1993, the Board of Directors authorizedthe reservation of an additional 300,000 shares for the 1990 Plan, which wasapproved by the stockholders.  In 1997,the Board of Directors authorized the reservation of an additional 300,000shares for the 1990 Plan, which was approved by the stockholders.  In 2001, the Board of Directors authorizedthe reservation of an additional 300,000 shares for the 1990 Plan, which wasalso approved by the stockholders. Options generally vest over four or five years, with a maximum term offive to ten years.

We account for stock optionsand restricted stock issued under the plan in accordance with Statement ofAccounting 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.

A summary of stock optionactivity under the plan for the six****monthsended December 31, 2006 is as follows:

7

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| ** **                  | ** ** | **Number of Shares** | ** ** | **Range of  Exercise Price ** | ** **  | **Average **       | ** ** |
|-----------------------------|------------|--------------------------------|------------|----------------------------------------------|-------------|-------------------------|------------|
| ** **                  | ** ** | **(in thousands)**        | ** ** | **Per Share**                           | ** **  | **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, December 31,  2006 |       | 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   |                                                                     | 2.9        |   |
| $15.75-$19.12 |       | 261,162 / 181,412                                        |       | $                                                                           | 17.60 / $17.56 |                                                                     | 2.8        |   |
| $22.01-$28.80 |       | 282,000 / 89,000                                         |       | $                                                                           | 24.76 / $23.62 |                                                                     | 4.5        |   |
|          |       | 560,662 / 287,912                                        |       | $                                                                           | 20.84 / $18.74 |                                                                     |       |   |

 

As of December 31, 2006,there was 1,253,896 of total unrecognized compensation cost related to stockoptions granted under the plan. This cost is expected to be recognized over aweighted average period of 1.89 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 six months ended December 31, 2006amounted to $1,620,906  This was a resultof net income for the period adjusted for changes in operating assets and  ** **current liabilities, which aroseprimarily out of increases in other current assets, accrued liabilities, and adecrease in accounts payable.

Capitalexpenditures for new equipment (including production tooling) were $164,214 forthe six months ended December 31, 2006. Capital expenditures for fiscal year 2007 are expected to beapproximately $1.9 million.  The Companyexpects to generate sufficient funds through operations to fund these expenditures.

Stockholders’investment increased to $22,480,717 at December 31, 2006, from $21,174,306 atJune 30, 2006.  The increase reflects netincome and exercise of stock options offset by the effect of the purchase andretirement of common stock and dividends declared.

TheCompany amended its existing credit facility in November 2006, extending thematurity date of the unsecured line of credit to November 1, 2007.  This credit facility provides for borrowingsup to a maximum of $10,000,000.  TheCompany can use this credit facility for working capital purposes or for thepurchase of its own common stock pursuant to the Company’s common stockrepurchase program.

8

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Borrowingsunder this credit facility bear interest at the bank’s prime rate, or LIBORplus 1.75%.  This credit facilityincludes financial covenants that require the Company to maintain a minimumtangible net worth and specified current, interest coverage and leverageratios.  The Company uses its creditfacility from time to time, although there was no utilization of this creditfacility at December 31, 2006 or June 30, 2006. The Company did not utilize the credit facility during the quarter orsix months ended December 31, 2006.

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 directors periodically has approved increasesin the stock repurchase program.  Themost recent increase was for an additional $2,000,000 in October 2006, for amaximum of $45,500,000.  The Companyintends to effectuate all stock purchases either on the open market or throughprivately negotiated transactions, and intends to finance all stock purchasesthrough its own cash flow or by borrowing for such purchases.

Forthe quarter ended December 31, 2006, the Company purchased 50,799 shares of itscommon stock at an average net price of $23.27 per share, for a total netpurchase price of $1,182,179. For the six months ended December 31, 2006, theCompany purchased 66,089 shares of its common stock at an average net price of$22.55 per share, for a total net purchase price of $1,490,322.

Fromthe commencement of the Company’s stock repurchase program through December 31,2006, the Company has purchased a total of 5,389,030 shares for a total grosspurchase price of $51,094,508, (representing an average gross purchase price of$9.48 per share) and a total net purchase price of $40,270,765 (representing anaverage net purchase price of $7.47 per share). The difference between the total gross purchase price and the total netpurchase price is the result of the Company receiving from employees cashacquired from such employees pursuant to the Company’s stock optionprogram.  In determining the dollaramount available for additional purchases under the stock repurchase program,the Company 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.  There were no ESOP purchases of the Company’scommon stock for the six months ended December 31, 2006

Results of Operations

Netsales for the second quarter ended December 31, 2006 fell 21% to $12,222,584from $15,435,597 for the same period in 2005. Net sales for the six months ended December 31, 2006 were $25,547,683down 7% compared with $27,385,438 during the same six months one year ago.  The decrease was primarily due to a slow downin domestic mass market sales, a decline in sales to superstores and a slowdown in the automotive industry this year which reduced demand for the Company’srear seat entertainment products.

Grossprofit as a percent of net sales was 36% for the quarter ended December 31,2006 down 3% from the same period in the prior year.  For the six month periods ended December 31,2006 and 2005, the gross profit percentage was 39%. The decrease in grossprofit for the quarter ended December 31, 2006 was primarily due to a lessprofitable model mix sold in the month of December.

Selling,general and administrative expenses for the quarter ended December 31, 2006were $2,421,909 or 20% of net sales, compared to $2,849,784 or 18% of net salesfor the same period in 2005.  For the sixmonth period ended December 2006, these expenses were $5,354,710 or 21% of netsales, compared to $5,297,401 or 19% of net sales, for the same period in 2005.

9

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Forthe second quarter ended December 31, 2006, income from operations was$1,988,656 versus $3,188,786 for the same period in the prior year, a 38%decrease.  Income from operations for thesix months ended December 31, 200 was $4,651,399 as compared to $5,416,048 forthe same period in 2005, a 14% decrease. Income from operations decreased primarily as a result of decreased netsales for the quarter and six months ended December 31, 2006.

Net income decreased 37%, from $2,031,246 to $1,283,758 for the same period in 2005. Net income for the six months decreased 14% from $3,472,464 to$2,977,438 for the same six months ending December 31, 2005.  Net income decreased primarily as aresult of decreased net sales for the quarter and six months ended December 31,2006.

Royalty income for thequarter ended December 31, 2006 was $81,249 compared to $100,307 for thequarter ended December 31, 2006.  For thesix month period ended December 31, 2006 royalty income was $162,498 comparedto $201,918 for the period ending December 31, 2005. The decrease in royalty income was primarilya result of lower sales from the Company’s primary licensee.

Interest income for the quarter was $34,611 as compared to $40,825 forthe same quarter in 2005.  For the sixmonth period interest income was $67,149 compared to $75,470.  Interest income fluctuates in relation tocash balances on hand throughout the year and fluctuations in interest ratesearned.

The provision for incometaxes for the quarter ended December 31, 2006, was $820,758 compared with$1,298,672 for the same period last year. For the six months ended December 31, 2006, the provision for incometaxes was $1,903,608 compared with $2,220,972 for the same period lastyear.  The effective tax rate was 39% foreach of the quarters.

Recently IssuedFinancial Accounting Pronouncements

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

**Item 3.  Quantitative and Qualitative DisclosuresAbout 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 and Capital Resources” section of the “Management’sDiscussion and Analysis of Financial Conditions and Results of Operations,”above.

###### **Item 4.    Controls and Procedures.**

(a)                                  *Evaluation of DisclosureControls and Procedures*.  The Company maintains a system of disclosurecontrols and procedures that are designed to provide reasonable assurance thatinformation, which is required to be timely disclosed, is accumulated andcommunicated to management in a timely fashion. A control system, no matter how well conceived and operated, can provideonly reasonable, not absolute, assurance that the objectives of the controlsystem are

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met.  The Company, under the supervision and withthe participation of the Company’s management, including the Company’s ChiefExecutive Officer/Chief Financial Officer, after evaluating the effectivenessof the Company’s disclosure controls and procedures (as defined in Rules13a-15(e) and 15d-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 rules andforms.

(b)                                 *Changes in InternalControls*.  The Company’s internal control over financialreporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) isdesigned to provide reasonable assurances regarding the reliability offinancial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles.  There were no changes in the Company’sinternal control over financial reporting that occurred during the Company’smost recent fiscal quarter that have materially affected, or are reasonablylikely to materially affect, the Company’s internal control over financialreporting.  However, because of theinherent limitations in all control systems, no evaluation of controls canprovide absolute assurance that all control issues and instances of fraud, ifany, within the Company have been detected.

**PART II**

**OTHER INFORMATION**

**Item1A**                                                     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 our Annual Report onForm 10-K are not the only risks facing our Company.  Additional risk and uncertainties notcurrently known to us or that we currently deem to be immaterial also maymaterially adversely affect our business, financial condition and/or operatingresults.

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

The following table presents information with respect to purchases ofcommon stock of the Company made during the three months ended December 31,2006, by the Company.

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**COMPANYREPURCHASES OF EQUITY SECURITIES**
| **Period (2006)**         | ** ** | **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** | ** ** |
|--------------------------------|------------|---------------------------------------------|------------|----------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------|------------|
|                           |       |                                        |       |                                         |       |                                                                                                                   |       |                                                                                                   |       |
| October 1 —  October 31   |       | 19,579                                      |       | $                                            | 22.99      |                                                                                                                   | 19,579     |                                                                                                   | $          | 2,735,889 |   |
|                           |       |                                        |       |                                         |       |                                                                                                                   |       |                                                                                                   |       |
| November 1 —  November 30 |       | 17,852                                      |       | $                                            | 22.57      |                                                                                                                   | 17,852     |                                                                                                   | $          | 2,636,485 |   |
|                           |       |                                        |       |                                         |       |                                                                                                                   |       |                                                                                                   |       |
| December 1 — December  31 |       | 13,368                                      |       | $                                            | 24.63      |                                                                                                                   | 13,368     |                                                                                                   | $          | 2,413,715 |   |

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(1)    In Aprilof 1995, the Board of Directors approved a stock repurchase program authorizingthe Company to purchase from time to time up to $2,000,000 of its common stockfor its own account.  Subsequently, theBoard of Directors periodically has approved increases in the stock repurchaseprogram, the most recent increase was for an additional $2,000,000 in October2006, for a maximum of $45,500,000.

**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 oralforward-looking statements may be made by the Company from time to time infilings with the Securities Exchange Commission, press releases, orotherwise.  Statements contained in thisForm 10-Q that are not historical facts are forward-looking statements madepursuant to the safe harbor provisions of the Act.  Forward-looking statements may include, butare not limited to, projections of revenue, income or loss and capitalexpenditures, statements regarding future operations, anticipated financingneeds, compliance with financial covenants in loan agreements, plans foracquisitions or sales of assets or businesses, plans relating to products orservices of the Company, assessments of materiality, predictions of futureevents, the effects of pending and possible litigation, and assumptionsrelating to the foregoing.  In addition,when used in this Form 10-Q, the words “anticipates,” “believes,” “estimates,” “expects,”“intends,” “plans,” “forecasts” and variations thereof and similar expressionsare intended to identify forward-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 actualresults could differ materially from those set forth in, contemplated by, or underlyingthe forward-looking statements contained in this Form 10-Q, or in other Companyfilings, press releases, or otherwise. In addition to the factors discussed in this Form 10-Q, other factorsthat could contribute to or cause such differences include, but are not limitedto, developments in any one or more of the following areas: future fluctuationsin economic conditions, the receptivity of consumers to new consumerelectronics technologies, the rate and consumer acceptance of new productintroductions, competition, pricing, the number and nature of customers andtheir product orders, production by third party vendors, foreign manufacturing,sourcing and sales (including foreign government regulation, trade andimportation concerns), borrowing costs, changes in tax rates, pending orthreatened litigation and investigations, and

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other risk factorswhich may be detailed from time to time in the Company’s Securities andExchange Commission filings.

Readersare cautioned not to place undue reliance on any forward-looking statementscontained herein, which speak only as of the date hereof.  The Company undertakes no obligation topublicly release the result of any revisions to these forward-lookingstatements that may be made to reflect events or circumstances after the datehereof or to reflect the occurrence of unexpected events.

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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: February 12, 2007 | /s/ Michael J. Koss          |
|-------------------------|------------------------------|
|                    | Michael J. Koss              |
|                    | Vice Chairman, President,    |
|                    | Chief Executive Officer,     |
|                    | Chief Financial Officer      |
|                    |                         |
| Date: February 12, 2007 | /s/ Sue Sachdeva             |
|                    | Sue Sachdeva                 |
|                    | Vice President—Finance, |
|                    | Secretary                    |

 

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

 

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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     |   | 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                                                                                                                                                                                                                                                                                             |   |

 

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