**SECURITIES AND EXCHANGE COMMISSION****Washington, D.C. 20549**

**Form 10-Q**

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

**for the quarterly period ended September 30, 2006**

**OR**

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

**CommissionFile Number 0-3295**

**KOSS CORPORATION**

(Exact Name of Registrantas Specified in its Charter)

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

 

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

Indicate by check mark whether the registrant:  (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant was requiredto file such reports), and (2) has been subject to such filing requirements forthe past 90 days.

YES         x                  NO       o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer.  See definition of“accelerated filer and large accelerated filer” in Rule 12b-2 of the ExchangeAct.  (Check one):

Large accelerated filer     o                                     Acceleratedfiler     o                                    Non-acceleratedfiler     x

 

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

YES         o                  NO       x

 

At November 1, 2006, there were 3,684,939 sharesoutstanding of the registrant’s common stock, $0.005 par value per share.

 

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KOSS CORPORATION AND SUBSIDIARIESFORM 10-QSeptember 30, 2006

INDEX
| PART I  |   | FINANCIAL  INFORMATION |   |
|---------|--------|------------------------|--------|
|    |   |                   |   |   |   |
|    |   | Item 1                 |   | Financial  Statements |   |
|    |   |                   |   |   |   |
|    |   |                   |   | Condensed  Consolidated Balance Sheets (Unaudited)  September 30, 2006 and June 30, 2006 | 3 |
|    |   |                   |   |   |   |
|    |   |                   |   | Condensed Consolidated Statements of Income  (Unaudited)  Three months ended September 30, 2006 and 2005 | 4 |
|    |   |                   |   |   |   |
|    |   |                   |   | Condensed Consolidated Statements of Cash Flows  (Unaudited)  Three months ended September 30, 2006 and 2005 | 5 |
|    |   |                   |   |   |   |
|    |   |                   |   | Notes to Condensed Consolidated Financial Statements  (Unaudited)  September 30, 2006 | 6 |
|    |   |                   |   |   |   |
|    |   | Item 2                 |   | Management’s Discussion and Analysis of Financial  Condition and  Results of Operations | 8 |
|    |   |                   |   |   |   |
|    |   | Item 3                 |   | Quantitative and Qualitative Disclosures About Market  Risk | 10 |
|    |   |                   |   |   |   |
|    |   | Item 4                 |   | Controls and Procedures | 10 |
|    |   |                   |   |   |   |
| PART II |   | OTHER INFORMATION      |   |
|    |   |                   |   |
|    |   | Item 1A                |   | Risk  Factors | 11 |
|    |   |                   |   |   |   |
|    |   | Item 2                 |   | Unregistered Sales of Equity Securities and Use of  Proceeds | 11 |
|    |   |                   |   |   |   |
|    |   | Item 4                 |   | Submission of Matters to a Vote of Security-Holders | 12 |
|    |   |                   |   |   |   |
|    |   | Item  6                |   | Exhibits | 12 |

 

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**PART IFINANCIAL INFORMATION**

**Item 1. FinancialStatements.**

KOSS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS(Unaudited)
| ** **                                | ** ** | **September 30, 2006** | ** ** | **June 30, 2006** | ** ** |
|-------------------------------------------|------------|----------------------------------|------------|-----------------------------|------------|
| ASSETS                                    |       |                             |       |                        |       |
| Current Assets:                           |       |                             |       |                        |       |
| Cash                                      |       | $                                | 3,527,562  |                        | $          | 6,146,580 |   |
| Accounts  receivable                      |       | 8,264,209                        |       | 6,819,852                   |       |
| Inventories                               |       | 9,350,221                        |       | 10,522,605                  |       |
| Other current  assets                     |       | 2,472,364                        |       | 1,784,365                   |       |
| Total current  assets                     |       | 23,614,356                       |       | 25,273,402                  |       |
| Property and  equipment, net              |       | 2,846,721                        |       | 3,037,548                   |       |
| Deferred income  taxes                    |       | 672,823                          |       | 672,823                     |       |
| Other assets                              |       | 2,288,509                        |       | 2,457,840                   |       |
|                                      |       | $                                | 29,422,409 |                        | $          | 31,441,613 |   |
|                                      |       |                             |       |                        |       |
| LIABILITIES AND  STOCKHOLDERS' INVESTMENT |       |                             |       |                        |       |
| Current  liabilities:                     |       |                             |       |                        |       |
| Accounts payable                          |       | 2,643,241                        |       | $                           | 1,870,256  |   |
| Accrued  liabilities                      |       | 2,189,921                        |       | 2,149,102                   |       |
| Income taxes payable                      |       | 717,379                          |       | 927,528                     |       |
| Dividends  payable                        |       | 481,479                          |       | 4,202,591                   |       |
| Total current  liabilities                |       | 6,032,020                        |       | 9,149,477                   |       |
| Deferred  compensation                    |       | 1,022,831                        |       | 992,830                     |       |
| Derivative  liability                     |       | 125,000                          |       | 125,000                     |       |
| Stockholders'  investment                 |       | 22,242,558                       |       | 21,174,306                  |       |
|                                      |       | $                                | 29,422,409 |                        | $          | 31,441,613 |   |

 

See accompanying notes.

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KOSS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME(Unaudited)
| **Three Months Ended September 30,** | ** ** | ** ** | ** ** | **2006**  | ** ** | **2005**   | ** ** |
|----------------------------------------------------------|------------|------------|------------|-----------|------------|------------|------------|
|                                                     |       |       |       |      |       |
| Net sales                                                |       | $          | 13,325,099 |      | $          | 11,949,841 |       |
| Cost of goods sold                                       |       | 7,729,555  |       | 7,274,962 |       |
| Gross profit                                             |       | 5,595,544  |       | 4,674,879 |       |
| Selling, general and  administrative expense             |       | 2,932,801  |       | 2,447,617 |       |
| Income from operations                                   |       | 2,662,743  |       | 2,227,262 |       |
| Other income (expense)                                   |       |       |       |      |       |
| Royalty income                                           |       | 81,249     |       | 101,611   |       |
| Interest income                                          |       | 32,538     |       | 34,645    |       |
| Income before income  tax provision                      |       | 2,776,530  |       | 2,363,518 |       |
| Provision for income  taxes                              |       | 1,082,850  |       | 922,300   |       |
| Net income                                               |       | $          | 1,693,680  |      | $          | 1,441,218  |       |
|                                                     |       |       |       |      |       |
| Earnings per common  share:                              |       |       |       |      |       |
| Basic earnings per  common share                         |       | $          | 0.46       |      | $          | 0.39       |       |
|                                                     |       |       |       |      |       |
| Diluted earnings per  common share                       |       | $          | 0.45       |      | $          | 0.38       |       |
|                                                     |       |       |       |      |       |
| Dividends per common share                               |       | $          | 0.13       |      | $          | 0.13       |       |

 

See accompanying notes.

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KOSS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited)
| **Three Months Ended September 30,**                           | ** ** | ** ** | ** ** | **2006**  | ** ** | **2005**  | ** ** |
|------------------------------------------------------------------------------------|------------|------------|------------|-----------|------------|-----------|------------|
| CASH FLOWS FROM  OPERATINGACTIVITIES:                                              |       |       |       |      |       |
| Net income                                                                         |       | $          | 1,693,680  |      | $          | 1,441,218 |       |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |       |       |      |       |
| Depreciation and  amortization                                                     |       | 283,082    |       | 248,843   |       |
| Net changes in  operating assets and liabilities                                   |       | (3,756,757 | )          | (116,383  | )          |
| Net cash (used)  provided by operating activities                             |       | (1,779,995 | )          | 1,573,678 |       |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                        |       |       |       |      |       |
| Acquisition of  equipment                                                          |       | (72,925    | )          | (259,919  | )          |
| Net cash used in  investing activities                                             |       | (72,925    | )          | (259,919  | )          |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                             |       |       |       |      |       |
| Dividends  declared                                                                |       | (481,479   | )          | (486,788  | )          |
| Purchase of  common stock                                                          |       | (308,143   | )          | (239,820  | )          |
| Exercise of  stock options                                                         |       | 23,524     |       | —    |       |
| Net cash used in  financing activities                                        |       | (766,098   | )          | (726,608  | )          |
| Net increase (decrease)  in cash                                                   |       | (2,619,018 | )          | 587,151   |       |
| Cash at beginning of  period                                                       |       | 6,146,580  |       | 5,218,698 |       |
| Cash at end of period                                                              |       | $          | 3,527,562  |      | $          | 5,805,849 |       |

 

See accompanying notes.

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KOSS CORPORATIONAND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSSeptember 30, 2006(Unaudited)

1.             CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS

The financial statements presented herein are based oninterim amounts.  In the opinion of management,all adjustments (consisting only of normal recurring accruals) necessary topresent fairly the financial position, results of operations and cash flows atSeptember 30, 2006 and for all periods presented have been made.  The income from operations for the quarterended September 30, 2006 is not necessarily indicative of the operating resultsfor the full year.

Certaininformation and footnote disclosures normally included in financial statementsprepared in accordance with accounting principles generally accepted in theUnited States of 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 percommon share are computed based on the weighted average number of common sharesoutstanding.  The weighted average numberof common shares outstanding for the quarters ending September 30, 2006 and2005 were 3,709,936 and 3,735,878, respectively.  When dilutive, stock options are included asshare equivalents using the treasury stock method.  Common stock equivalents of 65,857 and 46,210related to stock option grants were included in the computation of the averagenumber of shares outstanding for diluted earnings per common share for thequarters ended September 30, 2006 and 2005, respectively.

3.             INVENTORIES

The classification of inventories is as follows:

|                                    | ** ** | **September 30, 2006** | ** ** | **June 30, 2006** | ** ** |
|------------------------------------|------------|----------------------------------|------------|-----------------------------|------------|
| Raw materials and work  in process |       | $                                | 4,405,410  |                        | $          | 4,388,680 |   |
| Finished goods                     |       | 6,320,054                        |       | 7,509,168                   |       |
|                               |       | 10,725,464                       |       | 11,897,848                  |       |
| LIFO reserve                       |       | (1,375,243                       | )          | (1,375,243                  | )          |
|                               |       | $                                | 9,350,221  |                        | $          | 10,522,605 |   |

 

4.             STOCKPURCHASE AGREEMENT

The Company has an agreement with its Chairman, JohnC. Koss, to, at the request of the executor of the estate, repurchase Companycommon stock from his estate (only upon the election of the estate) in theevent of his death.  The Company does nothave the right to require the estate to sell stock to the Company.  As such, this arrangement is accounted for asa written put option with the fair value of the put option recorded as aderivative liability.  The fair value ofthe option at September 30, 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 

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$2,500,000 or the amount of estate taxes andadministrative expenses incurred by the Chairman’s estate.  The Company may elect to pay the purchaseprice in cash or may elect to pay cash equal to 25% of the total amount due andto execute a promissory note for the balance, payable over four years, at theprime rate of interest.  The Companymaintains a $1,150,000 life insurance policy to fund a substantial portion ofthis obligation.  At September 30, 2006,$125,000 has been classified as a derivative liability on the Company’sfinancial statements.

5.                                       DIVIDENDSDECLARED

On September 14, 2006,the Company declared a quarterly cash dividend of $0.13 per share forstockholders of record on September 29, 2006 to be paid October 13, 2006.  Such dividend payable has been recorded atSeptember 30, 2006.

6.                                       STOCK-BASEDCOMPENSATION

In1990, pursuant to the recommendation of the Board of Directors, thestockholders ratified the creation of the Company’s 1990 Flexible IncentivePlan (the “1990 Plan”).  The 1990 Plan isadministered by a committee of the Board of Directors and provides for thegranting of various stock-based awards including stock options to eligibleparticipants, primarily officers and certain key employees.  A total of 225,000 shares of common stockwere available in the first year of the Plan’s existence.  Each year thereafter additional shares equalto .25% of the shares outstanding as of the first day of the applicable fiscalyear were reserved for issuance pursuant to the 1990 Plan.  On July 22, 1992, the Board of Directorsauthorized the reservation of an additional 250,000 shares for the 1990 Plan,which was approved by the stockholders. In 1993, the Board of Directors authorized the reservation of anadditional 300,000 shares for the 1990 Plan, which was approved by thestockholders.  In 1997, the Board ofDirectors authorized the reservation of an additional 300,000 shares for the 1990Plan, which was approved by the stockholders. In 2001, the Board of Directors authorized the reservation of anadditional 300,000 shares for the 1990 Plan, which was also approved by thestockholders.  Options generally vestover four or five years, with a maximum term of five to ten years.

We account for stock options and restricted stockissued under the plan in accordance with Statement of Accounting Standards (‘SFAS’)No. 123 (R), “Share Based Payments”. The fair value of each stock option grantwas estimated as of the date of grant using the Black-Scholes pricing model.The resulting compensation cost for fixed awards with graded vesting schedulesis amortized on a strait line basis over the vesting period for the entireaward. The fair value of each restricted stock grant was based on the marketprice of the underlying common stock as of the date of grant. The resultingcompensation cost is amortized on a strait line basis over the vesting period.

A summary of stockoption activity under the plan for the three months ended September 30, 2006 isas follows:
| ** **                   | ** ** | **Number of Shares  (in thousands)** | ** ** | **Range of Exercise  Price Per Share** | ** ** | **Average Exercise  Price** | ** ** |
|------------------------------|------------|-----------------------------------------------------|------------|------------------------------------------------------------|------------|----------------------------------|------------|
| Balance, June  30, 2006      |       | 591,594                                             |       | $                                                          | 5.28-$28.8 | 0                                | $          | 20.60 |   |
| Granted                      |       | —                                              |       | —                                                     |       | —                           |       |
| Exercised                    |       | (1,404                                              | )          | $                                                          | 16.76      |                             | $          | 16.76 |   |
| Expired                      |       | —                                              |       | —                                                     |       | —                           |       |
| Forfeited                    |       | —                                              |       | —                                                     |       | —                           |       |
| Balance, September 30,  2006 |       | 590,190                                             |       | $                                                          | 5.28-$28.8 | 0                                | $          | 20.61 |   |

 

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| ** **    | ** ** | **Number of Options  Outstanding/Exercisable** | ** ** | **Weighted Average Exercise  Price Outstanding/Exercisable** | ** ** | **Weighted Average  Remaining Contractual  Life (Years)** | ** ** |
|---------------|------------|----------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|--------------------------------------------------------------------------|------------|
| $5.28-$6.73   |       | 18,461  / 18,461                                         |       | $6.11 / $6.11                                                               |       | 3.5                                                                      |       |
| $15.75-$19.12 |       | 289,729  / 209,979                                       |       | $17.49 / $17.42                                                             |       | 3.7                                                                      |       |
| $22.01-$28.80 |       | 282,000  / 89,000                                        |       | $24.76 / $23.62                                                             |       | 5.2                                                                      |       |
|          |       | 590,190 / 317,440                                        |       | $20.61 / $18.50                                                             |       |                                                                     |       |

 

Asof September 30, 2006, there was $1,394,566 of total unrecognized compensationcost related to stock options granted under the plan. This cost is expected tobe recognized over a weighted average period of 2.25 years. Total unrecognizedcompensation cost will be adjusted for any future changes in estimated andactual forfeitures.

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

Financial Condition,Liquidity and Capital Resources

Cash used by operating activities during the threemonths ended September 30, 2006 amounted to $1,779,995.  This was a result of net income for theperiod adjusted for changes in operating assets and current liabilities, whicharose primarily as a result of a special cash dividend that the Companydistributed during the quarter.  On July14, 2006, the Company distributed a special cash dividend of $1.00 per share toshareholders of record June 30, 2006. After the satisfaction of this commitment, the Company believes that itscash position remains strong.

Capital expenditures for new equipment (includingproduction tooling) were $72,925 for the quarter.  Capital expenditures for fiscal year 2007 areexpected to be approximately $1.9 million. The Company expects to generate sufficient funds through operations tofund these expenditures.

Stockholders’ investment increased to $22,242,558 atSeptember 30, 2006, from $21,174,306 at June 30, 2006.  The increase reflects net income offset by(i) the effect of the purchase and retirement of common stock and (ii)dividends declared.

The Company amended its existing credit facility inNovember 2005, extending the maturity date of the unsecured line of credit toNovember 1, 2006, and expects to extend it to November 1, 2007 in the currentquarter.  This credit facility providesfor borrowings up to a maximum of $10,000,000. The Company can use this credit facility for working capital purposes orfor the purchase of its own common stock pursuant to the Company’s common stockrepurchase program.  Borrowings underthis credit facility bear interest at the bank’s prime rate, or LIBOR plus1.75%.  This credit facility includesfinancial covenants that require the Company to maintain a minimum tangible networth and specified current, interest coverage, and leverage ratios, with whichthe Company has complied.  The Companyuses its credit facility from time to time, although there was no utilizationof this credit facility during the quarter ended September 30, 2006.

In April of 1995, the Board of Directors approved astock repurchase program authorizing the Company to purchase from time to timeup to $2,000,000 of its common stock for its own account.  Subsequently, the Board of Directorsperiodically has approved increases in the stock repurchase program.  The most recent increase was for anadditional $1,000,000 in July 2006, for a maximum of $43,500,000.  The Company intends to effectuate all stockpurchases either on the open market or through privately negotiatedtransactions, and intends to finance all stock purchases through its own cashflow or by borrowing for such purchases.

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For the three month period ended September 30, 2006,the Company purchased 15,290 shares of its common stock at an average net priceof $20.15 per share, for a total net purchase price of $308,143.

From the commencement of the Company’s stock repurchaseprogram through September 30, 2006, the Company has purchased a total of5,338,231 shares for a total gross purchase price of $49,912,329 (representingan average gross purchase price of $9.35 per share) and a total net purchaseprice of $39,565,627 (representing an average net purchase price of $7.41 pershare).  The difference between the totalgross purchase price and the total net purchase price is the result of theCompany purchasing from certain employees shares of the Company’s stock acquiredby such employees pursuant to the Company’s stock option program.  In determining the dollar amount availablefor additional purchases under the stock repurchase program, the Company usesthe total net purchase price paid by the Company for all stock purchases, asauthorized by the Board of Directors.

The Company also has an Employee Stock Ownership Planand Trust (“ESOP”) pursuant to which shares of the Company’s stock arepurchased by the ESOP for allocation to the accounts of ESOP participants.  There were no ESOP purchases for the quarterended September 30, 2006.

Results of Operations

Net sales for the first quarter ended September 30,2006 increased by 12% to $13,325,099 compared with $11,949,841 for the sameperiod in 2005, an increase of $1,375,258. The increase is primarily due to strong European sales, which wereconsistent across all market classes. Export sales, most notably to Europe, have been exceptionally strong inour first quarter.  The concern for thebalance of the year remains with domestic U.S. retail, where we may see demandsoften in comparison to last year, as well as in comparison to anticipateddemand in Europe.

Gross profit as a percent of net sales was 42% for thequarter ended September 30, 2006 and 39% for the quarter ended September 30,2005.  The increase is primarily due tothe Company experiencing a more profitable model mix.

Selling, general and administrative expenses for thequarter ended September 30, 2006 were $2,932,801 or an improved 22% of netsales, compared to $2,447,617 or 20% of net sales for the same period in 2005,primarily as a result of strong sales during the recent quarter.

For the first quarter endedSeptember 30, 2006, income from operations was $2,662,743 versus $2,227,262 forthe same period in the prior year.  Netincome for the three months rose by 18% to $1,693,680 from $1,441,218 for thesame three month period one year ago. The increases in income from operations and net income are primarily dueto strong European sales, which were consistent across all market classes.

Royalty income for the quarter ended September 30,2006 was $81,249, compared with $101,611 for the quarter ended September 30,2005. The decrease inroyalty income for the three month period was primarily a result of theterminated license agreement with Jiangsu Electronics Industries Limited (“Jiangsu”).  Effective November 23, 2004, the Companyterminated the License Agreement dated November 15, 1991, as subsequentlyamended, between the Company and Jiangsu (the “Jiangsu License Agreement”).  As a result of the termination, other thanJiangsu’s post-termination right to sell Company-approved licensed products, asset forth in the Jiangsu License Agreement, Jiangsu no longer has the right touse certain Company trademarks in connection with the manufacture, marketingand distribution of Jiangsu’s products under the Jiangsu License Agreement.

Effective June 30, 2003, the Company entered into aLicense Agreement (the “License Agreement”) with Sonigem Products, Inc. (“Sonigem”)of Ontario, Canada whereby the Company licensed to Sonigem the right to sellvideo and communications products under the Koss brand name.  This License Agreement

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covers Canada, requiringroyalty payments by Sonigem through June 30, 2010, subject to certain minimumannual royalty amounts.  To furtherenhance the relationship between the Company and Sonigem, on June 30, 2005, theCompany announced the extension of its licensing agreement for electronicsproducts with Sonigem.  The Amendment tothe License Agreement with Sonigem was effective August 1, 2005 (the “Amendment”).  The Amendment provides Sonigem with theexclusive right and license to use certain Company trademarks in Canada inconnection with the manufacture, production, distribution and sale of anincreased number of licensed products, with the prior approval of theCompany.  In consideration for theseincreased rights, the Amendment also provides for increased minimum royaltypayments payable to the Company, which partially offset the previouslydiscussed reductions in royalty income from the terminated Jiangsu LicenseAgreement.

Interest income for thequarter was $32,538 as compared to $34,645 for the same quarter in 2005.  Interest income fluctuates in relation tocash balances on hand throughout the period and fluctuations in interest ratesearned.

The provision for income taxes was $1,082,850 and$922,300 for the quarters ended September 30, 2006 and 2005, respectively.  The effective tax rate was 39% for eachquarter.

Recently Issued Financial Accounting Pronouncements

In June 2006, the FinancialAccounting Standards Board (“FASB”) issued Interpretation No. 48, “Accountingfor Uncertainty in Income Taxes” (FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxesrecognized in financial statements in accordance with SFAS No. 109, “Accountingfor 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 effective for fiscal years beginning afterDecember 15, 2006.  We are currentlyevaluating the impact FIN 48 will have on our financial position or results ofoperations.

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

**Item 4.**                          Controlsand Procedures.

(a)                                                *Evaluation of DisclosureControls and Procedures*.  The Company maintains a system of disclosurecontrols and procedures that are designed to provide reasonable assurance thatinformation, which is required to be timely disclosed, is accumulated andcommunicated to management in a timely fashion. A control system, no matter how well conceived and operated, can provideonly reasonable, not absolute, assurance that the objectives of the controlsystem are met.  The Company, under thesupervision and with the participation of the Company’s management, includingthe Company’s Chief Executive Officer/Chief Financial Officer, after evaluatingthe effectiveness of the Company’s disclosure controls and procedures (as definedin Rules 13a-15(e) and 15(d)-15(e) of the Securities Exchange Act of 1934, asamended (the “Exchange Act)) as of the end of the period covered by thisreport, has concluded that the Company’s disclosure controls and procedures areeffective to provide reasonable assurance that information required to bedisclosed by the Company in the reports that it files or submits under theExchange Act is accumulated and communicated to the Company’s management,including its principal executive officer and principal financial officer, asappropriate to allow timely

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decisions regarding required disclosure and are effective to providereasonable assurance that such information is recorded, processed, summarized,and reported within the time periods specified in the SEC’s rules and forms.

(b)                                               *Changes in 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 IIOTHER INFORMATION**

**Item 1A**                    Risk Factors

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

Thefollowing table presents information with respect to purchases of common stockof the Company made during the three months ended September 30, 2006, by theCompany.

**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** | ** ** |
|----------------------------------|------------|------------|------------|---------------------------------------------|------------|----------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------|------------|
| July 1 — July 31            |       | 7,425      |       | $                                           | 19.57      |                                         | 7,425      |                                                                                                             | $          | 1,258,239                                                                                          |       |
| August 1 —  August 31       |       | 4,711      |       | $                                           | 20.77      |                                         | 4,711      |                                                                                                             | $          | 1,160,402                                                                                          |       |
| September 1 — September  30 |       | 3,154      |       | $                                           | 20.61      |                                         | 3,154      |                                                                                                             | $          | 1,095,393                                                                                          |       |

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(1)             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 

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program.  The most recently approved increase was foradditional purchases of $1,000,000, which occurred in July 2006, for anaggregate maximum of $43,500,000, of which $42,404,607 had been expendedthrough September 30, 2006.

**Item 4**                                 Submission of Mattersto Vote of Security-Holders

(a)                          OnOctober 11, 2006 an Annual Meeting of Stockholders was held.

(b)                         Proxiesfor the election of directors were solicited pursuant toRegulation 14.  There was nosolicitation in opposition to management’s nominees, and all such nominees wereelected.

(c)                          Therewere 3,706,842 shares of common stock eligible to vote at the Annual Meeting,of which 3,222,395 shares were present at the Annual Meeting in person or byproxy, which constituted a quorum.  Thefollowing is a summary of the results of the voting:
| **Nominees for 1-year**       | ** ** | **Number of Votes** | ** ** | **Broker**   | ** ** |
|-----------------------------------------|------------|-------------------------------|------------|--------------|------------|
| **terms ending in 2007** | ** ** | **For**                       | ** ** | **Withheld** | ** ** | **Non-Votes** | ** ** |
|                                    |       |                          |       |         |       |   |   |
| John C. Koss                            |       | 3,213,808                     |       | 8,587        |       | 0 |   |
| Thomas L. Doerr                         |       | 3,214,192                     |       | 8,203        |       | 0 |   |
| Michael J. Koss                         |       | 3,201,354                     |       | 21,041       |       | 0 |   |
| Lawrence S.  Mattson                    |       | 3,201,228                     |       | 21,167       |       | 0 |   |
| Theodore H.  Nixon                      |       | 3,213,315                     |       | 9,080        |       | 0 |   |
| John J. Stollenwerk                     |       | 3,212,695                     |       | 9,700        |       | 0 |   |

 
| ** **                                                                                   | ** ** | **Number of Votes** | ** ** | ** **  | ** ** | **Broker**  | ** ** |
|----------------------------------------------------------------------------------------------|------------|-------------------------------|------------|-------------|------------|-------------|------------|
| ** **                                                                                   | ** ** | **For**                       | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Non-Votes** | ** ** |
| Appointment of  Grant Thornton LLP as independent auditors for the year ending June 30, 2007 |       | 3,219,098                     |       | 1,373       |       | 1,924       |       | 0 |   |

 

**Item 6**                                 Exhibits

**                                                                  **See Exhibit Index attachedhereto.

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**CAUTIONARY STATEMENT REGARDING FORWARD-LOOKINGSTATEMENTS**

This Form 10-Q contains forward-looking statementswithin the meaning of that term in the Private Securities Litigation Reform Actof 1995 (the “Act”) (Section 27A of the Securities Act of 1933 and Section 21Eof the Securities Exchange Act of 1934). 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.  Statementscontained in this Form 10-Q that are not historical facts are forward-lookingstatements made pursuant to the safe harbor provisions of the Act.  Forward-looking statements may include, butare not limited to, projections of revenue, income or loss and capital expenditures,statements regarding future operations, anticipated financing needs, compliancewith financial covenants in loan agreements, plans for acquisitions or sales ofassets or businesses, plans relating to products or services of the Company,assessments of materiality, predictions of future events, the effects ofpending and possible litigation, and assumptions relating to theforegoing.  In addition, when used inthis Form 10-Q, the words “anticipates,” “believes,” “estimates,” “expects,” “intends,”“plans” and variations thereof and similar expressions are intended to identifyforward-looking statements.

Forward-looking statements are inherently subject torisks and uncertainties, some of which cannot be predicted or quantified basedon current expectations.  Consequently,future events and actual results could differ materially from those set forthin, contemplated by, or underlying the forward-looking statements contained inthis Form 10-Q, or in other Company filings, press releases, or otherwise.  In addition to the factors discussed in thisForm 10-Q, other factors that could contribute to or cause such differencesinclude, but are not limited to, developments in any one or more of thefollowing 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 threatenedlitigation and investigations, fluctuations in currency exchange rates andother risk factors which may be detailed from time to time in the Company’sSecurities and Exchange Commission filings.

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

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Signatures

Pursuant to the requirements of the Securities andExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.
|        |               |   |   | KOSS CORPORATION            |
|--------|--------------------|--------|--------|-----------------------------|
| Date:  | November  13, 2006 |   |   | /s/ Michael J. Koss         |
|   |               |   |   | Michael J. Koss             |
|   |               |   |   | Vice Chairman, President,   |
|   |               |   |   | Chief Executive Officer,    |
|   |               |   |   | Chief Financial Officer     |
| Date:  | November  13, 2006 |   |   | /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     |   | 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 **                                                                                                                                                                                                                              |

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*                    Filedherewith

**             Furnishedherewith

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