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STOCK-BASED COMPENSATION The Company has a stock-based employee compensation plan, which is described more fully in Note 6. The Company accounts for stock-based compensation in

STOCK-BASED COMPENSATION The Company has a stock-based employee compensation plan, which is described more fully in Note 6. The Company accounts for stock-based compensation in accordance with ASC 718. Under the fair value recognition provisions of this statement, share-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the vesting period. Determining the fair value of share-based awards at the grant date requires judgment, including estimating future volatility of the Companys stock, the amount of share-based awards that are expected to be forfeited and the expected term of awards granted. The Company estimates the fair value of stock options granted using the Black-Scholes option valuation model. The fair value of all awards is amortized on a straight-line basis over the vesting periods. The expected term of awards granted represent the period of time they are expected to be outstanding. The Company determines the expected term based on historical experience with similar awards, giving consideration to the contractual terms and vesting schedules. The Company estimates the expected volatility of its common stock at the date of grant based on the historical volatility of its common stock. The volatility factor used in the Black-Scholes option valuation model is based on the Companys historical stock prices over the most recent period commensurate with the estimated expected term of the awards. The risk-free interest rate used in the Black-Scholes option valuation model is based on the implied yield currently available on U.S. Treasury zero-coupon issues with a remaining term commensurate with the expected term of the awards. Pre-vesting option forfeitures are estimated using historical actual forfeitures. Stock-based compensation is recorded only for those options expected to vest. If actual results differ significantly from these estimates, stock-based compensation expense and the Companys results of operations could be materially impacted.

USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. RECLASSIFICATIONS Certain amounts previously reported have been reclassified to conform to the current presentation.

2. UNAUTHORIZED TRANSACTIONS, RELATED COSTS AND RECOVERIES

In December 2009, the Company learned of significant unauthorized transactions, which totaled approximately $31,500,000 from fiscal 2005 through December 2009. The volume of these unauthorized transactions was $10,286,988 from July 1, 2009 until the unauthorized transactions were discovered in December 2009.

The unauthorized transaction related costs and recoveries, net line in the Consolidated Statements of Operations is comprised of the legal and professional fees for legal defense costs as well as legal fees related to certain claims initiated against third parties (see Note 16). The insurance proceeds and other recoveries represent amounts received under the Companys insurance and other settlements related to the unauthorized transactions. Included in the other recoveries for the year ended June 30, 2011, is a payment of $208,895 that the Company received from Michael Koss, who voluntarily reimbursed the Company for the excess portion of the bonus that he received during the restatement periods. In addition, other recoveries for the year ended June 30, 2011 included $850,000 to be paid by the insurance company under the terms of the settlement of a legal action and $401,456 from garnishment of the 401(k) and Koss Employee Stock Ownership Trust (KESOT) balances of Ms. Sachdeva, the former VP-Finance. For the years ended June 30, 2011 and 2010, these costs and recoveries were as follows:

2011

2010

Legal fees

$

3,035,269

$

2,335,985

Professional fees

1,243,733

Total costs

3,035,269

3,579,718

Insurance proceeds

(2,398,202

)

(1,746,469

)

Other recoveries

(1,463,250

)

(166,263

)

Total recoveries

(3,861,452

)

(1,912,732

)

Unauthorized transaction related costs and (recoveries), net

$

(826,183

)

$

1,666,986

3. EQUIPMENT AND LEASEHOLD IMPROVEMENTS

The major categories of equipment and leasehold improvements at June 30, 2011 and 2010 are summarized as follows:

Estimated

Useful Lives

2011

2010

Machinery and equipment

5-10 years

$

527,450

$

629,757

Furniture and office equipment

5-10 years

228,935

383,554

Tooling

5-10 years

2,958,268

4,160,970

Display booths

5-7 years

253,680

287,180

Computer equipment

3-10 years

742,797

724,448

Leasehold improvements

5-15 years

1,804,755

1,746,763

Assets in progress

N/A

1,546,019

814,335

8,061,904

8,747,007

Less: accumulated depreciation and amortization

4,977,914

6,354,235

Equipment and leasehold improvements, net

$

3,083,990

$

2,392,772

Question 1: How much were the approximate unauthorized transactions from 2005 through 2009?

Question 2: How much did the company spend on legal and professional fees related to this item in 2010 and 2011?

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