Which asset accounts might be overstated? How difficult would it be to overstate them? What would be the effects on Koss's value if assets were overstated?

Koss CORPORATION AND UNAUTHORIZED FINANCIAL TRANSACTIONS CASE 6.3 477 NEWS RELEASE 4129 NORTH PORT WASHINGTON AVENUE, MILWAUKEE, WI 53212 / 414 964-5000 / WWW.KOSS.COM EXHIBIT 1 Koss CORPORATION, SEC FORM 8-K FILING, DECEMBER 21, 2009 FOR IMMEDIATE RELEASE December 21, 2009 CONTACT: Michael J. Koss President & CEO (414) 964-5000 mjkoss@koss.com Trading of Koss Corporation Stock Halts Milwaukee, Wisconsin: Koss Corporation (NASDAQ SYMBOL: KOSS), the U.S. based high-fidelity stereophone leader, requested today that NASDAQ immediately halt trading of its securities after discovering information regarding certain unauthorized transactions. The Board of Directors appointed a special committee of independent directors to lead an internal investigation involving the unauthorized transactions and determine the effect, if any, on Koss' financial statements. NASDAQ halted trading of Koss Corporation stock today. Law enforcement is also assisting Koss Corporation with this matter. Sujata Sachdeva, Vice President of Finance and Secretary of Koss Corporation, was placed on unpaid administrative leave pending the results of this investigation. Koss Corporation markets a complete line of high-fidelity stereophones, speaker-phones, computer headsets, telecommunications headsets, active noise canceling stereophones, wireless stereophones, and compact disc recordings of American Symphony Orchestras on the Koss Classics label. 1 This press release contains forward-looking statements. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "forecasts," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "potential," or "continue" or the negative of such terms and other comparable terminology. These statements are only predictions. Actual events or results may differ materially. In evaluating forward-looking statements, you should specifically consider various factors that may cause actual results to vary from those contained in the forward-looking statements, such as general economic conditions, in particular, consumer demand for the Company's and its customers' products, competitive and technological developments, foreign currency fluctuations, and costs of operations. Shareholders, potential investors and other readers are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements made herein are only made as of the date of this press release and the Company undertakes no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances. In addition, such uncertainties and other operational matters are discussed further in the Company's quarterly and annual filings with the Securities and Exchange Commission. 478 SECTION SIX VALUATION EXHIBIT 2 Koss CORPORATION, SEC ORM S-K FILING, ECEMBER 21, 009 PROPOSAL 1. ELECTION OF DIRECTORS The By-Laws of the Company provide that the number of directors on the Board of Directors of the Company (the "Board) will be no fewer than five and no greater than twelve. We had six directors during fiscal year 2009 and will also elect six directors for fiscal year 2010. Each director elected will serve until the next Annual Meeting of Stockholders and until the director's successor is duly elected, or until his prior death, resignation, or removal. The six nominees that receive the most votes will be appointed to serve on our Board for the next year. Information as to Nominees The following identifies the nominees for the six director positions and provides information as to their business experience for the past five years. Each nominee is presently a director of the Company: John C. Koss, 79, has served continuously as Chairman of the Board of the Company or its predecessors since 1958. Previously, he served as Chief Executive Officer from 1958 until 1991. He is the father of Michael J. Koss (the Company's Vice Chairman, President, Chief Executive Officer, Chief Financial Officer, and Chief Operating Officer, and a nominee for director of the Company), and the father of John Koss, Jr. (the Company's Vice President-Sales). Thomas L. Doerr, 65, has been a director of the Company since 1987. In 1972, Mr. Doerr co-founded Leeson Electric Corporation and served as its President and Chief Executive Officer until 1982. The company manufactures industrial electric motors. In 1983, Mr. Doerr incorporated Doerr Corporation as a holding company for the purpose of acquiring established companies involved in distributing products to industrial and commercial markets. Currently, Mr. Doerr serves as President of Doerr Corporation. Michael J. Koss, 55, has held various positions at the Company since 1976, and has been a director of the Company since 1985. He was elected President, Chief Operating Officer, and Chief Financial Officer of the Company in 1987, Chief Executive Officer in 1991, and Vice-Chairman in 1998. He is the son of John C. Koss (the Company's Chairman of the Board) and the brother of John Koss, Jr. (the Company's Vice President-Sales). Michael J. Koss is also a director of STRATTEC Security Corporation. Lawrence S. Mattson, 77, has been a director of the Company since 1978. Mr. Mattson is the retired President of Oster Company, a division of Sunbeam Corporation, which manufactures and sells portable household appliances. Theodore H. Nixon, 57, has been a director of the Company since 2006. Since 1992, Mr. Nixon has been the Chief Executive Officer of D.D. Williamson, which is a manufacturer of caramel coloring used in the food and beverage industries. Mr. Nixon joined D.D. Williamson in 1974 and was promoted to President and Chief Operating Officer in 1982. Mr. Nixon is also a director of the non-profit Center for Quality of Management. John J. Stollenwerk, 69, has been a director of the Company since 1986. Mr. Stollenwerk is the Chairman of the Allen-Edmonds Shoe Corporation, an international manufacturer and retailer of high quality footwear. He is also a director of Allen-Edmonds Shoe Corporation, Badger Meter, Inc., U.S. Bancorp, and Northwestern Mutual Life Insurance Company. The Company expects that the "Koss Family" (John C. Koss, Michael J. Koss, and John Koss, Jr.), who beneficially own approximately 73.13% of the outstanding Common Stock, vote for the election of all nominees named above to the Board of Directors. 00 * M+ C3 KOSS CORPORATION AND UNAUTHORIZED FINANCIAL TRANSACTIONS CASE 6.3 THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" THE ELECTION OF ALL NOMINEES NAMED ABOVE TO THE BOARD OF DIRECTORS. Board Committees (Selected) EXHIBIT 2- continued Koss CORPORATION, FORM 8-K FILII DECEMBER 21, 2009 matters, executive compensation and board nominations. Each member of these committees The Board has appointed the following standing committees for auditing and accounting is "independent" as defined in Nasdaq Marketplace Rule 4200. Audit Committee. The Audit Committee, which is composed of Mr. Doerr, Mr. Mattson Mr. Nixon, and Mr. Stollenwerk, reviews and evaluates the effectiveness of the Company's financial and accounting functions, including reviewing the scope and results of the audit work performed by the independent accountants and by the Company's internal accounting staff. The Audit Committee met three times during the fiscal year ended June 30, 2009. The independent accountants were present at two of these meetings to discuss their audit scope and the results of their audit. For more information about the Audit Committee meetings, see the "Audit Committee Report." The Audit Committee is governed by a written charter approved and adopted by the Board, which charter was attached as Appendix A to the proxy materials, dated August 31, 2007, for the annual meeting held on October 10, 2007 for the fiscal year ended June 30, 2007. Audit Committee Financial Expert. The Board has determined that Mr. Mattson is an "Audit Committee Financial Expert" as that term is defined in Item 407(d)(5)(ii) of Regulation S-K promulgated by the Securities and Exchange Commission (the "SEC"). Attendance at Board and Committee Meetings During the fiscal year ended June 30, 2009, the Board held four meetings. Every incumbent director attended 75% or more of the total of (i) all meetings of the Board, plus (ii) all meetings of the committees on which they served during their respective terms office. Attendance at Annual Meetings All of the members of the Board, Mr. John C. Koss, Mr. Michael J. Koss, Mr. Doerr, Mr. Mattson, Mr. Stollenwerk and Mr. Nixon, attended last year's annual meeting held on October 08, 2008. The Company has no formal written policy regarding attendance at annual meetings of the Company, but strongly encourages all directors to make attendance at all annual meetings a priority. Independence of the Board Each of Mr. Doerr, Mr. Mattson, Mr. Nixon, and Mr. Stollenwerk, is "independent" as such term is defined in Nasdaq Marketplace Rule 4200. These independent directors constitute a majority of the Board, as required under Nasdaq Marketplace Rule 4350(c). Code of Ethics The Board approved and adopted a Code of Ethics for the Company's directors, officers, and employees, which is attached as Exhibit 14 to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2004. Executive Officers Information is provided below with respect to the executive officers of the Company. Each or until 80 SECTION SIX VALUATION XHIBIT 2- ontinued Current Position Held Since OSS Name Age Michael J. Koss 55 ORPORATION, SEC PRM S-K FLING Ec. 21, 2009 Positions Held President, Chief Operating Officer, Chief Financial Officer, Chief Executive Officer 1987 (Chief Executive Officer since 1991) 1988 1992 1994 1998 52 45 John Koss, Jr. Sujata Sachdeva Declan Hanley Lenore E. Lillie Cheryl Mike 62 50 Vice President - Sales Vice President - Finance, Secretary Vice President - International Sales Vice President - Operation Vice President - Human Resources and Customer Service 57 2001 Beneficial Ownership of Company Securities Security Ownership by Nominees and Management. The following table sets forth, as of August 1, 2009, the number of shares of Common Stock "beneficially owned" (as defined under applicable regulations of the SEC), and the percentage of such shares to the total number of shares outstanding, for all nominees, for each executive officer named in the Summary Compensation Table (see "Executive Compensation and Related Matters-Summary Compensation Table"), for all directors and executive officers as a group, and for each person and each group of persons who, to the knowledge of the Company as of June 30, 2009, were the beneficial owners of more than 5% of the outstanding shares of Common Stock. Number of Shares Beneficially Owned (2) 1,404,476 999,976 295,142 Percent of Outstanding Common Stock (3) 38.05% 27.09% 8.00% 0 0 Name and Business Address (1) John C. Koss (4) Michael J. Koss (5) John Koss, Jr. (6) Thomas L. Doerr Lawrence S. Mattson Theodore H. Nixon John J. Stollenwerk Sujata Sachdeva (7) Declan Hanley (8) Lenore E. Lillie (9) Cheryl Mike (10) All directors and executive officers as a group (11 persons) (11) Koss Family Voting Trust, John C. Koss, Trustee (12) Koss Employee Stock Ownership Trust ("KESOT") (13) Royce and Associates, LLC (14) 2,480 13,551 35,785 60,000 58,984 40,494 1.63% 1.60% 1.10% 2,910,888 1,216,785 339,258 370,723 78.86% 32.96% 9.19% 10.04% (continued) Koss CORPORATION AND UNAUTHORIZED FINANCIAL TRANSACTIONS CASE 6.3 (4) Includes the following shares which are deemed to be "beneficially owned by John C. Koss: (i) 61,732 shares owned directly or by his spouse; (ii) 1,216,785 shares as a result of his position as trustee of the Koss Family Voting Trust; (iii) 124,300 shares as a result of his position as co-trustee of the John C. and Nancy Koss Revocable Trust; and (iv) 1,659 shares by reason of the allocation of those shares to his account under the Koss Employee Stock Ownership Trust ("KESOT") and his ability to vote such shares pursuant to the terms of the KESOT see "Executive Compensation and Related Matters - Other Compensation Arrangements-Employee Stock Ownership Plan and Trust." (5) Includes the following shares which are deemed to be "beneficially owned" by Michael J. Koss: of the allocation of those shares to his account under the KESOT and his ability to vote such shares: (i) 538,380 shares owned directly or by reason of family relationships; (ii) 73,696 shares by reason (iii) 111,034 shares as a result of his position as an officer of the Koss Foundation; (iv) 85,000 shares with respect to which he holds options which are exercisable within 60 days of August 1, 2009; and EXHIBIT 2- continued Koss CORPORATION FORM 8-K FIL DEC. 21, 2009 aforementioned 339,258 shares but are counted only once in his individual total. 107 339,258 shares which are bett, byer which these do te f9), below). The 73,626 Shares located within the (6) Includes the following shares which are deemed to be "beneficially owned by John Koss, J.: 0 247,642 shares owned directly or by reason of family relationships: (1) 47,500 shares with respect to which he holds options which are exercisable within 60 days of August 1, 2009; and (ii) 53,495 shares by reason of the allocation of those shares to his account under the KESOT and his ability to vote such shares. [Notes 7-10 not included.] (11) This group includes 11 people, all of whom are listed on the accompanying table. To avoid double- counting: (i) the 339,258 total shares held by the KESOT and deemed to be beneficially owned by Michael J. Koss as a result of his position as a KESOT Trustee (see Note (5), above) include shares allocated to the KESOT accounts of John C. Koss, Michael J. Koss, John Koss, Jr., Ms. Sachdeva, Ms. Lillie, and Ms. Mike, in the above table but are included only once in the total; and (ii) the 1,216,785 shares deemed to be beneficially owned by John C. Koss as a result of his position as trustee of the Koss Family Voting Trust (see Note (4), above) are included in his individual total share ownership and are included only once in the total. (12) The Koss Family Voting Trust was established by John C. Koss. The sole trustee is John C. Koss. The term of the Koss Family Voting Trust is indefinite. Under the Trust Agreement, John C. Koss, as trustee, holds full voting and dispositive power over the shares held by the Koss Family Voting Trust. All of the 1,216,785 shares held by the Koss Family Voting Trust are included in the number of shares shown as beneficially owned by John C. Koss (see Note (4), above). (13) The KESOT holds 339,258 shares. Authority to vote these shares is vested in KESOT participants to the extent shares have been allocated to individual KESOT accounts. All 339,258 of these KESOT shares are also included in the number of shares shown as beneficially owned by Michael J. Koss (see Note (5), above). Michael J. Koss and Cheryl Mike (the Company's Vice President of Human Resources) serve as Trustees of the KESOT and, as such, they share dispositive power with respect to (and are therefore each deemed under applicable SEC rules to be beneficially own) all 339,258 KESOT shares. SUMMARY COMPENSATION TABLE The following table presents certain summary information concerning compensation paid or accrued by the Company for services rendered in all capacities during the fiscal year ended June 30, 2009 for (i) the Chief Executive Officer ("CEO") of the Company, and (ii) each of the other six executive officers of the Company (determined as of the end of the last fiscal year) whose total annual salary and bonus exceeded $75,000 (collectively, including the CEO, the "Named Executive Officers"). (continued) 482 SECTION SIX VALUATION EXHIBIT 2-continued Koss CORPORATION, SEC Form 8-K FILING, Dec. 21, 2009 Stock Option Bonus Awards Awards ($) (5) ($) (1) Total (5) 267,242 401,045 0 0 0 0 0 0 0 0 0 192,995 450,507 831,553 Non-Equity Nonqualified Incentive Plan Deferred All Other Compensation Compensation Compensation ($) Earnings ($) (5) 82,795 0 34,447 213,433 0 37,612 115,913 0 39,594 298,807 0 59,251 0 0 35,122 46,555 o 39,912 11,851 0 16,883 28,717 0 22,585 264,581 o 30,746 286,345 0 32,722 0 Salary Name & Principal Position Year ($) John C. Koss (2) 2009 150,000 Chairman of the Board 2008 150,000 Michael J. Koss (3) 2009 295,000 Chief Executive Officer 2008 280,500 John Koss, Jr. (4) 2009 200,000 Vice President-Sales 2008 190,000 Sujata Sachdeva (5) 2009 145,000 Vice President-Finance 2008 137,000 Declan Hanley (6) 2009 131,346 Vice President-International 2008 110,114 0 235,122 372,966 0 0 96,499 0 0 0 173,734 206,462 0 0 18,160 0 0 0 426,673 447,341 0 0 18,160 Sales 0 0 0 11,442 2009 140,000 2008 130,000 0 0 22,115 23,994 173,557 199,404 0 0 18,160 27,250 Lenore Lillie (7) Vice President-Operations Cheryl Mike (8) Vice President-Human Resources & Cust. Service 0 0 7,764 0 2009 95,000 2008 90,000 0 0 15,060 28,513 117,824 155,538 0 18,160 18,865 0 DIRECTOR COMPENSATION The Company uses cash-based incentive compensation to attract and retain qualified candidates to serve on the Board. In setting director compensation, the Company considers the significant amount of time that Directors expend in fulfilling their duties to the Company as well as the skill-level required by the Company of members of the Board. Cash Contributions Paid to Non-employee Board Members Directors who are not also employees of the Company receive an annual retainer of $10,000, plus $2,000 per director for each board meeting attended, $1,000 per director for each committee meeting attended, $2,000 per year for the audit committee chair to review statements with the audit partner, and $1,000 per year for other committee chairs for service for each remaining committee. DIRECTOR COMPENSATION TABLE Fees Earned or Paid in Cash ($) Stock Awards ($) Name Non-Equity Incentive Plan Compensation ($) Options Awards ($) Nonqualified Deferred Compensation Earnings ($) Year All Other Compensation ($) Total ($) 2009 0 0 0 0 0 0 0 0 0 John C. Koss (1) Thomas L. Doerr Michael J. Koss (2) Lawrence S. Mattson Theodore H. Nixon John J. Stollenwerk 0 0 24,000 2009 24,000 2009 0 2009 23,000 2009 21,000 2009 23,000 0 0 0 0 0 0 0 0 0 0 23,000 21,000 23,000 0 (1) John C. Koss did not receive additional compensation for his service as a member of our Board. (2) Michael J. Koss did not receive additional compensation for his service as a member of our Board. vive 946-6280 Koss CORPORATION AND UNMUTHORIZED FINANCIAL TRANSACTIONS CASE 6.3 EXHIBIT 3 Koss CORPORATION, CONSOLIDATED BALANCE SHEETS, YEARS ENTED JUNE 30, 2005 TO 2009 2009 2008 2007 491 Assets Current Assets: Cash 2006 2005 Accounts receivable Inventories Prepaid expense Deferred income taxes Income taxes receivable Total current assets Equipment and Leasehold Improvements at cost: Leasehold improvements Machinery, equipment, furniture, and fixtures Tools, dies, molds, and patterns $1,664,407 $8,679,606 $9.763,158 $179,549 $720,121 $0 $21,006,841 $3,322,873 $10,148,646 $9,374,344 $504,806 $783,995 SO $24,134,664 54.187.682 $7.938.913 $9.923,54% $403.983 $1,124,799 $291,251 $23,870,172 $6.146.580 56.819.852 $10.522.605 $418.818 $1,365,547 50 525,273,402 55 218.699 58.763.9618 57.595,803 51.129.939 5857 840 $0 523.566.248 $1,783,946 $1,766,842 $1,748,816 $1,706,484 51.562.506 Less-accumulated depreciation $2,650,158 $11,371,402 $15,805,506 $11,729,308 $4,076,198 $1,237,727 $2,149,586 $28,470,352 $2,488,657 $9,605,720 $13,861,219 $11,114,852 $2,746,367 $1,066,853 $2,029,123 $29,977,007 $2,464,050 $11,656,951 $15,869,817 $13,302,678 $2,567,139 $423,928 $2,312,304 $29,173,543 53.444.111 $11,898,074 $17,048,669 $14,011,121 $3,037,548 $672,823 $2,457,840 $31,441,613 55.068.368 $11.198,723 $17,929,597 $14,935.897 $2.993.700 $315,531 $2.365.982 $29,241,461 Deferred Income Taxes Other Assets Total Assets Liabilities and Stockholders' Investment Current Liabilities Accounts payable $1,810,466 Accrued liabilities $1,153,089 Dividends payable $479,876 Income taxes payable $175,568 Total current liabilities $3,618,999 Deferred Compensation $1,095,961 Derivative Liability $125,000 Stockholders Investment: Common stock $2,049,384 Retained earnings $21,581,008 Total Stockholders' Investment $23,630,392 Total Liabilities plus Equity $28,470,352 $2,950,721 $1,808,467 $480,395 $347,507 $5,587,090 $1,047,482 $125,000 $1,371,152 $2,282,155 $476,459 $0 $4,129,766 $989,153 $125,000 $1,870,256 $2,149,102 $4,202,591 $927,528 $9,149,477 $992,830 $125,000 $3,012.736 $1,841,862 $486,918 $692,538 $6,034,054 $961,165 $125,000 $1,649,408 $21,568,027 $1,104,200 $22,825,424 $23,929,624 $29,173,543 $541,782 $20,632,524 $21,174,306 $31,441,613 $18.728 $22,102,514 $22,121,242 $29,241,461 $23,217,435 $29,977,007 484 VALUATION SECTION SIX EXHIBIT 4 Koss CORPORATION, STATEMENTS OF INCOME AND CASH FLOW, YEARS ENDED JUNE 30, 2005 TO 2009 CONSOLIDATED STATEMENTS OF INCOME 2009 2008 $46,943,293 $29,151,791 $17,791,502 $38,184,150 $24,917,013 $13,267,137 2007 $46,201,858 $28,284,981 $17,916,877 2005 $40,286,691 $25,216,760 $15,069,931 2006 $50,891,637 $31,095,377 $19,796,260 $10,653,243 $2,613,894 $8,544,383 $6,525,548 $10,066,385 $7,850,492 $10,792,064 $6,999,438 $10,063,871 $9,732,389 Net sales Cost of goods sold Gross profit Selling, general, and administrative expense Income from operations Other income (expense) Royalty income Interest income Interest expense Income before income tax provision Provision for income taxes Net income $805,485 $64,795 $258,333 $15,503 $0 $291,667 $119,464 $0 $324,996 $169,227 $0 $341,918 $169,047 $0 $2,887,730 $911,062 $1,976,668 $7,410,569 $2,916,280 $4,494,289 $8,344,715 $3,188,195 $5,156,520 $10,243,354 $4,021,163 $6,222,191 $7,395,828 $2,902,001 $4,493,827 CONSOLIDATED STATEMENTS OF CASH FLOWS 2009 2005 2008 2007 2006 $6,222,191 $4,493,827 Cash Flows From Operating Activities Net Income $1,976,668 $4,494,289 $5,156,520 Adjustments to reconcile net income to net cash provided by operating activities Change in allowance for doubtful accounts $77,007 ($58,164) ($222,491) (Gain) loss on disposal $0 ($149,775) $0 Depreciation and amortization $817,957 $961,605 $973,802 Stock compensation expense $399,996 $545,052 $562,680 Deferred income taxes ($107,000) ($302, 121) $489,643 Cash surrender value ($195,463) ($193,533) ($181,787) Deferred compensation $48,479 $58,329 ($3,677) Net changes in operating assets and liabilities ($639,018) ($18,553) ($1,867,504) Net cash provided by operating activities $2,378,626 $5,337,129 $4,907,186 Cash Flows from Investing Activities Sale of investments $75,000 $25,000 $250,000 Proceeds from sale of certain $0 $700,000 $0 Acquisition of equipment and and leasehold improvements ($2,147,866) ($1,179,344) Net cash used in investing ($426,070) activities ($2,072,866) ($176,070) $572,688 $116 $955,166 $523,194 ($864,999) ($169,181) $31,665 $155,324 $0 $1,103,951 $0 ($61,875) ($177,641) ($24,100) ($1,444,503) $2,251,161 $5,826,337 $7,740,647 Bi-Audio assets $0 $0 $0 $0 ($921,807) ($1,170,494) ($454,344) ($921,807) ($1,170,494) (continued) KOSS CORPORATION AND UNAUTHORIZED FINANCIAL TRANSACTIONS CASE 6.3 Z Koss CORPORATION, STATEMENTS OF INCOME AND CASH FLOWS, YEARS ENDED JUNE 30, 2005 TO 2009 EXHIBIT 4-continued 485 Cash Flows from Financing Activities Tax benefit of non-qualified stock options $0 ($286,200) $288,630 $691,660 $104,749 Dividends paid to stockholders ($1,920,586) ($5,591,850) ($5,641,556) ($1,932,483) (51,923,938) ($43,640) ($1,283,413) ($1,837,655) (56,605,451) ($2,217,371) $0 $1,413,869 $500,566 $3,869,626 $577,188 Purchase of common stock Exercise of options Net cash used in financing activities Net (decrease) increase in cash Cash at beginning of period Cash at end of period ($1,964,226) ($5,747,594) ($6,690,015) ($3,976,648) (53,459,372) ($1,658,466) ($864,809) ($1,958,899) $927,882 $3,110,781 $3,322,873 $4,187,682 $6,146,580 $5,218,698 $2,110,917 $1,664,407 $3,322,873 $4,187,681 $6,146,580 $5,221,698 Koss ASSETS Current Assets: Cash Accounts receivable Inventories Deferred income taxes Other current assets Total current assets Property and equipment, net Deferred income taxes Other assets Total Assets CONDENSED CONSOLIDATED BALANCE SHEETS EXHIBIT 5 September 30, 2009 June 30, 2009 CORPORATION (Unaudited) CONSOLIDATE BALANCE SH THREE MON ENDED SEPI $2,847,643 $1,664,407 2008 AND 2 10,280,462 8,679,606 10,371,604 9,763,158 720,121 720,121 920,153 179,549 25,139,983 21,006,841 4,364,028 4,076,198 1,237,727 1,237,727 2,160,586 2,149,586 $32,902,324 $28,470,352 LIABILITIES AND STOCKHOLDERS' INVESTMENT Current Liabilities: Line of credit Accounts payable Accrued liabilities Dividends payable Income tax payable Total current liabilities Deferred compensation Derivative liability Stockholders' investment Total Liabilities & Stockholders' Investments $2,750,000 2,428,020 1,935,695 479,876 287,681 7,881,272 1,095,961 125,000 23,800,091 $32,902,324 1,810,466 1,153,089 479,876 175,568 3,618,999 1,095,961 125,000 23,630,392 $28,470,352 See accompanying notes to the condensed consolidated financial statements. SECTION SIX VATION an 6 RATIN VTS OF AND CASH 3 MONTHS SEPTEMBER 98 AND 2009 2008 $11,486,034 7,085,574 4,400,460 2,998,527 1,401,933 KOSS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) 2009 Three months ended September 30 $10,796,853 Net sales 6,679,562 Cost of goods sold Gross profit 4,117,291 Selling, general and administrative expense 3,188,800 Income from operations 928,491 Other income (expense) Royalty income Interest income Income before income tax provision 928,491 Provision for income taxes 362,112 Net income $566,379 58,333 14,053 1,474,319 560,555 $913,764 See accompanying notes to the condensed consolidated financial statements. 2008 $913,764 KOSS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) 2009 Three months ended September 30 CASH FLOWS FROM OPERATING ACTIVITIES: $566,379 Net income Adjustments to reconcile net income to net cash by operating activities: Depreciation and amortization 252, 107 Net changes in operating assets and liabilities (1,363,103) Net cash used in provided by operating activities (544,617) CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of equipment (542,271) Net cash used in investing activities (542,271) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from line of credit 2,750,000 Dividends paid (479,876) Net cash provided by (used in) financing activities 2,270,124 Net increase in cash 1,183,236 Cash at beginning of period Cash at end of period 1,664,407 $2,847,643 289,899 980,370 2,184,033 (941,493) (941,493) (480,395) (480,395) 762,145 3,322,873 $4,085,018