LEGAL MATTERS

The Company is currently involved in the following legal matters described below:

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As previously reported, on January 15, 2010, a class action complaint was filed in federal court in Wisconsin against the Company, Michael J. Koss and Sujata Sachdeva. On March 9, 2012, the Court entered an order preliminarily approving a proposed settlement involving the claims that were brought against the Company and Michael J. Koss (the "Proposed Settlement") and directing that notice of the Proposed Settlement be given to the proposed settlement class. The Proposed Settlement involves a total payment of $1 million to the shareholders included within the proposed settlement class. This amount was funded by the Company’s insurance company, with any fee awarded to lead plaintiffs' counsel to be paid out of the $1 million payment. The Court scheduled a settlement hearing for July 10, 2012, to determine: whether the Proposed Settlement is fair, reasonable and adequate to the Class and should be approved by the Court; whether to certify a settlement class; whether a judgment as provided in the Proposed Settlement should be entered; whether the proposed plan of allocation should be approved; and to determine the amount of fees and expenses that should be awarded to lead plaintiffs' counsel. See David A. Puskala v. Koss Corporation, et al., United States District Court, Eastern District of Wisconsin, Case No. 2:2010cv00041.

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On January 26, 2010, the SEC’s Division of Enforcement advised the Company that it obtained a formal order of investigation in connection with the unauthorized transactions. The Company voluntarily brought the unauthorized transactions to the SEC staff’s attention when they were discovered in December 2009. On October 24, 2011, the Company announced that the Company and Michael J. Koss agreed to a settlement with the SEC without admitting or denying the Commission’s charges in a Complaint that the SEC filed in Milwaukee, Wisconsin. On February 23, 2012, the United States District Court for the Eastern District of Wisconsin entered Final Judgments against the Company and Michael J. Koss in accordance with the terms of the settlement. See United States Securities and Exchange Commission v. Koss Corporation and Michael J. Koss, civil action no. 2:11-cv-00991. Pursuant to the settlement, Michael J. Koss reimbursed the Company 160,000 of options and an additional $242,419 in cash pursuant to Section 304 of the Sarbanes-Oxley Act, 15 U.S.C. Section 7243, which together with his previous voluntary reimbursement of $208,895, represents the full amount of bonuses that he received during the restatement periods.

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On February 18, 2010, the Company filed an action against American Express Company, American Express Travel Related Services Company, Inc., AMEX Card Services Company, Decision Science, and Pamela S. Hopkins in Superior Court of Maricopa County, Arizona, case no. CV2010-006631, alleging various claims of aiding and abetting breach of fiduciary duty, aiding and abetting fraud, conversion, and negligence relating to the unauthorized transactions. American Express filed a Motion to Dismiss the claims that the Company filed, and the Court granted the Motion to Dismiss. The Company filed a Motion for New Trial requesting that the Court reconsider its prior ruling that granted the Motion to Dismiss, and the Court denied the Motion for New Trial. The Company has appealed these rulings.

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On June 24, 2010, the Company filed an action against its former independent auditor, Grant Thornton, LLP, and Ms. Sachdeva, in Circuit Court of Cook County, Illinois, alleging various claims of accounting malpractice, negligent misrepresentation, and fraud relating to the unauthorized transactions. Grant Thornton filed a claim for contribution against the Koss outside directors, a claim for contribution against John Koss Sr., and claims for contribution and/or common law indemnity and fraudulent misrepresentation against Michael J. Koss. Ms. Sachdeva subsequently filed a response to the complaint and Grant Thornton filed a Motion to Dismiss the action. This Motion to Dismiss was denied. Grant Thornton also filed a Motion to Dismiss based on Forum Non Conveniens grounds and the Court granted this motion, holding that this case should be litigated in Milwaukee, Wisconsin as opposed to Cook County, Illinois. The Company has appealed this decision.


•	On December 17, 2010, the Company filed an action against Park Bank in Circuit Court of Milwaukee County, Wisconsin alleging a claim of negligence relating to the unauthorized transactions, and discovery is now proceeding.

The ultimate resolution of these litigation matters is not determinable unless otherwise noted.

On November 17, 2010, Sujata Sachdeva was sentenced to 11 years in prison. As part of a restitution order that was entered relating to her sentence, the Company received $640,384 during the 3 months ended March 31, 2012 from the sale or transfer of certain of Ms. Sachdeva's assets that were seized by law enforcement and $53,983 of additional proceeds from the sale of Ms. Sachdeva's shares held in the Koss Employee Stock Ownership Trust. The Company expects to receive recoveries from the sale of additional assets that law enforcement seized from Ms. Sachdeva.