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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K

(Mark One)
/X/ Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934 (Fee Required)
for the fiscal year ended June 30, 1996
or
/ / Transition Report Pursuant to Section 13 or 15(d) of
the Securities and Exchange Act of 1934 (No Fee Required)
for the transition period from to .

Commission File No. 0-23456
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CAMBRIDGE SOUNDWORKS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

MASSACHUSETTS 04-2998824
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
311 NEEDHAM STREET
NEWTON, MASSACHUSETTS 02164
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)

(617) 332-5936
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:

COMMON STOCK (WITHOUT PAR VALUE)
(TITLE OF CLASS)
------------------------

Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No ____

Indicate by check mark if the disclosure of delinquent filers pursuant to
Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of the
Registrant's knowledge, in definitive proxy or information statements
incorporated in Part III of this Form 10-K or any amendments to this Form 10-K.
_________

The aggregate market value of the Registrants voting stock held by
non-affiliates of the Registrant as of September 18, 1996, was $8,632,281. As of
September 18, 1996, there were issued and outstanding 2,889,399 shares of
Registrant's Common Stock, without par value.

DOCUMENTS INCORPORATED BY REFERENCE

(1) Portions of the Registrants Annual Report to Stockholders for the fiscal
year ended June 30, 1996 (Items 5, 6, 7, and 14 (a) (1))

(2) Portions of the definitive Proxy Statement for Registrants Annual Meeting of
Stockholders to be held on October 22, 1996 (Items 11, 12, and 13)

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CAMBRIDGE SOUNDWORKS, INC.
TABLE OF CONTENTS

SECURITIES AND EXCHANGE COMMISSION
ITEM NUMBERS AND DESCRIPTION PAGE
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PART I

ITEM 1. Business.................................................................................... 2
ITEM 2. Properties.................................................................................. 10
ITEM 3. Legal Proceedings........................................................................... 10
ITEM 4. Submission of Matters to a Vote of Security Holders......................................... 10
PART II
ITEM 5. Market for the Registrant's Common Equity
and Related Stockholder Matters............................................................. 10
ITEM 6. Selected Financial Data..................................................................... 10
ITEM 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................................................... 10
ITEM 8. Financial Statements and Supplementary Data................................................. 10
ITEM 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure...................................................... 10
PART III
ITEM 10. Directors and Executive Officers of the Registrant.......................................... 11
ITEM 11. Executive Compensation...................................................................... 12
ITEM 12. Security Ownership of Certain Beneficial Owners
and Management.............................................................................. 12
ITEM 13. Certain Relationships and Related Transactions.............................................. 13
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K................................................................................. 13

Inasmuch as the calculation of shares of Registrant's voting stock held by
non-affiliates requires a calculation of the number of shares held by
affiliates, such figure, as shown on the cover page hereof, represents the
Registrant's best good faith estimate for purposes of this Annual Report on Form
10-K, and the Registrant disclaims that such figure is binding for any other
purpose. The aggregate market value of Common Stock indicated is based upon the
closing sale price of the Common Stock as reported on the Nasdaq National Market
System on September 18, 1996. All outstanding shares beneficially owned by
executive officers and directors of the Registrant or by any shareholder
beneficially owning more than 5% of Registrant's Common Stock, as disclosed
herein, were considered solely for purposes of this disclosure to be held by
affiliates.

PART I

ITEM 1. BUSINESS
OVERVIEW

Cambridge SoundWorks, Inc. (the "Company" or "Cambridge SoundWorks") designs
and manufactures audio products for stereo, home theater and multimedia computer
audio under the brand name Cambridge SoundWorks. The Company sells its Cambridge
SoundWorks products and selected audio and video components manufactured by
other companies directly to consumers through its catalog and at its
Company-owned retail stores. The sale of these other products enables the
Company to offer all of the components necessary for complete stereo and home
theater systems. The Company also sells its Cambridge SoundWorks speakers on a
wholesale basis.

The Company was founded in 1988 to market the Company's proprietary ENSEMBLE
speaker system. The ENSEMBLE-Registered Trademark- was sold directly to
consumers rather than through audio dealers. As the Company grew, a factory
outlet was established at the production facility and opened for retail sales in
1990. In 1990, the Company began offering, in addition to the speaker systems
designed by the Company, a variety of high quality home audio products
manufactured by other companies, including receivers, VCR's, and cassette, laser
disc and compact disc players. In 1991, the Company developed a catalog to
supplement its direct advertising in national and local media. In 1994, the
Company began its retail expansion and opened 13 new Company-owned stores in New
England and Northern California. From January 1995 to June 1996, the Company
opened nine additional Company-owned stores. In June 1995, the Company began to
sell its products in more than 200 Best Buy Co., Inc. ("Best Buy") stores under
an exclusive arrangement.

INDUSTRY TRENDS

In recent years, the market for speakers has been affected by increased
consumer demand for "surround sound" home theater entertainment systems that use
additional audio channels and speakers to reproduce the sound experienced in
movie theaters. Home theater entertainment systems require a number of high
quality passive and electronically integrated or "active" (amplified) speakers,
and thus represent a growth trend in the industry.

Another significant trend in the speaker market is the development of
multimedia PC's and the creation of a large market for add-on speakers which
reproduce high fidelity sound for PC's with interactive CD-ROM's and sound
cards. The Company believes that the trend in sales of PC's equipped or upgraded
with CD-ROM drives and sound cards will create a large potential customer base
for high quality add-on speakers.

The Company anticipates the introduction of Digital Video Discs (DVD)
sometime early in 1997 and believes that this new ultra-high-density data
storage medium may have a large impact on both the home entertainment and the
computer industries. In both industries, DVD may result in more focus on the
movies and video, which may, in turn, increase demand for home theater sound
systems and multimedia speaker systems. Cambridge SoundWorks intends to offer
DVD players for sale to its home theatre customers.

COMPANY STRATEGY

The Company's strategy is to build the Cambridge SoundWorks brand name
through a combination of product quality, direct distribution to consumers, new
channels of distribution and service. Key elements of this strategy include:

- BRAND BUILDING. The Company believes that extensive advertising and
promotions of the Company and its products, have helped build the
Cambridge SoundWorks brand name and the Company's reputation for selling
high quality speakers at competitive prices.

- CONSUMER-DIRECT SALES. By selling directly to the consumer through its
catalog and Company-owned stores, the Company believes it is able to
offer value and service to its customers. The Company's factory-direct
selling eliminates the retail mark-up of the conventional dealer

network and allows the Company to offer high quality products at
competitive prices. At the same time, the Company retains control over
all aspects of the sales effort, including presentation of merchandise,
demonstration of products and customer service. The Company's direct
relationship with the consumer results in feedback which enables it to
monitor advertising effectiveness and respond to changes in consumer
demands for new or improved audio products.

- NEW CHANNELS OF DISTRIBUTION. The Company believes that it can enhance
its brand image, while maintaining its commitment to bring high quality
products to the consumer at the lowest possible cost, by expanding into
certain new channels of distribution, including the following:

In February 1995, the Company announced the signing of an agreement
with Best Buy, Co., Inc. ("Best Buy"). Under the terms of the
agreement, Best Buy will be the exclusive reseller of certain
Cambridge SoundWorks products for three years. Best Buy is one of the
nation's fastest growing consumer electronics retailers. It offers a
wide selection of name brand consumer electronics, personal computers
and home office products, entertainment software, major appliances and
photographic equipment throughout the United States.

Cambridge SoundWorks products are currently displayed at more than 260
Best Buy stores, some in FACTORY DIRECT SPEAKER WALLS-TM- which are
specially designed, automated displays for all Cambridge SoundWorks
key products, allowing easy consumer self-demonstration.

Cambridge SoundWorks' amplified speakers system called
SOUNDWORKS-Registered Trademark- is being marketed nationally as a
premium in the current issue of Philip Morris' "Marlboro Gear"
catalog.

SOUNDWORKS is also being bundled with computer systems being packaged
by IBM and Cyrix Corporation.

- EMPHASIS ON CUSTOMER SERVICE. The Company strives to provide a high level
of personalized service and product information to its catalog and retail
customers. The Company's current full-color catalog contains information
on how to select and test speakers as well as a detailed introduction to
home theater and surround sound technology with little technical jargon.
The Company's audio experts are trained to avoid high-pressure sales
tactics and they take a consultative approach to selling. The audio
experts help consumers make an appropriate selection from the Company's
product offerings, provide follow-up technical assistance, keep abreast
of consumer preferences and monitor customer comments on the quality and
performance of the Company's products.

- GROWTH THROUGH GEOGRAPHIC EXPANSION. Based on the success of its original
retail store in Newton, Massachusetts, the Company has opened 27
additional stores to date, including the Company's first store in a major
urban shopping mall, the CambridgeSide Galleria, in Cambridge,
Massachusetts, and the Company's first store in a factory outlet center,
the Worcester Common Fashion Outlets Mall in Worcester, Massachusetts.
The Company currently has a total of 18 stores in New England and 10 in
Northern California.

The Company believes that by opening multiple stores in concentrated
geographic areas it may be able to achieve certain economies of scale
particularly with regard to advertising expenses. The Company is
currently evaluating other potential retail sites and plans to open more
Company-owned stores in fiscal 1997. Management estimates that the
capital cost to open a new retail store currently averages approximately
$180,000 (exclusive of start-up inventory and grand-opening advertising).

- GROWTH THROUGH PRODUCT SUB-CATEGORY EXPANSION. The Company also has plans
to grow by adding new products and product sub-categories to its line-up
of branded goods. To date, the Company's home speakers line has focused
on the "subwoofer/satellite" category, a strong niche of the overall
loudspeaker market. In the fall of 1996, the Company plans to introduce
its first series of floor-standing "Tower" loudspeakers that use much
larger cabinets and are more costly ($599-$1,499 compared to $249-$599).
This category represents a significant portion of the overall market for
high quality speakers. The Company also plans to introduce a new,
higher-performance multimedia speaker system for the computer-user
market.

- GROWTH THROUGH NEW MARKET OPPORTUNITIES. The Company continues to develop
speakers for the growing home theater entertainment market. The
proliferation of VCR's and increased viewing of home movies is driving
consumer demand for surround sound home theater entertainment systems.
The Company has developed add-on speakers for the emerging PC/ multimedia
market.

The Company believes its position as a vertically integrated factory-direct
retailer gives it important competitive advantages by allowing it to provide
high quality products at competitive prices and to react early to new consumer
preferences and trends.

COMPANY PRODUCTS

The Company makes speakers for conventional stereo systems, home theater
entertainment systems and for multimedia computing. A typical home theater
speaker system configuration includes: the original (or upgraded) stereo
speakers (placed in front of the listener to the left and right of the TV
screen); a center channel speaker (placed directly in front of the listener near
the TV to keep dialogue firmly centered); and a pair of surround speakers
(placed behind the listener to complete the surround sound effect). In order to
convey the low bass energy of special effects, many home theaters are equipped
with supplemental subwoofers. The Company offers a number of speakers for all of
the above applications as well as many specialty speaker systems.

The Company manufactures and sells the following speakers:

ENSEMBLE SUBWOOFER-SATELLITE SPEAKER SYSTEMS. The heart of the Cambridge
SoundWorks product lineup consists of the ENSEMBLE, ENSEMBLE II, ENSEMBLE III,
ENSEMBLE IV, ENSEMBLE III HOME THEATRE and ENSEMBLE IV HOME THEATER speaker
systems. Subwoofer-satellite speaker systems allow listeners to place the
subwoofer in out-of-the-way places without adversely affecting performance. The
small satellite speakers convey high performance midrange and treble sound with
ease of placement. The original ENSEMBLE system uses two separate subwoofers
(which convey the bass notes) to maximize room placement flexibility. ENSEMBLE
II uses a single subwoofer cabinet that contains two separate bass drivers.
ENSEMBLE III is a more compact, more affordable three-piece system. ENSEMBLE IV
is the most compact, most affordable 3-piece system. ENSEMBLE IV HOME THEATER
adds three satellites to the ENSEMBLE IV for the most affordable,
high-performance surround speaker system.

ENSEMBLE III HOME THEATRE. Ensemble III Home Theatre adds three satellites
to the ENSEMBLE III to create a compact, affordable surround speaker system.

ENSEMBLE IV HOME THEATRE. Ensemble III Home Theatre adds three satellites to
the ENSEMBLE IV for the most affordable surround speaker system.

TOWER-TM- Series Speakers. The Company has introduced three new
floor-standing tower speakers. TOWER is a three-way, dual-woofer, bipolar design
with real hardwood veneer cabinets that appeals to "high end" audiophile
customers. TOWER II is very similar to TOWER, but does not use a bipolar design
(which involves rear-facing speakers that reflect off the wall), and uses
wood-simulating vinyl finishes. TOWER III is an affordable audiophile speaker
system using a two-way, single woofer design.

CENTER CHANNEL SPEAKERS. Cambridge SoundWorks manufactures five speakers for
use as center channel speakers in Dolby Pro Logic home theater systems which
incorporate separate channels for movie sound reproduction (the center channel
carries the dialogue). All five speakers are magnetically

shielded so they can be placed near a TV or computer monitor. CENTER/SURROUND IV
and CENTER/ SURROUND III are small, affordable center speakers designed for use
with the Company's ENSEMBLE IV and ENSEMBLE III speaker systems. CENTER CHANNEL
II is a center speaker with a wide/low profile designed to be used with the
Company's ENSEMBLE II speaker system. CENTER CHANNEL PLUS is a center speaker
with a wide/low profile designed to be used with the Companys ENSEMBLE speaker
system. CENTERSTAGE-TM- is a high-output center speaker with a wide/low profile
designed to be used with the Company's TOWER series speaker systems.

SURROUND SPEAKERS. Cambridge SoundWorks makes five surround speakers.
CENTER/SURROUND IV and CENTER/SURROUND III are small affordable surround
speakers designed for use with the Company's ENSEMBLE IV and ENSEMBLE III
speaker systems. MODEL SEVENTEEN is a two-way, wide-range speaker suitable for
use as surround speakers in the new Dolby Digital surround sound systems. THE
SURROUND-Registered Trademark- and THE SURROUND II are "dipole radiator"
surround speakers which reproduce sound from both sides of the speaker, causing
the reflected sound to surround the listener with uniform sound. THE SURROUND
has a very high power handling capacity and is often selected for "high end"
surround sound systems, including the new Dolby Digital systems. THE SURROUND II
is smaller and more affordable than THE SURROUND.

POWERED SUBWOOFERS. The POWERED SUBWOOFER by Cambridge SoundWorks consists
of a heavy-duty 12" woofer housed in an acoustic-suspension cabinet with a
140-watt amplifier and a built-in electronic crossover. The POWERED SUBWOOFER II
uses a 120 watt amplifier with an 8" woofer. The POWERED SUBWOOFER III uses an
even smaller amplifier with a 6 1/2" woofer. Cambridge SoundWorks' SLAVE
SUBWOOFER, used in connection with the POWERED SUBWOOFER, uses the same woofer
driver and cabinet as the POWERED SUBWOOFER, but does not include the amplifier
or crossover.

MODEL SIX SPEAKERS. MODEL SIX is a two-way, acoustic-suspension speaker
available in three cabinet finishes.

MODEL SEVENTEEN SPEAKERS. MODEL SEVENTEEN is a two-way, acoustic-suspension
speaker available in four cabinet finishes.

AMBIANCE-REGISTERED TRADEMARK- IN-WALL SPEAKERS. AMBIANCE IN-WALL is a
compact two-way speaker designed to deliver high performance music reproduction
in rooms with limited space.

WEATHER-RESISTANT SPEAKERS. Cambridge SoundWorks makes two versions of its
all-weather speaker: THE OUTDOOR and THE OUTDOOR IN-WALL. These speakers perform
like the AMBIANCE speakers.

SOUNDWORKS. SOUNDWORKS is a compact, amplified speaker system designed for
use with multimedia computer systems or in home stereo systems. It consists of a
pair of satellite speakers and a compact, subwoofer cabinet that also encloses
the systems amplifier. An optional carry bag and rechargeable battery are also
available.

TRANSPORTABLE SPEAKER SYSTEM. The Company's MODEL TWELVE consists of two
satellite speakers, a three-channel amplifier with built-in electronic crossover
and a carrying case (the patented BASSCASE-TM-) that doubles as the system's
subwoofer. The MODEL TWELVE can work on 110, 220 and 12 volts, and is designed
for use in computer-audio presentations to groups of people.

PRODUCTS OF OTHER MANUFACTURERS

The Company sells a variety of audio and home theater products manufactured
by Aiwa, Carver, Clarion, Harman Kardon, Marantz, Panasonic, Pioneer, RCA, JVC,
Sony, and others, including receivers, cassette decks, CD and laser disc
players, CD interactive players, VCR's, TVs, wide screen televisions and DSS
(digital satellite systems). These other products complement the Company's
branded speakers and enable the Company to offer all of the components necessary
for complete stereo and home theater systems. The Company has also recently
started to offer selected car stereo components and systems from brands such as
Pioneer and Clarion. In addition, the Company sells a variety of audio
accessories including audio and video tapes, cable, earphones, stands, mounting
brackets, cabinets, remote control systems, and other related equipment. Many of
the cable and connecting accessories are sold under the Cambridge SoundWorks
brand.

Consistent with its overall philosophy, the Company sells only products that
it believes will enhance the performance of the Company's speakers. The Company
sells a select range of competing products, those designed to be one of the best
values in its product category. By pre-selecting what it believes to be the best
audio components, the Company saves the consumer the time required to analyze
all the different brands and models currently on the market and focuses the
selling effort on the Company's speakers.

Through high-volume buying arrangements with the manufacturers of these
products, the Company believes it is able to offer these products at prices
which are, in most instances, comparable to, or lower than, those offered by
competitors. The Company currently matches advertised prices from authorized,
inventory-stocking dealers for the components featured in its retail stores and
in its catalog.

CUSTOMER SATISFACTION

The Company has a 30-day return policy intended to ensure customer
satisfaction. The Company's non-amplified speakers are also covered by a
seven-year limited parts and labor warranty covering repairs or replacements due
to manufacturing defects in its speakers. Historically, warranty costs are not
significant. The Company believes its return policy and warranty are consistent
with industry practices and essential to customer satisfaction.

The Company has a Cambridge SoundWorks charge card (with credit extended by
a bank) which permits qualified customers to make credit purchases without
finance charges for extended periods, provided payment is made when due. The
Company believes that its charge card facilitates customer purchases of the
Company's merchandise and reinforces customer loyalty to the Company's products
and brand name.

MARKETING AND CATALOG CIRCULATION

The Company engages in extensive national advertising in audio magazines,
general interest magazines and national and local newspapers targeted by the
Company. In certain circumstances, the Company uses its advertising in national
audio publications as a mini-catalog for the Company's key products, providing
information concerning the Company's products, stressing the Company's
reputation for value, the persona and experience of Henry Kloss, and the
availability of experienced audio experts. The mini-catalog includes the
Company's toll-free number and other information to assist the reader in
obtaining the full catalog and ordering products by phone. The Company also
advertises extensively on local radio stations in the Boston, Massachusetts, and
San Francisco, California, markets where its retail stores are located.
Television advertising is also used in the Boston, Massachusetts market.

The Company has developed and uses a customer database which is maintained
by its sales personnel. The Company uses this database to monitor inquiry and
sales productivity, demographic information and the overall effectiveness of its
advertising. The Company believes that its database provides a cost effective
means to target repeat customers. The database also provides supplemental

information to focus advertising and marketing strategies and to develop new
product ideas. The Company creates most of its advertising and marketing
materials in-house in order to minimize costs, shorten lead times and control
the presentation of the Company's brand image.

The Company published three full-color catalogs in the period from July
3,1995, to June 30, 1996, depicting the Company's speakers as well as selected
other audio and video components that complement the Company's speakers. The
catalogs contain extracts from trade reviews of the Company's products as well
as information on speaker placement, surround sound and home theater technology,
and other items of topical interest. The catalogs contain minimal technical
jargon and are designed to increase sales through education of the consumer. The
Company generates names for its mailing list primarily through advertising and
customer referrals. The Company also tests, from time to time, other methods for
distributing its catalogs to potential customers, such as including free
catalogs with selected issues of specialty magazines and renting selected
mailing lists.

STORE OPERATIONS

As of September 1996, the Company had 18 stores in New England, and 10
stores in the San Francisco, California, Bay area. These stores contain
approximately 2,000 to 4,000 square feet of retail space, including listening
rooms. They are decorated with pictures of the Company's factory operations and
stock only quantities of inventory sufficient for immediate customer needs. Two
stores, one in Newton Upper Falls, Massachusetts and one on Van Ness Avenue in
San Francisco, California, are large "SuperStores" capable of doing high-volume
business. Three New England stores (Newton Upper Falls, Massachusetts, Harvard
Square in Cambridge, Massachusetts and Worcester, Massachusetts) and one Bay
Area store (South San Francisco, California) are "Outlet Centers" that include
large departments of open-box and refurbished goods at discounted prices.

As of September, 1996, Cambridge SoundWorks had 28 retail stores as
described in the summary below.

NEW ENGLAND AREA

DATE OPENED LOCATION TYPE OF LOCATION
- ------------------- ---------------------------------------------------- --------------------------------------

1990 West Newton, Massachusetts Original factory store
September 1994 Newton Upper Falls, Massachusetts New factory "SuperStore"
February 1994 Hanover, Massachusetts Outdoor shopping center
March 1994 Danvers, Massachusetts Major suburban shopping mall
Relocated to North Shore Mall
Peabody,Massachusetts in August 1996
June 1994 Burlington, Massachusetts Major suburban shopping mall
Relocated to Burlington Mall
Burlington, Massachusetts in September 1996
October 1994 Nashua, New Hampshire Outdoor shopping center
November 1994 CambridgeSide Galleria, Major urban shopping mall
Cambridge, Massachusetts
December 1994 Worcester Common Fashion Outlets Mall, Enclosed factory outlet center
Worcester, Massachusetts
March 1995 Cape Cod Mall, Major suburban shopping center
Hyannis, Massachusetts
June 1995 Framingham, Massachusetts Outdoor shopping center
September 1995 Harvard Square, Urban "Main Street" location
Cambridge, Massachusetts

DATE OPENED LOCATION TYPE OF LOCATION
- ------------------- ---------------------------------------------------- --------------------------------------
September 1995 Square One Mall, Major suburban shopping center
Saugus, Massachusetts

September 1995 The Mall at Rockingham Park Major suburban shopping center
Salem, New Hampshire
September 1995 The Mall of New Hampshire Major suburban shopping center
Manchester, New Hampshire
October, 1995 The Emerald Square Mall Major suburban shopping center
N. Attleboro, Massachusetts
August, 1996 The Maine Mall Major suburban shopping center
S. Portland, Maine
August, 1996 Solomon Pond Mall Major suburban shopping center
Marlboro, Massachusetts
September, 1996 West Farms Mall Major suburban shopping center
W. Hartford, Connecticut
SAN FRANCISCO AREA
September 1994 San Francisco, California Urban "Main Street" location
October 1994 Berkeley, California Suburban "Main Street" location
October 1994 Hayward, California Outdoor shopping center
October 1994 Concord, California Major suburban shopping center
Relocated to SunValley Mall
Concord, California, September, 1996
October 1994 Walnut Creek, California Suburban "Main Street" location
December 1994 Palo Alto, California Suburban "Main Street" location
June 1995 South San Francisco, California Factory outlet store
November 1995 Stonestown Galleria Major suburban shopping center
San Francisco, California
September 1996 Stoneridge Mall Major suburban shopping center
Pleasanton, California
September 1996 The Great Mall Enclosed Factory Outlet center
Milpitas, California

PRODUCT DEVELOPMENT

To maintain its competitive position in the audio products industry, the
Company introduces new products and features that address the demands and
preferences of consumers. The Company's research and development effort is
directed by the Company's President, Thomas J. DeVesto. The Company's research
and development team consists of Henry E. Kloss, product development consultant,
Tom Wethern, Engineering Manager, Fred Pinkerton, Product Manager, and Roy
Allison, product development consultant. Mr. DeVesto has over 15 years
experience working with Mr. Kloss developing a wide range of audio and video
products from big-screen TVs to multimedia speaker systems. Mr. Kloss is one of
the original founders of the Company, and has over 40 years of experience
designing speakers, including best-selling models at Acoustic Research, KLH and
Advent. Mr. Wethern was Chief Acoustician at a/d/s, a New England loudspeaker
and amplifier manufacturer. Prior to a/d/s,

Mr. Wethern was Transducer Engineer for Boston Acoustics. Mr. Pinkerton was
formerly Product Manager at Boston Acoustics, Inc. and Advent. Roy Allison has
over 40 years of speaker design experience, including highly acclaimed models at
Acoustic Research, Allison Acoustics and RDL.

At an early date, the Company recognized the importance of home theater
(which involves integrating TV and video output with stereo or multi-channel
audio sound) and has designed a variety of products for this application. A
significant portion of the Company's fiscal 1996 speaker revenues were derived
from speaker sales related to the home theater concept. The Company also
recognized the emergence of opportunities in the PC/multimedia markets and
introduced SOUNDWORKS in 1994, its first speaker designed for use with
multimedia computer systems.

The Company's product development cycle is driven by ongoing market
analysis, by customer feedback and by its responsive manufacturing process. The
Company is quick to identify audio trends and brings new products to market that
are of high quality and offer good value to a wide range of consumers. The
Company also uses the services of outside consultants in industrial design and
the design of electronic circuitry as needed. In addition, the Company works
closely with selected audio component suppliers and other technology developers
to evaluate the latest developments in audio-related technology.

MANUFACTURING, VENDORS AND SUPPLIERS

The Company's manufacturing facilities are located in Newton Upper Falls,
Massachusetts. The products assembled by the Company include traditional
speakers, which require various semi-skilled light assembly operations, as well
as electronically integrated, powered speakers, which entail more complex
assembly and testing procedures. The Company currently employs 89 production
workers and manufacturing support personnel.

The Company's speakers are assembled from parts and sub-assemblies designed
or selected by its research and development team. Some of these parts and
sub-assemblies are purchased from, or specially fabricated for the Company by,
outside suppliers. The Company also manufactures parts and sub-assemblies
in-house, including some of the speaker cabinets, woofers, crossover networks
and electronic components used in the final assembly of many of its branded
speakers. The Company has a fully-integrated cabinet building operation
including woodworking and paint shops.

The Company sells a number of other audio and video components which it
purchases from selected manufacturers. The Company offers only those products of
selected manufacturers which it believes are of comparable quality to, and
compatible with, its own speaker products.

TRADEMARKS, LICENSES AND PATENTS

The following are trademarks of the Company: CAMBRIDGE
SOUNDWORKS-REGISTERED TRADEMARK-, CAMBRIDGE SOUNDWORKS LISTENING ROOM-TM-,
BASSCASE-REGISTERED TRADEMARK-, ENSEMBLE-REGISTERED TRADEMARK-, ENSEMBLE BY
HENRY KLOSS-REGISTERED TRADEMARK-, ENSEMBLE BY HENRY KLOSS AND
DESIGN-REGISTERED TRADEMARK-, MODEL SIX-TM-, MODEL SEVENTEEN-TM-,
AMBIANCE-REGISTERED TRADEMARK-, AMBIANCE BY HENRY KLOSS-REGISTERED TRADEMARK-,
AMBIANCE BY HENRY KLOSS AND DESIGN-REGISTERED TRADEMARK-, MODEL TEN-A-TM-, THE
SURROUND AND DESIGN-REGISTERED TRADEMARK-, THE SURROUND-REGISTERED TRADEMARK-,
THE SURROUND BY HENRY KLOSS-TM-, THE OUTDOOR-TM-, MODEL
ELEVEN-REGISTERED TRADEMARK-, MODEL TWELVE-TM-, POWERED SUBWOOFER-TM-, SLAVE
SUBWOOFER-TM-, SOUNDWORKS-REGISTERED TRADEMARK-, SOUNDWORKS BY HENRY
KLOSS-REGISTERED TRADEMARK-, FACTORY-DIRECT SPEAKER WALL-TM-, CAMBRIDGE
SOUNDWORKS PROLINE AND DESIGN-TM-, TOWER BY HENRY KLOSS-TM-, CENTER STAGE-TM-,
CENTER STAGE BY HENRY KLOSS-TM-, MOVIEWORKS-TM-, MICROWORKS-TM-, MICROWORKS BY
HENRY KLOSS-TM-, YOU JUST CAN'T GET IT ANYWHERE ELSE-TM-, AND A NEW KIND OF
AUDIO COMPANY-TM-. The Company also has a number of other unregistered
trademarks. The Company holds a United States patent relating to the design of
its BassCase, a component of the MODEL ELEVEN-A and MODEL TWELVE speaker
systems. The Company believes that the success of its business is more dependent
upon marketing and product innovations than patented technology.

CUSTOMERS

The Company had one customer, Best Buy, which accounted for 22% of net sales
for the year ended June 30, 1996, the loss of which would have a material
adverse effect on the Company's operations.

EMPLOYEES

At September 18, 1996, the Company had 271 full-time and 13 part-time
employees, of whom 110 were engaged in manufacturing, 155 in sales, customer
service and marketing, four in engineering and product development and 15 in
administration. The Company considers its employee relations to be good. None of
the Company's employees is covered by a collective bargaining agreement.

ITEM 2. PROPERTIES

The Company's administration, direct marketing/catalog fulfillment, audio
"SuperStore" and manufacturing operations are located in a 73,300 square foot
building in Newton Upper Falls, Massachusetts. The building is under a ten year
lease that commenced September 1994.

The Company signed a four-year lease for 99,000 square feet of warehouse
space in Westwood, Massachusetts, in June 1995. The Company also has a leased
warehouse, containing approximately 5,800 square feet, in South San Francisco,
California, which is used to service the Company's retail stores in Northern
California and fulfill West Coast catalog orders.

The Company's retail stores typically contain 2,000 to 4,000 square feet of
retail space under operating lease agreements with terms ranging from two to 15
years or tenancies-at-will. The Company plans to open additional retail stores
in fiscal 1997 using leased premises.

The Company's manufacturing facility generally operated moderately below
capacity for the year ended June 30, 1996.

ITEM 3. LEGAL PROCEEDINGS

None

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS

The information required by this item is incorporated herein by reference to
the section entitled "Market for Registrant's Common Equity and Related
Stockholder Matters" on page 3 of the Company's 1996 Annual Report, which is
filed herewith as Exhibit 13.

ITEM 6. SELECTED FINANCIAL DATA

The information required by this item is incorporated herein by reference to
the section entitled "Selected Financial Data" on page 2 of the Company's 1996
Annual Report, which is filed herewith as Exhibit 13.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The information required by this item is incorporated herein by reference to
the section entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations", pages 4 and 5 of the Company's 1996 Annual
Report, which is filed herewith as Exhibit 13.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The information required by this item is incorporated herein by reference to
the consolidated financial statements of the Company (including the notes
thereto) and the independent public accountant's report thereon appearing on
pages 6 through 11 of the Company's 1996 Annual Report, which is filed herewith
as Exhibit 13.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
EXECUTIVE OFFICERS AND DIRECTORS

The following table sets forth certain information concerning executive
officers and directors of the Company:

NAME AGE POSITION
- ------------------------------- --- ---------------------------------------------------------------------------

Thomas J. DeVesto 49 President, Chief Executive Officer and Director
Wayne P. Garrett 40 Vice President -- Finance, Chief Financial Officer, Treasurer and Clerk
Thomas J. Hannaher 44 Vice President -- Marketing
Robert S. Mainiero 40 Vice President -- Business Development
Sandy Ruby 55 Vice President -- Retail
Thomas E. Brew, Jr. (1)(2) 54 Director
Leo Kahn (1)(2) 79 Director
Henry E. Kloss 67 Director
Peter B. Seamans (1)(2) 72 Director

(1) Member of Audit Committee
(2) Member of Compensation Committee

THOMAS J. DEVESTO co-founded the Company. He has been a director, President
and Chief Executive Officer since 1988. From 1985 to 1988, he was a consultant
to ITT Corporation and represented ITT in connection with its relationship with
Kloss Video Corporation. From 1978 to 1985, he was Vice President of Sales and
Marketing of Kloss Video Corporation. From 1976 through 1978, Mr. DeVesto held
various sales management positions in the international and domestic divisions
of Advent.

WAYNE P. GARRETT has been Vice President -- Finance, Chief Financial
Officer, Treasurer and Clerk of the Company since June 1995. Mr. Garrett was
employed by Argus Management Corp. as a management consultant from 1983 to 1995.
From 1978 to 1981, he was employed as an auditor by Price Waterhouse. Mr.
Garrett has BS and MBA degrees from Boston College and is a Certified Public
Accountant.

THOMAS J. HANNAHER has been Vice President -- Marketing of the Company since
December 1993. From 1979 to 1993, he owned and operated an advertising and
marketing agency and provided consulting services to a number of companies,
including the Company, Boston Acoustics, NAD, Tweeter and Apple Computer.

ROBERT S. MAINIERO has been Vice President -- Business Development of the
Company since January 1996. Mr. Mainiero was Vice President - Sales for a/d/s
from October 1993 to December 1995. From 1985 to 1993 he served as Zone Manager
for Alpine Electronics of America and previously served as Assistant National
Sales Manager of Kloss Video Corporation.

SANDY RUBY has been Vice President -- Retail of the Company since July 1995.
From 1985 to 1995, Mr. Ruby was a systems consultant and Vice President of
Practicorp International. Mr. Ruby was a founder and Chief Executive Officer of
Tech HiFi, a 70-store consumer electronics retail chain from 1968 to 1984.

THOMAS E. BREW, JR., has been a director of the Company since June 1995. Mr.
Brew has been the President, Chief Executive Officer and a director of Kurzweil
Applied Intelligence, Inc., since November 1994. From 1979 to 1994 he was
co-founder and Executive Vice President of Argus Management Corp. Mr. Brew is a
Certified Public Accountant and an attorney.

LEO KAHN has been a director of the Company since June 1995. Mr. Kahn has
been a partner of United Properties since 1985, and a director of Big V
Supermarkets and of Grossmans, Inc., since 1986. In 1948 Mr. Kahn was a founder,
President and Chief Executive Officer of Purity Supreme, Inc., and co-founder of
Staples, Inc., in 1986.

HENRY E. KLOSS co-founded the Company. He has been a director of the Company
since 1988. From 1988 to May 1996, Mr. Kloss served as the Company's Chairman of
the Board of Directors and Director of Product Development. Mr. Kloss also
served as Clerk and Treasurer of the Company from 1988 to February 1994. Prior
to 1988, Mr. Kloss co-founded and was General Manager of Acoustic Research and
was the founder and President of KLH, Advent and Kloss Video. Mr. Kloss was
responsible for product design and development at each of these companies.

PETER B. SEAMANS has been a director of the Company since March 1996. Mr.
Seamans has been a partner with the law firm of Peabody & Arnold since 1957. He
previously served as a director of Kloss Video Corporation and Advent
Corporation and currently serves on the board of the Peabody Essex Museum and
the USS Constitution Museum.

All directors hold office until the next annual meeting of the stockholders
and until their successors are elected and qualified. All officers of the
Company are elected annually by the Board of Directors and serve at the Board's
discretion. There are no family relationships among any of the directors, or
officers of the Company.

BOARD COMMITTEES

The Board of Directors has a Compensation Committee, which makes
recommendations concerning salaries and incentive compensation for employees of,
and consultants to, the Company, and an Audit Committee, which reviews the
results and scope of the audit and other services provided by the Company's
independent auditors.

DIRECTOR COMPENSATION

Outside directors are compensated for their service on the Board of
Directors at the rate of $1,000 per meeting plus expenses. Directors who are
employees of the Company are not paid any additional compensation for serving as
directors.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Company has a Compensation Committee, consisting of Thomas E. Brew, Jr.,
Leo Kahn and Peter B. Seamans. The Compensation Committee is responsible for
establishing executive compensation.

The Company entered into a license agreement with Henry Kloss giving it the
right to use Mr. Kloss' name on its products. The license agreement between the
Company and Mr. Kloss provides that the Company has the perpetual right to use
his name on products which Mr. Kloss designed or had a substantial role in
designing, subject to termination as to any products whose appearance or
performance specifications are materially changed by the Company without Mr.
Kloss' consent. Upon the termination of Mr. Kloss' employment, the Company may
not use his name generically or in connection with a product unless the Company
had previously done so, even if Mr. Kloss designed the product while employed by
the Company.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this item is incorporated herein by reference to
the information appearing in the Company's definitive Proxy Statement for its
Annual Meeting of Stockholders to be held on October 22, 1996 under the heading
"Executive Compensation."

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item is incorporated herein by reference to
the information appearing in the Summary Compensation Table in the Company's
definitive Proxy Statement for its Annual Meeting of Stockholders to be held on
October 22, 1996 under the heading "Executive Compensation" and the information
appearing therein under the heading "Certain Transactions and Relationships."

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) The following documents are included as part of the report:

(1) Financial Statements

The following financial statements of the Company and the report of
the independent certified public accountants are incorporated herein by
reference to the Company's 1996 Annual Report, which is filed herewith as
Exhibit 13.

Report of Independent Public Accountants
Balance Sheets
Statements of Operations
Statements of Stockholders' Equity
Statements of Cash Flows
Notes to Financial Statements

(2) Financial Statement Schedules

None

(3) Exhibits

Certain of the exhibits listed hereunder have been previously filed
with the Commission as exhibits to certain registration statements and
periodic reports as indicated in the footnotes below and are incorporated
herein by reference pursuant to Rule 411 promulgated under the Securities
Act and Rule 24 of the Commission's Rules of Practice.

*3.1 Restated Articles of Organization
*3.2 Amended and Restated By-Laws
*4 Specimen Common Stock Certificate
*10.1 License Agreement with Henry E. Kloss
*10.2 Form of Noncompetition, Nondisclosure and Assignment of Inventions Agreement
*10.3 Cambridge SoundWorks, Inc., 1993 Stock Option Plan
*10.4 Form of Incentive Stock Option Agreement
*10.5 Form of Nondisclosure Agreement with Consultants
*10.6 Employment Agreement (Henry E. Kloss)
*10.7 Employment Agreement (Thomas J. DeVesto)
*10.8 Exclusive Retailer Agreement dated February 27, 1995 with Best Buy Co., Inc.
*10.9 Lease dated May 20, 1994 with Burlington Square Limited Partnership, as
amended by First Amendment to Lease dated May 20, 1994
*10.10 Lease dated February 10, 1994 with John C. Sanidas, Trustee of Amberwood
Development Trust, u/d/t dated July 17, 1984
*10.11 Lease dated January 1994 with Fred Ross, as Trustee of Sher-Zall Families
Trust, u/d/t dated November 15, 1976
*10.12 Retail Lease dated July 19, 1994 with Chestnuts Realty Trust

*10.13 Lease dated May 31, 1994 with L&CP Realty Corporation, as amended by Addendum
to Lease dated June 1, 1994, Agreement dated September 15, 1994, Amendment to
Lease dated December 28, 1994, and Agreement of Settlement and Release dated
December 28, 1994
*10.14 License and Indemnification Agreement dated November 23, 1994 with Worcester
Center Realty Trust u/d/t dated March 31, 1989
*10.15 Indenture of Lease dated September 26, 1994 with Trustees of CambridgeSide
Galleria Associates Trust, formerly known as Riverside Galleria Associates
Trust, u/d/t dated as of April 1, 1985
*10.17 License Agreement with Trustees under Trust Agreement dated February 1, 1967
*10.18 Commercial Lease and Deposit Receipt dated August 30, 1994 with The Victor
Family Trust
*10.19 Lease dated July 15, 1994 with M.K. Blake Estate Co.
*10.20 Shopping Center Lease dated as of July 8, 1994 with Keadjian Living Trust, a
Family Trust
*10.21 Lease dated August 25, 1994 with Richard E. Brenkwitz, Trustee of the Richard
E. Brenkwitz Living Trust dated February 12, 1987
*10.22 Retail Lease dated as of June 7, 1994 with John and Robert Isaacs
*10.23 Shopping Center Lease dated as of July 8, 1994 with Keadjian Living Trust, a
Family Trust
*10.24 Standard Industrial/Commercial Single-Tenant Lease dated November 11, 1994
with Janet Christiansen and Rod McDougall
*10.25 Lease Agreement dated June 26, 1995 with Granite Investment Corp.
*10.26 Loan and Security Agreement dated April 27, 1995 with The First National Bank
of Boston
*10.27 Letter Agreement dated October 18, 1995 from The First National Bank of
Boston to the Company
*10.28 Lease Agreement dated April 14, 1995 with Homart Development Co.
*10.29 Retail Lease Agreement dated April 6, 1995 with Project 101 Associates
*10.30 Lease Agreement dated April 6, 1995 with Project 101 Associates
*10.31 Indenture of Lease dated January 5, 1996 with Square One Mall Limited
Partnership
*10.32 Memorandum of Lease dated October 31, 1995 with Dorothy Waugh Wrightson
*10.33 Indenture of Lease dated January 5, 1996 with Rocksoe Mall L.L.C.
*10.34 Indenture of Lease dated January 5, 1996 with MNH Mall L.L.C.
*10.35 Indenture of Lease dated January 5, 1996 with N.A. Realty Trust, u/d/t dated
as of June 17, 1983
10.36 Letter Agreement dated February 27, 1996 from the First National Bank of
Boston to the Company
10.37 Letter Agreement dated June 30, 1996 from the First National Bank of Boston
to the Company
10.38 Letter Agreement dated August 5, 1996 from the First National Bank of Boston
to the Company
13 Cambridge SoundWorks, Inc. 1996 Annual Report
23 Consent of Arthur Andersen LLP
27 Financial Data Schedule

- ------------------------
*Previously filed

(b) Reports on Form 8-K

No reports on Form 8-K were filed by the Company during the last quarter of
the period covered by this report.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the Town of Newton,
Commonwealth of Massachusetts, on the 25th day of September, 1996.

CAMBRIDGE SOUNDWORKS, INC.

BY: /s/ Thomas J. DeVesto
------------------------------
Thomas J. DeVesto
President and Chief Executive
Officer

Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in their capacities and on the date indicated.

SIGNATURE CAPACITY DATE
- -------------------------------- ------------------------------------------------------ -----------------------

/s/ Thomas J. DeVesto President, Chief Executive September 25, 1996
- --------------------- Officer and Director
Thomas J. DeVesto (Principal
Executive Officer)

/s/ Wayne P. Garrett Vice President -- Finance, Chief September 25, 1996
- --------------------- Financial Officer, Treasurer
Wayne P. Garrett and Clerk (Principal Financial and
Accounting Officer)

/s/ Peter B. Seamans Director September 25, 1996
- ---------------------
Peter B. Seamans

/s/ Thomas E. Brew, Jr. Director September 25, 1996
- ---------------------
Thomas E. Brew, Jr.