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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

for the quarterly period ended December 27, 2003

or

for the transition period from                      to                     

Commission File No. 33-9875

BOSTON ACOUSTICS, INC.

(Exact name of registrant as specified in its charter)

(978) 538-5000

(Registrant’s telephone number, including area code)

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 þ No ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes ¨ No þ

There were 4,105,645 shares of Common Stock issued and outstanding as of February 10, 2004.

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Boston Acoustics, Inc.

Index

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PART I: FINANCIAL INFORMATION

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Boston Acoustics, Inc. and Subsidiaries

Consolidated Balance Sheets

Assets

The accompanying notes are an integral part of these consolidated financial statements.

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Boston Acoustics, Inc. and Subsidiaries

Consolidated Balance Sheets

Liabilities and Shareholders’ Equity

The accompanying notes are an integral part of these consolidated financial statements.

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Boston Acoustics, Inc. and Subsidiaries

Consolidated Statements of Operations

The accompanying notes are an integral part of these consolidated financial statements.

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Boston Acoustics, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

The accompanying notes are an integral part of these consolidated financial statements.

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Boston Acoustics, Inc. and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

(1) Basis of Presentation

The unaudited consolidated financial statements included herein have been prepared by Boston Acoustics, Inc. and subsidiaries (the Company), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission and include, in the opinion of management, all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of interim period results. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations. The Company believes, however, that its disclosures are adequate to make the information presented not misleading. The results for the three and nine-month periods ended December 27, 2003 are not necessarily indicative of results to be expected for the full fiscal year. These financial statements should be read in conjunction with the Company’s Annual Report included in its Form 10-K for fiscal year ended March 29, 2003.

(2) Stock-Based Compensation

The Company follows Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) and related interpretations, in accounting for its stock-based compensation plans, rather than the alternative fair value accounting method provided for under Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation. Under APB 25, when the exercise price of options granted under these plans equals the market price of the underlying stock on the date of grant, no compensation expense is required. In accordance with Emerging Issues Task Force (EITF) 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services, the Company records compensation expense equal to the fair value of options and warrants granted to non-employees over the vesting period, which is generally the period of service.

The following tables illustrate the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123 and disclosure provisions of SFAS No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure, to stock-based employee compensation. The Company has computed the pro forma disclosures required under SFAS No. 123 and SFAS No. 148, for all stock options granted to employees of the Company for the three and nine-month periods ended December 28, 2002 and December 27, 2003, respectively, using the Black-Scholes option-pricing model prescribed by SFAS No. 123.

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Pro forma disclosure. The pro forma effect on the Company’s financial statements of applying SFAS No. 123 for all options to purchase common stock of the Company would be as follows:

(3) Inventories

Inventories are stated at the lower of cost (first-in, first-out) or market and consist of the following:

Work-in-process and finished goods inventories consist of materials, labor and manufacturing overhead.

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(4) Net Income Per Common Share

The Company follows the provisions of SFAS No. 128, Earnings per Share. This standard requires presentation of both basic and diluted earnings per share on the face of the consolidated statements of operations. These consolidated financial statements have been prepared and presented based on this standard. For the three-month and nine-month periods ended December 27, 2003, there were 239,350 and 391,465 options, respectively, that have been excluded from the weighted-average number of common and dilutive potential shares outstanding as their effect would be anti-dilutive. For the three-month and nine-month periods ended December 28, 2002, there were 190,800 options, respectively, that have been excluded from the weighted-average number of common and dilutive potential shares outstanding as their effect would be anti-dilutive.

The computation of basic and diluted shares outstanding, as required by SFAS No. 128, is as follows:

(5) Revenue Recognition

The Company recognizes revenue in accordance with the Securities and Exchange Commission’s Staff Accounting Bulletin 104 (SAB 104), Revenue Recognition.

Revenue is recognized when products are shipped to customers, provided that there are no uncertainties regarding customer acceptance, there is persuasive evidence of an arrangement, the sales price is fixed or determinable and collection of the related receivable is probable.

At the time of revenue recognition, the Company provides reserves for sales rebates, cooperative advertising, timely pay discounts, and freight reserves.

The Company charges many of its customers shipping and freight costs related to the delivery of its products. Accordingly, the Company follows the provisions of Emerging Issues Task Force (EITF) Issue No. 00-10, Accounting for Shipping and Handling Fees and Costs. Amounts charged to customers are included in net sales in the accompanying consolidated statements of operations. The related shipping and handling costs are recorded in cost of sales in the accompanying consolidated statements of operations.

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(6) Segment Reporting

The Company has determined that it has two reportable segments: 1) core, and 2) original equipment manufacturer (OEM) and multimedia.

The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company does not allocate operating expenses between its two reportable segments. Accordingly, the Company’s measure of profit for each reportable segment is based on gross profit.

(7) Significant Customers and Concentration of Credit Risk

For the three-month periods ended December 27, 2003 and December 28, 2002, one OEM/Multimedia customer represented approximately 6% and 26% of the Company’s net sales, respectively, and one core customer represented approximately 32% and 21% of net sales, respectively. For the nine-month periods ended December 27, 2003 and December 28, 2002, one OEM/Multimedia customer represented approximately 12% and 29% of the Company’s net sales, respectively, and one core customer represented approximately 32% and 16% of net sales, respectively. One OEM/Multimedia customer represented approximately 3% of net accounts receivable and one core customer represented approximately 34% of net accounts receivable at December 27, 2003, respectively.

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(8) International Operations

The Company maintains sales concentrations in Europe, Asia, and Canada in addition to distributing product through three foreign subsidiaries. Export sales accounted for approximately 21% and 16% of net sales for the three-month periods ended December 27, 2003 and December 28, 2002, respectively. For the nine-month periods ended December 27, 2003 and December 28, 2002, export sales accounted for approximately 18% and 15% of net sales, respectively.

(9) Accounting for Customer Consideration

The Company follows the provisions of EITF Issue No. 01-09, Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products). The Company offers cooperative advertising programs to its largest customers whereby the customers can earn sales credits for approved advertisements involving the Company’s products. The Company records these credits as an adjustment to the selling price of its products. For the three-month periods ended December 27, 2003 and December 28, 2002, cooperative advertising credits included as sales adjustments were approximately $707,000 and $945,000, respectively. For the nine-month periods ended December 27, 2003 and December 28, 2002, cooperative advertising credits included as sales adjustments were approximately $1,804,000 and $2,263,000, respectively.

(10) Warranty Costs

The Company’s products generally carry a one to five-year warranty. The Company establishes a warranty reserve based on anticipated warranty claims at the time product revenue is recognized. Factors that affect the Company’s warranty reserve level include the number of sold units, the anticipated cost of warranty repairs and historical and anticipated rates of warranty claims. The following table provides the detail of the change in the Company’s product warranty reserve, which is a component of other accrued expenses on the consolidated balance sheets.

(11) Recent Accounting Pronouncements

In May 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. Among other things, SFAS No. 145 rescinds SFAS 4, Reporting Gains and Losses from Extinguishment of Debt and eliminates the requirement that gains and losses from the extinguishment of debt be classified as an extraordinary item, net of related income tax effects, unless the criteria in APB Opinion No. 30, Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions are met. Adoption of this statement is generally required in fiscal years beginning after May 15, 2002. The Company has adopted the provisions of SFAS No. 145 and the adoption did not have a material impact on the Company’s consolidated financial statements.

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In December 2002, the EITF reached conclusion on EITF Issue No. 00-21, Accounting for Revenue Arrangements with Multiple Deliverables. This consensus provides guidance in determining when a revenue arrangement with multiple deliverables should be divided into separate units of accounting, and, if separation is appropriate, how the arrangement consideration should be allocated to the identified accounting units. The provisions of EITF No. 00-21 are effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The Company currently does not have revenue arrangements with multiple deliverables but will evaluate any multiple element arrangements in accordance with this EITF upon its effective date for new arrangements into which the Company enters.

In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46) to clarify the conditions under which assets, liabilities and activities of another entity should be consolidated into the financial statements of a company. FIN 46 requires the consolidation of a variable interest entity by a company that bears the majority of the risk of loss from the variable interest entity’s activities, is entitled to receive a majority of the variable interest entity’s residual returns, or both. The adoption of FIN 46 is not expected to have a material impact on the Company’s financial position or results of operations.

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Results of Operations

The following table sets forth the results of operations for the three-month and nine-month periods ended December 28, 2002 and December 27, 2003 expressed as percentages of net sales.

Net sales for the third quarter decreased 25%, from approximately $20,464,000 last year to approximately $15,377,000 for the current fiscal period. For the nine-month period ended December 27, 2003, net sales decreased 28% from approximately $57,249,000 during fiscal 2003 to approximately $41,085,000. The overall sales decrease for the three-month period ended December 27, 2003 was the result of an 83%, or approximately $4,516,000, sales decrease in the OEM and multimedia segment and a 4%, or approximately $570,000, decrease in net sales of the Company’s Core products from the same period a year ago. The significant decrease in the OEM/Multimedia segment was anticipated and incorporated in the 2004 fiscal year business plan. During January 2004, the Company, in partnership with Visteon Corporation, began initial shipments of its premium audio systems for the Chrysler Group for upcoming vehicles. The Company anticipates a ramping up of these shipments during the fourth fiscal quarter ending March 27, 2004. Revenue generated from these shipments will be reported in the OEM segment of sales. There is not at this time, however, sufficient historical information to predict with any certainty the volume of revenue the Company will experience during this initial stage.

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During the third quarter of fiscal 2004, the Company introduced upgraded series of its Micro Reference high performance satellite speaker systems. These compact satellites can fit anywhere, including bookshelves or floor stands or they can be mounted to fit particular needs more precisely. There are four models, Micro130x, Micro120x, Micro110x, and the MicroCenter, with suggested retails ranging from $100 to $250 each. Also contributing to gross sales during the quarter were sales of Video Reference (VR) floor-standing speaker systems which were introduced during the second quarter of the fiscal year, along with sales of the Company’s high performance AM/FM Recepter^TM Radio. Introductions of upgraded versions of existing product offerings, while permitting the Company to remain competitive, are not likely to result in significant increases in revenue over the long term, because they are replacing products that are being phased out.

Expenses included in the cost of goods sold line item are raw material, direct labor, freight, and indirect costs associated with the Company’s manufacturing operations.

The Company’s overall gross margin for the three-month period ended December 27, 2003 increased from 32.2% to 42.6% as compared to the same period a year ago. For the nine-month period ended December 27, 2003, gross margin increased from 31.6% to 38.9% for the same period last year. The increases for both the three-month and nine-month periods were due to the Core business segment and reflect sales of product categories that reflect higher margins and have also benefited from the continued improvements in manufacturing efficiencies that were implemented at the end of the fourth quarter fiscal 2003. Additionally, the OEM/Multimedia segment represented a smaller portion of total net sales during the three-month and nine-month periods ended December 27, 2003 as compared to the same periods a year ago, and as a result, the Company’s overall gross margin increased. The OEM/Multimedia segment, which currently consists of speakers for the computer environment actually reflected a gross profit loss for the three-month period ended December 27, 2003. The gross profit loss in this segment is due to costs associated with storage, rework and warranty expenses that continue despite the decreased sales volume.

Selling and marketing expenses include payroll and payroll-related costs as well as corporate advertising and literature costs associated with the sale and marketing of the Company’s products. Expenses included in the general and administrative expenses line item are management and administrative payroll and other expenses associated with the Company’s operations outside of manufacturing, research and development and sales and marketing, and include professional services, consulting arrangements, and investor relations expenditures. Engineering and development expenses include payroll and payroll-related expenses attributed to the design and enhancement of existing products along with the creation of new products; associated expenses include supplies, samples, test equipment, and inventory consumed.

Total operating expenses, although increasing as a percentage of net sales, have decreased in absolute dollars by approximately $319,000 for the three-month period and approximately $2,126,000 for the nine-month period ended December 27, 2003 as compared to the corresponding periods a year ago. This decrease is the result of the corporate reorganization and rationalization plan implemented in the fourth quarter of fiscal 2003, resulting in reduced payroll costs and other expenses across all departments during fiscal 2004. Selling and marketing expenses have increased in absolute dollars for the three-month period ended December 27, 2003 (approximately $47,000) and decreased in absolute dollars for the nine-month period ended December 27, 2003 (approximately $768,000) as compared to the same periods a year ago. Decreases in payroll and payroll-related expenses (approximately $13,000 and $309,000) and corporate advertising and literature expenses (approximately $202,000 and $820,000) partially offset increases in sales promotions and commissions (approximately $250,000 and $253,000) as compared to the same periods a year ago. General and administrative expenses have increased in absolute dollars for the three-month period ended December 27, 2003 (approximately $94,000) and decreased in absolute dollars for the nine-month period ended December 27, 2003 (approximately $194,000) as compared to the same periods a year ago. Decreases in payroll and payroll-related expenses (approximately $84,000 and $292,000) and the decrease in value of donations contributed to charitable organizations (approximately $6,000 and $217,000)

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partially offset by an increases in tax consulting fees (approximately $83,000 and $218,000) attributable to the Company’s research tax credit as compared to the same three-month and nine-month periods a year ago, and increases in the general allowance for doubtful accounts (approximately $166,000 and $203,000) due to the increase in the accounts receivable balance at December 27, 2003. Engineering and development expenses have decreased in absolute dollars (approximately $460,000 and $1,163,000) for the three-month and nine-month periods, respectively, due to a reduction in payroll and payroll-related expenses (approximately $230,000 and $676,000) and consulting fees (approximately $253,000 and $421,000) as compared to the corresponding periods in fiscal 2003.

The Company posted net interest income of approximately $45,000 for the three-month period ended December 27, 2003 compared to approximately $18,000 for the corresponding period last year. For the nine-month period ended December 27, 2003, the Company reported net interest income of approximately $93,000 compared to approximately $45,000 for the same period a year ago. The increase is due to the Company’s repayment of its outstanding line of credit balance during fiscal 2003. At December 27, 2003 and December 28, 2002, the Company did not have any borrowings under either of its lines of credit.

During the second quarter of fiscal 2003, the Company recognized a gain on the sale of property and equipment totaling approximately $100,000. The gain resulted primarily from the sale of a fully depreciated automated production line. For presentation purposes, the gain is grouped with the gain on foreign currency translations and reflected as other income for the nine-month period ended December 28, 2002. For the three-month and nine-month periods ended December 27, 2003, other expense includes foreign currency translation expenses related to consolidating the Company’s international subsidiaries’ results.

The Company’s overall effective tax rate for the three-month period ended December 27, 2003 increased to 28.4% from 23.1% for the corresponding period a year ago. The Company’s overall effective income tax rate increased to 32.6% for the nine-month period ended December 27, 2003 as compared to 30.6% for the nine-month period ended December 28, 2002. The lower effective income tax rate for the three-month and nine-month periods ended December 28, 2002 was primarily the result of the recognition of benefits from additional research and development tax credits identified during the December 2002 fiscal quarter. The effective tax rate on U.S. operations during both the three-month and nine-month periods ended December 27, 2003 was 30.5% as compared to 23.9% and 31.1% for the three-month and nine-month periods ended December 28, 2002, respectively.

Net income for the third quarter increased from approximately $789,000 in fiscal 2003 to approximately $1,016,000 in fiscal 2004, while diluted earnings per share increased from $.18 to $.25 per share. Net income for the nine-month period ended December 27, 2003 decreased from approximately $1,424,000 in fiscal 2003 to approximately $1,369,000 in fiscal 2004, while diluted earnings per share increased from $.31 to $.32 per share. The decrease is primarily attributable to the reduction in net sales partially offset by the increase in gross profit and the decrease in operating expenses resulting from the corporate reorganization and rationalization plan implemented during the fourth quarter of fiscal year 2003.

Liquidity and Capital Resources

As of December 27, 2003, the Company’s working capital was approximately $20,894,000, a decrease of approximately $1,897,000 since the end of fiscal 2003. The decrease in working capital was due to an increase in accounts payable offset by a decrease in inventory and deferred and prepaid income taxes. The Company’s cash and cash equivalents were approximately $7,396,000 at December 27, 2003, an increase of approximately $455,000 from March 29, 2003. Current liabilities increased by approximately $3,606,000 due to an increase in accounts payable and accrued income taxes. The Company has two lines of credit with two U.S. banking institutions totaling $26,500,000. At December 27, 2003, the Company did not have any borrowings under either of these lines of credit.

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Based on current market prices, management believes that the Company’s stock is undervalued and that the current Company stock repurchase program is a good investment of available funds. Repurchases are made from time to time on the open market at prevailing market prices and in negotiated transactions off the market. The repurchase program is expected to continue through the end of the current fiscal year unless extended or shortened by the Board of Directors. Repurchased shares will be held in treasury and, at the present, the Company has no plans for their reissuance.

Given the Company’s historical profitability and its ability to manage expenses, the Company believes that its current resources are adequate to meet its requirements for working capital and capital expenditures through the foreseeable future.

Significant Customers

One OEM/Multimedia customer accounted for 6% and 12%, respectively, of the Company’s net sales for the three-month and nine-month periods ended December 27, 2003, as compared to 26% and 29%, respectively, of the Company’s net sales for the corresponding periods a year ago. The Company had anticipated that OEM sales would decrease during fiscal 2004 as compared to fiscal 2003 and, based on information currently available from our OEM customer, the Company expects sales to this customer to decline to zero by the end of the fourth quarter of the current fiscal year. The Company’s management has taken steps (including pursuit of additional OEM automotive customers, expansion of the Company’s aftermarket automotive products offerings and renewed efforts to increase sales of the Company’s Core products), which it believes will mitigate the consequences of the expected decline in orders from this customer.

One Core customer accounted for approximately 32% of the Company’s net sales for both the three-month and nine-month periods ended December 27, 2003 as compared to 21% and 16%, respectively, of net sales for the corresponding periods a year ago. In addition to its strategy of expanding the Company’s product offerings, management continues its efforts to enlarge and diversify its customer base for all products in order to reduce dependence on any single customer.

Cautionary Statements

The Private Securities Litigation Reform Act of 1995 contains certain safe harbors regarding forward-looking statements. From time to time, information provided by the Company or statements made by its directors, officers, or employees may contain “forward-looking” information which involve risk and uncertainties. Any statements in this report that are not statements of historical fact are forward-looking statements (including, but not limited to, statements concerning the characteristics and growth of the Company’s market and customers, the Company’s objectives and plans for future operations, and the Company’s expected liquidity and capital resources). Such forward-looking statements are based on a number of assumptions and involve a number of risks and uncertainties, and accordingly, actual results could differ materially. Factors that may cause such differences include, but are not limited to: the continued and future acceptance of the Company’s products, the rate of growth in the audio industry; the presence of competitors with greater technical, marketing and financial resources; the Company’s ability to promptly and effectively respond to technological change to meet evolving consumer demands; capacity and supply constraints or difficulties; and the Company’s ability to successfully integrate new operations. The words “believe,” “expect,” “anticipate,” “intend” and “plan” and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statement was made. For a further discussion of these and other significant factors to consider in connection with forward-looking statements concerning the Company, reference is made to Exhibit 99 of the Company’s Form 8-K filed on July 18, 1996.

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As of December 27, 2003, the Company did not participate in any derivative financial instruments, or other financial and commodity instruments for which fair value disclosure would be required under SFAS No. 107. All of the Company’s investments are considered cash equivalents and consist of money market accounts. Accordingly, the Company has no quantitative information concerning the market risk of participating in such investments.

The Company’s primary market risk exposures are in the areas of interest rate risk and foreign currency exchange rate risk. The Company’s investment portfolio of cash equivalents is subject to interest rate fluctuations, but the Company believes this risk is immaterial due to the short-term nature of these investments.

For the three-month periods ended December 27, 2003 and December 28, 2002, foreign currency translations were approximately $206,000 and $114,000, respectively. For the nine-month periods ended December 27, 2003 and December 28, 2002, foreign currency translations were approximately $204,000 and $167,000. During the three and nine-month periods ended December 27, 2003, the Company did not engage in any foreign currency hedging activities.

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PART II: OTHER INFORMATION

None

None

None

None

None

Form 8-K, Item 5, November 10, 2003, Reporting release of the Company’s earnings report for the quarter ended September 27, 2003

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SIGNATURES

Pursuant to the requirements 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.

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