<PAGE>
 
                                   FORM 10-K
                       SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C.  20549
(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              December 31, 1995
                          ------------------------------------------------------
                                       OR
[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                 SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________________to_____________________________

                         Commission file number 0-14482
                                               --------

                               CARVER CORPORATION
                               ------------------
             (Exact Name of Registrant as specified in its charter)

        WASHINGTON                                      91-1043157
        ----------                                      ----------
     (State of other jurisdiction                    (I.R.S. Employer
     of incorporation or organization)              Identification Number)

                 20121 - 48th Avenue West, Lynnwood, WA  98036
                 ---------------------------------------------
                    (Address of principal executive offices)
                                   (Zip Code)

                                 (206) 775-1202
                                 --------------
              (Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

       Title of each class        Name of each exchange on which registered
       -------------------        -----------------------------------------
                                                  None

Securities registered pursuant to Section 12(g) of the Act:

                          Common Stock, $.01 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 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 registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.  [ ]

     The aggregate market value of the voting stock held by non-affiliates of
the registrant based upon the closing price for the registrant's Common Stock,
as reported by the National Association of Securities Dealers' Automated
Quotation National Market System on March 26, 1996 was $6,845,586.

     Number of shares of Common Stock of the Registrant outstanding as of March
25, 1996:  3,687,080 shares.

     Items 10, 11, 12 and 13 of Part II are incorporated by reference to the
Company's definitive proxy statement for its 1996 Annual Meeting of shareholders
which involves the election of directors and which will be filed with the
Commission within 120 days after the close of the fiscal year.

                                       1
<PAGE>
 
                               TABLE OF CONTENTS

PART I                                                                PAGE
------                                                                ----

Item  1.  Business..................................................

Item  2.  Properties................................................

Item  3.  Legal Proceedings.........................................

Item  4.  Submission of Matters to a Vote of
          Security Holders..........................................


PART II
-------

Item  5.  Market for the Company's Common Stock and
          Related Security Holder Matters...........................

Item  6.  Selected Financial Data...................................

Item  7.  Management's Discussion and Analysis of
          Financial Condition and Results of Operations.............

Item  8.  Financial Statements and Supplementary Data...............

Item  9. Changes in and Disagreements with Accountants on
         Accounting and Financial Disclosure........................

PART III
--------

Item 10. Directors and Executive Officers of the Company............

Item 11. Executive Compensation.....................................

Item 12. Security Ownership of Certain Beneficial Owners
         and Management.............................................

Item 13. Certain Relationships and Related Transactions.............


PART IV
-------

Item 14. Exhibits, Financial Statement Schedules, and Reports
         on Form 8-K................................................

                                       2
<PAGE>
 
                                     PART I

ITEM 1.  BUSINESS

INTRODUCTION

Forward-Looking Statements

Statements in this report covering future performance, developments,
expectations or events, including the discussion of the Company's strategy,
product development and introduction plans and various statements concerning the
Company's expectations for its growth and for the consumer electronics industry,
and generations of additional working capital, constitute forward-looking
statements which are subject to a number of risks and uncertainties which might
cause actual results to differ materially from stated expectations. These
include the risks and uncertainties described under the caption "Risk Factors"
in Part I of this report and those identified by the Company from time to time
in other filings with the Commission, press releases and other communications.

Description of Business

Carver Corporation ("Carver" or "the Company") designs, develops, manufactures
and markets high-fidelity audio components targeted to the mid-to high-end audio
entertainment systems market.

Carver products are positioned in the middle and upper price range of most audio
components.  The Company offers technically innovative audio products for the
home hi-fi market that deliver affordable "audiophile" quality.  It targets its
distribution channels toward knowledgeable consumers who insist on high quality
products which offer superior features and performance.

During 1995, the Company continued to pursue its strategy designed to broaden
its market presence and return its operations to profitability.  It continued to
streamline its product lines to focus the Company's resources on its core
strength, the design and marketing of amplifiers and preamplifiers.  The Company
continued to cut overhead expenses.  It broadened and strengthened Carver's
distribution network.  It concluded the sale of the Company's professional
product line to Phoenix Gold International, Inc. and discontinued its mobile
product line of products.

The Company was incorporated in the State of Washington in 1978, and its initial
public offering occurred in May 1985.  Its stock is traded on the Nasdaq
National Market under the symbol CAVR.  The Company is located at 20121 - 48th
Avenue West, Lynnwood, Washington 98046.  Its telephone number is (206) 775-
1202.

INDUSTRY OVERVIEW

Carver estimates, based on market industry surveys, the U.S. consumer high-
fidelity audio market (electronics of all types including portable and mobile
audio) to be currently in excess of $11 billion per year at the factory selling
price.

Home audio systems vary widely in design, quality and price from inexpensive
systems having relatively low-quality sound reproduction to expensive systems
designed for the high-fidelity sound enthusiasts who demand that their systems
duplicate, as closely as possible, the sound of a live performance.  System
prices range from under $100 to well over $100,000.  Carver considers itself
positioned between the middle segment and the extreme high-end companies.  It
estimates the total size of the market for separate audio components to be
around $2.6 billion annually.  A Carver system, including loudspeakers, ranges
in price from approximately $2,800 to approximately $7,800.

                                       3
<PAGE>
 
RECENT DEVELOPMENTS

Significant New Customer - The Circuit City Affiliation.

In December 1995, the Company announced that the Company's consumer product line
would be carried in the superstores operated by Circuit City Stores, Inc.,
("Circuit City") the nation's largest retailer of brand-name consumer
electronics.  Circuit City operates approximately 352 superstores throughout the
United States.  Pursuant to the Company's agreement with Circuit City, opening
orders will be shipped in three stages.  The initial product roll out was
shipped in late December 1995 and early January 1996; the second roll out was
shipped in February 1996; and the third roll out is expected to ship in May
1996.   If shipments of the Company's products to all Circuit City superstores
are as contemplated by Carver and Circuit City, the number of retail outlets
selling the Company's consumer products will be approximately twice the number
of retail outlets that were selling the Company's consumer products on December
1, 1995. (See Item 1-- Certain Risks and Item 7--Management's Discussion and 
Analysis Financial Condition and Results of Operations).

Sale of Professional Audio Product Line.

In November 1995, the Company sold all of the tangible and intangible assets
related to its professional audio products line to Phoenix Gold International,
Inc ("Phoenix Gold").  The transaction included a license which allows Phoenix
Gold to use the name "Carver Professional", and an agreement by the Company not
to compete against Phoenix Gold in the professional audio market for a period of
five years from the date of the sale.  The transaction provided needed working
capital and enabled the Company to focus on its consumer product business, and
further reduce staff and related overhead.  However, there can be no assurance
that such benefits from the sale will accrue to the Company.  Cash generated by
the transaction allowed Carver to purchase previously deferred shipments of
offshore-sourced consumer products.  (See Item 7 - Management's Discussion and
Analysis Financial Condition and Results of Operations).

Customs Audit

Between 60% to 70% of the Company's revenues in prior years were of products
which are sourced from offshore suppliers primarily from the Far East.  Late in
1994, the United States Customs Service completed an audit of the Company's
import operations.  The Customs Service found that the Company had made late
duty payments totaling $99,000 on tooling between 1989 to 1993.  On March 9,
1995, the Customs Service issued to the Company a prepenalty notice indicating
that it would assess a penalty up to approximately $400,000.  The Company has
provided documentation to the Customs Service which the Company believes should
significantly mitigate any penalty.  In July 1995, the Company paid the Customs
Service $50,000 as an offer in compromise of the penalty.  While the Company
believes its offer will be accepted, there can be no assurances of this.  The
Company's current cash flow position would not allow it to pay a $400,000
penalty.  (See Item 7 - Management's Discussion and Analysis Financial Condition
and Results of Operations).

Mobile Products

In an effort to further streamline its operations, the Company discontinued its
mobile product line in 1995.  The Company had not been able to invest in
research, development and marketing which this intensely competitive market
would require.  In December 1995, the Company wrote off its remaining mobile
product raw material inventory. 

Personnel

Robert A. Fulton resigned as  the President and Chief Executive Officer in
January 1996 and Stephen M. Williams, formerly the Company's Executive Vice
President and Chief Operating Officer, was elected President and Chief Executive
Officer.  Mr. Fulton remains with the Company as one of its directors.  In
February 1996, Sandra L. 

                                       4
<PAGE>
 
Jenkins, the Company's Vice President of Finance and Administration and Chief
Financial Officer, resigned. The Company expects to complete the process of
recruiting a successor to Ms. Jenkins during the second quarter of 1996.

Thomas C. Graham was elected Chairman of Carver's Board of Directors and John F.
Vynne was elected Vice-Chairman in November 1995.  Walter C. Howe, Jr. resigned
as a director of the Company in November 1995.  Robert W. Carver was elected to
the Board of Directors in December 1995.

PRODUCTS

In 1996, Carver's AV-806x was named the "THX Amplifier of the Year" by Britian's
Home Cinema, a British trade magazine.  The Company's Lightstar Reference
Amplifier won the Special Technology Award in the influential Hi Fi Grand Prix
award given by Audio Video International, an important trade publication.
Products are nominated by retailers and then a panel of audio engineers and
magazine writers review the benefits, features and overall value of the product.
These are compiled to produce three or four winners in each category.  Carver's
products have historically been well represented in this competition.

Other awards received in 1995 were the Electronics Industries Association's
Design and Engineering award, called Innovations.  Manufacturers are invited to
submit entries.  A panel of judges consisting of industry engineers, audio press
editors and other experts review each entry and evaluate such items like
aesthetic appeal, improvement of quality of life and technological advances.
Votes are then cast and the winning products are displayed in a special exhibit
at the Consumer Electronics Show in Las Vegas in January.  Three Carver products
won this award in 1995:  The Carver Research Lightstar Direct remote
controlled preamplifier; the Carver AV-806x power amplifier; and the Z-5 power
expander.

Home Audio Products

The Company markets a home audio video component line of 17 products which 
include 4 power amplifiers, 2 multi-channel amplifiers, 2 preamplifier/ tuners,
1 integrated amplifier, 1 receiver, 2 preamplifiers and one model each of a
tuner, CD changer, CD player, cassette deck and loudspeakers. Manufacturers
Suggested Retail Price on consumer home products ranged from $399-$4000.

An audio entertainment system typically includes a signal source such as a CD
player, cassette deck or radio tuner which outputs to a preamplifier that
controls the volume level, tone, and source switching.  Specialized
amplification circuits in the preamplifier convert input signal to a compatible
format and feed it to the amplifier which increases the signal strength to a
level strong enough to drive loudspeakers.  An audio/video receiver accomplishes
most of these functions in one box, but the consumer is typically compromising
performance to achieve compactness.  Although Carver offers receivers, it
believes its strength lies in its separate components which allow the consumer
the flexibility to customize power and features to suit their home acoustics and
listening preferences.  Separates also provide superior audio performance,
improved reliability and more upgrade options.  The Company believes consumers
select separates primarily by power, accuracy or sonic superiority, features and
price.

In recent years, Carver has concentrated its efforts on the major area for
growth in audio products, audio for video or home theater separates.  The
Company has discontinued most of its signal source products, its lower priced
preamplifiers and receivers, and its home theater loudspeakers.

Professional Products.

Until November 1995, Carver offered multiple lines of professional power
amplifiers that covered a wide range of professional applications.  Sale of all
of the products were discontinued by the Company upon completion of the sale of
the professional product line to Phoenix Gold.

                                       5
<PAGE>
 
Carver Technologies

The Company's business strategy has involved the identification of certain
fundamental limitations of the stereophonic sound reproduction process and the
development of innovative electronic circuits or other technologies which
address these limitations.  The Company holds thirteen patents with respect to
certain of the technologies described below and licenses an additional
technology.  See "Patents and Trademarks".   The Company's technologies include:

Lightstar Power Amplifier Technology.   The Company believes Lightstar Reference
represents the most advanced power amplifier technology on the market today.
This technology offers performance advantages over current amplifier designs in
terms of current capability, the capability to easily drive any loudspeaker
load, independence from voltage fluctuations from the AC power line and
effortless sound quality.  The Company has filed three patent applications on
its Lightstar technology, one of which has been granted.

Magnetic Field Power Amplifier Technology enables the Company's amplifiers to
deliver more current, more power and more voltage than competitively-priced
designs while dealing with demanding, variable speaker impedances.  Carver
Magnetic Field amplifiers are capable of delivering both high voltage and high
current simultaneously into modern speaker designs which can swing as low as two
ohms in certain frequency ranges.  The patents relating to Magnetic Field Power
Amplifier technology are licensed by the Company from Robert W. and 
Diana R. Carver.  The patents expire from 1997 to 2003.

Transfer Function Modification Technology.  The t-modification process allows
the Company to duplicate many of the sonic characteristics of its very costly 
amplifier in solid state designs at a fraction of the cost.

Sonic Holography(R).  Using principles analogous to those employed in producing
visual holograms with intersecting laser beams, the Company's patented Sonic
Holography technology produces the illusion that the musical program is being
performed by instruments arrayed on a three-dimensional stage.  The Company's
U.S. patent relating to Sonic Holography will expire in 1997.

Asymmetrical Charge-Coupled FM Detection Technology.  Carver's patented
Asymmetrical Charge-Coupled FM Detector (ACCD) circuit substantially reduces
interference caused by multipath distortion and noise present in weak stereo
radio broadcast signals.  Thus, high quality stereo reproduction can be achieved
from FM signals which would produce unacceptably poor sound quality on other
equipment.  The patent for the Asymmetrical Charge-Coupled FM Detection
Technology will expire in 2001.

Flat Panel Speaker Technology.  The Company's Flat Panel Speaker technology was
developed to address many of the problems encountered in conventional speaker
designs and ribbon array speakers.  This dipole ribbon technology employs
innovative materials, panel geometry and driver positioning to achieve a sharply
focused, yet large three-dimensional sound effect. The Company's patent expires
in 2007.

Patents and Trademarks

The Company holds thirteen domestic patents issued between 1980 and 1994 on
several of its technologies which are incorporated into a number of its
products.  See "Carver Technologies" above.  Patents with respect to Sonic
Holography (R) and ACCD have been issued by various countries.

Robert W. and Diana R. Carver personally own domestic and foreign patents on the
Magnetic Field Power Amplifier technology which expire beginning in 1997.  The
Company has a non-exclusive license to the technology and pays Robert W. and
Diana R. Carver royalties on sales of products incorporating such technology.

While the Company believes that the patent rights owned by the Company and under
which the Company is licensed are important and cover and protect adequately the
Company's proprietary rights in the patented technologies, there can be no
assurance that any current or future patents will prove valid.  Moreover, the
Company believes that its growth, competitive position and future success are
more dependent upon technical expertise and marketing skills 

                                       6
<PAGE>
 
than on the ownership of patent rights.

"Carver", "Cinema Holography", "Sonic Holography", "Lightstar", "Great American
Sound", and "Ampzilla" are registered trademarks of the Company.  The Company
claims common law rights to the following trademarks:  "Digital Time Lens",
"Magnetic Field Amplifier", "Soft EQ", and "KLW Audio". 

SALES AND MARKETING

Home Audio Systems.  

The Company markets its home audio products in the United States primarily
through retail outlets, ranging from audio-video specialty stores to national
retailers of brand-name consumer electronics, serviced by 18 independent
manufacturers' representatives and the Company's sales and marketing staff. The
Company's dealers typically stock a broad variety of audio equipment and may
also carry automobile audio systems, televisions, video cassette recorders and
other consumer-oriented electronic products. The Company seeks dealers who
emphasize high quality audio systems and who are knowledgeable about the
characteristics of audio/video products. The Company's sales and marketing
department emphasizes dealer education programs and product literature to enable
individual sales people to understand and explain to consumers the superior
price/performance features offered by the Company's products. In order to
maintain a high quality distribution system that is competitive with those of
other brands, the Company sells products only to dealers who have signed dealer
agreements reflecting the Company's distribution policies.

Purchasers of high quality audio equipment tend to rely on audio specialty
publications, the recommendations of their friends and acquaintances who are
audio enthusiasts, and recommendations of and demonstrations by knowledgeable
sales people.  Accordingly, the Company believes that the favorable reviews of
the Company's products that have been featured in such publications as Stereo
Review, Audio, Stereophile, High Performance Review, Audio/Video Interiors,
Video, Home Theater magazines, Sensible $ounds and Guide to Home Theater and 
the Company's general reputation for producing superior products are important
elements of its sales and marketing program. Domestic sales of consumer audio
products accounted for approximately 57%, 57%, and 46% of the Company's sales in
1993, 1994 and 1995, respectively. Total Company sales of consumer audio
products were 72%, 71%, and 60%, respectively, for the same years.

Professional Sound Equipment

The Company's professional audio products were marketed principally through
musical instrument and professional audio retailers, sound contractors and to
major touring sound companies.  The Company had a domestic network of 18
manufacturer's representatives for its professional audio products.  Worldwide
sales of professional audio products accounted for approximately 25 percent of
the Company's sales in each of 1993, 1994 and 1995, respectively.  Figures for
1995 are based on sales of professional audio products through mid-November 1995
when the Company sold its professional audio products line.

OEM Product

Prior to 1994, Carver built product in its Lynnwood facility for other audio
manufacturers to be resold under their brand name on a very limited basis.  In
1994, the Company expanded this aspect of its business to include contracts to
supply product as an Original Equipment Manufacturer (OEM).  OEM production
accounted for approximately 1% and 8% of sales in 1994 and 1995, respectively.
Most of the products which the Company sold as an OEM were professional audio
products, and the underlying contracts for the OEM products were included in the
sale of Carver's professional product line.  Since then, the Company's OEM sales
have returned to their pre-1994 levels.

International Sales

The Company has a network of 56 distributors who provide retail sales coverage
in over 56 countries.  International sales are also made to U.S. military
exchanges.  Foreign sales accounted for approximately 25, 27, and 28 percent of
the Company's sales in 1993, 1994 and 1995, respectively.  Management had
intended to allocate more resources in 

                                       7
<PAGE>
 
global marketing in 1995 in an effort to increase its international revenues.
The Company's cash restraints in 1995 prevented it from allocating additional
resources in developing products for its international markets and from
marketing its existing products.

Competition

The consumer electronics industry is intensely competitive. Many large and small
manufacturers offer audio systems which vary widely in price and quality and
which are distributed through a variety of distribution channels, including
audio specialty stores, discount stores, department stores and mail order firms.
The Company has chosen to concentrate its efforts on the segments of the market
served principally by audio specialty stores and a major national consumer
electronics retailer, Circuit City.  In recognition of current market trends
which show that consumers are purchasing more electronics via direct mail,
Carver products can now be purchased through upscale direct marketing companies 
such as Cambridge SoundWorks and Crutchfield.


In the home audio market, the Company competes mainly with Adcom,Parasound,
Marantz and NAD. Most of the Company's competitors have substantially greater
financial and technical resources than the Company. The Company believes that
its competitive position in the consumer audio components market is enhanced by
unique Carver technologies and features which have given the Company strong
price/ performance advantages. The Company also believes that consumers of high
fidelity audio products have a greater awareness of the Carver brand name than
that of the Company's competitors.

Product Returns

From time to time the Company has accepted returns of unsold products from its
dealers.  Historically, return of unsold products has been insignificant.

Backlog

The Company's current policy is to attempt to maintain sufficient finished goods
inventory to fill orders within three business days after they are received.
However, during most of 1995, the Company operated under very tight cash
constraints and it's backlog rose somewhat higher than normal due to the
Company's deferral of the purchase of sourced product. Also, the Company's
backlog of orders may rise significantly following major product introductions
as dealers place orders for the new products in excess of the numbers produced
in initial production runs or if an offshore supplier fails to make on-time
deliveries of product.  Because of the Company's policy of filling an order
promptly after receipt, the Company does not view the level of backlog to be an
important index of future performance.  The Company's backlog of orders at
January 31, 1996 was approximately $2,575,000, compared to approximately
$1,035,000 on January 31, 1995.

Engineering, Research and Development

The Company recognizes that its future is dependent on its ability to introduce
products which incorporate technological innovation and advanced features.  The
engineering group has developed  a modular amplifier design which will be used
in a new line of amplifiers scheduled for introduction beginning in April 1996.
The new amplifiers will also incorporate the Company's "Power Steering"
technology which allows up to 40% more power on demand for selected amplifier
channels. Carver expects to release approximately 10 new and replacement
products during 1996.

The engineering group has designed a five-channel amplifier, the AV-505, which
will be manufactured by the Company and replace an existing five channel
amplifier currently sourced offshore, representing a continuation of the
Company's strategy to return production to the United States.

There can be no assurances that product development or introduction plans will
be accomplished on schedule or that the new products will be well received by
the market.

                                       8
<PAGE>
 
The Company employs 6 full-time technical personnel in its  research,
development, engineering and product development organization. The Company's
expenditures for engineering, research and development in 1993, 1994, and 1995
were $1,310,000, $1,160,000, and $808,000, respectively.

Manufacturing

During 1995, approximately 47% of the Company's sales were of products
manufactured by third parties to the Company's specifications.  The Company
presently sources these products from five different suppliers primarily located
in the Far East.  The Company determines whether a product will be manufactured
by the Company or a third party principally on the basis of two factors:  1) the
location of the sources of parts and subassemblies, and 2) the cost relative to
expected volume of products to be manufactured.  The Company believes it has
excellent working relationships with its various suppliers.  During 1995, the
Company was forced, due to cash restraints, to defer purchases of sourced
product and delay payment of certain of its vendors.  These actions resulted in
interruptions in the availability of products manufactured by the suppliers.
Availability of these products is also dependent on the suppliers' continued
cooperation and responsiveness to the Company's needs.  Should the Company be
required to supplement or replace a supplier, the Company believes that there
are a number of alternate sources, although the transition to a new supplier
would probably involve added costs and delays.  The Company has recently entered
into a relationship with another supplier from whom the Company expects to
source at least two of its new products scheduled for introduction in mid-1996.

Four of 17 current Carver consumer products and two accessories are built in its
Lynnwood, Washington facility.  Carver's goal is to manufacture as many of its
products in the United States as practical.  The Company is currently in
discussions with other potential OEM customers.  However, there can be no
assurances that these discussions will be completed favorably or that any OEM
business will result from these discussions.

Carver is vigorously pursuing "Total Quality Management" (TQM), and "Continuous
Quality Improvement" (CQI) techniques in an effort to  increase quality, lower
costs, and add profitability.  Carver will concentrate on value-added operations
where in-house manufacturing skills and process control are most important.

Consistent with its commitment to quality, the Company maintains strict testing
procedures.  All products, whether manufactured in the United States or by OEM
suppliers, are tested at their respective manufacturing facilities prior to
shipment.  The Company retests products manufactured by OEM suppliers on a
statistical sample basis at its Lynnwood facility to monitor quality control.  A
program to establish strategic partnerships with certain vendors has been
implemented to ensure timely delivery of quality raw materials, cost effective
pricing, and creative value engineering between Carver and vendor engineering
departments.

The Company offers a three-year limited warranty on consumer amplifiers, pre-
amplifiers and loudspeakers; a two-year limited warranty on integrated
amplifiers, pre-amp tuners, receivers and tuners; and a one-year limited
warranty on compact disc players and tape decks.

Human Resources

On March 18, 1996, the Company had 83 full-time employees, of whom 55 were
engaged in production and customer service, 6 in research, development,
engineering and product development, 11 in general and administrative functions,
and 11 in sales and marketing.  None of the Company's employees is covered by a
collective bargaining agreement. The Company believes its relations with its
employees are satisfactory.

                                       9
<PAGE>
 
Executive Officers of the Registrant

The executive officers of the Corporation who are not directors are listed in
the following table.  A description of their occupations for the past five years
also appears below.
<TABLE>
<CAPTION>
 
Name             Age  Position
<S>              <C>  <C>
James Croft       43  Vice President of Research and Development
John P. World     49  Executive Vice President and General Manager
</TABLE>

Mr. Croft joined the Company in October 1992 as its Director of Product Research
and Marketing Development.  He became Vice President of Marketing and Product
Development in March 1993, and Vice President Research and Development in
February 1995.  From 1990 through October 1992, Mr. Croft was employed by
Dahlquist, Inc., a loudspeaker manufacturer, most recently as its Vice President
of Research and Development.  Mr. Croft is a Vice President of Definitive Audio,
Inc., a Seattle audio specialty retailer which he co-founded in 1975 and managed
until 1985.

Mr. World was employed by the Company in February 1987 as General Counsel.  Mr.
World is currently  responsible for the internal operations of  the Company.
Mr. World also provides management support for the Company's international sales
activities.  Since joining the Company in 1987, Mr. World has at various times
been responsible for the administration, credit, human resource, legal, order
entry, day care and facilities departments.  Mr. World received his Juris Doctor
in 1975 from the University of Puget Sound and his Bachelor of Arts degree in
Political Science in 1972 from the University of Washington.

Risks Factors

Late in 1995, the Company entered into a distribution arrangement with a new
customer ("Key Customer"). Sales to the Key Customer are projected to be as much
as 50%, or more, of the Company's revenue in 1996. However, the Company has no
prior sales experience with the Key Customer on which to base its projection and
has no history of re-orders from the Key Customer. Although the Company has
shipped two of the three opening orders to the Key Customer, the Company does
not have purchase orders for the third shipment. The Key Customer may not be
able to successfully market and sell the Company's products. Factors which could
affect the volume of sales by the Key Customer include factors which generally
influence retail sales of electronic products. The agreement between the Company
and the Key Customer may be terminated by either party for any reason upon 30
days advance, written notice without penalty. In the event of an unexpected
termination of this agreement, the Company may not be able to change its
operations quickly enough to respond to a significantly lower level of sales.

The Company expects sales of products sourced offshore to account for over 50%
of its revenue in 1996.  Due to the size of the orders for sourced products
which the Company expects to receive from the Key  Customer,  the Company plans
to submit larger than normal orders for sourced products.  Larger lot sizes
increase the risk that the Company's inventory of finished goods could increase
sharply if the Key Customer or a significant number of other customers of the
Company order smaller quantities than those forecasted by  the Company.
Although, the Company believes that its forecast is conservative, the Company
has no prior sales history with the Key Customer and there can be no assurance
that the forecast will be met or that it will generate cash flow sufficient to
provide operating capital for the Company that it requires.

If revenues are significantly less than forecasted in 1996 or if the Company is
not successful in obtaining additional capital to fund operations during the
second and third quarters of 1996 (See, Liquidity and Capital Reserves, below),
it may not be able to purchase adequate quantities of sourced product.
There can be no assurance that the Company's actual cash requirements will not
exceed its anticipated cash requirement projections or that additional cash
requirements will not arise.  Lack of product whether due to delays in
or cancellation of deliveries of sourced product would result in revenues
significantly below those forecasted by  the Company.  Product delivery delays
greater than 90 days may result in the termination of the Company's
relationships with certain of its dealers, 

                                       10
<PAGE>
 
including the Key Customer.

During the last four completed fiscal years, the Company has incurred aggregate
net losses of approximately $12,766,000 or $3.47 per share.  There can be no
assurance that it will generate profits in future periods.  The Company's future
operating results will be dependent upon a number of factors, particularly those
associated with the streamlining of its product lines, increased sales and
margins, the reduction of overhead costs, the ability of the Company to
successfully identify and respond to emerging trends in the consumer electronics
industry, the level of competition and general economic conditions.  See
"Business - Sales and Marketing" and "Management's Discussion and Analysis of
Financial Conditions and Results of Operations."

The success of the Company's operations depends to a significant extent upon a
number of factors relating to discretionary consumer spending.  These factors
include economic conditions such as employment, business conditions, interest
rates and taxation.  The Company's business is also sensitive to consumer
spending patterns and consumer preferences.  There can be no assurances that
consumer spending and consumer preferences will not be adversely affected by
general social trends and economic conditions, thereby impacting the Company's
revenues, sales and product types.  If the demand for consumer electronics, in
particular middle to high-end audio entertainment systems, were to decline, the
Company's business, financial condition and operating results could be adversely
affected.

The consumer electronics industry is highly competitive.  The Company's products
compete directly against other middle to high-end audio entertainment systems
and other functionally similar products which vary widely in price and quality
and which are distributed through a variety of distribution channels, including
audio specialty stores, discount stores, department stores and mail order firms.
The Company competes against a number of companies, many of which have
substantially greater resources than the Company.  Such competition could have a
material adverse effect on the Company's business, financial condition and
operating results.  The Company believes that success in the consumer
electronics industry depends, in part, on providing consumers with unique
technologies and features, and on brand name recognition.  Given the Company's
current financial situation, there can be no assurance that the Company will be
able to continue to develop such products, or that, if and when introduced, such
products will be accepted by its customers.  See "Business - Competition" and
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations - Liquidity and Capital Resources."

Concentration of Accounts

Two of the Company's customers, including the Key Customer, accounted for 60% of
its receivables as of March 25, 1996.  Due to the anticipated pattern of
purchases by the Key Customer, the Company anticipates that the Key Customer's
accounts receivable will be 35% of the Company's total accounts receivables.
The purchases by the other customer of the Company are for raw materials
associated with the transfer of the professional products line to Phoenix Gold.
Although there are inconsistencies between the amount the Company and Phoenix
Gold each believe is payable for the raw materials, the Company believes that
these receivables will be paid by the end of April.

ITEM 2.  PROPERTIES

The Company owns its 74,000 square foot headquarters and manufacturing
facilities located in Lynnwood, Washington, a suburb of Seattle.  In December
1995, after the sale of its professional audio products line, the Company listed
this facility for sale. The Company believes that its facilities are adequate 
for its operations.

ITEM 3.  LEGAL PROCEEDINGS

None.

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

No matters were submitted to a vote of shareholders during the fourth quarter of
the Company's fiscal year.

                                       11
<PAGE>
 
PART II

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


Dividend Policy

It has been Company policy to retain all earnings to fund operations.

Stock Market Activity

The common stock of Carver Corporation has traded over the counter on the Nasdaq
National Market under the symbol CAVR since its initial public offering
on May 9, 1985.  The following table sets forth high and low sales prices by
quarter as reported by the Nasdaq National Market in 1995 and 1994:
<TABLE>
<CAPTION>
 
           Fiscal Year 1995  Fiscal Year 1994
           ----------------  ----------------
<S>        <C>       <C>     <C>       <C>
 
Quarter    High      Low     High      Low
---------  --------  ------  --------  ------
 
First        $3 3/8   2 1/4    $3 1/8  $2
 
Second        2 7/8   1         3 1/4   2 1/4
 
Third         2 1/2   1 5/8     3 3/8   2 1/8
 
Fourth        2 1/8   1         3 1/2   2 3/4
 
</TABLE>

The approximate number of shareholders of record as of March 22, 1996 was 509.

                                       12
<PAGE>
 
ITEM 6.  SELECTED FINANCIAL DATA

FIVE YEAR SELECTED FINANCIAL DATA
(Dollars in Thousands Except Per Share Data)
<TABLE>
<CAPTION>
                                              FISCAL YEARS

                             1995        1994        1993       1992       1991
--------------------------------------------------------------------------------
<S>                      <C>          <C>         <C>        <C>         <C> 
Income Statement Data                                                
---------------------                                                
                                                                     
Net sales                 $18,428     $22,171     $26,274    $25,596    $27,776
Gross profit                3,390       4,676       4,469      6,924      8,087
Income (loss)                                                        
  from operations          (2,857)     (2,536)     (2,994)    (1,153)       561
Income (loss) before                                                 
  income tax and                                                     
  discontinued                                                       
  operations               (3,157)     (2,873)     (3,564)    (1,328)       306
Net income (loss)         $(3,157)    $(2,873)    $(5,408)   $(1,328)   $   306
                          -------     -------     -------    -------    -------
                                                                     
Earnings (loss)                                                      
  per share*              $(  .86)    $  (.78)    $ (1.47)   $(  .36)   $   .08
                          -------     -------     -------    -------    -------
                                                                     
                                                                     
Balance Sheet Data                                                   
                                                                     
Working capital           $ 4,931     $ 7,589     $ 9,943    $14,012    $16,035
Total assets               10,674      16,628      18,897     22,914     22,305
Long-term debt               --           899         716        735        751
                                                                     
Shareholders'                                                        
  equity                  $ 7,389     $10,537     $13,408    $18,808    $20,124
                          -------     -------     -------    -------    -------
</TABLE>
*    Earnings per share are calculated on the basis of 3,659,000 shares in 1991,
     3,671,000 shares in 1992, 3,676,000 shares in 1993, 3,678,000 shares in
     1994 and 3,680,000 in 1995.

                                       13
<PAGE>
 
Item 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS

Forward-Looking Statements

Statements in this report covering future performance, developments,
expectations or events, including the discussion of the Company's strategy,
product development and introduction plans and various statements concerning the
Company's expectations for its growth and for the consumer electronics industry
constitute forward-looking statements which are subject to a number of risks and
uncertainties which might cause actual results to differ materially from stated
expectations.  These include the risks and uncertainties described under the
caption "Risk Factors" in Part I of this report and those identified by the
Company from time to time in other filings with the Commission, press releases
and other communications.

The markets for high-fidelity audio equipment are somewhat seasonal with
moderately higher sales generally occurring in the last six months of the year.
The Company's sales in the first six months of 1995 were $10,161,000 compared to
$8,267,000 in the last six months of the year.  The decline in sales in the
second half of 1995 is attributable primarily to inventory shortage due to
working capital constraints and the November 1995 sale of the Company's
professional products line.  The introduction of new products may affect this
seasonality and year-to-year comparisons.  Demand for audio products also
exhibits some cyclicality, reflecting the general state of the economy and
consumer expectations.

The portion of the Company's business involving products which the Company
elects to have manufactured by its suppliers may be influenced by factors
affecting imports, such as changes in the dollar exchange rate as well as United
States and the vendor countries' policies relating to tariffs, trade
restrictions and taxation.  See "Effects of Inflation and Changes in Foreign
Currency Exchange Rates".


RESULTS OF OPERATIONS

1995 Compared with 1994

Net revenues in 1995 were $18,428,000 which were down 16.9% from 1994 sales of
$22,171,000.  The sales decline represents a $2,927,000 decrease in domestic
consumer sales and a $823,000 decrease in domestic sales of professional
products.  Sales of mobile products were $489,000 less in 1995 compared to 1994
and sales to military exchange systems were down $626,000.  OEM sales increased
in 1995 by $1,275,000 over 1994 sales, however, contracts which represented 95%
of 1995 OEM sales were included in the assets sold to Phoenix Gold
International, Inc. in the professional audio products transaction.  Sales of
professional products in 1995 were down when compared to 1994 due, in large
part, to the closing of the sale of the professional products in mid-November
1995.  Fourth quarter 1995 sales of professional products were $428,000 compared
to sales of $1,320,000 in the fourth quarter of 1994.  Sales of professional
products were down in 1995 from 1994 levels also due to the Company's decision
to reduce its sales and marketing presence in the market at the same time that
Carver's competitors in the professional market were engaged in aggressive price
cutting.  Military exchange sales were down primarily due to a decision, in the
first half of 1995, by the exchange system to discontinue the product category
in the Army Air Force Exchange System.

The decline in consumer domestic sales was due in part to the Company's
strategy of reducing its product line, especially those at the low end of the
price range and with low margins.  However, the single largest factor in the
decline of 1995 sales over 1994 was the severe cash restraints under which the
Company was forced to operate for most of 1995.  Due to its cash constraints the
Company was unable to purchase enough of the products which it sources offshore
to fill orders throughout the second half of 1995.  Sales of tuner/preamplifiers
and preamplifiers decreased 13%, CD players decreased 46% and receivers
decreased 58% in year-to-year comparisons.  Sales of amplifiers grew by 5% in
1995.

Export sales were flat from 1994 to 1995.  Early in 1995, the Company had
increased its international marketing 

                                       14
<PAGE>
 
efforts. However, when the Company's cash tightened and as part of its efforts
to reduce expenses, it sharply reduced expenditures for the Company's
international sales and marketing. 1995 export sales were also negatively
effected by the lack of availability of product.

The Company's gross margin declined from 21% in 1994 to 18% in 1995.  The 1995
gross margin was adversely impacted by a year end inventory and tooling write-
off of $311,000.  Other major factors which adversely affected the gross margin
in 1995 were inventory write downs on mobile products raw material and finished
goods inventory and severance payable to employees who were laid off  in a work
force reduction in June 1995.  In addition, increased material costs on product
sourced from Japan due to the weakness of the U.S. dollar versus the Japanese
Yen in the first half of 1995 further decreased the margin.  Margins are
expected to improve as the Company introduces its new Lynnwood produced
amplifiers in  1996 and purchases other new products to be introduced in 1996
from offshore vendors located outside of Japan.  Although there can be no
assurance that foreign exchange rates, cost increases or other factors will not
negatively impact margins.  In an effort to improve its overall gross margin,
the Company increased prices by approximately 5% in January 1995.  In 1995, 47%
of sales were of product that was sourced from offshore suppliers compared to
60% in 1994.

Selling expense increased slightly as a percent of sales in year-to-year
comparisons.  Selling expense is expected to increase in 1996 as part of
management's plan to increase the Company's distribution.   The Company has
employed three persons as technical/product trainers and increased the travel
schedule and related expenses of its sales managers, trainers and support staff
to provide additional field support and training to the Company's dealers.

General and administrative expense decreased more than $330,000 from 1994 to
1995 but remained flat as a percent of sales.  Decreases in salary and legal
expenses were offset by an increase in bad debt expense and expenses associated
with investigation of strategic alternatives.  Early in 1995, the Company
retained the services of the investment banking firm of Cruttenden Roth to seek
a strategic partner, capital infusion or buyer for part or all of the Company.
After conducting discussions with various interested parties, the Company
concluded a sale of its professional audio products line.  The Company
subsequently terminated its agreement with Cruttenden Roth.

Engineering, research and development expense decreased from 5% of sales in 1994
to 4% in 1995 primarily due to decreased expenditures for salaries, new project
material and agency and safety approvals.  Management does not expect further
decreases in research and development expense as it believes that the current
level of expenditures is necessary to complete the introduction of nine new
products scheduled for release in the second and third quarters of 1996.  After
release of the new products and/or when the Company obtains additional capital,
management intends to commence development of a new line of loudspeakers for
home theater application and pursue the safety and electrical approvals
necessary to sell the Company's products in the European Common Market
countries.  The Company recognizes that the need to invest in the development of
new technologies is vital to assure its future success.  While cash constraints
have reduced the Company's efforts to research and develop new technologies, it
has in 1995 developed its "Power Steering" technology and made further
improvements in its patented Lightstar and Sonic Holography technologies.

In mid-November 1995, Carver sold its professional product line to Phoenix Gold
International, Inc. ("Phoenix Gold").  The transaction included all of the
tangible and intangible assets used by the Company in the manufacture and sale
of its professional products including one patent.  In addition, the transaction
included the right of Phoenix Gold to use the name "Carver Professional" for
five years and the agreement of the Company not to compete with Phoenix Gold
during the five year period. Sales of professional products and equipment
contributed approximately 33% and 30% of the Company's revenues in 1995 and
1994, respectively.  The Company believes that sale of the professional product
line will benefit it by allowing Carver to focus on its consumer business,
reduce staff and overhead, and improve its liquidity and balance sheet.  The
total amount of the transaction was approximately $2,100,000.  Of this amount,
payment of $350,000 is deferred until mid-November 1996 and $209,000 was paid
directly to Robert W. and  Diana R. Carver as payment of the remaining
installment payments due pursuant to the settlement of litigation between the
Company and Mr. and Mrs. Carver in December 1994.  The gain on the sale of the
professional products line was $1,208,000.  Cash from this transaction was used
by the Company to purchase shipments of offshore sourced product which the
Company had previously deferred due to its cash shortage.  As part of the
transaction, the Company signed a one-year supply and manufacturing agreement
with Phoenix Gold to 

                                       15
<PAGE>
 
continue to manufacture certain products for and to sell certain raw materials
used in the professional products to Phoenix Gold. The Company's obligation to
source and sell raw material to Phoenix Gold ends in June 1996. The Company
anticipates that it will manufacture few products for Phoenix Gold after April
1996.

The Company recorded a restructuring charge of $1,319,000 in December 1995 which
included a $287,000 tooling write down, a $740,000 inventory write down and
$223,000 in severance costs.  As of December 31, 1995, $143,000 of the
severance costs was accrued relating to personnel reductions that have been
substantially completed in 1996.  The restructuring charge is a result of the
change in the Company's operations due to the sale of the professional products
line, the discontinuation of the current mobile product line, the early
discontinuation of certain consumer product models,  a decision to change
product vendors by mid-1996 and  a decision to sell its Lynnwood facility and
move to a facility that is one-third the size.

Losses from operations for the year ended December 31, 1995 were $2,857,000
compared to losses of $2,536,000 from operations for the year ended December 31,
1994.   In addition to the gain on the sale of the professional products line
and the restructuring charges, net losses for 1995 include $311,000 in write
offs of tooling and inventory and a $150,000 increase at year end in the reserve
for doubtful accounts.  The operating results for  the year ended December 31,
1994 include an aggregate of $391,000 payable relating to settlement of and
attorneys' fees incurred in litigation between the Company and Robert W. and 
Diana R. Carver and $50,000 paid to the U.S. Customs Service in an offer and
compromise of a penalty imposed by U.S. Customs (See Notes 13 and 14 to
Consolidated Financial Statements.)

The Company has approximately $13,581,000 of net operating losses which may be
utilized to reduce taxable income in future years.  These loss carryforwards
will expire between the years 2004 and 2010.

Management is of the opinion that it is not appropriate to record a benefit for
net operating loss carryforwards of approximately $13,581,000 at this time.  As
future operating results improve, management will re-assess its position in this
matter.

The Company's 1995 net loss was $3,157,000 compared with a net loss of
$2,873,000 in 1994.

1994 Compared with 1993

Net revenues in 1994 were $22,171,000 which were off 15.6% from sales of
$26,274,000 for the fiscal year of 1993.  The sales shortfall was primarily
comprised of a $2,500,000 drop in sales to military exchange systems and a
$1,200,000 decrease in domestic sales of professional product.  The military
exchange sales of $3,500,000 in 1993 were an anomaly due to a one time military
promotion that featured certain Carver products and extended credit to the
military exchange customers.  The drop in professional sales was due to delays
in the first shipments of new products and the traditional lag in the acceptance
of new professional amplifiers.  Inventory supplies of the old product were
depleted before the new product was available.  At the same time, Carver's
competitors in the professional market were engaged in aggressive price cutting.

Management had anticipated a significant decline in consumer domestic sales in
1994 due to the discontinuance of nearly one-third of the product offerings,
especially those at the low end of the price range.  A 49% decrease in cassette
decks and a 43% decrease in CD players was largely offset by an actual unit
increase of 15% in tuner/preamplifiers while unit sales of consumer amplifiers
remained relatively stable in year-to-year comparisons.  Total consumer domestic
sales decreased less than 5%.

Export sales decreased 8.2% from 1993 to 1994 primarily in sales to Europe, but
increased slightly as a percentage of total sales.  Management believed export
sales declined for much the same reasons as consumer sales.

In 1994, 60% of sales were of product that was sourced from offshore suppliers.
Due to price increases, the gross margin on sourced product improved by 3% in
1994, even though the yen-to-dollar rate deteriorated by 11% thereby greatly
inflating costs.

                                       16
<PAGE>
 
Selling expense decreased slightly as a percent of sales in year-to-year
comparisons.  The decrease in variable selling expense associated with a decline
in revenues was somewhat offset by a $100,000 increase in advertising and
promotional expense.

General and administrative expense increased approximately $320,000 from 1993 to
1994. A $300,000 decrease in salary expense largely associated with the
elimination of the Company's onsite childcare center was somewhat offset by
increased legal expenses and increased bank fees. Costs associated with the
settlement of the lawsuit between the Company and Robert and Diana Carver and a
reserve of $50,000 associated with a proposed settlement with U.S. customers,
(see Note 13 of Notes to consolidated Financial Statements), also contributed to
increased General and Administrative expense.

Engineering, research and development expense decreased 11.2% from 1993
primarily due to decreased expenditures for salaries, new project material and
agency and safety approvals.

The Company sustained losses of $2,536,000 from operations for the year ended
December 31, 1994 which compared to losses of $2,994,000 for the year ended
December 31, 1993 which had included a write down of discontinued inventory and
tooling in excess of $1,000,000.  By reducing expenses the Company was able to
improve its operating performance in the face of a significant decrease in net
revenues.

Interest expense was $365,000 in fiscal 1994 compared with $330,000 in 1993 due
to an increase in the effective interest rate. Other expense in 1993 included a
disposition charge of $1,055,000 associated with the discontinuation and sale of
the Company's 80%-owned subsidiary, US Sound (See Note 15 of Notes to
Consolidated Financial Statements) and $790,000 associated with the operations
of US Sound. 1993 also included $194,000 of losses recorded on the sale of the
office building adjacent to the Company's headquarters.

The Company's net loss was $2,873,000 in 1994 compared with a net loss of
$5,408,000 in 1993.

Liquidity and Capital Resources

The Company's working capital on December 31, 1995 was $4,931,000 which included
cash and short-term investments aggregating approximately $266,000.  This
compares with working capital of $7,589,000 and cash and short-term investments
of $254,000 at December 31, 1994.  At March 25, 1996, the Company's immediate
capital resources consisted of approximately $49,000 in cash (and cash
equivalents) and the credit facility described below.

The Company has a $6,000,000 revolving line of credit, $1,000,000 of which can
be used to open commercial letters of credit.  Borrowings under this agreement
are restricted to 70% of eligible accounts receivable and 50% of eligible
inventory. As a condition to its approval of the sale of the professional
products line, the Company's lender required that borrowings under the line of
credit be reduced by an "Availability Block" of $250,000 plus twenty percent of
the gross proceeds from the sale of raw material and work-in-process inventories
used for professional products and sold as part of the sale to Phoenix Gold.  At
March 25, 1996, the Company had borrowed $2,258,000 of the $2,440,000 then
available under this facility. The line is collateralized by substantially all
assets of the Company and bears interest at the prime lending rate plus 2%. On
January 15, 1996, the lender agreed to make temporary overadvances to the
Company in amounts of up to $1,000,000 in addition to amounts otherwise
available under the formulas described above. The Company granted its lender a
Deed of Trust on Carver's Lynnwood, Washington facility as security for the
temporary accommodation. The overadvance must be repaid in the following amounts
on the following dates: $575,000 on February 29, 1996; $75,000 on March 31,
1996; $100,000 on April 30, 1996; and $250,000 on May 31, 1995. This line
expires May 31, 1996. In February 1996, management met with representatives from
its lender to discuss the renewal of its line of credit. Based on this
discussion, the Company believes that its lender will renew the line of credit
for a two year term and the temporary accommodation for an additional 120 days
on substantially the same terms. However, there can be no assurance that the
Company will be able to renew its line of credit or that it will be able to do
so on a timely basis or on favorable terms. The Company's lender has also
indicated that it will extend the expiration date of the line of credit to June
30, 1996 to allow sufficient time to complete the renewal process.

                                       17
<PAGE>
 
The Company's inventory decreased $4,123,000 from December 31, 1994 to December
31, 1995 due to the streamlining of the product line, better inventory
management procedures, sale of the professional product line and inventory write
off.  Improved inventory turns is one of the major benefits the Company expects
to realize by returning more of its production to its Lynnwood facility and from
purchasing products sourced offshore from vendors who will allow the Company to
purchase smaller lot sizes.  Accounts receivable decreased $1,526,000 from the
end of 1994 due to lower revenues and a tightening of credit policies and terms.

As the Company's borrowing base is dependent on its inventory and receivables,
the borrowing availability has contracted to a level at which the Company is
likely to experience a cash shortfall and could be forced to delay the payment
of its accounts payables which could impair its relationship with its vendors
and/or delay receipt of major sourced product purchases.  Another alternative
would be to sharply lower prices to generate cash which would impair margins.
During most of the second half of 1995, the Company was forced to defer payments
to its vendors and canceled delayed receipt of purchase orders totaling more
than $1,000,000.  As a result, the Company's  revenues in 1995 declined due to
lack of product availability.

The Company believes that cash flow from operations and borrowings available
under its credit line, including the $1,000,000 temporary accommodation, will be
sufficient to provide for its immediate working capital needs if it carefully
manages it cash and controls its expenses.  The Company's current operating plan
indicates that the Company will experience a cash shortfall during the second
quarter of 1996.  If the Company is unable to obtain an extension of the
$1,000,000 special accommodation from its lender, the Company believes that it
can obtain a short-term mortgage from another lender or delay payments to
vendors to meet the cash shortfall.  During the third quarter, the Company's
expects its cash needs to exceed the cash available to it from operations and
borrowings available under its credit line.  The Company is seeking a buyer for
its headquarters in Lynnwood, Washington.  Although, the Company believes that
proceeds from the sale of its headquarters would enable it to meet its third
quarter cash needs, there can be no assurance of this.  Nor can there be any
assurance that the facility will sell by the time the Company requires the
additional cash for its operations.  If the Company is unable to obtain
sufficient cash to meet its needs in the second and third quarters, it will be
forced to cancel purchase orders or defer the placement of purchase orders for
product sourced offshore.  Such cancellations or deferrals will have a
significant negative impact on product availability and may result in severely
reduced revenues.  In addition, if revenues fail to meet the Company's
expectations for the remainder of the year, the Company may not have sufficient
cash from its operations and borrowings available under its line of credit to
meet its operating needs.

It is unlikely that the Company will be able to benefit from certain
opportunities it has available without additional working capital.  There can be
no assurance that the Company would be able to generate additional sources of
working capital on terms favorable to the Company, if at all.  If the Company
does not attract additional financing and if it continues to record losses, the
Company likely would have to delay payment of suppliers and be forced to seek
other relief from its creditors.

In January 1990, the Company purchased a 16,000 square foot office building
adjacent to its facility in Lynnwood, Washington.  The purchase price for this
building was $1,260,000 including the assumption of a $793,000 note which is
payable at a rate of $7,790 per month with final payment due April 10, 2010.  In
September 1993, the Company sold this office building at a loss, after closing
costs, of $194,000.  Terms of the sale agreement included a down payment of
$112,750 in cash at closing and a promissory note and deed of trust in favor of
the Company in the amount of $1,013,000 at a fixed interest rate of 8-1/2% per
annum payable in equal monthly payments of $8,000 per month for 36 months at
which time a balloon payment for the remaining interest and principal will be
entirely due.  The Company believes that it will receive the balloon payment as
scheduled in September 1996.  Upon its receipt of the payment, the Company will
payoff the underlying mortgage and net approximately $300,000 in cash.

In 1996, the Company expects to purchase approximately $75,000 of capital
equipment, primarily manufacturing and office equipment, and has made a firm
commitment for $35,000 of these expenditures.

                                       18
<PAGE>
 
EFFECTS OF INFLATION AND CHANGES IN FOREIGN CURRENCY EXCHANGE RATES

Due to the competitive conditions in the market for consumer electronics,
historically the Company has been limited in its ability to increase prices for
its products in amounts sufficient to offset increased production and operating
costs. The Company increased its domestic consumer and worldwide professional
prices on an average of 5% on January 15, 1995 to partially offset the increase
in material and labor costs it had been experiencing as well as the continued
erosion in the strength of the U.S. dollar. Consumer export prices were
increased a like amount in July 1995. While some revenue fall off is anticipated
due to these price increases, the Company believes that it is appropriate to
trade some decline in sales for an improvement in margins. The Company intends
to continue to monitor costs and its market and adjust prices as necessary. All
sales of the Company's products are in U.S. dollars.

Approximately 47% of the Company's net sales in 1995 and 60% in 1994 were of
products designed by and/or manufactured to the Company's specifications by
overseas suppliers. The Company purchased a substantial portion of these
products at an agreed per unit price payable in Japanese Yen. Accordingly, a
weakening in the value of the dollar versus the Yen in the first quarter of 1995
had an adverse effect on the Company's gross margin. Although the dollar
recovered somewhat against the Yen later in the year, the Company received
minimum benefits from the recovery because it was unable to purchase sourced
product for much of the year due to its severe cash restraints. The adverse
impact of the weak dollar was somewhat mitigated by the Company's decreased
reliance on offshore sourcing of its products. The Company's 1996 plan presently
is for 58% of its revenues to be sourced offshore.

Historically, the Company has had a policy of generally hedging its foreign
currency exposure between the date orders are placed with overseas suppliers and
the date at which payment is made. Due to credit restrictions under its line of
credit, the Company is not hedging at this time and therefore does have exposure
to currency fluctuations which might adversely effect its gross profits in 1996.
As of December 31, 1995, the Company has committed to the purchase of
approximately $2,371,000 of inventory which it expects to receive in 1996. Of
this amount, approximately $1,883,000 is denominated for payment in Japanese
Yen. A 15% appreciation in the Yen against the U.S. Dollar would increase the
amount which the Company has committed to purchase approximately $282,000 to a
total of $2,165,450. As of December 31, 1995, the Company has committed to the
purchase of approximately $2,371,000 of inventory which it expects to receive in
1996. Of this amount, approximately $1,883,000 is denominated for payment in
Japanese Yen. A 15% appreciation in the Yen against the U.S. Dollar would
increase the amount which the Company has committed to purchase approximately
$282,000 to a total of $2,165,450.
                                       19
<PAGE>
 
ITEM 8.        FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


                                                            Page
                                                            ----

Report of Independent Certified Accountants                  21

Consolidated Balance Sheet as of
December 31, 1995 and 1994                                   22

Consolidated Statement of Operations, Years
Ended December 31, 1995, 1994 and 1993                       23

Consolidated Statement of Shareholder's Equity,
Years Ended December 31, 1995, 1994 and 1993                 24

Consolidated Statement of Cash Flows, Years
Ended December 31, 1995, 1994 and 1993                       25

Notes to Consolidated Financial Statement                    26

                                       20
<PAGE>
 
[LETTERHEAD OF MOSS-ADAMS LLP APPEARS HERE]

                         INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Shareholders
Carver Corporation


We have audited the accompanying consolidated balance sheet of Carver
Corporation and subsidiary as of December 31, 1995 and 1994, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the years in the three year period ended December 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Carver Corporation
and subsidiary as of December 31, 1995 and 1994, and the results of their
operations and cash flows for each of the years in the three year period ended
December 31, 1995 in conformity with generally accepted accounting principles.

/s/ Moss Adams LLP

Seattle, Washington
February 15, 1996

                                      21
<PAGE>
 
                       CARVER CORPORATION AND SUBSIDIARY

                          CONSOLIDATED BALANCE SHEET
 
 
                                    ASSETS
<TABLE> 
<CAPTION> 
                                                                December 31,
                                                         -------------------------
                                                             1995          1994
                                                         ------------  -----------
<S>                                                      <C>           <C> 
Current assets
 Cash and cash equivalents                               $   261,000   $   249,000
 Marketable securities                                         5,000         5,000
 Accounts receivable, trade, net                           2,304,000     3,830,000
 Inventories                                               3,927,000     8,050,000
 Current portion of note receivable                        1,342,000        13,000
 Prepaid expenses                                            377,000       634,000
                                                         -----------   -----------
   Total current assets                                    8,216,000    12,781,000
                                                         -----------   -----------
Property and equipment
 Land                                                        440,000       440,000
 Buildings and improvements                                2,452,000     2,444,000
 Equipment                                                 2,018,000     2,026,000
                                                         -----------   -----------
                                                           4,911,000     4,910,000
 Less accumulated depreciation                            (2,620,000)   (2,382,000)
                                                         -----------   -----------
                                                           2,291,000     2,528,000
                                                         ------------  -----------
Other assets and deferred charges
 Note receivable, net of current portion                           -       989,000
 Other                                                       167,000       330,000
                                                         -----------   -----------
                                                             167,000     1,319,000
                                                         -----------   -----------
   Total assets                                          $10,674,000   $16,628,000
                                                         ===========   ===========
<CAPTION> 
                     LIABILITIES AND SHAREHOLDERS' EQUITY
<S>                                                      <C>           <C> 
Current liabilities
 Note payable                                            $ 1,216,000   $ 3,067,000
 Accounts payable                                            842,000     1,383,000
 Accrued liabilities
  Commissions and advertising                                104,000       221,000
  Payroll and related taxes                                  198,000       243,000
  Warranty                                                    73,000       103,000
  Other                                                      156,000       155,000
 Current portion of long-term debt                           696,000        20,000
                                                         -----------   -----------
   Total current liabilities                               3,285,000     5,192,000
                                                         -----------   -----------
Long-term settlement payable, net of current portion               -       203,000
Long-term debt, net of current portion                             -       696,000
                                                         -----------   -----------
   Total long-term liabilities                                     -       899,000
                                                         -----------   -----------

Commitment and contingencies (Notes 7 and 13)

Shareholders' equity
 Preferred stock, par value $.01 per share,
  2,000,000 shares authorized, no shares issued
 Common stock, par value $.01 per share,
  20,000,000 shares authorized                                37,000        37,000
 Additional paid-in capital                               15,940,000    15,931,000
 Accumulated deficit                                      (8,588,000)   (5,431,000)
                                                         -----------   -----------
   Total shareholders' equity                              7,389,000    10,537,000
                                                         -----------   -----------
   Total liabilities and shareholders' equity            $10,674,000   $16,628,000
                                                         ===========   ===========
</TABLE>

                    See accompanying notes to consolidated
                             financial statements.

                                      22
<PAGE>
 
                       CARVER CORPORATION AND SUBSIDIARY

                     CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE> 
<CAPTION>  
 
                                                                  Years Ended December 31,
                                                           ---------------------------------------
                                                                1995         1994          1993
                                                           -----------   -----------   ----------- 
<S>                                                        <C>           <C>           <C>
Net sales                                                  $18,428,000   $22,171,000   $26,274,000

Cost of sales                                               15,038,000    17,495,000    21,805,000
                                                           -----------   -----------   -----------
        Gross profit                                         3,390,000     4,676,000     4,469,000
                                                           -----------   -----------   -----------
Operating expenses                                    
  Selling                                                    3,441,000     3,827,000     4,254,000
  General and administrative                                 1,887,000     2,221,000     1,899,000
  Engineering, research and development                        808,000     1,164,000     1,310,000
  Restructuring Charges                                      1,319,000             -             -
  Gain on sale of professional products line                (1,208,000)            -             -
                                                           -----------   -----------   -----------
                                                             6,247,000     7,212,000     7,463,000
                                                           -----------   -----------   -----------
        Loss from operations                                (2,857,000)   (2,536,000)   (2,994,000)
                                                           -----------   -----------   -----------
Other (income) expense                                
  Interest expense                                             335,000       365,000       330,000
  Interest income                                              (86,000)      (87,000)      (24,000)
  Loss on disposal of property and equipment                     3,000         2,000       194,000
  Miscellaneous                                                 48,000        57,000        70,000
                                                           -----------   -----------   -----------
                                                               300,000       337,000       570,000
                                                           -----------   -----------   -----------
Loss before discontinued operations                         (3,157,000)   (2,873,000)   (3,564,000)
                                                           -----------   -----------   -----------
Discontinued operations                               
  Loss from operations of discontinued                  
        subsidiary                                                   -             -      (790,000)
  Loss on sale of subsidiary                                         -             -    (1,054,000)
                                                           -----------   -----------   -----------
                                                                     -             -    (1,844,000)
                                                           -----------   -----------   -----------
Net loss                                                   $(3,157,000)  $(2,873,000)  $(5,408,000)
                                                           ===========   ===========   ===========
Loss per share                                        
  Loss before discontinued operations                            $(.86)         (.78)       $ (.97)
  Discontinued operations                                            -             -          (.50)
                                                                 -----         -----        ------
  Net loss                                                       $(.86)        $(.78)       $(1.47)
                                                                 =====         =====        ======
</TABLE>

                    See accompanying notes to consolidated
                             financial statements

  

                                     -23-
<PAGE>
 
                       CARVER CORPORATION AND SUBSIDIARY
 
                 CONSOLIDATED STATEMENT OF SHAREHOLDERS'EQUITY


<TABLE>
<CAPTION>
 
  
                                    Common Stock                                        
                                   $.01 Par Value          Additional        Retained   
                                ---------------------        Paid-In         Earnings   
                                 Shares       Amount         Capital        (Deficit)         Total
                                ---------    --------     -----------     -----------     ----------- 
<S>                           <C>           <C>            <C>             <C>            <C>
Balance, December 31, 1992      3,673,511    $ 37,000     $15,921,000     $ 2,850,000     $18,808,000
                                                                                       
   Issuance of stock                4,045         -             8,000             -             8,000
                                                                                       
   Net loss                           -           -               -        (5,408,000)     (5,408,000)
                                ---------    --------     -----------     -----------     ----------- 
                                                                                       
Balance, December 31, 1993      3,677,556      37,000      15,929,000      (2,558,000)     13,408,000
                                                                                       
   Issuance of stock                1,118         -             2,000             -             2,000
                                                                                       
   Net loss                           -           -               -        (2,873,000)     (2,873,000)
                                ---------    --------     -----------     -----------     ----------- 
                                                                                       
Balance, December 31, 1994      3,678,674      37,000      15,931,000      (5,431,000)     10,537,000
                                                                                       
   Issuance of stock                7,656         -             9,000             -             9,000
                                                                                       
   Net loss                           -           -               -        (3,157,000)     (3,157,000)
                                ---------    --------     -----------     -----------     ----------- 
                                                                                       
Balance, December 31, 1995      3,686,330     $37,000     $15,940,000     $(8,588,000)    $ 7,389,000
                                =========     =======      ==========     ===========     =========== 
</TABLE>

                    See accompanying notes to consolidated 
                             financial statements.

                                     -24-
<PAGE>
 
                       CARVER CORPORATION AND SUBSIDIARY

                     CONSOLIDATED STATEMENT OF CASH FLOWS

<TABLE>
<CAPTION>
 
 
                                                               Years Ended December 31,
                                                       ---------------------------------------- 
                                                           1995          1994          1993
                                                       ------------  ------------  ------------ 
<S>                                                    <C>           <C>           <C>
CASH FLOWS FROM OPERATING ACTIVITIES
  Net loss                                             $ (3,157,000)  $(2,873,000)   $(5,408,000)
  Adjustments to reconcile net loss                    
      to cash flows from operating activities             
    Depreciation and amortization                           300,000       371,000        536,000
    Gain on sale of professional products line           (1,208,000)          -              -
    Restructuring Costs                                   1,319,000           -              -
    Loss on disposal of property and equipment                3,000         2,000        200,000
    Loss on discontinued operations                             -             -        1,844,000
    Changes in assets and liabilities                   
      Accounts receivable, trade, net                     1,526,000     1,261,000      1,943,000
      Inventories                                         2,555,000     1,053,000         97,000
      Prepaid expenses                                      (31,000)     (300,000)       155,000
      Other assets and deferred charges                     126,000        87,000       (170,000)
      Accounts payable and accrued liabilities           (1,159,000)      846,000        (54,000)
                                                       ------------   -----------    -----------
           Cash flows from operating activities             274,000       447,000       (857,000)
           Cash flows from discontinued activities              -             -       (1,159,000)
                                                       ------------   -----------    -----------
                                                            274,000       447,000     (2,016,000)
                                                       ------------   -----------    -----------
  CASH FLOWS FROM INVESTING ACTIVITIES                
    Proceeds from repayment of note receivable               10,000        10,000            -
    Proceeds from sale of professional products line      1,632,000           -              -
    Proceeds from sale of investment                            -             -          102,000
    Proceeds from sale of discontinued subsidiary               -             -          374,000
    Acquisition of property, plant and equipment            (44,000)     (139,000)      (210,000)
    Proceeds from disposal of property and equipment          2,000         2,000         13,000
                                                       ------------   -----------    -----------
           Cash flows from investing activities           1,600,000      (127,000)       279,000
                                                       ------------   -----------    -----------
  CASH FLOWS FROM FINANCING ACTIVITIES                
    Issuance of common stock                                  9,000         2,000          8,000
    Increase (decrease) in note payable, net             (1,851,000)     (226,000)     1,454,000
    Repayment of long-term debt                             (20,000)      (18,000)       (17,000)
                                                       ------------   -----------    -----------
           Cash flows from financing activities          (1,862,000)     (242,000)     1,445,000
                                                       ------------   -----------    -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS             12,000        78,000       (292,000)

CASH AND CASH EQUIVALENTS                           
  Beginning of year                                         249,000       171,000        463,000
                                                       ------------   -----------    -----------
  End of year                                          $    261,000   $   249,000    $   171,000
                                                       ============   ===========    ===========
SUPPLEMENTAL CASH FLOW INFORMATION                  
  Income tax paid                                      $        -     $     1,000    $     2,600
                                                       ============   ===========    ===========
  Interest paid                                        $    335,000   $   365,000    $   329,000
                                                       ============   ===========    ===========
  Non-cash investing and financing activity
    Proceeds from sale of building and land in 
      exchange for long-term note receivable           $        -     $       -      $ 1,013,000
                                                       ============   ===========    ===========
    Proceeds from sale of professional products line
       in exchange for short-term note receivable      $    350,000   $       -      $       -
                                                       ============   ===========    ===========
</TABLE>

                    See accompanying notes to consolidated 
                             financial statements

                                     -25-
<PAGE>
 
                       CARVER CORPORATION AND SUBSIDIARY

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                          DECEMBER 31, 1995 AND 1994



NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES

         PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of Carver Corporation; its wholly-owned subsidiary, Carver
International, Ltd., a Foreign Sales Corporation (FSC); and its 80%-owned
subsidiary, USS Corporation through the date of disposition (Note 15).
Significant intercompany transactions are eliminated in consolidation.

         OPERATIONS - The Company is engaged primarily in the development,
manufacture and distribution of audio entertainment systems. Sales are conducted
throughout the United States and various foreign nations. Net export sales by
geographic areas are as follows:

<TABLE>
<CAPTION>
 
                                               Years Ended December 31,
                                        -------------------------------------
                                           1995         1994         1993
                                        -----------  -----------  -----------
         <S>                            <C>          <C>          <C>
         Western Europe                 $ 1,608,000  $ 1,974,000  $ 2,590,000
         Canada                             577,000      683,000      759,000
         Asia                             1,771,000    1,706,000    1,000,000
         Other                            1,236,000    1,547,000    2,090,000
                                        -----------  -----------  -----------
                                        $ 5,192,000  $ 5,910,000  $ 6,439,000
                                        ===========  ===========  ===========
</TABLE>

         REVENUE RECOGNITION - Revenue is recognized when products are shipped.
The Company warrants its products for a period of one to five years following
the date of sale. Estimated warranty costs are recorded in the period of the
sale.

         INVENTORIES - Inventories consist of electronic components and audio
equipment, and are stated at the lower of cost (determined on a first-in, first-
out basis) or market. Inventories consist of the following:

<TABLE>
<CAPTION>
                                                           December 31,
                                                     -----------------------
                                                        1995        1994
                                                     ----------  -----------
        <S>                                          <C>         <C>        
 
        Raw materials                                $  893,000  $ 1,444,000
        Work-in-process                               1,284,000    1,712,000
        Finished products                             1,750,000    4,894,000
                                                     ----------  -----------
                                                     $3,927,000  $ 8,050,000
                                                     ==========  ===========
 
</TABLE>

                                     -26-
<PAGE>
 
                       CARVER CORPORATION AND SUBSIDIARY

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                          DECEMBER 31, 1995 AND 1994
                                  (CONTINUED)


NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

         PROPERTY AND EQUIPMENT - Property and equipment are stated at cost.
Depreciation for financial reporting purposes is provided using straight-line
and accelerated methods. Estimated useful lives range from three to thirty
years.

         INTANGIBLES - Patents are amortized over the useful lives which range
from seven to seventeen years.

         RESEARCH AND DEVELOPMENT - Costs associated with product research and
development are charged to operations when incurred and are included in
operating expenses.

         ADVERTISING - The Company expenses the costs of advertising the first
time the advertising takes place. Advertising expense in 1995, 1994 and 1993 was
$777,000, $868,000 and $754,000, respectively.

         CASH EQUIVALENTS - The Company considers all short-term investments
with a maturity at the date of purchase of three months or less to be cash
equivalents.

         EARNINGS PER SHARE - Earnings per share are based on earnings for the
period, divided by the weighted average number of shares and common share
equivalents outstanding during each year. The earnings per share calculations
exclude common share equivalents because the effect would be anti-dilutive. The
weighted average number of common shares for purposes of computing earnings per
share amounted to 3,680,000, 3,678,000 and 3,676,000 shares for the years ended
December 31, 1995, 1994 and 1993, respectively.

         PRESENTATION - Certain balances have been reclassified in the 1994
presentation to conform with the 1995 presentation.

         USE OF ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.

                                     -27-
<PAGE>
 
                       CARVER CORPORATION AND SUBSIDIARY

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                          DECEMBER 31, 1995 AND 1994
                                  (CONTINUED)

NOTE 2 - ACCOUNTS RECEIVABLE

          Accounts receivable are as follows:

<TABLE>
<CAPTION>
 
                                                           December 31,
                                                     -------------------------
                                                        1995          1994
                                                     -----------  ------------
          <S>                                        <C>          <C>
                                            
          Trade receivables                          $ 2,570,000    $ 4,074,000
          Allowance for doubtful accounts               (233,000)      (183,000)
          Allowance for discounts                        (33,000)       (61,000)
                                                     -----------    -----------
                                                     $ 2,304,000    $ 3,830,000
                                                     ===========    ===========
 
</TABLE>
NOTE 3 - NOTE RECEIVABLE

         In September 1993, the Company received a note for $1,015,000 secured
by deed of trust in connection with the sale of a building and land. The note is
payable in monthly installments of $8,000 including interest of 8.5% with the
unpaid balance due in September 1996. The building and land are being held as
collateral on the original mortgage (Note 4) and will be transferred to the
buyer upon full satisfaction of the mortgage and this obligation.


NOTE 4 - FINANCING

         SHORT-TERM BORROWINGS - The Company has an agreement with a financial
institution which provides for working capital advances  up to $6,000,000.  A
maximum of $1,000,000 of this line may be used to secure letters of credit.
Funds available under this agreement are restricted, however, to a portion of
eligible accounts receivable and inventories.  Advances are collateralized by
substantially all assets and bear interest at the prime lending rate plus 2%.
The outstanding balance on the line of credit was $1,216,000 and $3,067,000 at
December 31, 1995 and 1994, respectively.  The agreement expires with extensions
on May 31, 1996.  Maximum and average amounts outstanding during the year ended
December 31, 1995 were $3,067,000 and $2,195,000, respectively.  The weighted
average interest rate at December 31, 1995 was 10.75% and the weighted average
interest rate during the year, computed monthly, was 10.64%.

                                     -28-
<PAGE>
 
                       CARVER CORPORATION AND SUBSIDIARY

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                          DECEMBER 31, 1995 AND 1994
                                  (CONTINUED)

NOTE 4 - FINANCING  (CONTINUED)

         LONG-TERM DEBT - The Company assumed a $790,000 note secured by a deed
of trust in connection with the purchase of a building and land in 1990. The
note is payable in monthly installments of $7,790 and bears interest at 10.375%.
The building and land were sold during 1993 for a note receivable (Note 3). The
Company continues to be the primary debtor of the note payable. The $696,000
balance outstanding at December 31, 1995 is expected to be paid in full in 1996
upon collection of the note receivable. Accordingly, the debt has been
reclassified to current in the accompanying financial statements.


NOTE 5 - FINANCIAL INSTRUMENTS AND CREDIT RISK

         FINANCIAL INSTRUMENTS AND CREDIT RISK - Financial instruments which
potentially subject the Company to significant concentrations of credit risk
consist principally of cash and cash equivalents and trade accounts receivable.
The Company maintains cash accounts with creditworthy financial institutions and
credit risk is deemed to be minimal. At December 31, 1995, accounts receivable
with one customer were $1,004,000.

         The Company enters into purchase commitments with foreign companies
(Note 7).

         FAIR VALUES - The carrying amounts of cash and cash equivalents, note
receivable, notes payable and the current portion of long term debt approximated
fair value as of December 31, 1995.

                                     -29-
<PAGE>
 
                       CARVER CORPORATION AND SUBSIDIARY

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                          DECEMBER 31, 1995 AND 1994
                                  (CONTINUED)

NOTE 6 - INCOME TAX

         A reconciliation of the income tax benefit to the amounts computed by
applying the federal statutory income tax rate to income before income tax is as
follows:

<TABLE>
<CAPTION>
 
                                                 1995                              1994                            1993
                                        -----------------------          ----------------------          ----------------------- 
                                                        % of                            % of                              % of
                                                       Pre-Tax                         Pre-Tax                          Pre-Tax
                                          Amount       Income              Amount      Income              Amount       Income
                                        -----------  ----------          ----------  ----------          -----------  ----------
<S>                                     <C>          <C>                 <C>         <C>                 <C>            <C>  
Income tax provision (benefit) at                                                                
 federal statutory rate                 (1,073,000)     (34.0)%          $(977,000)     (34.0)%          $(1,212,000)  (34.0)%
FSC income                                      -          -                (6,000)       (.2)               (16,000)    (.1)
Benefit from discontinued operations            -          -                   -           -                (627,000)   (1.9)
Loss for which no tax benefit is                                                                 
 currently available                     1,073,000       34.0              983,000       34.2              1,855,000    36.0
                                        ----------   --------            ---------   --------            -----------  ------
                                        $       -          -  %          $      -          -  %          $        -       -  %
                                        ==========   ========            =========   ========            ===========  ====== 
</TABLE>

 The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 1995 and
1994 are presented below:
<TABLE>
<CAPTION>
 
                                          1995          1994     
                                      ------------  ------------ 
     <S>                              <C>           <C>          
      Deferred tax assets                                        
        Net operating loss            $ 4,618,000   $ 3,423,000  
        Other                             178,000       230,000  
                                                                 
      Deferred tax liabilities                                   
        Accelerated depreciation         (398,000)     (413,000) 
        Other                              (5,000)      (19,000) 
                                      -----------   -----------  
                                                                 
        Total gross deferred taxes      4,393,000     3,221,000  
        Less valuation allowance       (4,393,000)   (3,221,000) 
                                      -----------   -----------  
                                                                 
        Net deferred taxes            $        -    $        -           
                                      ===========   ===========   
</TABLE>

                                      -30-
<PAGE>
 
                       CARVER CORPORATION AND SUBSIDIARY

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                          DECEMBER 31, 1995 AND 1994
                                  (CONTINUED)
                                 
NOTE 6 - INCOME TAX  (CONTINUED) 
                                 
     For tax reporting purposes, the Company has approximately $13,581,000 of
net operating losses which may be utilized to offset future taxable income.
These loss carryforwards expire between the years 2004 and 2010. Under FAS 109,
the Company is required to recognize the future benefit of its net operating
loss carryforwards. The Company has a benefit from its net operating loss
carryforwards of approximately $4,618,000 and has recorded a valuation allowance
of 100% of the deferred tax asset.
                                 
                                 
NOTE 7 - COMMITMENT              
                                 
     INVENTORY PURCHASE - As of December 31, 1995, the Company has committed to
the purchase of approximately $2,371,000 of inventory expected to be received in
1996 from various vendors. Of th is amount, approximately $1,883,000 is
denominated in Japanese Yen.


NOTE 8 - EMPLOYEE BENEFITS

     KEY EMPLOYEES' BONUS - The Company has an incentive bonus program which
provides for payment of cash bonuses to its executive officers and department
managers. During each fiscal year, the Board of Directors determines a bonus
amount to be paid to participants. Expense for this program was $30,000 in 1995.
No amounts were paid during 1994 and 1993.

     EMPLOYEE BONUS PLANS - The Company has a bonus plan in which all employees
are eligible to participate other than those who are eligible for the Key
Employees' Bonus program. Pursuant to this plan, a portion of operating income
(to a maximum of $100,000 quarterly) is allocated among eligible employees based
upon department performance, base salaries and individual performance. No
allocations were made in 1995, 1994 or 1993.

     In addition, certain incentive programs exist which provide for cash
bonuses upon achievement of sales goals and meeting of product introduction
dates. Total expense amounted to $15,000 in 1995. No payments were made under
this plan during 1994 or 1993.

                                     -31-
<PAGE>
 
                       CARVER CORPORATION AND SUBSIDIARY

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                          DECEMBER 31, 1995 AND 1994
                                  (CONTINUED)


NOTE 8 - EMPLOYEE BENEFITS  (CONTINUED)

     STOCK BONUS PLAN - In 1995, the Company adopted a stock bonus plan for
employees, directors, and consultants. The plan allows the Board of Directors to
grant shares of authorized, unissued common stock. In 1995, 1,500 shares were
granted to three directors of the Company.

     STOCK PURCHASE PLAN - The Company has a stock purchase plan for the benefit
of its employees. Employees who choose to participate enroll annually and may
make voluntary contributions to a fund. On June 30 and December 31 of each year,
the participant may apply contributed funds toward the purchase of Company stock
at 85% of the prevailing market price or 85% of the market price on the date of
enrollment in the plan. The Company has reserved 100,000 shares for issuance
under this plan. The shares issued under this plan and the proceeds received are
as follows:
<TABLE>
<CAPTION>
                                             Shares      Proceeds
                                            --------    ----------
         <S>                                 <C>         <C>     
          1995                                2,663      $  3,500
          1994                                1,118         2,000
          1993                                4,045         8,000
</TABLE>

     PROFIT SHARING PLAN - The Company has a 401(k) profit sharing plan for the
benefit of all full-time employees. Participants may make voluntary
contributions while the Company, at its discretion, may make a matching
contribution at a rate of $.50 for every $1 of participant contribution up to
$1,000 per participant. The Company made no contributions to the Plan in 1995,
1994 or 1993.

     STOCK OPTIONS - The Company has a 1985 Incentive Stock Option (ISO) Plan
for employees and a 1985 Non-Qualified Stock Option (NSO) Plan for directors.
The Company also has a 1995 stock option plan which provides for grants to key
employees, directors, and consultants. Under all plans, the Board of Directors
determines the option price at the date of grant (not to be less than the fair
market value for ISOs and equal to the fair market value for NSOs). Options
granted under all plans generally vest between three and four and one half years
and expire between five and ten years from the date of grant. At December 31,
1995, 148,239 shares were vested and 192,500 were available for future grants
under the plans.

                                     -32-
<PAGE>
 
                       CARVER CORPORATION AND SUBSIDIARY

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                          DECEMBER 31, 1995 AND 1994
                                  (CONTINUED)


NOTE 8 - EMPLOYEE BENEFITS  (CONTINUED)

     The Company granted options of 50,000 shares on August 6, 1993 and 50,000
shares on August 26, 1994 to key employees as a condition of employment.  The
option price is the fair market value of the underlying common stock on the date
of grant.  These options were fully vested on the date of grant and have terms
of ten years subject to earlier lapse three years from the date of termination
of employment or one year from the date of death or disability whichever comes
first.

     Option prices at December 31, 1995 range from $1.81 to $3.25 per share. The
following summary sets forth the activity under the plans in 1995 and 1994.
<TABLE>
<CAPTION>
 
                                                   Number of Shares       
                                                  -------------------     
                                                     ISO       NSO's      
                                                  ---------  --------     
            <S>                                   <C>        <C>          
             Balance, December 31, 1993             200,639   131,250     
               Granted                              200,000    50,000     
               Lapsed                               (60,275)        -     
                                                   --------   -------     
             Balance, December 31, 1994             340,364   181,250     
               Granted                              182,000    27,500     
               Lapsed                              (226,000)  (16,250)    
                                                   --------   -------     
             Balance, December 31, 1995             296,364   192,500
                                                   ========   =======
 
</TABLE>

NOTE 9 - RELATED PARTY TRANSACTIONS

     PATENTS AND ROYALTIES - Robert W. and Diana R. Carver, shareholders of
Carver Corporation, hold three patents on the Magnetic Field Amplifier
technology which is used in several Carver products.  Pursuant to terms of the
license agreement, Carver Corporation pays royalties to Robert W. and Diana R.
Carver for each amplifier sold which incorporates the licensed technology.  Such
royalties amounted to $45,000 in 1995, $57,000 in 1994 and $102,000 in 1993.

                                     -33-
<PAGE>
 
                       CARVER CORPORATION AND SUBSIDIARY

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                          DECEMBER 31, 1995 AND 1994
                                  (CONTINUED)


NOTE 10 - QUARTERLY FINANCIAL DATA (UNAUDITED)

<TABLE>
<CAPTION>
 
                                        First     Second    Third     Fourth   
                                       Quarter   Quarter   Quarter   Quarter   
                                       --------  --------  --------  --------  
                                              (All amounts in thousands        
                                               except per share amounts)       
       <S>                             <C>       <C>       <C>       <C>       
       Year ended December 31, 1995                                            
        Revenues                     $   5,230     4,931     4,494     3,773   
        Operating loss                    (542)   (1,140)      (81)   (1,094)  
        Loss before income taxes          (632)   (1,303)     (151)   (1,071)  
        Net loss                          (632)   (1,303)     (151)   (1,071)  
        Net loss per share                (.17)     (.35)     (.04)     (.30)  
                                                                               
       Year ended December 31, 1994                                            
        Revenues                     $   5,516  $  4,800  $  5,675  $  6,180   
        Operating loss                    (462)     (866)     (379)     (829)  
        Loss before income taxes          (544)     (948)     (887)     (494)  
        Net loss                          (544)     (948)     (887)     (494)  
        Net loss per share                (.15)     (.26)     (.24)     (.13)  
 
</TABLE>

NOTE 11 - RESTRUCTURING CHARGES

     In the fourth quarter of 1995, the Company recorded a restructuring
charge of $1,319,000 for costs associated with downsizing of operations,
consolidating facilities, and the disposal either through sale or abandonment,
of certain product lines.  The charges include severance costs and write-off of
intangible assets and inventories.  As of December 31, 1995, $143,000 was
accrued relating to personnel reduction that is expected to be substantially
complete during March 1996.

                                      -34-
<PAGE>
 
                       CARVER CORPORATION AND SUBSIDIARY

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                          DECEMBER 31, 1995 AND 1994
                                  (CONTINUED)


NOTE 12 - SALE OF PROFESSIONAL PRODUCTS LINE

     On November 20, 1995, the Company sold assets relating to its professional
products line for a gain of $1,208,000.  The purchase price, net of certain
selling expenses, was $1,982,000, of which $350,000 will be paid to the Company
one year from the closing date and $209,000 was paid directly to Robert W. and
Diana R. Carver in settlement of a royalty dispute.


NOTE 13 - CONTINGENCIES

     The Company has recently undergone a United States Customs Service audit.
The results of the audit have been referred to the Office of Investigations of
the Customs Service for possible civil penalty action on late payments of duty
relating to imported equipment and materials for periods prior to 1994.
Negotiations commenced with the government as to a possible disposition of the
case, however, it could be several months before any final resolution is
accomplished. The Customs Service issued to the Company a pre-penalty notice
indicating that it will assess a penalty of up to approximately $400,000. The
Company, by regulation, was afforded the opportunity to respond. At December 31,
1994, the Company recorded a liability of $50,000. In 1995, the Company
submitted an offer in compromise to the Customs Service and included a payment
of $50,000. The Customs Service has not yet responded to the offer in
compromise.

     In 1996, a suit was filed against the Company by a former employee alleging
that the Company engaged in discriminatory employment practices.  The suit does
not specify damages.  Management has indicated its plans to vigorously contest
this suit and believes that the loss, if any, resulting from the suit will not
have a material impact on the Company's financial position, results of
operations, or cash flows in future years.


NOTE 14 - LITIGATION SETTLEMENT

     On December 8, 1994, the Company executed an agreement which settled a
lawsuit with Robert and Diana Carver for royalties payable. The agreement
provided, in part, that the Company pay the Carvers $300,000 in forty-eight
monthly installments. The entire balance was paid in full in 1995 in connection
with the sale of the professional products line (Note 12). Operating losses in
1994 include a charge of $391,000 relating to settlement of the litigation
including legal fees.

                                      -35-
<PAGE>
 
                       CARVER CORPORATION AND SUBSIDIARY

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                          DECEMBER 31, 1995 AND 1994
                                  (CONTINUED)


NOTE 15 - DISCONTINUED OPERATIONS

     On November 19, 1993, the Company sold its subsidiary USS Corporation,
including all patents, contract rights, licenses, files and records, equipment
and inventory.  Proceeds from the sale of USS Corporation amounted to $374,000
as well as royalty payments of 7.5% of net revenues for the next five years and
4% thereafter.  The sale resulted in a loss of $1,054,000 which includes amounts
paid to terminate employment obligations.  Revenues and operating loss for this
subsidiary for the years ended December 31, 1994 and 1993 were $182,000 and
$790,000, respectively.

                                      -36-
<PAGE>
 
[LETTERHEAD OF MOSS-ADAMS LLP APPEARS HERE]


             INDEPENDENT AUDITORS' REPORT ON SUPPLEMENTAL SCHEDULE


To the Board of Directors and Shareholders
Carver Corporation


Under date of February 15, 1996, we reported on the consolidated balance sheet
of Carver Corporation and subsidiary as of December 31, 1995 and 1994 and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the years in the three year period ended December 31, 1995, as
listed in item 8 of the Annual Report on Form 10-K for the year 1995.  In
connection with our audit of the aforementioned consolidated financial
statements, we also audited the related supplemental financial statement
schedule.

In our opinion, this financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.



Seattle, Washington
February 15, 1996

                                      37
<PAGE>
 
                       CARVER CORPORATION AND SUBSIDIARY

         SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

                           YEARS ENDED DECEMBER 31,



<TABLE>
<CAPTION>
 
 
                                                                               Additions
                                                            Balance At        Charged To                          Balance
                                                            Beginning          Costs And                           At End
            Descriptions                                     of Year           Expenses         Deductions(1)      Of Year
------------------------------------------                 ------------       -----------      ----------       -----------
<S>                                                        <C>                <C>              <C>              <C>  
Allowance for doubtful accounts - deducted                                                                   
    from accounts receivable in the                                                                          
    balance sheet                                                                                            
 1995                                                       $  183,000         $ 447,000        $ 397,000        $ 233,000 
 1994                                                          190,000           195,000          202,000          183,000   
 1993                                                           72,000           231,000          113,000          190,000 
                                                                                                             
Allowance for discounts - deducted from                                                                      
    accounts receivable in the balance sheet                                                                 
 1995                                                        $  61,000         $ 450,000        $ 478,000        $  33,000
 1994                                                           90,000           580,000          609,000           61,000
 1993                                                          113,000           655,000          678,000           90,000
 
</TABLE>



(1) Represents uncollectible accounts written off and discounts taken by
    customers.

                                     -38-
<PAGE>
 
ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
          ON ACCOUNTING AND FINANCIAL DISCLOSURE

None

PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

Incorporated by reference to the Proposal 1 - Election of Directors, "Nominees,"
section of the Company's Proxy Statement with respect to its 1996 Annual Meeting
of Shareholders to be filed by April 12, 1996.


ITEM 11.    EXECUTIVE COMPENSATION

Incorporated by reference to the Directors' Compensation and Executive
                                --------------------------------------
Compensation sections of the Company's Proxy Statement with respect to its 1996
------------                           ---------------                         
Annual Meeting of Shareholders to be filed by April 12, 1996.


ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
            MANAGEMENT

Incorporated by reference to the Securities and Principal Holders, Proposal 1 -
                                 ----------------------------------------------
Elections of Directors, "Nominees," and Executive Compensation, sections of the
--------------------------------------------------------------                 
Company's Proxy Statement with respect to its 1996 Annual Meeting of
          ---------------                                           
Shareholders to be filed by April 12, 1996.


ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Incorporated by reference to the Certain Transactions section of the Company's
                                 --------------------                         
Proxy Statement with respect to its 1996 Annual Meeting of Shareholders to be
filed by April 12, 1996.

                                      39
<PAGE>
 
PART IV

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

(a)  Index to Financial Statements and Financial Statement Schedules

1.  FINANCIAL STATEMENTS
    --------------------
                                                        PAGE IN
                                                          THIS
 Financial Statements Index                              REPORT
---------------------------                              ------

Report of Independent Accountants                          21

Consolidated Balance Sheet at
December 31, 1995 and 1994                                 22

Consolidated Statement of Operations, Years
Ended December 31, 1995, 1994 and 1993                     23

Consolidated Statement of Shareholders'
Equity, Years Ended December 31, 1995,                     
1994 and 1993                                              24

Consolidated Statement of Cash Flows, Years                
Ended December 31, 1995, 1994 and 1993                     25

Notes to Consolidated Financial Statements                 26

                                                        PAGE IN
                                                          THIS
2.  FINANCIAL  STATEMENT SCHEDULES                       REPORT 
    -------------------------------                      ------
                                                        


     Report of Independent Accountants on 
     Supplemental Schedule                                 37 

     II - Valuation and Qualifying Accounts and Reserves   38 

All other schedules are omitted because they are not applicable or the required
information is shown in the consolidated financial statements or notes thereto.


(b)  Reports on Form 8-K.  One report on Form 8-K was filed on December 5, 1995
describing the transaction in which the Company sold its professional product
line to Phoenix Gold International, Inc.

(c)  Exhibits.

Executive Compensation Plans and Arrangements
---------------------------------------------

The following list is a subset of the list of exhibits described below and
contains all compensatory plans, contracts or arrangements in which any director
or executive officer of the Company is a participant, unless the method of
allocation of benefits thereunder is the same for management and non-management
participants:

                                      40
<PAGE>
 
(1)  License Agreement dated as of June 1, 1980 between the Company and Carver
Technology Development, Inc.  See Exhibit 10.1.

(2)  The Company's Amended 1985 Incentive Stock Option Plan.  See Exhibit 10.3.

(3)  The Company's Amended 1985 Non-Qualified Stock Option Plan. See Exhibit
10.4.

(4)  Form of Amended Stock Option Agreement used in connection with options
granted under the Company's Amended 1985 Incentive Stock Option Plan.  See
Exhibit 10.5.

(5)  Stock Option Agreement dated August 6, 1993 between Robert A. Fulton and
the Company.  See Exhibit 10.10.

(6)  Stock Option Agreement dated March 10, 1994 between Robert A. Fulton and
the Company.  See Exhibit 10.21.

(7)  Employment Agreement dated August 26, 1994 between Stephen M. Williams and
the Company.  See Exhibit 10.22.

(8)  Stock Option Agreement dated August 26, 1994 between Stephen M. Williams
and the Company.  See Exhibit 10.23.

(9)  Stock Option Agreement dated August 26, 1994 between Stephen M. Williams
and the Company.  See Exhibit 10.24.

(10)  Employment Agreement dated January 2, 1996 between Stephen M. Williams
and the Company.  See Exhibit 10.34.

(11)  The Stephen M. Williams 1996 Bonus Plan dated January 3, 1996 between
Stephen M Williams and the Company.  See Exhibit 10.35.

(12)  Stock Option Agreement dated March 11, 1995 between Stephen M. Williams
and the Company.  See Exhibit 10.36.

(13)  Stock Option Agreement dated March 24, 1995 between Stephen M. Williams
and the Company.  See Exhibit 10.37.

(14)  Stock Option Agreement dated January 15, 1996 between Stephen M. Williams
and the Company.  See Exhibit 10.38.

EXHIBIT INDEX
-------------

Exhibit
-------
Number  See Attachment "Exhibits"
------                           

2.1  Asset Purchase and Sale Agreement dated as of December 23, 1992 among
     Carver Corporation, U.S. Sound, Inc., John Lemon and USS Corporation.
     (Incorporated by reference to Exhibit 2.1 to the Registrant's Form 8-K
     dated December 23, 1992).

2.2  Asset Purchase Agreement dated November 19, 1993 between Carver Corporation
     and Bose Corporation. (Incorporated by reference to Exhibit 2.2 to the
     Registrant's Form 10-K for the year ended December 31, 1993.).

3.1  The Company's Restated Articles of Incorporation filed July 29, 1985.
     (Incorporated by reference to Exhibit 3.1 to the Registrant's Form 10-K for
     the year ended December 31, 1989).

                                      41
<PAGE>
 
3.2*   The Company's Seventh Amended and Restated Bylaws.

10.1   License Agreement dated as of June 1, 1980 between the Company and Carver
       Technology Development, Inc. (Incorporated by reference to Exhibit 10.6
       to the Registrant's Registration Statement on Form S-1, No. 2-96896).
 
10.2   Employment Agreement dated as of April 4, 1985 between Robert W. Carver
       and the Company. (Incorporated by reference to Exhibit 10.10 to the
       Registrant's Registration Statement on Form S-1, No. 2-96896).
 
10.3   The Company's Amended 1985 Incentive Stock Option Plan. (Incorporated by
       reference to Exhibit 10.3 to the Registrant's Form 10-K for the year
       ended December 31, 1992).

10.4   The Company's Amended 1985 Non-Qualified Stock Option Plan. (Incorporated
       by reference to Exhibit 10.2 to the Registrant's Registration Statement
       on Form S-8, No.33-31344).

10.5   Form of the Amended Stock Option Agreement used in connection with the
       Company's Amended 1985 Incentive Stock Option Plan. (Incorporated by
       reference to Exhibit 10.5 to the Registrant's Form 10-K for the year
       ended December 31, 1992).
 
10.6   The Company's Amended 1988 Employee Stock Purchase Plan. (Incorporated by
       reference to Exhibit 10.6 to the Registrant's Form 10-K for the year
       ended December 31, 1992).  

10.7   Stock Purchase Agreement dated April 2, 1985 among Marubeni Corporation,
       Robert W. and Diana R. Carver and the Company. (Incorporated by reference
       to Exhibit 10.18 to the Registrant's Registration Statement on Form S-1,
       No. 2-96896).
 
10.8   Employment Agreement dated February 28, 1992, between Thomas C. Graham
       and the Company. (Incorporated by reference to Exhibit 10.8 to the
       Registrant's Form 10-K for the year ended December 31, 1992).
 
10.9   Severance Agreement dated as of September 22, 1993 between Thomas C.
       Graham and the Company. (Incorporated by reference to Exhibit 10.9 to the
       Registrant's Form 10-K for the year ended December 31, 1989).
 
10.10  Stock Option Agreement dated August 6, 1993 between Robert A. Fulton and
       the Company. (Incorporated by reference to Exhibit 10.10 to the
       Registrant's Form 10-K for the year ended December 31, 1993).
 
10.11  Form of Authorized Dealer Agreement. (Incorporated by reference to
       Exhibit 10.10 to the Registrant's Form 10-K for the year ended December
       31, 1989).
 
10.12  Amended Carver Corporation Stock Appreciation Rights Plan. (Incorporated
       by reference to Exhibit 10.11 to the Registrant's Form 10-K for the year
       ended December 31, 1992). 

10.13  License Agreement dated July 20, 1988 between the Company and Toshiba
       Corporation. (Incorporated by reference to Exhibit Number 10.20 to the
       Company's Form 10-K for the year ended December 31, 1988).
 
10.14  Letter Agreement for Accounts Receivable Financing between the Company
       and Congress Financial Corporation (Western) dated October 24, 1990, and
       related Security Agreements dated December 20, 1990. (Incorporated by
       reference to Exhibit 10.23 to the Company's Form 10-K for the year ended
       December 31, 1990).

                                      42
<PAGE>
 
10.15  Ninth Amendment to the Accounts Financing Agreement between Carver
       Corporation and Congress Financial Corporation (Western) dated March 31,
       1994. (Incorporated by reference to Exhibit 10.15 to the Registrant's
       Form 10-K for the year ended December 31, 1994.) 

10.16  Employment Agreement dated as of December 23, 1992, among John Lemon, USS
       Corporation and Carver Corporation. (Incorporated by reference to Exhibit
       10.1 to the Registrant's Form 8-K dated December 23, 1992.)
 
10.17  Employment Agreement dated as of December 23, 1992, among Clifford
       Henricksen, USS Corporation and Carver Corporation. (Incorporated by
       reference to Exhibit 10.2 to the Registrant's Form 8-K dated December 23,
       1992.)
 
10.18  Noncompetition Agreement dated as of December 23, 1992, among Carver
       Corporation, U.S. Sound, Inc., John Lemon and Clifford Henricksen.
       (Incorporated by reference to Exhibit 10.3 to the Registrant's Form 8-K
       dated December 23, 1992.)

 
10.19  Severance Agreement dated November 19, 1993 by and among U.S. Sound,
       Inc., Carver Corporation and John Lemon. (Incorporated by reference to
       Exhibit 10.19 to the Registrant's Form 10-K for the year ended December
       31, 1993.)
 
10.20  Severance Agreement dated November 9, 1993 by and among U.S. Sound,
       Inc., Carver Corporation and Clifford Henricksen. (Incorporated by
       reference to Exhibit 10.20 to the Registrant's Form 10-K for the year
       ended December 31, 1993.)
 
10.21  Stock Option Agreement dated March 10, 1994 between Robert A. Fulton and
       the Company. (Incorporated by reference to Exhibit 10.21 to the Company's
       Form 10-K for the year ended December 31, 1994.)
 
10.22  Employment Agreement dated August 26, 1994 between Stephen M. Williams
       and the Company. (Incorporated by reference to Exhibit 10.22 to the
       Company's Form 10-K for the year ended December 31, 1994.)
 
10.23  Stock Option Agreement dated August 26, 1994 between Stephen M. Williams
       and the Company. (Incorporated by reference to Exhibit 10.23 to the
       Company's Form 10-K for the year ended December 31, 1994.)
 
10.24  Stock Option Agreement dated August 26, 1994 between Stephen M. Williams
       and the Company. (Incorporated by reference to Exhibit 10.24 to the
       Company's Form 10-K for the year ended December 31, 1994.)
 
10.25  Settlement Agreement dated December 8, 1994 between Robert W. and Diana
       R. Carver and the Company. (Incorporated by reference to Exhibit 10.25 to
       the Company's Form 10-K for the year ended December 31, 1994.)
 
10.26  The Company's 1995 Stock Option Plan. (Incorporated by reference to
       Exhibit 10.26 to the Company's Form 10-Q for the quarter ended June 30,
       1995.)
 
10.27  The Company's 1995 Stock Bonus Plan. (Incorporated by reference to
       Exhibit 10.27 to the Company's Form 10-Q for the quarter ended June 30,
       1995.)
 
10.28  Asset Purchase Agreement dated November 20, 1995 between Phoenix Gold
       International Inc. and the Company. (Incorporated by reference to Exhibit
       2.1 to the Company's Form 8-K dated December 5, 1995.)
 
                                      43
<PAGE>
 
10.29  Amendment No. 1 to Asset Purchase Agreement dated November 20, 1995
       between Phoenix Gold International, Inc. and the Company. (Incorporated
       by reference to Exhibit 2.2 to the Company's Form 8-K dated December 5,
       1995).
 
10.30  License Agreement dated November 20, 1995 between Phoenix Gold
       International Inc. and the Company. (Incorporated by reference to Exhibit
       2.3 to the Company's Form 8-K dated December 5, 1995.).
 
10.31* Tenth Amendment to the Accounts Financing Agreement dated November 20,
       1995 between Congress Financial Corporation (Western) and the Company.
 
10.32* Eleventh Amendment to the Accounts Financing Agreement dated January 15,
       1996 between Congress Financial Corporation (Western) and the Company.
 
10.33* Twelfth Amendment to the Accounts Financing Agreement dated February 26,
       1996 between Congress Financial Corporation (Western) and the Company.

10.34* Employment Agreement dated January 2, 1996 between Stephen M. Williams
       and the Company.

10.35* The Stephen M. Williams 1996 Bonus Plan dated January 3, 1996 between
       Stephen M. Williams and the Company.

10.36* Stock Option Agreement dated March 11, 1995 between Stephen M. Williams
       and the Company.

10.37* Stock Option Agreement dated March 24, 1995 between Stephen M. Williams
       and the Company.

10.38* Stock Option Agreement dated January 15, 1996 between Stephen M. Williams
       and the Company.

11*    Computation of Earnings Per Share for years ended December 31, 1995, 1994
       and 1993.

21*    Subsidiaries of the Registrant.

23.1*  Consent of Moss Adams.

28.1   Amendment to Registration Statements Re: Indemnification. (Incorporated
       by reference to Exhibit 28.1 to the Company's Form 10-Q for the quarter
       ended September 30, 1990).

_____________
*Filed herewith

                                      44
<PAGE>
 
EXHIBIT INDEX
                                                                         PAGE IN
                                                                           THIS
ITEM                           DESCRIPTION                                REPORT

2.1  Asset Purchase and Sale Agreement dated as of December 23, 1992 among
     Carver Corporation, U.S. Sound, Inc., John Lemon and USS Corporation.
     (Incorporated by reference to Exhibit 2.1 to the Registrant's Form 8-K
     dated December 23,1992)

2.2  Asset Purchase Agreement dated November 19, 1993 between Carver
     Corporation and Bose Corporation.  (Incorporated by reference to Exhibit
     2.2 to the Registrant's Form 10-K for the year ended December 31, 1993.

3.1  The Company's Restated Articles of Incorporation filed July 29, 1985.
     (Incorporated by reference to Exhibit 3.1 to the Registrant's Form 10-K for
     the year ended December 31, 1989)

3.2* The Company's Seventh Amended and Restated Bylaws. 

10.1 License Agreement dated as of June 1, 1980 between the Company and
     Carver Technology Development, Inc. (Incorporated by reference to
     Exhibit 10.6 to the Registrant's Registration Statement on Form S-1, No.
     2-96896)

10.2 Employment Agreement dated as of April 4, 1985 between Robert W. Carver
     and the Company.  (Incorporated by reference to Exhibit 10.10 to the
     Registrant's Registration Statement on Form S-1, No. 2-96896)

10.3 The Company's Amended 1985 Incentive Stock Option Plan. (Incorporated
     by reference to Exhibit 10.3 to the Registrant's Form 10-K for the year
     ended December 31, 1992

10.4 The Company's Amended 1985 Non-Qualified Stock Option  Plan.
     (Incorporated by reference to Exhibit 10.2 to the Registrant's Registration
     Statement on Form S-8, No. 33-31344)

10.5 Form of the Amended Stock Option Agreement used in connection with the
     Company's Amended 1985 Incentive Stock Option Plan.  (Incorporated by
     reference to Exhibit 10.5 to the Registrant's Form 10-K for the year ended
     December 31, 1992)

10.6 The Company's Amended 1988 Employee Stock Purchase Plan.
     (Incorporated by reference to Exhibit 10.6 to the Registrant's Form 10-K
     for the year ended December 31, 1992)

10.7 Stock Purchase Agreement dated April 2, 1985 among Marubeni Corporation,
     Robert W. and Diana R. Carver and the Company. (Incorporated by reference
     to Exhibit 10.18 to the Registrant's Registration Statement on Form S-1,
     No. 2-96896)

                                      45
<PAGE>
 
                                                                         PAGE IN
                                                                           THIS
                                                                          REPORT

10.8   Employment Agreement dated February 28, 1992, between Thomas C. Graham
       and the Company. (Incorporated by reference to Exhibit 10.8 to the
       Registrant's Form 10-K for the year ended December 31, 1992.)

10.9   Severance Agreement dated as of September 22, 1993 between Thomas C.
       Graham and the Company. (Incorporated by reference to Exhibit 10.9 to the
       Registrant's Form 10-K for the year ended December 31, 1993.)

10.10  Stock Option Agreement dated August 6, 1993 between Robert A. Fulton and
       the Company. (Incorporated by reference to Exhibit 10.10 to the
       Registrant's Form 10-K for the year ended December 31, 1993.)

10.11  Form of Authorized Dealer Agreement. (Incorporated by reference to
       Exhibit 10.11 to the Company's Form 10-K for the year ended December 31,
       1989.)

10.12  Amended Carver Corporation Stock Appreciation Rights Plan. (Incorporated
       by reference to Exhibit 10.11 to the Registrant's Form 10-K for the year
       ended December 31, 1992.)

10.13  License Agreement dated July 20, 1988 between the Company and Toshiba
       Corporation. (Incorporated by reference to Exhibit Number 10.20 to the
       Company's Form 10-K for the year ended December 31, 1988.)

10.14  Letter Agreement for Accounts Receivable Financing between the Company
       and Congress Financial Corporation (Western) dated October 24, 1990, and
       related Security Agreements dated December 20, 1990. (Incorporated by
       reference to Exhibit 10.23 to the Company's Form 10-K for the year ended
       December 31, 1990.)

10.15  Ninth amendment to the Accounts Financing Agreement between Carver
       Corporation and Congress Financial Corporation (Western) dated March 31,
       1994. (Incorporated by reference to Exhibit 10.15 to the Company's Form
       10-K for the year ended December 31, 1994.)

10.16  Employment Agreement dated as of December 23, 1992, among John Lemon, USS
       Corporation and Carver Corporation. (Incorporated by reference to Exhibit
       10.1 to the Registrant's Form 8-K dated December 23, 1992.)

10.17  Employment Agreement dated as of December 23, 1992, among Clifford
       Henricksen, USS Corporation and Carver Corporation. (Incorporated by
       reference to Exhibit 10.2 to the Registrant's Form 8-K dated December 23,
       1992.)

10.18  Noncompetition Agreement dated as of December 23, 1992, among Carver
       Corporation, U.S. Sound, Inc., John Lemon and Clifford Henricksen.
       (Incorporated by reference to Exhibit 10.3 to the Registrant's Form 8-K
       dated December 23, 1992.)



                                      46
<PAGE>

10.19  Severance Agreement dated November 19, 1993 by and among U. S. Sound,
       Inc., Carver Corporation and John Lemon. (Incorporated by reference to
       Exhibit 10.19 to the Registrant's Form 10-K for the year ended December
       31, 1993)
 
10.20  Severance Agreement dated November 9, 1993 by and among U. S. Sound,
       Inc., Carver Corporation and Clifford Henricksen. (Incorporated by
       reference to Exhibit 10.20 to the Registrant's Form 10-K for the year
       ended December 31, 1993.)

10.21  Stock Option Agreement dated March 10, 1994 between Robert A. Fulton
       and the Company.
   
10.22  Employment Agreement dated August 26, 1994 between Stephen M.
       Williams and the Company.

10.23  Stock Option Agreement dated August 26, 1994 between Stephen M.
       Williams and the Company.

10.24  Stock Option Agreement dated August 26, 1994 between Stephen M.
       Williams and the Company.

10.25  Settlement Agreement dated December 8, 1994 between Robert W. and
       Diana R. Carver and the Company.

10.26  The Company's 1995 Stock Option Plan. (Incorporated by reference to
       Exhibit 10.26 to the Company's Form 10-Q for the quarter ended June 30,
       1995.)

10.27  The Company's 1995 Stock Bonus Plan. (Incorporated by reference to
       Exhibit 10.27 to the Company's Form 10-Q for the quarter ended June 30,
       1995.)

10.28  Asset Purchase Agreement dated November 20, 1995 between Phoenix Gold
       International Inc. and the Company. (Incorporated by reference to Exhibit
       2.1 to the Company's Form 8-K dated December 5, 1995.)

10.29  Amendment No. 1 to Asset Purchase Agreement dated November 20, 1995
       between Phoenix Gold International Inc. and the Company. (Incorporated by
       reference to Exhibit 2.2 to the Company's Form 8-K dated December 5,
       1995.)

10.30  License Agreement dated November 20, 1995 between Phoenix Gold
       International Inc. and the Company. (Incorporated by reference to Exhibit
       2.3 to the Company's Form 8-K dated December 5, 1995.)

10.31* Tenth Amendment to the Accounts Financing Agreement dated November 20,
       1995 between Congress Financial Corporation (Western) and the Company.

10.32* Eleventh Amendment to the Accounts Financing Agreement dated January 15,
       1996 between Congress Financial Corporation (Western) and the Company.

                                      47
<PAGE>
 
10.33* Twelfth Amendment to the Accounts Financing Agreement dated February 26,
       1996 between Congress Financial Corporation (Western) and the Company

10.34* Employment Agreement dated January 2, 1996 between Stephen M. Williams
       and the Company

10.35* The Stephen M. Williams 1996 Bonus Plan dated January 3, 1996 between
       Stephen M. Williams and the Company

10.36* Stock Option Agreement dated March 11, 1995 between Stephen M. Williams
       and the Company

10.37* Stock Option Agreement dated March 24, 1995 between Stephen M. Williams
       and the Company

10.38* Stock Option Agreement dated January 15, 1996 between
       Stephen M. Williams and the Company

11*    Computation of Earnings Per Share for years ended December 31, 1995,
       1994 and 1993

21*    Subsidiaries of the Registrant

23.1*  Consent of Moss Adams

28.1   Amendment to Registration Statements RE: Indemnification. (Incorporated
       by reference to Exhibit 28.1 to the Registrant's Form 10-Q for the
       quarter ended September 30, 1990)

____________
*Filed herewith

                                      48
<PAGE>
 
Pursuant to the requirement of Section 13 of the Securities Exchange Commission
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.


CARVER CORPORATION


By:  /s/STEPHEN M. WILLIAMS   By:/s/JOHN P. WORLD
     ----------------------      ----------------
     Stephen M. Williams,        John P. World
     President and Chief         Executive Vice President,
     Executive Officer           General Manager and
                                 Principal Accounting
                                 Officer


Date:  March 28, 1995
---------------------


Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature                 Title         Date
<S>                       <C>           <C>
 
/s/ROBERT W. CARVER       Director      March 28, 1996
-------------------                     --------------
Robert W. Carver
 
/s/ROBERT A. FULTON       Director      March 28, 1996
-------------------                     --------------
Robert A. Fulton
 
/s/THOMAS C. GRAHAM       Director      March 28, 1996
-------------------                     --------------
 Thomas C. Graham
 
/s/JOHN F. VYNNE          Director      March 28, 1996
----------------                        --------------
 John F. Vynne
 
/s/STEPHEN M. WILLIAMS    Director      March 28, 1996
----------------------                  --------------
 Stephen M. Williams
</TABLE>

                                      49