(FORTUNE Small Business) – Bose is known for high-end audio equipment and dedication to research. Founder Amar Bose, who still owns most of the $1.7 billion company, reinvests all its earnings into R&D. That approach has created cultlike fans and innovative products—its wildly successful Wave radio took 14 years to create. Now Bose has a new product that could shake up the car industry. (Hint: It's not stereo equipment.) —BRIAN DUMAINE

"When I was 12 years old, In 1943, I bought a radio kit, and in building it I learned how to read schematic diagrams and repair radios. My father, an immigrant from India who used to sell imported mats and rugs, would go around to the hardware stores where he used to sell them and talk them into letting me repair the radios that their customers would bring in. It was a good business—no one was making new radios because of the war effort, and many of the radio repairmen had been drafted. As the business grew, I was working nights and all day Saturday and Sunday. I even hired a couple of employees.

In 1956, when I was at MIT finishing my doctorate, I bought my first hi-fi system based on the best specifications. I brought it home and played some violin records, and I couldn't believe it. The sound wasn't right (I had played violin growing up), but it should have been right based on everything I had been taught about engineering. So either the manufacturer was cheating on the specs, or the specs were not meaningful. It turned out it was both, by the way. So I started working in the MIT acoustics lab to find a solution.

My first product didn't come out until 1965. It was a speaker in the shape of an eighth of a sphere, which fit in a corner and reflected sound all around the room instead of in a direct beam as with conventional speakers. I was a professor and didn't know anything about business. I projected we'd sell $1 million worth of speakers our first year. We ended up making 60 units and sold 40. That sphere-shaped speaker eventually evolved into our 901 system, which we launched in 1968 and which was the product that really built the company. It was much different from anything that existed—I was able to patent it—but it was a hard sell at first. The 901 had no woofers and no tweeters, which every speaker was supposed to have. It was very small compared with the steamer trunk--sized things that were on the market at the time. When you hear live music, very little of it comes to you directly; most of it bounces off walls and ceilings first. A traditional speaker just blasts the sound directly at you. Like a live performance, the 901 blended both direct and reflected sound.

When we first launched the 901, it was a total disaster. None of the retailers had any idea how to demonstrate the product. One dealer in Santa Barbara loved the sound and put the 901 out in the middle of his showroom floor. One time, however, I was out visiting him and couldn't find the Bose speaker, so I asked him about it. He pointed up to a high shelf, and there it was in a corner, practically out of sight and not even connected. He said, "Look, I love your speaker but I cannot sell it because it makes me lose all my credibility as a salesman. I can't explain to anyone why the 901 doesn't have any woofers or tweeters. A man came in and saw the small size, and he started looking in the drawers for the speaker cabinets. I walked over to him, and he said, 'Where are you hiding the woofer?' I said to him, 'There is no woofer'. So he said, 'You're a goddamn liar,' and he walked out."

When I got back to Bose, I created a seven-minute audio demonstration to help dealers explain to customers how the 901 worked, and that really helped spur sales. [Editor's note: Bose doesn't release any figures, but the NPD Group, a market information firm in Port Washington, N.Y., says that Bose today is No. 1 in home speakers, with a 12.6% market share; its 901 speakers are still sold.]

The biggest crisis I ever faced at Bose hit in the early 1980s, when interest rates rose to 22% or so. Technology companies everywhere were going down, and banks were panicked, putting all sorts of restrictions on their loans. We were in the thick of developing our new car audio system for GM. The situation was pretty scary because it could have forced us to go public to raise capital, something I vowed I would never do. Going public for me would have been the equivalent of losing the company. My real interest is research—that's the excitement—and I wouldn't have been able to do long-term projects with Wall Street breathing down my neck.

How did we hang on? I told GM how our bank—it had given us a $14 million loan—was trying to constrain us. A couple of weeks later I got a call from Ed Czapor, who was head of GM's Delco Electronics. He asked me to fly out to Detroit. When I met him, all he said was, "I'd like to introduce you to our CFO." He walked me up to the 14th floor of the GM headquarters, introduced me to the CFO, and walked out. The finance fellow had heard our new audio system and loved it. He said, "I understand you have a financial problem." I told him about how our bank wanted to make us cut costs that would force us to wind down our R&D spending. The next day the CFO called up a bank he dealt with in Boston and told it to assume the loan from our bank with no constraints—just like that. That's what saved us. People just would not believe that a company as large as GM would do such a thing.

Around the same time, GM delivered $700,000 worth of production equipment to our factory in Massachusetts. I called Ed and said, "Seven hundred thousand dollars of equipment just arrived at our factory, and I didn't order it and I can't pay for it." Ed said, "Look, everyone comes to us with a widget in his hand and says, 'Here's my widget, and here's how much money I want.' You've been working with us for almost a year now, and you've never asked for a cent. You've gone your mile a long time ago; it's time we go our mile." Can you imagine this? Without GM's help, we might not be here at all.

Our latest product is a new car suspension system, which has been in development for nearly a quarter of a century. I first got interested in suspensions as a young man. In Paris in the 1950s I saw a sleek Citroën DS-19 C and immediately thought, "Oh, my God, I've got to buy one." Which I did when I returned to the States. The Citroën had a novel hydropneumatic suspension system that made you feel you were floating along the highway. Over the years I remained intrigued by it. In fact, I used to give my MIT students quizzes on it. In 1980 I started looking into the subject and realized that conventional suspensions, made with springs and shocks, acted differently for luxury and sports cars. Make the damper and springs stiffer, and you've got a sports car. Make them softer, and you've got a luxury car. But the slow roll of a luxury car can make you seasick, and the stiff ride of the sports car makes you want a chiropractor.

At this time people were looking to hydraulics for solutions, but they weren't getting anywhere. So we decided to start from scratch and throw out the old system entirely. After five years of working out some complex mathematical algorithms, we found we could get huge improvements on paper, but we didn't know what the hardware would be. What we ended up with is an electromagnetic motor installed at each wheel. When power is applied, the motor retracts and extends. One of the key advantages of an electromagnetic system is speed. The motor responds to conditions in the road quickly enough to counter the effects of bumps and potholes, maintaining a comfortable ride. The motor is also strong enough to put out enough force to prevent the car from rolling and pitching during an aggressive maneuver.

We've worked on this system and tested it for 24 years now, and are finally ready to show it to the auto companies. It will probably take several years before they adopt it; they'll want to do some of their own testing, but we've designed it so that it can bolt right onto the chassis of current production cars—they won't have to do expensive retooling to make this technology work. We'll probably first see it as an option in luxury cars—we don't know exactly how much it will cost, but as the suspension gets more widely adopted, the price will come down, and we'll probably see it in all but the most inexpensive cars, which is how ABS brakes developed. Oh, and the potential size of the market? We really have no idea. We just know that we have a technology that's so different and so much better that many people will want it.