An underwater transducer system reproduces high-fidelity audio signals underwater, and detects and monitors low levels of sound activity, both adjacent to a body of water such as a swimming pool, and in the water. The system includes an underwater housing for a diaphragm that directly contacts the water, a coil assembly movable within the housing and rigidly connected to the center of the diaphragm by a tubular member of the coil assembly engaging a cylindrical boss portion of the diaphragm. The housing can be suspended by an elongated cord member from a wall coping, or mounted within a wall fixture structure. The system can have a source of illumination, a conduit from the source terminating in the housing on the coil axis proximate the diaphragm, and an optical element sealingly protrudes the diaphragm for transmitting light-amplified illumination into the water. A head portion of the optical element that substantially fills the boss portion of the diaphragm incorporates a pair of mirrored surfaces for spreading the illumination and transmitting it into the water. A control unit located to one side of the water provides a speaker mode and a microphone mode of operating the transducer, the microphone mode having a monitor mode and an alarm mode for detecting an alarm condition based on discrimination of an alarm sound condition occurring in the pool. The control unit can also interface a closed circuit TV for visually monitoring the pool. Also disclosed is a method for making the underwater transducer.