##### Table of Contents



---

---

Form 10-Q

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2003

Commission file number: 0-24091

Tweeter Home Entertainment Group, Inc.(Exact name of Registrant as specified in its charter)

|                                                                       |  |                                               
|---------------------------------------------------------------------- |  | ----------------------------------------------
|DELAWARE(State or other jurisdiction of
incorporation or organization) |  | 04-3417513(I.R.S. Employer Identification No.)

40 PEQUOT WAY
CANTON, MA 02021(Address of principal executive offices including zip code)

781-830-3000(Registrants telephone number including area code)

Indicate by check mark whether the registrant (1) has filed all documents
and 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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes[   ]   No [X]

Indicate the number of shares outstanding of each of the registrants
classes of common stock, as of the latest practicable date.

|                                            |  |                                          
|------------------------------------------- |  | -----------------------------------------
|TITLE OF CLASS
Common Stock, $.01 par value |  | OUTSTANDING AT AUGUST 12, 2003
23,914,510



---

---





---

TABLE OF CONTENTS



|                                            |                                                                                               |  |  |  |  |  |  | 
|------------------------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|                                            | Consolidated Balance Sheets                                                                  
|                                            | Consolidated Statements of Operations                                                        
|                                            | Consolidated Statements of Cash Flows                                                        
|                                            | NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS                               
|                                            | ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                                            | ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                           
|                                            | ITEM 4. CONTROLS AND PROCEDURES                                                              
|PART II. OTHER INFORMATION                 
|                                            | ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS                                            
|                                            | ITEM 5. OTHER INFORMATION                                                                    
|                                            | ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                                                     
|SIGNATURES                                 
|EX-3.1 AMENDED CERTIFICATE OF INCORPORATION
|EX-3.2 AMENDMENT TO AMENDED CERTIFICATE    
|EX-3.3 AMENDED BY-LAWS                     
|EX-4.1 SPECIMEN CERTIFICATE                
|EX-4.2 SHAREHOLDERS RIGHTS AGREEMENT       
|EX-31.1 RULE 13A-14(A) CERTIFICATION       
|EX-31.2 RULE 13A-14(A) CERTIFICATION       
|EX-32.1 SECTION 1350 CERTIFICATION         
|EX-32.2 SECTION 1350 CERTIFICATION         



---



##### Table of Contents



TWEETER HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES

INDEX

|        |  |                                                                                                         |      | 
|------- |  | ------------------------------------------------------------------------------------------------------- | ---- | 
|        |  |                                                                                                         | PAGE
|Part I  |  | FINANCIAL INFORMATION                                                                                   |      | 
|Item 1  |  | Condensed Consolidated Financial Statements (Unaudited)                                                 |      | 
|        |  | Consolidated Balance Sheets as of September 30, 2002
and June 30, 2003                                  | 3    | 
|        |  | Consolidated Statements of Operations for the Three Months and
Nine Months Ended June 30, 2002 and 2003 | 4    | 
|        |  | Consolidated Statements of Cash Flows for the Nine
Months Ended June 30, 2002 and 2003                  | 5    | 
|        |  | Notes to Unaudited Consolidated Financial Statements                                                    | 6    | 
|Item 2  |  | Managements Discussion and Analysis of Financial
Condition and Results of Operations                   | 11   | 
|Item 3  |  | Quantitative and Qualitative Disclosures About Market Risk                                              | 15   | 
|Item 4  |  | Controls and Procedures                                                                                 | 15   | 
|Part II |  | OTHER INFORMATION                                                                                       |      | 
|Item 2  |  | Changes in Securities and Use of Proceeds                                                               | 16   | 
|Item 5  |  | Other Information                                                                                       | 16   | 
|Item 6  |  | Exhibits and Reports on Form 8-K                                                                        | 16   | 

2



---



##### Table of Contents






Tweeter Home Entertainment Group, Inc. and Subsidiaries
Consolidated Balance Sheets

|                                     |                      |                                                                                                                                            |                           |   |               |             |             |   |              |             | 
|------------------------------------ | -------------------- | ------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------- | - | ------------- | ----------- | ----------- | - | ------------ | ----------- | 
|                                     |                      |                                                                                                                                            |                           |   | September 30, |             | June 30,   
|                                     |                      |                                                                                                                                            |                           |   | 2002          |             | 2003       
|                                     |                      |                                                                                                                                            |                           |   |               |             |            
|                                     |                      |                                                                                                                                            |                           |   |               |             |             |   | (Unaudited) 
|Assets                               |                      |                                                                                                                                            |                           |   |               |             |             |  
|                                     | Current Assets:      |                                                                                                                                            |                           |   |               |             |             |   |             
|                                     |                      | Cash and cash equivalents                                                                                                                  |                           | $ | 2,282,635     |             |             | $ | 5,483,279    |            
|                                     |                      | Accounts receivable, net of allowance for doubtful accounts of
$1,075,000 at September 30, 2002 and $840,000 at June 30, 2003              |                           |   | 23,116,040    |             |             |   | 18,553,019   |            
|                                     |                      | Inventory                                                                                                                                  |                           |   | 143,234,060   |             |             |   | 132,507,258  |            
|                                     |                      | Deferred tax assets                                                                                                                        |                           |   | 3,943,838     |             |             |   | 3,762,887    |            
|                                     |                      | Prepaid expenses and other current assets                                                                                                  |                           |   | 17,084,739    |             |             |   | 17,345,339   |            
|                                     |                      |                                                                                                                                            |                           |   |               |             |             |  
|                                     |                      |                                                                                                                                            | Total current assets      |   |               | 189,661,312 |             |   |              | 177,651,782 | 
|                                     |                      | Property and equipment, net                                                                                                                |                           |   | 134,310,705   |             |             |   | 133,460,602  |            
|                                     |                      | Long-term investments                                                                                                                      |                           |   | 1,103,280     |             |             |   | 1,862,451    |            
|                                     |                      | Deferred tax assets                                                                                                                        |                           |   | 7,273,068     |             |             |   | 8,662,226    |            
|                                     |                      | Intangible assets, net                                                                                                                     |                           |   | 2,606,667     |             |             |   | 2,096,667    |            
|                                     |                      | Other assets, net                                                                                                                          |                           |   | 923,169       |             |             |   | 2,525,982    |            
|                                     |                      |                                                                                                                                            |                           |   |               |             |             |  
|                                     |                      |                                                                                                                                            | Total                     |   | $             | 335,878,201 |             |   | $            | 326,259,710 | 
|                                     |                      |                                                                                                                                            |                           |   |               |             |             |  
|Liabilities and Stockholders Equity |                      |                                                                                                                                            |                           |   |               |             |             |  
|                                     | Current Liabilities: |                                                                                                                                            |                           |   |               |             |             |   |             
|                                     |                      | Current portion of long-term debt                                                                                                          |                           | $ | 288,745       |             |             | $ | 200,928      |            
|                                     |                      | Amount due to bank                                                                                                                         |                           |   | 4,520,513     |             |             |   | 17,677,100   |            
|                                     |                      | Accounts payable                                                                                                                           |                           |   | 51,550,051    |             |             |   | 28,593,593   |            
|                                     |                      | Accrued expenses                                                                                                                           |                           |   | 27,449,859    |             |             |   | 25,015,286   |            
|                                     |                      | Customer deposits                                                                                                                          |                           |   | 16,259,734    |             |             |   | 18,615,945   |            
|                                     |                      | Deferred warranty                                                                                                                          |                           |   | 301,583       |             |             |   | 301,583      |            
|                                     |                      |                                                                                                                                            |                           |   |               |             |             |  
|                                     |                      |                                                                                                                                            | Total current liabilities |   |               | 100,370,485 |             |   |              | 90,404,435  | 
|Long-Term Debt                       |                      |                                                                                                                                            | 50,073,501                |   |               |             | 50,032,914  |  
|Other Long-Term Liabilities:         |                      |                                                                                                                                            |                           |   |               |             |             |  
|                                     |                      | Rent related accruals                                                                                                                      |                           |   | 10,338,737    |             |             |   | 11,050,748   |            
|                                     |                      | Deferred warranty                                                                                                                          |                           |   | 484,673       |             |             |   | 80,549       |            
|                                     |                      |                                                                                                                                            |                           |   |               |             |             |  
|Total other long-term liabilities    |                      |                                                                                                                                            | 10,823,410                |   |               |             | 11,131,297  |  
|                                     |                      |                                                                                                                                            |                           |   |               |             |             |  
|                                     |                      |                                                                                                                                            | Total liabilities         |   |               | 161,267,396 |             |   |              | 151,568,646 | 
|Stockholders Equity                 |                      |                                                                                                                                            |                           |   |               |             |             |  
|                                     |                      | Preferred stock, $.01 par value, 10,000,000 shares authorized, no
shares issued                                                            |                           |   |              |             |             |   |             |            
|                                     |                      | Common stock, $.01 par value, 60,000,000 shares authorized;
25,378,308 shares issued at September 30, 2002 and 25,669,614
at June 30, 2003 |                           |   | 253,783       |             |             |   | 256,696      |            
|                                     |                      | Additional paid in capital                                                                                                                 |                           |   | 292,464,945   |             |             |   | 294,419,680  |            
|                                     |                      | Accumulated other comprehensive income                                                                                                     |                           |   | 49,280        |             |             |   | 54,722       |            
|                                     |                      | Unearned compensation                                                                                                                      |                           |   |              |             |             |   | (542,966     | )          
|                                     |                      | Accumulated deficit                                                                                                                        |                           |   | (116,305,296  | )           |             |   | (117,686,040 | )          
|                                     |                      |                                                                                                                                            |                           |   |               |             |             |  
|                                     |                      |                                                                                                                                            | Total                     |   |               | 176,462,712 |             |   |              | 176,502,092 | 
|                                     |                      | Less treasury stock: 1,818,503 shares at September 30, 2002 and
1,760,104 shares at June 30, 2003, at cost                                 |                           |   | (1,851,907    | )           |             |   | (1,811,028   | )          
|                                     |                      |                                                                                                                                            |                           |   |               |             |             |  
|Total stockholders equity           |                      |                                                                                                                                            | 174,610,805               |   |               |             | 174,691,064 |  
|                                     |                      |                                                                                                                                            |                           |   |               |             |             |  
|Total                                |                      | $                                                                                                                                          | 335,878,201               |   |               | $           | 326,259,710 |  
|                                     |                      |                                                                                                                                            |                           |   |               |             |             |  

See notes to unaudited condensed consolidated financial statements.

3



---



##### Table of Contents






Tweeter Home Entertainment Group, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)

|                                               |         |                                   |              |                    |            |                   |              |            |            |      |              |            |             |   |              |            |             |  
|---------------------------------------------- | ------- | --------------------------------- | ------------ | ------------------ | ---------- | ----------------- | ------------ | ---------- | ---------- | ---- | ------------ | ---------- | ----------- | - | ------------ | ---------- | ----------- | -
|                                               |         |                                   |              | Three Months Ended |            | Nine Months Ended
|                                               |         |                                   |              | June 30,           |            | June 30,         
|                                               |         |                                   |              |                    |            |                  
|                                               |         |                                   |              | 2002               |            | 2003              |              | 2002       |            | 2003
|                                               |         |                                   |              |                    |            |                   |              |            |            |     
|Total revenue                                  |         | $                                 | 175,326,678  |                    |            | $                 | 170,472,384  |            |            | $    | 613,062,047  |            |             | $ | 602,092,785  |           
|Cost of sales                                  |         |                                   | (111,869,058 | )                  |            |                   | (107,116,295 | )          |            |      | (391,339,628 | )          |             |   | (387,046,684 | )         
|                                               |         |                                   |              |                    |            |                   |              |            |            |      |              |            |             |   |              |           
|                                               |         | Gross Profit                      |              |                    | 63,457,620 |                   |              |            | 63,356,089 |      |              |            | 221,722,419 |   |              |            | 215,046,101 |  
|Selling expenses                               |         |                                   | 50,427,204   |                    |            |                   | 58,636,281   |            |            |      | 160,088,800  |            |             |   | 182,380,081  |           
|Corporate, general and administrative expenses |         |                                   | 11,959,171   |                    |            |                   | 10,989,772   |            |            |      | 31,864,622   |            |             |   | 32,799,583   |           
|Amortization of intangibles                    |         |                                   | 393,198      |                    |            |                   | 170,000      |            |            |      | 1,184,083    |            |             |   | 510,000      |           
|                                               |         |                                   |              |                    |            |                   |              |            |            |      |              |            |             |   |              |           
|                                               |         | Income (loss) from operations     |              |                    | 678,047    |                   |              |            | (6,439,964 | )    |              |            | 28,584,914  |   |              |            | (643,563    | )
|Income (loss) from joint venture               |         |                                   | (826         | )                  |            |                   |             |            |            |      | 71,126       |            |             |   |             |           
|Interest expense                               |         |                                   | 509,195      |                    |            |                   | 434,764      |            |            |      | 1,667,815    |            |             |   | 1,664,116    |           
|Interest income                                |         |                                   | (4,367       | )                  |            |                   | (1,140       | )          |            |      | (13,149      | )          |             |   | (9,578       | )         
|                                               |         |                                   |              |                    |            |                   |              |            |            |      |              |            |             |   |              |           
|                                               |         | Income (loss) before income taxes |              |                    | 172,393    |                   |              |            | (6,873,588 | )    |              |            | 27,001,374  |   |              |            | (2,298,101  | )
|Income tax expense (benefit)                   |         |                                   | 68,957       |                    |            |                   | (2,749,436   | )          |            |      | 10,802,883   |            |             |   | (917,357     | )         
|                                               |         |                                   |              |                    |            |                   |              |            |            |      |              |            |             |   |              |           
|NET INCOME (LOSS)                              |         | $                                 | 103,436      |                    |            | $                 | (4,124,152   | )          |            | $    | 16,198,491   |            |             | $ | (1,380,744   | )         
|                                               |         |                                   |              |                    |            |                   |              |            |            |      |              |            |             |   |              |           
|Basic earnings (loss) per share                |         | $                                 | 0.00         |                    |            | $                 | (0.17        | )          |            | $    | 0.70         |            |             | $ | (0.06        | )         
|                                               |         |                                   |              |                    |            |                   |              |            |            |      |              |            |             |   |              |           
|Diluted earnings (loss) per share              |         | $                                 | 0.00         |                    |            | $                 | (0.17        | )          |            | $    | 0.67         |            |             | $ | (0.06        | )         
|                                               |         |                                   |              |                    |            |                   |              |            |            |      |              |            |             |   |              |           
|Weighted average shares outstanding:           |         |                                   |              |                    |            |                   |              |            |            |      |              |            |             |   |              |           
|                                               | Basic   |                                   |              | 23,454,117         |            |                   |              | 23,752,013 |            |      |              | 23,278,568 |             |   |              | 23,637,822 |            
|                                               |         |                                   |              |                    |            |                   |              |            |            |      |              |            |             |   |              |           
|                                               | Diluted |                                   |              | 24,138,413         |            |                   |              | 23,752,013 |            |      |              | 24,268,771 |             |   |              | 23,637,822 |            
|                                               |         |                                   |              |                    |            |                   |              |            |            |      |              |            |             |   |              |           

See notes to unaudited condensed consolidated financial statements.

4



---



##### Table of Contents






Tweeter Home Entertainment Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)

|                                      |                                                    |                                                                                          |                                              |                                                                     |             |                   |             |           |             |            |             |  
|------------------------------------- | -------------------------------------------------- | ---------------------------------------------------------------------------------------- | -------------------------------------------- | ------------------------------------------------------------------- | ----------- | ----------------- | ----------- | --------- | ----------- | ---------- | ----------- | -
|                                      |                                                    |                                                                                          |                                              |                                                                     |             | Nine Months Ended
|                                      |                                                    |                                                                                          |                                              |                                                                     |             | June 30,         
|                                      |                                                    |                                                                                          |                                              |                                                                     |             |                  
|                                      |                                                    |                                                                                          |                                              |                                                                     |             | 2002              |             | 2003     
|                                      |                                                    |                                                                                          |                                              |                                                                     |             |                   |             |          
|CASH FLOWS FROM OPERATING ACTIVITIES: |                                                    |                                                                                          |                                              |                                                                     |             |                   |             |          
|                                      |                                                    | Net
income (loss)                                                                        |                                              | $                                                                   | 16,198,491  |                   |             | $         | (1,380,744  | )         
|                                      |                                                    | Adjustments to reconcile net income (loss) to net cash provided by
operating activities: |                                              |                                                                     |             |                   |             |           |             |           
|                                      |                                                    |                                                                                          | Depreciation and amortization                |                                                                     |             | 12,957,464        |             |           |             | 16,205,282 |            
|                                      |                                                    |                                                                                          | Non cash compensation                        |                                                                     |             |                  |             |           |             | 1,084,534  |            
|                                      |                                                    |                                                                                          | Income from joint venture                    |                                                                     |             | (71,126           | )           |           |             |           |            
|                                      |                                                    |                                                                                          | (Gain) loss on disposal of equipment         |                                                                     |             | (12,350           | )           |           |             | 359,550    |            
|                                      |                                                    |                                                                                          | Provision for uncollectible accounts         |                                                                     |             | 818,209           |             |           |             | 92,100     |            
|                                      |                                                    |                                                                                          | Deferred income tax provision                |                                                                     |             | (812,583          | )           |           |             | (1,208,207 | )          
|                                      |                                                    |                                                                                          | Changes in operating assets and liabilities: |                                                                     |             |                   |             |           |             |            |            
|                                      |                                                    |                                                                                          |                                              | Decrease in accounts receivable                                     |             |                   | 1,943,203   |           |             |            | 4,470,921   |  
|                                      |                                                    |                                                                                          |                                              | (Increase) decrease in inventory                                    |             |                   | (4,286,353  | )         |             |            | 10,726,802  |  
|                                      |                                                    |                                                                                          |                                              | Increase in prepaid expenses and other assets                       |             |                   | (384,787    | )         |             |            | (2,413,546  | )
|                                      |                                                    |                                                                                          |                                              | Decrease in accounts payable and accrued expenses                   |             |                   | (6,949,347  | )         |             |            | (26,144,760 | )
|                                      |                                                    |                                                                                          |                                              | Increase in customer deposits                                       |             |                   | 1,209,454   |           |             |            | 2,356,211   |  
|                                      |                                                    |                                                                                          |                                              | Increase in deferred rent                                           |             |                   | 129,203     |           |             |            | 92,261      |  
|                                      |                                                    |                                                                                          |                                              | Decrease in deferred warranty                                       |             |                   | (650,278    | )         |             |            | (404,124    | )
|                                      |                                                    |                                                                                          |                                              |                                                                     |             |                   |             |          
|                                      |                                                    |                                                                                          |                                              | Net cash provided by operating activities                           |             |                   | 20,089,200  |           |             |            | 3,836,280   |  
|                                      | CASH FLOWS FROM INVESTING ACTIVITIES:              |                                                                                          |                                              |                                                                     |             |                   |             |           |            
|                                      |                                                    | Purchase of property and equipment                                                       |                                              |                                                                     | (41,852,886 | )                 |             |           | (21,028,101 | )         
|                                      |                                                    | Net proceeds from sale of property and equipment                                         |                                              |                                                                     | 12,350      |                   |             |           | 6,993,255   |           
|                                      |                                                    | Sale of investments                                                                      |                                              |                                                                     | 63,416      |                   |             |           |            |           
|                                      |                                                    | Cash paid for acquisitions                                                               |                                              |                                                                     | (3,912,968  | )                 |             |           |            |           
|                                      |                                                    | Distributions from joint venture                                                         |                                              |                                                                     | 1,583,469   |                   |             |           |            |           
|                                      |                                                    |                                                                                          |                                              |                                                                     |             |                   |             |          
|                                      |                                                    |                                                                                          |                                              | Net cash used in investing activities                               |             |                   | (44,106,619 | )         |             |            | (14,034,846 | )
|                                      | CASH FLOWS FROM FINANCING ACTIVITIES:              |                                                                                          |                                              |                                                                     |             |                   |             |           |            
|                                      |                                                    | (Decrease) increase in amount due to bank                                                |                                              |                                                                     | (2,311,682  | )                 |             |           | 13,156,587  |           
|                                      |                                                    | Net proceeds (payments) of revolving Credit Facility                                     |                                              |                                                                     | 23,058,967  |                   |             |           | (128,404    | )         
|                                      |                                                    | Proceeds from options exercised                                                          |                                              |                                                                     | 2,386,610   |                   |             |           | 74,374      |           
|                                      |                                                    | Proceeds from employee stock purchase plan                                               |                                              |                                                                     | 271,321     |                   |             |           | 296,653     |           
|                                      |                                                    |                                                                                          |                                              |                                                                     |             |                   |             |          
|                                      |                                                    |                                                                                          |                                              | Net cash provided by financing activities                           |             |                   | 23,405,216  |           |             |            | 13,399,210  |  
|                                      |                                                    |                                                                                          |                                              |                                                                     |             |                   |             |          
|                                      | (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS   |                                                                                          |                                              | (612,203                                                            | )           |                   |             | 3,200,644 |            
|                                      | CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD     |                                                                                          |                                              | 3,277,969                                                           |             |                   |             | 2,282,635 |            
|                                      |                                                    |                                                                                          |                                              |                                                                     |             |                   |             |          
|                                      | CASH AND CASH EQUIVALENTS, END OF PERIOD           |                                                                                          | $                                            | 2,665,766                                                           |             |                   | $           | 5,483,279 |            
|                                      |                                                    |                                                                                          |                                              |                                                                     |             |                   |             |          
|                                      | SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: |                                                                                          |                                              |                                                                     |             |                   |             |           |            
|                                      |                                                    | Cash paid during the period for:                                                         |                                              |                                                                     |             |                   |             |           |             |           
|                                      |                                                    |                                                                                          | Interest                                     |                                                                     | $           | 1,779,960         |             |           | $           | 1,624,914  |            
|                                      |                                                    |                                                                                          |                                              |                                                                     |             |                   |             |          
|                                      |                                                    |                                                                                          | Taxes                                        |                                                                     | $           | 9,832,757         |             |           | $           | 86,678     |            
|                                      |                                                    |                                                                                          |                                              |                                                                     |             |                   |             |          
|                                      |                                                    | Noncash investing activities:                                                            |                                              |                                                                     |             |                   |             |           |             |           
|                                      |                                                    |                                                                                          |                                              | Issuance of common stock and assumption of options for acquisitions |             | $                 | 1,000,016   |           |             | $          |            |  
|                                      |                                                    |                                                                                          |                                              |                                                                     |             |                   |             |          

See notes to unaudited condensed consolidated financial statements.

5



---



##### Table of Contents






TWEETER HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.  Basis of Presentation

The unaudited condensed consolidated financial statements of Tweeter Home
Entertainment Group, Inc. and its subsidiaries (Tweeter or the Company),
included herein, should be read in conjunction with the consolidated financial
statements and notes thereto included in Tweeters Annual Report on Form 10-K
for the fiscal year ended September 30, 2002.

2.  Accounting Policies

The unaudited consolidated financial statements of Tweeter have been
prepared in accordance with accounting principles generally accepted in the
United States of America. In the opinion of management, all adjustments
(consisting only of normal recurring adjustments) considered necessary for a
fair presentation of the interim consolidated financial statements have been
included. Operating results for the nine-month period ended June 30, 2003 are
not necessarily indicative of the results that may be expected for the fiscal
year ending September 30, 2003. Tweeter typically records its highest revenue
and earnings in its first fiscal quarter.

Allowance for Bad and Doubtful Accounts Most of the Companys accounts
receivable are due from the vendors from which the Company buys products. The
various types of accounts receivable are for purchase rebate allowances,
cooperative advertising allowances, returned merchandise and warranty work
performed by the Companys service departments.

Purchase rebate allowances and general cooperative advertising allowances
are earned based on the purchase of inventory and are recorded in accounts
receivable when the inventory is purchased. The carrying value of inventory is
initially reduced by the amount of purchase rebates earned, resulting in lower
cost of goods sold when the inventory is sold.

When the Company returns merchandise to the vendor, typically because it
is defective, the Company establishes a receivable for the value of the
merchandise returned and reduces the inventory balance.

The Company sells products that come with a manufacturers warranty, but
the Company has its own service centers that repair products. When the Company
repairs products that is still under manufacturers warranty, the vendor
reimburses the Company for the parts and for the Companys technicians labor.
Once the product is repaired, the Company establishes a receivable from the
vendor and records warranty revenue.

Vendor Allowances Tweeter receives cash discounts for timely payment of
merchandise invoices and recognizes these amounts in our income statement upon
the sale of the related inventory. The Company also receives substantial funds
from our vendors for volume rebates, coop advertising and other specifically
reimbursable expenses. These funds can be generated primarily in two ways; the
first is based on levels of inventory purchases and the second is based on
performance of specific advertising or other activities. Amounts earned based
on levels of inventory purchases are recognized in the statement of operations
based on when the inventory is sold. Amounts earned based on performance of
specific advertising or other activities are recognized in the statement of
operations as these activities are performed. On January 1, 2003, the Company
adopted Emerging Issues Task Force (EITF) 02-16 Accounting by a Customer for
Certain Consideration Received from a Vendor, which addresses how and when to
reflect consideration received from vendors in the consolidated financial
statements. See further discussion of EITF 02-16 at Note 10.

For the three months ended June 30, 2002 and 2003, gross advertising
expense was $9.9 million and $8.0 million, respectively. Cooperative
advertising received from vendors offsetting the Companys gross advertising
expense for the same periods was $9.2 million and $6.8 million, resulting in
net advertising for the same periods of $711,000 and $1.2 million. For the
nine months ended June 30, 2002 and 2003, gross advertising expense was $36.5
million and $ 35.1 million, respectively. Cooperative advertising received
from vendors offsetting the Companys gross advertising expense for the same
periods was $28.4 million and $21.9 million, resulting in net advertising for
the same periods of $8.1 million and $13.2 million. The amount of
reimbursements received after

6



---



##### Table of Contents



January 1, 2003 upon adoption of EITF 02-16 thru
June 30, 2003 that was not treated as a reduction of cost of goods sold and was
recorded as an offset to gross advertising expense was $6,816,000.

Stock-based compensation Statement of Financial Accounting Standards
(SFAS) No. 123, Accounting for Stock-Based Compensation, addresses the
financial accounting and reporting standards for stock or other equity-based
compensation arrangements. The Company provides disclosures based on the fair
value as permitted by SFAS No. 123. Stock or other equity-based compensation
for non-employees must be accounted for under the fair value-based method as
required by SFAS No. 123 and EITF No. 96-18, Accounting for Equity Instruments
That Are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services, and other related interpretations. Under this
method, the equity-based instrument is valued at either the fair value of the
consideration received or the equity instrument issued on the date of grant.
The resulting compensation cost is recognized and charged to operations over
the service period, which is usually the vesting period.

For purposes of determining the disclosures required by SFAS No. 123, the
fair value of each stock option granted in the three and nine months ended June
30, 2002 and June 30, 2003 under the Companys stock option plan was estimated
on the date of grant using the Black-Scholes option-pricing model. Key
assumptions used to apply this pricing model were as follows:

|                                        |  |                    |       |                   |  |      |       |      |  |  |       |   |  |  |       |  
|--------------------------------------- |  | ------------------ | ----- | ----------------- |  | ---- | ----- | ---- |  |  | ----- | - |  |  | ----- | -
|                                        |  | Three Months Ended |       | Nine Months Ended
|                                        |  | June 30,           |       | June 30,         
|                                        |  |                    |       |                  
|                                        |  | 2002               |       | 2003              |  | 2002 |       | 2003
|                                        |  |                    |       |                   |  |      |       |     
|Risk free interest rate                 |  |                    | 4.69  | %                 |  |      | 2.82  | %    |  |  | 4.23  | % |  |  | 2.82  | %
|Expected life of options grants         |  |                    | 5.4   |                   |  |      | 8.4   |      |  |  | 5.4   |   |  |  | 8.3   |  
|Expected volatility of underlying stock |  |                    | 78.13 | %                 |  |      | 98.06 | %    |  |  | 91.10 | % |  |  | 98.00 | %

Had compensation cost for the Companys stock option plans been determined
using the fair value method, pro forma net income (loss) and pro forma diluted
earnings (loss) per share would have been:

|                                                                                                                                    |  |                    |            |                   |  |      |            |      |  |   |            |   |  |   |            |  
|----------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ---------- | ----------------- |  | ---- | ---------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|                                                                                                                                    |  | Three Months Ended |            | Nine Months Ended
|                                                                                                                                    |  | June 31,           |            | June 31,         
|                                                                                                                                    |  |                    |            |                  
|                                                                                                                                    |  | 2002               |            | 2003              |  | 2002 |            | 2003
|                                                                                                                                    |  |                    |            |                   |  |      |            |     
|Net income (loss) as reported                                                                                                       |  | $                  | 103,436    |                   |  | $    | (4,124,152 | )    |  | $ | 16,198,491 |   |  | $ | (1,380,744 | )
|Total stock-based employee compensation
expense recorded, net of related tax effects                                                |  |                    |           |                   |  |      | 21,432     |      |  |   |           |   |  |   | 21,432     |  
|Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of
related tax effects |  |                    | (1,279,026 | )                 |  |      | (1,921,949 | )    |  |   | (3,806,487 | ) |  |   | (4,398,417 | )
|                                                                                                                                    |  |                    |            |                   |  |      |            |      |  |   |            |   |  |   |            |  
|Pro forma net income (loss)                                                                                                         |  | $                  | (1,175,590 | )                 |  | $    | (6,024,669 | )    |  | $ | 12,392,004 |   |  | $ | (5,757,729 | )
|                                                                                                                                    |  |                    |            |                   |  |      |            |      |  |   |            |   |  |   |            |  
|Earnings (loss) per share                                                                                                           |  |                    |            |                   |  |      |            |      |  |   |            |   |  |   |            |  
|Basic  as reported                                                                                                                 |  | $                  | 0.00       |                   |  | $    | (0.17      | )    |  | $ | 0.70       |   |  | $ | (0.06      | )
|                                                                                                                                    |  |                    |            |                   |  |      |            |      |  |   |            |   |  |   |            |  
|Basic  pro forma                                                                                                                   |  | $                  | (0.05      | )                 |  | $    | (0.25      | )    |  | $ | 0.53       |   |  | $ | (0.24      | )
|                                                                                                                                    |  |                    |            |                   |  |      |            |      |  |   |            |   |  |   |            |  
|Diluted  as reported                                                                                                               |  | $                  | 0.00       |                   |  | $    | (0.17      | )    |  | $ | 0.67       |   |  | $ | (0.06      | )
|                                                                                                                                    |  |                    |            |                   |  |      |            |      |  |   |            |   |  |   |            |  
|Diluted  pro forma                                                                                                                 |  | $                  | (0.05      | )                 |  | $    | (0.25      | )    |  | $ | 0.51       |   |  | $ | (0.24      | )
|                                                                                                                                    |  |                    |            |                   |  |      |            |      |  |   |            |   |  |   |            |  

During the quarter ended June 30, 2003, the Company issued 270,000 shares
of restricted stock and granted 120,000 stock options to a newly hired
employee. The restricted stock had a purchase price of $.01 per share and
vests through October 1, 2004. The stock options were granted with an exercise
price that was less than the fair value of the Companys common stock on the
date of grant. The stock options vest through April 21, 2005. During the
quarter ended June 30, 2003, the Company recorded $1,084,534 of compensation
expense related to the restricted stock and stock options. As of June 30,
2003, the Company has recorded unearned compensation of $542,966 related to the
restricted stock and stock options which will be charged to expense over the
period earned.

7



---



##### Table of Contents



3.  Earnings per Share

The weighted average shares used in computing basic and diluted net income
(loss) per share are presented in the table below. Certain options are not
included in the earnings per share calculation when the exercise price is
greater than the average market price for the period. The number of options
excluded in each period is reflected in the table.

|                                                                     |                                            |                    |                    |                   |                   |                    |            |                   |      |   |            |            |  |   |            |            |  
|-------------------------------------------------------------------- | ------------------------------------------ | ------------------ | ------------------ | ----------------- | ----------------- | ------------------ | ---------- | ----------------- | ---- | - | ---------- | ---------- |  | - | ---------- | ---------- | -
|                                                                     |                                            |                    | Three Months Ended |                   | Nine Months Ended
|                                                                     |                                            |                    | June 30,           |                   | June 30,         
|                                                                     |                                            |                    |                    |                   |                  
|                                                                     |                                            |                    | 2002               |                   | 2003              |                    | 2002       |                   | 2003
|                                                                     |                                            |                    |                    |                   |                   |                    |            |                   |     
|Basic Earnings (Loss) Per Share:                                     |                                            |                    |                    |                   |                   |                    |            |                   |      |   |            |            |  |   |            |           
|Numerator:                                                           |                                            |                    |                    |                   |                   |                    |            |                   |      |   |            |            |  |   |            |           
|                                                                     | Net income (loss)                          |                    | $                  | 103,436           |                   |                    | $          | (4,124,152        | )    |   | $          | 16,198,491 |  |   | $          | (1,380,744 | )
|Denominator:                                                         |                                            |                    |                    |                   |                   |                    |            |                   |      |   |            |            |  |   |            |           
|                                                                     | Weighted average common shares outstanding |                    |                    | 23,454,117        |                   |                    |            | 23,752,013        |      |   |            | 23,278,568 |  |   |            | 23,637,822 |  
|                                                                     |                                            |                    |                    |                   |                   |                    |            |                   |      |   |            |            |  |   |            |           
|Basic earnings (loss) per share                                      |                                            | $                  | 0.00               |                   |                   | $                  | (0.17      | )                 |      | $ | 0.70       |            |  | $ | (0.06      | )         
|                                                                     |                                            |                    |                    |                   |                   |                    |            |                   |      |   |            |            |  |   |            |           
|Diluted Earnings (Loss) Per Share:                                   |                                            |                    |                    |                   |                   |                    |            |                   |      |   |            |            |  |   |            |           
|Numerator:                                                           |                                            | $                  | 103,436            |                   |                   | $                  | (4,124,152 | )                 |      | $ | 16,198,491 |            |  | $ | (1,380,744 | )         
|Denominator:                                                         |                                            |                    |                    |                   |                   |                    |            |                   |      |   |            |            |  |   |            |           
|                                                                     | Weighted average shares outstanding        |                    |                    | 23,454,117        |                   |                    |            | 23,752,013        |      |   |            | 23,278,568 |  |   |            | 23,637,822 |  
|                                                                     | Potential common stock outstanding         |                    |                    | 684,296           |                   |                    |            |                  |      |   |            | 990,203    |  |   |            |           |  
|                                                                     |                                            |                    |                    |                   |                   |                    |            |                   |      |   |            |            |  |   |            |           
|Total                                                                |                                            |                    | 24,138,413         |                   |                   |                    | 23,752,013 |                   |      |   | 24,268,771 |            |  |   | 23,637,822 |           
|                                                                     |                                            |                    |                    |                   |                   |                    |            |                   |      |   |            |            |  |   |            |           
|Diluted earnings (loss) per share                                    |                                            | $                  | 0.00               |                   |                   | $                  | (0.17      | )                 |      | $ | 0.67       |            |  | $ | (0.06      | )         
|                                                                     |                                            |                    |                    |                   |                   |                    |            |                   |      |   |            |            |  |   |            |           
|Anti dilutive options not included in Earnings
per share calculation |                                            |                    | 534,415            |                   |                   |                    | 1,114,035  |                   |      |   | 534,600    |            |  |   | 1,111,520  |           
|                                                                     |                                            |                    |                    |                   |                   |                    |            |                   |      |   |            |            |  |   |            |           
|Price range of anti dilutive options                                 |                                            | $18.390 to $32.125 |                    | $0.305 to $32.125 |                   | $21.000 to $32.125 |            | $0.305 to $32.125
|                                                                     |                                            |                    |                    |                   |                   |                    |            |                  

4.  Comprehensive Income

Comprehensive income (loss) for the three and nine months ended June 30,
2002 and June 30, 2003 was as follows:

|                                                           |  |                    |         |                   |  |      |            |      |  |   |            |   |  |   |            |  
|---------------------------------------------------------- |  | ------------------ | ------- | ----------------- |  | ---- | ---------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|                                                           |  | Three Months Ended |         | Nine Months Ended
|                                                           |  | June 30,           |         | June 30,         
|                                                           |  |                    |         |                  
|                                                           |  | 2002               |         | 2003              |  | 2002 |            | 2003
|                                                           |  |                    |         |                   |  |      |            |     
|Net income (loss)                                          |  | $                  | 103,436 |                   |  | $    | (4,124,152 | )    |  | $ | 16,198,491 |   |  | $ | (1,380,744 | )
|Change in fair value of long-term investments (net of tax) |  |                    | (4,658  | )                 |  |      | 5,393      |      |  |   | (3,855     | ) |  |   | 5,442      |  
|                                                           |  |                    |         |                   |  |      |            |      |  |   |            |   |  |   |            |  
|Comprehensive income (loss)                                |  | $                  | 98,778  |                   |  | $    | (4,118,759 | )    |  | $ | 16,194,636 |   |  | $ | (1,375,302 | )
|                                                           |  |                    |         |                   |  |      |            |      |  |   |            |   |  |   |            |  

5.  Intangible Assets

The financial information for acquired intangible assets is as follows:

|                                      |  |                          |            |                     |  |                |          |              |  |  |            |  |  |  |            | 
|------------------------------------- |  | ------------------------ | ---------- | ------------------- |  | -------------- | -------- | ------------ |  |  | ---------- |  |  |  | ---------- | 
|                                      |  | As of September 30, 2002 |            | As of June 30, 2003
|                                      |  |                          |            |                    
|                                      |  | Gross Carrying           |            | Accumulated         |  | Gross Carrying |          | Accumulated 
|                                      |  | Amount                   |            | Amortization        |  | Amount         |          | Amortization
|                                      |  |                          |            |                     |  |                |          |             
|Amortized intangible assets:          |  |                          |            |                     |  |                |          |              |  |  |            |  |  |  |            | 
|Non compete agreements and tradenames |  |                          | $3,400,000 |                     |  |                | $793,333 |              |  |  | $3,400,000 |  |  |  | $1,303,333 | 

For the nine months ended June 30, 2003, the aggregate amortization
expense was $510,000. For each of the fiscal years 2003 through 2005, the
amortization expense is estimated to be approximately $680,000 and for fiscal
year 2006, the amortization expense is estimated to be approximately $567,000.

6.  New Senior Secured Revolving Credit Facility

On April 16, 2003, Tweeter concluded arrangements with Fleet National Bank
and Fleet Retail Finance Inc., on behalf of themselves and other co-lenders,
for a new three-year senior secured revolving credit facility in the amount of
$110 million. The facility replaces a $100 million line of credit which was due
to expire in 2004. Availability

8



---



##### Table of Contents



under the credit facility will be based on a
borrowing base tied to a percentage of eligible inventory, receivables and real
estate. The interest rate on the new facility ranges from 2.00% to 2.50% over
LIBOR, provided Tweeter commits the balances for a period of thirty days or
more, or 0% to .25% over the prime rate. The line is secured by substantially
all of the assets of Tweeter and its subsidiaries and contains various
covenants and restrictions. The borrowers under the credit facility will be
subsidiaries of Tweeter, and Tweeter will be a guarantor of any amounts
borrowed. In addition, there is a commitment fee for the unused portion of
the line of .375%.

Under the Companys credit facility, Tweeter is required to maintain a
certain fixed charge coverage ratio as of the end of each month. The term
fixed charge coverage ratio refers, for any period, to the ratio of (a)
consolidated EBITDA to (b) the sum of (i) capital expenditures incurred during
the period plus (ii) income taxes paid in cash during the period, plus (iii)
consolidated interest expense for the period, plus (iv) current maturities of
long term indebtedness during the period, plus (v) dividends or other
distributions with respect to any shares of any class of capital stock, or any
payments on account of the purchase, redemption, retirement, acquisition,
cancellation or termination of any such shares of capital stock or any option,
warrant or other right to acquire such shares of capital stock, made in cash
during the period. The ratios the Company is required to maintain are as
follows:

|                                                         |  |               |            | 
|-------------------------------------------------------- |  | ------------- | ---------- | 
|Period                                                   |  | Minimum Ratio
|Fiscal Month ending April 2003                           |  |               | 0.67: 1.00 | 
|Fiscal Month ending May 2003                             |  |               | 0.71: 1.00 | 
|Fiscal Month ending June 2003                            |  |               | 0.68: 1.00 | 
|Fiscal Month ending July 2003                            |  |               | 0.65: 1.00 | 
|Fiscal Month ending August 2003                          |  |               | 0.60: 1.00 | 
|Fiscal Month ending September 2003                       |  |               | 0.60: 1.00 | 
|Fiscal Months ending October, November and December 2003 |  |               | 0.80: 1.00 | 
|Fiscal Months ending January, February and March 2004    |  |               | 0.90: 1.00 | 
|Fiscal Months ending April, May and June 2004            |  |               | 1.00: 1.00 | 
|Each Fiscal Month ending thereafter                      |  |               | 1.10: 1.00 | 

The fixed charge coverage ratio is calculated (a) for each fiscal month
ending April 2003 through and including August 2003, on a cumulative basis for
the period from October 2002 through the end of the month of such
calculation, and (b) thereafter, commencing with the fiscal month ending September 2003, on
a trailing four-quarters basis.

7.  Investments

On June 30, 2003, Tweeter made an additional investment of $750,000 in
Tivoli Audio, LLC (Tivoli). This increased the Companys ownership percentage
to 25%. Tivoli is a manufacturer of consumer electronic products from which
the Company purchases product for resale. Effective on July 1, 2003, the
Company will account for its investment in Tivoli under the equity method of
accounting, recognizing the Companys share of Tivolis income or loss in the
Companys statement of operations.

8.  Related-Party Transactions

On June 30, 2003, Tweeter made an additional investment in Tivoli Audio,
LLC. Tivoli is a manufacturer of consumer electronic products. For the three
months ended June 30, 2002 and June 30, 2003, the Company purchased $170,000
and $322,000 of product from Tivoli. For the nine months ended June 30, 2002
and June 30, 2003, the Company purchased $1.7 million and $1.2 million of
product from Tivoli.

9.  Reclassifications

Certain 2002 reclassifications have been made to conform to the 2003
presentation.

9



---



##### Table of Contents



10.  New Accounting Pronouncements

During the quarter ended March 31, 2003, Tweeter adopted EITF 02-16,
Accounting by a Customer for Certain Consideration Received from a Vendor,
(EITF 02-16) which addresses how and when to reflect consideration received
from vendors in the consolidated financial statements. Under EITF 02-16,
certain consideration received from vendors that would have previously been
recorded as a reduction to selling expenses, is now recorded as a reduction to
cost of good sold. During the three months ended March 31, 2003, EITF 02-16
did not have a material impact on the Companys financial statements. During
the three months ended June 30, 2003, $5,658,000 was recorded as a reduction to
cost of goods sold that would have previously been recorded as a reduction of
selling expenses.

10



---



##### Table of Contents






ITEM 2.  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

INTRODUCTION

Tweeter Home Entertainment Group, Inc. (Tweeter or the Company) is a
specialty retailer of mid- to high-end audio and video consumer electronics
products. Tweeter currently operates 177 stores under the Tweeter, HiFi Buys,
Sound Advice, Bang & Olufsen, Electronic Interiors, Showcase Home Entertainment
and Hillcrest names in the New England, Mid-Atlantic, Southeast, Texas,
Southern California, Chicago, Florida and Phoenix markets.

RESULTS OF OPERATIONS

THREE MONTHS ENDED JUNE 30, 2003 AS COMPARED TO THREE MONTHS ENDED JUNE 30, 2002

Total Revenue.Total revenue includes delivered merchandise, labor, net
commissions on service contracts sold, completed service center work orders,
insurance replacement and corporate sales. Total revenue decreased $4.9
million, or 2.8%, to $170.5 million for the three months ended June 30, 2003
from $175.3 million for the three months ended June 30, 2002. Comparable store
sales decreased $16.7 million or 10.3%. Comparable store sales is a term we
use to compare the year-over-year sales performance of our stores. A store is
included in the comparable store sales base after it is in operation for 12
full months. An acquired store is included after 12 full months from the date
of acquisition. Remodeled or relocated stores are excluded from the comparable
store base until they have competed 12 full months of operation from the date
the remodeling was completed or the store re-opened after relocation. The
comparable store sales decrease was offset by $12.8 million in sales generated
from new stores that have not been opened for a twelve-month period and are
therefore not yet includable in the comparable store sales base. Additionally
there was a $1.7 million increase in sales generated from stores that were
relocated and have not been in operation at the new location for a twelve-month
period as well as a decrease of $1.5 million for stores that closed. For the
quarter ended June 30, 2003, flat panel television sales continued to grow,
representing 15.7% of sales in the quarter. Average selling price for the flat
panel category was 7.3% higher than the projection television category and 262%
higher than the tube television category. For the quarter ended June 30, 2003,
plasma televisions represented 78% of the flat panel categorys dollars and 43%
of the units sold. Home installation labor grew to 3.1% of revenues during the
quarter ended June 30, 2003 from 2.5% during the quarter ended June 30, 2002
and labor dollars increased 21% from 2002 to 2003. Total digital sales
represented over 54% of total revenue for the quarter ended June 30, 2003 as
compared to 50% for the quarter ended June 30, 2002.

Gross Profit.Cost of sales includes merchandise costs, net delivery
costs, distribution costs, home installation labor costs, purchase discount and
vendor allowances. Cost of sales decreased $4.8 million, or 4.2%, to $107.1
million for the three months ended June 30, 2003 from $111.9 million for the
three months ended June 30, 2002. Gross profit decreased $102,000, or .2%, to
$63.4 million for the three months ended June 30, 2003 from $63.5 million for
the three months ended June 30, 2002. The gross margin percentage increased 100
basis points to 37.2% for the three months ended June 30, 2003 from 36.2% for
the three months ended June 30, 2002. The quarter ended June 30, 2003 includes
$5,658,000 that was recorded as a reduction to cost of goods sold that would
have previously been recorded as a reduction of selling expenses prior to the
adoption of EITF 02-16. The reclassification moved vendor allowances out of
cooperative advertising and into vendor rebates. Without the
reclassification, the
gross margin percentage for the quarter ended June 30, 2003 would have been
33.8%, a decrease of 240 basis points. It is impractical for the Company to
determine what the prior year reclassification would have been; therefore the
two periods are not comparative. Overall margins, excluding vendor allowances,
distribution and labor cost decreased by 150 basis points and vendor allowances
decreased by 140 basis points due to revenues being below plan with a number of
vendors. This was offset by distribution costs, which decreased by 80 basis
points. This decrease was mainly attributable to lower compensation costs and
lower vehicle costs.

Selling Expenses.Selling expenses include the compensation of store
personnel, occupancy costs, store level depreciation, advertising expenses,
pre-opening expenses and credit card fees. Selling expenses increased $8.2
million, or 16.3%, to $58.6 million for the three months ended June 30, 2003
from $50.4 million for the three months ended June 30, 2002. As a percentage of
revenue, selling expenses increased to 34.4% for the three months ended June
30, 2003 from 28.8% for the three months ended June 30, 2002. The quarter
ended June 30, 2003

11



---



##### Table of Contents



includes a reclassification of $5.7 million from the
adoption of EITF 02-16. The reclassification moved vendor allowances out of
cooperative advertising and into vendor rebates. Without the reclassification, selling
expenses for the quarter ended June 30, 2003 would have increased 230 basis
points. This was driven by declines in comparable store sales and increases in
fixed costs as a percentage of sales. Occupancy costs and depreciation expense
together as a percentage of revenue increased 190 basis points for the three
months ended June 30, 2003 compared to the three months ended June 30, 2002.
Coop advertising allowances decreased 130 basis points for the three months
ended June 30, 2003 compared to the same period in 2002. Offsetting these
increases was gross advertising, which decreased 100 basis points for the three
months ended June 30, 2003 compared to the same period last year.

Corporate, General and Administrative Expenses.Corporate, general and
administrative expenses include the costs of executive officers, finance,
merchandising, marketing, information systems, human resources, training, and
related support functions. Corporate, general and administrative expenses
decreased 8.1% or $1.0 million to $11.0 million for the three months ended June
30, 2003 from $12.0 million for the three months ended June 30, 2002. As a
percentage of total revenue, corporate general and administrative expenses
decreased to 6.4% for the three months ended June 30, 2003 from 6.8% for the
three months ended June 30, 2002. The decrease was due to an 80 basis point
reduction in travel, bad debt, occupancy costs and depreciation. Offsetting
these decreases were increases in compensation costs, professional fees and
bank fees related to the new three-year senior secured revolving credit
facility.

Amortization of Intangibles.Amortization of intangibles decreased to
$170,000 for the three months ended June 30, 2003 from $393,000 for the three
months ended June 30, 2002. This was due to the write off of intangible assets
of $3,425,000 recorded in the period ended September 30, 2002.

Interest Expense.Interest expense decreased to $435,000 for the three
months ended June 30, 2003 compared to $509,000 for the three months ended June
30, 2002. This decrease is due to the reduced borrowings on our revolving
credit agreement during the three months ended June 30, 2003 compared to the
balances borrowed during the three months ended June 30, 2002. Borrowings were
reduced as a result of a reduction in inventory on hand.

Income Taxes.The effective tax rate for the three months ended June 30,
2003 and June 30, 2002 was 40.0%.

Seasonality.Tweeters operations, in common with other retailers, are
subject to seasonal influences. Historically, Tweeter has realized more of its
revenue and net earnings in its first fiscal quarter, which includes the
holiday season, than in any other fiscal quarter. The net earnings of any
interim quarter are seasonally disproportionate to net sales since certain
selling expenses and administrative expenses are relatively fixed during the
year. Therefore, interim results should not be relied upon as indicative of
results for the entire fiscal year.

NINE MONTHS ENDED JUNE 30, 2003 AS COMPARED TO NINE MONTHS ENDED JUNE 30, 2002

Total Revenue.Total revenue decreased $11.0 million, or 1.8%, to $602.1
million for the nine months ended June 30, 2003 from $613.1 million for the
nine months ended June 30, 2002. Comparable store sales decreased by $61.0
million or 10.8%, excluding acquired stores. Closed stores contributed $4.7
million to the decrease. Sales from new and relocated stores were $54.0
million to offset this decrease. Digital technology products continue to drive
sales performance as they represented over 56% of revenues for the nine months
ended June 30, 2003 compared to 51% for the nine months ended June 30, 2002.
In addition, revenue from home installation labor, net of labor costs,
continued to increase as a percentage of our revenues to 1.5% for the nine
months ended June 30, 2003 from .9% for the nine months ended June 30, 2002.

Gross Profit.Cost of sales decreased $4.3 million, or 1.1%, to $387.0
million for the nine months ended June 30, 2003 from $391.3 million for the
nine months ended June 30, 2002. Gross profit decreased $6.7 million, or 3.0%
to $215.0 million for the nine months ended June 30, 2003 from $221.7 million
for the nine months ended June 30, 2002. The gross margin percentage decreased
50 basis points to 35.7% from 36.2% last year. The nine months ended June 30,
2003 includes a reclassification of $5.7 million from the adoption of EITF
02-16. The reclassification moved vendor allowances out of cooperative
advertising and into vendor rebates. Without the reclassification, the gross margin
percentage for the nine months ended June 30, 2003 would have been 34.8%, a
decrease of 140 basis points from the nine months ended June 30, 2002. It is
impractical for the Company to determine what the prior year reclassification
would have been; therefore the two periods are not comparative. The largest
contributor

12



---



##### Table of Contents



of this decrease was lower vendor allowances, which was due to the
lower revenues. In addition, the product mix continues to shift towards video,
which has lower margins than the audio and mobile categories.

Selling Expenses.Selling expenses increased $22.3 million, or 13.9 %, to
$182.4 million for the nine months ended June 30, 2003 from $160.1 million for
the nine months ended June 30, 2002. As a percentage of revenue, selling
expenses increased 4.2% to 30.3% for the nine months ended June 30, 2003 from
26.1% in the prior year period. The nine months ended June 30, 2003 includes
$5,658,000 that was recorded as a reduction to cost of goods sold that would
have previously been recorded as a reduction of selling expenses prior to the
adoption of EITF 02-16. The reclassification moved vendor allowances out of
cooperative advertising and into vendor rebates. Without the reclassification, the
selling expenses percentage for the nine months ended June 30, 2003 would have
been 29.4%, an increase of 330 basis points from the nine months ended June 30,
2002. Driving up the percentage was mostly fixed costs as comparable store
sales declined 10.8%. Occupancy costs, depreciation, utilities and insurance
increased 210 basis points for the nine months ended June 30, 2003 compared to
the nine months ended June 30, 2002. In addition, cooperative advertising
allowances declined 100 basis points for the nine months ended June 30, 2003
compared to the same period last year.

Corporate, General and Administrative Expenses.Corporate, general and
administrative expenses for the nine months ended June 30, 2003 increased 2.9%
to $32.8 million from $31.9 million for the nine months ended June 30, 2002. As
a percentage of total revenue, corporate general and administrative expenses
increased to 5.4% for the nine months ended June 30, 2003 from 5.2% for the
prior year period. Compensation increased 30 basis points as a percent of
revenue due the lower revenues during the nine months ended June 30, 2003. In
addition, professional fees increased 10 basis points as a percentage of
revenue due to the external sourcing of the internal audit department and the
hiring of Retail Masters, a consultant group of experienced retail veterans
with expertise in operations, strategy, consumer research, and organizational
assessment. This was offset by decreases in travel and bad debts.

Amortization of Intangibles.Amortization of intangibles decreased to
$510,000 for the nine months ended June 30, 2003 from $1.2 million for the nine
months ended June 30, 2002. The decrease was due to the write off of intangible
assets of $3,425,000 recorded in the period ended September 30, 2002.

Interest Expense.Interest expense was $1.7 million for the nine months
ended June 30, 2003 and for the nine months ended June 30, 2002.

Income Taxes.The effective tax rate for the nine months ended June 30,
2003 and June 30, 2002 was 40.0%.

BALANCE SHEET COMPARISON: JUNE 30, 2003 AS COMPARED TO SEPTEMBER 30, 2002

Inventory. Total inventory decreased during the nine months ended June 30,
2003 compared to the year ended September 30, 2002 by $10.7 million. This is
due to the effort of increasing inventory turns and reducing long-term debt.
In addition, at the end of the fiscal year is when the inventory starts to
build for the holiday season, our first quarter of the fiscal year. The
average inventory per store decreased by over $109,000 per store during the
period.

Accounts receivable.Total accounts receivable decreased by $4.6 million
during the nine months ended June 30, 2003 compared to the year ended September
30, 2002. The decrease was mostly attributable to monies due from vendors for
allowances that were lower as a result of the decrease in purchases.

Amount due bank and accounts payable.The total of amount due bank and
accounts payable decreased by $9.8 million during the nine months ended June
30, 2003 compared to the year ended September 30, 2002. The major factor in
driving this down was the $10.7 million dollar reduction in inventory.

LIQUIDITY AND CAPITAL RESOURCES

Net cash provided by operating activities was $3.8 million for the nine
months ended June 30, 2003 compared to $20.1 million for the nine months ended
June 30, 2002. The increase in cash provided by operating activities for the
nine months ended June 30, 2003 was primarily a result of decreases in
inventory of $10.7 million and accounts receivable of $4.5 million and an
increase on customer deposits of $2.4 million. This was offset by a decrease in

13



---



##### Table of Contents



accounts payable and accrued expenses of $26.1 million and an increase in
prepaid expenses and other current assets of $2.4 million. The adjustments to
reconcile net income to net cash provided by operating activities consisted
primarily of $16.2 million for depreciation and amortization, as well as other
minor items.

At June 30, 2003, working capital was $87.2 million, compared to $89.3
million at September 30, 2002. The ratio of current assets to current
liabilities was 1.97 to 1 at June 30, 2003 and 1.89 to 1 at September 30, 2002.

Net cash used in investing activities for the nine months ended June 30,
2003 consisted of capital expenditures of $21.0 million, primarily used for the
building of new stores and the relocation of existing stores. Offsetting this
was $7.0 million in proceeds from a sale-leaseback transaction whereby the
Company sold and leased back one of its owned retail property.

Net cash provided by financing activities during the nine months ended
June 30, 2003 was $13.4 million, which was mostly due to an increase in amount
due to bank of $13.2 million.

On April 16, 2003, Tweeter entered into an agreement with Fleet National
Bank and Fleet Retail Finance Inc., on behalf of themselves and other
co-lenders, for a new three-year senior secured revolving credit facility in
the amount of $110 million. The facility replaced a $100 million line of credit
which was due to expire in 2004. Availability
under the credit facility will be
based on a borrowing base tied to a percentage of eligible inventory,
receivables and real estate. The interest rate on the new facility ranges from
2.00% to 2.50% over LIBOR, provided Tweeter commits the balances for a period
of thirty days or more, or 0% to .25% over the prime rate. The line is secured
by substantially all of the assets of Tweeter and its subsidiaries and contains
various covenants and restrictions, including: (i) cannot create, incur, assume
or permit additional Indebtedness (ii) cannot create, incur, assume or permit
any lien on any property or asset (iii) cannot merge or consolidate with any
other Person or permit any other Person to merge or consolidate with Tweeter
(iv) cannot purchase, hold or acquire any investment in any other Person except
those specifically permitted (v) cannot sell, transfer, lease or otherwise
dispose of any asset except permitted exceptions (vi) cannot declare or make
any Restricted Payments. The borrowers under the credit facility will be
subsidiaries of Tweeter, and Tweeter will be a guarantor of any amounts
borrowed. In addition, there is a commitment fee for the unused portion of the
line of .375%. Our weighted-average interest rate on outstanding borrowings
(under this credit facility and our prior credit facility) for the first nine
months of fiscal 2003 was approximately 3.0%. The credit facility has a
maturity date of April 1, 2006, and there are not any required quarterly or
monthly principal prepayments under the facility.

Under the credit facility, we are required to maintain a certain fixed
charge coverage ratio as of the end of each month. The term fixed charge
coverage ratio refers, for any period, to the ratio of (a) consolidated EBITDA
to (b) the sum of (i) capital expenditures incurred during the period plus (ii)
income taxes paid in cash during the period, plus (iii) consolidated interest
expense for the period, plus (iv) current maturities of long term indebtedness
during the period, plus (v) dividends or other distributions with respect to
any shares of any class of capital stock, or any payments on account of the
purchase, redemption, retirement, acquisition, cancellation or termination of
any such shares of capital stock or any option, warrant or other right to
acquire such shares of capital stock, made in cash during the period. The
ratios we are required to maintain are as follows:

|                                                         |  |               |            | 
|-------------------------------------------------------- |  | ------------- | ---------- | 
|Period                                                   |  | Minimum Ratio
|                                                         |  |              
|Fiscal Month ending April 2003                           |  |               | 0.67: 1.00 | 
|Fiscal Month ending May 2003                             |  |               | 0.71: 1.00 | 
|Fiscal Month ending June 2003                            |  |               | 0.68: 1.00 | 
|Fiscal Month ending July 2003                            |  |               | 0.65: 1.00 | 
|Fiscal Month ending August 2003                          |  |               | 0.60: 1.00 | 
|Fiscal Month ending September 2003                       |  |               | 0.60: 1.00 | 
|Fiscal Months ending October, November and December 2003 |  |               | 0.80: 1.00 | 
|Fiscal Months ending January, February and March 2004    |  |               | 0.90: 1.00 | 
|Fiscal Months ending April, May and June 2004            |  |               | 1.00: 1.00 | 
|Each Fiscal Month ending thereafter                      |  |               | 1.10: 1.00 | 

The fixed charge coverage ratio is calculated (a) for each fiscal month
ending March 2003 through and including August 2003, on a cumulative basis for
the period from October 2002 through the end of the month of such

14



---



##### Table of Contents



calculation, and (b) thereafter, commencing with the fiscal month ending September 2003, on
a trailing four-quarters basis.

As of June 30, 2003, the Company had $60.0 million available under this
revolving credit facility and $50.0 million outstanding.

Tweeter believes that its existing cash, together with cash generated by
operations and available borrowings under its credit facility, will be
sufficient to finance its working capital and capital expenditure requirements
for at least the next twelve months. Furthermore, due to the seasonality of its
business, Tweeters working capital needs are significantly higher in the
fiscal third and fourth quarters and there is the possibility that this could
cause unforeseen capital constraints in the future. Within our credit
facility, there is an option during our peak holiday season buying periods to
have more availability on our credit line to meet these needs.

During the quarter ending September 30, 2003, Tweeter plans a major
initiative to eliminate its open box and discontinued inventory. This could
potentially have a $2 million to $3 million negative impact to gross margin.

New Accounting Pronouncements

During the quarter ended March 31, 2003, Tweeter adopted EITF 02-16,
Accounting by a Customer for Certain Consideration Received from a Vendor,
(EITF 02-16) which addresses how and when to reflect consideration received
from vendors in the consolidated financial statements. Under EITF 02-16,
certain consideration received from vendors that would have previously been
recorded as a reduction to selling expenses, is now recorded as a reduction to
cost of good sold. During the three months ended March 31, 2003, EITF 02-16
did not have a material impact on the Companys financial statements. During
the three months ended June 30, 2003, $5,658,000 was recorded as a reduction to
cost of goods sold that would have previously been recorded as a reduction of
selling expenses.

FORWARD-LOOKING STATEMENTS

Certain statements contained in this Quarterly Report on Form 10-Q,
including, without limitation, statements containing the words expects,
anticipates, believes and words of similar import, constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements are subject to
various risks and uncertainties, including Company growth and acquisitions,
dependence on key personnel, the need for additional financing, competition and
seasonal fluctuations, and those referred to in the Companys Annual Report on
Form 10-K filed on December 17, 2002 and the Companys
Registration Statement on FormS-3 filed on July 31, 2003 that could cause actual future results
and events to differ materially from those currently anticipated. Readers are
cautioned not to place undue reliance on these forward-looking statements.




ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The market risk inherent in our financial instruments and in our financial
position is the potential for loss arising from adverse changes in interest
rates. We do not enter into financial instruments for trading purposes.

At June 30, 2003, the Company had $50.0 million of variable rate
borrowings outstanding under its revolving credit agreements, which
approximates fair value. A hypothetical 10% adverse change in interest rates
for this variable rate debt would have an approximate $190,000 annual impact on
the Companys earnings and cash flows.




ITEM 4.  CONTROLS AND PROCEDURES

Our chief executive officer and chief financial officer, after evaluating
the effectiveness of our disclosure controls and procedures (as defined in
the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) as of the
end of the period covered by this quarterly report (the Evaluation Date),
have concluded that as of the Evaluation Date our disclosure controls and
procedures were effective and designed to ensure that material information
relating to Tweeter would be made known to them by others within the company.
During the period covered by this quarterly report, there were no changes in
our internal control over financial reporting that have materially affected, or
are reasonably likely to materially affect, our internal control over financial
reporting.

15



---



##### Table of Contents






PART II.  OTHER INFORMATION




ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS

Effective April 21, 2003, Philo Pappas became Tweeters Senior
Vice-President and Chief Merchandising Officer. As part of the consideration
for Mr. Pappass employment, on April 21, 2003 we issued to Mr. Pappas (in a private placement under Section 4(2) of
the Securities Act of 1933) 270,000 shares of our common stock for a purchase price of $.01 per share. We
have filed a Registration Statement on Form S-3 with respect to the resale by
Mr. Pappas from time to time of the 162,000 vested shares of common stock
issued to Mr. Pappas.




ITEM 5.  OTHER INFORMATION

(a)  Subsequent Event

None




ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

(a)  Exhibits



| | 3.1  |  | Amended and Restated Certificate of Incorporation of the Company.                                                                                                      
| | ---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 3.2  |  | Amendment to Amended and Restated Certificate of Incorporation of the Company.                                                                                         
|
| | 3.3  |  | Amended and Restated By-Laws of the Company, as amended.                                                                                                               
|
| | 4.1  |  | Specimen Certificate representing the Companys common stock.                                                                                                          
|
| | 4.2  |  | Shareholders Rights Agreement.                                                                                                                                        
|
| | 10.1 |  | Credit Agreement dated as of April
16, 2003. Filed as an exhibit to the Companys Current Report on
Form 8-K filed April 23, 2003 and incorporated herein by reference.
|
| | 10.2 |  | Guarantee dated as of April 16,
2003. Filed as an exhibit to the Companys Current Report on
Form 8-K filed April 23, 2003 and incorporated herein by reference.       
|
| | 31.1 |  | Rule 13a-14(a)/15d-14(a) Certifications.                                                                                                                               
|
| | 31.2 |  | Rule 13a-14(a)/15d-14(a) Certifications.                                                                                                                               
|
| | 32.1 |  | Section 1350 Certifications.                                                                                                                                           
|
| | 32.2 |  | Section 1350 Certifications.                                                                                                                                           

(b)  Reports on Form 8-K

On April 7, 2003, Tweeter filed with the Securities and Exchange
Commission a Current Report on Form 8-K to announce its sales results for the
quarter ended March 31, 2003.

On April 23, 2003, Tweeter filed with the Securities and Exchange
Commission a Current Report on Form 8-K to announce it concluded arrangements
with Fleet National Bank (its existing lender) and Fleet Retail Finance Inc.,
on behalf of themselves and other co-lenders, for a new three-year senior
secured revolving credit facility in the amount of $110 million.

On April 24, 2003, Tweeter filed with the Securities and Exchange
Commission a Current Report on Form 8-K to announce its Results of Operations
and Financial Condition for the quarter ended March 31, 2003. In addition,
Tweeter filed a transcript of its quarterly earnings conference call held on
April 24, 2003.

16



---



##### Table of Contents






SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.



| | TWEETER HOME ENTERTAINMENT GROUP, INC.
| | --------------------------------------



| | By: /s/ Joseph McGuire
Joseph McGuire,
Senior Vice-President and Chief Financial Officer
| | ----------------------------------------------------------------------------------------



|Date: August 14, 2003 | 
|--------------------- | 

17