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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 December 31, 2001

Commission file number: 0-24091

TWEETER HOME ENTERTAINMENT GROUP, INC.(Exact name of Registrant as specified in its charter)

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

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 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 Check.gif No Checkbox.gif

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               |  | OUTSTANDING AT FEBRUARY 11, 2002
|                            
|                            
|                            
|                            
|Common Stock, $.01 par value |  | 23,368,783                      

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##### Table of Contents



TWEETER HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES

INDEX

|         |  |                                                                                             |  |     
|-------- |  | ------------------------------------------------------------------------------------------- |  | ----
|         |  |                                                                                             |  | PAGE
|         |  |                                                                                             |  |     
|Part I.  |  | FINANCIAL INFORMATION                                                                       |  |     
|        
|        
|        
|        
|Item 1   |  | Financial Statements (Unaudited)                                                            |  |     
|        
|        
|        
|        
|         |  | Consolidated Balance Sheets as of September 30, 2001 and December 31, 2001                  |  | 3   
|        
|        
|        
|        
|         |  | Consolidated Statements of Income for the Three Months Ended December 31,
2000 and 2001     |  | 4   
|        
|        
|        
|        
|         |  | Consolidated Statements of Cash Flows for the Three Months Ended December 31,
2000 and 2001 |  | 5   
|        
|        
|        
|        
|         |  | Notes to Unaudited Consolidated Financial Statements                                        |  | 6   
|        
|        
|        
|        
|Item 2   |  | Managements Discussion and Analysis of Financial Condition and Results of Operations       |  | 10  
|        
|        
|        
|        
|Item 3   |  | Quantitative and Qualitative Disclosures About Market Risk                                  |  | 13  
|        
|        
|        
|        
|Part II. |  | OTHER INFORMATION                                                                           |  | 14  

2



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TABLE OF CONTENTS



|                                                                                                                       |                                                                                               |  |  |  |  |  |  | 
|---------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|Tweeter Home Entertainment Group, Inc. and Subsidiaries Consolidated Balance Sheets                                   
|Tweeter Home Entertainment Group, Inc. and Subsidiaries Consolidated Statements of Income (Unaudited)                 
|Tweeter Home Entertainment Group, Inc. and Subsidiaries Consolidated Statements of Cash Flows                         
|TWEETER HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES 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                           
|PART II. OTHER INFORMATION                                                                                            



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##### Table of Contents






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

|                                     |                                                                                                                                                |                                   |            |               |             |              |            |             |             | 
|------------------------------------ | ---------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------- | ---------- | ------------- | ----------- | ------------ | ---------- | ----------- | ----------- | 
|                                     |                                                                                                                                                |                                   |            | September 30, |             | December 31,
|                                     |                                                                                                                                                |                                   |            | 2001          |             | 2001        
|                                     |                                                                                                                                                |                                   |            |               |             |             
|                                     |                                                                                                                                                |                                   |            |               |             |              |            | (Unaudited)
|Assets                               |                                                                                                                                                |                                   |            |               |             |              |            |            
|Current Assets:                      |                                                                                                                                                |                                   |            |               |             |              |            |            
|                                    
|                                    
|                                    
|                                    
|                                     | Cash and cash equivalents                                                                                                                      |                                   | $          | 3,277,969     |             |              | $          | 11,416,435  |            
|                                    
|                                    
|                                    
|                                    
|                                     | Accounts receivable, net of allowance for doubtful accounts of $850,000 at September 30, 2001 and $831,000 at December 31, 2001                |                                   |            | 31,251,444    |             |              |            | 44,131,150  |            
|                                    
|                                    
|                                    
|                                    
|                                     | Inventory                                                                                                                                      |                                   |            | 129,172,638   |             |              |            | 143,057,265 |            
|                                    
|                                    
|                                    
|                                    
|                                     | Deferred tax assets                                                                                                                            |                                   |            | 4,054,489     |             |              |            | 3,984,869   |            
|                                    
|                                    
|                                    
|                                    
|                                     | Prepaid expenses and other current assets                                                                                                      |                                   |            | 3,468,864     |             |              |            | 4,161,718   |            
|                                     |                                                                                                                                                |                                   |            |               |             |              |            |            
|                                     |                                                                                                                                                | Total current assets              |            |               | 171,225,404 |              |            |             | 206,751,437 | 
|                                    
|                                    
|                                    
|                                    
|                                     | Property and equipment, net                                                                                                                    |                                   |            | 109,141,981   |             |              |            | 122,515,343 |            
|                                    
|                                    
|                                    
|                                    
|                                     | Investment in joint venture                                                                                                                    |                                   |            | 3,397,722     |             |              |            | 3,154,674   |            
|                                    
|                                    
|                                    
|                                    
|                                     | Long-term investments                                                                                                                          |                                   |            | 1,194,425     |             |              |            | 1,116,055   |            
|                                    
|                                    
|                                    
|                                    
|                                     | Intangible assets, net                                                                                                                         |                                   |            | 7,254,832     |             |              |            | 6,879,582   |            
|                                    
|                                    
|                                    
|                                    
|                                     | Other assets, net                                                                                                                              |                                   |            | 536,675       |             |              |            | 353,516     |            
|                                    
|                                    
|                                    
|                                    
|                                     | Goodwill, net                                                                                                                                  |                                   |            | 187,676,605   |             |              |            | 187,676,605 |            
|                                     |                                                                                                                                                |                                   |            |               |             |              |            |            
|                                     |                                                                                                                                                | Total                             |            | $             | 480,427,644 |              |            | $           | 528,447,212 | 
|                                     |                                                                                                                                                |                                   |            |               |             |              |            |            
|Liabilities and Stockholders Equity |                                                                                                                                                |                                   |            |               |             |              |            |            
|                                    
|                                    
|                                    
|                                    
|                                     | Current
Liabilities:                                                                                                                           |                                   |            |               |             |              |            |             |            
|                                    
|                                    
|                                    
|                                    
|                                     | Current portion of long-term debt                                                                                                              |                                   | $          | 322,245       |             |              | $          | 305,362     |            
|                                    
|                                    
|                                    
|                                    
|                                     | Amount due to bank                                                                                                                             |                                   |            | 8,464,682     |             |              |            | 15,192,406  |            
|                                    
|                                    
|                                    
|                                    
|                                     | Accounts payable                                                                                                                               |                                   |            | 38,557,984    |             |              |            | 40,217,914  |            
|                                    
|                                    
|                                    
|                                    
|                                     | Accrued expenses                                                                                                                               |                                   |            | 38,887,498    |             |              |            | 51,934,631  |            
|                                    
|                                    
|                                    
|                                    
|                                     | Customer deposits                                                                                                                              |                                   |            | 13,998,996    |             |              |            | 18,048,181  |            
|                                    
|                                    
|                                    
|                                    
|                                     | Deferred warranty                                                                                                                              |                                   |            | 532,681       |             |              |            | 502,043     |            
|                                     |                                                                                                                                                |                                   |            |               |             |              |            |            
|                                     |                                                                                                                                                | Total current liabilities         |            |               | 100,764,086 |              |            |             | 126,200,537 | 
|                                     |                                                                                                                                                |                                   |            |               |             |              |            |            
|Long-Term Debt                       |                                                                                                                                                |                                   | 36,699,411 |               |             |              | 45,007,256 |            
|                                     |                                                                                                                                                |                                   |            |               |             |              |            |            
|Other Long-Term Liabilities:         |                                                                                                                                                |                                   |            |               |             |              |            |            
|                                    
|                                    
|                                    
|                                    
|                                     | Rent related accruals                                                                                                                          |                                   |            | 9,326,705     |             |              |            | 9,317,484   |            
|                                    
|                                    
|                                    
|                                    
|                                     | Deferred warranty                                                                                                                              |                                   |            | 1,048,562     |             |              |            | 925,801     |            
|                                    
|                                    
|                                    
|                                    
|                                     | Deferred tax liabilities                                                                                                                       |                                   |            | 197,353       |             |              |            | 222,916     |            
|                                     |                                                                                                                                                |                                   |            |               |             |              |            |            
|                                     |                                                                                                                                                | Total other long-term liabilities |            |               | 10,572,620  |              |            |             | 10,466,201  | 
|                                     |                                                                                                                                                |                                   |            |               |             |              |            |            
|                                     |                                                                                                                                                | Total liabilities                 |            |               | 148,036,117 |              |            |             | 181,673,994 | 
|                                     |                                                                                                                                                |                                   |            |               |             |              |            |            
|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;
24,722,974 shares issued at September 30, 2001 and
25,078,669 at December 31, 2001 |                                   |            | 247,230       |             |              |            | 250,792     |            
|                                    
|                                    
|                                    
|                                    
|                                     | Additional paid in capital                                                                                                                     |                                   |            | 285,132,941   |             |              |            | 285,999,327 |            
|                                    
|                                    
|                                    
|                                    
|                                     | Accumulated other comprehensive income                                                                                                         |                                   |            | 65,918        |             |              |            | 72,108      |            
|                                    
|                                    
|                                    
|                                    
|                                     | Retained earnings                                                                                                                              |                                   |            | 48,823,695    |             |              |            | 62,326,943  |            
|                                     |                                                                                                                                                |                                   |            |               |             |              |            |            
|                                     |                                                                                                                                                | Total                             |            |               | 334,269,784 |              |            |             | 348,649,170 | 
|                                    
|                                    
|                                    
|                                    
|                                     | Less treasury stock: 1,856,146 shares at September 30, 2001 and
1,852,852 shares at December 31, 2001, at cost                                 |                                   |            | (1,878,257    | )           |              |            | (1,875,952  | )          
|                                     |                                                                                                                                                |                                   |            |               |             |              |            |            
|                                     |                                                                                                                                                | Total stockholders equity        |            |               | 332,391,527 |              |            |             | 346,773,218 | 
|                                     |                                                                                                                                                |                                   |            |               |             |              |            |            
|                                     |                                                                                                                                                | Total                             |            | $             | 480,427,644 |              |            | $           | 528,447,212 | 
|                                     |                                                                                                                                                |                                   |            |               |             |              |            |            

See notes to unaudited consolidated financial statements.

3



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##### Table of Contents






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

|                                               |         |              |              |                    |            |      |              |            |            | 
|---------------------------------------------- | ------- | ------------ | ------------ | ------------------ | ---------- | ---- | ------------ | ---------- | ---------- | 
|                                               |         |              |              | Three Months Ended
|                                               |         |              |              | December 31,      
|                                               |         |              |              |                   
|                                               |         |              |              | 2000               |            | 2001
|                                               |         |              |              |                    |            |     
|Total revenue                                  |         | $            | 161,968,381  |                    |            | $    | 251,912,948  |           
|                                              
|                                              
|                                              
|                                              
|Cost of sales                                  |         |              | (103,854,565 | )                  |            |      | (160,010,575 | )         
|                                               |         |              |              |                    |            |      |              |           
|                                               |         | Gross Profit |              |                    | 58,113,816 |      |              |            | 91,902,373 | 
|                                              
|                                              
|                                              
|                                              
|Selling expenses                               |         |              | 36,049,203   |                    |            |      | 58,484,462   |           
|                                              
|                                              
|                                              
|                                              
|Corporate, general and administrative expenses |         |              | 6,061,338    |                    |            |      | 10,010,406   |           
|                                              
|                                              
|                                              
|                                              
|Amortization of intangibles                    |         |              | 480,000      |                    |            |      | 375,250      |           
|                                               |         |              |              |                    |            |      |              |           
|Income from operations                         |         |              | 15,523,275   |                    |            |      | 23,032,255   |           
|                                              
|                                              
|                                              
|                                              
|Income from joint venture                      |         |              | 485,206      |                    |            |      | 71,952       |           
|                                              
|                                              
|                                              
|                                              
|Interest income (expense), net                 |         |              | 321,509      |                    |            |      | (598,792     | )         
|                                               |         |              |              |                    |            |      |              |           
|Income before income taxes                     |         |              | 16,329,990   |                    |            |      | 22,505,415   |           
|                                              
|                                              
|                                              
|                                              
|Income taxes                                   |         |              | 6,531,996    |                    |            |      | 9,002,166    |           
|                                               |         |              |              |                    |            |      |              |           
|NET INCOME                                     |         | $            | 9,797,994    |                    |            | $    | 13,503,249   |           
|                                               |         |              |              |                    |            |      |              |           
|Basic earnings per share                       |         | $            | 0.53         |                    |            | $    | 0.59         |           
|                                               |         |              |              |                    |            |      |              |           
|Diluted earnings per share                     |         | $            | 0.51         |                    |            | $    | 0.56         |           
|                                               |         |              |              |                    |            |      |              |           
|Weighted average shares outstanding:           |         |              |              |                    |            |      |              |           
|                                              
|                                              
|                                              
|                                              
|                                               | Basic   |              |              | 18,481,100         |            |      |              | 23,020,589 |           
|                                               |         |              |              |                    |            |      |              |           
|                                               | Diluted |              |              | 19,237,496         |            |      |              | 24,214,744 |           
|                                               |         |              |              |                    |            |      |              |           

See notes to unaudited consolidated financial statements.

4



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##### Table of Contents






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

|                                                   |                                                                                   |          |                                                                                           |                                                          |         |                    |             |             |         |           |             |  
|-------------------------------------------------- | --------------------------------------------------------------------------------- | -------- | ----------------------------------------------------------------------------------------- | -------------------------------------------------------- | ------- | ------------------ | ----------- | ----------- | ------- | --------- | ----------- | -
|                                                   |                                                                                   |          |                                                                                           |                                                          |         | Three Months Ended
|                                                   |                                                                                   |          |                                                                                           |                                                          |         | December 31,      
|                                                   |                                                                                   |          |                                                                                           |                                                          |         |                   
|                                                   |                                                                                   |          |                                                                                           |                                                          |         | 2000               |             | 2001       
|                                                   |                                                                                   |          |                                                                                           |                                                          |         |                    |             |            
|CASH FLOWS FROM OPERATING ACTIVITIES:              |                                                                                   |          |                                                                                           |                                                          |         |                    |             |            
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Net income                                                                        |          | $                                                                                         | 9,797,994                                                |         |                    | $           | 13,503,249  |        
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Adjustments to reconcile net income to net cash provided by
operating activities: |          |                                                                                           |                                                          |         |                    |             |             |        
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                                                                   |          | Depreciation and amortization                                                             |                                                          |         | 2,329,930          |             |             |         | 3,620,052 |            
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                                                                   |          | Income from joint venture                                                                 |                                                          |         | (485,206           | )           |             |         | (71,952   | )          
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                                                                   |          | Gain on disposal of equipment                                                             |                                                          |         | (5,000             | )           |             |         |          |            
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                                                                   |          | Deferred income tax provision                                                             |                                                          |         |                   |             |             |         | 91,056    |            
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                                                                   |          | Changes in operating assets and liabilities, net of effects from
acquisition of business: |                                                          |         |                    |             |             |         |           |            
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                                                                   |          |                                                                                           | Increase in accounts receivable                          |         |                    | (13,679,964 | )           |         |           | (12,879,706 | )
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                                                                   |          |                                                                                           | Increase in inventory                                    |         |                    | (5,601,946  | )           |         |           | (13,884,627 | )
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                                                                   |          |                                                                                           | (Increase) decrease in prepaid expenses and other assets |         |                    | 164,758     |             |         |           | (520,645    | )
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                                                                   |          |                                                                                           | Increase in accounts payable and accrued expenses        |         |                    | 17,844,039  |             |         |           | 14,707,061  |  
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                                                                   |          |                                                                                           | Increase in customer deposits                            |         |                    | 2,204,648   |             |         |           | 4,049,185   |  
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                                                                   |          |                                                                                           | Increase (decrease) in deferred rent                     |         |                    | 185,331     |             |         |           | (9,221      | )
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                                                                   |          |                                                                                           | Decrease in deferred warranty                            |         |                    | (128,475    | )           |         |           | (153,399    | )
|                                                   |                                                                                   |          |                                                                                           |                                                          |         |                    |             |            
|                                                   |                                                                                   |          |                                                                                           | Net cash provided by operating activities                |         |                    | 12,626,109  |             |         |           | 8,451,053   |  
|                                                   |                                                                                   |          |                                                                                           |                                                          |         |                    |             |            
|CASH FLOWS FROM INVESTING ACTIVITIES:              |                                                                                   |          |                                                                                           |                                                          |         |                    |             |            
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Purchase of property and equipment                                                |          |                                                                                           | (4,155,931                                               | )       |                    |             | (16,592,214 | )      
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Proceeds from sale of property and equipment                                      |          |                                                                                           | 5,000                                                    |         |                    |             |            |        
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | (Purchase) sale of investments                                                    |          |                                                                                           | (200,000                                                 | )       |                    |             | 88,687      |        
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Cash paid for acquisitions                                                        |          |                                                                                           | (3,837,048                                               | )       |                    |             |            |        
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Dividends from joint venture                                                      |          |                                                                                           |                                                         |         |                    |             | 300,000     |        
|                                                   |                                                                                   |          |                                                                                           |                                                          |         |                    |             |            
|                                                   |                                                                                   |          |                                                                                           | Net cash used in investing activities                    |         |                    | (8,187,979  | )           |         |           | (16,203,527 | )
|                                                   |                                                                                   |          |                                                                                           |                                                          |         |                    |             |            
|CASH FLOWS FROM FINANCING ACTIVITIES:              |                                                                                   |          |                                                                                           |                                                          |         |                    |             |            
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Increase (decrease) in amount due to bank                                         |          |                                                                                           | (191,289                                                 | )       |                    |             | 6,727,724   |        
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Net proceeds (payments) of long term debt                                         |          |                                                                                           | (9,363                                                   | )       |                    |             | 8,290,962   |        
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Equity transactions                                                               |          |                                                                                           | 156,846                                                  |         |                    |             | 872,254     |        
|                                                   |                                                                                   |          |                                                                                           |                                                          |         |                    |             |            
|                                                   |                                                                                   |          |                                                                                           | Net cash provided (used) by financing activities         |         |                    | (43,806     | )           |         |           | 15,890,940  |  
|                                                   |                                                                                   |          |                                                                                           |                                                          |         |                    |             |            
|INCREASE IN CASH AND CASH EQUIVALENTS              |                                                                                   |          | 4,394,324                                                                                 |                                                          |         |                    | 8,138,466   |            
|                                                  
|                                                  
|                                                  
|                                                  
|CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD     |                                                                                   |          | 34,292,555                                                                                |                                                          |         |                    | 3,277,969   |            
|                                                   |                                                                                   |          |                                                                                           |                                                          |         |                    |             |            
|CASH AND CASH EQUIVALENTS, END OF PERIOD           |                                                                                   | $        | 38,686,879                                                                                |                                                          |         | $                  | 11,416,435  |            
|                                                   |                                                                                   |          |                                                                                           |                                                          |         |                    |             |            
|SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: |                                                                                   |          |                                                                                           |                                                          |         |                    |             |            
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Cash paid during the period for:                                                  |          |                                                                                           |                                                          |         |                    |             |             |        
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                                                                   | Interest |                                                                                           | $                                                        | 4,569   |                    |             | $           | 575,914 |          
|                                                   |                                                                                   |          |                                                                                           |                                                          |         |                    |             |            
|                                                   |                                                                                   | Taxes    |                                                                                           | $                                                        | 827,500 |                    |             | $           | 141,169 |          
|                                                   |                                                                                   |          |                                                                                           |                                                          |         |                    |             |            

See notes to unaudited consolidated financial statements.

5



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##### 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, 2001.

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 three-month period ended December 31, 2001
are not necessarily indicative of the results that may be expected for the
fiscal year ending September 30, 2002. Tweeter typically records its highest
revenue and earnings in this first fiscal quarter.

3. Earnings per Share

The weighted average shares used in computing basic and diluted net income
per share are presented in the table below. Options to purchase 432,871 and
313,298 shares of common stock at prices ranging from $23.125 to $32.125 and
$21.00 to $32.125 per share were outstanding for the quarters ended December
31, 2000 and December 31, 2001, respectively, but were not included in the
computation of diluted net income per share because options exercise prices
were greater than the average market prices of the common shares.

|                            |                                            |   |                    |            |      |   |            |            | 
|--------------------------- | ------------------------------------------ | - | ------------------ | ---------- | ---- | - | ---------- | ---------- | 
|                            |                                            |   | Three Months Ended
|                            |                                            |   | December 31,      
|                            |                                            |   |                   
|                            |                                            |   | 2000               |            | 2001
|                            |                                            |   |                    |            |     
|Basic Earnings Per Share:   |                                            |   |                    |            |      |   |            |           
|                           
|                           
|                           
|                           
|Numerator:                  |                                            |   |                    |            |      |   |            |           
|                           
|                           
|                           
|                           
|                            | Net income                                 |   | $                  | 9,797,994  |      |   | $          | 13,503,249 | 
|                           
|                           
|                           
|                           
|Denominator:                |                                            |   |                    |            |      |   |            |           
|                           
|                           
|                           
|                           
|                            | Weighted average common shares outstanding |   |                    | 18,481,100 |      |   |            | 23,020,589 | 
|                            |                                            |   |                    |            |      |   |            |           
|Basic earnings per share    |                                            | $ | 0.53               |            |      | $ | 0.59       |           
|                            |                                            |   |                    |            |      |   |            |           
|Diluted Earnings Per Share: |                                            |   |                    |            |      |   |            |           
|                           
|                           
|                           
|                           
|Numerator:                  |                                            | $ | 9,797,994          |            |      | $ | 13,503,249 |           
|                           
|                           
|                           
|                           
|Denominator:                |                                            |   |                    |            |      |   |            |           
|                           
|                           
|                           
|                           
|                            | Weighted average shares outstanding        |   |                    | 18,481,100 |      |   |            | 23,020,589 | 
|                           
|                           
|                           
|                           
|                            | Potential common stock outstanding         |   |                    | 756,396    |      |   |            | 1,194,155  | 
|                            |                                            |   |                    |            |      |   |            |           
|Total                       |                                            |   | 19,237,496         |            |      |   | 24,214,744 |           
|                            |                                            |   |                    |            |      |   |            |           
|Diluted earnings per share  |                                            | $ | 0.51               |            |      | $ | 0.56       |           
|                            |                                            |   |                    |            |      |   |            |           

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##### Table of Contents



4. Comprehensive Income

Comprehensive income for the three months ended December 31, 2000 and
December 31, 2001 was as follows:

|                                                           |  |                    |           |      |  |   |            | 
|---------------------------------------------------------- |  | ------------------ | --------- | ---- |  | - | ---------- | 
|                                                           |  | Three Months Ended
|                                                           |  | December 31,      
|                                                           |  |                   
|                                                           |  | 2000               |           | 2001
|                                                           |  |                    |           |     
|Net income                                                 |  | $                  | 9,797,994 |      |  | $ | 13,503,249 | 
|                                                          
|                                                          
|                                                          
|                                                          
|Change in fair value of long-term
investments (net of tax) |  |                    | (474,148  | )    |  |   | 6,190      | 
|                                                           |  |                    |           |      |  |   |            | 
|Comprehensive income                                       |  | $                  | 9,323,846 |      |  | $ | 13,509,439 | 
|                                                           |  |                    |           |      |  |   |            | 

5. Tweeter@Outpost.com Joint Venture

On November 9, 2001, the Company received notification from Outpost.com
that the Joint Venture was being dissolved effective February 9, 2002. The
Company discontinued its Internet operations on December 31, 2001. The Company
believes that the carrying amount of its investment in the joint venture of
approximately $3.2 million at December 31, 2001 and its receivable balance from
the joint venture of approximately $720,000 will be realized during fiscal year
2002.

6. Goodwill and Other Intangibles

On October 1, 2001 the Company adopted, SFAS No.142, Goodwill and Other
Intangible Assets, which eliminated the amortization of purchased goodwill and
other intangibles with indefinite useful lives. SFAS No.142 changes the
accounting for goodwill and intangible assets with indefinite lives from an
amortization method to an impairment approach. Other intangible assets will
continue to be amortized over their useful lives. Amortization of goodwill,
including goodwill recorded in prior business combinations, ceased upon the
adoption of this standard. Under SFAS No.142, goodwill will be tested at least
annually and more frequently if an event occurs which indicates that goodwill
may be impaired. In connection with this statement, management is required to
perform an impairment assessment within six months of adoption. As of December
31, 2001, the Company had not completed the goodwill impairment review and
therefore has made no determination of any impairment charge that could result
from adoption of this statement.

The following financial information is presented as if the statement was
adopted at the beginning of the quarter ended December 31, 2000.

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|                          |  |                   |            |                   |  |   |             | 
|------------------------- |  | ----------------- | ---------- | ----------------- |  | - | ----------- | 
|                          |  | December 31, 2000 |            | December 31, 2001
|                          |  |                   |            |                  
|Reported net income       |  | $                 | 9,797,994  |                   |  | $ | 13,503,249  | 
|                         
|                         
|                         
|                         
|Goodwill amortization     |  |                   | 480,000    |                   |  |   |            | 
|                          |  |                   |            |                   |  |   |             | 
|Adjusted net income       |  | $                 | 10,277,994 |                   |  | $ | 13,503,249  | 
|                          |  |                   |            |                   |  |   |             | 
|Goodwill                  |  | $                 | 41,223,741 |                   |  | $ | 187,676,605 | 
|                          |  |                   |            |                   |  |   |             | 
|Basic income per share:   |  |                   |            |                   |  |   |             | 
|                         
|                         
|                         
|                         
|Reported net income       |  | $                 | 0.53       |                   |  | $ | 0.59        | 
|                         
|                         
|                         
|                         
|Goodwill amortization     |  |                   | 0.03       |                   |  |   |            | 
|                          |  |                   |            |                   |  |   |             | 
|Adjusted net income       |  | $                 | 0.56       |                   |  | $ | 0.59        | 
|                          |  |                   |            |                   |  |   |             | 
|Diluted income per share: |  |                   |            |                   |  |   |             | 
|                         
|                         
|                         
|                         
|Reported net income       |  | $                 | 0.51       |                   |  | $ | 0.56        | 
|                         
|                         
|                         
|                         
|Goodwill amortization     |  |                   | 0.02       |                   |  |   |            | 
|                          |  |                   |            |                   |  |   |             | 
|Adjusted net income       |  | $                 | 0.53       |                   |  | $ | 0.56        | 
|                          |  |                   |            |                   |  |   |             | 

The financial information for acquired intangible assets is as follows:

|                       |                          |   |               |           |              |   |           |           | 
|---------------------- | ------------------------ | - | ------------- | --------- | ------------ | - | --------- | --------- | 
|                       |                          |   | September 30, |           | December 31,
|                       |                          |   | 2001          |           | 2001        
|                       |                          |   |               |           |             
|Non compete Agreements |                          |   |               |           |              |   |           |          
|                      
|                      
|                      
|                      
|                       | Original Cost            | $ | 3,905,000     |           |              | $ | 3,905,000 |          
|                      
|                      
|                      
|                      
|                       | Accumulated Amortization |   |               | 130,168   |              |   |           | 325,420   | 
|                      
|                      
|                      
|                      
|Tradenames:            |                          |   |               |           |              |   |           |          
|                      
|                      
|                      
|                      
|                       | Original Cost            |   | $             | 3,600,000 |              |   | $         | 3,600,000 | 
|                      
|                      
|                      
|                      
|                       | Accumulated Amortization |   |               | 120,000   |              |   |           | 300,000   | 

For the quarter ended December 31, 2001, the aggregate amortization
expense was $375,250. For each of the fiscal years 2002 through 2005, the
amortization expense is estimated to be $1,501,000 and for the fiscal year 2006
the amortization is estimated to be $1,251,000.

7. Subsequent Events

On January 15, 2002, Tweeter announced that it has reached an agreement in
principle to acquire Hillcrest High Fidelity, Inc. (Hillcrest), located in
the greater Dallas, TX market. Hillcrest, which has operated in Dallas for 53
years, is a two-store specialty retailer with a significant focus on custom
installation with annual sales of approximately $14 million. The companies
expect to complete the transaction on or about March 1, 2002. Tweeter expects
to fund the acquisition with a combination of cash and stock with an
approximate purchase price of $5.5 million for the Net Assets of Hillcrest. The
company intends to issue these shares from its shelf registration filed on
April 13, 1999, and amended on December 23, 1999. The transaction will be
accounted for as a purchase.

8. New Accounting Pronouncements

In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
SFAS No. 144 supersedes SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and the
accounting and reporting provisions of Accounting Principles Board (APB)
Opinion No. 30, Reporting the Results of Operations  Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently

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Occurring Events and Transactions. The provisions of SFAS No. 144
are effective for financial statements issued for fiscal years beginning after
December 15, 2001, and interim periods within those fiscal years. The Company
is in the process of evaluating the impact that implementing SFAS No. 144 will
have on its consolidated financial statements.

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##### Table of Contents






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

INTRODUCTION

Tweeter is a specialty retailer of mid to high-end audio and video
consumer electronics products. Tweeter currently operates 155 stores under the
Tweeter, HiFi Buys, Sound Advice, Bang & Olufsen, Electronic Interiors,
Showcase Home Entertainment and Great Indoors Home Theater names in the New
England, Texas, San Diego, Mid-Atlantic, Chicago, Southeast, Florida and
Phoenix markets respectively.

RESULTS OF OPERATIONS

THREE MONTHS ENDED DECEMBER 31, 2001 AS COMPARED TO THREE MONTHS ENDED DECEMBER 31, 2000

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
increased $89.9 million, or 55.5%, to $251.9 million for the three months ended
December 31, 2001 from $162.0 million for the three months ended December 31,
2000. The increase was mainly comprised of $21.8 million from new stores and
$70.1 million from acquired companies. This was offset by a comparable store
sales decrease of $2.3 million. Comparable store sales were down 1.6%
excluding the Big Screen City, Audio Video Systems and the Sound Advice chains.
The Big Screen City stores had a comparable store sales decrease of 7.3%, the
Audio Video Systems stores had a comparable store sales decrease of 20.0% and
the Sound Advice stores had a comparable store sales decrease of 3.9%. Digital
and digital ready tube televisions continued their rapid penetration into the
tube category in the quarter, as they accounted for over 55% of all tubes sold
in the quarter, and 7.3% of total revenue. Flat Panel televisions sets 
Plasma and LCD  were the fastest growing category for quarter ended December
31, 2001, up 117% from the quarter ended December 31, 2000. Total digital
sales penetration exceeded 52% of total revenue.

Gross Profit.Cost of sales includes merchandise, net delivery costs,
distribution costs, home installation labor costs, purchase discounts, and
vendor volume rebates. Cost of sales increased $56.2 million, or 54.1%, to
$160.0 million for the three months ended December 31, 2001 from $103.9 million
for the three months ended December 31, 2000. Gross profit increased $33.8
million, or 58.1%, to $91.9 million for the three months ended December 31,
2001 from $58.1 million for the three months ended December 31, 2000. The gross
margin percentage increased 60 basis points, to 36.5% for the three months
ended December 31, 2001, from 35.9% for the three months ended December 31,
2000. The increase in margin was primarily due to the continued strength of the
digital product sales. Also contributing to the increase was the net labor
generated from the Companys continued efforts to pursue the home installation
business.

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 $22.4
million, or 62.2%, to $58.5 million for the three months ended December 31,
2001 from $36.0 million for the three months ended December 31, 2000. As a
percentage of revenue, selling expenses increased to 23.2% for the three months
ended December 31, 2001 from 22.3% for the three months ended December 31,
2000. This increase was primarily due to increased occupancy costs incurred for
new stores, higher bank fees associated with interest promotions, and other
store compensation costs.

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
increased 65.2% to $10.0 million for the three months ended December 31, 2001
from $6.1 million for the three months ended December 31, 2000. As a percentage
of total revenue, corporate general and administrative expenses increased to
4.0% for the three months ended December 31, 2001 from 3.7% for the three
months ended December 31, 2000. This increase was primarily due to increased
payroll at the corporate level, as the company has added to its corporate
infrastructure.

Amortization of Intangibles. Amortization of intangibles decreased to
$375,000 for the three months ended December 31, 2001 from $480,000 for the
three months ended December 31, 2000. The decrease was due to the October 1,
2001 adoption of Financial Accounting Standards Board (FASB) Statement of
Financial Accounting Standards (SFAS) No. 142, Goodwill

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and Other Intangible Assets. This statement requires that amortization
be recorded only on intangible assets and not on goodwill.

Net Interest Income (Expense).Net interest expense increased to $599,000
for the three months ended December 31, 2001 from net interest income of
$322,000 for the three months ended December 31, 2000. This increase is due
primarily to the borrowings on our revolving credit agreement during the three
months ended December 31, 2001 compared to cash investment income realized on
our outstanding cash balances during the three months ended December 31, 2000.
The increase in borrowings was due to the debt acquired in the Sound Advice
acquisition and the opening of new stores.

Income Taxes. The effective tax rate for the fiscal quarters ended
December 31, 2001 and December 31, 2000 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 this 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 necessarily
indicative of results for the entire fiscal year.

LIQUIDITY AND CAPITAL RESOURCES

Net cash provided by operating activities was $8.5 million for the three
months ended December 31, 2001 compared to $12.6 million for the three months
ended December 31, 2000. Cash provided by operations for the three months
ended December 31, 2001 was primarily the result of net income of $13.5
million, an increase in accounts payable and accrued expenses of $14.7 million
and an increase in customer deposits of $4.0 million. Cash used from
operations included, primarily, an increase in inventory of $13.9 million and
an increase in accounts receivable of $12.9 million. The adjustments to
reconcile net income to cash provided by operating activities consist primarily
of $3.6 million for depreciation and amortization, as well as minor changes in
other operating accounts.

At December 31, 2001, working capital was $80.6 million, compared to $70.5
million at September 30, 2001. The ratio of current assets to current
liabilities was 1.64 to 1 at December 31, 2001 and 1.70 to 1 at September 30,
2001.

Cash used in investing activities for the three months ended December 31,
2001 included capital expenditures of $16.6 million, primarily used for the
building of new stores and the relocation of existing stores.

Net cash provided by financing activities during the three months ended
December 31, 2001 was $15.9 million, which was predominantly due to borrowings
of long-term debt of $8.3 million and an increase in amount due to bank of $6.7
million.

Tweeter has a three-year senior credit facility (the credit facility),
which provides the Company the ability to borrow up to $75 million. The Company
had $30,000,000 available on its revolving credit facility at December 31,
2001, and there was $45,000,000 outstanding at December 31, 2001. The unpaid
balances under this agreement bear interest at the lenders base rate, or
Eurodollar pricing plus 1.25% if the Company commits the balances for a period
of thirty days or more.

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. If management pursues additional
acquisitions within this period, however, such acquisitions could strain
Tweeters capital resources. Furthermore, due to the seasonality of its
business, Tweeters working capital needs are significantly higher the fiscal
third and fourth quarters and there is the possibility that this could cause
unforeseen capital constraints in the future.

New Accounting Pronouncements

In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
SFAS No. 144 supersedes SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and the
accounting and reporting provisions of Accounting Principles Board (APB)
Opinion No. 30, Reporting the Results of Operations  Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions. The provisions of SFAS No. 144
are effective for financial statements issued for fiscal years

11



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##### Table of Contents



beginning after December 15, 2001, and interim periods within those fiscal
years. The Company is in the process of evaluating the impact that implementing
SFAS No. 144 will have on its consolidated financial statements.

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 those relating to the income tax
rate for fiscal 2001, Company growth and acquisitions, dependence on key
personnel, the need for additional financing, competition and seasonal
fluctuations, and those referred to in Tweeters Registration Statement filed
on Form S-4 on June 13, 2001 and in the Companys Annual Report on Form 10-K
filed on December 20, 2001, 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.

12



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##### Table of Contents






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 December 31, 2001, the Company had $45,000,000 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 $149,000 annual impact on the Companys
earnings and cash flows.

At December 31, 2001, we had approximately $120,000 in marketable equity
securities. Equity market fluctuations can impact fair values (although not
earnings, unless such equity positions are actually liquidated). A 10%
fluctuation in the value of such securities would either reduce or increase
total assets by $12,000.

13



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##### Table of Contents






PART II. OTHER INFORMATION

ITEM 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)  Exhibits

Exhibit          Description

None

(b)  Reports on Form 8-K.

None

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,                       
|
|
|
|
| |  |  | Chief Financial Officer               

Date: February 12, 2002

14