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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, 2002

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 FEBRUARY 11, 2003
23,594,355



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TABLE OF CONTENTS



|                                          |                                                                                               |                                                                |  |  |  |  |  | 
|----------------------------------------- | --------------------------------------------------------------------------------------------- | -------------------------------------------------------------- |  |  |  |  |  | 
|                                          |                                                                                               | Consolidated Balance Sheets                                   
|                                          |                                                                                               | Consolidated Statements of Income                             
|                                          |                                                                                               | 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               
|SIGNATURES                               
|CERTIFICATIONS                           
|Ex-10.1 5th Amendment to Credit Agreement
|Ex-99.1 Certification of CEO             
|Ex-99.2 Certification of CFO             



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##### Table of Contents



TWEETER HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES




INDEX


|                                      |  |                                                                                             |    |  |    |      |  | 
|------------------------------------- |  | ------------------------------------------------------------------------------------------- | -- |  | -- | ---- |  | 
|                                      |  |                                                                                             |    |  |    | Page
|                                      |  |                                                                                             |    |  |    |     
|Part I         
FINANCIAL INFORMATION |  |                                                                                             |    | 
|Item 1                                |  | Condensed Financial Statements (Unaudited)                                                  |    |  |    |     
|                                      |  | Consolidated Balance Sheets as of September 30, 2002 and December 31, 2002                  |    |  | 3  |     
|                                      |  | Consolidated Statements of Income for the Three Months Ended December 31, 2001 and 2002     |    |  | 4  |     
|                                      |  | Consolidated Statements of Cash Flows for the Three Months Ended December 31, 2001 and 2002 |    |  | 5  |     
|                                      |  | Notes to Unaudited Condensed Consolidated Financial Statements                              |    |  | 6  |     
|Item 2                                |  | Management's Discussion and Analysis of Financial Condition and Results of Operations       |    |  | 8  |     
|Item 3                                |  | Quantitative and Qualitative Disclosures About Market Risk                                  |    |  | 10 |     
|Item 4                                |  | Controls and Procedures                                                                     |    |  | 10 |     
|Part II        
OTHER INFORMATION     |  |                                                                                             | 11 | 

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

|                                                                                                                                               |                                   |   |               |             |              |   |              |             | 
|---------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------- | - | ------------- | ----------- | ------------ | - | ------------ | ----------- | 
|                                                                                                                                               |                                   |   | September
30, |             | December 31,
|                                                                                                                                               |                                   |   | 2002          |             | 2002        
|                                                                                                                                               |                                   |   |               |             |             
|                                                                                                                                               |                                   |   | (Unaudited)  
|Assets                                                                                                                                         |                                   |   |               |             |              |   |              |            
|Current Assets:                                                                                                                                |                                   |   |               |             |              |   |              |            
|Cash and cash equivalents                                                                                                                      |                                   | $ | 2,282,635     |             |              | $ | 1,502,610    |            
|Accounts receivable, net of allowance for doubtful accounts of
$1,075,000 at September 30, 2002 and $1,080,000 at December 31, 2002            |                                   |   | 23,116,040    |             |              |   | 25,324,770   |            
|Inventory                                                                                                                                      |                                   |   | 143,234,060   |             |              |   | 162,152,357  |            
|Deferred tax assets                                                                                                                            |                                   |   | 3,943,838     |             |              |   | 4,015,248    |            
|Prepaid expenses and other current assets                                                                                                      |                                   |   | 17,084,739    |             |              |   | 15,257,726   |            
|                                                                                                                                               |                                   |   |               |             |              |   |              |            
|                                                                                                                                               | Total current assets              |   |               | 189,661,312 |              |   |              | 208,252,711 | 
|Property and equipment, net                                                                                                                    |                                   |   | 134,310,705   |             |              |   | 139,329,345  |            
|Long-term investments                                                                                                                          |                                   |   | 1,103,280     |             |              |   | 1,104,188    |            
|Deferred tax assets                                                                                                                            |                                   |   | 7,273,068     |             |              |   | 7,535,693    |            
|Intangible assets, net                                                                                                                         |                                   |   | 2,606,667     |             |              |   | 2,436,667    |            
|Other assets, net                                                                                                                              |                                   |   | 923,169       |             |              |   | 1,685,532    |            
|                                                                                                                                               |                                   |   |               |             |              |   |              |            
|                                                                                                                                               | Total                             |   | $             | 335,878,201 |              |   | $            | 360,344,136 | 
|                                                                                                                                               |                                   |   |               |             |              |   |              |            
|Liabilities and Stockholders Equity                                                                                                           |                                   |   |               |             |              |   |              |            
|Current Liabilities:                                                                                                                           |                                   |   |               |             |              |   |              |            
|Current portion of long-term debt                                                                                                              |                                   | $ | 288,745       |             |              | $ | 225,622      |            
|Amount due to bank                                                                                                                             |                                   |   | 4,520,513     |             |              |   | 6,159,120    |            
|Accounts payable                                                                                                                               |                                   |   | 51,550,051    |             |              |   | 75,830,071   |            
|Accrued expenses                                                                                                                               |                                   |   | 27,449,859    |             |              |   | 34,461,779   |            
|Customer deposits                                                                                                                              |                                   |   | 16,259,734    |             |              |   | 17,519,415   |            
|Deferred warranty                                                                                                                              |                                   |   | 301,583       |             |              |   | 301,583      |            
|                                                                                                                                               |                                   |   |               |             |              |   |              |            
|                                                                                                                                               | Total current liabilities         |   |               | 100,370,485 |              |   |              | 134,497,590 | 
|                                                                                                                                               |                                   |   |               |             |              |   |              |            
|Long-Term Debt                                                                                                                                 |                                   |   | 50,073,501    |             |              |   | 35,158,552   |            
|                                                                                                                                               |                                   |   |               |             |              |   |              |            
|Other Long-Term Liabilities:                                                                                                                   |                                   |   |               |             |              |   |              |            
|Rent related accruals                                                                                                                          |                                   |   | 10,338,737    |             |              |   | 10,374,469   |            
|Deferred warranty                                                                                                                              |                                   |   | 484,673       |             |              |   | 341,569      |            
|                                                                                                                                               |                                   |   |               |             |              |   |              |            
|                                                                                                                                               | Total other long-term liabilities |   |               | 10,823,410  |              |   |              | 10,716,038  | 
|                                                                                                                                               |                                   |   |               |             |              |   |              |            
|                                                                                                                                               | Total liabilities                 |   |               | 161,267,396 |              |   |              | 180,372,180 | 
|                                                                                                                                               |                                   |   |               |             |              |   |              |            
|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
25,393,306 at December 31, 2002 |                                   |   | 253,783       |             |              |   | 253,933      |            
|Additional paid in capital                                                                                                                     |                                   |   | 292,464,945   |             |              |   | 292,607,358  |            
|Accumulated other comprehensive income                                                                                                         |                                   |   | 49,280        |             |              |   | 49,825       |            
|Accumulated deficit                                                                                                                            |                                   |   | (116,305,296  | )           |              |   | (111,100,939 | )          
|                                                                                                                                               |                                   |   |               |             |              |   |              |            
|                                                                                                                                               | Total                             |   |               | 176,462,712 |              |   |              | 181,810,177 | 
|Less treasury stock: 1,818,503 shares at September 30, 2002 and
1,798,951 shares at December 31, 2002, at cost                                 |                                   |   | (1,851,907    | )           |              |   | (1,838,221   | )          
|                                                                                                                                               |                                   |   |               |             |              |   |              |            
|Total stockholders equity                                                                                                                     |                                   |   | 174,610,805   |             |              |   | 179,971,956  |            
|                                                                                                                                               |                                   |   |               |             |              |   |              |            
|Total                                                                                                                                          |                                   | $ | 335,878,201   |             |              | $ | 360,344,136  |            
|                                                                                                                                               |                                   |   |               |             |              |   |              |            

See notes to unaudited condensed
consolidated financial statements.

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

|                                                                    |         |                            |              |                    |            |      |              |            |            | 
|------------------------------------------------------------------- | ------- | -------------------------- | ------------ | ------------------ | ---------- | ---- | ------------ | ---------- | ---------- | 
|                                                                    |         |                            |              | Three Months Ended
|                                                                    |         |                            |              | December 31,      
|                                                                    |         |                            |              |                   
|                                                                    |         |                            |              | 2001               |            | 2002
|                                                                    |         |                            |              |                    |            |     
|Total revenue                                                       |         | $                          | 251,912,948  |                    |            | $    | 249,649,877  |           
|Cost of sales                                                       |         |                            | (160,010,575 | )                  |            |      | (162,634,064 | )         
|                                                                    |         |                            |              |                    |            |     
|                                                                    |         | Gross Profit               |              |                    | 91,902,373 |      |              |            | 87,015,813 | 
|Selling expenses                                                    |         |                            | 58,484,462   |                    |            |      | 66,457,094   |           
|Corporate, general and administrative expenses                      |         |                            | 10,010,406   |                    |            |      | 11,328,114   |           
|Amortization of intangibles                                         |         |                            | 375,250      |                    |            |      | 170,000      |           
|                                                                    |         |                            |              |                    |            |     
|                                                                    |         | Income from operations     |              |                    | 23,032,255 |      |              |            | 9,060,605  | 
|Income from joint venture                                           |         |                            | 71,952       |                    |            |      |             |           
|Interest expense, net                                               |         |                            | (598,792     | )                  |            |      | (386,676     | )         
|                                                                    |         |                            |              |                    |            |     
|                                                                    |         | Income before income taxes |              |                    | 22,505,415 |      |              |            | 8,673,929  | 
|Income taxes                                                        |         |                            | 9,002,166    |                    |            |      | 3,469,572    |           
|                                                                    |         |                            |              |                    |            |     
|NET INCOME                                                          |         | $                          | 13,503,249   |                    |            | $    | 5,204,357    |           
|                                                                    |         |                            |              |                    |            |     
|Basic earnings per share                                            |         | $                          | 0.59         |                    |            | $    | 0.22         |           
|                                                                    |         |                            |              |                    |            |     
|Diluted earnings per share                                          |         | $                          | 0.56         |                    |            | $    | 0.22         |           
|                                                                    |         |                            |              |                    |            |     
|Weighted average shares outstanding:                                |         |                            |              |                    |            |      |              |           
|                                                                    | Basic   |                            |              | 23,020,589         |            |      |              | 23,565,397 |           
|                                                                    |         |                            |              |                    |            |     
|                                                                    | Diluted |                            |              | 24,214,744         |            |      |              | 24,026,667 |           
|                                                                    |         |                            |              |                    |            |     
|                                                                   
|See notes to unaudited condensed consolidated financial statements.

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

|                                                   |                                                                                   |                                              |                                                                     |                                                  |           |                    |             |             |           |             |             |  
|-------------------------------------------------- | --------------------------------------------------------------------------------- | -------------------------------------------- | ------------------------------------------------------------------- | ------------------------------------------------ | --------- | ------------------ | ----------- | ----------- | --------- | ----------- | ----------- | -
|                                                   |                                                                                   |                                              |                                                                     |                                                  |           | Three Months Ended
|                                                   |                                                                                   |                                              |                                                                     |                                                  |           | December 31,      
|                                                   |                                                                                   |                                              |                                                                     |                                                  |           |                   
|                                                   |                                                                                   |                                              |                                                                     |                                                  |           | 2001               |             | 2002       
|                                                   |                                                                                   |                                              |                                                                     |                                                  |           |                    |             |            
|CASH FLOWS FROM OPERATING ACTIVITIES:              |                                                                                   |                                              |                                                                     |                                                  |           |                    |             |            
|                                                   | Net income                                                                        |                                              | $                                                                   | 13,503,249                                       |           |                    |             | 5,204,357   |          
|                                                   | Adjustments to reconcile net income to net cash provided by
operating activities: |                                              |                                                                     |                                                  |           |                    |             |             |          
|                                                   |                                                                                   | Depreciation and amortization                |                                                                     |                                                  | 3,620,052 |                    |             |             | 5,034,142 |            
|                                                   |                                                                                   | Income from joint venture                    |                                                                     |                                                  | (71,952   | )                  |             |             |           |            
|                                                   |                                                                                   | Loss on disposal of equipment                |                                                                     |                                                  |          |                    |             |             | 122,943   |            
|                                                   |                                                                                   | Provision for uncollectible accounts         |                                                                     |                                                  |          |                    |             |             | 32,115    |            
|                                                   |                                                                                   | Deferred income tax provision                |                                                                     |                                                  | 91,056    |                    |             |             | (334,035  | )          
|                                                   |                                                                                   | Changes in operating assets and liabilities: |                                                                     |                                                  |           |                    |             |             |           |            
|                                                   |                                                                                   |                                              | Increase in accounts receivable                                     |                                                  |           | (12,879,706        | )           |             |           | (2,240,845  | )          
|                                                   |                                                                                   |                                              | Increase in inventory                                               |                                                  |           | (13,884,627        | )           |             |           | (18,918,297 | )          
|                                                   |                                                                                   |                                              | (Increase) decrease in prepaid expenses and other assets            |                                                  |           | (520,645           | )           |             |           | 1,012,150   |            
|                                                   |                                                                                   |                                              | Increase in accounts payable and accrued expenses                   |                                                  |           | 14,707,061         |             |             |           | 31,291,577  |            
|                                                   |                                                                                   |                                              | Increase in customer deposits                                       |                                                  |           | 4,049,185          |             |             |           | 1,259,681   |            
|                                                   |                                                                                   |                                              | Increase (decrease) in deferred rent                                |                                                  |           | (9,221             | )           |             |           | 35,732      |            
|                                                   |                                                                                   |                                              | Decrease in deferred warranty                                       |                                                  |           | (153,399           | )           |             |           | (143,104    | )          
|                                                   |                                                                                   |                                              |                                                                     |                                                  |           |                    |             |             |           |             |             |  
|                                                   |                                                                                   |                                              |                                                                     | Net cash provided by operating activities        |           |                    | 8,451,053   |             |           |             | 22,356,416  |  
|                                                   |                                                                                   |                                              |                                                                     |                                                  |           |                    |             |             |           |             |             |  
|CASH FLOWS FROM INVESTING ACTIVITIES:              |                                                                                   |                                              |                                                                     |                                                  |           |                    |             |            
|                                                   | Purchase of property and equipment                                                |                                              |                                                                     | (16,592,214                                      | )         |                    |             | (9,953,225  | )        
|                                                   | Sale of investments                                                               |                                              |                                                                     | 88,687                                           |           |                    |             |            |          
|                                                   | Distibutions from joint venture                                                   |                                              |                                                                     | 300,000                                          |           |                    |             |            |          
|                                                   |                                                                                   |                                              |                                                                     |                                                  |           |                    |             |             |           |             |             |  
|                                                   |                                                                                   |                                              |                                                                     | Net cash used in investing activities            |           |                    | (16,203,527 | )           |           |             | (9,953,225  | )
|                                                   |                                                                                   |                                              |                                                                     |                                                  |           |                    |             |             |           |             |             |  
|CASH FLOWS FROM FINANCING ACTIVITIES:              |                                                                                   |                                              |                                                                     |                                                  |           |                    |             |            
|                                                   | Increase in amount due to bank                                                    |                                              |                                                                     | 6,727,724                                        |           |                    |             | 1,638,607   |          
|                                                   | Net proceeds (payments) of revolving Credit Facility                              |                                              |                                                                     | 8,290,962                                        |           |                    |             | (14,978,072 | )        
|                                                   | Proceeds from options excercised                                                  |                                              |                                                                     | 791,057                                          |           |                    |             | 58,877      |          
|                                                   | Proceeds from employee stock purchase plan                                        |                                              |                                                                     | 81,197                                           |           |                    |             | 97,372      |          
|                                                   |                                                                                   |                                              |                                                                     |                                                  |           |                    |             |             |           |             |             |  
|                                                   |                                                                                   |                                              |                                                                     | Net cash provided (used) by financing activities |           |                    | 15,890,940  |             |           |             | (13,183,216 | )
|                                                   |                                                                                   |                                              |                                                                     |                                                  |           |                    |             |             |           |             |             |  
|INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS   |                                                                                   |                                              | 8,138,466                                                           |                                                  |           |                    | (780,025    | )          
|CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD     |                                                                                   |                                              | 3,277,969                                                           |                                                  |           |                    | 2,282,635   |            
|                                                   |                                                                                   |                                              |                                                                     |                                                  |           |                    |             |             |           |             |             |  
|CASH AND CASH EQUIVALENTS, END OF PERIOD           |                                                                                   | $                                            | 11,416,435                                                          |                                                  |           |                    | 1,502,610   |            
|                                                   |                                                                                   |                                              |                                                                     |                                                  |           |                    |             |             |           |             |             |  
|SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: |                                                                                   |                                              |                                                                     |                                                  |           |                    |             |            
|                                                   | Cash paid during the period for:                                                  |                                              |                                                                     |                                                  |           |                    |             |             |          
|                                                   |                                                                                   | Interest                                     |                                                                     | $                                                | 575,914   |                    |             |             | 397,332   |            
|                                                   |                                                                                   |                                              |                                                                     |                                                  |           |                    |             |             |           |             |             |  
|                                                   |                                                                                   | Taxes                                        |                                                                     | $                                                | 141,169   |                    |             |             | 561,000   |            
|                                                   |                                                                                   |                                              |                                                                     |                                                  |           |                    |             |             |           |             |             |  
|                                                   | Noncash investing activites:                                                      |                                              |                                                                     |                                                  |           |                    |             |             |          
|                                                   |                                                                                   |                                              | Issuance of common stock and assumption of options for acquisitions |                                                  | $         |                   |             |             | $         |            |            
|                                                   |                                                                                   |                                              |                                                                     |                                                  |           |                    |             |             |           |             |             |  

See notes to unaudited condensed consolidated financial statements.

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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 three-month period ended December 31, 2002
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.

3. Earnings per Share

The weighted average shares used in computing basic and diluted net income
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 
|                                                                     |                                               |   | December 31,       
|                                                                     |                                               |   |                    
|                                                                     |                                               |   | 2001                |            | 2002
|                                                                     |                                               |   |                     |            |     
|Basic
Earnings Per Share:                                            |                                               |   |                     |            |      |   |                   |           
|Numerator:                                                           |                                               |   |                     |            |      |   |                   |           
|                                                                     | Net income                                    |   | $                   | 13,503,249 |      |   | $                 | 5,204,357  | 
|Denominator:                                                         |                                               |   |                     |            |      |   |                   |           
|                                                                     | Weighted average common shares outstanding    |   |                     | 23,020,589 |      |   |                   | 23,565,397 | 
|                                                                     |                                               |   |                     |            |      |   |                   |           
|Basic earnings per share                                             |                                               | $ | 0.59                |            |      | $ | 0.22              |           
|                                                                     |                                               |   |                     |            |      |   |                   |           
|Diluted Earnings Per share:                                          |                                               |   |                     |            |      |   |                   |           
|Numerator:                                                           |                                               | $ | 13,503,249          |            |      | $ | 5,204,357         |           
|Denominator:                                                         |                                               |   |                     |            |      |   |                   |           
|                                                                     | Weighted average common shares outstanding    |   |                     | 23,020,589 |      |   |                   | 23,565,397 | 
|                                                                     | Potential common stock equivalent outstanding |   |                     | 1,194,155  |      |   |                   | 461,270    | 
|                                                                     |                                               |   |                     |            |      |   |                   |           
|Total                                                                |                                               |   | 24,214,744          |            |      |   | 24,026,667        |           
|                                                                     |                                               |   |                     |            |      |   |                   |           
|Diluted earnings per share                                           |                                               | $ | 0.56                |            |      | $ | 0.22              |           
|                                                                     |                                               |   |                     |            |      |   |                   |           
|Anti-dilutive options not included in Earnings
per share calculation |                                               |   | 253,766             |            |      |   | 768,533           |           
|                                                                     |                                               |   |                     |            |      |   |                   |           
|Price Range                                                          |                                               |   | $21.000 to  $32.125 |            |      |   | $8.500 to $32.125 |           
|                                                                     |                                               |   |                     |            |      |   |                   |           

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4. Comprehensive Income

Comprehensive income for the three months ended December 31, 2001 and
December 31, 2002 was as follows:

|                                                             |  |                    |            |      |  |   |           | 
|------------------------------------------------------------ |  | ------------------ | ---------- | ---- |  | - | --------- | 
|                                                             |  | Three Months Ended
|                                                             |  | December 31,      
|                                                             |  |                   
|                                                             |  | 2001               |            | 2002
|                                                             |  |                    |            |     
|Net income                                                   |  | $                  | 13,503,249 |      |  | $ | 5,204,357 | 
|Change in fair value of long  term
investments (net of tax) |  |                    | 6,190      |      |  |   | 545       | 
|                                                             |  |                    |            |      |  |   |           | 
|Comprehensive income                                         |  | $                  | 13,509,439 |      |  | $ | 5,204,902 | 
|                                                             |  |                    |            |      |  |   |           | 

5. Intangible Assets

The financial information for acquired intangible assets is as follows:

|                                                                 |  |                          |                         |              |  |                |         |              |  |  |           |  |  |  |         | 
|---------------------------------------------------------------- |  | ------------------------ | ----------------------- | ------------ |  | -------------- | ------- | ------------ |  |  | --------- |  |  |  | ------- | 
|                                                                 |  | As of September 30, 2002 | As of December 31, 2002 |             
|                                                                 |  |                          |                         |             
|                                                                 |  | Gross Carrying           |                         | Accumulated  |  | Gross Carrying |         | Accumulated 
|                                                                 |  | Amount                   |                         | Amortization |  | Amount         |         | Amortization
|                                                                 |  |                          |                         |              |  |                |         |             
|Amortized intagible assets
Non compete agreements and tradenames |  |                          | 3,400,000               |              |  |                | 793,333 |              |  |  | 3,400,000 |  |  |  | 963,333 | 

For the three months ended December 31, 2002, the aggregate amortization
expense was $170,000. 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. Amended Senior Credit Facility

On January 29, 2003, Tweeter signed an amendment to its existing $100
million senior credit facility that, among other revisions, waived one of the
financial covenants to match Tweeters current forecasts for the balance of the
year. The interest rate on the amended credit facility increased 25 basis
points effective with the amendment. The credit facility has a maturity date
of July 31, 2004 and is secured by inventory, and certain other assets. The
unpaid balances under this agreement bear interest at the lenders base rate
plus .25%, or Eurodollar Pricing plus 1.75% if the Company commits the balances
for a period of thirty days or more. The principal balance outstanding at
December 31, 2002 was $35,000,000.

7. Reclassifications

Certain 2001 reclassifications have been made to conform to the 2002
presentation.

8. Subsequent Events

On January 29, 2003, Tweeter received a commitment letter from Fleet
National Bank and Fleet Retail Finance Inc., subject to certain terms and
conditions, for a new three-year senior secured revolving credit facility in
the amount of $110,000,000. Availability going forward will be based on a
borrowing base tied to a percentage of eligible inventory, receivables and real
estate. The anticipated interest rate structure on the new facility
contemplates a rate that ranges from 2.00% to 2.50% margin over the LIBOR rate
or 0% to .25% over the base rate. Additionally, the commitment fee for the
unused portion of the line increased from .25% to .375%. The final agreement
is subject to due diligence procedures and is anticipated to be finalized
before the end of the quarter ending June 30, 2003.

7



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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 174 stores under the
Tweeter, HiFi Buys, Sound Advice, Bang & Olufsen, Electronic Interiors,
Showcase Home Entertainment and Hillcrest names in the New England, Texas,
Southern California, Mid-Atlantic, Chicago, Southeast, Florida and Phoenix
markets.

RESULTS OF OPERATIONS

THREE MONTHS ENDED DECEMBER 31, 2002 AS COMPARED TO THREE MONTHS ENDED DECEMBER
31, 2001

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 $2.3
million, or .9%, to $249.6 million for the three months ended December 31, 2002
from $251.9 million for the three months ended December 31, 2001. Comparable
store sales decreased $24.2 million and were down 10.4%. This excludes the two
Hillcrest stores acquired in March 2002. These stores had a comparable stores
sales decrease of 12.6% for the quarter ended December 31, 2002. The comparable
store sales decrease was offset by $20.2 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 $2.7 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.
Sales of High Definition and High Definition ready projection sets accounted
for 98.3% of projection television sales for the quarter ended December 31,
2002. Sales of digital tubes increased by 19.0% from the same period last year.
Sales of flat panel Plasma and LCD TVs were up 237% for the December 31, 2002
quarter compared to the same quarter last year. The category represented 11.6%
of total revenue for the quarter ended December 31, 2002. The sales of
satellite ready car head-units continued to be an important new technology, as
sales were up 64.2% from the same quarter last year. Satellite ready
head-units represented 47.3% of the head-unit category. Total digital sales
penetration exceeded 58% of total revenue.

Gross Profit.Cost of sales includes merchandise costs, net delivery
costs, distribution costs, home installation labor costs, purchase discounts,
and vendor volume rebates. Cost of sales increased $2.6 million, or 1.6%, to
$162.6 million for the three months ended December 31, 2002 from $160.0 million
for the three months ended December 31, 2001. Gross profit decreased $4.9
million, or 5.3%, to $87.0 million for the three months ended December 31, 2002
from $91.9 million for the three months ended December 31, 2001. The gross
margin percentage decreased 160 basis points to 34.9% for the three months
ended December 31, 2002 from 36.5% for the three months ended December 31,
2001. While pure product margins were up slightly during the quarter ended
December 31, 2002, we received less in vendor rebates and allowances than
planned. This is a result of our under performing on the sales plan with a
number of vendors, which resulted in our missing several sales incentive goals.

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 $8.0
million, or 13.6%, to $66.5 million for the three months ended December 31,
2002 from $58.5 million for the three months ended December 31, 2001. As a
percentage of revenue, selling expenses increased to 26.6% for the three months
ended December 31, 2002 from 23.2% for the three months ended December 31,
2001. This was driven by declines in comparable store sales and increases in
fixed costs as a percentage of sales. Occupancy, depreciation and advertising
expenses together as a percentage of revenue increased 260 basis points for the
three months ended December 31, 2002 compared to the three months ended
December 31, 2001. Compensation costs and credit card fees together increased
60 basis points for the three months ended December 31, 2002 compared to the
same period in 2001.

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 13.2% to $11.3 million for the three months ended December 31, 2002
from $10.0 million for the three months ended December 31, 2001. As a
percentage of total revenue, corporate general and administrative expenses
increased to 4.5% for the three months ended December 31, 2002 from 4.0% for
the three months ended December 31, 2001. Approximately 35 basis points of this
increase was due to increases in compensation costs and professional fees.

Amortization of Intangibles.Amortization of intangibles decreased to
$170,000 for the three months ended December 31, 2002 from $375,000 for the
three months ended December 31, 2001. This was due to the write off of
intangible assets of $3,425,000 recorded in the period ending September 30,
2002.

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Net Interest Expense.Net interest expense decreased to $387,000 for the
three months ended December 31, 2002 from net interest expense of $599,000 for
the three months ended December 31, 2001. This decrease is due primarily to the
reduced borrowings on our revolving credit agreement during the three months
ended December 31, 2002 compared to the balance during the three months ended
December 31, 2001.

Income Taxes.The effective tax rate for the fiscal quarters ended
December 31, 2002 and December 31, 2001 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.

LIQUIDITY AND CAPITAL RESOURCES

Net cash provided by operating activities was $22.4 million for the three
months ended December 31, 2002 compared to $8.5 million for the three months
ended December 31, 2001. Cash provided by operations for the three months
ended December 31, 2002 was primarily the result of net income of $5.2 million,
an increase in accounts payable and accrued expenses of $31.3 million and an
increase in customer deposits of $1.3 million. Cash used in operations
included, primarily, an increase in inventory of $18.9 million and an increase
in accounts receivable of $2.2 million. The adjustments to reconcile net
income to net cash provided by operating activities consisted primarily of $5.0
million for depreciation and amortization, as well as other minor items.

At December 31, 2002, working capital was $73.8 million, compared to $89.3
million at September 30, 2002. The ratio of current assets to current
liabilities was 1.55 to 1 at December 31, 2002 and 1.89 to 1 at September 30,
2002.

Cash used in investing activities for the three months ended December 31,
2002 consisted of capital expenditures of $10.0 million, primarily used for the
building of new stores and the relocation of existing stores.

Net cash used by financing activities during the three months ended
December 31, 2002 was $13.2 million, which was predominantly due to repayment
of long-term debt of $15.0 million and an increase in amount due to bank of
$1.6 million.

Tweeter has a three-year senior credit facility, which provides the
Company the ability to borrow up to $100 million. The Company had $65,000,000
available on its revolving credit facility at December 31, 2002, and there was
$35,000,000 outstanding at December 31, 2002. The unpaid balances under this
agreement bear interest at the lenders base rate, or Eurodollar pricing plus
1.75% if the Company commits the balances for a period of thirty days or more.

On January 29, 2003, Tweeter signed an amendment to its existing $100
million senior credit facility that, among other revisions, waived a breach of
one of the financial covenants and adjusted the same financial covenant to
match Tweeters current forecasts. The interest rate on the amended credit
facility increased 25 basis points effective with the amendment. The credit
facility has a maturity date of July 31, 2004 and is secured by inventory and
certain other assets.

On January 29, 2003, Tweeter received a commitment letter from Fleet
National Bank and Fleet Retail Finance Inc., subject to certain terms and
conditions, for a new three-year senior secured revolving credit facility in
the amount of $110,000,000 which will replace the $100 million facility
described above. Availability going forward will be based on a borrowing base
tied to a percentage of eligible inventory, receivables and real estate. The
anticipated interest rate structure on the new facility contemplates a rate
that ranges from 2.00% to 2.50% margin over the LIBOR rate or 0% to .25% over
the base rate. Additionally, the commitment fee for the unused portion of the
line would increase from .25% to .375%. The final agreement is subject to due
diligence procedures and is anticipated to be finalized before the end of the
quarter ending June 30, 2003.

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.

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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, 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, 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 December 31, 2002, the Company had $35,000,000 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 $120,000 annual impact on
the Companys earnings and cash flows.




ITEM 4. CONTROLS AND PROCEDURES

The Companys chief executive officer and chief financial officer, after
evaluating the effectiveness of the Companys disclosure controls and
procedures (as defined in the Securities Exchange Act of 1934 Rules 13a-14(c)
and 15-d-14(c)) as of December 31, 2002 (the Evaluation Date), have concluded
that as of the Evaluation Date, the Companys disclosure controls and
procedures were adequate and designed to ensure that material information
relating to the Company (including its consolidated subsidiary) is made known
to them by others within the Company. There were no significant changes in the
Companys internal controls or, to the Companys knowledge, in other factors
that could significantly affect the Companys disclosure controls and
procedures subsequent to the Evaluation Date.

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PART II. OTHER INFORMATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

10.1 Fifth Amendment to Credit Agreement, dated as of January 29, 2003,
among the registrant, Fleet National Bank and the other parties thereto.



| |                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------
| | 99.1 Certification pursuant to 18 U.S.C. Section 1350, As adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002



| |                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------
| | 99.2 Certification pursuant to 18 U.S.C. Section 1350, As adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(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,
Senior Vice President and Chief Financial Officer

Date: February 14, 2003

11



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CERTIFICATIONS

I, Jeffrey S. Stone, certify that:



|  
|--
|1.
|  
|2.
|  
|3.
|  
|4.



| | a) |  | designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | evaluated the effectiveness of the registrants disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the Evaluation Date); and                                                                                                  
|
| | c) |  | presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        



|5. |  | The registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to
record, process, summarize and report financial data and have identified
for the registrants auditors any material weaknesses in internal
controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal
controls; and                                                                                                                                        



|6. |  | The registrants other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                        |  |                                                           
|----------------------- |  | ----------------------------------------------------------
|                        |  |                                                           
|Date: February 14, 2003 |  | /s/ Jeffrey S. Stone
President and Chief Executive Officer

12



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##### Table of Contents



I, Joseph G. McGuire, certify that:



|  
|--
|1.
|  
|2.
|  
|3.
|  
|4.



| | a) |  | designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | evaluated the effectiveness of the registrants disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the Evaluation Date); and                                                                                                  
|
| | c) |  | presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        



|5. |  | The registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to
record, process, summarize and report financial data and have identified
for the registrants auditors any material weaknesses in internal
controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal
controls; and                                                                                                                                        



|6. |  | The registrants other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                        |  |                                                                        
|----------------------- |  | -----------------------------------------------------------------------
|                        |  |                                                                        
|Date: February 14, 2003 |  |                                                                        
|                        |  | /s/ Joseph G. McGuire
Senior Vice President and Chief Financial Officer

13