##### Table of Contents









SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


Form 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934


For the quarterly period ended June 30,
2001

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.)

10 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 [X] No [ ]

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 August 3, 2001
|                             |  |                              
|Common Stock, $.01 par value |  | 23,149,758                   



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---

TABLE OF CONTENTS



|                              |                                                                                                            |                                                                |  |  |  |  |  | 
|----------------------------- | ---------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------- |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION
|                              | ITEM 1. Financial Statements (Unaudited)                                                                  
|                              |                                                                                                            | CONSOLIDATED BALANCE SHEETS                                   
|                              |                                                                                                            | CONSOLIDATED STATEMENTS OF OPERATIONS                         
|                              |                                                                                                            | CONSOLIDATED STATEMENTS OF CASH FLOWS                         
|                              |                                                                                                            | NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|                              | ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION
|                              | ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                        
|PART II.OTHER INFORMATION    
|                              | ITEM 5.OTHER INFORMATION                                                                                  
|                              | ITEM 6.EXHIBITS AND REPORTS ON FORM 8-K                                                                   
|SIGNATURES                   



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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)                                                                  |  |      | 3  | 
|        
|        
|        
|        
|         |  | Consolidated Balance Sheets as of September 30,
	2000 and June 30, 2001                           |  |      | 3  | 
|        
|        
|        
|        
|         |  | Consolidated Statements of Operations For the
	Three and Nine Months Ended June 30, 2000 and 2001 |  |      | 4  | 
|        
|        
|        
|        
|         |  | Consolidated Statements of Cash Flows For the
	Nine Months Ended June 30, 2000 and 2001           |  |      | 5  | 
|        
|        
|        
|        
|         |  | Notes to Unaudited Condensed Consolidated
	Financial Statements                                   |  |      | 6  | 
|        
|        
|        
|        
|Item  2. |  | Managements Discussion and Analysis of
	Financial Condition and Results of Operations            |  |      | 11 | 
|        
|        
|        
|        
|Item  3. |  | Quantitative and Qualitative Disclosures About
	Market Risk                                       |  |      | 15 | 
|        
|        
|        
|        
|Part II. |  | OTHER INFORMATION                                                                                 |  |      | 16 | 

2



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##### Table of Contents






PART I.  FINANCIAL
INFORMATION






ITEM 1.  Financial Statements
(Unaudited)





TWEETER HOME ENTERTAINMENT GROUP, INC. AND
SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

|                                      |                                                                                                                                              |                                   |   |             |             |  |   |             |             | 
|------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------- | - | ----------- | ----------- |  | - | ----------- | ----------- | 
|                                      |                                                                                                                                              | September 30,                     |   | June 30,   
|                                      |                                                                                                                                              | 2000                              |   | 2001       
|                                      |                                                                                                                                              |                                   |   |            
|                                      |                                                                                                                                              |                                   |   | (Unaudited)
|                                     
|                                     
|                                     
|                                     
|Assets                               
|                                     
|                                     
|                                     
|                                     
|Current Assets:                       |                                                                                                                                              |                                   |   |             |             |  |   |            
|                                     
|                                     
|                                     
|                                     
|                                      | Cash and cash equivalents                                                                                                                    |                                   | $ | 34,292,555  |             |  | $ | 26,517,573  |            
|                                     
|                                     
|                                     
|                                     
|                                      | Accounts receivable, net of allowance for
	doubtful accounts of $800,000 at September 30, 2000 and
	$844,000 at June 30, 2001                |                                   |   | 14,662,914  |             |  |   | 22,973,098  |            
|                                     
|                                     
|                                     
|                                     
|                                      | Inventory                                                                                                                                    |                                   |   | 85,967,261  |             |  |   | 81,567,454  |            
|                                     
|                                     
|                                     
|                                     
|                                      | Deferred tax assets                                                                                                                          |                                   |   | 2,424,294   |             |  |   | 2,588,127   |            
|                                     
|                                     
|                                     
|                                     
|                                      | Prepaid expenses and other current assets                                                                                                    |                                   |   | 1,578,893   |             |  |   | 3,933,741   |            
|                                      |                                                                                                                                              |                                   |   |             |             |  |   |            
|                                      |                                                                                                                                              | Total current assets              |   |             | 138,925,917 |  |   |             | 137,579,993 | 
|                                     
|                                     
|                                     
|                                     
|                                      | Investment in joint venture                                                                                                                  |                                   |   | 3,214,451   |             |  |   | 3,446,508   |            
|                                     
|                                     
|                                     
|                                     
|                                      | Long-term investments                                                                                                                        |                                   |   | 1,653,109   |             |  |   | 10,189,681  |            
|                                     
|                                     
|                                     
|                                     
|                                      | Property and equipment, net                                                                                                                  |                                   |   | 51,937,902  |             |  |   | 76,695,615  |            
|                                     
|                                     
|                                     
|                                     
|                                      | Other assets, net                                                                                                                            |                                   |   | 1,262,874   |             |  |   | 521,881     |            
|                                     
|                                     
|                                     
|                                     
|                                      | Goodwill, net                                                                                                                                |                                   |   | 38,043,290  |             |  |   | 51,500,889  |            
|                                      |                                                                                                                                              |                                   |   |             |             |  |   |            
|                                      |                                                                                                                                              | Total                             |   | $           | 235,037,543 |  |   | $           | 279,934,567 | 
|                                      |                                                                                                                                              |                                   |   |             |             |  |   |            
|                                     
|                                     
|                                     
|                                     
|Liabilities and Stockholders
	Equity
|                                     
|                                     
|                                     
|                                     
|Current Liabilities:                  |                                                                                                                                              |                                   |   |             |             |  |   |            
|                                     
|                                     
|                                     
|                                     
|                                      | Current portion of long-term debt                                                                                                            |                                   | $ | 63,074      |             |  | $ | 69,229      |            
|                                     
|                                     
|                                     
|                                     
|                                      | Amount due to bank                                                                                                                           |                                   |   | 8,865,870   |             |  |   | 5,435,449   |            
|                                     
|                                     
|                                     
|                                     
|                                      | Accounts payable                                                                                                                             |                                   |   | 21,499,910  |             |  |   | 30,994,551  |            
|                                     
|                                     
|                                     
|                                     
|                                      | Accrued expenses                                                                                                                             |                                   |   | 19,509,166  |             |  |   | 29,105,680  |            
|                                     
|                                     
|                                     
|                                     
|                                      | Customer deposits                                                                                                                            |                                   |   | 5,153,801   |             |  |   | 6,778,542   |            
|                                     
|                                     
|                                     
|                                     
|                                      | Deferred warranty                                                                                                                            |                                   |   | 294,477     |             |  |   | 726,942     |            
|                                      |                                                                                                                                              |                                   |   |             |             |  |   |            
|                                      |                                                                                                                                              | Total current liabilities         |   |             | 55,386,298  |  |   |             | 73,110,393  | 
|                                      |                                                                                                                                              |                                   |   |             |             |  |   |            
|Long-Term Debt:                       |                                                                                                                                              |                                   |   |             |             |  |   |            
|                                     
|                                     
|                                     
|                                     
|                                      | Notes payable to bank                                                                                                                        |                                   |   | 13,638      |             |  |   | 3,310       |            
|                                      |                                                                                                                                              |                                   |   |             |             |  |   |            
|Other Long-Term Liabilities:          |                                                                                                                                              |                                   |   |             |             |  |   |            
|                                     
|                                     
|                                     
|                                     
|                                      | Rent related accruals                                                                                                                        |                                   |   | 3,489,645   |             |  |   | 4,065,640   |            
|                                     
|                                     
|                                     
|                                     
|                                      | Deferred warranty                                                                                                                            |                                   |   | 72,504      |             |  |   | 725,086     |            
|                                     
|                                     
|                                     
|                                     
|                                      | Deferred tax liabilities                                                                                                                     |                                   |   | 1,124,656   |             |  |   | 3,129,259   |            
|                                      |                                                                                                                                              |                                   |   |             |             |  |   |            
|                                      |                                                                                                                                              | Total other long-term liabilities |   |             | 4,686,805   |  |   |             | 7,919,985   | 
|                                      |                                                                                                                                              |                                   |   |             |             |  |   |            
|                                      |                                                                                                                                              | Total liabilities                 |   |             | 60,086,741  |  |   |             | 81,033,688  | 
|                                      |                                                                                                                                              |                                   |   |             |             |  |   |            
|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; 20,251,734 shares issued at September 30, 2000
	and 20,642,498 at June 30, 2001 |                                   |   | 202,517     |             |  |   | 206,430     |            
|                                     
|                                     
|                                     
|                                     
|                                      | Additional paid in capital                                                                                                                   |                                   |   | 144,538,059 |             |  |   | 149,009,034 |            
|                                     
|                                     
|                                     
|                                     
|                                      | Accumulated other comprehensive income                                                                                                       |                                   |   | 176,208     |             |  |   | 3,593,323   |            
|                                     
|                                     
|                                     
|                                     
|                                      | Retained earnings                                                                                                                            |                                   |   | 31,928,911  |             |  |   | 47,976,401  |            
|                                      |                                                                                                                                              |                                   |   |             |             |  |   |            
|                                      |                                                                                                                                              | Total                             |   |             | 176,845,695 |  |   |             | 200,785,188 | 
|                                     
|                                     
|                                     
|                                     
|                                      | Less treasury stock: 1,879,911 shares at
	September 30, 2000 and 1,864,791 shares at June 30,
	2001, at cost                                 |                                   |   | (1,894,893  | )           |  |   | (1,884,309  | )          
|                                      |                                                                                                                                              |                                   |   |             |             |  |   |            
|                                      |                                                                                                                                              | Total stockholders equity        |   |             | 174,950,802 |  |   |             | 198,900,879 | 
|                                      |                                                                                                                                              |                                   |   |             |             |  |   |            
|                                      |                                                                                                                                              | Total                             |   | $           | 235,037,543 |  |   | $           | 279,934,567 | 
|                                      |                                                                                                                                              |                                   |   |             |             |  |   |            

See notes to unaudited condensed consolidated
financial statements.

3



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##### Table of Contents






TWEETER HOME ENTERTAINMENT GROUP, INC. AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF
OPERATIONS

(Unaudited)


|                                               |         |                    |             |                   |            |      |             |            |            |   |              |            |             |   |              |            |             | 
|---------------------------------------------- | ------- | ------------------ | ----------- | ----------------- | ---------- | ---- | ----------- | ---------- | ---------- | - | ------------ | ---------- | ----------- | - | ------------ | ---------- | ----------- | 
|                                               |         |                    |             |                  
|                                               |         | Three Months Ended |             | Nine Months Ended
|                                               |         | June 30,           |             | June 30,         
|                                               |         |                    |             |                  
|                                               |         | 2000               |             | 2001              |            | 2000 |             | 2001      
|                                               |         |                    |             |                   |            |      |             |           
|Total revenue                                  |         | $                  | 93,486,226  |                   |            | $    | 110,038,056 |            |            | $ | 303,072,003  |            |             | $ | 389,839,141  |           
|                                              
|                                              
|                                              
|                                              
|Cost of sales                                  |         |                    | (59,528,277 | )                 |            |      | (70,017,266 | )          |            |   | (191,588,534 | )          |             |   | (247,559,541 | )         
|                                               |         |                    |             |                   |            |      |             |            |            |   |              |            |             |   |              |           
|                                               |         | Gross Profit       |             |                   | 33,957,949 |      |             |            | 40,020,790 |   |              |            | 111,483,469 |   |              |            | 142,279,600 | 
|                                              
|                                              
|                                              
|                                              
|Selling expenses                               |         |                    | 25,765,427  |                   |            |      | 29,984,767  |            |            |   | 75,551,532   |            |             |   | 97,884,116   |           
|                                              
|                                              
|                                              
|                                              
|Corporate, general and administrative expenses |         |                    | 4,979,969   |                   |            |      | 5,739,587   |            |            |   | 14,213,470   |            |             |   | 17,895,576   |           
|                                              
|                                              
|                                              
|                                              
|Amortization of goodwill                       |         |                    | 433,650     |                   |            |      | 521,137     |            |            |   | 1,103,192    |            |             |   | 1,481,137    |           
|                                               |         |                    |             |                   |            |      |             |            |            |   |              |            |             |   |              |           
|Income from operations                         |         |                    | 2,778,903   |                   |            |      | 3,775,299   |            |            |   | 20,615,275   |            |             |   | 25,018,771   |           
|                                              
|                                              
|                                              
|                                              
|Income from joint venture                      |         |                    | 168,545     |                   |            |      | 92,877      |            |            |   | 366,879      |            |             |   | 777,057      |           
|                                              
|                                              
|                                              
|                                              
|Interest income, net                           |         |                    | 528,149     |                   |            |      | 248,318     |            |            |   | 540,532      |            |             |   | 949,989      |           
|                                               |         |                    |             |                   |            |      |             |            |            |   |              |            |             |   |              |           
|Income before income taxes                     |         |                    | 3,475,597   |                   |            |      | 4,116,494   |            |            |   | 21,522,686   |            |             |   | 26,745,817   |           
|                                              
|                                              
|                                              
|                                              
|Income taxes                                   |         |                    | 1,390,238   |                   |            |      | 1,650,550   |            |            |   | 8,609,041    |            |             |   | 10,698,327   |           
|                                               |         |                    |             |                   |            |      |             |            |            |   |              |            |             |   |              |           
|NET INCOME                                     |         | $                  | 2,085,359   |                   |            | $    | 2,465,944   |            |            | $ | 12,913,645   |            |             | $ | 16,047,490   |           
|                                               |         |                    |             |                   |            |      |             |            |            |   |              |            |             |   |              |           
|Basic earnings per share                       |         | $                  | 0.12        |                   |            | $    | 0.13        |            |            | $ | 0.78         |            |             | $ | 0.86         |           
|                                               |         |                    |             |                   |            |      |             |            |            |   |              |            |             |   |              |           
|Diluted earnings per share                     |         | $                  | 0.11        |                   |            | $    | 0.13        |            |            | $ | 0.71         |            |             | $ | 0.83         |           
|                                               |         |                    |             |                   |            |      |             |            |            |   |              |            |             |   |              |           
|Weighted average shares outstanding:           |         |                    |             |                   |            |      |             |            |            |   |              |            |             |   |              |           
|                                              
|                                              
|                                              
|                                              
|                                               | Basic   |                    |             | 17,862,213        |            |      |             | 18,717,060 |            |   |              | 16,576,536 |             |   |              | 18,609,033 |            
|                                               |         |                    |             |                   |            |      |             |            |            |   |              |            |             |   |              |           
|                                               | Diluted |                    |             | 19,432,720        |            |      |             | 19,396,276 |            |   |              | 18,277,504 |             |   |              | 19,283,544 |            
|                                               |         |                    |             |                   |            |      |             |            |            |   |              |            |             |   |              |           

See notes to unaudited condensed consolidated
financial statements.

4



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##### Table of Contents






TWEETER HOME ENTERTAINMENT GROUP, INC. AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH
FLOWS

(Unaudited)


|                                                    |                                                                                    |                            |                                                                                            |                                                               |           |           |             |             |           |           |             |  
|--------------------------------------------------- | ---------------------------------------------------------------------------------- | -------------------------- | ------------------------------------------------------------------------------------------ | ------------------------------------------------------------- | --------- | --------- | ----------- | ----------- | --------- | --------- | ----------- | -
|                                                    |                                                                                    |                           
|                                                    |                                                                                    | Nine months ended June 30,
|                                                    |                                                                                    |                           
|                                                    |                                                                                    | 2000                       |                                                                                            | 2001                                                         
|                                                    |                                                                                    |                            |                                                                                            |                                                              
|CASH FLOWS FROM OPERATING
	ACTIVITIES:              |                                                                                    |                            |                                                                                            |                                                               |           |           |             |            
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Net income                                                                         |                            | $                                                                                          | 12,913,644                                                    |           |           | $           | 16,047,490  |          
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Adjustments to reconcile net income to net cash
	provided by operating activities: |                            |                                                                                            |                                                               |           |           |             |             |          
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    |                                                                                    |                            | Depreciation and amortization                                                              |                                                               |           | 5,185,673 |             |             |           | 7,570,232 |            
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    |                                                                                    |                            | Income from joint venture                                                                  |                                                               |           | (366,879  | )           |             |           | (777,057  | )          
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    |                                                                                    |                            | Gain on disposal of equipment                                                              |                                                               |           | (25,800   | )           |             |           | (10,000   | )          
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    |                                                                                    |                            | Provision for uncollectible accounts                                                       |                                                               |           |          |             |             |           | 67,500    |            
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    |                                                                                    |                            | Deferred income tax benefit                                                                |                                                               |           |          |             |             |           | (437,308  | )          
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    |                                                                                    |                            | Changes in operating assets and liabilities, net
	of effects from acquisition of business: |                                                               |           |           |             |             |           |           |            
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    |                                                                                    |                            |                                                                                            | Increase in accounts receivable                               |           |           | (3,461,374  | )           |           |           | (6,769,615  | )
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    |                                                                                    |                            |                                                                                            | (Increase) decrease in inventory                              |           |           | (6,039,418  | )           |           |           | 12,277,580  |  
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    |                                                                                    |                            |                                                                                            | Increase (decrease) in prepaid expenses and
	other assets     |           |           | 453,419     |             |           |           | (1,569,587  | )
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    |                                                                                    |                            |                                                                                            | Increase (decrease) in accounts payable and
	accrued expenses |           |           | (688,711    | )           |           |           | 11,892,920  |  
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    |                                                                                    |                            |                                                                                            | (Increase) decrease in customer deposits                      |           |           | (778,575    | )           |           |           | 716,715     |  
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    |                                                                                    |                            |                                                                                            | Increase in deferred rent                                     |           |           | 357,551     |             |           |           | 575,995     |  
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    |                                                                                    |                            |                                                                                            | Decrease in deferred warranty                                 |           |           | (536,650    | )           |           |           | (808,679    | )
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    |                                                                                    |                            |                                                                                            | Decrease in other liabilities                                 |           |           | (279,500    | )           |           |           |            |  
|                                                    |                                                                                    |                            |                                                                                            |                                                               |           |           |             |            
|                                                    |                                                                                    |                            |                                                                                            | Net cash provided by operating activities                     |           |           | 6,733,380   |             |           |           | 38,776,186  |  
|                                                    |                                                                                    |                            |                                                                                            |                                                               |           |           |             |            
|CASH FLOWS FROM INVESTING
	ACTIVITIES:              |                                                                                    |                            |                                                                                            |                                                               |           |           |             |            
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Purchase of property and equipment                                                 |                            |                                                                                            | (12,685,077                                                   | )         |           |             | (28,650,896 | )        
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Proceeds from sale of property and equipment                                       |                            |                                                                                            | 25,800                                                        |           |           |             | 10,000      |          
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Purchase of marketable equity securities                                           |                            |                                                                                            |                                                              |           |           |             | (2,841,379  | )        
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Acquisition of businesses                                                          |                            |                                                                                            | (2,435,072                                                    | )         |           |             | (10,933,971 | )        
|                                                    |                                                                                    |                            |                                                                                            |                                                               |           |           |             |            
|                                                    |                                                                                    |                            |                                                                                            | Net cash used in investing activities                         |           |           | (15,094,349 | )           |           |           | (42,416,246 | )
|                                                    |                                                                                    |                            |                                                                                            |                                                               |           |           |             |            
|CASH FLOWS FROM FINANCING
	ACTIVITIES:              |                                                                                    |                            |                                                                                            |                                                               |           |           |             |            
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Increase (decrease) in amount due to bank                                          |                            |                                                                                            | 46,810                                                        |           |           |             | (3,685,372  | )        
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Payments of long-term debt                                                         |                            |                                                                                            | (8,126,760                                                    | )         |           |             | (2,037,456  | )        
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Issuance of common stock, net of issuance cost                                     |                            |                                                                                            | 60,011,256                                                    |           |           |             | 846,520     |          
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Other equity transactions                                                          |                            |                                                                                            | 1,574,399                                                     |           |           |             | 241,386     |          
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Investment in joint venture                                                        |                            |                                                                                            | (2,745,033                                                    | )         |           |             | 500,000     |          
|                                                    |                                                                                    |                            |                                                                                            |                                                               |           |           |             |            
|                                                    |                                                                                    |                            |                                                                                            | Net cash provided (used) by financing
	activities             |           |           | 50,760,672  |             |           |           | (4,134,922  | )
|                                                    |                                                                                    |                            |                                                                                            |                                                               |           |           |             |            
|INCREASE (DECREASE) IN CASH AND CASH
	EQUIVALENTS   |                                                                                    |                            | 42,399,703                                                                                 |                                                               |           |           | (7,774,982  | )          
|                                                   
|                                                   
|                                                   
|                                                   
|CASH AND CASH EQUIVALENTS, BEGINNING OF
	PERIOD     |                                                                                    |                            | 999,495                                                                                    |                                                               |           |           | 34,292,555  |            
|                                                    |                                                                                    |                            |                                                                                            |                                                               |           |           |             |            
|CASH AND CASH EQUIVALENTS, END OF
	PERIOD           |                                                                                    | $                          | 43,399,198                                                                                 |                                                               |           | $         | 26,517,573  |            
|                                                    |                                                                                    |                            |                                                                                            |                                                               |           |           |             |            
|SUPPLEMENTAL DISCLOSURES OF CASH FLOW
	INFORMATION: |                                                                                    |                            |                                                                                            |                                                               |           |           |             |            
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Cash paid during the period for:                                                   |                            |                                                                                            |                                                               |           |           |             |             |          
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    |                                                                                    | Interest                   |                                                                                            | $                                                             | 375,944   |           |             | $           | 11,527    |          
|                                                    |                                                                                    |                            |                                                                                            |                                                               |           |           |             |            
|                                                    |                                                                                    | Taxes                      |                                                                                            | $                                                             | 6,831,947 |           |             | $           | 8,611,431 |          
|                                                    |                                                                                    |                            |                                                                                            |                                                               |           |           |             |            

See notes to unaudited condensed 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, 2000.

2.  Accounting Policies

The unaudited consolidated financial statements
of Tweeter have been prepared in accordance with accounting
principles generally accepted in the United States of America.
In the opinion of management, all adjustments (consisting only
of normal recurring adjustments) considered necessary for a fair
presentation of the interim consolidated financial statements
have been included. Operating results for the nine-month period
ended June 30, 2001 are not necessarily indicative of the
results that may be expected for the fiscal year ending
September 30, 2001. Tweeter typically records its highest
revenue and earnings in the first fiscal quarter.

3.  Earnings per Share

Tweeter computed earnings per share in accordance
with Statement of Financial Accounting Standards
(SFAS) No. 128, Earnings Per Share.
Basic earnings per share is calculated based on the weighted
average number of common shares outstanding. Diluted earnings
per share is based on the weighted average number of common
shares outstanding, adjusted for the nominal issuance of certain
warrants and dilutive potential common shares (common stock
options and warrants).

The following is a reconciliation of the
numerators and denominators of the basic and diluted earnings
per share:

|                            |                                            |                    |           |                   |            |      |           |            |            |   |            |            |            |   |            |            |            | 
|--------------------------- | ------------------------------------------ | ------------------ | --------- | ----------------- | ---------- | ---- | --------- | ---------- | ---------- | - | ---------- | ---------- | ---------- | - | ---------- | ---------- | ---------- | 
|                            |                                            |                    |           |                  
|                            |                                            | Three Months Ended |           | Nine Months Ended
|                            |                                            | June 30,           |           | June 30,         
|                            |                                            |                    |           |                  
|                            |                                            | 2000               |           | 2001              |            | 2000 |           | 2001      
|                            |                                            |                    |           |                   |            |      |           |           
|Basic Earnings Per Share:   |                                            |                    |           |                   |            |      |           |            |            |   |            |            |            |   |            |           
|                           
|                           
|                           
|                           
|Numerator:                  |                                            |                    |           |                   |            |      |           |            |            |   |            |            |            |   |            |           
|                           
|                           
|                           
|                           
|                            | Net income                                 |                    | $         | 2,085,359         |            |      | $         | 2,465,944  |            |   | $          | 12,913,645 |            |   | $          | 16,047,490 |           
|                           
|                           
|                           
|                           
|Denominator:                |                                            |                    |           |                   |            |      |           |            |            |   |            |            |            |   |            |           
|                           
|                           
|                           
|                           
|                            | Weighted average common shares outstanding |                    |           | 17,862,213        |            |      |           | 18,717,060 |            |   |            | 16,576,536 |            |   |            | 18,609,033 |           
|                            |                                            |                    |           |                   |            |      |           |            |            |   |            |            |            |   |            |           
|Basic earnings per share    |                                            | $                  | 0.12      |                   |            | $    | 0.13      |            |            | $ | 0.78       |            |            | $ | 0.86       |           
|                            |                                            |                    |           |                   |            |      |           |            |            |   |            |            |            |   |            |           
|Diluted Earnings Per Share: |                                            |                    |           |                   |            |      |           |            |            |   |            |            |            |   |            |           
|                           
|                           
|                           
|                           
|Numerator:                  |                                            | $                  | 2,085,359 |                   |            | $    | 2,465,944 |            |            | $ | 12,913,645 |            |            | $ | 16,047,490 |           
|                           
|                           
|                           
|                           
|Denominator:                |                                            |                    |           |                   |            |      |           |            |            |   |            |            |            |   |            |           
|                           
|                           
|                           
|                           
|                            | Weighted average shares outstanding        |                    |           | 17,862,213        |            |      |           | 18,717,060 |            |   |            | 16,576,536 |            |   |            | 18,609,033 |           
|                           
|                           
|                           
|                           
|                            | Potential common stock outstanding         |                    |           | 1,570,507         |            |      |           | 679,216    |            |   |            | 1,700,968  |            |   |            | 674,511    |           
|                            |                                            |                    |           |                   |            |      |           |            |            |   |            |            |            |   |            |           
|                            |                                            | Total              |           |                   | 19,432,720 |      |           |            | 19,396,276 |   |            |            | 18,277,504 |   |            |            | 19,283,544 | 
|                            |                                            |                    |           |                   |            |      |           |            |            |   |            |            |            |   |            |           
|Diluted earnings per share  |                                            | $                  | 0.11      |                   |            | $    | 0.13      |            |            | $ | 0.71       |            |            | $ | 0.83       |           
|                            |                                            |                    |           |                   |            |      |           |            |            |   |            |            |            |   |            |           

6



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##### Table of Contents



TWEETER HOME ENTERTAINMENT GROUP, INC. AND
SUBSIDIARIES


NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

4.  Comprehensive Income

Comprehensive income for the three and nine
months ended June 30, 2000 and June 30, 2001 was as
follows:

|                                                            |  |                    |           |                   |  |      |           |      |  |   |            |   |  |   |            | 
|----------------------------------------------------------- |  | ------------------ | --------- | ----------------- |  | ---- | --------- | ---- |  | - | ---------- | - |  | - | ---------- | 
|                                                            |  |                    |           |                  
|                                                            |  | Three Months Ended |           | Nine Months Ended
|                                                            |  | June 30,           |           | June 30,         
|                                                            |  |                    |           |                  
|                                                            |  | 2000               |           | 2001              |  | 2000 |           | 2001
|                                                            |  |                    |           |                   |  |      |           |     
|Net income                                                  |  | $                  | 2,085,359 |                   |  | $    | 2,465,944 |      |  | $ | 12,913,631 |   |  | $ | 16,047,490 | 
|                                                           
|                                                           
|                                                           
|                                                           
|Change in fair value of long-term investments
	(net of tax) |  |                    | (324,901  | )                 |  |      | 3,461,424 |      |  |   | (14,023    | ) |  |   | 3,417,115  | 
|                                                            |  |                    |           |                   |  |      |           |      |  |   |            |   |  |   |            | 
|Comprehensive income                                        |  | $                  | 1,760,458 |                   |  | $    | 5,927,368 |      |  | $ | 12,899,608 |   |  | $ | 19,464,605 | 
|                                                            |  |                    |           |                   |  |      |           |      |  |   |            |   |  |   |            | 

The long-term investments primarily are comprised
of an investment in Sound Advice, Inc. of 7.6% of their total
outstanding shares as of June 30, 2001.

5.  Douglas TV Acquisition

On October 2, 2000, Tweeter completed the
acquisition of the retail operations of Douglas TV, Inc.
(Douglas TV). Douglas TV has four stores in the
greater Chicago area, and reported retail revenue of
approximately $30 million for calendar 1999. This
transaction is being accounted for as a purchase. Tweeters
total purchase price was paid in cash and shares of its common
stock from its shelf registration filed on April 13, 1999
with the Securities and Exchange Commission. The results of
operations for the acquired entity for the nine months and three
months ended June 30, 2001 would not have been significant
to the consolidated operations of Tweeter. Accordingly, pro
forma information has not been presented. The allocation of the
purchase price, which is preliminary, resulted in goodwill to
date of approximately $5,073,000, which is being amortized over
twenty years using the straight-line method. The approximate net
assets acquired at fair market value on October 2, 2000
were allocated as follows:

|                                                                                                                                          |                      |   |            |           | 
|----------------------------------------------------------------------------------------------------------------------------------------- | -------------------- | - | ---------- | --------- | 
|                                                                                                                                         
|                                                                                                                                         
|                                                                                                                                         
|                                                                                                                                         
|Inventory                                                                                                                                 |                      | $ | 4,124,000  |          
|                                                                                                                                         
|                                                                                                                                         
|                                                                                                                                         
|                                                                                                                                         
|Property and equipment                                                                                                                    |                      |   | 1,108,000  |          
|                                                                                                                                         
|                                                                                                                                         
|                                                                                                                                         
|                                                                                                                                         
|Accounts receivable/Prepaids                                                                                                              |                      |   | 488,000    |          
|                                                                                                                                         
|                                                                                                                                         
|                                                                                                                                         
|                                                                                                                                         
|Other current liabilities                                                                                                                 |                      |   | (2,506,000 | )        
|                                                                                                                                         
|                                                                                                                                         
|                                                                                                                                         
|                                                                                                                                         
|Notes Payable                                                                                                                             |                      |   | (200,000   | )        
|                                                                                                                                         
|                                                                                                                                         
|                                                                                                                                         
|                                                                                                                                         
|Deferred Warranty                                                                                                                         |                      |   | (1,894,000 | )        
|                                                                                                                                          |                      |   |            |          
|                                                                                                                                          | Net assets purchased |   |            | 1,120,000 | 
|                                                                                                                                         
|                                                                                                                                         
|                                                                                                                                         
|                                                                                                                                         
|Total purchase price and related costs (including
	the issuance of 36,849 shares of common stock with a fair market
	value of $1,330,000) |                      |   | 6,193,000  |          
|                                                                                                                                          |                      |   |            |          
|                                                                                                                                          | Goodwill             |   | $          | 5,073,000 | 
|                                                                                                                                          |                      |   |            |          

6.  Big Screen City
Acquisition

On May 1, 2001, Tweeter completed the
acquisition of The Video Scene, Inc. dba Big Screen City,
located in the greater San Diego, CA and Temecula, CA areas.
(Big Screen City). Big Screen City has four stores
and reported retail revenue of approximately $16 million
for calendar 2000. This transaction is being accounted for as a
purchase. Tweeters total purchase price was paid in cash
and 50,973 shares of its common stock from its shelf
registration filed on April 13, 1999 with the Securities
and Exchange Commission. The results of operations for the
acquired entity for the nine months and three months ended
June 30, 2001 would not have been significant to the
consolidated operations of Tweeter. Accordingly, pro forma
information has

7



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##### Table of Contents



TWEETER HOME ENTERTAINMENT GROUP, INC. AND
SUBSIDIARIES


NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

not been presented. The allocation of the
purchase price, which is preliminary, resulted in goodwill to
date of approximately $5,596,000, which is being amortized over
twenty years using the straight-line method. The approximate net
liabilities assumed at fair market value on May 1, 2001
were allocated as follows:

|                                                                                                                                          |                         |   |            |           |  
|----------------------------------------------------------------------------------------------------------------------------------------- | ----------------------- | - | ---------- | --------- | -
|                                                                                                                                         
|                                                                                                                                         
|                                                                                                                                         
|                                                                                                                                         
|Inventory                                                                                                                                 |                         | $ | 1,500,000  |          
|                                                                                                                                         
|                                                                                                                                         
|                                                                                                                                         
|                                                                                                                                         
|Property and equipment                                                                                                                    |                         |   | 158,000    |          
|                                                                                                                                         
|                                                                                                                                         
|                                                                                                                                         
|                                                                                                                                         
|Accounts receivable/Prepaids                                                                                                              |                         |   | 662,000    |          
|                                                                                                                                         
|                                                                                                                                         
|                                                                                                                                         
|                                                                                                                                         
|Other current liabilities                                                                                                                 |                         |   | (2,218,000 | )        
|                                                                                                                                         
|                                                                                                                                         
|                                                                                                                                         
|                                                                                                                                         
|Notes Payable                                                                                                                             |                         |   | (321,000   | )        
|                                                                                                                                          |                         |   |            |          
|                                                                                                                                          | Net liabilities assumed |   |            | (219,000  | )
|                                                                                                                                         
|                                                                                                                                         
|                                                                                                                                         
|                                                                                                                                         
|Total purchase price and related costs (including
	the issuance of 50,973 shares of common stock with a fair market
	value of $1,067,000) |                         |   | 5,377,000  |          
|                                                                                                                                          |                         |   |            |          
|                                                                                                                                          | Goodwill                |   | $          | 5,596,000 |  
|                                                                                                                                          |                         |   |            |          

7.  Audio Video Systems
Acquisition

On June 1, 2001, Tweeter completed the
acquisition of the retail operations of SMK Marketing, Inc. dba
Audio Video Systems, located in the greater Charlotte, North
Carolina area. (Audio Video Systems). Audio Video
Systems has three stores and reported retail revenue of
approximately $15 million for calendar 2000. This
transaction is being accounted for as a purchase. Tweeters
total purchase price was paid in cash and 40,717 shares of its
common stock from its shelf registration filed on April 13,
1999 with the Securities and Exchange Commission. The results of
operations for the acquired entity for the nine months and three
months ended June 30, 2001 would not have been significant
to the consolidated operations of Tweeter. Accordingly, pro
forma information has not been presented. The allocation of the
purchase price, which is preliminary, resulted in goodwill to
date of approximately $3,894,000, which is being amortized over
twenty years using the straight-line method. The approximate net
liabilities assumed at fair market value on June 1, 2001
were allocated as follows:

|                                                                                                                                          |                         |   |            |           |  
|----------------------------------------------------------------------------------------------------------------------------------------- | ----------------------- | - | ---------- | --------- | -
|                                                                                                                                         
|                                                                                                                                         
|                                                                                                                                         
|                                                                                                                                         
|Inventory                                                                                                                                 |                         | $ | 2,254,000  |          
|                                                                                                                                         
|                                                                                                                                         
|                                                                                                                                         
|                                                                                                                                         
|Property and equipment                                                                                                                    |                         |   | 852,000    |          
|                                                                                                                                         
|                                                                                                                                         
|                                                                                                                                         
|                                                                                                                                         
|Accounts receivable/Prepaids/Other                                                                                                        |                         |   | 856,000    |          
|                                                                                                                                         
|                                                                                                                                         
|                                                                                                                                         
|                                                                                                                                         
|Other current liabilities                                                                                                                 |                         |   | (2,637,000 | )        
|                                                                                                                                         
|                                                                                                                                         
|                                                                                                                                         
|                                                                                                                                         
|Notes Payable                                                                                                                             |                         |   | (1,513,000 | )        
|                                                                                                                                          |                         |   |            |          
|                                                                                                                                          | Net liabilities assumed |   |            | (188,000  | )
|                                                                                                                                         
|                                                                                                                                         
|                                                                                                                                         
|                                                                                                                                         
|Total purchase price and related costs (including
	the issuance of 40,717 shares of common stock with a fair market
	value of $1,084,000) |                         |   | 3,706,000  |          
|                                                                                                                                          |                         |   |            |          
|                                                                                                                                          | Goodwill                |   | $          | 3,894,000 |  
|                                                                                                                                          |                         |   |            |          

8.  Tweeter@Outpost.com Joint
Venture

On May 30, 2001, Cyberian Outpost, Inc.
(COOL) the operators of Outpost.com, announced that they
had filed a definitive merger agreement with PC Connection, Inc.
(PCCC). Outpost.com is an equity partner in a joint venture
(Tweeter.Outpost.com, LLC) that operates the companys
commercial Internet effort. Tweeter believes that this merger
will not result in a material impact on the financial position
or results of operations of the Company.

8



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##### Table of Contents



TWEETER HOME ENTERTAINMENT GROUP, INC. AND
SUBSIDIARIES


NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

On July 9, 2001, Cyberian Outpost, Inc.
(COOL) the operators of Outpost.com, announced that Fry
Electronics, Inc. had offered to acquire them for a cash price
of $.70 per share. At this time Tweeter has no knowledge of the
outcome of this offer.

9.  Sound Advice Merger

On June 1, 2001, Tweeter signed a definitive
merger agreement with Sound Advice, Inc., a 33-store specialty
consumer electronics retailer with annual sales of approximately
$200 million operating in the Florida markets for 27 years.
The merger is structured as a tax-free exchange for stock and
will be accounted for by Tweeter as a purchase. Under the terms
of the agreement, each share of Sound Advice common stock will
be converted into Tweeter common stock, at an exchange ratio of
1 for 1 while the five-day average market price for Tweeter is
between $21 and $30 per share. If the five-day average price for
Tweeter common stock at the time of closing is above $30 per
share, the exchange ratio will decrease in order to maintain $30
per share. If the five-day average price for Tweeter common
stock is below $21 per share, the exchange ratio will increase
in order to maintain $21 per share. Both parties have the right
to terminate the transaction if the 5-day average closing price
of Tweeter common stock is below $18 per share at the time of
closing. The transaction required shareholder approval which was
obtained on July 30, 2001

On August 1, 2001, Tweeter completed its
merger with Sound Advice, Inc. of Florida. The merger is
structured as a tax-free exchange for stock at an exchange ratio
of 1 for 1 and will be accounted for by Tweeter as a purchase.
Tweeter issued 4,355,995 shares of common stock in exchange for
100% of the outstanding shares of Sound Advice. Sound Advice is
now a wholly owned subsidiary of Tweeter.

10.  New Senior Credit
Facility

On June 29, 2001, Tweeter signed a new
three-year senior credit facility. This new credit facility has
a maximum availability of $75 million and a maturity date
of July 1, 2004 and is secured by inventory, and certain
other assets. 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.

11.  New Accounting
Pronouncements

During 1998, the Financial Accounting Standards
Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 133,
Accounting for Derivative Instruments and Hedging
Activities. SFAS No. 133 was not required to be
implemented until fiscal year 2000. In June 1999, the FASB
issued SFAS No. 137, Accounting for Derivative Instruments
and Hedging Activities-Deferral of the Effective Date of FASB
Statement No. 133  an amendment of FASB
Statement No. 133. SFAS No. 137 delayed the
original implementation date of SFAS No. 133 by one year.
In June 2000, the FASB issued SFAS 138, Accounting
for Certain Derivative Instruments and Certain Hedging
Activities, an amendment of FASB Statement No. 133.
Tweeter implemented FASB Statement No. 133 on the first day
of fiscal 2001 and there is no effect on the consolidated
financial statements.

On December 3, 1999, the Securities and
Exchange Commission published Staff Accounting Bulletin
(SAB) No. 101, Revenue Recognition in
Financial Statements. This SAB summarizes certain of the
staffs views in applying generally accepted accounting
principles to revenue recognition in financial statements. This
SAB requires, among other things, that revenues derived from
products or services in which companies typically act as an
agent be reported on a net basis. Tweeter implemented SAB
No. 101 during the quarter ended December 31, 2000. The net
effect for the nine months ended June 30, 2001 and
June 30, 2000 was a reduction in total revenues and cost of
sales of $4,853,000 and $3,557,000 and the net effect for the
three months ended June 30, 2001 and June 30, 2000 was
$1,522,000 and $1,196,000. The adoption of SAB No. 101 did
not have any impact on the results of operations for the nine
months ended June 30, 2001.

9



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##### Table of Contents



TWEETER HOME ENTERTAINMENT GROUP, INC. AND
SUBSIDIARIES


NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

In June 2001, the Financial Accounting
Standards Board issued Statement of Financial Accounting
Standards (SFAS) No. 141, Business
Combinations and No. 142 Goodwill and Other
Intangible Assets. SFAS No. 141 will require that the
purchase method of accounting be used for all business
combinations initiated after June 30, 2001 and that the use
of the pooling-of-interest method is no longer allowed. SFAS
No. 142 requires that upon adoption, amortization of
goodwill will cease and instead, the carrying value of goodwill
will be evaluated for impairment on an annual basis.
Identifiable intangible assets will continue to be amortized
over their useful lives and reviewed for impairment in
accordance with SFAS No. 121 Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of. SFAS No. 142 is effective for fiscal
years beginning after December 15, 2001; however, the
Company may elect early adoption of this statement on
October 1, 2001, the beginning of its 2002 fiscal year. The
amortization provisions apply to goodwill and intangible assets
acquired after June 30, 2001. Goodwill and intangible
assets on the books at June 30, 2001 will be affected when
the Company adopts this statement. The Company is evaluating the
impact of the adoption of these standards and has not yet
determined the effect of adoption on its financial position and
results of operations.

10



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##### Table of Contents






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

INTRODUCTION

Tweeter is a specialty retailer of mid to
high-end audio and video consumer electronics products. Tweeter
currently operates 108 stores under the Tweeter and HiFi Buys
names.

RESULTS OF OPERATIONS

THREE MONTHS ENDED JUNE 30, 2001 AS COMPARED
TO THREE MONTHS ENDED JUNE 30, 2000

Total Revenue.Total
revenue includes delivered sales, completed service center work
orders, insurance replacement and corporate sales. Total revenue
increased $16.6 million, or 17.7%, to $110.0 million
for the three months ended June 30, 2001 from
$93.5 million for the three months ended June 30,
2000. The increase was mainly comprised of $7.9 million
from new stores and $8.3 million from the Douglas TV, Big
Screen City and Audio Video Systems acquisitions. This was
offset by a comparable store sales decrease of $495,000.
Comparable store sales were down 0.6% excluding the Douglas TV,
Big Screen City and Audio Video Systems chains. The Douglas TV
stores had a total comparable store sales decrease of 21.5%, the
Big Screen City stores, opened two months, had a comparable
store sales increase of 13.6%, and the Audio Video Systems
stores, opened one month, had a comparable store sales decrease
of 18.9%. Digital and digital ready projection television sales
continued their strength during the quarter ended June 30,
2001, as digital accounted for 89% of all projection TV sales,
and 18% of total revenue. Projection television dollar sales
were up 16.2% for the quarter ended June 30, 2001 compared
to last years quarter ended June 30, 2000 and unit
sales exceeded 5,600 for the quarter. Digital and digital ready
tube televisions  in the market now for one
year  continued their rapid penetration into the tube
category in the quarter ended June 30, 2001, as they
accounted for 51.5% of all tubes sold in the quarter, and 7% of
total revenue. Tube television sales were up 29% in dollars from
last years quarter ended June 30, 2000 and unit sales
exceeded 3,800 during the quarter ended June 30, 2001
compared to 255 sets sold during last year. Plasma televisions
sets were the fastest growing category, up 72% for the quarter
ended June 30, 2001 from quarter ended June 30, 2000.
Unit sales of plasma television sets continue to increase as 122
units were sold the quarter ended June 30, 2001 compared to
80 during the quarter ended March 31, 2001. Digital
camcorder sales represented over 92% of all camcorders sold and
digital audio receivers represented 78% of all receivers sold.
During the quarter ended June 30, 2001 over 2,900 satellite
and satellite ready car radios were sold, which represented over
23% of all car stereos sold. Total digital sales penetration
exceeded 43% of total revenue.

Gross Profit.Cost
of sales includes merchandise, net delivery costs, distribution
costs, purchase discounts, and vendor volume rebates. Cost of
sales increased $10.5 million, or 17.6%, to
$70.0 million for the three months ended June 30, 2001
from $59.5 million for the three months ended June 30,
2000. Gross profit increased $6.1 million, or 17.9%, to
$40.0 million for the three months ended June 30, 2001
from $34.0 million for the three months ended June 30,
2000. The gross margin percentage increased 10 basis points, to
36.4% for the three months ended June 30, 2001, from 36.3%
for the three months ended June 30, 2000. The increase in
margin was primarily due to the continued strength of the
digital product sales. The sales of all digital categories
increased to 43.0% of total revenues for the quarter ended
June 30, 2001 compared to 31.8% for the same period last
year. Also contributing to the increase was the labor generated
from the Companys 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 and excludes corporate, general and
administrative expenses. Selling expenses increased
$4.2 million, or 16.4%, to $30.0 million for the three
months ended June 30, 2001 from $25.8 million for the
three months ended June 30, 2000. As a percentage of
revenue, selling expenses decreased to 27.2% for the three
months ended June 30, 2001 from 27.6% for the three months
ended June 30, 2000. This decrease was due to a decrease in
net advertising expense offset by higher payroll costs related
to the increased infrastructure of the home installation
departments.

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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 15.3% to
$5.7 million for the three months ended June 30, 2001
from $5.0 million for the three months ended June 30,
2000. As a percentage of total revenue, corporate general and
administrative expenses decreased to 5.2% for the three months
ended June 30, 2001 from 5.3% for the three months ended
June 30, 2000. This decrease was the result of leveraging
the additional sales volume of new stores and the acquisitions
of Douglas TV, Big Screen City and Audio Video Systems as well
as a deliberate effort by management to slow the growth in these
expenses.

Amortization of Goodwill.Amortization of goodwill increased to
$521,000 for the three months ended June 30, 2001 from
$434,000 for the three months ended June 30, 2000. The
increase was due to the completion of the Douglas TV acquisition
on October 2, 2000, the Big Screen City acquisition
completed on May 1, 2001 and the Audio Video Systems acquisition
completed on June 1, 2001.

Net Interest Income.Net interest income decreased to
$248,000 for the three months ended June 30, 2001 from
$528,000 for the three months ended June 30, 2000. The
decrease was due to lower cash balances as a result of using the
cash to acquire Douglas TV, Big Screen City and Audio Video
Systems as well as funding the opening of new stores.

Income Taxes.The
effective tax rate for the fiscal quarters ended June 30,
2001 and June 30, 2000 was 40.0%. Tweeter expects that the
income tax rate for the fiscal year ending September 30,
2001 will remain substantially unchanged.

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 the 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.

NINE MONTHS ENDED JUNE 30, 2001 AS COMPARED TO
NINE MONTHS ENDED JUNE 30, 2000

Total Revenue.Total
revenue increased $86.8 million, or 28.6%, to $389.8
million for the nine months ended June 30, 2001 from
$303.1 million for the nine months ended June 30,
2000. The increase was mainly comprised of $27.7 million
from new stores, $3.9 million from comparable store sales
growth and $52.2 million derived by sales from the acquisitions
of United Audio Centers, Douglas TV, Big Screen City and Audio
Video Systems. Comparable store sales, excluding acquired
stores, increased by 1.4%. Digital technology products continue
to drive sales performance as it represented over 40% of
revenues for the nine months ended June 30, 2001.

Gross Profit.Cost
of sales increased $56.0 million, or 29.2% to $247.6
million for the nine months ended June 30, 2001 from
$191.6 million for the nine months ended June 30,
2000. Gross profit increased $30.8 million, or 27.6% to
$142.3 million for the nine months ended June 30, 2001
from $111.5 million for the nine months ended June 30,
2000. The gross margin percentage decreased 30 basis points to
36.5% from 36.8% last year. The decrease in margin primarily
occurred in the first quarter and was attributed to three
factors. The acquisition of Douglas TV which has a higher video
mix than the other Tweeter stores. The Companys overall
video mix increased as a percentage of the total product mix.
The last contributing factor was higher distribution costs,
which are included in cost of sales. For the nine months ended
June 30, 2001, higher distribution costs contributed to a
50 basis point decrease in the gross margin percentage. This was
mostly attributable to the running of three distribution centers
in the Chicago marketplace during the first half of the year, as
the Company transitioned from three smaller distribution centers
into one larger one. These decreases in gross profit were offset
by an increase in revenue from the pursuit of the home
installation business.

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Selling Expenses.Selling expenses increased
$22.3 million, or 29.6%, to $97.9 million for the nine
months ended June 30, 2001 from $75.6 million for the
nine months ended June 30, 2000. As a percentage of
revenue, selling expenses increased to 25.1% for the nine months
ended June 30, 2001 from 24.9% in the prior year period.
This increase was primarily due to higher payroll costs
associated with increased infrastructure of the home
installation departments.

Corporate, General and Administrative
Expenses.Corporate, general and
administrative expenses for the nine months ended June 30,
2001 increased 25.9% to $17.9 million from
$14.2 million for the nine months ended June 30, 2000.
As a percentage of total revenue, corporate general and
administrative expenses decreased to 4.6% for the nine months
ended June 30, 2001 from 4.7% for the prior year period.
This decrease was the result of leveraging the additional sales
volume of new stores and the acquisitions of United Audio
Centers, Douglas TV, Big Screen City and Audio Video Systems.

Amortization of Goodwill.Amortization of goodwill increased to
$1.5 million for the nine months ended June 30, 2001
from $1.1 million for the nine months ended June 30,
2000. The increase was due to United Audio Centers acquisition
on April 1, 2000, the Douglas TV acquisition completed on
October 2, 2000, the Big Screen City acquisition completed
on May 1, 2001 and the Audio Video Systems acquisition
completed on June 1, 2001.

Net Interest Income.Net interest income increased to
$950,000 for the nine months ended June 30, 2001 from
$541,000 for the nine months ended June 30, 2000. The
increase was due to the elimination of outstanding debt with the
proceeds from our follow-on offering on February 7, 2000
and investment income realized on our outstanding cash balances.

Income Taxes.The
effective tax rate for the nine months ended June 30, 2001
and June 30, 2000 was 40.0%. Tweeter expects that the
income tax rate for the year ending September 30, 2001 will
approximate 40.0%.

LIQUIDITY AND CAPITAL RESOURCES

Net cash provided by operating activities was
$38.8 million for the nine months ended June 30, 2001
compared to $6.7 million for the nine months ended
June 30, 2000. Cash provided by operations in 2001 was
primarily the result of net income of $16.0 million, a
decrease in inventory of $12.3 million and an increase in
accounts payable and accrued expenses of $11.9 million.
Cash used from operations included, primarily, an increase in
accounts receivable of $6.8 million and an increase in prepaid
and other assets of $1.6 million. The adjustments to
reconcile net income to cash provided by operating activities
consist primarily of $7.6 million for depreciation and
amortization, as well as minor changes in other operating
accounts.

At June 30, 2001, working capital was
$64.5 million, compared to $83.5 million at
September 30, 2000. The decrease was attributed to lower
inventory levels as well as an increase in accounts payable and
accrued expenses. The ratio of current assets to current
liabilities was 1.88 to 1 at June 30, 2001 and 2.51 to 1 at
September 30, 2000.

Cash used in investing activities for the nine
months ended June 30, 2001 included capital expenditures of
$28.7 million, primarily used for the building of new
stores and the relocation of existing stores, $10.9 million
used in acquiring businesses, and $2.8 million to purchase
marketable equity securities.

Net cash used by financing activities during the
nine months ended June 30, 2001 was $4.1 million,
which was predominantly due to a decrease in amount due to bank
of $3.7 million and payments of long-term debt of
$2.0 million.

Tweeter had available at June 30, 2001 a
$75,000,000 revolving credit facility, and there were no
balances outstanding at June 30, 2001. The unpaid balances
under this agreement bear interest at the lenders base
rate, or LIBOR plus 1.25% if the Company commits the balances
for a period of thirty days or more.

On October 2, 2000, Tweeter completed the
acquisition of certain assets and liabilities of Douglas TV.
This transaction was accounted for as a purchase and,
accordingly, the results of operations of the Companys
business relating to Douglas TV are included in the consolidated
statements of operations from the acquisition

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date. The total purchase price, including
acquisition costs to date, was approximately $6.2 million,
$1.3 million of which was paid through the issuance of
36,849 shares of the Companys common stock.


On May 1, 2001, Tweeter completed the
acquisition of The Video Scene, Inc. dba Big Screen City. This
transaction was accounted for as a purchase and, accordingly,
the results of operations of the Companys business
relating to Big Screen City are included in the consolidated
statements of operations from the acquisition date. The total
purchase price, including acquisition costs to date, was
approximately $5.3 million, $1.1 million of which was
paid through the issuance of 50,973 shares of the Companys
common stock.

On June 1, 2001, Tweeter completed the
acquisition of certain assets and liabilities of SMK Marketing,
Inc. dba Audio Video Systems. This transaction was accounted for
as a purchase and, accordingly, the results of operations of the
Companys business relating to Audio Video Systems are
included in the consolidated statements of operations from the
acquisition date. The total purchase price, including
acquisition costs to date, was approximately $3.7 million,
$1.1 million of which was paid through the issuance of
40,717 shares of the Companys common stock.

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

During 1998, the Financial Accounting Standards
Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 133,
Accounting for Derivative Instruments and Hedging
Activities. SFAS No. 133 was not required to be
implemented until fiscal year 2000. In June 1999, the FASB
issued SFAS No. 137, Accounting for Derivative Instruments
and Hedging Activities-Deferral of the Effective Date of FASB
Statement No. 133  an amendment of FASB
Statement No. 133. SFAS No. 137 delayed the
original implementation date of SFAS No. 133 by one year.
In June 2000, the FASB issued SFAS 138, Accounting
for Certain Derivative Instruments and Certain Hedging
Activities, an amendment of FASB Statement No. 133.
Tweeter implemented FASB Statement No. 133 on the first day
of fiscal 2001 and there is no effect on the consolidated
financial statements.

On December 3, 1999, the Securities and
Exchange Commission published Staff Accounting Bulletin
(SAB) No. 101, Revenue Recognition in
Financial Statements. This SAB summarizes certain of the
staffs views in applying generally accepted accounting
principles to revenue recognition in financial statements. This
SAB requires, among other things, that revenues derived from
products or services in which companies typically act as an
agent be reported on a net basis. Tweeter implemented SAB
No. 101 during the quarter ended December 31, 2000. The net
effect for the nine months ended June 30, 2001 and
June 30, 2000 was a reduction in total revenues and cost of
sales of $4,853,000 and $3,557,000 and the net effect for the
three months ended June 30, 2001 and June 30, 2000 was
$1,522,000 and $1,196,000. The adoption of SAB No. 101 did
not have any impact on the results of operations for the nine
months ended June 30, 2001.

In June 2001, the Financial Accounting
Standards Board issued Statement of Financial Accounting
Standards (SFAS) No. 141, Business
Combinations and No. 142 Goodwill and Other
Intangible Assets. SFAS No. 141 will require that the
purchase method of accounting be used for all business
combinations initiated after June 30, 2001 and that the use
of the pooling-of-interest method is no longer allowed. SFAS
No. 142 requires that upon adoption, amortization of
goodwill will cease and instead, the carrying value of goodwill
will be evaluated for impairment on an annual basis.
Identifiable intangible assets will continue to be amortized
over their useful lives and reviewed for impairment in
accordance with SFAS No. 121 Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of. SFAS No. 142 is effective for fiscal
years beginning after December 15, 2001; however, the
Company may elect early adoption of this statement on
October 1, 2001, the beginning of its 2002 fiscal year. The
amortization provisions apply to goodwill and intangible assets
acquired after June 30, 2001. Goodwill and

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intangible assets on the books at June 30,
2001 will be affected when the Company adopts this statement.
The Company is evaluating the impact of the adoption of these
standards and has not yet determined the effect of adoption on
its financial position and results of operations.


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-3 (SEC file number 333-94433) on January 11,
2000 and in the Companys Annual Report on Form 10-K
filed on December 18, 2000, 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

Tweeters credit facility provides for
borrowings which bear interest at variable rates based on either
(i) the higher of Fleet National Banks Base Rate or
the Federal Funds rate plus 0.50% or (ii) the London
Interbank Offering Rate (LIBOR) plus an applicable margin
varying from 125 to 175 basis points. Tweeter had no borrowings
outstanding pursuant to the credit facility as of June 30,
2001. Tweeter believes that the effect, if any, of reasonably
possible near-term changes in interest rates on Tweeters
financial position, results of operations, and cash flows should
not be material.

At June 30, 2001, the Company had
approximately $10.2 million in marketable equity securities
classified as available-for-sale. 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 approximately $1.0 million.

Currently, Tweeter does not enter into financial
instrument transactions for speculative purposes or to manage
interest rate exposure.

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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.

On June 8, 2001, Tweeter filed with the
Securities and Exchange Commission a Current Report on
Form 8-K to announce that it had entered into an Agreement
and Plan of Merger dated as of June 1, 2001 among Tweeter,
Sound Advice, Inc. and TWT Acquisition Corp., a Florida
corporation and wholly owned subsidiary of Tweeter.

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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:  August 10, 2001

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