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Form 10-Q

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


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

For the quarterly period ended December 31, 2003

Commission file number: 0-24091

Tweeter Home Entertainment Group, Inc.

(Exact name of Registrant as specified in its charter)


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

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

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

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [   ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). 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 FEBRUARY 6, 2004
|Common Stock, $.01 par value |                                 |  | 24,157,848 | 



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TABLE OF CONTENTS



|                                               |                                                                                               |                                                                                             |  |  |  |  |  | 
|---------------------------------------------- | --------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------- |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION                 
|                                               |                                                                                               | CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)                                          
|                                               |                                                                                               | CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 2003 AND DECEMBER 31, 2003                 
|                                               |                                                                                               | CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE MONTHS ENDED DECEMBER 31, 2002 AND 2003    
|                                               |                                                                                               | CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED DECEMBER 31, 2002 AND 2003
|                                               |                                                                                               | NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS                             
|                                               | ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                                               | ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                           
|                                               | ITEM 4. CONTROLS AND PROCEDURES                                                              
|PART II. OTHER INFORMATION                    
|                                               | ITEM 1. LEGAL PROCEEDINGS                                                                    
|                                               | ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS                                            
|                                               | ITEM 3. DEFAULTS UPON SENIOR SECURITIES                                                      
|                                               | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                  
|                                               | ITEM 5. OTHER INFORMATION                                                                    
|                                               | ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                                                     
|SIGNATURES                                    
|EX-31.1 CERTIFICATION OF THE C.E.O.           
|EX-31.2 CERTIFICATION OF THE C.F.O.           
|EX-32.1 SECT. 1350 CERTIFICATION OF THE C.E.O.
|EX-32.2 SECT. 1350 CERTIFICATION OF THE C.F.O 



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TWEETER HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES

INDEX

|         |  |                                                                                                                                    |  |                                                                                             |    |      |   | 
|-------- |  | ---------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------- | -- | ---- | - | 
|         |  |                                                                                                                                    |  |                                                                                             |    | PAGE
|         |  |                                                                                                                                    |  |                                                                                             |    |     
|Part I.  |  | FINANCIAL INFORMATION                                                                                                              |  |                                                                                             |    |     
|Item 1   |  | Condensed
Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets as of September 30, 2003
and December 31, 2003 |  |                                                                                             | 3  |     
|         |  |                                                                                                                                    |  | Consolidated Statements of Income for the Three Months
Ended December 31, 2002 and 2003     |    |      | 4 | 
|         |  |                                                                                                                                    |  | Consolidated Statements of Cash Flows for the Three
Months Ended December 31, 2002 and 2003 |    |      | 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                                                                         |  |                                                                                             | 13 |     
|Item 4   |  | Controls and Procedures                                                                                                            |  |                                                                                             | 14 |     
|Part II. |  | OTHER INFORMATION                                                                                                                  |  |                                                                                             |    |     
|Item 1   |  | Legal Proceedings                                                                                                                  |  |                                                                                             | 15 |     
|Item 2   |  | Changes in Securities and Use of Proceeds                                                                                          |  |                                                                                             | 15 |     
|Item 3   |  | Defaults upon Senior Securities                                                                                                    |  |                                                                                             | 15 |     
|Item 4   |  | Submission of Matters to a Vote of Security Holders                                                                                |  |                                                                                             | 15 |     
|Item 5   |  | Other Information                                                                                                                  |  |                                                                                             | 15 |     
|Item 6   |  | Exhibits and Reports on Form 8-K                                                                                                   |  |                                                                                             | 15 |     

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

|                                     |                      |                                                                                                                                                |                           |   |               |             |              |   |              |             | 
|------------------------------------ | -------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------- | - | ------------- | ----------- | ------------ | - | ------------ | ----------- | 
|                                     |                      |                                                                                                                                                |                           |   | September 30, |             | December 31,
|                                     |                      |                                                                                                                                                |                           |   | 2003          |             | 2003        
|                                     |                      |                                                                                                                                                |                           |   |               |             |             
|                                     |                      |                                                                                                                                                |                           |   |               |             |              |   | (Unaudited) 
|Assets                               |                      |                                                                                                                                                |                           |   |               |             |              |  
|                                     | Current Assets:      |                                                                                                                                                |                           |   |               |             |              |   |             
|                                     |                      | Cash and cash equivalents                                                                                                                      |                           | $ | 1,850,449     |             |              | $ | 2,870,933    |            
|                                     |                      | Accounts receivable, net of allowance for doubtful accounts of
$1,110,000 at September 30, 2003 and $1,253,000 at December 31, 2003            |                           |   | 18,263,564    |             |              |   | 26,110,999   |            
|                                     |                      | Inventory                                                                                                                                      |                           |   | 117,569,528   |             |              |   | 145,839,912  |            
|                                     |                      | Deferred tax assets                                                                                                                            |                           |   | 5,938,916     |             |              |   | 6,698,256    |            
|                                     |                      | Prepaid expenses and other current assets                                                                                                      |                           |   | 26,930,455    |             |              |   | 14,862,689   |            
|                                     |                      |                                                                                                                                                |                           |   |               |             |              |   |              |            
|                                     |                      |                                                                                                                                                | Total current assets      |   |               | 170,552,912 |              |   |              | 196,382,789 | 
|                                     |                      | Property and equipment, net                                                                                                                    |                           |   | 126,220,975   |             |              |   | 125,131,044  |            
|                                     |                      | Long-term investments                                                                                                                          |                           |   | 2,113,020     |             |              |   | 2,255,856    |            
|                                     |                      | Deferred tax assets                                                                                                                            |                           |   | 5,217,877     |             |              |   | 4,147,774    |            
|                                     |                      | Intangible assets, net                                                                                                                         |                           |   | 1,926,667     |             |              |   | 1,756,667    |            
|                                     |                      | Other assets, net                                                                                                                              |                           |   | 2,404,938     |             |              |   | 2,809,082    |            
|                                     |                      |                                                                                                                                                |                           |   |               |             |              |   |              |            
|                                     |                      |                                                                                                                                                | Total                     |   | $             | 308,436,389 |              |   | $            | 332,483,212 | 
|                                     |                      |                                                                                                                                                |                           |   |               |             |              |   |              |            
|Liabilities and Stockholders Equity |                      |                                                                                                                                                |                           |   |               |             |              |  
|                                     | Current Liabilities: |                                                                                                                                                |                           |   |               |             |              |   |             
|                                     |                      | Current portion of long-term debt                                                                                                              |                           | $ | 7,364,925     |             |              | $ | 27,701,671   |            
|                                     |                      | Accounts payable                                                                                                                               |                           |   | 32,493,675    |             |              |   | 24,660,161   |            
|                                     |                      | Accrued expenses                                                                                                                               |                           |   | 22,735,570    |             |              |   | 27,236,388   |            
|                                     |                      | Customer deposits                                                                                                                              |                           |   | 21,168,837    |             |              |   | 22,819,583   |            
|                                     |                      | Deferred warranty                                                                                                                              |                           |   | 215,381       |             |              |   | 184,942      |            
|                                     |                      |                                                                                                                                                |                           |   |               |             |              |   |              |            
|                                     |                      |                                                                                                                                                | Total current liabilities |   |               | 83,978,388  |              |   |              | 102,602,745 | 
|Long-Term Debt                       |                      |                                                                                                                                                | 48,266,937                |   |               |             | 47,910,723   |  
|Other Long-Term Liabilities:         |                      |                                                                                                                                                |                           |   |               |             |              |  
|                                     |                      | Rent related accruals                                                                                                                          |                           |   | 11,056,253    |             |              |   | 11,081,972   |            
|                                     |                      | Deferred warranty                                                                                                                              |                           |   | 98,262        |             |              |   | 69,488       |            
|                                     |                      |                                                                                                                                                |                           |   |               |             |              |   |              |            
|Total other long-term liabilities    |                      |                                                                                                                                                | 11,154,515                |   |               |             | 11,151,460   |  
|                                     |                      |                                                                                                                                                |                           |   |               |             |              |   |              |            
|                                     |                      |                                                                                                                                                | Total liabilities         |   |               | 143,399,840 |              |   |              | 161,664,928 | 
|Stockholders Equity                 |                      |                                                                                                                                                |                           |   |               |             |              |  
|                                     |                      | Preferred stock, $.01 par value, 10,000,000 shares authorized, no
shares issued                                                                |                           |   |              |             |              |   |             |            
|                                     |                      | Common stock, $.01 par value, 60,000,000 shares authorized;
25,748,489 shares issued at September 30, 2003 and 25,813,671
at December 31, 2003 |                           |   | 257,485       |             |              |   | 258,137      |            
|                                     |                      | Additional paid in capital                                                                                                                     |                           |   | 294,969,338   |             |              |   | 295,476,274  |            
|                                     |                      | Unearned equity compensation                                                                                                                   |                           |   | (408,142      | )           |              |   | (273,318     | )          
|                                     |                      | Accumulated other comprehensive income (loss)                                                                                                  |                           |   | (15,931       | )           |              |   | 7,762        |            
|                                     |                      | Accumulated deficit                                                                                                                            |                           |   | (127,967,415  | )           |              |   | (122,859,966 | )          
|                                     |                      |                                                                                                                                                |                           |   |               |             |              |   |              |            
|                                     |                      |                                                                                                                                                | Total                     |   |               | 166,835,335 |              |   |              | 172,608,889 | 
|                                     |                      | Less treasury stock: 1,742,616 shares at September 30, 2003 and
1,730,929 shares at December 31, 2003, at cost                                 |                           |   | (1,798,786    | )           |              |   | (1,790,605   | )          
|                                     |                      |                                                                                                                                                |                           |   |               |             |              |   |              |            
|Total stockholders equity           |                      |                                                                                                                                                | 165,036,549               |   |               |             | 170,818,284  |  
|                                     |                      |                                                                                                                                                |                           |   |               |             |              |   |              |            
|Total                                |                      | $                                                                                                                                              | 308,436,389               |   |               | $           | 332,483,212  |  
|                                     |                      |                                                                                                                                                |                           |   |               |             |              |   |              |            

See notes to unaudited condensed consolidated financial statements.

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

|                                               |         |                            |              |                    |            |      |              |            |            | 
|---------------------------------------------- | ------- | -------------------------- | ------------ | ------------------ | ---------- | ---- | ------------ | ---------- | ---------- | 
|                                               |         |                            |              | Three Months Ended
|                                               |         |                            |              | December 31,      
|                                               |         |                            |              |                   
|                                               |         |                            |              | 2002               |            | 2003
|                                               |         |                            |              |                    |            |     
|Total revenue                                  |         | $                          | 249,649,877  |                    |            | $    | 255,239,751  |           
|Cost of sales                                  |         |                            | (162,634,064 | )                  |            |      | (158,469,644 | )         
|                                               |         |                            |              |                    |            |      |              |           
|                                               |         | Gross Profit               |              |                    | 87,015,813 |      |              |            | 96,770,107 | 
|Selling expenses                               |         |                            | 66,457,094   |                    |            |      | 76,033,765   |           
|Corporate, general and administrative expenses |         |                            | 11,385,544   |                    |            |      | 11,897,283   |           
|Amortization of intangibles                    |         |                            | 170,000      |                    |            |      | 170,000      |           
|                                               |         |                            |              |                    |            |      |              |           
|                                               |         | Income from operations     |              |                    | 9,003,175  |      |              |            | 8,669,059  | 
|Income from equity investment                  |         |                            | 57,430       |                    |            |      | 272,276      |           
|Interest expense                               |         |                            | (391,746     | )                  |            |      | (654,593     | )         
|Interest income                                |         |                            | 5,070        |                    |            |      | 225,673      |           
|                                               |         |                            |              |                    |            |      |              |           
|                                               |         | Income before income taxes |              |                    | 8,673,929  |      |              |            | 8,512,415  | 
|Income taxes                                   |         |                            | 3,469,572    |                    |            |      | 3,404,966    |           
|                                               |         |                            |              |                    |            |      |              |           
|NET INCOME                                     |         | $                          | 5,204,357    |                    |            | $    | 5,107,449    |           
|                                               |         |                            |              |                    |            |      |              |           
|Basic earnings per share                       |         | $                          | 0.22         |                    |            | $    | 0.21         |           
|                                               |         |                            |              |                    |            |      |              |           
|Diluted earnings per share                     |         | $                          | 0.22         |                    |            | $    | 0.21         |           
|                                               |         |                            |              |                    |            |      |              |           
|Weighted average shares outstanding:           |         |                            |              |                    |            |      |              |           
|                                               | Basic   |                            |              | 23,565,397         |            |      |              | 23,923,099 |           
|                                               |         |                            |              |                    |            |      |              |           
|                                               | Diluted |                            |              | 24,026,667         |            |      |              | 24,641,583 |           
|                                               |         |                            |              |                    |            |      |              |           

See notes to unaudited condensed consolidated financial statements.

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

|                                                   |                                                                            |          |                                                 |                                                              |         |                    |             |            |            |           |             |  
|-------------------------------------------------- | -------------------------------------------------------------------------- | -------- | ----------------------------------------------- | ------------------------------------------------------------ | ------- | ------------------ | ----------- | ---------- | ---------- | --------- | ----------- | -
|                                                   |                                                                            |          |                                                 |                                                              |         | Three Months Ended
|                                                   |                                                                            |          |                                                 |                                                              |         | December 31,      
|                                                   |                                                                            |          |                                                 |                                                              |         |                   
|                                                   |                                                                            |          |                                                 |                                                              |         | 2002               |             | 2003      
|                                                   |                                                                            |          |                                                 |                                                              |         |                    |             |           
|CASH FLOWS FROM OPERATING ACTIVITIES:              |                                                                            |          |                                                 |                                                              |         |                    |             |           
|                                                   | Net income                                                                 |          | $                                               | 5,204,357                                                    |         |                    |             | 5,107,449  |           
|                                                   | Adjustments to reconcile net income to net cash from
operating activities: |          |                                                 |                                                              |         |                    |             |            |           
|                                                   |                                                                            |          | Depreciation and amortization                   |                                                              |         | 5,034,142          |             |            |            | 5,634,325 |            
|                                                   |                                                                            |          | Noncash compensation                            |                                                              |         |                   |             |            |            | 134,824   |            
|                                                   |                                                                            |          | Loss on disposal of property and equipment      |                                                              |         | 122,943            |             |            |            | 73,942    |            
|                                                   |                                                                            |          | Provision for uncollectible accounts            |                                                              |         | 32,115             |             |            |            | 174,928   |            
|                                                   |                                                                            |          | Tax benefit from options exercised              |                                                              |         |                   |             |            |            | 50,367    |            
|                                                   |                                                                            |          | Deferred income tax (benefit) provision         |                                                              |         | (334,035           | )           |            |            | 294,968   |            
|                                                   |                                                                            |          | Amortization of deferred gain on sale leaseback |                                                              |         |                   |             |            |            | 11,211    |            
|                                                   |                                                                            |          | Income from equity investment                   |                                                              |         | (57,430            | )           |            |            | (272,276  | )          
|                                                   |                                                                            |          | Changes in operating assets and liabilities:    |                                                              |         |                    |             |            |            |           |            
|                                                   |                                                                            |          |                                                 | Increase in accounts receivable                              |         |                    | (2,240,845  | )          |            |           | (8,022,363  | )
|                                                   |                                                                            |          |                                                 | Increase in inventory                                        |         |                    | (18,918,297 | )          |            |           | (28,262,217 | )
|                                                   |                                                                            |          |                                                 | Decrease in prepaid expenses and other assets                |         |                    | 1,069,580   |            |            |           | 11,378,622  |  
|                                                   |                                                                            |          |                                                 | Increase (decrease) in accounts payable and accrued expenses |         |                    | 31,291,577  |            |            |           | (3,304,261  | )
|                                                   |                                                                            |          |                                                 | Increase in customer deposits                                |         |                    | 1,259,681   |            |            |           | 1,650,746   |  
|                                                   |                                                                            |          |                                                 | Increase in deferred rent                                    |         |                    | 35,732      |            |            |           | 14,508      |  
|                                                   |                                                                            |          |                                                 | Decrease in deferred warranty                                |         |                    | (143,104    | )          |            |           | (59,213     | )
|                                                   |                                                                            |          |                                                 |                                                              |         |                    |             |            |           
|                                                   |                                                                            |          |                                                 | Net cash provided by (used in) operating activities          |         |                    | 22,356,416  |            |            |           | (15,394,440 | )
|                                                   |                                                                            |          |                                                 |                                                              |         |                    |             |            |           
|CASH FLOWS FROM INVESTING ACTIVITIES:              |                                                                            |          |                                                 |                                                              |         |                    |             |           
|                                                   | Purchase of property and equipment                                         |          |                                                 | (9,953,225                                                   | )       |                    |             | (4,169,786 | )         
|                                                   | Proceeds from sale of property and equipment                               |          |                                                 |                                                             |         |                    |             | 6,450      |           
|                                                   | Distributions from equity investment                                       |          |                                                 |                                                             |         |                    |             | 132,326    |           
|                                                   |                                                                            |          |                                                 |                                                              |         |                    |             |            |           
|                                                   |                                                                            |          |                                                 | Net cash used in investing activities                        |         |                    | (9,953,225  | )          |            |           | (4,031,010  | )
|                                                   |                                                                            |          |                                                 |                                                              |         |                    |             |            |           
|CASH FLOWS FROM FINANCING ACTIVITIES:              |                                                                            |          |                                                 |                                                              |         |                    |             |           
|                                                   | Increase in amount due to bank                                             |          |                                                 | 1,638,607                                                    |         |                    |             | 20,379,337 |           
|                                                   | Net payments of debt                                                       |          |                                                 | (14,978,072                                                  | )       |                    |             | (398,805   | )         
|                                                   | Proceeds from options exercised                                            |          |                                                 | 58,877                                                       |         |                    |             | 371,535    |           
|                                                   | Proceeds from employee stock purchase plan                                 |          |                                                 | 97,372                                                       |         |                    |             | 93,867     |           
|                                                   |                                                                            |          |                                                 |                                                              |         |                    |             |            |           
|                                                   |                                                                            |          |                                                 | Net cash (used in) provided by financing activities          |         |                    | (13,183,216 | )          |            |           | 20,445,934  |  
|                                                   |                                                                            |          |                                                 |                                                              |         |                    |             |            |           
|(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS   |                                                                            |          | (780,025                                        | )                                                            |         |                    | 1,020,484   |           
|CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD     |                                                                            |          | 2,282,635                                       |                                                              |         |                    | 1,850,449   |           
|                                                   |                                                                            |          |                                                 |                                                              |         |                    |             |            |           
|CASH AND CASH EQUIVALENTS, END OF PERIOD           |                                                                            | $        | 1,502,610                                       |                                                              |         |                    | 2,870,933   |           
|                                                   |                                                                            |          |                                                 |                                                              |         |                    |             |            |           
|SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: |                                                                            |          |                                                 |                                                              |         |                    |             |           
|                                                   | Cash paid (received) during the period for:                                |          |                                                 |                                                              |         |                    |             |            |           
|                                                   |                                                                            | Interest |                                                 | $                                                            | 397,332 |                    |             | $          | 785,535    |          
|                                                   |                                                                            |          |                                                 |                                                              |         |                    |             |            |           
|                                                   |                                                                            | Taxes    |                                                 | $                                                            | 561,000 |                    |             | $          | (7,200,671 | )        
|                                                   |                                                                            |          |                                                 |                                                              |         |                    |             |            |           

See notes to unaudited condensed consolidated financial statements.

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

1. Basis of Presentation

The unaudited condensed consolidated financial statements of Tweeter Home
Entertainment Group, Inc. and its subsidiaries (Tweeter or the Company),
included herein, should be read in conjunction with the consolidated financial
statements and notes thereto included in Tweeters Annual Report on Form 10-K
for the fiscal year ended September 30, 2003.

2. Accounting Policies

The unaudited condensed consolidated financial statements of Tweeter have
been prepared in accordance with accounting principles generally accepted in
the United States of America. In the opinion of management, all adjustments
(consisting only of normal recurring adjustments) considered necessary for a
fair presentation of the interim consolidated financial statements have been
included. Operating results for the three-month period ended December 31, 2003
are not necessarily indicative of the results that may be expected for the
fiscal year ending September 30, 2004. Tweeter typically records its highest
revenue and earnings in this first fiscal quarter.

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

Cash discounts earned for timely payments of merchandise invoices are
recognized in the income statement upon the sale of the related inventory.

Purchase rebate allowances and general cooperative advertising allowances
are earned based on the purchase of inventory and are recorded in accounts
receivable when the inventory is purchased. The carrying value of inventory is
initially reduced by the amount of purchase rebates earned, resulting in lower
cost of goods sold when the inventory is sold. Certain vendor agreements
include stretch goals where the level of funds earned is dependent upon the
Company achieving certain purchase levels. These program funds are recorded as
a reduction of inventory costs when it is determined that it is likely that the
Company will achieve the goal.

Vendor rebates earned based on specific advertising activities and other
activities are recognized as a reduction to advertising expense as these
activities are performed and only to the extent that the cost of the activities
equals or exceeds the amount of the rebates.

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

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

During the quarter ended March 31, 2003, Tweeter adopted EITF 02-16,
Accounting by a Customer for Certain Consideration Received from a Vendor
(EITF 02-16) which addresses how and when to reflect consideration received
from vendors in the consolidated financial statements. Under EITF 02-16,
certain consideration received from vendors that would have previously been
recorded as a reduction to selling expenses, is now recorded as a reduction to
cost of goods sold. The amount of reimbursements received during the quarter
ended December 31, 2003 that were treated as a reduction of cost of goods sold
but which would have been recorded as a reduction of advertising expenses
(selling expenses) prior to EITF 02-16 amounted to $10.3 million.

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AdvertisingGross advertising including electronic media, newspaper,
buyers guides and direct mailings, are expensed when released. For the three
months ended December 31, 2002 and 2003 gross advertising was $16.1 million and
$15.9 million, respectively. Cooperative advertising, for specific advertising
activities received from vendors, offsetting our gross advertising
expense,
amounted to $9.1 million and $1.2 million for the three months ended December
31, 2002 and 2003, respectively, resulting in net advertising of $7.0 million
and $14.7 million for the three months ended December 31, 2002 and 2003,
respectively.

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

For purposes of determining the disclosures required by SFAS No. 123, the
fair value of each stock option granted in the three months ended December 31,
2002 and December 31, 2003 under the Companys stock option plan was estimated
on the date of grant using the Black-Scholes option-pricing model. Key
assumptions used to apply this pricing model were as follows:

|                                        |  |                    |       |      |  |  |       |  
|--------------------------------------- |  | ------------------ | ----- | ---- |  |  | ----- | -
|                                        |  | Three Months Ended
|                                        |  | December 31,      
|                                        |  |                   
|                                        |  | 2002               |       | 2003
|                                        |  |                    |       |     
|Risk free interest rate                 |  |                    | 2.62  | %    |  |  | 3.46  | %
|Expected life of options grants         |  |                    | 5.1   |      |  |  | 7.2   |  
|Expected volatility of underlying stock |  |                    | 82.13 | %    |  |  | 87.53 | %

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

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|                                                                                                                                    |  |                    |            |      |  |   |            |  
|----------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ---------- | ---- |  | - | ---------- | -
|                                                                                                                                    |  | Three Months Ended
|                                                                                                                                    |  | December 31,      
|                                                                                                                                    |  |                   
|                                                                                                                                    |  | 2002               |            | 2003
|                                                                                                                                    |  |                    |            |     
|Net income as reported                                                                                                              |  | $                  | 5,204,357  |      |  | $ | 5,107,449  |  
|Total stock-based employee compensation expense recorded,
net of related -tax effects                                               |  |                    |           |      |  |   | 80,894     |  
|Total stock-based employee compensation expense determined
under fair value based method for all awards, net of related
tax effects |  |                    | (1,255,975 | )    |  |   | (1,616,034 | )
|                                                                                                                                    |  |                    |            |      |  |   |            |  
|Pro forma net income                                                                                                                |  | $                  | 3,948,382  |      |  | $ | 3,572,309  |  
|                                                                                                                                    |  |                    |            |      |  |   |            |  
|Earnings per share                                                                                                                  |  |                    |            |      |  |   |            |  
|Basic
- as reported                                                                                                                 |  | $                  | 0.22       |      |  | $ | 0.21       |  
|                                                                                                                                    |  |                    |            |      |  |   |            |  
|Basic - pro forma                                                                                                                   |  | $                  | 0.17       |      |  | $ | 0.15       |  
|                                                                                                                                    |  |                    |            |      |  |   |            |  
|Diluted - as reported                                                                                                               |  | $                  | 0.22       |      |  | $ | 0.21       |  
|                                                                                                                                    |  |                    |            |      |  |   |            |  
|Diluted
- pro forma                                                                                                                 |  | $                  | 0.16       |      |  | $ | 0.14       |  
|                                                                                                                                    |  |                    |            |      |  |   |            |  

3. Earnings per Share

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

|                                                                     |                                            |   |                    |            |      |   |                  |            | 
|-------------------------------------------------------------------- | ------------------------------------------ | - | ------------------ | ---------- | ---- | - | ---------------- | ---------- | 
|                                                                     |                                            |   | Three Months Ended
|                                                                     |                                            |   | December 31,      
|                                                                     |                                            |   |                   
|                                                                     |                                            |   | 2002               |            | 2003
|                                                                     |                                            |   |                    |            |     
|Basic Earnings Per Share:                                            |                                            |   |                    |            |      |   |                  |           
|Numerator:                                                           |                                            |   |                    |            |      |   |                  |           
|                                                                     | Net income                                 |   | $                  | 5,204,357  |      |   | $                | 5,107,449  | 
|Denominator:                                                         |                                            |   |                    |            |      |   |                  |           
|                                                                     | Weighted average common shares outstanding |   |                    | 23,565,397 |      |   |                  | 23,923,099 | 
|                                                                     |                                            |   |                    |            |      |   |                  |            | 
|Basic earnings per share                                             |                                            | $ | 0.22               |            |      | $ | 0.21             |           
|                                                                     |                                            |   |                    |            |      |   |                  |            | 
|Diluted Earnings Per Share:                                          |                                            |   |                    |            |      |   |                  |           
|Numerator:                                                           |                                            | $ | 5,204,357          |            |      | $ | 5,107,449        |           
|Denominator:                                                         |                                            |   |                    |            |      |   |                  |           
|                                                                     | Weighted average shares outstanding        |   |                    | 23,565,397 |      |   |                  | 23,923,099 | 
|                                                                     | Potential common stock outstanding         |   |                    | 461,270    |      |   |                  | 718,484    | 
|                                                                     |                                            |   |                    |            |      |   |                  |            | 
|Total                                                                |                                            |   | 24,026,667         |            |      |   | 24,641,583       |           
|                                                                     |                                            |   |                    |            |      |   |                  |            | 
|Diluted earnings per share                                           |                                            | $ | 0.22               |            |      | $ | 0.21             |           
|                                                                     |                                            |   |                    |            |      |   |                  |            | 
|Anti dilutive options not included in earnings
per share calculation |                                            |   | 768,533            |            |      |   | 3,088,814        |           
|                                                                     |                                            |   |                    |            |      |   |                  |            | 
|Price range of anti dilutive options                                 |                                            | $ | 8.500 to $32.125   |            |      | $ | 8.500 to $32.125 |           
|                                                                     |                                            |   |                    |            |      |   |                  |            | 

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4. Comprehensive Income

Comprehensive income for the three months ended December 31, 2002 and
December 31, 2003 was as follows:

|                                                                    |  |                    |           |      |  |   |           | 
|------------------------------------------------------------------- |  | ------------------ | --------- | ---- |  | - | --------- | 
|                                                                    |  | Three Months Ended
|                                                                    |  | December 31,      
|                                                                    |  |                   
|                                                                    |  | 2002               |           | 2003
|                                                                    |  |                    |           |     
|Net income                                                          |  | $                  | 5,204,357 |      |  | $ | 5,107,449 | 
|Change in fair value of long-term
investments (net of tax)          |  |                    | 545       |      |  |   | 17,061    | 
|Change in fair value of interest rate forward
contract (net of tax) |  |                    |          |      |  |   | 6,632     | 
|                                                                    |  |                    |           |      |  |   |           | 
|Comprehensive income                                                |  | $                  | 5,204,902 |      |  | $ | 5,131,142 | 
|                                                                    |  |                    |           |      |  |   |           | 

5. Intangible Assets

The financial information for acquired intangible assets is as follows:

|                                      |  |                          |           |                         |  |                |           |              |  |  |           |  |  |  |           | 
|------------------------------------- |  | ------------------------ | --------- | ----------------------- |  | -------------- | --------- | ------------ |  |  | --------- |  |  |  | --------- | 
|                                      |  | As of September 30, 2003 |           | As of December 31, 2003
|                                      |  |                          |           |                        
|                                      |  | Gross Carrying           |           | Accumulated             |  | Gross Carrying |           | Accumulated 
|                                      |  | Amount                   |           | Amortization            |  | Amount         |           | Amortization
|                                      |  |                          |           |                         |  |                |           |             
|Amortized intangible assets:          |  |                          |           |                         |  |                |           |              |  |  |           |  |  |  |           | 
|Non compete agreements and tradenames |  |                          | 3,400,000 |                         |  |                | 1,473,333 |              |  |  | 3,400,000 |  |  |  | 1,643,333 | 

For the three months ended December 31, 2002 and 2003, the aggregate
amortization expense was $170,000 in each period. For each of the fiscal years
2004 through 2005, the amortization expense is estimated to be approximately
$680,000 and for fiscal year 2006, the amortization expense is estimated to be
approximately $567,000.

6. Related-Party Transactions

On June 30, 2003, Tweeter made an additional investment in Tivoli Audio,
LLC, a manufacturer of consumer electronic products, which increased its
ownership to 25%. The Company accounts for this investment in Tivoli under the
equity method of accounting, recognizing the Companys share of Tivolis income
or loss in the Companys statement of income. For the three months ended
December 31, 2002 and December 31, 2003, the Company purchased $670,000 and
$459,000, respectively, of product from Tivoli. Dividends received from Tivoli
amounted to $57,000 and $132,000 in the three months ended December 31, 2002
and 2003, respectively. Amounts payable to Tivoli were $294,000 and $14,000 at
December 31, 2002 and 2003, respectively.

7. Reclassifications

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

8. New Accounting Pronouncements

In January 2003, the FASB issued Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities, which clarifies the application
of Accounting Research Bulletin No. 51, Consolidated Financial Statements,
relating to consolidation of certain entities. First, FIN 46 will require
identification of our participation in variable interest entities (VIEs),
which are defined as entities with a level of invested equity that is not
sufficient to fund future activities to permit them to operate on a stand alone
basis, or whose equity holders lack certain characteristics of a controlling
financial interest. For entities identified as VIEs, FIN 46 sets forth a model
to evaluate potential consolidation based on an assessment of which party to
the VIEs, if any, bears a majority of the exposure to its expected losses, or
stands to gain from a majority of its expected returns. FIN 46 also sets forth
certain disclosure regarding interests in VIEs that are deemed significant,
even if consolidation is not required. The Company does not expect that the
adoption of this statement will have a material impact on our consolidated
financial position or results of operations.

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

INTRODUCTION

Tweeter Home Entertainment Group, Inc. (Tweeter or the Company) is a
specialty retailer of mid- to high-end audio and video consumer electronics
products. Tweeter currently operates 174 stores under the Tweeter, HiFi Buys,
Sound Advice, Bang & Olufsen, Electronic Interiors, Showcase Home Entertainment
and Hillcrest names in the New England, Mid-Atlantic, Southeast, Texas,
Southern California, Chicago, Florida and Phoenix markets.

RESULTS OF OPERATIONS

THREE MONTHS ENDED DECEMBER 31, 2003 AS COMPARED TO THREE MONTHS ENDED DECEMBER
31, 2002

Total Revenue.Total revenue includes delivered merchandise, labor, net
commissions on service contracts sold, completed service center work orders,
insurance replacement and corporate sales. Total revenue increased $5.6
million, or 2.2%, to $255.2 million for the three months ended December 31,
2003 from $249.6 million for the three months ended December 31, 2002.
Comparable store sales decreased $1.9 million or .8%. Comparable store sales
is a term we use to compare the year-over-year sales performance of our stores.
A store is included in the comparable store sales base after it is in
operation for 12 full months. An acquired store is included after 12 full
months from the date of acquisition. Remodeled or relocated stores are excluded
from the comparable store base until they have competed 12 full months of
operation from the date the remodeling was completed or the store re-opened
after relocation. The comparable store sales decrease was offset by $6.9
million in sales generated from new stores that have not been opened for a
twelve-month period and are therefore not yet includable in the comparable
store sales base. There was also a decrease of $2.5 million related to stores
that closed. In addition, our corporate sales/insurance replacement sales
increased by $4.0 million due to an increased concentration in our fulfillment
business. For the quarter ended December 31, 2003, flat panel television sales
grew to 18.9% of total sales compared to 11.6% for the quarter ended December
31, 2002. For the quarter ended December 31, 2003, plasma televisions
represented 75.3% of the flat panel categorys dollars and 43.5% of the units
sold. Home installation labor revenue grew to 2.7% of revenues during the
quarter ended December 31, 2003 from 2.4% during the quarter ended December 31,

2002 and labor revenues increased 16.8% from 2002 to 2003. The mobile multi
media category increased to 2.1% for the quarter ended December 31, 2003 from
1.6% for the quarter ended December 31, 2002. Total digital sales represented
over 63.1% of total revenue for the quarter ended December 31, 2003 as compared
to 57.5% for the quarter ended December 31, 2002.

Cost of Sales and Gross Profit.Cost of sales includes merchandise costs,
net delivery costs, distribution costs, home installation labor costs, purchase
discount and vendor allowances. Cost of sales decreased $4.2 million, or 2.6%,
to $158.5 million for the three months ended December 31, 2003 from $162.6
million for the three months ended December 31, 2002. Gross profit increased
$9.8 million, or 11.2%, to $96.8 million for the three months ended December
31, 2003 from $87.0 million for the three months ended December 31, 2002. The
gross margin percentage increased 310 basis points to 37.9% for the three
months ended December 31, 2003 from 34.9% for the three months ended December
31, 2002. The quarter ended December 31, 2003 includes $10.3 million that was
recorded as a reduction to cost of goods sold that would have previously been
recorded as a reduction of selling expenses prior to the adoption of EITF 02-16
on January 1, 2003. The reclassification moved certain vendor allowances out
of cooperative advertising (selling expenses) and into vendor rebates (cost of
sales). Without the reclassification, the gross margin percentage for the
quarter ended December 31, 2003 would have been 33.9%, a decrease of 100 basis
points from the prior year. It is impractical for the Company to determine
what the prior year reclassification would have been; therefore the two periods
are not comparative. Overall margins, excluding vendor allowances,
distribution and labor costs, decreased by 230 basis points and labor costs
increased by 30 basis points. Vendor allowances increased by 60 basis points,
excluding the EITF 02-16 reclassification, and distribution costs decreased by
80 basis points, mainly attributable to lower compensation costs and lower
vehicle costs.

Selling Expenses.Selling expenses include the compensation of store
personnel and store specific support functions, occupancy costs, store level
depreciation, advertising, pre-opening expenses and credit card fees. Selling
expenses increased $9.6 million, or 14.4%, to $76.0 million for the three
months ended December 31, 2003 from $66.5 million for the three months ended
December 31, 2002. As a percentage of revenue, selling expenses

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increased to 29.8% for the three months ended December 31, 2003 from 26.6%
for the three months ended December 31, 2002. The quarter ended December 31,
2003 includes a reclassification of $10.3 million from the adoption of EITF
02-16 on January 1, 2003. The reclassification moved vendor allowances out of
cooperative advertising (selling expenses) and into vendor rebates (cost of
sales). Without the reclassification, selling expenses for the quarter ended
December 31, 2003 would have decreased 90 basis points. The decrease in
selling expenses as a percent of revenue is due to a 30 basis point reduction
in store level compensation costs, driven by the product mix shift to video as
the video categories pay a lower commission than the other categories. In
addition, credit card fees decreased by 30 basis points and gross advertising
expense was 20 basis points lower than last year.

Corporate, General and Administrative Expenses.Corporate, general and
administrative expenses include the costs of the finance, information systems,
merchandising, marketing, human resources and training departments, related
support functions and executive officers. Corporate, general and administrative
expenses increased 4.5% or $512,000 to $11.9 million for the three months ended
December 31, 2003 from $11.4 million for the three months ended December 31,
2002. As a percentage of total revenue, corporate general and administrative
expenses increased to 4.7% for the three months ended December 31, 2003 from
4.6% for the three months ended December 31, 2002. This was due to a 40 basis
point increase in professional fees, mostly due to payments to outside
consultants and bank fees related to the three-year senior secured revolving
credit facility entered into in April 2003. These increases were offset by a
20 basis point decrease in compensations costs and a 20 basis point decrease in
travel costs and telephone expense.

Amortization of Intangibles.Amortization of intangibles was $170,000 for
the three months ended December 31, 2003 and December 31, 2002.

Interest Expense.Interest expense increased to $655,000 for the three
months ended December 31, 2003 compared to $392,000 for the three months ended
December 31, 2002. This increase is due to the additional borrowings on our
revolving credit agreement during the three months ended December 31, 2003
compared to the balances borrowed during the three months ended December 31,
2002. Borrowings were increased as a result of higher inventory levels. We
decided to bring in the holiday video inventory earlier than in the past so
that products that were in short supply and in high demand could be on hand for
the holiday selling season.

Interest Income.Interest income increased to $226,000 for the three
months ended December 31, 2003 compared to $5,000 for the three months ended
December 31, 2002. The increase was due to interest income paid by suppliers
on pre-payments to secure inventory purchases.

Income from Equity Investment.Income from equity investment increased to
$272,000 for the three months ended December 31, 2003 from $57,000 for the year
ended December 31, 2002. In June 2003, the Company increased its investment in
Tivoli Audio, LLC to 25% from 17.5%.

Income Taxes.The effective tax rate for the three months ended December
31, 2003 and December 31, 2002 was 40.0%.

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

BALANCE SHEET COMPARISON: DECEMBER 31, 2003 AS COMPARED TO SEPTEMBER 30, 2003

Inventory. Total inventory increased during the three months ended December
31, 2003 compared to September 30, 2003 by $28.3 million. The increase is
attributable to additional video merchandise, which was high in demand and
short in supply, brought in during the December quarter in anticipation of
January sales which historically has been a strong video month.

Accounts receivable.Total accounts receivable increased by $7.8 million
during the three months ended December 31, 2003 compared to September 30, 2003.
The increase was primarily attributable to monies due from vendors for
allowances that were higher as a result of the increase in purchases for the
quarter. In addition, credit card

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receivables increased due to the higher sales volume in the quarter.

Prepaid expenses and other current assets.Prepaid expenses and other current
assets decreased by $12.1 million during the three months ended December 31,
2003 compared to September 30, 2003. The decrease was due to income tax
refunds received during the quarter of $7.1 million and a decrease in prepaid
health insurance premiums.

Current portion of long-term debt.Current portion of long-term debt increased
by $20.3 million during the three months ended December 31, 2003 compared to
September 30, 2003. The increase is a result of the timing of accounts payable
checks clearing the bank.

LIQUIDITY AND CAPITAL RESOURCES

Net cash used in operating activities was $15.4 million for the three
months ended December 31, 2003 compared to net cash provided of
$22.4 million
for the three months ended December 31, 2002. Cash used in operating activities
for the three months ended December 31, 2003 was primarily the result of an
increase in inventory of $28.3 million, an increase in accounts receivable of
$8.0 million and a decrease in accounts payable and accrued expenses of $3.3
million. This was offset by net income of $5.1 million, a decrease in prepaid
expenses and other current assets of $11.4 million and an increase in customer
deposits of $1.7 million. The adjustments to reconcile net income to net cash
provided by operating activities consisted primarily of $5.6 million for
depreciation and amortization, as well as other minor items.

At December 31, 2003, working capital was $93.8 million, compared to $86.6
million at September 30, 2003. The ratio of current assets to current
liabilities was 1.91 to 1 at December 31, 2003 and 2.03 to 1 at September 30,
2003. The decrease was primarily the result of higher inventory levels at
December 31, 2003.

Net cash used in investing activities for the three months ended December
31, 2003 consisted primarily of capital expenditures of $4.2 million, primarily
used for the building of new video displays in stores and the relocation of an
existing store.

Net cash provided by financing activities during the three months ended
December 31, 2003 was $20.4 million, which was primarily due to an increase in
current portion of long-term debt of $20.4 million. This increase was due to
the timing and clearing of outstanding checks.

On April 16, 2003, Tweeter entered into an agreement with Fleet National
Bank and Fleet Retail Finance Inc., on behalf of themselves and other
co-lenders, for a new three-year senior secured revolving credit facility in
the amount of $110 million. The facility replaced a $100 million line of credit
that was due to expire in 2004. Availability under the credit facility will be
based on a borrowing base tied to a percentage of eligible inventory,
receivables and real estate. The interest rate on the new facility ranges from
2.00% to 2.50% over LIBOR, provided Tweeter commits the balances for a period
of thirty days or more, or 0% to .25% over the prime rate. The line is secured
by substantially all of the assets of Tweeter and its subsidiaries and contains
various covenants and restrictions, including that: (i) Tweeter cannot create,
incur, assume or permit additional indebtedness, (ii) Tweeter cannot create,
incur, assume or permit any lien on any property or asset, (iii) Tweeter cannot
merge or consolidate with any other person or permit any other person to merge
or consolidate with Tweeter, (iv) Tweeter cannot purchase, hold or acquire any
investment in any other person except those specifically permitted, (v) Tweeter
cannot sell, transfer, lease or otherwise dispose of any asset except permitted
exceptions, and (vi) Tweeter cannot declare or make any restricted payments.
The borrowers under the credit facility will be subsidiaries of Tweeter, and
Tweeter will be a guarantor of any amounts borrowed. In addition, there is a
commitment fee for the unused portion of the line of .375%. Our
weighted-average interest rate on outstanding borrowings under this credit
facility for the first three months of fiscal 2004 was approximately 3.6%. The
credit facility has a maturity date of April 1, 2006, and there are no required
quarterly or monthly principal prepayments under the facility.

Under the credit facility as originally signed, we were required to
maintain a certain fixed charge coverage ratio as of the end of each month. On
August 30, 2003, we amended the agreement to eliminate this requirement, and
replaced it with additional reserves in the amount of $6.0 million, used when
computing the available borrowing base under the facility.

As of December 31, 2003, the Company had $35.5 million available under
this revolving credit facility and

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$47.9 million outstanding.

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

New Accounting Pronouncements

In January 2003, the FASB issued Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities, which clarifies the application
of Accounting Research Bulletin No. 51, Consolidated Financial Statements,
relating to consolidation of certain entities. First, FIN 46 will require
identification of our participation in variable interest entities (VIEs),
which are defined as entities with a level of invested equity that is not
sufficient to fund future activities to permit them to operate on a stand alone
basis, or whose equity holders lack certain characteristics of a controlling
financial interest. For entities identified as VIEs, FIN 46 sets forth a model
to evaluate potential consolidation based on an assessment of which party to
the VIEs, if any, bears a majority of the exposure to its expected losses, or

stands to gain from a majority of its expected returns. FIN 46 also sets forth
certain disclosure regarding interests in VIEs that are deemed significant,
even if consolidation is not required. We do not expect that the adoption of
this statement will have a material impact on our consolidated financial
position or 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 Company growth and acquisitions,
dependence on key personnel, the need for additional financing, competition and
seasonal fluctuations, and those referred to in the Companys Annual Report on
Form 10-K filed on December 12, 2003, that could cause actual future results
and events to differ materially from those currently anticipated. Readers are
cautioned not to place undue reliance on these forward-looking statements.




ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

At December 31, 2003, the Company had $47.9 million of variable rate
borrowings outstanding under its revolving credit agreements, which
approximates fair value. A hypothetical 10% adverse change in interest rates
for this variable rate debt would have an approximate $183,000 annual impact on
the Companys earnings and cash flows.

On July 14, 2003, the Company entered into an interest rate swap that
fixes the interest rate on up to $35 million of libor-based borrowings under
the revolving term bank loan at 1.69%, plus the applicable margin, for the
period from January 1, 2004 to December 31, 2004. The interest rate swap has
been designated as a cash flow hedge. The effective portion of the gain or loss
on the derivative instrument is reported as a component of accumulated other
comprehensive income and reclassified into earnings in the same period or
periods during which the hedged transaction affects earnings. The remaining
gain or loss on the derivative instrument in excess of the cumulative change in
the present value of future cash flows of the hedged item, if any, is
recognized in current earnings during the period of change. For the quarter
ended December 31, 2003, we did not record any expense or income in the
statement of income with respect to this instrument.

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ITEM 4. CONTROLS AND PROCEDURES

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

14



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##### Table of Contents






PART II. OTHER INFORMATION




ITEM 1. LEGAL PROCEEDINGS



| |  | None
| |  | ----




ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS



| |  | None
| |  | ----




ITEM 3. DEFAULTS UPON SENIOR SECURITIES



| |  | None
| |  | ----




ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS



| |  | None
| |  | ----




ITEM 5. OTHER INFORMATION



|(a) |  | Subsequent Event
|--- |  | ----------------



| |  | None
| |  | ----




ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K



|(a) |  | Exhibits
|--- |  | --------

| |  |  |      |  |  |                                          |  |  |  |  | 
| |  |  | ---- |  |  | ---------------------------------------- |  |  |  |  | 
| |  |  | 31.1 |  |  | Rule 13a-14(a)/15d-14(a) Certifications.
| |  |  |      |  |  |                                         
| |  |  | 31.2 |  |  | Rule 13a-14(a)/15d-14(a) Certifications.
| |  |  |      |  |  |                                         
| |  |  | 32.1 |  |  | Section 1350 Certifications.            
| |  |  |      |  |  |                                         
| |  |  | 32.2 |  |  | Section 1350 Certifications.            



|(b) |  | Reports on Form 8-K
|--- |  | -------------------

On November 26, 2003, Tweeter filed with the Securities and Exchange
Commission a Current Report on Form 8-K to announce its Results of Operations
and Financial Condition for the quarter and year ended September 30, 2003. In
addition, Tweeter filed a transcript of its earnings conference call held on
November 26, 2003.

15



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##### Table of Contents






SIGNATURES

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

| |  |                                                   |  |                   
| |  | ------------------------------------------------- |  | ------------------
| |  | TWEETER HOME ENTERTAINMENT GROUP, INC.           
| |  |                                                   |  |                   
| |  | By:                                               |  | /s/ Joseph McGuire
| |  |                                                   |  |                   
| |  | Joseph McGuire,                                  
| |  | Senior Vice-President and Chief Financial Officer

Date: February 10, 2004

16