##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 Form 10-Q
  ý
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended June 30, 2006
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from
___________________ to ___________________
 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 incorporation or organization)
    
    (I.R.S. Employer Identification No.)
 40 Pequot Way
Canton, MA 02021
 781-830-3000
 þ o
  Large accelerated filer   o
    
    Accelerated
filer   þ
    
    Non-accelerated filer   o
 o þ
  TITLE OF CLASS
    
    OUTSTANDING AT August 2, 2006Common Stock, $0.01 par value
    
    25,475,516




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##### Table of Contents



TWEETER HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
 PAGEPART I -
    
    FINANCIAL INFORMATIONItem 1.
    
    Condensed Consolidated Financial Statements (Unaudited).Condensed Consolidated Balance Sheets as of June 30, 2006, September 30, 2005 and
June 30, 2005.
    
    
    2Condensed Consolidated Statements of Operations for the Three and Nine Months Ended
June 30, 2006 and 2005.
    
    
    3Condensed Consolidated Statements of Cash Flows for the Nine Months Ended June 30,
2006 and 2005.
    
    
    4Notes to Condensed Consolidated Financial Statements.
    
    
    5Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations.
    
    
    13Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk.
    
    
    18Item 4.
    
    Controls and Procedures.
    
    
    18PART II -
    
    OTHER INFORMATIONItem 1.
    
    Legal Proceedings.
    
    
    19Item 1A.
    
    Risk Factors
    
    
    19Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds.
    
    
    19Item 3.
    
    Defaults upon Senior Securities.
    
    
    19Item 4.
    
    Submission of Matters to a Vote of Security Holders.
    
    
    19Item 5.
    
    Other Information.
    
    
    19Item 6.
    
    Exhibits.
    
    
    19SIGNATURESEx-10.1 Employment Agreement between the Company and Gregory HuntEx-10.2 Amendment to Employment Agreement between the Company and Gregory HuntEx-31.1 Section 302 Certification of CEO & acting CFOEx-32.1 Section 906 Certification of CEO & acting CFO




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Item 1. Condensed Consolidated Financial Statements.
 
 TWEETER HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 June 30,
    
    
    September 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2005ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    1,001,538
    
    
    $
    1,309,871
    
    
    $
    1,425,126Accounts receivable, net of allowance
for doubtful accounts of $1,457,653,
$1,400,172, and $754,989, respectively
    
    
    24,063,188
    
    
    
    28,189,414
    
    
    
    23,780,637Inventory
    
    
    102,321,991
    
    
    
    111,506,056
    
    
    
    102,409,660Refundable income taxes
    
    
    9,013,361
    
    
    
    9,006,740
    
    
    
    10,438,418Prepaid expenses and other current assets
    
    
    6,011,182
    
    
    
    8,189,625
    
    
    
    9,415,727Total current assets
    
    
    142,411,260
    
    
    
    158,201,706
    
    
    
    147,469,568Property and equipment, net
    
    
    99,483,442
    
    
    
    115,306,933
    
    
    
    118,752,686Long-term investments
    
    
    2,698,544
    
    
    
    2,220,353
    
    
    
    1,766,741Intangible assets, net
    
    
    56,666
    
    
    
    566,667
    
    
    
    736,667Goodwill
    
    
    5,250,868
    
    
    
    5,250,868
    
    
    
    5,250,868Other assets, net
    
    
    1,635,556
    
    
    
    2,470,599
    
    
    
    1,622,969Total Assets
    
    $
    251,536,336
    
    
    $
    284,017,126
    
    
    $
    275,599,499LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Current portion of long-term debt
    
    $
    6,656,751
    
    
    $
    9,278,849
    
    
    $
    15,930,161Current portion of deferred consideration
    
    
    451,533
    
    
    
    484,866
    
    
    
    484,866Accounts payable
    
    
    30,679,699
    
    
    
    34,885,458
    
    
    
    36,033,843Accrued expenses
    
    
    44,089,848
    
    
    
    48,775,158
    
    
    
    42,286,678Customer deposits
    
    
    20,724,606
    
    
    
    25,623,763
    
    
    
    20,776,176Deferred warranty
    
    
    
    
    
    
    
    
    
    
    19,750Total current liabilities
    
    
    102,602,437
    
    
    
    119,048,094
    
    
    
    115,531,474Long-term debt
    
    
    37,349,143
    
    
    
    62,617,263
    
    
    
    38,179,877Rent related accruals
    
    
    21,045,745
    
    
    
    16,939,556
    
    
    
    16,463,630Deferred consideration
    
    
    2,306,897
    
    
    
    2,545,547
    
    
    
    2,666,763Commitments and Contingencies
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; 27,012,797,
26,249,725 and 26,245,750 shares issued,
respectively
    
    
    270,128
    
    
    
    262,497
    
    
    
    262,457Additional paid in capital
    
    
    309,606,213
    
    
    
    304,663,875
    
    
    
    304,594,395Accumulated other comprehensive income
    
    
    222,539
    
    
    
    112,329
    
    
    
    101,327Accumulated deficit
    
    
    (220,210,874
    )
    
    
    (220,488,691
    )
    
    
    (200,498,969
    )Treasury stock, 1,538,481, 1,577,698 and
1,603,571 shares, at cost, respectively
    
    
    (1,655,892
    )
    
    
    (1,683,344
    )
    
    
    (1,701,455
    )Total stockholders equity
    
    
    88,232,114
    
    
    
    82,866,666
    
    
    
    102,757,755Total Liabilities and Stockholders Equity
    
    $
    251,536,336
    
    
    $
    284,017,126
    
    
    $
    275,599,499
  2




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TWEETER HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 Three Months ended
    
    
    Nine Months endedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Total revenue
    
    $
    159,255,995
    
    
    $
    166,577,644
    
    
    $
    613,010,639
    
    
    $
    606,840,001Cost of sales
    
    
    (94,674,514
    )
    
    
    (103,297,849
    )
    
    
    (358,600,354
    )
    
    
    (365,521,887
    )Gross profit
    
    
    64,581,481
    
    
    
    63,279,795
    
    
    
    254,410,285
    
    
    
    241,318,114Selling, general and administrative expenses
    
    
    78,137,969
    
    
    
    80,100,861
    
    
    
    250,945,771
    
    
    
    255,473,856Amortization of intangibles
    
    
    170,000
    
    
    
    170,000
    
    
    
    510,000
    
    
    
    510,000Restructuring charges
    
    
    
    
    
    
    16,867,876
    
    
    
    483,530
    
    
    
    16,867,876Income (loss) from continuing operations
    
    
    (13,726,488
    )
    
    
    (33,858,942
    )
    
    
    2,470,984
    
    
    
    (31,533,618
    )Interest expense
    
    
    (1,000,822
    )
    
    
    (780,137
    )
    
    
    (3,500,447
    )
    
    
    (2,008,369
    )Interest income
    
    
    
    
    
    
    30
    
    
    
    243
    
    
    
    14,071Gain on sale of equity investments
    
    
    
    
    
    
    9,869,065
    
    
    
    
    
    
    
    9,869,065Loss from continuing operations before
income taxes
    
    
    (14,727,310
    )
    
    
    (24,769,984
    )
    
    
    (1,029,220
    )
    
    
    (23,658,851
    )Income tax provision (benefit)
    
    
    (110,000
    )
    
    
    
    
    
    
    
    
    
    
    21,920,538Loss from continuing operations before
income from equity investments
    
    
    (14,617,310
    )
    
    
    (24,769,984
    )
    
    
    (1,029,220
    )
    
    
    (45,579,389
    )Income from equity investments
    
    
    275,353
    
    
    
    248,566
    
    
    
    1,461,384
    
    
    
    539,511Net income (loss) from continuing operations
    
    
    (14,341,957
    )
    
    
    (24,521,418
    )
    
    
    432,164
    
    
    
    (45,039,878
    )Discontinued operations:Net loss from discontinued operations
    
    
    (25,733
    )
    
    
    (7,422,546
    )
    
    
    (154,347
    )
    
    
    (9,323,039
    )Net income (loss)
    
    $
    (14,367,690
    )
    
    $
    (31,943,964
    )
    
    $
    277,817
    
    
    $
    (54,362,917
    )Basic earnings (loss) per share:Income (loss) from continuing operations
    
    $
    (0.57
    )
    
    $
    (1.00
    )
    
    $
    0.02
    
    
    $
    (1.84
    )Loss from discontinued operations
    
    
    
    
    
    
    (0.30
    )
    
    
    (0.01
    )
    
    
    (0.38
    )Basic net income (loss) per share
    
    $
    (0.57
    )
    
    $
    (1.30
    )
    
    $
    0.01
    
    
    $
    (2.22
    )Diluted earnings (loss) per share:Income (loss) from continuing operations
    
    $
    (0.57
    )
    
    $
    (1.00
    )
    
    $
    0.02
    
    
    $
    (1.84
    )Loss from discontinued operations
    
    
    
    
    
    
    (0.30
    )
    
    
    (0.01
    )
    
    
    (0.38
    )Diluted net income (loss) per share
    
    $
    (0.57
    )
    
    $
    (1.30
    )
    
    $
    0.01
    
    
    $
    (2.22
    )Weighted average shares outstanding:Basic
    
    
    25,369,473
    
    
    
    24,600,731
    
    
    
    25,044,992
    
    
    
    24,538,937Diluted
    
    
    25,369,473
    
    
    
    24,600,731
    
    
    
    25,472,935
    
    
    
    24,538,937
  3




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TWEETER HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 Nine Months EndedJune 30,2006
    
    
    2005CASH FLOWS FROM OPERATING ACTIVITIES:Net income (loss)
    
    $
    277,817
    
    
    $
    (54,362,917
    )Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:Depreciation and amortization
    
    
    19,464,611
    
    
    
    18,699,385Accretion expense
    
    
    125,623
    
    
    
    Stock-based compensation  vendor
    
    
    191,000
    
    
    
    Stock-based compensation  employee
    
    
    547,882
    
    
    
    75,727Income from equity investment
    
    
    (1,461,384
    )
    
    
    (733,475
    )Distributions from equity investment
    
    
    625,727
    
    
    
    1,435,754Gain on sale of equity investments, net
    
    
    
    
    
    
    (9,869,065
    )Impairment charge
    
    
    37,121
    
    
    
    7,853,925Loss on disposal of property and equipment
    
    
    492,645
    
    
    
    28,589Allowance for doubtful accounts
    
    
    322,286
    
    
    
    308,015Tax benefit from options exercised
    
    
    
    
    
    
    45,853Deferred income tax provision
    
    
    
    
    
    
    22,282,497Amortization of deferred gain on sale leaseback
    
    
    (182,613
    )
    
    
    (33,632
    )Recognition of deferred lease incentives
    
    
    (473,871
    )
    
    
    179,670Changes in operating assets and liabilities:Accounts receivable
    
    
    3,803,940
    
    
    
    (6,292,730
    )Inventory
    
    
    9,327,016
    
    
    
    3,909,846Prepaid expenses and other assets
    
    
    2,611,484
    
    
    
    (3,329,642
    )Accounts payable and accrued expenses
    
    
    (7,807,594
    )
    
    
    7,928,694Customer deposits
    
    
    (4,899,157
    )
    
    
    (1,117,729
    )Deferred warranty
    
    
    
    
    
    
    (73,875
    )Rent related accruals
    
    
    131,574
    
    
    
    2,196,205Deferred consideration
    
    
    (403,219
    )
    
    
    (396,983
    )Net cash provided by (used in) operating activities
    
    
    22,730,888
    
    
    
    (11,265,888
    )CASH FLOWS FROM INVESTING ACTIVITIES:Purchase of property and equipment
    
    
    (13,176,748
    )
    
    
    (19,755,118
    )Proceeds from sale-leaseback transaction, net of fees
    
    
    13,521,951
    
    
    
    2,946,707Proceeds from sale of property and equipment
    
    
    17,416
    
    
    
    231,638Proceeds from sale of equity investments
    
    
    
    
    
    
    10,248,966Return of equity investments
    
    
    249,839
    
    
    
    Purchase of equity investments
    
    
    
    
    
    
    (300,000
    )Net cash provided by (used in) investing activities
    
    
    612,458
    
    
    
    (6,627,807
    )CASH FLOWS FROM FINANCING ACTIVITIES:(Decrease) increase in amount due to bank
    
    
    (2,620,704
    )
    
    
    12,756,970Net (repayments) proceeds of long-term debt
    
    
    (25,269,514
    )
    
    
    3,166,864Proceeds from options exercised
    
    
    4,015,097
    
    
    
    337,161Proceeds from employee stock purchase plan
    
    
    223,442
    
    
    
    256,821Net cash (used in) provided by financing activities
    
    
    (23,651,679
    )
    
    
    16,517,816DECREASE IN CASH AND CASH EQUIVALENTS
    
    
    (308,333
    )
    
    
    (1,375,879
    )CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
    
    
    1,309,871
    
    
    
    2,801,005CASH AND CASH EQUIVALENTS, END OF PERIOD
    
    $
    1,001,538
    
    
    $
    1,425,126
  4




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##### Table of Contents



TWEETER HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 1. Basis of Presentation
   2. Summary of Selected Accounting Policies
 Inventory 
 Long-Term Investments 
  Revenue Recognition 
    3. Recent Accounting Pronouncements
 Accounting for Uncertainty in Income Taxes  an interpretation of FASB Statement
109
 5




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##### Table of Contents



4. Stock Based Compensation
 Stock-based compensation  Share-Based Payment Accounting for Stock-Based Compensation Accounting for Stock Issued to Employees
    Accounting for Equity Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services
  6




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Three Months Ended
    
    
    Nine Months EndedJune 30, 2006
    
    
    June 30, 2006Stock
    
    
    
    
    
    
    StockOption
    
    
    
    
    
    
    OptionPlan
    
    
    ESPP
    
    
    Plan
    
    
    ESPPRisk-free interest rate
    
    
    4.9
    %
    
    
    4.5
    %
    
    
    4.3
    %
    
    
    3.9
    %Expected dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %Expected life of option grants and ESPP shares (years)
    
    
    5.17
    
    
    
    0.25
    
    
    
    5.17
    
    
    
    0.25Expected volatility of underlying stock
    
    
    73.9
    %
    
    
    114.8
    %
    
    
    77.7
    %
    
    
    100.5
    %Expected forfeitures as percentage of total option
grants and ESPP shares
    
    
    5.7
    %
    
    
    0.0
    %
    
    
    5.7
    %
    
    
    0.0
    %
   7




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##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedJune 30, 2005
    
    
    June 30, 2005Net loss as reported
    
    $
    (31,943,964
    )
    
    $
    (54,362,917
    )Add:Total stock-based employee
compensation expense
recorded, net of related
tax effects
    
    
    1,410
    
    
    
    75,727Deduct:Total stock-based employee
compensation expense
determined under fair value
based method for all
awards, net of related tax
effects
    
    
    (1,158,208
    )
    
    
    (3,488,013
    )Pro forma net loss
    
    $
    (33,100,762
    )
    
    $
    (57,775,203
    )Loss per shareBasic and diluted  as reported
    
    $
    (1.30
    )
    
    $
    (2.22
    )Basic and diluted  pro forma
    
    $
    (1.35
    )
    
    $
    (2.35
    )
  Three Months Ended
    
    
    Nine Months EndedJune 30, 2005
    
    
    June 30, 2005Risk-free interest rate
    
    
    4.1
    %
    
    
    3.4
    %Expected dividend yield
    
    
    0.0
    %
    
    
    0.0
    %Expected life of option grants (years)
    
    
    10.0
    
    
    
    10.0Expected volatility of underlying stock
    
    
    83.0
    %
    
    
    83.2
    %Expected forfeitures as percentage of total grants
    
    
    7.0
    %
    
    
    7.0
    %
  Stock Option Activity
  Weighted-AverageNumber of
    
    
    ExerciseOptions
    
    
    PriceOutstanding at March 31, 2006
    
    
    3,484,184
    
    
    $
    6.93Granted
    
    
    20,000
    
    
    
    8.59Exercised
    
    
    (262,845
    )
    
    
    6.11Forfeited or expired
    
    
    (202,873
    )
    
    
    14.16Outstanding at June 30, 2006
    
    
    3,038,466
    
    
    $
    6.52Exercisable at June 30, 2006
    
    
    2,402,879
    
    
    $
    7.19
  8




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##### Table of Contents



Weighted-AverageNumber of
    
    
    ExerciseOptions
    
    
    PriceOutstanding at September 30, 2005
    
    
    3,601,505
    
    
    $
    7.21Granted
    
    
    748,159
    
    
    
    3.94Exercised
    
    
    (723,072
    )
    
    
    5.55Forfeited or expired
    
    
    (588,126
    )
    
    
    8.60Outstanding at June 30, 2006
    
    
    3,038,466
    
    
    $
    6.52Exercisable at June 30, 2006
    
    
    2,402,879
    
    
    $
    7.19
  Options Outstanding
    
    
    Options ExercisableWeighted-
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Weighted-Weighted-
    
    
    Average
    
    
    
    
    
    
    
    
    
    
    Weighted-
    
    
    AverageAverage
    
    
    Remaining
    
    
    Aggregate
    
    
    
    
    
    
    Average
    
    
    Remaining
    
    
    AggregateExercise
    
    
    Contractual
    
    
    Intrinsic
    
    
    
    
    
    
    Exercise
    
    
    Contractual
    
    
    IntrinsicRange of Exercise Prices
    
    Shares
    
    
    Price
    
    
    Term (Years)
    
    
    Value
    
    
    Shares
    
    
    Price
    
    
    Term (Years)
    
    
    Value$2.70 - $4.38
    
    
    596,184
    
    
    $
    3.60
    
    
    
    9.2
    
    
    $
    2,089,528
    
    
    
    34,236
    
    
    $
    3.54
    
    
    
    9.0
    
    
    $
    121,766$4.70 - $5.64
    
    
    901,685
    
    
    
    5.48
    
    
    
    6.4
    
    
    
    1,460,502
    
    
    
    892,140
    
    
    
    5.48
    
    
    
    6.4
    
    
    
    1,442,175$5.90 - $7.18
    
    
    547,114
    
    
    
    6.06
    
    
    
    6.5
    
    
    
    572,934
    
    
    
    505,114
    
    
    
    6.00
    
    
    
    6.2
    
    
    
    556,034$7.27 - $8.59
    
    
    705,313
    
    
    
    7.85
    
    
    
    4.8
    
    
    
    
    
    
    
    683,219
    
    
    
    7.82
    
    
    
    4.6
    
    
    
    $12.00 - $32.00
    
    
    288,170
    
    
    
    13.50
    
    
    
    1.2
    
    
    
    
    
    
    
    288,170
    
    
    
    13.50
    
    
    
    1.2
    
    
    
    Total
    
    
    3,038,466
    
    
    $
    6.52
    
    
    
    6.1
    
    
    $
    4,122,964
    
    
    
    2,402,879
    
    
    $
    7.19
    
    
    
    5.3
    
    
    $
    2,119,975
        9




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Weighted-AverageNumber of
    
    
    ExerciseOptions
    
    
    PriceNon-vested at March 31, 2006
    
    
    662,225
    
    
    $
    3.83Granted
    
    
    20,000
    
    
    
    8.59Vested
    
    
    (700
    )
    
    
    2.70Forfeited
    
    
    (45,938
    )
    
    
    3.60Non-vested at June 30, 2006
    
    
    635,587
    
    
    $
    4.00
  Weighted-AverageNumber of
    
    
    ExerciseOptions
    
    
    PriceNon-vested at September 30, 2005
    
    
    1,750
    
    
    $
    2.70Granted
    
    
    718,159
    
    
    
    3.96Vested
    
    
    (700
    )
    
    
    2.70Forfeited
    
    
    (83,622
    )
    
    
    3.60Non-vested at June 30, 2006
    
    
    635,587
    
    
    $
    4.00
 5. Restructuring Charges
    Accounting for
Costs Associated with Exit or Disposal Activities
  LeaseTerminationand OtherRelated
    
    
    ProfessionalCharges
    
    
    Fees
    
    
    Severance
    
    
    TotalBalance as of September 30, 2005
    
    $
    6,394,552
    
    
    $
    928,564
    
    
    $
    8,992
    
    
    $
    7,332,108Change in estimate  revised assumptions
    
    
    483,530
    
    
    
    
    
    
    
    
    
    
    
    483,530Payments
    
    
    (2,678,397
    )
    
    
    (227,547
    )
    
    
    (8,992
    )
    
    
    (2,914,936
    )Balance as of June 30, 2006
    
    $
    4,199,685
    
    
    $
    701,017
    
    
    $
    
    
    
    $
    4,900,702
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6. Discontinued Operations
   Accounting for the Impairment or
Disposal of Long-Lived Assets
  LeaseTerminationand OtherRelated
    
    
    ProfessionalCharges
    
    
    Fees
    
    
    Severance
    
    
    TotalBalance as of September 30, 2005
    
    $
    1,565,310
    
    
    $
    530,885
    
    
    $
    6,653
    
    
    $
    2,102,848Change in estimate  revised assumptions
    
    
    154,347
    
    
    
    
    
    
    
    
    
    
    
    154,347Payments
    
    
    (508,588
    )
    
    
    (162,745
    )
    
    
    (6,653
    )
    
    
    (677,986
    )Balance as of June 30, 2006
    
    $
    1,211,069
    
    
    $
    368,140
    
    
    $
    
    
    
    $
    1,579,209
  7. Income Taxes
 Accounting for Income Taxes
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##### Table of Contents



8. Net Income per Share
   Three Months Ended
    
    
    Nine Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Basic Earnings (Loss) Per Share:Numerator:Net income (loss) from continuing operations
    
    $
    (14,341,957
    )
    
    $
    (24,521,418
    )
    
    $
    432,164
    
    
    $
    (45,039,878
    )Denominator:Weighted-average shares outstanding
    
    
    25,369,473
    
    
    
    24,600,731
    
    
    
    25,044,992
    
    
    
    24,538,937Basic net income (loss) per share
    
    $
    (0.57
    )
    
    $
    (1.00
    )
    
    $
    0.02
    
    
    $
    (1.84
    )Diluted Earnings (Loss) Per Share:Numerator:Net income (loss) from continuing operations
    
    $
    (14,341,957
    )
    
    $
    (24,521,418
    )
    
    $
    432,164
    
    
    $
    (45,039,878
    )Denominator:Weighted-average shares outstanding
    
    
    25,369,473
    
    
    
    24,600,731
    
    
    
    25,472,935
    
    
    
    24,538,937Diluted net income (loss) per share
    
    $
    (0.57
    )
    
    $
    (1.00
    )
    
    $
    0.02
    
    
    $
    (1.84
    )Anti-dilutive options and warrants not included in
earnings per share calculation
    
    
    3,995,046
    
    
    
    4,342,352
    
    
    
    1,981,063
    
    
    
    4,429,388Exercise price range of anti-dilutive options and warrantsLow
    
    $
    2.70
    
    
    $
    0.31
    
    
    $
    6.70
    
    
    $
    0.31High
    
    $
    32.00
    
    
    $
    32.13
    
    
    $
    32.00
    
    
    $
    32.13
 9. Related-Party Transactions
    12




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##### Table of Contents



10. Sale-Leaseback Transaction
  
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
 INTRODUCTION
   Accounting for the Impairment or Disposal of
Long-Lived Assets
  13




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RESULTS OF OPERATIONS
 THREE MONTHS ENDED JUNE 30, 2006 AS COMPARED TO THREE MONTHS ENDED JUNE 30, 2005
 Total Revenue 
  Cost of Sales and Gross Profit  ,
 Selling, General and Administrative Expenses 
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##### Table of Contents



Amortization of Intangibles 
 Interest Expense 
 Income from Equity Investments 
 Income Taxes  Accounting for Income Taxes
 Discontinued Operations 
 NINE MONTHS ENDED JUNE 30, 2006 AS COMPARED TO NINE MONTHS ENDED JUNE 30, 2005
 Total Revenue 
  Cost of Sales and Gross Profit  ,
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##### Table of Contents



Selling, General and Administrative Expenses 
 Amortization of Intangibles 
 Restructuring Charges 
 Interest Expense 
 Income from Equity Investments 
 Income Taxes  Accounting for Income Taxes
 Discontinued Operations 
 LIQUIDITY AND CAPITAL RESOURCES
  16




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##### Table of Contents



FORWARD-LOOKING STATEMENTS
  
 Item 3. Quantitative and Qualitative Disclosures about Market Risk.
   
 Item 4. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
 Changes in Internal Control over Financial Reporting.
 
    
    The Company has added resources to its accounting and finance staff, including appointing a
Director of Internal Audit to spearhead its internal control compliance efforts. The Company is
actively recruiting to further add staff with financial reporting and internal control expertise
and the Company expects to add an adequate number of experienced finance and accounting personnel
to eliminate the delays in the financial statement preparation and other issues that have occurred
in the past. In addition, training of the finance and accounting staff will be formalized and
enhanced. The Company has also engaged outside consultants to augment its staff and to add
internal control expertise.
    
    The Company has re-emphasized to store, distribution center, and corporate personnel the
importance of controls surrounding the accurate and timely approval and reporting of information to
the corporate office, and has begun a program of education and audit to ensure that these controls
are understood and uniformly applied. This re-emphasis is expected to eliminate certain of the
weaknesses cited above.
    
    The Company has taken steps to correct weaknesses relating to system access, segregation of
duties, supervisory controls, and control over spreadsheets.
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##### Table of Contents



PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings.
  
 Item 1A. Risk Factors.
  
 Item 2. Unregistered Sales of Equity 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.
 Ex. 10.1
    Employment Agreement between the Company and Gregory HuntEx. 10.2
    Amendment to Employment Agreement between the Company and Gregory HuntEx. 31.1
    Certification of Chief Executive Officer and acting Chief Financial Officer
pursuant to Section 302 of the Sarbanes-Oxley ActEx. 32.1
    Certification of Chief Executive Officer and acting Chief Financial Officer
pursuant to 18 U.S.C. Section 1350
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##### Table of Contents



SIGNATURES
  TWEETER HOME ENTERTAINMENT GROUP, INC.By:
    /s/ Joseph G. McGuireJoseph G. McGuirePresident and Chief Executive
Officer andacting Chief Financial Officer