Use these links to rapidly review the documentTABLE OF CONTENTS INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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FORM 10-K /A-1

(Mark One)

|ý | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ------------------------------------------------------------------------------------

For the fiscal year ended January 31, 2002

or

|o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

For the transition period from  to

Commission file number 0-22532

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ULTIMATE ELECTRONICS, INC.(Exact Name of Registrant as Specified in its Charter)

Delaware(State of Incorporation or Organization)

84-0585211(I.R.S. Employer Identification No.)321 W. 84th Avenue, Suite A
Thornton, CO(Address of principal executive office)

80260(Zip Code)


Registrant's telephone number, including area code:(303) 412-2500

Securities
registered pursuant to Section 12(b) of the Act:None

Securities
registered pursuant to Section 12(g) of the Act:Common Stock, $.01 Par Value Per Share

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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 ý    No o

Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of
registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.  ý

The
aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $197,012,783 as of March 1, 2002.

The
number of shares of Common Stock outstanding as of March 1, 2002 was 11,245,545.

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TABLE OF CONTENTS



|                                           |  |                                                                                      |  | Page
|------------------------------------------ |  | ------------------------------------------------------------------------------------ |  | ----
|EXPLANATORY NOTE                           |  | 1                                                                                   
|ITEM 1:                                    |  | BUSINESS                                                                             |  | 2   
|                                           |  | Overview                                                                             |  | 2   
|                                           |  | Business Strategy                                                                    |  | 2   
|                                           |  | Growth Strategy                                                                      |  | 3   
|                                           |  | Store Operations                                                                     |  | 4   
|                                           |  | Merchandising and Inventory                                                          |  | 7   
|                                           |  | Advertising and Marketing                                                            |  | 9   
|                                           |  | Management Information System                                                        |  | 9   
|                                           |  | Competition                                                                          |  | 9   
|                                           |  | Intellectual Property                                                                |  | 10  
|                                           |  | Employees                                                                            |  | 10  
|                                           |  | Seasonality                                                                          |  | 10  
|                                           |  | Corporate Information                                                                |  | 10  
|                                           |  | Risk Factors                                                                         |  | 11  
|                                           |  | Forward-Looking Statements                                                           |  | 19  
|ITEM 7:                                    |  | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION |  | 20  
|ITEM 10:                                   |  | DIRECTORS AND CERTAIN EXECUTIVE OFFICERS OF ULTIMATE ELECTRONICS, INC.               |  | 28  
|ITEM 11:                                   |  | EXECUTIVE COMPENSATION                                                               |  | 30  
|ITEM 12:                                   |  | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT                       |  | 33  
|ITEM 13:                                   |  | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                       |  | 34  
|ITEM 14:                                   |  | EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K                     |  | 35  
|INDEX TO CONSOLIDATED FINANCIAL STATEMENTS |  | F-1                                                                                 

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EXPLANATORY NOTE

This
Annual Report on Form 10-K/A is being filed solely to make the following amendments to Items 1, 10, 11, 12, 13 and 14:

Item 1:A risk factor entitled "If Our Warehouse and Distribution Center were Destroyed or Severely Damaged, Our Results of Operations Would Be
Negatively Impacted" has been added.

Item 7:The description of the security for the Company's revolving credit facility was amended to state that bank accounts, negotiable instruments,
investment property, intellectual property and equity interests in our subsidiaries also secure borrowings.

Items 10, 11, 12 and 13:The Company has decided to include the information required by these items rather than incorporate such information by
reference to its Proxy Statement to be filed pursuant to Regulation 14A.

Item 14:The list of exhibits was amended to add the Ultimate Electronics' bonus plans as Exhibit 10.16 and to add exhibit numbers to the
information incorporated by reference.

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ITEM 1:BUSINESS

Overview

Ultimate Electronics is a leading specialty retailer of consumer electronics and home entertainment products in the Rocky Mountain, Midwest and Southwest regions
of the United States. We focus on mid- to high-end audio, video, television and mobile electronics products sold by a highly trained, knowledgeable, commissioned sales force.
We offer over 4,000 stock keeping units (SKU's) at a wide range of price points representing approximately 150 brands, including a broad presentation of the most popular names and a large selection of
limited-distribution, upscale brands and lines. We emphasize products with the latest technology by dedicating significant resources to their promotion, advertising, merchandising and related product
training. We believe our commitment to technologically advanced products, combined with our highly trained sales force, allows us to capitalize on the growing demand for consumer electronics products,
which is being driven by digital technologies.

We
showcase our consumer electronics products in an upscale, demonstration-oriented store format (generally between 30,000 and 34,000 square feet), which enables customers to sample and
compare features and functions of the many products we offer. We also provide a complete menu of value-added services, including home installation by our own technicians. We believe our
differentiating characteristics, together with our parity pricing strategy and satisfaction guarantees, often make us the preferred retailer for consumer electronics.

We
operate 46 stores in Arizona, Colorado, Idaho, Iowa, Minnesota, Missouri, Nevada, New Mexico, Oklahoma, South Dakota and Utah. We opened 10 stores in fiscal 2002 and plan to continue
our store expansion program by opening 10 to 12 new stores during each of fiscal 2003 and 2004.

Business Strategy

Our objective is to enhance our position as a leading specialty retailer of consumer electronics and home entertainment products. Key elements of this strategy
include:

Offering an Extensive Selection of Products at a Wide Range of Price Points, with the Focus on Mid- to High-End
Audio and Video Products.Our broad merchandise mix of widely distributed brands includes a significant variety of high-end SKU's that are not
generally available at our major competitors. In addition, a significant portion of the approximately 150 brands that we offer are mid- to high-end names, such as Boston
Acoustics, Denon, Krell, Martin Logan, Mitsubishi and Sony ES, and have limited distribution through select retailers. We believe that customers make better informed buying decisions when they are
presented with a broad selection of competitively priced products and are educated at our stores about the features and benefits of the products. Through our Simple Solution program, we highlight our
broad selection to our customers and simplify the purchase decision for them by offering complete system packages. In addition, our parity pricing strategy and satisfaction guarantees are designed to
remove pricing and other concerns from the purchase decision and allow the customer and the sales staff to focus on product features, quality and our unique menu of services.

Being a Leader in Offering the Best Selection of New Technology.We are recognized by consumers and
vendors as a leader in presenting the best selection of the latest technology. We devote significant resources to marketing and substantial floor space to displaying new technologies to achieve
increased market share of the newest and most sought after consumer electronics products. For example, we sold the first HDTV for residential use in the United States in July 1998, and we are
currently taking a leadership position in marketing and displaying LCD and plasma televisions. We believe that showcasing the latest technology differentiates us from less specialized competitors and
stimulates the sales of other products and services. We provide our sales associates with specialized training so that they can present the advantages of new technology to our customers. We also
frequently hold special events at our stores to introduce and promote new products.

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Training and Developing a Premier Sales and Installation Team.We conduct an extensive ongoing
training program designed to ensure that our sales associates are equipped with the most up-to-date sales techniques and product knowledge. We believe that the quality and
knowledge of our sales associates and installation technicians is critical to our success and represents a significant competitive advantage. We also believe that our ongoing, specialized training
creates a superior customer experience that stimulates sales of our products.

Providing "Red Carpet" Customer Service.We support our product sales by providing many important
customer services, including home delivery and set-up, home theater and audio design and installation, home satellite installation, mobile electronics installation and regional service
centers that offer in-home and carry-in repair services. We also provide in-store product instruction and, upon request, will provide follow-up
instruction at a customer's home. In addition, we offer a 30-day money-back satisfaction guarantee on most products and an in-stock guarantee on advertised
products.

Providing an Upscale, Demonstration-Oriented Store Format.We have developed an upscale,
demonstration-oriented store format that showcases our merchandise and encourages customers to fully experience our products. We believe that this format assists our customers in understanding the
benefits of upscale products and new technologies. Our stores have acoustically designed home audio and car stereo demonstration rooms, fully furnished home theater rooms and automobiles equipped with
the latest in car stereo and car security products. Carpeted and hardwood floors, soft lighting and high quality merchandise fixtures further enhance the appeal of our stores.

Growth Strategy

In addition to our business strategy that is focused on generating comparable store sales increases, we intend to grow our business by opening additional stores
in existing markets, entering new markets that meet our criteria and relocating or expanding existing stores to enhance sales and profitability.

Capturing Large Market Opportunity in Consumer Electronics.We have identified a national opportunity
of more than 250 potential sites in new and existing markets that meet our criteria for potential store development. We have a proven ability to open new stores in our existing markets as well as to
successfully enter new markets with the simultaneous opening of multiple stores. We believe that we are well positioned to execute a disciplined growth strategy over the next several years. We also
believe that we have the necessary distribution and management information systems, as well as management experience and depth, to support our targeted expansion plans. Our store development strategy
is predicated on a detailed market analysis that includes a comparison of the demographics of our existing customers with the demographics of the target market and a review of competitors' positions
in the market and economic data. Based on this market analysis, we believe that there are significant opportunities for new store growth both in new and existing markets.

Opening Stores in New Markets.During fiscal 2001 and 2002, we entered three new markets. During
fiscal 2001 and 2002, we entered the Phoenix metropolitan area with eight stores. During fiscal 2002, we entered the Oklahoma City market with two stores and the St. Louis market with four stores.
Stores in these markets have performed well and have further confirmed the portability of our concept outside of our historical core markets. We plan to open two additional stores in the St. Louis
market during fiscal 2003. We also plan on expanding into the Dallas/Fort Worth market, with eight to 10 stores scheduled for opening in fiscal 2003. We intend to continue to expand into select
metropolitan areas in the Midwest and Southwest regions.

Expanding Our Presence in Existing Markets.We believe that there are opportunities to increase our
presence in a number of our existing markets, either through opening new stores or through relocating or expanding existing stores. We periodically analyze the competitor, demographic and economic
data in our existing markets in order to take advantage of additional growth opportunities. We intend to open or relocate new stores within existing markets in order to increase market share and

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leverage our advertising, distribution and other fixed expenses to create operating efficiencies. Since 1994, we have successfully relocated and expanded eight smaller stores to conform to the size
and format of our current prototype. We anticipate relocating or expanding many of our 14 smaller stores in the future, particularly the older stores in the Minneapolis/St. Paul market.

Store Operations

Stores.We operate 46 stores, including 11 stores in Colorado under the trade name SoundTrack, 27
stores in Arizona, Idaho, Iowa, Missouri, Nevada, New Mexico, Oklahoma, South Dakota and Utah under the trade name Ultimate Electronics and eight stores in Minnesota under the trade name Audio King.
Of these 46 stores, 32 are large format stores and the balance are smaller stores. While our 32 larger stores vary in size from 30,000 to 52,000 square feet, our current prototype large format store
generally ranges from 30,000 to 34,000 square feet, with approximately 55% to 60% of the square footage devoted to selling space. The remaining space is dedicated to a car audio installation facility,
a
store warehouse, general office space and, in selected stores, a service facility and extra space for deliverable products such as big screen televisions. These large format stores feature an
extensive selection of over 4,000 SKU's with products in the following categories:



Our
large format stores emphasize mid- to high-end products and feature multiple home audio and car demonstration rooms, multiple home theater settings, extensive
portable electronics displays and an area displaying over 50 projection televisions. Each of these stores has displays designed to provide the customer with a full spectrum of our products upon
entering the store, including the best selection of the latest technology such as LCD and plasma televisions. At these locations, we offer home installation of audio, video and satellite products, a
customized car on our showroom floor to demonstrate our expertise in upscale car audio and installation and a separate demonstration area that features the latest in mobile video.

Our
14 smaller stores average approximately 18,000 square feet, with approximately 60% to 65% of the square footage devoted to selling space. In certain smaller markets, we may open
stores as small as 20,000 square feet. These stores generally contain the same products and services available at our large format stores except that they typically contain fewer large screen
televisions and fewer demonstration rooms for home and mobile electronics. We may relocate or expand a number of our existing smaller stores as opportunities become available.

Site Selection.We typically locate our prototype stores in power centers or freestanding locations
near shopping malls and other major retail shopping areas. We select locations for future stores based on our evaluation of individual site economics, market conditions and our customer demographics.

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With the help of an independent site selection consultant, we evaluate a number of criteria, including the following:



In
choosing specific sites in a new or existing market, we apply site selection criteria taking into account numerous factors, including the following:



Store Economics.We believe that we benefit from attractive store level economics. Our average
investment for the 15 large format stores we opened in the past two years was approximately $3.3 million including leasehold improvements, fixtures and equipment, inventory (net of payables)
and preopening expenses. Our large format stores have typically been profitable on a store operating basis within their first 12 months of operation and, on average, return our investment in
30 months or less.

The
cost of our new large format stores is anticipated to average approximately $3.3 million per store, which includes leasehold improvements, fixtures and equipment, inventory
(net of payables) and preopening expenses. Leasehold improvements, fixtures and equipment are expected to average approximately $2.2 million per store, depending on tenant allowances.
Preopening expenses for these stores are expected to average approximately $350,000, and include costs for advertising prior to opening and recruitment and training of new employees. The inventory
requirement for our new stores is expected to average approximately $1.5 million, of which $750,000 is typically financed through trade credit from our vendors. For relocations of existing
stores, preopening costs are expected to average approximately $150,000 and will be higher if we terminate existing store leases prior to their maturity.

Training.We provide new sales associates with a minimum of three weeks of intensive classroom
training. Our sales associates also receive additional weekly training at the store, weekly self-study programs and testing. Our training program begins with an orientation by one or more
of our executive officers and continues with instruction in areas such as technical knowledge by product category, selling techniques and our policies and procedures. We provide ongoing sales and
product training through a customized series of DVD based training videos. We test our associates' retention upon completion of each video. In addition, we conduct role playing exercises to allow
sales associates to practice new selling techniques and their product knowledge prior to customer contact. We have similar programs for our installation, delivery and support staff.

Store Management and Personnel.An average large format store is generally staffed with a store
manager, two sales managers (one for home electronics and one for mobile electronics), 30 to 35 sales associates, an installation supervisor, six to eight installers, an operations manager and eight
support personnel, including four warehouse employees and four customer service representatives. All of our store managers have been promoted from within the company. Our store managers have an
average tenure with us of over seven years, including over three years as a store manager. The staffing of our smaller
stores generally follows the same format as our larger stores but with fewer employees in each area and no operations manager.

Store Personnel Compensation.Our compensation plan is designed to incentivize our sales associates
to sell more than one product to a customer. Our sales associates are compensated based on a flexible incentive pay plan with commissions determined on the basis of sales, gross margins and attachment
selling. Installers are also paid on a commission basis. Store managers receive a base salary,

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monthly and annual bonuses and opportunities for commissions. Sales managers similarly receive a small base salary, bonuses and earned commissions. Bonuses are calculated on a
store-by-store basis. Our support staff is typically paid an hourly wage plus bonuses and may also earn commissions. We provide opportunities for advancement through
participation in Ultimate University, an in-depth training program designed to prepare selected candidates for future management positions.

Services.We support our product sales by providing many important customer services, including the
following:



We
provide our customers with expedited service through our Fast Trak service program. Virtually all merchandise purchased from us may be taken to any of our stores for repair, whether
or not the product is currently under the manufacturer's warranty or an extended warranty contract. Our large service facilities, located in metropolitan Denver and Minneapolis, provide backup for our
regional
service centers. In order to provide maximum service to our customers, we have regional service centers in: Albuquerque, New Mexico; Boise, Idaho; Denver, Colorado; Des Moines, Iowa; Las Vegas,
Nevada; Minneapolis, Minnesota; Phoenix, Arizona; Salt Lake City, Utah; St. Louis, Missouri; and Tulsa, Oklahoma. We employ approximately 180 employees in connection with our service business. Each
service department is staffed with product specialists capable of making complex repairs. In addition, we operate a fleet of approximately 240 customer service vehicles to provide in-home
repair and delivery, installation and setup of home satellites, home theater components and televisions.

We
offer private label and manufacturer sponsored credit cards, which are financed, operated and serviced by third party finance companies on a non-recourse basis. We have
entered into agreements with finance companies whereby they retain all credit risk associated with these credit cards. These arrangements permit us to provide our customers with financing promotions,
including interest-free financing and deferred payments, without using our working capital. During fiscal 2002, approximately 32% of our total sales were to customers who financed their
purchases using our private label or manufacturer sponsored credit cards.

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Merchandising and Inventory

Products.We offer our customers a comprehensive selection of high quality, brand name television,
audio, video, mobile electronics and home office products. We emphasize depth of product selection within key product categories as follows:

|Category           |  | Products                                                                                                                                      |  | Selected Brands                                                                                                                                                                                                                       
|------------------ |  | --------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Television/DBS     |  | Conventional televisions, projection televisions, plasma televisions, LCD televisions and digital satellite systems                           |  | DirecTV, GE, Hitachi, JVC, Mitsubishi, Monster Cable, Panasonic, Pioneer, Pioneer Elite, RCA, Samsung, Sharp, Sony, Sony XBR and Sylvania                                                                                             
|Audio              |  | Audio components, compact disc players, speakers and portable electronics                                                                     |  | Aiwa, Bose, Boston Acoustics, Definitive Technology, Denon, Infinity, JVC, Kenwood, Klipsch, Krell, Martin Logan, Monster Cable, Panasonic, Pioneer, Pioneer Elite, Sunfire, Sony, Sony ES and Yamaha                                 
|Video/DVD          |  | VCRs, camcorders, digital cameras, DVD players, personal video recorders and editing equipment.                                               |  | Canon, Denon, Go Video, JVC, Mitsubishi, Monster Cable, Olympus, Panasonic, Phillips, Pioneer, Samsung, Sony, Sylvania and Yamaha                                                                                                     
|Mobile Electronics |  | Car stereo components, car stereo speakers, mobile video, wireless communications, satellite radio and mobile phones                          |  | Alpine, AudioVox, Boston Acoustics, Cobra, Clifford, ESCORT, Infinity, JVC, Kenwood, Monster Cable, Motorola, Nokia, Panasonic, Pioneer, Python, Rockford Fosgate, Samsung, Sirius Satellite Radio, Sony, XM Satellite
Radio and XTANT
|Home Office        |  | Computers, computer peripherals, fax machines, personal digital assistants and telephones                                                     |  | Canon, General Electric, Monster Cable, Palm, Panasonic, Sony and Vtech                                                                                                                                                               
|Other              |  | Audio and video furniture, gaming, blank tapes, batteries, extended warranty contracts and product repair, delivery and installation services |  | Bell'O International, Boltz, Bush, Furniture Works, Laurier, Omnimount, Panasonic, Sanus, Sony, TDK, Techcraft, Wambold and Warrantech                                                                                                

We
offer customers a wide range of price points within each product category, with the greatest depth in mid- to high-end products. Within our product categories,
we carry and actively promote new models as they become available. We do not carry home appliances or music, video or computer software.

We
assist our customers in making larger and more complex consumer electronics purchases with our Simple Solution program. Our Simple Solution program provides customers with complete
packages that make home theater, car audio and computer purchase decisions simpler. This program also offers the consumer an excellent value when compared with purchasing the same components
separately. Our Simple Solution product packages generally range across several price points in each product category. We negotiate special purchases from manufacturers for our Simple Solution program
to provide lower prices to our customers while achieving attractive gross margins on the products.

The
following table shows the approximate percent of sales for each major product category for the last three fiscal years.

|                   |  | Fiscal Year Ended January 31, |  
|------------------ |  | ----------------------------- | -
|
|
|Television/DBS     |  | 31                            | %
|Audio              |  | 24                            | %
|Video/DVD          |  | 17                            | %
|Mobile Electronics |  | 12                            | %
|Home Office        |  | 6                             | %
|Other              |  | 10                            | %

We
offer extended warranty contracts to our customers for most categories of our products. The extended warranty contracts cover parts and labor for service periods not covered by the
manufacturer's

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warranty on such products. An unaffiliated third party is warrantor for these contracts and pays for the repair service. We sell all of these extended service contracts on behalf of the warrantor on
a non-recourse basis. The warrantor purchases insurance for each contract that is sold, which allows the warrantor to fulfill its obligations under the extended warranty contract. The
warrantor has named us as an additional insured. We are deemed to be the obligor under the extended warranty contracts entered into prior to February 1, 2000, and we recognize revenues over the
term of these obligor contracts. For contracts entered into after February 1, 2000, we are a non-obligor, and therefore, we recognize commissions from the sale of these
non-obligor contracts as revenues at the time of sale to customers.

Pricing.We emphasize competitive pricing on all items and reinforce this strategy with extensive
advertising of our 60 day price guarantee and our 30 day satisfaction guarantee. Our 60 day price guarantee allows our customers to receive 110% of the difference between the
original purchase price and any verified locally available lower price for the identical product under the same purchase conditions. This guarantee applies to all products, excluding computer products
and digital cameras, which are covered by a 30 day price guarantee. Our 30 day satisfaction guarantee allows our customers to return most products within 30 days for a full
refund. Computer products and digital cameras have a 14 day satisfaction guarantee. Camcorders, car multimedia and radar detectors have a 14 day money-back or 30 day
exchange guarantee. Our price guarantee and our satisfaction guarantee are designed to remove pricing and suitability concerns from the purchase decision and allow the customer and the sales staff to
focus on product functionality, performance and quality. In addition, we offer an in-stock guarantee on advertised products.

Purchasing.We purchase substantially all of our products directly from the manufacturers. Each of
our buyers has responsibility for specified product categories. Buyers are assisted by a management information system that provides them with our current inventory quantity, price and sales
information by item, thus allowing them to react quickly to market changes.

We
are one of the largest members of the Progressive Retailers' Organization, a volume-buying group. Membership in this organization helps us to obtain additional volume rebates, special
buys and access to closeout and final production items. We believe that based on our current size, we could obtain independently most of the benefits provided by membership in the Progressive
Retailers' Organization.

During
fiscal 2002, our 10 largest suppliers accounted for approximately 75% of the merchandise we purchased. Three of our suppliers, Sony, Mitsubishi and Panasonic, each accounted for
10% or more of our merchandise mix. The master agreements under which we operate with each of our suppliers are normally terminable upon 30 to 60 days' notice by either party. As is customary
in the industry, we do not have commitments of longer than one year with the majority of our product suppliers. We believe that our relationships with our large vendors are excellent and that our
focused merchandising and high degree of customer service makes us an important distribution channel, particularly for the introduction of new products.

Distribution.We currently distribute most of our merchandise to our stores from a 226,000 square
foot warehouse and distribution center located in Thornton, Colorado, a suburb of Denver. All of our stores in Colorado are located within 75 miles of this center. For stores more than 75 miles from
this facility, we use contract carriers for distribution. Our warehouse and distribution center reduces our inventory requirements at individual stores, while preserving the benefits of volume
purchasing and facilitating centralized inventory and accounting controls.

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Advertising and Marketing

Our marketing program is designed to create public awareness of our comprehensive selection of mid-to high-end brands at competitive
prices. Our advertising strategy primarily uses newspaper, radio and targeted direct mail media. We present a blend of aggressive promotional price points on products sold by our competitors as well
as an extensive selection of mid- to high-end products that may not be offered by our competitors. We primarily advertise through newspaper in every market we serve, producing
24- to 32-page full color weekly inserts. We also conduct a direct mail campaign, the cornerstone of which is a 108- to 120-page full color catalog,
which is published four times a year and emphasizes the breadth of our selection and new technology. The catalog educates our customers on the features and benefits of the latest consumer electronics
products and advertises the full array of products and services available at our stores. We mail our catalog to 950,000 to 1.2 million current and 600,000 to 1.0 million prospective
customers in our markets. We build top-of-mind awareness through an ongoing radio advertising campaign that specifically targets our core customers. We also hold special events
at our stores to introduce or promote new products. We produce prominent and colorful in-store signage that describes differentiating product features, new technology and promotional
information.

The
specific allocation of advertising dollars among the various types of advertising media is reviewed from time to time by management and, if necessary, adjusted to reflect our
assessment of advertising results and market conditions.

Our
web site,www.ultimateelectronics.com, is designed to provide a company overview and stockholder information. We have not made the
investment to enable us to conduct sales through our web site, primarily because a significant number of our major and high-end manufacturers currently restrict the sale of their products
via the Internet.

Management Information System

During fiscal 2002, we implemented a warehouse management system to manage our warehouse and distribution center in Thornton, Colorado. This system was interfaced
with our existing management information system, which is an on-line system that connects all of our facilities and allows sales associates to determine the location of our inventory at
any time and our merchandising department to change pricing immediately in response to competitor pricing.

In
fiscal 2002, we began implementing Oracle's e-business suite of products to manage our administrative applications and Tomax's retail suite of applications to create a new
infrastructure for managing our operations. We believe this combined solution will provide us with a powerful web-enabled solution for supporting the critical functions of our business.
This project is designed to upgrade the majority of our internal software systems, thereby increasing productivity and supporting the further expansion of our company. By implementing this fully
integrated, end-to-end solution, we plan to provide comprehensive, easy-to-use applications for our sales associates and enhance our customer's shopping
experience. We have already completed the first phase of the project, which included installation of Oracle's financial modules. We are proceeding with the implementation of the remaining portions of
our new management information system and expect to complete the process in the first half of fiscal 2004.

Competition

We operate in a highly competitive and price sensitive industry. The principal competitive factors in the consumer electronics industry are breadth of product
selection, price, store location and customer service. We face competition from large national chains, numerous smaller specialty stores and consumer electronics departments of many department,
discount and home improvement stores. We consider our primary competitors to include consumer electronics retailers such as Best Buy, Circuit City and Sears as well as mass merchants such as
Wal-Mart, Sam's Club, Costco and Target and

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specialty retailers such as Tweeter Home Entertainment. We compete with Circuit City in every market except Sioux Falls, South Dakota; Rochester, Minnesota; and our three stores in Iowa. We compete
with Best Buy in every market except Utah and Idaho. Best Buy has announced plans to enter those markets this year. We will be competing with Best Buy, Circuit City and Tweeter Home Entertainment when
we enter the Dallas/Fort Worth market later this year. Our primary competitors have financial and other resources greater than ours. Our operating results may be adversely affected by such increased
competition. In addition, if such competitors seek to gain or retain market share by reducing prices, we may be required to reduce our prices, thereby reducing gross margins and profits. Also, as we
expand into markets where our name may not be recognized, our success will depend in part on our ability to compete with established and future competitors in such markets.

We
also compete with retailers of consumer electronics who market their merchandise on the Internet. We believe that competition from the Internet will increase in the future.

Intellectual Property

We believe our trademark and service mark portfolio includes marks that have developed public recognition and are of significant value. ULTIMATE ELECTRONICS
(Stylized), AFFORDABLE PORTABLE (Stylized), AUDIO KING and FAST TRAK are all federally registered on the Principal Register of the U.S. Patent and Trademark Office in the name of Ultimate
Electronics, Inc. These registrations have received incontestable status. The marks BIG NAMES. LITTLE PRICES. GUARANTEED., SIMPLE SOLUTION and SOUNDTRACK are also federally registered on the
Principal Register of the U.S. Patent and Trademark Office in the name of Ultimate Electronics, Inc. Further, we have an application pending before the U.S. Patent and Trademark Office for
ULTIMATE ELECTRONICS EXPRESS and a Colorado State registration for the mark THE ULTIMATE SOUNDTRACK. We control the nature and quality of the goods and services offered under our portfolio of marks to
maintain our proprietary intellectual property rights in the portfolio. We are not aware of any adverse claims concerning our trademarks and service marks.

Employees

As of March 1, 2002, we employed approximately 3,000 persons, approximately 2,640 of whom were store, customer delivery or service employees and
approximately 360 of whom were main warehouse or corporate personnel. We consider our employee relations to be good. Most employees, other than corporate and store support personnel, are paid pursuant
to a flexible pay plan. We believe that we provide working conditions and wages that compare favorably with those of other retail companies within our industry. None of our employees are covered by
collective bargaining agreements.

Seasonality

Our business is affected by seasonal consumer buying patterns. As is the case with many other retailers, our sales and profits have been greatest in the fourth
quarter (which includes the holiday selling season). Due to the importance of the holiday selling season, any factors negatively impacting the holiday selling season could have a material adverse
impact on the our financial condition and results of operations.

Corporate Information

Ultimate Electronics, Inc. is a Delaware corporation formed in 1993 as the successor to Pearse Electronics. We opened our first store in 1968. We grew to
nine stores in Colorado by fiscal 1994 and then adopted an expansion strategy to enter new markets in the Rocky Mountain, Midwest and Southwest regions. By the end of fiscal 1997, we had grown to 18
stores. In June 1997, we acquired Audio King Corporation, a consumer electronics specialty retailer with 11 retail stores in Minnesota,

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Iowa and South Dakota. We then opened one store in fiscal 1998, one store in fiscal 2000, five stores in fiscal 2001 and ten stores in fiscal 2002.

RISK FACTORS

Our business is subject to the risks set forth below. If any of the following risks, or other risks not presently known to us or that we currently believe not to
be significant, develop into actual events, then our business, financial condition, results of operations or prospects could be materially adversely affected.

Risk Factors Related to Our Business

Our Success Depends in Large Part on Our Ability to Open and Profitably Operate New Stores in Existing and New Geographic Markets

We plan to open 10 to 12 new stores in fiscal 2003 and to continue our expansion by opening approximately 10 to 12 new stores in fiscal 2004. We may not be able
to open all of these stores, and any new stores that we open may not be profitable, either of which could have a material adverse impact on our financial results. We have not yet selected all sites
for stores that we plan to open in fiscal 2004.

There
are a number of factors that could affect our ability to open and operate new stores consistent with our business plan. These factors include, but are not limited to:



These
factors may also affect the ability of any newly opened stores to achieve sales and profitability levels comparable with our existing stores or to become profitable at all.

We May Not Be Able to Achieve and Manage Planned Expansion

We face many business risks associated with rapidly growing companies, including the risk that our existing management, information systems and financial controls
will be inadequate to support our planned expansion. Our growth plans will require us to expend significant management time and effort and additional resources to ensure the continuing adequacy of our
financial controls, operating

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procedures, information systems, product purchasing, warehousing and distribution systems and employee training programs. We cannot predict whether we will be able to effectively manage these
increased demands or respond on a timely basis to the changing demands that our planned expansion will impose on our management, information systems and financial controls. If we fail to continue to
improve our management, information systems and financial controls or encounter unexpected
difficulties during expansion, our business, financial condition, operating results or cash flows could be materially adversely affected.

Furthermore,
we may seek to acquire businesses that are complementary to ours. To do so successfully, we would need to identify suitable acquisition candidates, obtain financing on
acceptable terms, and negotiate acceptable acquisition terms. Even if we are successful in completing acquisitions, they may have a material adverse effect on our operating results, particularly in
the fiscal quarters immediately following the completion of an acquisition, while the acquired business is being integrated into our operations. We do not currently have any definitive agreements,
arrangements or understandings regarding any particular acquisition.

We May Be Unable to Fund Our Significant Future Capital Needs, and We May Need Additional Funding Sooner than Anticipated

We will need substantial capital to finance our expansion plans, including funds for capital expenditures, preopening costs and potential initial operating losses
related to new store openings. We may not be able to obtain additional financing on acceptable terms. If adequate funds are not available, we will have to curtail projected growth, which could
materially adversely affect our business, financial condition, operating results or cash flows.

We
estimate that capital expenditures during fiscal 2003 will be approximately $40 million and that capital expenditures during future years may exceed this amount. Although we
expect that the funds available under our line of credit and cash flows from operations will be sufficient to fund our capital requirements at least through fiscal 2003, this may not be the case. We
may be required to seek additional capital earlier than anticipated if:



A Decline in General Economic Conditions Could Lead to Reduced Consumer Demand for the Products We Sell

Consumer spending patterns, particularly discretionary spending for products such as consumer electronics, are affected by, among other things, prevailing
economic conditions, wage rates, inflation, new housing starts, consumer confidence and consumer perception of economic conditions. General economic, political and market conditions, such as
recessions, may adversely affect our business results and the market price of our common stock. The terrorist attacks on New York City and Washington, D.C. on September 11, 2001, had a negative
effect on an already slowing economy and on consumer confidence. This adversely affected our business in the second half of fiscal 2002. There is no assurance that the economy or consumer confidence
will improve or that these factors will not continue to have an adverse effect on our operating results and financial conditions.

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We Face Significant Competition from National, Regional and Local Consumer Electronics Retailers

The retail consumer electronics industry is highly competitive. We currently compete against a diverse group of retailers, including several national retailers,
such as Best Buy, Circuit City and Sears, and regional and local merchants, who sell, among other products, audio and video consumer electronics products similar and often identical to those we sell.
Each of our stores competes directly with either a Best Buy or a Circuit City, and over three-quarters of our stores compete with both. We also compete in particular markets with a substantial number
of retailers that specialize in one or more types of consumer electronics products that we sell. Some of our competitors have financial resources that are substantially greater than ours and may be
able to purchase inventory at lower costs, initiate and sustain predatory price competition and better sustain economic downturns. In addition, appliance/electronic superstores, warehouse clubs, home
improvement retailers and mass merchants selling consumer electronics, such as Wal-Mart, Sam's Club, Costco and Target, are continuing to expand their selection of consumer electronics
products, and such expansion may increase price competition and reduce gross margins within our markets. We also compete with retailers of consumer electronics who market products through store
catalogs and the Internet, which may increase price competition for certain of our products.

A
number of different competitive factors could have a material adverse effect on our results of operations and financial condition, including:



If New Products are Not Introduced or Consumers Do Not Accept New Products, Our Sales May Decline

Our historical growth rate has been directly related to our ability to be a leader in sales of new technology products. We depend to a large extent on the
periodic introduction and availability of new products and technologies. Many products that incorporate the newest technologies, such as DVD and HDTV, are subject to significant technological changes
and pricing limitations, and are subject to the actions and cooperation of third parties such as television broadcasters and movie distributors, all of which could impact our ability to continue to
deliver new consumer electronic technologies to our customers. The HDTV market, for example, could be adversely affected by a significant delay in the broadcast of HD signal. It is possible that
products such as HDTV or other new products will never achieve widespread consumer acceptance. Significant deviation from the projected demand for products we sell may have a material adverse effect
on our results of operations and financial condition, either from lost sales or lower margins due to the need to mark down excess inventory.

Any Failure of Our Information Technology Infrastructure Could Harm Our Business

The capacity, reliability and security of our information technology hardware and software infrastructure and our ability to expand and update this infrastructure
in response to our growth and changing needs are important to the operation of our business. In connection with our growth, we are continually updating our information technology infrastructure. We
are currently implementing Oracle's e-business suite of products to manage our administrative applications and Tomax's retail suite of

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applications to create a new infrastructure for managing our operations. This project is designed to upgrade the majority of our internal software systems, thereby increasing productivity and
supporting the further expansion of our company. We expect to incur significant costs and expend significant management and other resources in implementing these programs. We are systematically
implementing
portions of our new management information system and expect to complete the process in the first half of fiscal 2004. Any failure to successfully integrate and operate this system could adversely
impact our business.

Our Limited Geographical Dispersion May Reduce Our Ability to Manage Adverse Market Events

We currently operate 46 stores in 11 states in the Rocky Mountain, Midwest and Southwest regions of the United States. We are vulnerable to adverse market events
in these locations including weather-related conditions, regional competition and unfavorable economic conditions.

A Disruption in Our Relationship with, or in the Operations of, any of Our Key Suppliers Could Cause Our Sales to Decline

The success of our business and growth strategy depends to a significant degree upon our suppliers, particularly our brand name suppliers of audio and video
equipment such as Sony, Mitsubishi, Panasonic, JVC, Pioneer, Monster Cable and RCA. We rely on a number of suppliers for limited distribution upscale items. We also rely on our suppliers for
cooperative advertising support. We do not have long-term supply agreements or exclusive arrangements with any vendors. We typically order our inventory through the issuance of individual
purchase orders to vendors. In addition, we rely heavily on a relatively small number of suppliers. Our top 10 suppliers represented 75% of our purchases in fiscal 2002. The loss of any of these key
vendors or the failure by us to establish and maintain relationships with these or other vendors could have a material adverse effect on our results of operations and financial condition. Our ability
to successfully enter new markets depends to a significant extent on the willingness and the ability of our vendors to supply those additional stores. If vendors are unwilling or unable to supply some
or all of their products to us at acceptable prices in one or more markets, our results of operations and financial condition could be adversely affected.

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If We are Unable to Timely Respond to Changes in Consumer Demand and Preferences, We May Lose Customers and Our Sales May Decline

Our success depends on our ability to anticipate and respond in a timely manner to consumer demand and preferences for consumer electronics products and changes
in such demand and preferences. Any sustained failure by us to identify and respond to changes in consumer demand and preferences would have a material adverse effect on our results of operations and
financial condition.

Changes in Trade Regulations, Currency Fluctuations and Other Factors Beyond Our Control Could Impact Our Business

A significant portion of our inventory is manufactured overseas. Changes in trade regulations, currency fluctuations or other factors may increase the cost of
items we purchase or create shortages of such items, which in turn could have a material adverse effect on our results of operations and financial condition. Conversely, significant reductions in the
cost of such items in U.S. dollars may cause a significant reduction in retail price levels of those products, resulting in a material adverse effect on our sales, margins or competitive position.

Because of Our Small Store Base, Our Operating Results Could Be Materially Adversely Affected By the Negative Performance of a Small Number of Stores

We currently operate 46 stores, 10 of which we opened in fiscal 2002. Due to our small store base, poor operating results at one or more stores could materially
adversely affect our business, financial condition, operating results or cash flows. Our operating results achieved to date may not be indicative of our future operating results with a larger number
of stores.

If Our Warehouse and Distribution Center Were Destroyed or Severely Damaged, Our Results of Operations Would Be Negatively Impacted

We distribute most of our merchandise to our stores from a warehouse and distribution center located in Thornton, Colorado. If our warehouse and distribution
center were destroyed or severely damaged, our results of operations would be negatively impacted.

The Loss of the Services of Our Chairman, Chief Executive Officer, President or Other Key Employees Could Jeopardize Our Ability to Maintain Our Competitive Position

We believe that our success depends on the continued service of our key executive management personnel. Loss of the services of William J. Pearse, our Chairman,
J. Edward McEntire, our Chief Executive Officer, and David J. Workman, our President and Chief Operating Officer, or other key employees could jeopardize our ability to maintain our competitive
position in the industry. We do not currently have employment agreements with any of our executives or key person life insurance for any of our officers or directors.

We Could Face Potential Labor Shortages

Our success depends in large part upon our ability to attract, motivate and retain a sufficient number of qualified employees, including store managers, sales
associates, installers and support personnel, necessary to keep pace with our expansion schedule. Qualified individuals needed to fill these positions are in short supply in certain areas. The
inability to recruit and retain such individuals may delay the planned openings of new stores or result in high employee turnover in existing stores, which could have a material adverse effect on our
business, financial condition, operating results or cash flows. Additionally, competition for qualified employees could require us to pay higher wages to attract a sufficient number of qualified
employees, which could result in higher labor costs.

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We May Be Unable to Protect Our Intellectual Property Rights, Which Could Impair Our Name and Reputation

We believe that our success and ability to compete depends, in part, upon consumer identification of the Ultimate Electronics, SoundTrack, Audio King and Fast
Trak trademarks. We intend to vigorously protect our trademarks against infringement or misappropriation by others. A third party could, however, misappropriate our intellectual property in the
future. Furthermore, the enforcement of our proprietary rights through litigation could result in costs to us that could have a material adverse effect
on our financial condition. In addition, though we do not believe that we infringe the proprietary rights of third parties, infringement claims may be asserted against us in the future. An adverse
determination or the costs of defending litigation based on such a claim could have a material adverse effect on our business and financial condition.

Our Charter, Bylaws and Anti-Takeover Protections Could Delay or Prevent an Acquisition or Sale of Ultimate Electronics

Our corporate charter and bylaws, as well as certain provisions of the Delaware General Corporation Law, contain provisions that may deter, discourage or make
more difficult a change in control, even if such a change in control would be in the interest of a significant number of our stockholders or if such change in control would provide such stockholders
with a substantial premium for their shares over the then-prevailing market price for the common stock. In particular:



In
addition, under the terms of our Stockholder Rights Plan, in general, if a person or group acquires more than 15% of the outstanding shares of common stock, all of our other
stockholders would have the right to purchase securities from us at a discount to such securities' fair market value, thus causing substantial dilution to the holdings of that acquiring person or
group. The Stockholder Rights Plan may inhibit a change in control and, therefore, could materially adversely affect the stockholders' ability to
realize a premium over the then-prevailing market price for our common stock in connection with such a transaction.

Risk Factors Related to Our Common Stock

Because We Experience Seasonal Fluctuations in Our Sales, Our Quarterly Results Will Fluctuate and Our Annual Results Could Be Below Expectations, Which May Adversely Affect
Our Common Stock Price

Seasonal
consumer buying patterns affect our business. Our fourth fiscal quarter includes the holiday selling season and has historically contributed, and is expected to continue to
contribute, a substantial portion of our sales, income from operations and net income for our entire fiscal year. The

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fourth quarter of fiscal 2002 contributed 37% of sales, 56% of income from operations and 57% of net income. As a result, any factors negatively affecting us during the fourth quarter of any year,
including adverse weather or unfavorable economic conditions, would have a material adverse effect on our results of operations for the entire year. More generally, our quarterly results of operations
and financial condition may fluctuate based upon such factors as:



Fluctuations
in our results of operation or financial condition may adversely affect our common stock price.

You Should Not Rely on Our Comparable Store Sales as an Indication of Our Future Results of Operations Because They Fluctuate Significantly and May Cause Our Stock Price to
Fluctuate

A number of factors have historically affected, and will continue to affect, our comparable store sales results including among other factors:



We
do not expect comparable store sales to increase at rates experienced in fiscal 2000 and 2001, and comparable store sales may be negative in the future. Our historical results have
fluctuated significantly from quarter to quarter. For example, comparable store sales were up 10% during the last quarter of fiscal 2001, were flat during the first quarter of fiscal 2002 and were
down 5% during the second quarter of fiscal 2002. Changes in our quarterly and annual comparable store sales results could cause the price of our common stock to fluctuate substantially. See
"Management's Discussion and Analysis of Financial Condition and Results of Operations Quarterly Results of Operations."

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Our Common Stock Price May Be Volatile, Which Could Result in Substantial Losses to Stockholders

Our common stock trading price has been and is likely to continue to be highly volatile and subject to wide fluctuations in response to a variety of internal and
external factors, some of which are beyond our control, including:



The
stock market has experienced significant price and volume fluctuations over the past several years, which have often been unrelated or disproportionate to the operating performance
of particular companies. Broad market factors may have a material adverse effect on our stock price, regardless of our actual operating performance.

Our Management, Including a Principal Stockholder, Owns a Significant Portion of Our Common Stock and Will Be Able to Exercise Significant Influence Over Our Affairs

William J. Pearse, our Chairman, beneficially owns approximately 15.9% of our outstanding common stock. In addition, our directors and executive officers as a
group (including Mr. Pearse) beneficially own approximately 19.4% of our common stock. As a result of this share ownership, our management, and in particular Mr. Pearse, will be able to
exert significant influence on corporate actions requiring stockholder approval, including the election of directors. This share ownership could delay or prevent a change in control. It could also
prevent our stockholders from realizing a premium over the market price for our common stock or making a change in management.

Future Sales of our Common Stock May Cause Our Stock Price to Decline

All of our outstanding shares of common stock, other than shares owned by affiliates, are freely tradeable without restriction or further registration. Affiliates
must comply with the volume and other requirements of Rule 144 in the sale of their shares. Sales of substantial amounts of common stock by our stockholders, including shares issued upon the
exercise of outstanding options, or even the potential for such sales, may have a depressive effect on the market price of our common stock and could impair our ability to raise capital through the
sale of our equity securities.

We May Issue Additional Shares and Dilute Your Ownership Percentage

Some events over which you have no control could result in the issuance of additional shares of our common stock, which would dilute the ownership percentage of
holders of our common stock. We may issue additional shares of common stock or shares of preferred stock to raise additional capital or finance acquisitions or upon the exercise or conversion of
outstanding options. The rights of holders of common stock may be adversely affected by the rights of holders of any preferred stock that may be issued in the future that would be senior to the rights
of the holders of the common stock.

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FORWARD-LOOKING STATEMENTS

This report and the documents incorporated by reference into this report include forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. We use words such as "may," "believe," "estimate," "expect," "plan," "intend," "project," "anticipate" and similar
expressions to identify forward-looking statements. We have based these forward-looking statements on our current expectations and projections about future events, activities or developments. Our
actual results could differ materially from those discussed in or implied by these forward-looking statements. Forward-looking statements include statements relating to, among other things:



These
forward-looking statements are subject to numerous risks, uncertainties and assumptions about us, including the factors described under "Risk Factors." The forward-looking events
we discuss in this report might not occur in light of these risks, uncertainties and assumptions. We undertake no obligation, and disclaim any obligation, to publicly update or revise any
forward-looking statements, whether as a result of new information, future events or otherwise.

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ITEM 7:MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

Overview

We opened our first store in 1968. We grew to nine stores in Colorado by fiscal 1994 and then adopted an expansion strategy to enter new markets in the Rocky
Mountain, Midwest and Southwest regions. By the end of fiscal 1997, we had grown to 18 stores. In June 1997, we acquired Audio King Corporation, a consumer electronics specialty retailer with
11 retail stores in Minnesota, Iowa and South Dakota. We then opened one store in fiscal 1998, one store in fiscal 2000, five stores in fiscal 2001 and ten stores in fiscal 2002. We currently operate
46 stores in 11 states.

We
plan to open 10 to 12 stores in fiscal 2003. We have signed leases for 11 of these store locations, nine of which are in the Dallas/Fort Worth market and two of which are in the St.
Louis market. We expect to open approximately 10 to 12 new stores in fiscal 2004.

Our
investment cost for large format stores opened in the last two fiscal years has been approximately $3.3 million per store, including leasehold improvements, fixtures and
equipment, inventory (net of payables) and preopening expenses. Our large format stores have typically been profitable on a store operating basis within their first 12 months of operation and,
on average, return our investment in 30 months or less. The timing of our new store openings and relocations will significantly impact our results of operations and financial condition in
future periods.

Critical Accounting Policies

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States, which require us to make
estimates and assumptions. We believe that, of the significant accounting policies described in Notes 1 and 2 to the consolidated financial statements, the following involve a higher degree of
judgment and complexity, and are therefore considered critical.



Revenue is recognized at the time the customer takes possession of the merchandise or such merchandise is delivered to the customer. Sales, which includes net
warranty revenue, consists of gross sales less discounts, price guarantees, returns and allowances. We grant credit to customers through independent, third-party finance companies, who assume the
credit risk for the collection of the related accounts receivable. During fiscal 2002, approximately 32% of our total sales were to customers who financed their purchases using our private label and
manufacturer sponsored credit cards. When we offer interest-free promotions, we normally pay a fee at the time of the transaction. This fee averages between 3.0% and 4.0% of the amount financed by the
customer.

We
sell extended warranty contracts on behalf of a fully-insured unrelated party. The contracts extend beyond the normal manufacturer's warranty period, usually with terms of coverage
(including the manufacturer's warranty period) between 12 and 60 months. The extended warranty contracts are administered by a third party and all performance obligations and risk of loss with respect
to such contracts are the responsibility of such administrator and other parties. Effective February 1, 2000, we restructured our extended warranty master contract with the administrator. For
extended warranty contracts entered into after February 1, 2000, we are a non-obligor and, therefore, we recognize commissions from the sale of these non-obligor contracts as revenues at the
time of sale to customers. We are deemed to be the obligor under the extended warranty contracts entered into prior to February 1, 2000, and we recognize revenues over the term of these obligor
contracts, generally 12 to 60 months. Revenues from extended warranty contracts entered into prior to February 1, 2000, will be amortized in decreasing amounts through fiscal 2005.

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In accordance with AICPA Statement of Position 93-7, "Reporting on Advertising Costs," all advertising costs are deferred until the first time the
advertising takes place. In addition, we accrue rebates based upon specified percentages of inventory purchases and record such amounts as a reduction of advertising expense. Certain rebates are based
on projected volumes of purchases from related vendors, reflecting product demand in each of our markets. Although our projections have historically been representative of actual purchases, changes in
market or economic conditions in specific markets where we operate could have a material impact on the realization of the recorded rebate receivables and reductions of advertising expense. We also
deduct amounts for cooperative advertising directly from payment to manufacturers for inventory purchases based on individual agreements with our manufacturers. Net advertising expense charged to
operations was $9.0 million, $6.4 million and $4.8 million for fiscal years 2002, 2001 and 2000, respectively.



We state merchandise inventories at the lower of cost (weighted average cost) or market. Significant management judgement is required to determine the reserve for
obsolete or excess inventory. Inventory on hand may exceed future demand because a product may either be discontinued or become technologically outdated earlier than anticipated. Inventories are
presented net of an allowance for obsolescence of $1.2 million and $951,000 at January 31, 2002 and 2001, respectively.

Results of Operations

The following table sets forth, for the periods indicated, the relative percentages that certain income and expense items bear to sales:

Percentage of Sales
for the Years Ended
January 31,2000

2001

2002Sales

100.0
%
100.0
%
100.0
%Cost of goods sold

70.0

68.6

69.0Gross profit

30.0

31.4

31.0Selling, general and administrative expenses

26.0

26.5

27.6Income from operations

4.0

4.9

3.4Interest expense, net

0.5



0.1Income before taxes and extraordinary items

3.5

4.9

3.3Income tax expense

1.3

1.8

1.2Income before extraordinary item

2.2

3.1

2.1Extraordinary loss on early extinguishment of debt, net of taxes



0.1

Net income

2.2
%
3.0
%
2.1
%


Fiscal 2002 Compared to Fiscal 2001

Sales.For the year ended January 31, 2002, sales were $580.2 million, a 20% increase from sales of
$484.4 million for the prior year. The increase in sales during fiscal 2002 was primarily due to sales from the 10 new stores opened during the year. This increase was partially offset by a
decrease in comparable store sales of 2% for the year due to a sluggish economy and weak consumer confidence. In the first three quarters of fiscal 2002, we experienced negative single digit
comparable store sales, a trend that was further aggravated by the terrorist attacks on September 11, 2001. We generated a 2%

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comparable store sales growth in the fourth quarter due to improved consumer confidence and increased demand for digital products.

Revenues
from extended warranty contracts entered into prior to February 1, 2000, will be amortized in decreasing amounts through fiscal 2005.

Gross Profit.Costs of goods sold includes merchandise costs, buying costs and warehousing and distribution costs less vendor
purchase discounts and volume rebates. Gross profit in fiscal 2002
increased 18% to $180.1 million (31.0% of sales) from $152.3 million (31.4% of sales) in fiscal 2001. The decrease in gross profit as a percentage of sales was due to higher than
expected inventory shrinkage in the fourth quarter, reduced amortization of warranties sold prior to February 1, 2000, and the continued shift in merchandise mix to lower margin categories.
This decrease was partially offset by higher margins in most product categories.

Over
the last three years, we have experienced a continued shift in our merchandise mix from higher margin products such as audio and mobile electronics to lower margin products such as
television and DVD. For example, sales of audio products have decreased from 24% of total sales during fiscal 2000 to 20% of total sales in fiscal 2002, while sales of televisions have increased from
31% of total sales during fiscal 2000 to 38% of total sales in fiscal 2002. This shift in merchandise mix has negatively impacted our gross profit margins. At the same time, our gross margins in most
product categories have increased, which has offset the decrease in our gross profit margins due to the shift in merchandise mix.

Selling, General and Administrative Expenses.Selling, general and administrative expenses include net advertising costs,
occupancy costs, payroll, depreciation, computer costs and all other expenses necessary to operate our business. Selling, general and administrative expenses in fiscal 2002 increased 25% to
$160.5 million (27.6% of sales) from $128.4 million (26.5% of sales) in fiscal 2001. The increase in selling, general and administrative expenses as a percentage of sales was primarily
the result of increased occupancy costs for new stores, additions in personnel to facilitate our expansion, increased net advertising expenses incurred as we entered three new markets over the past
two years and lower than planned comparable store sales growth for the year.

Income from Operations.As a result of the foregoing, income from operations decreased 18% to $19.6 million (3.4% of
sales) from $23.9 million (4.9% of sales) in fiscal 2001.

Interest Expense.Net interest expense for fiscal 2002 increased to $321,000 from $144,000 in fiscal 2001. This increase was
primarily due to higher average amounts outstanding under our revolving line of credit during fiscal 2002, partially offset by lower average interest rates during the year.

Income Taxes.Our effective tax rate was 38.0% in fiscal 2002 compared to 37.5% in fiscal 2001 primarily due to the state tax
impact of new markets.

Net Income.Net income for fiscal 2002 was $12.0 million compared to $14.6 million for the prior year, for the
reasons described above.

At
an assumed effective tax rate of 38.5%, the net income from extended warranty contracts entered into prior to February 1, 2000, will be approximately $967,000 in fiscal 2003,
$565,000 in fiscal 2004 and $229,000 in fiscal 2005.

Fiscal 2001 Compared to Fiscal 2000

Sales.For the year ended January 31, 2001, sales were $484.4 million, a 26% increase from sales of $385.0
million for the prior year. The increase in sales during fiscal 2001 was due primarily to the five new stores opened during the year as well as the comparable store sales increase. Comparable

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store sales increased 13% for the year ended January 31, 2001 due to the introduction of new products such as DVD and HDTV, an increase in demand for digital products generally and a strong
economy.

Gross Profit.Gross profit in fiscal 2001 increased 32% to $152.3 million (31.4% of sales) from $115.5 million
(30.0% of sales) in fiscal 2000. The improvement in gross profit was due primarily to increased sales of new digital technology products; margin improvements in almost every product category,
partially offset by a lower mix of higher margin categories such as audio and mobile electronics; increased sales of high margin installation services; and amortization of warranty income in the
amount of $5.7 million (1.2% of sales).

Selling, General and Administrative Expenses.Selling, general and administrative expenses in fiscal 2001 increased 29% to
$128.4 million (26.5% of sales) from $99.9 million (26.0% of sales) in fiscal 2000. The percentage increase in selling, general and administrative expenses was directly related to
selling costs associated with amortization of warranty income (0.5% of sales).

Income From Operations.As a result of the foregoing, income from operations increased 54% to $23.9 million (4.9% of
sales) from $15.6 million (4.0% of sales) in fiscal 2000.

Interest Expense.Interest expense for fiscal 2001 decreased to $144,000 from $2.1 million in fiscal 2000. This
decrease was primarily due to our redemption of our outstanding bonds in March 2000 (see "Liquidity and Capital Resources") along with lower average amounts outstanding under our revolving line
of credit.

Income Taxes.Our effective tax rate of 37.5% in fiscal 2001 was the same as the prior year.

Net Income.Net income for fiscal 2001 was $14.6 million compared to $8.4 million for the prior year, for the
reasons described above.

Quarterly Results of Operations

The following table shows certain financial and operating data for each of the most recent eight quarters. The quarterly information is unaudited but has been
prepared on the same basis as our audited financial statements included elsewhere in the report. In the view of management, this unaudited data includes all adjustments, consisting only of normal
recurring adjustments, necessary to present fairly the unaudited quarterly results when read in conjunction with our audited financial

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statements. The results of operations for any quarter are not necessarily indicative of the results for any future period.

|                           |  | Three Months Ended |        
|-------------------------- |  | ------------------ | -------
|
|
|Fiscal 2002                |  |                    |        
|Sales                      |  | $                  | 115,132
|Gross profit               |  |                    | 35,570 
|Preopening expenses        |  |                    | 172    
|Income from operations     |  |                    | 2,842  
|Net income                 |  |                    | 1,698  
|Earnings per sharebasic   |  |                    | .16    
|Earnings per sharediluted |  |                    | .15    
|New stores opened          |  |                    | 1      
|Comparable store sales     |  |                    | 0      
|Fiscal 2001                |  |                    |        
|Sales                      |  | $                  | 95,006 
|Gross profit               |  |                    | 29,721 
|Preopening expenses        |  |                    | 199    
|Income from operations     |  |                    | 2,900  
|Net income                 |  |                    | 1,554  
|Earnings per sharebasic   |  |                    | .15    
|Earnings per sharediluted |  |                    | .14    
|New stores opened          |  |                    |       
|Comparable store sales     |  |                    | 18     

Operating
results are dependent upon a number of factors, including discretionary consumer spending, which is affected by local, regional and national economic conditions affecting
disposable consumer income, such as employment, business conditions, interest rates and taxation. Our quarterly results of operations may fluctuate significantly as a result of a number of factors,
including:



As
we have opened additional stores within markets we already serve, sales at existing stores have been adversely affected. Such adverse effects may occur in the future.

In
the past, we have experienced significant variability in preopening costs from quarter to quarter. These fluctuations are primarily a function of the timing of new store openings. We typically
incur the most significant portion of preopening costs associated with a given store in the three months prior to its opening.

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Our
business is affected by seasonal consumer buying patterns. As is the case with many other retailers, our sales and profits have been greatest in the fourth quarter (which includes the holiday
selling season). Due to the importance of the holiday selling season, any factors negatively impacting the holiday selling season could have a material adverse impact on our financial condition and
results of operations.

Liquidity and Capital Resources

Historically, our primary sources of liquidity for funding our expansion have been net cash from operations, revolving credit lines, term debt and issuances of
common stock. Our primary cash requirements are related to expenditures for new store openings and the relocation or remodeling of existing store locations. These expenditures include leasehold
improvements, fixtures and equipment, preopening expenses, additional inventory requirements and selling, general and administrative expenses.

Net
cash provided by operating activities equaled $15.3 million for fiscal 2002 compared to net cash provided by operating activities of $1.0 million for fiscal 2001. The
increase in cash provided by operating activities over the past year was primarily the result of higher accounts payable balances in fiscal 2002.

Net
cash used in investing activities was $47.3 million for fiscal 2002, primarily related to capital expenditures for new store openings, the installation of warehouse management
software, the reconfiguration and expansion of our warehouse and distribution center and implementation of our new management information system. In February 2001, we completed a sale and leaseback
transaction with a related party for our store in Colorado Springs, Colorado. See "Certain Relationships and Related Transactions." In October 2001, we increased the size of our main warehouse
and distribution center in Thornton, Colorado by 50,000 square feet. For fiscal 2001, net cash used in investing activities was $13.1 million. We incurred capital expenditures of
$25.1 million during fiscal 2001, primarily for new
store openings and the relocation and expansion of an existing store, which was partially offset by receipt of $12.0 million in proceeds from the sale of an investment available for sale
acquired with the proceeds from our public offering in fiscal 2000.

We
expect capital expenditures of approximately $40 million in fiscal 2003, primarily for new store openings, a remodel of our Fort Collins, Colorado store and implementation of
our new management information system. We have signed leases for 11 new store locations. The cost of new stores is anticipated to average approximately $3.3 million per store during fiscal
2003, which amount includes leasehold improvements, fixtures and equipment, inventory (net of payables) and preopening expenses. Leasehold improvements, fixtures and equipment are expected to average
approximately $2.2 million per store, depending on tenant allowances. The inventory requirement for each new store is expected to average approximately $1.5 million, approximately
$750,000 of which will be financed through trade credits from our vendors. Preopening expenses for new stores are expected to average approximately $350,000, and include costs for advertising prior to
opening and recruitment and training of new employees. If we relocate existing stores, preopening costs are expected to average $150,000 and will be higher if we are required to terminate existing
store leases prior to their maturity. We anticipate capital expenditures of approximately $6 million to complete the implementation of our new management information system.

Net
cash provided by financing activities totaled $31.7 million during fiscal 2002 compared to net cash used in financing activities of $2.3 million during fiscal 2001. Net
cash provided by financing activities for fiscal 2002 related primarily to net borrowings under our revolving line of credit. Net cash used in financing activities for the prior year was primarily the
result of repayment, in full, of our 10.25% bonds on March 31, 2000, partially offset by borrowings under our revolving line of credit.

25

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On
September 30, 1998, we executed a three-year $40 million credit agreement, as amended, with Foothill Capital Corporation, a wholly owned subsidiary of Wells
Fargo Bank. Borrowings under this revolving line of credit were limited to the lesser of $40 million or 80% of eligible inventory and a portion of accounts receivable. This credit agreement was
replaced on September 28, 2001 when we entered into a three-year $50 million credit agreement with Wells Fargo Finance, LLC. On December 12, 2001, we amended the
agreement to increase the credit limit to $80 million. Borrowings under this revolving line of credit are limited to the lesser of (i) $80 million and (ii) 75% of eligible
inventory plus the lesser of 75% of eligible accounts receivable and $2.5 million. Amounts borrowed bear interest, payable monthly, based on a blend of (i) LIBOR plus 1.75% to 2.25% and
(ii) Wells Fargo Bank's prime rate minus 0.375%. Our weighted average interest rate was 4.1% at January 31, 2002. Inventories, bank accounts, accounts receivable, equipment, intangibles,
negotiable instruments, investment property, intellectual property and equity interests in our subsidiaries secure the borrowings. The facility includes negative covenants that place restrictions on
our ability to incur indebtedness, create liens, enter into mergers and consolidations, pay dividends, repurchase our capital stock, issue guarantees, sell or otherwise dispose of assets and engage in
transactions with affiliates without the written consent of the bank. The facility also contains covenants regarding our gross margins, inventory levels, tangible net worth and capital expenditures.
Effective December 31, 2001, we amended the agreement with respect to the capital expenditures covenant. We are in compliance with all loan covenants. As of January 31, 2002, we had a
borrowing base of $75 million, of which $35.2 million was outstanding.

We
believe that our cash flow from operations and borrowings under our revolving line of credit will be sufficient to fund our operations, debt repayment and expansion through fiscal
2003. We believe the proceeds from this offering, together with our cash flow from operations and borrowings under our revolving line of credit, will be sufficient to fund our operations, debt
repayment and expansion through fiscal 2005. To fund our capital requirements beyond that time, we may be required to seek additional financing, which could include an increase in our revolving line
of credit or additional debt or equity financings. We may also remortgage our Thornton facility. We may not be able to obtain such funds on favorable terms, if at all.

The
following table reflects our contractual obligations and other commercial commitments as of January 31, 2002:

Contractual Obligations

|                          |  | Payments Due by Period
|------------------------- |  | ----------------------
|
|
|Capital lease obligations |  | $                     
|Operating leases          |  |                       
|Purchase commitments      |  |                       
|Construction commitments  |  |                       
|                          |  |                       
|                          |  | $                     
|                          |  |                       

26

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Other Commercial Commitments

|                            |  | Amount of Commitment Expiration by Period
|--------------------------- |  | -----------------------------------------
|
|
|Revolving line of credit(1) |  |                                         
|                            |  |                                          
|                            |  |                                         
|                            |  |                                          

---

Impact of Inflation

We believe that inflation has not had a significant effect on results of operations during the last few years. We cannot predict whether inflation will have an
impact on our results of operations in the future.

Recently Issued Accounting Standards

Accounting for Derivative Instruments and Hedging Activities (SFAS 133)

In June 1998, the Financial Accounting and Standards Board issued Statement 133, "Accounting for Derivative Instruments and Hedging Activities"
("SFAS 133"), as amended by SFAS 138, which was adopted by us on February 1, 2001. SFAS 133 requires that all derivatives be recorded on the balance sheet at fair value.
Changes in derivatives that are not hedges are adjusted to fair value through income. Changes in derivatives that meet SFAS 133 hedge criteria are either offset through income or recognized in
other comprehensive income until the hedged item is recognized in earnings. Our adoption of SFAS 133 had no effect on our financial condition, results of operations, or cash flows because we do
not own any derivative instruments.

Business Combinations (SFAS 141) and Goodwill and Other Intangible Assets (SFAS 142)

In
July 2001, the Financial Accounting Standards Board issued Statement No. 141, "Business Combinations" ("SFAS 141") and Statement No. 142, "Goodwill and
Other Intangible Assets" ("SFAS 142"). SFAS 141 requires companies to reflect intangible assets apart from goodwill and requires all business combinations subsequent to July 1,
2001 to be accounted for using the purchase method of accounting. SFAS 142 eliminates amortization of goodwill and indefinite lived intangible assets and requires us to perform an annual
impairment test on all goodwill and indefinite lived intangible assets. We adopted these statements on February 1, 2002. Goodwill amortization expense was $275,000, $275,000 and $276,000 during
fiscal years 2002, 2001 and 2000, respectively.

27

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ITEM 10:DIRECTORS AND CERTAIN EXECUTIVE OFFICERS OF ULTIMATE ELECTRONICS, INC.

Directors and Executive Officers

Ultimate Electronics directors and executive officers are as follows:

|Name               |  | Age |  | Position                                                                                                     |  | Served as Officer or Director Since |  | Class/Year in Which Term Expires
|------------------ |  | --- |  | ------------------------------------------------------------------------------------------------------------ |  | ----------------------------------- |  | --------------------------------
|William J. Pearse  |  | 60  |  | Chairman of the Board, Founder and Director                                                                  |  | 1968                                |  | Class III/2003                  
|J. Edward McEntire |  | 58  |  | Chief Executive Officer and Director                                                                         |  | 1993                                |  | Class III/2003                  
|David J. Workman   |  | 45  |  | President, Chief Operating Officer and Director                                                              |  | 1985                                |  | Class II/2002                   
|Alan E. Kessock    |  | 42  |  | Senior Vice PresidentFinance and Administration, Chief Financial Officer, Secretary, Treasurer and Director |  | 1988                                |  | Class I/2004                    
|Neal A. Bobrick    |  | 41  |  | Senior Vice PresidentSales and Store Operations                                                             |  | 1992                                |  | Not applicable                  
|Robert W. Beale    |  | 65  |  | Director                                                                                                     |  | 1993                                |  | Class I/2004                    
|Randall F. Bellows |  | 73  |  | Director                                                                                                     |  | 1995                                |  | Class II/2002                   
|Larry D. Strutton  |  | 61  |  | Director                                                                                                     |  | 2001                                |  | Class II/2002                   

All
executive officers hold office at the discretion of the Board.

Biographical Information

William J. Pearse.Mr. Pearse is Chairman of the Board and has been an officer and director of Ultimate Electronics
since he founded Ultimate Electronics with his wife, Barbara, in 1968. From 1968 to 1992, Mr. Pearse was our President and Chief Executive Officer, and from 1992 to 1997, he served as our Chief
Executive Officer. Mr. Pearse is a founding member and former president of the Progressive Retailers' Organization.

J. Edward McEntire.Mr. McEntire was promoted to Chief Executive Officer of Ultimate Electronics and elected as a
director in August of 1997. Mr. McEntire had previously held the position of Vice President Operations for Ultimate Electronics since February 1995. He was also a
non-employee director of Ultimate Electronics from August 1993 to January 31, 1995. From 1993 to January 31, 1995, Mr. McEntire operated JEM Enterprises, a
private investing and consulting firm. From 1991 until 1993, he was the President of the Regulatory Products Division of IHS Group, an information publishing company. From 1989 until 1991,
Mr. McEntire was the Executive Vice President Investor Services and, from 1981 until 1988, was the Group Vice President of Standard & Poor's Corporation.

David J. Workman.Mr. Workman is our President and Chief Operating Officer. He has been a director since
April 1993. He was promoted to Executive Vice President and General Manager in 1991 and then to President and Chief Operating Officer in 1992. From 1985 until 1991, Mr. Workman worked
with Ultimate Electronics as Vice President of Sales and Store Operations. He joined us in 1979 as a sales associate and was promoted to store manager in 1982. Mr. Workman was part owner of
Dakota Sight and Sound from 1976 until 1979.

Alan E. Kessock.Mr. Kessock is our Senior Vice President of Finance and Administration, Chief Financial Officer,
Secretary and Treasurer and a director. Mr. Kessock has been Chief Financial

28

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Officer, Secretary and Treasurer and a director of Ultimate Electronics since April 1993. Mr. Kessock was our Vice President of Finance and Administration from 1988 to 1999, and joined
us in 1985 as Controller. From 1981 through 1985, Mr. Kessock worked two years with the accounting firm of KPMG Peat Marwick and two years with American Home Video Corporation.

Neal A. Bobrick.Mr. Bobrick is our Senior Vice President of Sales and Store Operations. He was a Vice President of
Sales and Store Operations from 1992 to 1999. Mr. Bobrick joined us in 1981 as a sales associate and was promoted to store manager in 1984. He was made Director of Sales in 1989.
Mr. Bobrick has worked in the consumer electronics industry since 1979.

Robert W. Beale.Mr. Beale has been a director of Ultimate Electronics since April 1993 and is the President of
Beale International, a management consulting firm specializing in mid-sized businesses. Mr. Beale was formerly the Chief Executive Officer and founder of Management Design
Associates, a national management consulting firm. He was also an employee of IBM in the marketing division, and a consultant on the staff of Deloitte & Touche.

Randall F. Bellows.Mr. Bellows became a director of Ultimate Electronics on January 31, 1995.
Mr. Bellows was a co-founder of Cobe Laboratories, Inc. in 1965. He served as an Executive Vice President of Cobe Laboratories from 1965 until its acquisition by Gambro A.B.
in 1990 and as a director until 1995. Mr. Bellows has also served as a director of Scimed Life Systems, Inc., which was acquired by Boston Scientific Corp. in February 1996, since
1992. Mr. Bellows served as a director of Boston Scientific Corp. from 1996 until May 1999.

Larry D. Strutton.Mr. Strutton became a director of Ultimate Electronics in March 2001. Mr. Strutton
was the Publisher and Chief Executive Officer of the Rocky Mountain News from 1990 until his retirement in 2001. He also served as President of the Rocky Mountain News from 1990 to 1997. Prior to
joining the Rocky Mountain News in 1990, Mr. Strutton held various executive positions with the Baltimore Sun, Times-Mirror and Detroit Free Press.

The
board of directors is divided into three classes, each class consisting as nearly as possible of one-third of the total number of directors. Directors hold office for
staggered terms of three years or until their successors have been duly elected and qualified. Directors in one of the three classes are elected each year at the annual meeting of stockholders to
succeed the directors whose terms are expiring. Class I directors include Alan E. Kessock and Robert W. Beale and will serve as directors until the 2004 annual meeting. Class II
directors include David J. Workman, Randall F. Bellows and Larry D. Strutton and will serve as directors until the 2002 annual meeting. Class III directors include William J. Pearse and J.
Edward McEntire and will serve until the 2003 annual meeting.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), requires that our directors, executive officers and persons who
beneficially own greater than ten percent of a registered class of the our equity securities to file initial reports of ownership and changes in ownership with the Securities and Exchange Commission
(the "SEC"). Directors, officers and greater than ten percent shareholders are required by SEC regulation to furnish the Company with copies of all Section 16(a) reports filed.

Based
solely upon our review of copies of the Commission's Forms 3, 4 and 5 and amendments thereto submitted to us during the most recent fiscal year, we have identified no persons who
failed to file such forms on a timely basis with the Commission, as required by Section 16(a), during the most recent fiscal year or prior fiscal years.

29

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ITEM 11:EXECUTIVE COMPENSATION

EXECUTIVE COMPENSATION

The following table sets forth the compensation paid by us to our chief executive officer and our four most highly compensated executive officers, other than our
chief executive officer, whose salary and bonus exceeded $100,000 for services rendered for the fiscal years ended January 31, 2002, 2001 and 2000.

Summary Compensation Table

|                                         |  |      |  |         |  |         |  | Long-term
Compensation
Securities
Underlying Options
(#)
|---------------------------------------- |  | ---- |  | ------- |  | ------- |  | --------------------------------------------------------
|
|
|William J. Pearse                        |  | 2002 |  | 275,000 |  |        |  | 5,000                                                   
|Chairman of the Board                    |  | 2001 |  | 275,000 |  | 133,363 |  |                                                        
|                                         |  | 2000 |  | 275,000 |  | 455,103 |  |                                                        
|J. Edward McEntire                       |  | 2002 |  | 350,000 |  |        |  | 15,000                                                  
|Chief Executive Officer                  |  | 2001 |  | 325,000 |  | 143,005 |  | 30,000                                                  
|                                         |  | 2000 |  | 325,000 |  | 494,486 |  |                                                        
|David J. Workman                         |  | 2002 |  | 350,000 |  |        |  | 15,000                                                  
|President and Chief Operating Officer    |  | 2001 |  | 325,000 |  | 143,005 |  |                                                        
|                                         |  | 2000 |  | 300,000 |  | 474,795 |  |                                                        
|Alan E. Kessock                          |  | 2002 |  | 205,000 |  |        |  | 10,000                                                  
|Senior Vice President-Finance and        |  | 2001 |  | 190,000 |  | 116,971 |  |                                                        
|Administration, Chief Financial Officer, |  | 2000 |  | 180,000 |  | 380,274 |  |                                                        
|Treasurer and Secretary                  |  |      |  |         |  |         |  |                                                         
|Neal A. Bobrick                          |  | 2002 |  | 205,000 |  |        |  | 10,000                                                  
|Senior Vice President-                   |  | 2001 |  | 190,000 |  | 116,971 |  |                                                        
|Sales and Store Operations               |  | 2000 |  | 180,000 |  | 380,274 |  |                                                        

---

Share Option Grants

The following table contains further information concerning the share option grants made to our chief executive officer and the four other most highly compensated
executives of Ultimate Electronics during the fiscal year ended January 31, 2002.

Amounts
shown as potential realizable values are based on compounded annual rates of share price appreciation of five and ten percent over the 10-year or 5-year
term of the options, as mandated by rules of the Securities and Exchange Commission, and are not indicative of expected share price performance. Actual gains, if any, on share option exercises are
dependent on future performance of the overall market conditions, as well as the option holders' continued employment through the vesting period. The amounts reflected in this table may not
necessarily be achieved or may be exceeded. The indicated amounts are net of the option exercise price but before taxes that may be payable upon exercise.

30

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OPTION GRANTS IN THE LAST FISCAL YEAR

|                   |  |        |  |      |  |         |  |          |  | Potential Realized
Value at Assumed
Annual Rates of Stock Price Appreciation for
Option Term($)
|------------------ |  | ------ |  | ---- |  | ------- |  | -------- |  | -----------------------------------------------------------------------------------------------
|
|
|
|
|
|J. Edward McEntire |  | 15,000 |  | 8.19 |  | 28.1875 |  | 2/5/2011 |  | 265,905                                                                                        
|David J. Workman   |  | 15,000 |  | 8.19 |  | 28.1875 |  | 2/5/2011 |  | 265,905                                                                                        
|Alan E. Kessock    |  | 10,000 |  | 5.46 |  | 28.1875 |  | 2/5/2011 |  | 177,270                                                                                        
|Neal A. Bobrick    |  | 10,000 |  | 5.46 |  | 28.1875 |  | 2/5/2011 |  | 177,270                                                                                        
|William J. Pearse  |  | 5,000  |  | 2.73 |  | 31.00   |  | 2/5/2006 |  | 33,403                                                                                         

Option Exercises and Holdings

The following table sets forth information concerning option exercises by the named executive officers during the fiscal year ended January 31, 2002 and
outstanding options held by the named executive officers as of January 31, 2002:

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES

|Name               |  | Number of
Securities
Underlying Options
Exercised (#) |  | Value
Realized($) |  | Number of Shares
Underlying Unexercised
Options at
Fiscal Year End (#)
Exercisable/Unexercisable |  | Value of Unexercised
In-the-Money
Options at Fiscal Year End ($)
Exercisable/Unexercisable (1)
|------------------ |  | ----------------------------------------------------- |  | ----------------- |  | ------------------------------------------------------------------------------------------------ |  | ----------------------------------------------------------------------------------------------
|William J. Pearse  |  | 22,500                                                |  | 631,688           |  | 0/5,000                                                                                          |  | 0/0                                                                                           
|J. Edward McEntire |  | 70,000                                                |  | 1,671,451         |  | 115,023/36,977                                                                                   |  | 2,785,179/265,193                                                                             
|David J. Workman   |  | 6,000                                                 |  | 107,729           |  | 14,847/17,879                                                                                    |  | 379,044/85,395                                                                                
|Alan E. Kessock    |  | 28,025                                                |  | 685,497           |  | 30,000/11,975                                                                                    |  | 765,900/58,372                                                                                
|Neal A. Bobrick    |  | 30,000                                                |  | 771,900           |  | 60,864/11,975                                                                                    |  | 1,569,435/58,372                                                                              

---

Employment Agreements

We currently have no employment agreements with any of our officers or employees. In June 1997, however, we entered into agreements (each an "Agreement")
with each of William J. Pearse, J. Edward McEntire, David J. Workman, Alan E. Kessock and Neal A. Bobrick that establish the terms of the employment of such individuals with Ultimate Electronics in
the event of a change in control of Ultimate Electronics, as defined in the Agreements. In the event of any such change in control, or the termination of any such executive's employment in
anticipation of a change in control, each executive would, pursuant to the terms of his Agreement, have the right to remain employed by us for a period of three years from the date of the change in
control, at a level of responsibility and compensation commensurate with his individual responsibilities and compensation in place prior to the change in control. If an executive's employment
following a change in control is terminated by us for any reason other than cause (as defined in the Agreements) or disability, or the executive terminates his employment because we have violated the
provision of our Agreement with such executive or because of certain other specified events, we are obligated to pay the executive in a cash lump sum, within five

31

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days following such termination, all salary and deferred or accrued compensation due the executive, a prorated annual bonus for the portion of the fiscal year for which the executive was employed and
two additional years' salary and annual bonus, with the bonus to be based upon the higher of the preceding years' bonus and the annualized bonus for the year in which termination occurs. In the event
of any such termination, all options and restricted stock held by the executive also vest in full, and all options remain exercisable for a period of twelve months following termination.

Four
of our executive officers, J. Edward McEntire, David J. Workman, Alan E. Kessock and Neal A. Bobrick, have each also entered into confidentiality and non-compete
agreements with us. Each agreement provides that none of Messrs. McEntire, Workman, Kessock or Bobrick, as the case may be, will work for any competitor in particular geographic areas for one
year after he voluntarily leaves, or is terminated for cause by, Ultimate Electronics. The agreements provide that if the executive breaches the terms of the non-compete provisions, we
will have the right (i) to repurchase at the option exercise price any shares purchased by the executive upon exercise of options within the twelve month period immediately preceding the
breach, or (ii) if the executive no longer holds such shares, to receive from the executive a payment of that amount per share equal to the price at which he sold the shares minus the exercise
price of the underlying option.

Compensation of Directors

We have adopted compensation and incentive benefit plans to enhance our ability to continue to attract, retain and motivate qualified persons to serve as our
non-employee directors. We pay our non-employee directors $8,000 per year and reimburse each non-employee director for reasonable expenses in attending board
meetings. Under our 2000 Equity Incentive Plan, each non-employee director receives an initial grant of 4,000 non-statutory options ("NSOs") upon appointment and an annual
automatic grant of 4,000 NSOs for his or her board service. NSOs issued to non-employee directors under the 2000 Equity Incentive Plan vest in their entirety and become exercisable one
year from the date of grant.

Compensation Committee Interlocks and Insider Participation in Compensation Decisions

The current members of the Compensation Committee of our Board are Messrs. Beale, Bellows and Strutton. No member of the Compensation Committee was, during
the last fiscal year, an officer or employee of Ultimate Electronics, or was formerly an officer of Ultimate Electronics or had a disclosable relationship with us.

32

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ITEM 12:SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth information regarding beneficial ownership of Ultimate Electronics' common stock and stock options exercisable within
60 days of April 23, 2002 held by (i) each person or group of persons known by us to own beneficially five percent (5%) or more of the outstanding shares of common stock,
(ii) each director of Ultimate Electronics, (iii) our chief executive officer and each of the next four most highly compensated executive officers and (iv) all directors and
executive officers of Ultimate Electronics as a group. All information is taken from or based upon ownership filings made by such persons with the Securities and Exchange Commission or upon
information provided by such persons to us. Unless otherwise indicated, the stockholders listed below have sole voting and investment power with respect to the shares reported as owned.

|Name and Address of Beneficial Owner (1)                        |  | Number of Shares
Beneficially Owned |  | Percentage of Shares
Outstanding |  
|--------------------------------------------------------------- |  | ----------------------------------- |  | -------------------------------- | -
|William J. Pearse(2)                                            |  | 1,794,656                           |  | 15.9                             | %
|Various Pearse family trusts(3)                                 |  | 906,810                             |  | 8.1                              | %
|T. Rowe Price Associates, Inc.(4)                               |  | 1,187,100                           |  | 10.6                             | %
|Wellington Management Company, LLP(5)                           |  | 788,500                             |  | 7.0                              | %
|David L. Babson & Company, Inc.(6)                              |  | 697,550                             |  | 6.2                              | %
|AXA Assurances I.A.R.D. Mutuelle(7)                             |  | 630,400                             |  | 5.6                              | %
|Mellon Financial Corporation(8)                                 |  | 594,602                             |  | 5.3                              | %
|J. Edward McEntire(9)                                           |  | 173,280                             |  | 1.5                              | %
|David J. Workman(9)                                             |  | 99,420                              |  | *                                |  
|Alan E. Kessock(9)                                              |  | 41,323                              |  | *                                |  
|Neal A. Bobrick(9)                                              |  | 80,089                              |  | *                                |  
|Robert W. Beale(9)                                              |  | 26,000                              |  | *                                |  
|Randall F. Bellows(9)                                           |  | 24,000                              |  | *                                |  
|Larry D. Strutton(9)                                            |  | 4,000                               |  | *                                |  
|All directors and executive officers as a group (8 persons)(10) |  | 2,242,768                           |  | 19.4                             | %

---

33

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ITEM 13:CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

We entered into a lease agreement with William J. and Barbara A. Pearse (the "Lessors") on April 1, 1989 for the lease of our store in Colorado Springs,
Colorado. The Lessors' interest was subsequently transferred to Pearse Investment Company, L.L.L.P., an entity controlled by the Lessors. We have extended the term of the lease to July 1, 2005,
and the lease can be cancelled by us with nine months
notice to the landlord. We paid $125,400 in lease payments during fiscal 2002 for the property. In addition, we are responsible for all real property taxes and insurance premiums on the property.

We
entered into a lease agreement with the Lessors on October 13, 1989 for the lease of our store in Fort Collins, Colorado. The Lessors' interest was subsequently transferred to
Pearse Investment Company, L.L.L.P., an entity controlled by the Lessors. The lease is for a term of 15 years, commencing on April 1, 1990, at an annual base rent of $120,000. Effective
April 1, 1992, the rent increases annually at a rate equal to the lesser of (i) $6,000 or (ii) an amount based upon the increase, if any, over the prior year in the Denver
Consumer Price Index. We paid $158,177 in lease payments during fiscal 2002 for the property. We are also responsible for all real property taxes and insurance premiums on the property.

During
the fiscal year ended January 31, 2001, we purchased land and constructed a retail building in a new location in Colorado Springs, Colorado. The new store opened in
November 2000. In February 2001, we sold the land and the building to Pearse Investment Company, L.L.L.P., an entity controlled by the Lessors, for $4.5 million and at no gain or
loss to us. We also entered into a lease for a term of 15 years at an annual base rent of $427,500. Effective March 1, 2006 and March 1, 2011, the annual base rent increases to
$470,265 and $517,272, respectively. We paid $393,147 in lease payments during fiscal 2002. We are responsible for all real property taxes and insurance premiums on the property. This sale and
leaseback transaction was approved by the disinterested directors of our board.

Although
we did not obtain independent appraisals in connection with these transactions, we believe that the terms of all of the foregoing transactions were better for our company than
the terms that we would have obtained with independent third parties. All future transactions with the Lessors or any other affiliate of our company will be subject to the approval of our
disinterested directors and will be on terms believed by such directors to be no less favorable to us than those available from unaffiliated third parties.

We
employ William J. Pearse III, the son of William J. and Barbara A. Pearse, as Vice President Marketing. In fiscal 2002, we paid him a salary and bonus of $129,615. Daniel N. Workman,
the brother of David J. Workman, is employed by us as a Regional Sales Manager. In fiscal 2002, we paid him a salary and bonus of $129,888.

34

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PART IV

ITEM 14:EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K





|Exhibit
No. |  | Description of Exhibit                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1         |  | Amended and Restated Certificate of Incorporation of Ultimate Electronics, Inc., incorporated by reference to Exhibit 3(i) to the Registration Statement on Form S-1 (File No. 33-68314), filed with the Commission on
September 2, 1993, as amended by Certificate of Amendment No. 1 to the Amended and Restated Certificate of Incorporation, incorporated by reference to Exhibit 4.1 to the Registration Statement on Form S-3 (File No. 333-87341), filed with the
Commission on September 29, 1999.                                                                                                                                                                                                 
|3.2         |  | Certificate of Amendment No. 2 to the Amended and Restated Certificate of Incorporation, incorporated by reference to Exhibit 3.2 to Ultimate Electronics' Annual Report on Form 10-K for the year ended January 31, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|3.3         |  | Bylaws of Ultimate Electronics, incorporated by reference to Exhibit 3(ii) to the Registration Statement on Form S-1 (File No. 33-68314), filed with the Commission on September 2, 1993.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|4.1         |  | Rights Agreement, dated as of January 31, 1994, by and between Ultimate Electronics and Norwest Bank Minnesota, National Association, as rights agent, incorporated by reference to Exhibit 4.1 to Ultimate Electronics' Current Report on Form 8-K filed
with the Commission on February 10, 1995; as amended by Amendment No. 1 to the Rights Agreement, dated January 31, 1995, by and between Ultimate Electronics and Norwest Bank Minnesota, N.A. as rights agent, incorporated by reference to Exhibit 4.3 to
Ultimate Electronics' Quarterly Report on Form 10-Q for the period ended April 30, 1995.                                                                                              
|10.1        |  | Second Amended and Restated Loan and Security Agreement, by and among Ultimate Electronics, Inc. and Wells Fargo Retail Finance, LLC dated September 28, 2001, as amended by the First Amendment to the Second Amended and Restated Loan Agreement
dated December 12, 2001, as incorporated by reference to Exhibits 10.1 and 10.2, respectively, to Ultimate Electronics' Quarterly Report on Form 10-Q for the period ended October 31, 2001, as amended by the Second Amendment to the Second Amended and
Restated Loan Agreement, effective as of December 31, 2001, incorporated by reference to Exhibit 10.1 to Ultimate Electronics' Annual Report on Form 10-K for the year ended January 31, 2002.
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

35

---

|10.2  |  | Employee Stock Option Plan, incorporated by reference to Exhibit 10.8 to the Registration Statement on Form S-1 (File No. 33-68314), filed with the Commission on September 2, 1993.                                                                                                                                                                                        
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.3  |  | Non-Employee Stock Option Plan, incorporated by reference to Exhibit 10.9 to Amendment No. 1 to the Registration Statement on Form S-1 (File No. 33-68314), filed with the Commission on October 7, 1993.                                                                                                                                                                   
|10.4  |  | 1997 Equity Incentive Plan, incorporated by reference to Exhibit 4 to the Registration Statement on Form S-8 (File No. 333-43049), filed with the Commission on December 23, 1997.                                                                                                                                                                                          
|10.5  |  | Amended and Restated 2000 Equity Incentive Plan, incorporated by reference to Exhibit 4.1 to Ultimate Electronics' Current Report on Form 8-K, filed with the Commission on September 15, 2000.                                                                                                                                                                             
|10.6  |  | Amended and Restated Employee Stock Purchase Plan, incorporated by reference to Exhibit 4.2 to Ultimate Electronics' Current Report on Form 8-K, filed with the Commission on September 15, 2000.                                                                                                                                                                           
|10.7  |  | Ultimate Electronics, Inc. 401(k) Retirement Savings Plan, incorporated by reference to Exhibit 10.10 to the Registration Statement on Form S-1 (File No. 33-68314), filed with the Commission on September 2, 1993.                                                                                                                                                        
|10.8  |  | Form of Confidentiality Agreement, dated February 5, 2001, by and between Ultimate Electronics and each of William J. Pearse, J. Edward McEntire, David J. Workman, Alan E. Kessock and Neal A. Bobrick, incorporated by reference to Exhibit 10.8 to the
Ultimate Electronics' Annual Report on Form 10-K for the year ended January 31, 2002.                             
|10.9  |  | Form of Change of Control Agreement, dated June 27, 1997, by and between Ultimate Electronics and each of William J. Pearse, J. Edward McEntire, David J. Workman, Alan E. Kessock and Neal A. Bobrick, incorporated by reference to Exhibit 10.30 to the
Ultimate Electronics' Quarterly Report on Form 10-Q for the period ended July 31, 1997.                           
|10.10 |  | Form of Incentive Stock Option Agreement for Key Employees, incorporated by reference to Exhibit 10.10 to Ultimate Electronics' Annual Report on Form 10-K for the year ended January 31, 2002.                                                                                                                                                                             
|10.11 |  | Form of Non-Statutory Stock Option Agreement for Key Employees, incorporated by reference to Exhibit 10.11 to Ultimate Electronics' Annual Report on Form 10-K for the year ended January 31, 2002.                                                                                                                                                                         
|10.12 |  | Form of Indemnification Agreement by and between Ultimate Electronics and each of William J. Pearse, J. Edward McEntire, David J. Workman, Alan E. Kessock, Neal A. Bobrick, Robert W. Beale, Randall F. Bellows, and Larry D. Strutton, incorporated by
reference to Exhibit 10.12 to Ultimate Electronics' Annual Report on Form 10-K for the year ended January 31, 2002.
|10.13 |  | Lease Agreement, dated April 1, 1989, by and between Ultimate Electronics and Pearse Investment Company, L.L.L.P. (successor in interest to William J. and Barbara A. Pearse), incorporated by reference to Exhibit 10.2 to the Registration Statement on
Form S-1 (File No. 33-68314), filed with the Commission on September 2, 1993.                                     
|      |  |                                                                                                                                                                                                                                                                                                                                                                             

36

---

|10.14 |  | Lease Agreement, dated October 13, 1989, by and between Ultimate Electronics and Pearse Investment Company, L.L.L.P. (successor in interest to William J. and Barbara A. Pearse), incorporated by reference to Exhibit 10.3 to the Registration Statement
on Form S-1 (File No. 33-68314), filed with the Commission on September 2, 1993.
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.15 |  | Lease Agreement, dated February 28, 2001, by and between Ultimate Electronics and Pearse Investment Company, L.L.L.P., incorporated by reference to Exhibit 99.1 to Ultimate Electronics' Annual Report on Form 10-K for the period ended January 31,
2001.                                                                               
|10.16 |  | Ultimate Electronics, Inc. Bonus Plans for Fiscal Years Ended January 31, 2001 and January 31, 2002.*                                                                                                                                                                                                                                     
|21.1  |  | Subsidiaries of the Company, incorporated by reference to Exhibit 21.1 to Ultimate Electronics' Annual Report on Form 10-K for the year ended January 31, 2002.                                                                                                                                                                           
|23.1  |  | Consent of Ernst & Young LLP.*                                                                                                                                                                                                                                                                                                            
|24.1  |  | Power of Attorney (included in signature page), incorporated by reference to Exhibit 24.1 to the Ultimate Electronics' Annual Report on form 10-K for the year ended January 31, 2002.                                                                                                                                                    

---

37

---

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant had duly caused this amendment to be signed
April 25, 2002 on its behalf by the undersigned, thereunto duly authorized.

| |  | ULTIMATE ELECTRONICS, INC.
| |  | --------------------------
| |  | By:                       

38

---



INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



|                                                                                                                                   |  | Page
|---------------------------------------------------------------------------------------------------------------------------------- |  | ----
|Report of Independent Auditors                                                                                                     |  | F-2 
|Consolidated Balance Sheets as of January 31, 2002 and January 31, 2001                                                            |  | F-3 
|Consolidated Statements of Income for the fiscal years ended January 31, 2002, January 31, 2001 and January 31, 2000               |  | F-5 
|Consolidated Statements of Stockholders' Equity for the fiscal years ended January 31, 2002, January 31, 2001 and January 31, 2000 |  | F-6 
|Consolidated Statements of Cash Flows for the fiscal years ended January 31, 2002, January 31, 2001 and January 31, 2000           |  | F-7 
|Notes to Consolidated Financial Statements                                                                                         |  | F-8 

F-1

---

REPORT OF INDEPENDENT AUDITORS

The
Stockholders and Board of Directors
Ultimate Electronics, Inc.:

We
have audited the accompanying consolidated balance sheets of Ultimate Electronics, Inc. and subsidiaries ("the Company") as of January 31, 2002 and 2001, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the three years in the period ended January 31, 2002. Our audits also included the financial statement schedule listed in
the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements
and schedule based on our audits.

We
conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

In
our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Ultimate Electronics, Inc. at January 31, 2002
and 2001, and the results of its consolidated operations and its consolidated cash flows for each of the three years in the period ended January 31, 2002 in conformity with accounting
principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.



Denver,
Colorado
March 11, 2002

F-2

---



CONSOLIDATED BALANCE SHEETS        (amounts in thousands)

|                                                              |                                 | January 31,
|------------------------------------------------------------- | ------------------------------- | -----------
|
|ASSETS:                                                       |                                 |            
|Current assets:                                               |                                 |            
|                                                              | Cash and cash equivalents       |            
|                                                              | Accounts receivable, net        |            
|                                                              | Merchandise inventories, net    |            
|                                                              | Property held for sale          |            
|                                                              | Deferred tax asset              |            
|                                                              | Prepaid expenses and other      |            
|                                                              |                                 |            
|Total current assets                                          |                                 |            
|Property and equipment, at cost:                              |                                 |            
|                                                              | Furniture, fixtures & equipment |            
|                                                              | Leasehold improvements          |            
|                                                              | Autos and trucks                |            
|                                                              | Land and buildings              |            
|                                                              | Construction-in-progress        |            
|                                                              |                                 |            
|                                                              |                                 |            
|                                                              | Less accumulated depreciation   |            
|                                                              |                                 |            
|                                                              |                                 |            
|Property under capital leases, including related parties, net |                                 |            
|Goodwill, net                                                 |                                 |            
|Other assets                                                  |                                 |            
|                                                              |                                 |            
|Total assets                                                  |                                 | $          
|                                                              |                                 |            

See accompanying notes to consolidated financial statements

F-3

---

CONSOLIDATED BALANCE SHEETS (Continued)        (amounts in thousands, except share and per share data)

|                                                                           |                                                                         | January 31,                                                                          
|-------------------------------------------------------------------------- | ----------------------------------------------------------------------- | -------------------------------------------------------------------------------------
|
|LIABILITIES AND STOCKHOLDERS' EQUITY:                                      |                                                                         |                                                                                      
|Current liabilities:                                                       |                                                                         |                                                                                      
|                                                                           | Accounts payable                                                        |                                                                                      
|                                                                           | Accrued liabilities                                                     |                                                                                      
|                                                                           | Revolving line of creditshort term                                     |                                                                                      
|                                                                           | Current portion of term loans                                           |                                                                                      
|                                                                           | Current portion of capital lease obligations, including related parties |                                                                                      
|                                                                           | Deferred revenue                                                        |                                                                                      
|                                                                           | Deferred tax liability                                                  |                                                                                      
|                                                                           |                                                                         |                                                                                      
|Total current liabilities                                                  |                                                                         |                                                                                      
|Revolving line of creditlong term                                         |                                                                         |                                                                                      
|Capital lease obligations, including related parties, less current portion |                                                                         |                                                                                      
|Deferred revenue, less current portion                                     |                                                                         |                                                                                      
|Deferred tax liability                                                     |                                                                         |                                                                                      
|                                                                           |                                                                         |                                                                                      
|Total long-term liabilities                                                |                                                                         |                                                                                      
|                                                                           |                                                                         |                                                                                      
|Total liabilities                                                          |                                                                         |                                                                                      
|Commitments                                                                |                                                                         |                                                                                      
|Stockholders' equity:                                                      |                                                                         |                                                                                      
|                                                                           | Preferred Stock, par value $.01 per share                               |                                                                                      
|                                                                           |                                                                         | Authorized shares10,000,000                                                         
|                                                                           |                                                                         | No shares issued and outstanding                                                     
|                                                                           | Common stock, par value $.01 per share                                  |                                                                                      
|                                                                           |                                                                         | Authorized shares40,000,000                                                         
|                                                                           |                                                                         | Issued and outstanding shares, 11,241,686 and 10,938,331 at January 31, 2002 and 2001
|                                                                           | Additional paid-in capital                                              |                                                                                      
|                                                                           | Retained earnings                                                       |                                                                                      
|                                                                           |                                                                         |                                                                                      
|Total stockholders' equity                                                 |                                                                         |                                                                                      
|                                                                           |                                                                         |                                                                                      
|Total liabilities and stockholders' equity                                 |                                                                         | $                                                                                    
|                                                                           |                                                                         |                                                                                      

See accompanying notes to consolidated financial statements

F-4

---



CONSOLIDATED STATEMENTS OF INCOME        (amounts in thousands, except per share data)

|                                                                 |  | Year ended January 31,
|---------------------------------------------------------------- |  | ----------------------
|
|Sales                                                            |  | $                     
|Cost of goods sold                                               |  |                       
|                                                                 |  |                       
|Gross profit                                                     |  |                       
|Selling, general and administrative expenses                     |  |                       
|                                                                 |  |                       
|Income from operations                                           |  |                       
|Interest expense, net                                            |  |                       
|                                                                 |  |                       
|Income before taxes and extraordinary item                       |  |                       
|Income tax expense                                               |  |                       
|                                                                 |  |                       
|Income before extraordinary item                                 |  |                       
|Extraordinary loss on early extinguishment of debt, net of taxes |  |                       
|                                                                 |  |                       
|Net income                                                       |  | $                     
|                                                                 |  |                       
|Earnings per share before extraordinary itembasic               |  | $                     
|Earnings per share before extraordinary itemdiluted             |  | $                     
|Earnings per sharebasic                                         |  | $                     
|Earnings per sharediluted                                       |  | $                     
|Weighted average shares outstandingbasic                        |  |                       
|Weighted average shares outstandingdiluted                      |  |                       

See accompanying notes to consolidated financial statements

F-5

---

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY        (amounts in thousands, except share data)

|                           |                                      | Common Stock |           |   |     |    |   |       
|-------------------------- | ------------------------------------ | ------------ | --------- | - | --- | -- | - | ------
|
|
|BALANCES, JANUARY 31, 1999 |                                      | 8,160,796    |           | $ | 81  |    | $ | 33,912
|                           | Issuance of common stock             |              | 2,337,500 |   |     | 24 |   |       
|                           | Exercise of stock options            |              | 207,022   |   |     | 2  |   |       
|                           | Net income                           |              |          |   |     |   |   |       
|                           |                                      |              |           |   |     |    |   |       
|BALANCES, JANUARY 31, 2000 |                                      | 10,705,318   |           |   | 107 |    |   | 70,801
|                           | Exercise of stock options            |              | 233,013   |   |     | 2  |   |       
|                           | Net income                           |              |          |   |     |   |   |       
|                           |                                      |              |           |   |     |    |   |       
|BALANCES, JANUARY 31, 2001 |                                      | 10,938,331   |           |   | 109 |    |   | 73,290
|                           | Exercise of stock options            |              | 213,620   |   |     | 2  |   |       
|                           | Issuance of shares through ESPP plan |              | 89,735    |   |     | 1  |   |       
|                           | Net income                           |              |          |   |     |   |   |       
|                           |                                      |              |           |   |     |    |   |       
|BALANCES, JANUARY 31, 2002 |                                      | 11,241,686   |           | $ | 112 |    | $ | 77,215
|                           |                                      |              |           |   |     |    |   |       

See accompanying notes to consolidated financial statements

F-6

---



CONSOLIDATED STATEMENTS OF CASH FLOWS        (amounts in thousands)

|                                                                                  |                                              | Year ended January 31,                          |         
|--------------------------------------------------------------------------------- | -------------------------------------------- | ----------------------------------------------- | --------
|
|CASH FLOWS FROM OPERATING ACTIVITIES:                                             |                                              |                                                 |         
|Net income                                                                        |                                              | $                                               | 11,953  
|Adjustments to reconcile net income to net cash provided by operating activities: |                                              |                                                 |         
|                                                                                  | Depreciation and amortization                |                                                 |         
|                                                                                  | Deferred taxes                               |                                                 |         
|                                                                                  | Changes in operating assets and liabilities: |                                                 |         
|                                                                                  |                                              | Accounts receivable                             |         
|                                                                                  |                                              | Merchandise inventories                         |         
|                                                                                  |                                              | Prepaid expenses and other                      |         
|                                                                                  |                                              | Other assets                                    |         
|                                                                                  |                                              | Accounts payable, accrued and other liabilities |         
|                                                                                  |                                              |                                                 |         
|NET CASH PROVIDED BY OPERATING ACTIVITIES                                         |                                              |                                                 | 15,328  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                             |                                              |                                                 |         
|Purchases of property and equipment                                               |                                              |                                                 | (47,314 
|Redemptions (purchases) of investments available for sale                         |                                              |                                                 |        
|                                                                                  |                                              |                                                 |         
|NET CASH USED IN INVESTING ACTIVITIES                                             |                                              |                                                 | (47,314 
|CASH FLOWS FROM FINANCING ACTIVITIES:                                             |                                              |                                                 |         
|Aggregate borrowings under long-term revolving credit agreement                   |                                              |                                                 | 560,150 
|Aggregate repayments under long-term revolving credit agreement                   |                                              |                                                 | (532,232
|Early extinguishment of bonds payable                                             |                                              |                                                 |        
|Proceeds from issuance of common stock                                            |                                              |                                                 | 1,768   
|Proceeds from exercise of stock options                                           |                                              |                                                 | 2,160   
|Repurchase of long term bonds payable                                             |                                              |                                                 |        
|Principal payments on term loans and capital lease obligations                    |                                              |                                                 | (120    
|                                                                                  |                                              |                                                 |         
|NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES                               |                                              |                                                 | 31,726  
|                                                                                  |                                              |                                                 |         
|Net (decrease) increase in cash and cash equivalents                              |                                              |                                                 | (260    
|Cash and cash equivalents at beginning of year                                    |                                              |                                                 | 2,954   
|                                                                                  |                                              |                                                 |         
|Cash and cash equivalents at end of year                                          |                                              | $                                               | 2,694   
|                                                                                  |                                              |                                                 |         
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                                 |                                              |                                                 |         
|Cash paid during the year for:                                                    |                                              |                                                 |         
|Interest                                                                          |                                              | $                                               | 1,007   
|Income taxes                                                                      |                                              |                                                 | 4,410   

See accompanying notes to consolidated financial statements

F-7

---



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Significant Accounting Policies

Background

Ultimate
Electronics, Inc. (the "Company") is a leading specialty retailer of consumer electronics and home entertainment products. As of January 31, 2002, the Company operated 46 stores
in Arizona, Colorado, Idaho, Iowa, Minnesota, Missouri, Nevada, New Mexico, Oklahoma, South Dakota and Utah.

Principles of Consolidation

The
consolidated financial statements include the accounts of all subsidiaries. All intercompany accounts and transactions have been eliminated upon consolidation.

Use of Estimates

The
preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could
differ from those estimates.

Cash Equivalents

The
Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.

Property Held For Sale

During
fiscal year 2001, the Company purchased land and constructed a building for a new store located in Colorado Springs, Colorado. The store opened in November 2000. In February 2001,
the Company entered into a sale and leaseback transaction with Pearse Investment Company, LLLP, an entity controlled by William J. and Barbara A. Pearse (see Note 8). There was no gain or loss
recognized as a result of the sale.

Inventories

The
Company states merchandise inventories at the lower of cost (weighted average cost) or market. Inventories are presented net of an allowance for obsolescence of $1.2 million and $951,000 at
January 31, 2002 and 2001, respectively.

Property, Plant and Equipment

Property,
plant and equipment are stated at cost. Additions and improvements are capitalized. Maintenance and repairs are expensed as incurred.

F-8

---

Depreciation and Amortization

Depreciation
is provided principally using the straight-line method based upon the following useful lives:

Furniture, fixtures and equipment

5-7 yearsLeasehold improvements

7-20 yearsAutos and trucks

5 yearsProperty under capital leases

5-15 yearsBuildings

30 years


Capitalized Interest

For
the fiscal years ended January 31, 2002, 2001 and 2000, the Company capitalized interest of $930,000, $250,000 and $0, respectively, primarily associated with the construction of new
stores.

Accrued Liabilities

Accrued
liabilities are comprised of the following:

January 31,2002

2001(in thousands)Compensation

$
5,739

$
6,327Sales taxes


2,889


2,247Customer deposits


7,427


4,566Income taxes


5,760


4,988Other


4,307


5,568Total

$
26,122

$
23,696


Revenue Recognition

Revenue
is recognized at the time the customer takes possession of the merchandise or such merchandise is delivered to the customer. Sales, which includes net warranty revenue, consists of gross sales
less discounts, price guarantees, returns and allowances. The Company grants credit to customers through independent, third-party finance companies, which companies assume the credit risk for the
collection of the related accounts receivable. When interest-free promotions are offered by the Company, a fee is normally paid by the Company at the time of the transaction. This fee averages between
3.0% and 4.0% of the amount financed by the customer.

Advertising Costs and Cooperative Revenue

In
accordance with AICPA Statement of Position 93-7, "Reporting on Advertising Costs," all advertising costs are deferred until the first time the advertising takes place. In addition, the
Company accrues rebates based upon varying percentages of inventory purchases and records such amounts as a reduction of advertising expense. The Company also deducts amounts for cooperative
advertising directly from payment to manufacturers for inventory purchases based on individual agreements with

F-9

---

the Company's manufacturers. Net advertising expense charged to operations was $8,987,000, $6,352,000 and $4,778,000 for the years ended January 31, 2002, 2001 and 2000, respectively.

Barter/Exchange Transaction

The
Company entered into barter/exchange agreements with an unrelated party in April 2001, April 1999 and November 1998, whereby the Company agreed to transfer inventory with a
net carrying value of $675,000, $950,000 and $729,000, respectively, in exchange for $755,000, $550,000 and $500,000, respectively, of advertising credits. The Company accounted for the transactions
in accordance with EITF Issue No. 99-17, "Accounting for Advertising Barter Transactions." The Company had $685,000, $365,000 and $805,000 in prepaid advertising credits recorded as
current assets at January 31, 2002, 2001 and 2000, respectively.

Earnings Per Share of Common Stock

The
Company reports its earnings per share amounts in accordance with Statement No. 128, Earnings per Share (SFAS 128). Basic earnings per share excludes any dilutive effects of options,
warrants and convertible securities. Diluted earnings per share includes the dilutive effects of such equity instruments. The calculation of weighted average shares outstanding-diluted for the fiscal
years ending
January 31, 2002, 2001, and 2000 includes 441,562, 629,233 and 695,396 dilutive shares, respectively, to give effect to the potential exercise of options under the Company's stock option plans.

Goodwill

In
fiscal 1998, the Company completed a merger with Audio King Corporation. The transaction resulted in goodwill in the amount of $2.7 million, which is being amortized over a
10-year life. Amortization expense for fiscal years 2002, 2001 and 2000 was $275,000, $275,000 and $276,000, respectively. As of January 31, 2002 and 2001, total accumulated
amortization was $1.2 million and $961,000, respectively.

The
Company's policy is to account for goodwill at the lower of amortized cost or net realizable value. As part of an ongoing review of the valuation and amortization of goodwill, management assesses
the carrying value of the Company's goodwill to determine if changes in facts and circumstances suggest that they may be impaired. If this review indicates that the goodwill is not recoverable, as
determined by a discounted cash flow analysis over the remaining amortization period, the carrying value of the Company's goodwill would be reduced to its estimated fair market value. No event has
been identified that would indicate an impairment of the value of goodwill recorded in the accompanying consolidated financial statements.

Effective
February 1, 2002, the Company adopted new accounting standards issued by the Financial Accounting Standards Board. See "Recently Issued Accounting StandardsBusiness
Combinations (SFAS 141) and Goodwill and Other Intangible Assets (SFAS 142)."

Fair Value of Financial Instruments

The
Company's financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, revolving line of credit and other long-term debt, have fair values which
approximate their recorded values as the financial instruments are either short term in nature or carry interest rates that approximate market rates.

F-10

---

Segment Reporting

During
1997, the FASB issued Statement No. 131, "Disclosures about Segment Reporting of an Enterprise and Related Information," which establishes standards for the way public business
enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial
reports issued to stockholders. It also establishes standards for related disclosure about products and services, geographic areas and major customers. The Company conducts business in one operating
segment and determined its operating segment based on the individual operations that the chief operating decision maker reviews for purposes of assessing performance and making operating decisions.
These individual operations have been reflected as one reporting segment because the Company believes doing so helps users understand the Company's performance and assess its prospects. The combined
operations have similar economic characteristics and each operation has similar products, services, customers and distribution methods.

Recently Issued Accounting Standards

Accounting for Derivative Instruments and Hedging Activities (SFAS 133)

In
June 1998, the Financial Accounting and Standards Board issued Statement 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), as amended by
SFAS 138, which was adopted by the Company on February 1, 2001. SFAS 133 requires that all derivatives be recorded on the balance sheet at fair value. Changes in derivatives that
are not hedges are adjusted to fair value through income. Changes in derivatives that meet SFAS 133 hedge criteria are either offset through income or recognized in other comprehensive income
until the hedged item is recognized in earnings. The adoption of SFAS 133 had no effect on the Company's financial condition, results of operations, or cash flows because the Company currently
does not own any derivative instruments.

Business Combinations (SFAS 141) and Goodwill and Other Intangible Assets (SFAS 142)

In
July 2001, the Financial Accounting Standards Board issued Statement No. 141, "Business Combinations" ("SFAS 141") and Statement No. 142, "Goodwill and Other Intangible
Assets" ("SFAS 142"). SFAS 141 requires companies to reflect intangible assets apart from goodwill and requires all business combinations subsequent to July 1, 2001 to be
accounted for using the purchase method of accounting. SFAS 142 eliminates amortization of goodwill and indefinite lived intangible assets and requires the Company to perform an annual
impairment test on all goodwill and indefinite lived intangible assets. The Company adopted these statements on February 1, 2002. Goodwill amortization expense was $275,000, $275,000 and
$276,000 during fiscal years 2002, 2001 and 2000, respectively.

2. Accounting For Extended Warranty Contracts

The
Company sells extended warranty contracts on behalf of a fully-insured unrelated party. The contracts extend beyond the normal manufacturer's warranty period, usually with terms of coverage
(including the manufacturer's warranty period) between 12 and 60 months. The extended warranty contracts are administered by a third party and all performance obligations and risk of loss with
respect to such contracts are the responsibility of such administrator and other parties.

F-11

---

For
extended warranty contracts entered into prior to February 1, 2000, the Company recognizes revenues, net of direct selling expenses, over the term of the obligor contracts, as the Company
was deemed to be the obligor under the terms of its extended warranty master contract. Effective February 1, 2000, the Company restructured its extended warranty master contract with the
administrator such that the extended warranty contracts sold after the effective date generally qualify as non-obligor contracts. The Company retains a commission which it now recognizes
as revenue from the sale of these non-obligor contracts at the time of sale to the customers.

3. Recent Public Stock Offerings

On
October 22, 1999, the Company completed a public offering for the sale of 2,000,000 shares of its common stock at the offering price of $16.50 per share. The Company received proceeds of
$30.7 million, net of all offering costs. On November 9, 1999, the underwriters exercised their overallotment option related to this offering. As a result, the Company issued an
additional 337,500 shares of its common stock at a price of $16.50 per share. The Company received proceeds from the sale of these shares of $5.3 million, net of all offering costs. The shares
issued related to the
overallotment option brought the total shares issued in the offering to 2,337,500 and the total proceeds received by the Company to $36.0 million, net of all offering costs.

4. Revolving Line of Credit Agreement

On
September 30, 1998, the Company executed a three-year $40 million credit agreement, as amended, with Foothill Capital Corporation, a wholly owned subsidiary of Wells Fargo
Bank. Borrowings under this revolving line of credit were limited to the lesser of $40 million or 80% of eligible inventory and a portion of accounts receivable. This credit agreement was
replaced on September 28, 2001 when the Company entered into a three-year $50 million credit agreement with Wells Fargo Finance, LLC. On December 12, 2001, the Company
amended the agreement to increase the credit limit to $80 million. Borrowings under this revolving line of credit are limited to the lesser of (i) $80 million or (ii) 75%
of eligible inventory plus the lesser of 75% of eligible accounts receivable and $2,500,000. Amounts borrowed bear interest, payable monthly, based on a blend of (i) LIBOR plus 1.75% to 2.25%
and (ii) Wells Fargo Bank's prime rate minus 0.375%. The Company's weighted average interest rate was 4.1% at January 31, 2002. Inventories, accounts receivable, equipment and
intangibles secure the borrowings. The facility includes negative covenants that place restrictions on the Company's ability to incur indebtedness, create liens, enter into mergers and consolidations,
pay dividends, repurchase the Company's capital stock, issue guarantees, sell or otherwise dispose of assets and engage in transactions with affiliates without the written consent of the bank. The
facility also contains covenants regarding the Company's gross margins, inventory levels, tangible net worth and capital expenditures. Effective December 31, 2001, the Company amended the
agreement with respect to the capital expenditures covenant. The Company is in compliance with all loan covenants. As of January 31, 2002, the Company had a borrowing base of
$75 million, of which $35.2 million was outstanding.

5. Bonds Payable

On
March 23, 1995, the Company completed an offering for the sale of $13,000,000 aggregate principal amount of bonds payable (the "Bonds"). The Bonds were redeemable by the Company at par any
time at or after March 31, 2000. The Company acquired $1,300,000 of the Bonds in the open market in a series of transactions in fiscal 2000. On March 31, 2000, the Company paid
$13,111,000 to redeem the Bonds in full. The Bonds were redeemed at a redemption price of 100% of the principal amount and

F-12

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all accrued and unpaid interest as of such date, which totaled $111,000. As a result of the redemption of the Bonds, the Company recognized an extraordinary loss of $254,000 (net of taxes). The
Company received $1,300,000 (plus accrued interest) relating to the Bonds it held in connection with its open market purchases during fiscal 2000.

6. Stock Option and Stockholder Rights Plans

Stock Option Plan

Under
the terms of the Company's original stock option plan (the "Plan"), the Company granted to officers and employees awards of options to purchase shares of common stock and other types of awards.
The Plan authorized the issuance of 900,000 shares of common stock. Under the terms of the non-employee directors' stock option plan (the "Directors' Plan"), the Company granted awards of
stock options to non-employee directors. The Directors' Plan authorized the issuance of 20,000 shares of common stock.

In
June 1997, at the Company's annual meeting, the Company's stockholders approved a new stock option plan known as the Equity Incentive Plan (the "1997 Plan"). The 1997 Plan replaced both the
Plan and the Directors' Plan. Grants issued under the Plan and the Directors' Plan continue to be exercisable according to their original terms but no additional grants can be issued under these
plans. The 1997 Plan authorized the issuance of 750,000 shares to be awarded to employees, non-employee directors and/or outside consultants. The exercise price for incentive stock options
for employees and non-qualified options for outside directors is the market value of the underlying common stock at the date of grant. Incentive stock options issued to employees who then
have attributed ownership of more than 10% of the total combined voting power of all classes of stock must be issued at an exercise price of 110% of market value of the underlying common stock at the
date of grant. During fiscal 2001, 32,250 options were granted under the 1997 Plan. The options were granted at prices from $15.50 to $18.75.

In
July 2000, at the Company's annual meeting, the Company's stockholders approved a new stock option plan known as the 2000 Equity Incentive Plan (the "2000 Plan"), which replaced the 1997
Plan. Grants issued under the 1997 Plan continue to be exercisable according to original terms but no additional grants can be issued under the 1997 Plan. The 2000 Plan initially authorized the
issuance of up to 300,000 shares to be awarded to employees, non-employee directors or outside consultants. The 2000 Plan provides for annual increases of 100,000 shares subject to
a maximum of 1,200,000 shares. Each non-employee director receives an option to purchase 4,000 shares of common stock upon becoming a director and an option to purchase 4,000 shares
of common stock effective February 1st of each year, which options are exercisable one year from the date of grant. The Board of Directors continues to determine the person to whom employee
awards are granted, the types of awards granted, the number of shares granted, the vesting schedule and the term of any option (which cannot exceed ten years). The exercise price for incentive stock
options for employees and non-qualified options for outside directors is the market value of the underlying common stock at the date of grant. Incentive stock options issued to employees
who then have attributed ownership of more than 10% of the total
combined voting power of all classes of stock must be issued at an exercise price of 110% of the market value of the underlying common stock at the date of grant. During fiscal year 2001, 53,250
options were granted under the 2000 Plan. In fiscal year 2002, 188,000 options were granted under the 2002 Plan. The options were granted at prices from $21.70 to $31.00. The options available for
grant at January 31, 2002 include only the options available under the 2000 Plan.

F-13

---

Changes
in the options outstanding (and option exercise prices for such options) are as follows:

Year Ended January 31,2002

2001

2000Options outstanding at beginning of year

690,285

837,797

948,517Granted ($9.625 to $34.938)

188,000

85,500

104,000Canceled ($1.07 to $28.188)

5,000



7,700Exercised ($1.07 to $18.50)

213,620

233,012

207,020Options outstanding at end of year

659,665

690,285

837,797Options exercisable at end of year

366,356

379,969

399,307Options available for grant at end of year

163,750

346,750

32,250


The
weighted average exercise price of options outstanding at January 31, 2002, 2001 and 2000 was $14.28, $7.63 and $5.09, respectively. The weighted average contractual life of the options
outstanding at January 31, 2002, 2001 and 2000 was 7.0, 6.7 and 7.0 years, respectively.

The
Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related Interpretations, in accounting for its
employee stock options because, as discussed below, the alternative fair value accounting provided for under FASB Statement No. 123, "Accounting for Stock-Based Compensation," requires use of
option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of the Company's employee stock options equals the market price of
the underlying stock on the date of grant, no compensation expense is recognized.

Pro
forma information regarding net income and earnings per share is required by Statement 123, which also requires that the information be determined as if the Company has accounted for its employee
stock options granted subsequent to January 31, 1995 under the fair value method of that Statement. The fair value for these options was estimated at the date of grant or the date of repricing
using a Black-Scholes option valuation model with the following weighted average assumptions: risk-free interest rates ranging from 4.77% to 6.67%; a dividend yield of 0%; volatility
factors of the market price of the Company's common stock for fiscal years 2002, 2001 and 2000, respectively, of .734, .747 and .804, and a weighted average expected life of the options of three
years. The weighted average fair value of stock options granted during January 31, 2002, 2001 and 2000 was $27.73, $11.03 and $8.48, respectively.

The
Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option
valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense
over the options' vesting period.

F-14

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The
Company's pro forma information follows:

Year Ended January 31,2002

2001

2000Pro forma net income

$
10,901,000

$
13,983,000

$
7,932,000Pro forma earnings per share:Basic

$
0.99

$
1.30

$
0.90Diluted

$
0.95

$
1.22

$
0.83


Stockholder Rights Plan

On
January 31, 1995, the Company declared to stockholders of record at the close of business on February 10, 1995, a dividend of one right to purchase preferred stock (a "Right") for
each outstanding share of common stock. Each share of subsequently issued common stock will also incorporate one Right. The Rights will expire on February 10, 2005. Each Right entitles
stockholders, in certain circumstances, to buy one-hundredth of a newly issued share of Series A Junior Participating Preferred Stock (the "Junior Preferred Stock") of the Company
at the initial purchase price of $75.00 per share.

The
Rights are exercisable and transferable apart from the common stock only if a person or group (other than certain exempt persons) acquires beneficial ownership of 15% or more of the common stock,
or commences a tender or exchange offer upon consummation of which such person of group would beneficially own 15% or more of the common stock.

The
Company is generally entitled to redeem the Rights at $.001 per Right at any time until a person or group (other than certain exempt persons) has become the beneficial owner of 15% or more of the
common stock. Under the Rights "flip-in" feature, if any such person or group becomes the beneficial owner of 15% or more of the common stock, then each Right not owned by such person or
group of certain related parties will entitle its holder to purchase, at the Right's then current purchase price,
shares of common stock (or in certain circumstances as determined by the Company's Board, cash, other property or other securities) having a value of twice the Right's purchase price.

Under
the Rights "flip-over" provision, if, after any other person or group (other than certain exempt persons) becomes the beneficial owner of 15% or more of the common stock, the Company
is involved in a merger or other business combination transaction with another person, or sells 25% or more of its assets or earning power in one or more transactions, each Right will entitle its
holder to purchase, at the Right's then current purchase price, shares of common stock of such other person having a value of twice the Right's purchase price.

The
Junior Preferred Stock will not be redeemable and, unless otherwise provided in connection with the creation of a subsequent series of preferred stock, will be subordinate to all other series of
the Company's preferred stock. Each share of Junior Preferred Stock will represent the right to receive, when and if declared, a quarterly dividend at an annual rate equal to the greater of $1.00 per
share or 100 times the quarterly per share cash dividends declared on the common stock during the immediately preceding fiscal year. In addition, each share of Junior Preferred Stock will represent
the right to receive 100 times any non-cash dividends (other than dividends payable in common stock) declared on the common stock, in like kind. In the event of the liquidation,
dissolution, or winding up of the Company, each share of Junior Preferred Stock will represent the right to receive a liquidation payment in an amount equal to the greater of $1.00 per share or 100
times the liquidation payment made per share of common stock. Each share of Junior Preferred Stock will have 100 votes, voting

F-15

---

together with the common stock. In the event of any merger, consolidation, or other transaction in which common shares are exchanged, each share of Junior Preferred Stock represents the right to
receive 100 times the amount received per share of common stock. The rights of the Junior Preferred Stock as to dividends, liquidation, voting rights and merger participation are protected by
anti-dilution provisions.

7. Provision For Income Taxes

Under
the liability method of accounting for income taxes as prescribed by FASB Statement No. 109, "Accounting for Income Taxes," deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial reporting purposes and amounts used for income tax purposes. The components of the provision for income taxes as of
January 31, 2002, 2001 and 2000 are as follows:

Current

Deferred

Total(in thousands)January 31, 2002Federal

$
6,074

$
668

$
6,742State


528


58


586Total

$
6,602

$
726

$
7,328January 31, 2001Federal

$
6,588

$
1,743

$
8,331State


1,033


(449
)

584Total

$
7,621

$
1,294

$
8,915January 31, 2000Federal

$
5,492

$
(855
)
$
4,637State


501


(87
)

414Total

$
5,993

$
(942
)
$
5,051


The
following is a reconciliation of the provision for income taxes to the federal statutory rate for the years ended January 31, 2002, 2001 and 2000:

Year Ended January 31,2002

2001

2000(in thousands)Income taxes at the federal statutory rate

$
6,742

$
8,325

$
4,583State income taxes, net of federal benefit


586


590


468Provision for income taxes

$
7,328

$
8,915

$
5,051


F-16

---

The
tax effects of temporary differences that give rise to a significant portion of the deferred tax assets and liabilities at January 31, 2002 and 2001 are as follows:

January 31,2002

2001(in thousands)Deferred tax assets:Deferred warranties

$
1,038

$
1,893Inventories


2,003


1,944Accrued liabilities


676


623Valuation reserves


879


534Capital leases


137


137$
4,733

$
5,131Deferred tax liabilities:Inventories

$
(3,877
)
$
(3,118
)Depreciation and amortization


(2,059
)

(2,376
)(5,936
)

(5,494
)Net deferred tax liability

$
(1,203
)
$
(363
)


8. Leases

Operating Leases

The
Company leases retail stores under agreements that expire at various dates through 2047. Several leases contain escalation clauses or options to renew at negotiated or specified minimum lease
payments for periods ranging from one to 30 years beyond the initial noncancelable lease terms. Total rent expense charged to operations was $13,436,000, $9,407,000 and $7,521,000 for the years
ended January 31, 2002, 2001 and 2000, respectively.

Capital Leases

The
following property is held under capital leases:

January 31,2002

2001(in thousands)Buildings and improvements

$
2,877

$
2,877Less accumulated depreciation


1,675


1,540$
1,202

$
1,337


Related Party Leases

In
February 2001, the Company entered into a sale and leaseback transaction with an entity controlled by the two principal stockholders of the Company on a new store located in Colorado
Springs, Colorado. At January 31, 2002, the Company leases three retail stores with the entity controlled by two principal stockholders of the Company. The lease agreements for the three retail
stores provide for

F-17

---

annual rent increases over the initial noncancelable lease terms. Total rental payments to related parties under these leases were $677,000, $276,000 and $265,000 for the years ended
January 31, 2002, 2001 and 2000, respectively.

The
aggregate minimum annual rental commitments as of January 31, 2002 are as follows:

Operating
Leases

Capital
Leases(in thousands)Fiscal Year Ended January 31,2003

$
16,293

$
3412004


16,346


3462005


16,025


3532006


15,577


2382007


14,144


2042008-2020


129,578


1,833Total minimum lease payments

$
207,963

$
3,315Less amount representing interest





1,656Present value of net minimum lease payments





1,659Less portion due within one year





113Long term capital lease obligations




$
1,546


9. Purchase and Construction Commitments

The
Company had purchase commitments and construction commitments of $3.6 million and $2.5 million, respectively, as of January 31, 2002, and $1.0 million and
$4.5 million, respectively, as of January 31, 2001, relating to new store locations.

10. Employee Benefit Plans

The
Company has a 401(k) Savings Plan for the benefit of substantially all employees. The Plan provides for both employee and employer contributions. The Company matches 25% of the employee's
contribution limited to 1.5% of the employee's annual compensation subject to limitations set annually by the Internal Revenue Service. The Company's contributions were $350,000, $305,000 and $274,000
for the years ended January 31, 2002, 2001 and 2000, respectively.

In
July 2000, at the Company's annual meeting, the Company's stockholders approved an Employee Stock Purchase Plan (the "Purchase Plan"). Under the Purchase Plan, the Company initially
authorized the issuance of 400,000 shares. The Purchase Plan provides for an annual increase equal to the lesser of (i) 2% of the outstanding shares of the Company, or (ii) a
lesser amount determined by the Board, provided that the total shares issued shall never exceed 2,000,000 shares. Eligible employees may purchase a limited number of shares of the Company's
common stock at 85% of the market value at certain plan-defined dates. The Purchase Plan terminates on July 17, 2010. In fiscal 2002, 89,735 shares were issued pursuant to
the Purchase Plan. There were no shares issued pursuant to the Purchase Plan in fiscal 2001. At January 31, 2002, 310,265 shares were available for issuance under the Purchase Plan.

F-18

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11. Quarterly Financial Data(unaudited)

|                                 |  | Three Months Ended
|-------------------------------- |  | ------------------
|
|
|Fiscal 2002                      |  |                   
|Sales                            |  | $                 
|Gross profit                     |  |                   
|Income from operations           |  |                   
|Net income                       |  |                   
|Earnings per sharebasic         |  |                   
|Earnings per sharediluted       |  |                   
|Fiscal 2001                      |  |                   
|Sales                            |  | $                 
|Gross profit                     |  |                   
|Income from operations           |  |                   
|Income before extraordinary item |  |                   
|Net income                       |  |                   
|Earnings per sharebasic         |  |                   
|Earnings per sharediluted       |  |                   

F-19

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EXHIBIT INDEX

|Exhibit No. |  | Description of Exhibit                                                                              
|----------- |  | ----------------------------------------------------------------------------------------------------
|10.16       |  | Ultimate Electronics, Inc. Bonus Plans for Fiscal Years Ended January 31, 2001 and January 31, 2002.
|23.1        |  | Consent of Ernst & Young LLP.                                                                       

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