TWEETER HOME ENTERTAINMENT GROUP INC, S-3/A, 2000-02-04

TWEETER HOME ENTERTAINMENT GROUP INC
S-3/A, 2000-02-04
RADIO, TV & CONSUMER ELECTRONICS STORES

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 4, 2000

REGISTRATION NO. 333-94433

================================================================================

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

------------------------

PRE-EFFECTIVE AMENDMENT NO. 1

FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

------------------------

TWEETER HOME ENTERTAINMENT GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S> <C>
DELAWARE 04-3417513
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION) IDENTIFICATION NO.)
</TABLE>

------------------------

10 PEQUOT WAY
CANTON, MASSACHUSETTS 02021
(781) 830-3000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)

------------------------

JOSEPH MCGUIRE, CHIEF FINANCIAL OFFICER
TWEETER HOME ENTERTAINMENT GROUP, INC.
10 PEQUOT WAY
CANTON, MASSACHUSETTS 02021
(781) 830-3000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF AGENT FOR SERVICE)

------------------------

COPIES OF COMMUNICATIONS TO:

<TABLE>
<S> <C>
TIMOTHY B. BANCROFT, ESQ. EDWIN L. MILLER, JR., ESQ.
GOULSTON & STORRS, P.C. TESTA, HURWITZ & THIBEAULT, LLP
400 ATLANTIC AVENUE 125 HIGH STREET
BOSTON, MASSACHUSETTS 02110 BOSTON, MASSACHUSETTS 02110
</TABLE>

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.

If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, check the following
box. [ ]

If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
reinvestment plans, check the following box. [ ]

If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]

If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]

If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]

------------------------

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.

================================================================================
<PAGE> 2

THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT
SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE
THE OFFER OR SALE IS NOT PERMITTED.

SUBJECT TO COMPLETION, DATED FEBRUARY 4, 2000

LOGO

- --------------------------------------------------------------------------------

2,550,000 SHARES
COMMON STOCK

- --------------------------------------------------------------------------------

This is a public offering of common stock of Tweeter Home Entertainment
Group, Inc. We are offering 2,550,000 shares of common stock of which 550,000
are being offered by the selling stockholders and 2,000,000 are being offered
by us.

Our common stock is traded on the Nasdaq National Market under the symbol
"TWTR." On January 10, 2000, the last reported sale price of our common stock
was $31.125 per share.

INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE 8.

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.

<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- ----------
<S> <C> <C>
Public offering price $ $
Underwriting discounts and commissions $ $
Proceeds, before expenses, to Tweeter $ $
Proceeds, before expenses, to the selling stockholders $ $
</TABLE>

We have granted the underwriters the right to purchase up to 382,500
additional shares at the public offering price to cover any over-allotments.

The underwriters expect to deliver the shares against payment in Baltimore,
Maryland on , 2000.

DEUTSCHE BANC ALEX. BROWN

PAINEWEBBER INCORPORATED

DAIN RAUSCHER WESSELS

THE DATE OF THIS PROSPECTUS IS , 2000
<PAGE> 3
DESCRIPTION OF INSIDE FRONT COVER PAGE GRAPHICS

The graphics on the inside front cover page consist of one photograph headed by
a solid field with inset text heading, which solid field heading and photograph
are located in the top of two thirds of the page.

The photograph (without solid field heading) measures approximately 7.675 inch
(width) by 5.25 inch (length). The solid field heading measures approximately
7.675 inch (width) by 1.875 inch (length) (based on an 8.5 inch by 11 inch
page). The entire graphic is centered from side-to-side. The text in the solid
field heading reads "Tweeter Home Entertainment Group, Inc."

The photograph is a store-deep perspective showing general store layout and
product displays with a checkout counter in the foreground where three employees
are assisting customers.

The bottom of the page presents the following text: "When we refer in this
prospectus to "mid to high-end" products or the like, we mean, when referring to
audio products, products primarily in the $200 to $4,000 retail price range, and
when referring to video products, products primarily in the $500 to $7,500
retail price range."

Underneath such text reads as follows: "Tweeter, etc.," "Tweeter," "Bryn Mawr,"
"HiFi Buys," "Automatic Price Protection" and "Wise Buys" are service marks of
Tweeter."

<PAGE> 4

PROSPECTUS SUMMARY

You should read the following summary together with the more detailed
information, consolidated financial statements and notes to those statements
appearing elsewhere in this prospectus. Unless we indicate otherwise, all
information in this prospectus:

- assumes no exercise of the underwriters' over-allotment option;

- gives effect to the exercise of options to purchase 87,000 shares of
common stock which will be sold by certain selling stockholders in this
offering; and

- gives effect to a two-for-one split of our common stock effected on
December 2, 1999 as if it had been in effect for all periods presented.

TWEETER

We are a leading specialty retailer of mid to high-end audio and video
consumer electronics products. We operate 76 stores under the Tweeter, etc. name
in the New England market, the Bryn Mawr Stereo & Video name in the Mid-Atlantic
market, the HiFi Buys name in the Southeast market, the Home Entertainment name
in the Texas market and the DOW Stereo/Video name in the San Diego, California
market. Our stores feature an extensive selection of home and car audio systems
and components, portable audio equipment and home video products, including
large screen televisions, DVD players, digital satellite systems, video cassette
recorders and camcorders. We differentiate ourselves by focusing on consumers
who seek audio and video products with advanced features, functionality and
performance. We do not offer personal computers or home office equipment. We
seek to build name recognition and customer loyalty by combining quality
products and knowledgeable sales associates with a high level of service and
competitive prices. In 1999, we were recognized by Audio Video International
Magazine as the "Consumer Electronics Retailer of the Year," and we were
presented with the "Excellence in Retailing" award by the TWICE Consumer
Electronics Retail Registry and the "Dealer Pride" award by Dealerscope.

INDUSTRY

We believe that the consumer electronics industry is large, growing and
fragmented, with significant consolidation opportunities. We estimate that
between 1990 and 1997, retail sales of audio and video products expanded at a
compound annual growth rate of 2.3% to approximately $30.0 billion. More
recently, growth has accelerated with the advent of new digital products such as
DVD players and high definition televisions as well as direct broadcast
satellite systems and Internet-ready televisions. We believe that retail sales
of audio and video products grew at a compound annual growth rate of 5.3% from
1997 to approximately $33.3 billion in 1999. At the same time, the expansion of
large format national chains has created competitive pressures for smaller
specialty stores that may be successfully differentiated but lack an adequate
scale of operations or purchasing power to operate on a stand-alone basis. We
believe that these regional specialty operations provide acquisition
opportunities.
3
<PAGE> 5

BUSINESS STRATEGY

Our goal is to become the nation's leading specialty retailer of
high-quality audio and video products to our targeted customer base. To achieve
this objective, we have implemented an operating model in our Tweeter, etc.,
Bryn Mawr Stereo & Video, HiFi Buys, Home Entertainment and DOW Stereo/Video
stores that includes:

- a deep merchandise selection focused on mid to high-end audio and video
products, including limited distribution products which accounted for
approximately 34.5% of our sales for fiscal 1999;

- exceptional customer service based upon relationship and knowledge-based
selling that is critical to higher-end products;

- every day competitive pricing featuring our patented Automatic Price
Protection program; and

- a dynamic and inviting retail environment.

We believe that the quality and knowledge of our sales associates are
critical to our success and represent a significant competitive advantage. Sales
consultants initially receive five weeks of intensive classroom training and
five to 15 days of additional training per year, both in the store and at
regional training centers. Our relationship selling model encourages sales
associates to promote a comfortable, trusting, low pressure sales environment
that engenders long term customer loyalty. An integral part of our relationship
selling model is our Automatic Price Protection program. We designed this
program to remove pricing concerns from the purchase decision and to allow
customers and the sales staff to focus on product functionality, performance and
quality. Under the Automatic Price Protection program, if a customer purchases a
consumer electronics product from one of our stores and a competitor within 25
miles of the store advertises a lower price within 30 days, we automatically
send a check to the customer for the difference without requiring the customer
to request the payment.

GROWTH STRATEGY

We have developed an aggressive growth strategy to:

- Open new stores -- We seek to capitalize on our brand recognition and
infrastructure by opening new stores and relocating certain existing
stores to more favorable sites within their respective regional markets.
During fiscal 1999, we opened two Tweeter, etc. stores, two Bryn Mawr
Stereo & Video stores, and one HiFi Buys store. In fiscal 2000, we have
opened three new stores and intend to open an additional 13 new stores
and relocate four stores.

- Pursue acquisitions -- We selectively pursue acquisitions of established
specialty audio and video retailers in new regional markets. We acquired
Bryn Mawr Stereo & Video in the Mid-Atlantic market in May 1996, HiFi
Buys in the Southeast market in May 1997, Home Entertainment in the Texas
market in February 1999 and DOW Stereo/Video in the San Diego, California
market in July 1999. On January 20, 2000, we reached an agreement in
principle, subject to various terms and conditions, and regulatory
approval, to acquire United Audio Centers, Inc. in the Chicago, Illinois
market. In addition to expanding within and around each market by opening
new stores, we seek to convert the acquired company to our core operating
model.

4
<PAGE> 6

We believe that our initiatives have enabled us to significantly
improve operating performance in these acquired retailers. The following
table presents revenue, in thousands, and store contribution for each
acquired retailer. The results are pro forma in the year of acquisition as
if the acquisition had been completed at the start of the fiscal year.
Store contribution refers to gross profit after deducting selling expenses.

<TABLE>
<CAPTION>
THREE MONTHS
ENDED
FISCAL YEAR ENDED SEPTEMBER 30, DECEMBER 31,
------------------------------------- -----------------
1996 1997 1998 1999 1998 1999
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Bryn Mawr Stereo & Video
Total revenue............................... $33,525 $35,432 $51,768 $63,638 $21,271 $26,884

Store contribution.......................... 3.1% 6.8% 7.8% 10.2% 13.7% 14.9%

HiFi Buys

Total revenue............................... -- $87,968 $82,810 $85,021 $27,968 $30,821

Store contribution.......................... -- 6.9% 9.9% 11.4% 12.9% 14.5%

Home Entertainment

Total revenue............................... -- -- -- $25,577 -- $ 9,561

Store contribution.......................... -- -- -- 5.6% -- 14.9%

DOW Stereo/Video

Total revenue............................... -- -- -- $39,753 -- $11,410

Store contribution.......................... -- -- -- 3.9% -- 11.2%
</TABLE>

Tweeter is a Delaware corporation. Our principal executive offices are
located at 10 Pequot Way, Canton, Massachusetts 02021. Our telephone number is
(781) 830-3000. In this prospectus, references to "Tweeter," "we," "us," and
"our" mean Tweeter Home Entertainment Group, Inc. and its predecessors and
subsidiaries, unless otherwise required by the context. "Tweeter, etc." means
our New England stores.

5
<PAGE> 7

THE OFFERING

<TABLE>
<S> <C>
Shares offered by Tweeter............................ 2,000,000 shares
Shares offered by the selling stockholders........... 550,000 shares
Shares to be outstanding after the offering.......... 17,416,208 shares
Use of proceeds...................................... To provide working capital and for other
general corporate purposes, including
possible strategic acquisitions
Nasdaq National Market symbol........................ TWTR
</TABLE>

The number of shares that will be outstanding after the offering is based
on shares outstanding as of December 31, 1999 and includes the 87,000 shares of
common stock issuable upon exercise of the options being exercised and sold by
the selling stockholders in this offering. This number excludes 2,279,599 shares
of common stock issuable upon exercise of options outstanding as of December 31,
1999 with a weighted average exercise price of $7.25 per share and 8,812 shares
of common stock issuable upon exercise of warrants outstanding as of December
31, 1999 with a weighted average exercise price of $3.23 per share.

6
<PAGE> 8

SUMMARY FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT PER SHARE AND STORE DATA)

You should read the following summary information together with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our consolidated financial statements and the notes to those
statements included elsewhere in this prospectus.

<TABLE>
<CAPTION>
THREE MONTHS ENDED
FISCAL YEAR ENDED SEPTEMBER 30, DECEMBER 31,
-------------------------------------------------- -------------------------
1995 1996 1997 1998 1999 1998 1999
------- ------- -------- -------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Total revenue................................. $60,121 $80,607 $132,525 $232,289 $283,287 $86,784 $124,814
Gross profit.................................. 20,954 28,791 46,210 81,024 100,539 29,551 45,649
Income from operations...................... 2,238 1,953 2,053 12,072 15,436 7,796 13,688
Income from joint venture..................... -- -- -- -- -- -- 107
Interest expense.............................. 629 617 1,808 2,753 310 201 258
------- ------- -------- -------- -------- ------- --------
Income before income taxes.................... 1,609 1,336 245 9,319 15,126 7,595 13,537
Income tax expense (benefit).................. (174) (453) 99 3,724 6,050 3,038 5,415
------- ------- -------- -------- -------- ------- --------
Income before extraordinary item.............. 1,783 1,789 146 5,595 9,076 4,557 8,122
Extraordinary item (less applicable income
taxes)...................................... -- -- -- (340) -- -- --
------- ------- -------- -------- -------- ------- --------
Net income.................................. 1,783 1,789 146 5,255 9,076 4,557 8,122
======= ======= ======== ======== ======== ======= ========
Accretion of preferred stock.................. -- 1,036 2,156 2,514 -- -- --
------- ------- -------- -------- -------- ------- --------
Net income (loss) available to common
stockholders................................ $ 1,783 $ 753 $ (2,010) $ 2,741 $ 9,076 $ 4,557 $ 8,122
======= ======= ======== ======== ======== ======= ========
Basic earnings (loss) per share
Net income (loss) available to common
stockholders before extraordinary item.... 0.26 0.19 (0.60) 0.62 0.63 0.36 0.53
Extraordinary item.......................... -- -- -- (0.07) -- -- --
------- ------- -------- -------- -------- ------- --------
Net income (loss)........................... $ 0.26 $ 0.19 $ (0.60) $ 0.55 $ 0.63 $ 0.36 $ 0.53
======= ======= ======== ======== ======== ======= ========
Diluted earnings (loss) per share
Net income (loss) available to common
stockholders before extraordinary item.... 0.26 0.19 (0.60) 0.55 0.57 0.32 0.48
Extraordinary item.......................... -- -- -- (0.03) -- -- --
------- ------- -------- -------- -------- ------- --------
Net income (loss)........................... $ 0.26 $ 0.19 $ (0.60) $ 0.52 $ 0.57 $ 0.32 $ 0.48
======= ======= ======== ======== ======== ======= ========
Weighted average shares outstanding
Basic....................................... 6,742 3,880 3,345 4,973 14,385 12,713 15,277
Diluted..................................... 6,742 3,966 3,345 10,068 15,973 14,204 17,044
OPERATING DATA:
Store contribution(1)......................... $ 5,550 $ 6,798 $ 10,642 $ 24,117 $ 31,314 $12,052 $ 18,667
Stores open at beginning of period............ 16 18 33 47 52 52 73
New stores.................................... 2 2 4 5 5 1 3
Relocated stores.............................. 1 1 1 2 3 1 0
Closed stores................................. 0 0 0 0 0 0 0
Acquired stores............................... 0 13 10 0 16 0 0
Stores open at end of period.................. 18 33 47 52 73 53 76
Comparable store sales(2)..................... 12.5% 5.6% (7.2)% 12.5% 5.0% 10.6% 11.9%
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31, 1999
--------------------------
ACTUAL AS ADJUSTED(3)
-------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital........................................... $ 28,583 $ 86,839
Total assets.............................................. $165,232 $223,488
Stockholders' equity...................................... $ 96,167 $154,423
</TABLE>

- -------------------------

(1) Refers to gross profit after deducting selling expenses. Store contribution
is presented to provide additional information about us and should not be
considered in isolation or as a substitute for operating income, cash flow
from operating activities and other income or cash flow data prepared in
accordance with generally accepted accounting principles, or as a measure of
our profitability or liquidity. Our calculation of store contribution may
not be comparable to similarly titled items reported by other companies.

(2) Stores are included in the comparable store base after they are in operation
for 12 full months. Acquired stores are included if the store was open for
12 full months as of the date of acquisition. Remodeled or relocated stores
are excluded for 12 full months.

(3) Adjusted to reflect the sale of 2,000,000 shares of common stock offered by
Tweeter hereby, assuming a public offering price of $31.125 per share (the
closing price on January 10, 2000), and the exercise of options to purchase
87,000 shares of common stock which will be sold by certain selling
stockholders in this offering.
7
<PAGE> 9

RISK FACTORS

The value of an investment in Tweeter will be subject to the significant
risks inherent in its business. Investors should consider carefully the risks
and uncertainties described below and the other information in this prospectus
before deciding whether to invest. If any of the events described below actually
occur, our business, financial condition or operating results could be adversely
affected in a material way. This could cause the trading price of our common
stock to decline, perhaps significantly. See "Special Note Regarding Forward-
Looking Statements."

WE MAY BE UNABLE TO FIND SUITABLE TARGETS FOR OUR STRATEGIC ACQUISITIONS OR
SUITABLE SITES FOR NEW STORES.

Our success depends in large part on our ability to acquire or open new
stores in both existing and new geographic markets. We may not be able to
achieve our planned expansion, and any newly acquired or opened stores may not
achieve sales and profitability levels comparable with our existing stores, or
become profitable at all. In addition, the opening of new stores in an existing
market could result in lower net sales at our existing stores in that market.

There are a number of factors that affect the ability of any newly acquired
or opened stores to achieve sales and profitability levels comparable with our
existing stores. These factors include:

- the identification of existing audio and video consumer electronics
retailers appropriate for strategic acquisition;

- the successful consummation of such acquisitions;

- the identification and acquisition of suitable sites and the negotiation
of acceptable leases for such sites; and

- the obtaining of governmental and other third-party consents, permits and
licenses needed to operate such additional sites.

WE MAY BE UNABLE TO SUCCESSFULLY INTEGRATE THE BUSINESSES WE ACQUIRE.

Integration of newly acquired chains and stores may involve significant
delay and expense related to advertising, administration and distribution as we
enter new markets. New stores acquired through such acquisitions may not operate
profitably or integrate successfully into our operations. Previously acquired
stores have had, and newly acquired stores may have, different merchandising,
advertising, store format and operating approaches from ours, and our success in
integrating such stores will depend on our ability to effect significant changes
in the operations of such stores to conform to our approach in these areas. We
may not be successful in effecting such changes without an adverse effect on the
revenues or profitability of such stores.

8
<PAGE> 10

WE MAY BE UNABLE TO MANAGE OUR GROWTH.

Our rapid expansion through the opening or acquisition of new stores places
significant demands on our management, resources, operations and information
systems. Such expansion requires us to expend significant effort and additional
resources to ensure the continuing adequacy of our financial controls, operating
procedures, information systems, product purchasing and distribution systems and
employee training programs. We also need to attract and retain additional
qualified personnel, including new store managers, for such new stores.

In addition, future acquisitions could involve the issuance of equity
securities which could dilute the holdings of existing stockholders. Future
acquisitions could also involve the incurrence of debt and contingent
liabilities, and amortization expenses related to goodwill and other intangible
assets, any of which could have a material adverse effect on our results of
operations or financial condition.

WE ARE DEPENDENT ON THE SERVICES OF OUR KEY PERSONNEL, THE LOSS OF WHOM COULD
DISRUPT OUR OPERATIONS AND COULD PREVENT US FROM EXECUTING OUR BUSINESS
STRATEGIES.

Our success depends upon the active involvement of senior management
personnel, particularly Samuel J. Bloomberg, Tweeter's Chairman of the Board,
and Jeffrey Stone, Tweeter's Chief Executive Officer and President. The loss of
the full-time services of Messrs. Stone or Bloomberg or other members of senior
management could have a material adverse effect on our results of operations and
financial condition. Except for employment contracts with Messrs. Stone and
Bloomberg, and with Joseph McGuire, our Chief Financial Officer and Chief
Information Officer, we do not have employment agreements with any members of
our senior management team.

WE MAY LACK THE FINANCIAL AND OPERATIONAL RESOURCES TO COMPETE SUCCESSFULLY
AGAINST CURRENT AND FUTURE COMPETITORS.

We currently compete against a diverse group of retailers, including
several national and regional large format merchandisers and superstores, such
as Circuit City and Best Buy, which sell, among other products, audio and video
consumer electronics products similar and often identical to those we sell. We
also compete in particular markets with a substantial number of retailers that
specialize in one or more types of consumer electronic products that we sell.
Certain of these competitors have substantially larger operations and greater
financial resources than we do, enabling them to purchase inventory at lower
costs or to initiate and sustain aggressive price competition. In addition, the
large format stores are continuing to expand their geographic markets, and such
expansion may increase price competition within those markets. A number of
different competitive factors could have a material adverse effect on our
results of operations and financial condition, including:

- increased operational efficiencies of competitors;

- competitive pricing strategies;

- expansion by existing competitors;

- entry by new competitors into markets in which we currently operate; or

- adoption by existing competitors of innovative store formats or retail
sales methods.

9
<PAGE> 11

COMPETITION FROM SALES OF CONSUMER ELECTRONICS OVER THE INTERNET MAY DECREASE
OUR SALES AND OUR OPERATING MARGINS.

Our retail stores may face significant competition from sales of consumer
electronics over the Internet, and we expect such sales to increase. Such
increased Internet sales could cause sales in our retail stores to decrease. In
addition, such factors as the ease of price comparison made possible by the
Internet and the absence of sales tax in most cases for Internet sales may put
pressure on our retail stores to lower their prices, which would reduce our
operating margins.

WE EXPERIENCE SEASONAL AND QUARTERLY FLUCTUATIONS IN OUR SALES.

Seasonal shopping patterns affect our business, like that of many
retailers. The fourth calendar quarter, which is our first fiscal quarter and
which includes the December holiday shopping period, has historically
contributed to, and is expected to continue to represent, a substantial portion
of our operating income for the entire fiscal year. As a result, any factors
negatively affecting our business during such calendar 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 also may fluctuate based upon
such factors as:

- the timing of new store openings and new store acquisitions;

- the amount of store pre-opening expenses;

- the amount of net sales contributed by new and existing stores;

- the mix of consumer electronics products sold in our stores; and

- the profitability of sales of particular products.

YOU SHOULD NOT RELY ON OUR COMPARABLE STORE SALES AS AN INDICATION OF OUR FUTURE
RESULTS OF OPERATIONS BECAUSE THEY FLUCTUATE SIGNIFICANTLY AND ARE DIFFICULT TO
FORECAST.

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

- competition;

- general regional and national economic conditions;

- consumer trends;

- changes in our product mix;

- timing of promotional events;

- new product introductions; and

- our ability to execute our business strategy effectively.

We do not expect comparable store sales to increase at historical rates,
and comparable store sales may decrease in the future. Changes in our comparable
store sales results could cause the price of our common stock to fluctuate
substantially.

10
<PAGE> 12

WE MAY FAIL TO ANTICIPATE AND REACT TO CHANGES IN CONSUMER DEMAND AND
PREFERENCES.

Our success depends on our ability to anticipate and respond in a timely
manner to consumer demand and preferences regarding audio and video consumer
electronics products and changes in such demand and preferences. Consumer
spending patterns, particularly discretionary spending for products such as
those we market, are affected by, among other things, prevailing economic
conditions. The periodic introduction and availability of new products and
technologies at price levels which generate wide consumer interest historically
have been necessary to stimulate demand for audio and video consumer electronics
products. Recently, many products have been released which incorporate digital
technology, such as DVD and high-definition television. These products or other
new products may never achieve widespread consumer acceptance. If these products
or other new products do achieve widespread consumer acceptance, however, we may
face pressure to lower the prices of such products. Furthermore, the
introduction or expected introduction of new products or technologies may
depress sales of existing products and technologies. Significant deviations from
the projected demand for products we sell and the price at which we sell such
products would have a materially 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 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.

ANY DISRUPTION IN OUR RELATIONSHIPS WITH OUR THIRD-PARTY SUPPLIERS COULD CAUSE
OUR REVENUE TO DECLINE.

The success of our business and growth strategy depends to a significant
degree upon our suppliers, particularly our brand-name suppliers of stereo and
video equipment such as Sony, Mitsubishi, Yamaha, Boston Acoustics and
Panasonic. We do not have any 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 two largest suppliers accounted for approximately 34%
of our sales during fiscal 1999. The loss of any of these key vendors or our
failure to establish and maintain relationships with these or other vendors
could have a material adverse effect on our results of operations and financial
condition. It is possible, especially given our growth strategy, that we will be
unable to acquire sufficient quantities or an appropriate mix of consumer
electronic products at acceptable prices, if at all. Specifically, our ability
to establish additional stores in existing markets and to penetrate new markets
depends to a significant extent on the willingness and ability of vendors to
supply those additional stores, and vendors may not be willing or able to do so.
As we continue to open or acquire new stores, the inability or unwillingness of
suppliers to supply some or all of their products to us at acceptable prices in
one or more markets could have a material adverse effect on our results of
operations and financial condition.

11
<PAGE> 13

WE RELY ON OUR JOINT VENTURE WITH OUTPOST.COM FOR SELLING PRODUCTS OVER THE
INTERNET.

We have formed a joint venture with Outpost.com to sell products over the
Internet at the [email protected] Web site. We rely upon Outpost.com to drive
traffic to the [email protected] Web site, as well as for its experience in
e-commerce and its internal infrastructure to support order processing and
fulfillment. Our agreement with Outpost.com permits either party to terminate
the relationship at any time on 90 days' notice. If Outpost.com decided to
terminate our agreement, it would be necessary for us to handle internally many
of the functions currently provided by Outpost.com or contract with a third
party for those functions, either of which could result in significant expense
to us and delay and disruption of our Internet sales efforts. Because we only
have a 50% interest in the joint venture, if customers increased their
purchasing at [email protected] and decreased their purchasing in our retail
stores, our revenue would decline and our business would suffer.

WE MAY LACK THE FINANCIAL RESOURCES TO PURSUE OUR BUSINESS STRATEGY,
PARTICULARLY TO FUND ACQUISITIONS.

We intend to use a combination of cash and our common stock as
consideration for future acquisitions. If our common stock does not maintain a
sufficient valuation, or potential acquisition candidates are unwilling to
accept our common stock as part of the consideration for the sale of their
businesses, we may be required to use more cash. If we do not have sufficient
cash available, our growth could be limited unless we are able to obtain
additional capital through future debt or equity financings. Such debt or equity
financing may not be available on terms acceptable to us, if at all.

We estimate the average cash investment, including expenses for tenant
fit-out, demonstration and inventory (net of payables), required to open a store
to be approximately $985,000. The actual cost of opening a store may be
significantly greater than such current estimates, however, and we may need to
seek additional debt and/or equity financing in order to fund our continued
expansion through fiscal 2000 and beyond. In addition, our ability to incur
additional indebtedness or issue equity or debt securities could be limited by
covenants in present and future loan agreements and debt instruments. Additional
issuances of our equity may result in dilution to existing stockholders.

OUR EFFORTS TO PROTECT OUR TRADEMARKS AND SERVICEMARKS MAY NOT BE ADEQUATE TO
PREVENT THIRD PARTIES FROM MISAPPROPRIATING OUR INTELLECTUAL PROPERTY RIGHTS.

Our "Tweeter, etc.," "Bryn Mawr Stereo," "DOW" and "DOW Stereo/Video"
service marks have been registered with the United States Patent and Trademark
Office. We have not registered the "HiFi Buys" and "Home Entertainment" service
marks. We are aware that other consumer electronics retailers use the name "HiFi
Buys." We have submitted applications for registration of certain other of our
service marks, which applications are currently pending. We may be unable to
successfully register such service marks. In addition, our service marks,
whether registered or unregistered, and patents may not be effective to protect
our intellectual property rights, and infringement or invalidity claims may be
asserted by third parties in the future. Any such assertions, if proven to be
true, could have a material adverse effect on our results of operations and
financial condition.

12
<PAGE> 14

ANTI-TAKEOVER PROVISIONS MAY MAKE IT DIFFICULT FOR A THIRD PARTY TO ACQUIRE US
EVEN IF DOING SO WOULD BE BENEFICIAL TO OUR STOCKHOLDERS.

Our corporate charter and by-laws, as well as certain provisions of the
Delaware General Corporation Law, contain provisions which may deter, discourage
or make more difficult a merger or acquisition that stockholders may consider
favorable, including transactions in which you might otherwise receive a premium
for your shares.

THE PRICE OF OUR STOCK IS HIGHLY VOLATILE AND SUBJECT TO WIDE FLUCTUATIONS AND
YOU MAY NOT BE ABLE TO RESELL YOUR SHARES AT OR ABOVE THE OFFERING PRICE.

The trading price of our common stock has been and is likely to continue to
be highly volatile and could be subject to wide fluctuations in response to a
variety of internal and external factors. The stock market in general, and the
Nasdaq National Market in particular, have experienced extreme price and volume
fluctuations that have often been unrelated or disproportionate to the operating
performance of particular companies. The trading prices of many companies'
stocks are at or near historical highs and these trading prices and multiples
are substantially above historical levels. These trading prices and multiples
may not be sustained. These broad market factors may have a material adverse
effect on the market price of our common stock, regardless of our actual
operating performance. In the past, following periods of volatility in the
market price of a company's securities, securities class-action litigation has
often been instituted against such companies. Such litigation, if instituted,
could result in substantial costs and a diversion of management's attention and
resources, which would materially adversely affect our results of operations and
financial condition.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Some of the statements under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operation," "Business" and elsewhere in this prospectus constitute
forward-looking statements. These statements relate to future events or our
future financial performance and are identified by terminology such as "may,"
"will," "could," "should," "expects," "plans," "intends," "seeks,"
"anticipates," "believes," "estimates," "potential," or "continue" or the
negative of such terms or other comparable terminology. These statements are
only predictions. You should not place undue reliance on these forward-looking
statements. Actual events or results may differ materially. In evaluating these
statements, you should specifically consider various important factors,
including the risks outlined under "Risk Factors." These factors may cause our
actual results to differ materially from the expectations reflected in any
forward-looking statements.

Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. We are under no duty to update any of the
forward-looking statements after the date of this prospectus to conform such
statement to actual results.

13
<PAGE> 15

PRICE RANGE OF OUR COMMON STOCK

Our common stock trades on the Nasdaq National Market under the symbol
"TWTR." Public trading in our common stock commenced on July 16, 1998. Prior to
that date, there was no public market for our common stock. The following table
sets forth, for the periods indicated, the high and low sale prices for our
common stock as reported by Nasdaq:

<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
FISCAL YEAR ENDED SEPTEMBER 30, 1998
Fourth Quarter (From July 16, 1998)......................... $10.56 $ 5.63
FISCAL YEAR ENDED SEPTEMBER 30, 1999
First Quarter............................................... $15.50 $ 5.31
Second Quarter.............................................. $20.00 $ 13.38
Third Quarter............................................... $20.75 $ 11.06
Fourth Quarter.............................................. $19.00 $ 13.30
FISCAL YEAR ENDED SEPTEMBER 30, 2000
First Quarter............................................... $39.75 $ 18.50
Second Quarter (through February 2, 2000)................... $37.50 $ 27.75
</TABLE>

As of December 22, 1999, there were approximately 1,800 holders of record
of our common stock.

USE OF PROCEEDS

We estimate the net proceeds to us from the sale of 2,000,000 shares of our
common stock in this offering to be approximately $58,160,000 assuming a public
offering price of $31.125 per share (the closing price on January 10, 2000) and
after deducting the estimated underwriting discount and estimated offering
expenses. If the underwriters' over-allotment option is exercised in full, we
estimate the net proceeds to us will be $69,455,000. We expect to use the net
proceeds for working capital and other general corporate purposes, including
possible strategic acquisitions. We have not allocated any specific portion of
the net proceeds to any particular purpose, and our management will have the
ability to allocate the proceeds at its discretion. The net proceeds of this
offering will be invested in short-term, interest-bearing, investment-grade
securities until allocated for specific use.

DIVIDEND POLICY

We do not anticipate paying any cash dividends. Payment of future
dividends, if any, will depend upon our results of operations, financial
condition, cash requirements and other factors deemed relevant by our Board of
Directors. In addition, our current credit facility restricts the payment of
dividends.

14
<PAGE> 16

CAPITALIZATION

The following table sets forth our capitalization as of December 31, 1999
and as adjusted to reflect the application of the estimated net proceeds from
the sale of the 2,000,000 shares of common stock offered by us hereby, assuming
a public offering price of $31.125 share (the closing price on January 10,
2000), and the exercise of options to purchase an aggregate of 87,000 shares of
common stock which will be exercised and sold by certain selling stockholders in
this offering. This table should be read in conjunction with our consolidated
financial statements and the notes to those statements appearing elsewhere in
this prospectus.

The number of shares of common stock outstanding as of December 31, 1999
excludes 2,375,411 shares of common stock issuable upon exercise of options and
warrants outstanding at that date.

<TABLE>
<CAPTION>
DECEMBER 31, 1999
----------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
<S> <C> <C>
Stockholders' equity:
Preferred stock, $.01 par value, 10,000,000 shares
authorized, no shares issued and outstanding actual and
as adjusted............................................ $ -- $ --
Common stock, $.01 par value, 30,000,000 shares
authorized; 15,329,208 shares outstanding actual and
17,416,208 shares outstanding as adjusted.............. 172 193
Additional paid-in capital................................ 73,541 131,776
Accumulated other comprehensive income.................... 755 755
Retained earnings......................................... 23,605 23,605
Treasury stock, 1,896,007 shares actual and as adjusted,
at cost................................................ (1,906) (1,906)
------- --------
Total stockholders' equity............................. $96,167 $154,423
======= ========
</TABLE>

15
<PAGE> 17

SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT PER SHARE AND NUMBER OF STORES DATA)

The selected consolidated financial and operating data for each of the five
fiscal years ended September 30, 1999 have been derived from our consolidated
financial statements, which have been audited by our independent auditors. The
financial data for the three months ended December 31, 1998 and December 31,
1999, respectively, has been derived from unaudited financial statements of
Tweeter and reflect all adjustments, consisting only of normal recurring
accruals, that we consider necessary for a fair presentation of the financial
position and result of operations for these periods. You should read the
information set forth below together with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and our consolidated financial
statements and the notes to those statements included elsewhere in this
prospectus.

<TABLE>
<CAPTION>
THREE MONTHS ENDED
FISCAL YEAR ENDED SEPTEMBER 30, DECEMBER 31,
-------------------------------------------------- -------------------------
1995 1996 1997 1998 1999 1998 1999
------- ------- -------- -------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Total revenue.................................. $60,121 $80,607 $132,525 $232,289 $283,287 $86,784 $124,814
Cost of sales.................................. 39,167 51,816 86,315 151,265 182,748 57,233 79,165
------- ------- -------- -------- -------- ------- --------
Gross profit................................. 20,954 28,791 46,210 81,024 100,539 29,551 45,649
Selling expenses............................... 15,404 21,993 35,568 56,907 69,225 17,499 26,982
Corporate, general and administrative
expenses..................................... 3,247 4,716 8,102 11,128 14,822 4,041 4,647
Amortization of goodwill....................... 65 129 487 917 1,056 215 332
------- ------- -------- -------- -------- ------- --------
Income from operations....................... 2,238 1,953 2,053 12,072 15,436 7,796 13,688
Income from joint venture...................... -- -- -- -- -- -- 107
Interest expense............................... 629 617 1,808 2,753 310 201 258
------- ------- -------- -------- -------- ------- --------
Income before income taxes..................... 1,609 1,336 245 9,319 15,126 7,595 13,537
Income tax expense (benefit)................... (174) (453) 99 3,724 6,050 3,038 5,415
------- ------- -------- -------- -------- ------- --------
Income before extraordinary item............... 1,783 1,789 146 5,595 9,076 4,557 8,122
Extraordinary item (less applicable income
taxes)....................................... -- -- -- (340) -- -- --
------- ------- -------- -------- -------- ------- --------
Net income................................... 1,783 1,789 146 5,255 9,076 4,557 8,122
======= ======= ======== ======== ======== ======= ========
Accretion of preferred stock................... -- 1,036 2,156 2,514 -- -- --
------- ------- -------- -------- -------- ------- --------
Net income (loss) available to common
stockholders................................. $ 1,783 $ 753 $ (2,010) $ 2,741 $ 9,076 $ 4,557 $ 8,122
======= ======= ======== ======== ======== ======= ========
Basic earnings (loss) per share
Net income (loss) available to common
stockholders before extraordinary item..... 0.26 0.19 (0.60) 0.62 0.63 0.36 0.53
Extraordinary item........................... -- -- -- (0.07) -- --
------- ------- -------- -------- -------- ------- --------
Net income (loss)............................ $ 0.26 $ 0.19 $ (0.60) $ 0.55 $ 0.63 $ 0.36 $ 0.53
======= ======= ======== ======== ======== ======= ========
Diluted earnings (loss) per share
Net income (loss) available to common
stockholders
before extraordinary item.................. 0.26 0.19 (0.60) 0.55 0.57 0.32 0.48
Extraordinary item........................... -- -- -- (0.03) -- --
------- ------- -------- -------- -------- ------- --------
Net income (loss)............................ $ 0.26 $ 0.19 $ (0.60) $ 0.52 $ 0.57 $ 0.32 $ 0.48
======= ======= ======== ======== ======== ======= ========
Weighted average shares outstanding
Basic........................................ 6,742 3,880 3,345 4,973 14,385 12,713 15,277
Diluted...................................... 6,742 3,966 3,345 10,068 15,973 14,204 17,044

OPERATING DATA:
Store contribution(1).......................... $ 5,550 $ 6,798 $ 10,642 $ 24,117 $ 31,314 $12,052 $ 18,667
Stores open at beginning of period............. 16 18 33 47 52 52 73
New stores..................................... 2 2 4 5 5 1 3
Relocated stores............................... 1 1 1 2 3 1 0
Closed stores.................................. 0 0 0 0 0 0 0
Acquired stores................................ 0 13 10 0 16 0 0
Stores open at end of period................... 18 33 47 52 73 53 76
Comparable store sales(2)...................... 12.5% 5.6% (7.2)% 12.5% 5.0% 10.6% 11.9%
</TABLE>

16
<PAGE> 18

- -------------------------

17
<PAGE> 19

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following in conjunction with the consolidated
financial statements and notes to those statements which appear elsewhere in
this prospectus. The following discussion contains forward-looking statements
that reflect our plans, estimates and beliefs. See "Special Note Regarding
Forward-Looking Statements." Our actual results could differ materially from
those discussed in the forward-looking statements. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed
below and elsewhere in this prospectus, particularly under "Risk Factors."

OVERVIEW

We are a leading specialty retailer of mid to high-end audio and video
consumer electronics products under the Tweeter, etc., Bryn Mawr Stereo & Video,
HiFi Buys, Home Entertainment and DOW Stereo/Video names. We opened our first
Tweeter, etc. store in New England in 1972. Over 27 years, we have refined our
retail concept to meet the needs of consumers seeking brand name products with
advanced features, functionality and performance which we sell through our
highly trained, relationship-driven sales force. We believe that our effective
merchandising and superior customer service have enabled us to generate
substantial customer loyalty.

In 1995, we adopted an aggressive growth strategy to:

- open new stores in current regional markets and relocate certain stores
to more favorable sites; and

- selectively pursue acquisitions in new regional markets and achieve
operating improvements by converting the acquired companies to our core
operating model and leveraging distribution, marketing and corporate
infrastructure.

To support this growth strategy, we obtained equity investments in fiscal
1996 of approximately $10.6 million, net of issuance costs, from a group of
investors led by Weston Presidio and Advent International. In May 1996, we
completed the Bryn Mawr Stereo & Video acquisition. In May 1997, we raised an
additional $22 million, consisting of $7 million of equity and $15 million of
subordinated debt from those investors and a new group of investors. We used the
proceeds primarily to finance the HiFi Buys acquisition. In July 1998, we
completed our initial public offering of our common stock, raising net proceeds
of approximately $32.2 million. In February 1999, we completed a follow-on
public offering, raising net proceeds of approximately $24.3 million. The
proceeds of these offerings were used to pay off debt, fund the acquisitions of
Home Entertainment in February 1999 and DOW Stereo/Video in July 1999, and for
working capital. All of our acquisitions were accounted for by the purchase
method of accounting.

We seek to increase sales, profitability and asset productivity at acquired
companies by converting them to our standard operating model with enhanced
training for sales personnel, superior customer service, improved merchandising
focused on higher-end audio and video equipment and more stringent operating
controls. We also have aggressively expanded corporate infrastructure over the
past two years to support anticipated higher levels of growth, including
expanding our management team with the addition of senior financial, information
systems, and buying personnel. We have made enhancements to our management
information systems with the addition of a new mainframe and operating platform,
and

18
<PAGE> 20

to our distribution and administrative infrastructure to enable us to support
all five regions in which we operate on an integrated basis.

BRYN MAWR STEREO & VIDEO

Subsequent to the Bryn Mawr Stereo & Video acquisition, we implemented a
variety of strategic initiatives to convert Bryn Mawr Stereo & Video to our core
operating model. These initiatives were primarily focused on increasing sales
and gross margin, rather than reducing operating expenses, in order to improve
store contribution. These initiatives included:

- increasing advertising expenditures and refocusing advertising to
emphasize radio, television and direct marketing rather than print;

- implementing our every day competitive pricing and Automatic Price
Protection programs;

- initiating a substantial sales associate training program to improve
product knowledge and enhance relationship selling skills; and

- focusing the sales staff on higher margin products, particularly audio
products.

The following table sets forth total revenue in thousands and store
contribution as a percentage of total revenue for Bryn Mawr Stereo & Video on a
stand-alone basis. The pro forma results are presented as if the Bryn Mawr
Stereo & Video acquisition had occurred on October 1, 1995 and reflect the
results of Bryn Mawr Stereo & Video for a period under prior ownership. The pro
forma results are based on certain estimates we made and are not necessarily
indications of what our results would have been for the period.

<TABLE>
<CAPTION>
PRO FORMA THREE MONTHS ENDED
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED --------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
1996 1997 1998 1999 1998 1999
------------- ------------- ------------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Total revenue.... $33,525 $35,432 $51,768 $63,638 $21,271 $26,884
Store
contribution.... 3.1% 6.8% 7.8% 10.2% 13.7% 14.9%
</TABLE>

HIFI BUYS

As with the Bryn Mawr Stereo & Video acquisition, we initiated a series of
strategic initiatives subsequent to the HiFi Buys acquisition to conform that
chain with our business model. In contrast to Bryn Mawr Stereo & Video, however,
these initiatives combined a planned decrease of revenues with a planned
increase in gross margin and a substantial decrease in operating expenses to
generate increased store contribution. Specifically, we:

- adjusted the merchandise mix to increase the proportion of mid and
high-end products and reduce the number of lower margin introductory
products;

- altered store employee compensation to reduce the emphasis on promotional
sales and focus incentives on gross margin and store contribution;

- reduced marketing expenditures and shifted marketing emphasis from
promotional advertising toward our traditional relationship selling and
every day competitive price message;

- converted the advertising program to emphasize electronic advertising and
direct mail marketing as opposed to print media;

19
<PAGE> 21

- implemented the Automatic Price Protection program; and

- eliminated $2.4 million of overhead by centralizing accounting,
purchasing and other support infrastructure.

The following table sets forth total revenue in thousands and store
contribution as a percentage of total revenue for HiFi Buys on a stand-alone
basis. The pro forma results are presented as if the HiFi Buys acquisition had
occurred on October 1, 1996 and reflect the results of HiFi Buys for a period
under prior ownership. The pro forma results are based on certain estimates we
made and are not necessarily indications of what our results would have been for
the period.

<TABLE>
<CAPTION>
PRO FORMA THREE MONTHS ENDED
YEAR ENDED YEAR ENDED YEAR ENDED ---------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
1997 1998 1999 1998 1999
------------- ------------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Total revenue........ $87,968 $82,810 $85,021 $27,968 $30,821
Store contribution... 6.9% 9.9% 11.4% 12.9% 14.5%
</TABLE>

HOME ENTERTAINMENT

We implemented a variety of strategic initiatives to convert Home
Entertainment to our core operating model focused on increasing sales in order
to grow store contribution. Specifically, we:

- adjusted the merchandise mix to expand the number of mid and high-end
products offered in the stores and to introduce several new product
categories, including camcorders and portable audio;

- increased advertising expenditures and refocused advertising to emphasize
radio and direct marketing rather than print;

- implemented our every day competitive pricing and Automatic Price
Protection programs; and

- initiated a substantial sales associate training program to improve
product knowledge and enhance relationship selling skills.

The following table sets forth total revenue in thousands and store
contribution as a percentage of total revenue for Home Entertainment on a
stand-alone basis. The pro forma results are presented as if the Home
Entertainment acquisition had occurred on October 1, 1998 and reflect the
results of Home Entertainment for a period under prior ownership. The pro forma
results are based on certain estimates we made and are not necessarily
indications of what our results would have been for the period.

<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
YEAR ENDED THREE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
1999 1998 1999
------------- ------------------ ------------------
<S> <C> <C> <C>
Total revenue.................... $25,577 $7,400 $9,561
Store contribution............... 5.6% 5.3% 14.9%
</TABLE>

20
<PAGE> 22

DOW STEREO/VIDEO

As with the HiFi Buys acquisition, we initiated a series of strategic
initiatives that combined a planned decrease of revenues with a planned increase
in gross margin and a substantial decrease in operating expenses to generate
increased store contribution. Specifically, we:

- adjusted the merchandise mix to expand the number of mid and high-end
products offered in the stores and eliminated entry-level products from
the merchandise mix;

- decreased advertising expenditures and refocused advertising to emphasize
radio, television and direct marketing rather than print;

- implemented our every day competitive pricing and Automatic Price
Protection programs;

- initiated a substantial sales associate training program to improve
product knowledge and enhance relationship selling skills; and

- focused the sales staff on higher margin products, particularly audio
products.

The following table sets forth total revenue in thousands and store
contribution as a percentage of total revenue for DOW Stereo/Video on a
stand-alone basis. The pro forma results are presented as if the DOW
Stereo/Video acquisition had occurred on October 1, 1998 and reflect the results
of DOW Stereo/Video for a period under prior ownership. The pro forma results
are based on certain estimates we made and are not necessarily indications of
what our results would have been for the period.

<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
YEAR ENDED THREE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
1999 1998 1999
------------- ------------------ ------------------
<S> <C> <C> <C>
Total revenue.................... $39,753 $13,158 $11,410
Store contribution............... 3.9% 8.6% 11.2%
</TABLE>

21
<PAGE> 23

RESULTS OF OPERATIONS

The following table is derived from our consolidated financial statements
and sets forth, for the periods indicated, the actual amounts, in thousands, of
certain income and expense items and their percentages relative to total
revenue:

<TABLE>
<CAPTION>
THREE MONTHS ENDED
FISCAL YEAR ENDED SEPTEMBER 30, DECEMBER 31,
-------------------------------------------------------- -----------------------------------
1997 1998 1999 1998 1999
---------------- ---------------- ---------------- --------------- ----------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Total revenue.................. $132,525 100.0% $232,289 100.0% $283,287 100.0% $86,784 100.0% $124,814 100.0%

Gross profit................... 46,210 34.9 81,024 34.9 100,539 35.5 29,551 34.1 45,649 36.6

Selling expenses............... 35,568 26.8 56,907 24.5 69,225 24.4 17,499 20.2 26,982 21.6

Corporate, general and
administrative expenses...... 8,102 6.1 11,128 4.8 14,822 5.2 4,041 4.7 4,647 3.7

Amortization of goodwill....... 487 0.4 917 0.4 1,056 0.4 215 0.2 332 0.3
-------- ----- -------- ----- -------- ----- ------- ----- -------- -----

Income from operations....... 2,053 1.5 12,072 5.2 15,436 5.4 7,796 9.0 13,688 11.0

Income from joint venture...... -- 0.0 -- 0.0 -- 0.0 -- 0.0 107 0.1

Interest expense............... 1,808 1.4 2,753 1.2 310 0.1 201 0.2 258 0.2
-------- ----- -------- ----- -------- ----- ------- ----- -------- -----

Income before income taxes..... 245 0.2 9,319 4.0 15,126 5.3 7,595 8.8 13,537 10.8

Income tax expense............. 99 0.1 3,724 1.6 6,050 2.1 3,038 3.5 5,415 4.3
-------- ----- -------- ----- -------- ----- ------- ----- -------- -----

Income before extraordinary
item......................... 146 0.1 5,595 2.4 9,076 3.2 4,557 5.3 8,122 6.5

Extraordinary item (less
applicable income taxes)..... -- 0.0 (340) (0.1) -- 0.0 -- 0.0 -- 0.0
-------- ----- -------- ----- -------- ----- ------- ----- -------- -----

Net income................... $ 146 0.1% $ 5,255 2.3% $ 9,076 3.2% $ 4,557 5.3% $ 8,122 6.5%
======== ===== ======== ===== ======== ===== ======= ===== ======== =====

Accretion of preferred stock... 2,156 1.6 2,514 1.1 -- 0.0 -- 0.0 -- 0.0
-------- ----- -------- ----- -------- ----- ------- ----- -------- -----

Net income (loss) available to
common stockholders.......... $ (2,010) (1.5)% $ 2,741 1.2% $ 9,076 3.2% $ 4,557 5.3% $ 8,122 6.5%
======== ===== ======== ===== ======== ===== ======= ===== ======== =====
</TABLE>

THREE MONTHS ENDED DECEMBER 31, 1999 AS COMPARED TO THREE MONTHS ENDED DECEMBER
31, 1998

Total Revenue. Total revenue includes delivered sales, completed service
center work orders, insurance replacement and corporate sales. Total revenue
increased $38.0 million, or 43.8%, to $124.8 million in the three months ended
December 31, 1999 from $86.8 million for the three months ended December 31,
1998. The increase was mainly comprised of $9.7 million from new stores, $9.3
million from comparable store sales growth, $9.4 million from the acquisition of
Home Entertainment and, $10.8 million from the acquisition of Dow Stereo/Video.
Comparable store sales, excluding Home Entertainment and Dow Stereo/ Video,
increased by 11.9%. The Home Entertainment stores had a total comparable store
sales increase of 30.1%, and the DOW Stereo/Video stores had a comparable store
sales decrease of 9.1%. We are planning for comparable store sales decreases to
continue for six to nine months at DOW Stereo/Video as we eliminate entry-level
products and refine the merchandise mix to reflect the core Tweeter mix.

The increase at Home Entertainment primarily resulted from the introduction
of new product lines. New technology products contributed to the sales increase
for the fiscal quarter ended December 31, 1999. DVD players represented
approximately 8.7% of total revenue for the three months ended December 31,
1999, as compared to 6.0% for the same period in the prior year. Camcorder
business was up 11.7% and digital camcorders accounted for 80.2% of the
camcorder sales. Digital televisions accounted for 64.4% of all projection
television sets sold in the fiscal quarter ended December 31, 1999.

22
<PAGE> 24

Gross Profit. Cost of sales includes merchandise, net delivery costs,
distribution costs, purchase discounts, and vendor volume rebates. Cost of sales
increased $21.9 million, or 38.3%, to $79.2 million in the three months ended
December 31, 1999 from $57.2 million in the three months ended December 31,
1998. Gross profit increased $16.1 million, or 54.5%, to $45.6 million in the
three months ended December 31, 1999 from $29.6 million for the three months
ended December 31, 1998. The gross margin percentage increased 2.5%, to 36.6%
for the three months ended December 31, 1999, from 34.1% for the three months
ended December 31, 1998. The increase in margin was primarily due to increased
sales of new digital technology products, such as DVD players, digital
televisions and digital camcorders. These digital products realize higher gross
margin and higher average ticket than their analog counterparts. This increase
was offset by growth in the video category relative to other categories of
products that we sell. Video products generally realize lower gross margin than
audio products. We expect sales of digital televisions to accelerate over the
next few years, which will tend to increase video sales as a percentage of our
overall mix. It is a particular challenge for us to enact strategies such as its
"Sell Audio with Video" strategy in order to offset the margin erosion that
could occur due to an increase in sales of video products relative to the other
categories of products that we sell.

Selling Expenses. Selling expenses include the compensation of store
personnel, occupancy costs, store level depreciation, advertising expenses,
pre-opening expenses and credit card fees and excludes corporate, general and
administrative expenses. Selling expenses increased $9.5 million, or 54.2%, to
$27.0 million in the three months ended December 31, 1999 from $17.5 million for
the three months ended December 31, 1998. As a percentage of revenue, selling
expenses increased to 21.6% for the three months ended December 31, 1999 from
20.2% for the three months ended December 31, 1998. This increase was primarily
due to higher payroll costs associated with the opening of new stores and the
continued development of our custom installation departments. Higher payroll
costs were also driven by the substantial increase in gross margin, as our sales
force is paid an increasing commission rate on higher margin sales.

Corporate, General and Administrative Expenses. Corporate, general and
administrative expenses include the costs associated with executive officers,
finance, merchandising, information systems, human resources, training, and
related support functions. Corporate, general and administrative expenses
increased 15.0% to $4.6 million for the three months ended December 31, 1999
from $4.0 million for the three months ended December 31, 1998. As a percentage
of total revenue, corporate general and administrative expenses decreased to
3.7% for the three months ended December 31, 1999 from 4.7% for the three months
ended December 31, 1998. This decrease was due to the increased sales volume
from new stores opened since the fiscal quarter ended December 31, 1998 and from
stores acquired in the Home Entertainment and Dow Stereo/Video acquisitions.

Amortization of Goodwill. Amortization of goodwill increased to $332,000
for the three months ended December 31, 1999 from $215,000 for the three months
ended December 31, 1998. This increase was due to the completion of the Home
Entertainment acquisition on February 1, 1999 and the Dow Stereo/Video
acquisition on July 1, 1999.

Interest Expense. Interest expense increased to $258,000 for the three
months ended December 31, 1999 from $201,000 for the three months ended December
31, 1998. This increase was due to the incurrence of debt to facilitate the
building of new stores and the relocation of existing stores. Additionally,
inventory was maintained at a higher level due to the lack of availability of
the newer digital products.

23
<PAGE> 25

Income Taxes. Our effective tax rate for the fiscal quarters ended
December 31, 1999 and December 31, 1998 was 40.0%. We expect that the income tax
rate for the fiscal year ending September 30, 2000 will remain substantially
unchanged.

New Stores. In October 1999, Tweeter opened its 74(th) store in
Douglasville, Georgia, operating under the HiFi Buys name. In November 1999, the
Company opened its 75(th) and 76(th) stores in Snellville, Georgia and
Birmingham, Alabama, both operating under the HiFi Buys name.

FISCAL YEAR ENDED SEPTEMBER 30, 1999 AS COMPARED TO FISCAL YEAR ENDED SEPTEMBER
30, 1998

Total Revenue. Total revenue increased $51.0 million, or 22%, to $283.3
million for the fiscal year ended September 30, 1999 from $232.3 million for the
fiscal year ended September 30, 1998. The increase was primarily composed of
revenues of $16.3 million derived from Home Entertainment from the date of
acquisition, $8.0 million from DOW Stereo/Video revenues from the date of
acquisition, $14.4 million from new stores, and $9.7 million from comparable
store sales growth. Comparable store sales increased by 5.0%. This increase was
primarily driven by sales of new digital products. This excludes a 7.6% increase
in comparable store sales at Home Entertainment from February 1, 1999, and a
17.9% decrease in comparable store sales at DOW Stereo/Video from July 1, 1999.

Gross Profit. Cost of sales increased $31.5 million, or 20.8%, to $182.7
million for the fiscal year ended September 30, 1999 from $151.3 million for the
fiscal year ended September 30, 1998. Gross profit increased $19.5 million, or
24.1% to $100.5 million for the fiscal year ended September 30, 1999 from $81.0
million for the fiscal year ended September 30, 1998. Gross margin increased to
35.5% for the fiscal year ended September 30, 1999 from 34.9% for the fiscal
year ended September 30, 1998. The increase in gross margin was due to higher
sales of new, digital based products, which tend to have higher margins than
their analog counterparts.

Selling Expenses. Selling expenses increased $12.3 million, or 21.6%, to
$69.2 million for the fiscal year ended September 30, 1999 from $56.9 million
for the fiscal year ended September 30, 1998. The increase was principally
associated with increased advertising costs, sales commissions paid to employees
related to increased sales, fees related to private label credit card
promotions, and increased rent and related staff positions for the additional
stores acquired as part of both the Home Entertainment and DOW Stereo/Video
acquisitions. As a percentage of total revenue, selling expenses declined to
24.4% for the fiscal year ended September 30, 1999 from 24.5% for the fiscal
year ended September 30, 1998.

Corporate, General and Administrative Expenses. Corporate, general and
administrative expenses increased $3.7 million, or 33.2%, to $14,8 million for
the fiscal year ended September 30, 1999 from $11.1 million for the fiscal year
ended September 30, 1998. As a percentage of total revenue, corporate, general
and administrative expenses increased to 5.2% for the fiscal year ended
September 30, 1999 from 4.8% for the fiscal year ended September 30, 1998 as we
continued to add corporate infrastructure to support our recent and planned
acquisitions and new store growth.

Amortization of Goodwill. Amortization of goodwill increased to
$1,056,000, for the fiscal year ended September 30, 1999 from $917,000 for the
fiscal year ended September 30, 1998. This increase is attributable to goodwill
recorded in connection with the acquisitions of Home Entertainment and Dow
Stereo/Video.

24
<PAGE> 26

Interest Expense. Interest expense decreased to $310,000 for the fiscal
year ended September 30, 1999 from $2.8 million for the fiscal year ended
September 30, 1998 due primarily to the elimination of outstanding debt with
proceeds from our initial public offering in July 1998 and from our follow-on
public offering in February 1999.

Income Taxes. The effective tax rate for the fiscal years ended September
30, 1999 and September 30, 1998 was 40.0%.

FISCAL YEAR ENDED SEPTEMBER 30, 1998 AS COMPARED TO FISCAL YEAR ENDED SEPTEMBER
30, 1997

Total Revenue. Total revenue increased $99.8 million, or 75.3%, to $232.3
million for the fiscal year ended September 30, 1998 from $132.5 million for the
fiscal year ended September 30, 1997. The increase was comprised of $59.8
million from a full year of HiFi Buys revenues, $9.4 million from new stores,
and $20.9 million from comparable store sales growth. Comparable store sales
increased by 12.5%, made up of a 28.6% increase at Tweeter, etc., a 19.3%
increase at Bryn Mawr Stereo & Video, and a 5.2% decrease at HiFi Buys. The exit
from the New England market of competing retail chains has had a favorable
impact on comparable store sales at Tweeter, etc., while the revenue increase at
Bryn Mawr Stereo & Video resulted from the conversion to our operating model.
The decrease in HiFi Buys comparable store sales was primarily due to the
planned elimination of entry level products and a decrease in associated
promotional advertising.

Gross Profit. Cost of sales increased $65.0 million, or 75.2%, to $151.3
million for the fiscal year ended September 30, 1998 from $86.3 million for the
fiscal year ended September 30, 1997. Gross profit increased $34.8 million, or
75.3% to $81.0 million for the fiscal year ended September 30, 1998 from $46.2
million for the fiscal year ended September 30, 1997. The gross margin remained
the same for both periods at 34.9%.

Selling Expenses. Selling expenses increased $21.3 million, or 60.0%, to
$56.9 million in the fiscal year ended September 30, 1998 from $35.6 million for
the fiscal year ended September 30, 1997. The increase was principally
associated with increased advertising costs, sales commissions paid to employees
related to increased sales, fees related to private label credit card
promotions, and increased rent and related staff positions for the additional
stores acquired as part of the HiFi Buys acquisition. As a percentage of total
revenue, selling expenses declined to 24.5% for the fiscal year ended September
30, 1998 from 26.8% for the fiscal year ended September 30, 1997. This decline
was primarily the result of the inclusion of the HiFi Buys stores which have
lower advertising expenses as a percentage of revenue than our other stores due
to their concentration in a single market. Also the HiFi Buys insurance
replacement business generates significant revenues with reduced store level
expenses.

Corporate, General and Administrative Expenses. Corporate, general and
administrative expenses increased $3.0 million, or 37.3%, to $11.1 million for
the fiscal year ended September 30, 1998 from $8.1 million for the fiscal year
ended September 30, 1997. As a percentage of total revenue, corporate, general
and administrative expenses decreased to 4.8% for the fiscal year ended
September 30, 1998 from 6.1% for the fiscal year ended September 30, 1997 as we
benefited from a larger sales base.

Amortization of Goodwill. Amortization of goodwill increased to $917,000,
for the fiscal year ended September 30, 1998 from $487,000 for the fiscal year
ended September 30,

25
<PAGE> 27

1997. This increase is attributable to goodwill recorded for a full year in
connection with the HiFi Buys acquisition.

Interest Expense. Interest expense increased to $2.8 million for the
fiscal year ended September 30, 1998 from $1.8 million for the fiscal year ended
September 30, 1997 due primarily to the increased debt incurred to fund the HiFi
Buys acquisition.

Income Taxes. The effective tax rate for the fiscal year ended September
30, 1998 was 40.0% compared to 40.3%, for the fiscal year ended September 30,
1997.

SEASONALITY AND QUARTERLY RESULTS

Our business is subject to seasonal variations. Historically, we have
realized a significant portion of our total revenue and net income for the year
during the first and fourth fiscal quarters, with a majority of net income for
such quarters realized in the first fiscal quarter. Due to the importance of the
holiday shopping season, any factors negatively affecting the holiday selling
season could have a material adverse effect on our financial condition and
results of operations. Our quarterly results of operations may also fluctuate
significantly due to a number of factors, including the timing of new store
openings and acquisitions and unexpected changes in volume-related rebates from
manufacturers. In addition, operating results may be negatively affected by
increases in merchandise costs, price changes in response to competitive factors
and unfavorable local, regional or national economic developments that result in
reduced consumer spending.

The following tables set forth certain quarterly financial data in
thousands and percentages of total revenue for the nine quarters ended December
31, 1999. The quarterly information is unaudited but has been prepared on the
same basis as the audited financial statements included elsewhere in this
prospectus. We believe that all necessary adjustments (consisting only of normal
recurring adjustments) have been included to present fairly the unaudited
quarterly results when read in conjunction with our consolidated financial
statements and the notes to those statements included elsewhere in this
prospectus. The results of operations for any quarter are not necessarily
indicative of the results for any future period.

26
<PAGE> 28

<TABLE>
<CAPTION>
THREE MONTHS
ENDED
----------------
DECEMBER 31,
1999
----------------
<S> <C> <C>
Total revenue............. $124,814 100.0%
Cost of sales............. 79,165 63.4
-------- -----
Gross profit.............. 45,649 36.6
Selling expenses.......... 26,982 21.6
Corporate, general and
administrative
expenses................ 4,647 3.7
Amortization of
goodwill................ 332 0.3
-------- -----
Income from operations.... 13,688 11.0
Income from joint
venture................. 107 0.1
Interest expense.......... 258 0.2
-------- -----
Income before income
taxes................... 13,537 10.8
Income tax expense........ 5,415 4.3
-------- -----
Net income................ $ 8,122 6.5%
======== =====
Stores open at beginning
of period............... 73
New stores................ 3
Relocated stores.......... 0
Closed stores............. 0
Acquired stores........... 0
Stores open at end of
period.................. 76
</TABLE>

<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------------------
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1998 1999 1999 1999
---------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenue............. $ 86,784 100.0% $62,236 100.0% $59,653 100.0% $74,614 100.0%
Cost of sales............. 57,233 65.9 39,899 64.1 38,085 63.8 47,531 63.7
-------- ----- ------- ----- ------- ----- ------- -----
Gross profit.............. 29,551 34.1 22,337 35.9 21,568 36.2 27,083 36.3
Selling expenses.......... 17,499 20.2 16,423 26.4 16,246 27.2 19,057 25.5
Corporate, general and
administrative
expenses................ 4,041 4.7 3,222 5.2 3,451 5.8 4,108 5.5
Amortization of
goodwill................ 215 0.2 255 0.4 215 0.4 371 0.5
-------- ----- ------- ----- ------- ----- ------- -----
Income from operations.... 7,796 9.0 2,437 3.9 1,656 2.8 3,547 4.8
Interest expense.......... 201 0.2 37 0.1 41 0.1 31 0.0
-------- ----- ------- ----- ------- ----- ------- -----
Income before income
taxes................... 7,595 8.8 2,400 3.9 1,615 2.7 3,516 4.7
Income tax expense........ 3,038 3.5 960 1.5 646 1.1 1,406 1.9
-------- ----- ------- ----- ------- ----- ------- -----
Net income................ $ 4,557 5.3% $ 1,440 2.3% $ 969 1.6% $ 2,110 2.8%
======== ===== ======= ===== ======= ===== ======= =====
Stores open at beginning
of period............... 52 53 61 63
New stores................ 1 1 2 1
Relocated stores.......... 1 1 1 0
Closed stores............. 0 0 0 0
Acquired stores........... 0 7 0 9
Stores open at end of
period.................. 53 61 63 73
</TABLE>

27
<PAGE> 29

<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------------------
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1997 1998 1998 1998
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenue............... $74,617 100.0% $54,512 100.0% $49,676 100.0% $53,483 100.0%
Cost of sales............... 49,236 66.0 35,044 64.3 32,257 64.9 34,729 64.9
------- ----- ------- ----- ------- ----- ------- -----
Gross profit................ 25,381 34.0 19,468 35.7 17,419 35.1 18,754 35.1
Selling expenses............ 16,390 22.0 13,818 25.3 13,379 26.9 13,320 24.9
Corporate, general and
administrative expenses... 2,617 3.5 2,771 5.1 2,734 5.6 3,006 5.6
Amortization of goodwill.... 221 0.3 235 0.4 221 0.4 240 0.4
------- ----- ------- ----- ------- ----- ------- -----
Income from operations...... 6,153 8.2 2,644 4.9 1,085 2.2 2,188 4.1
Interest expense............ 865 1.2 745 1.4 745 1.5 397 0.7
------- ----- ------- ----- ------- ----- ------- -----
Income before income
taxes..................... 5,288 7.0 1,899 3.5 340 0.7 1,791 3.3
Income tax expense.......... 2,115 2.8 760 1.4 136 0.3 713 1.3
------- ----- ------- ----- ------- ----- ------- -----
Income before extraordinary
item...................... 3,173 4.2 1,139 2.1 204 0.4 1,078 2.0
Extraordinary item.......... -- -- -- -- -- -- (340) (0.6)
------- ----- ------- ----- ------- ----- ------- -----
Net income.................. $ 3,173 4.2% $ 1,139 2.1% $ 204 0.4% $ 738 1.4%
======= ===== ======= ===== ======= ===== ======= =====
Stores open at beginning of
period.................... 47 50 50 51
New stores.................. 3 0 1 1
Relocated stores............ 2 0 0 0
Closed stores............... 0 0 0 0
Acquired stores............. 0 0 0 0
Stores open at end of
period.................... 50 50 51 52
</TABLE>

LIQUIDITY AND CAPITAL RESOURCES

Our cash needs are primarily for working capital to support our inventory
requirements and capital expenditures, pre-opening expenses and beginning
inventory for new stores and for remodeling or relocating older stores.
Additionally, we pursue an active acquisition strategy, and capital needs are
created as acquisition opportunities arise.

At December 31, 1999, working capital was $28.6 million, compared to $14.8
million at December 31, 1998. In addition, at December 31, 1999, we had $50.0
million available for borrowing under our credit facility with BankBoston N.A.,
and there were no balances outstanding at December 31, 1999.

Net cash provided by operating activities was $12.8 million for the three
months ended December 31, 1999 compared to $9.7 million for the three months
ended December 31, 1998. This was primarily the result of $8.1 million in net
income, an increase in accounts payable and accrued expenses of $17.1 million,
depreciation and amortization of $1.6 million and an increase in customer
deposits of $1.1 million. This was offset by increases in accounts receivable of
$9.0 million and inventory of $5.8 million, as well as minor changes in other
operating accounts.

Net cash used in investing activities during the three months ended
December 31, 1999 was $4.1 million, primarily used for the building of new
stores and the relocation of existing stores.

Net cash used in financing activities during the three months ended
December 31, 1999 was $5.9 million, composed mainly of payments made for
long-term debt of $5.7 million and

28
<PAGE> 30

an investment in our Tweeter.Outpost.com joint venture of $2.7 million. This was
offset by an increase in the amount due bank of $2.2 million.

On January 20, 2000, we announced that we had reached an agreement in
principle to acquire United Audio Centers, Inc. located in the greater Chicago,
Illinois area. We expect to exchange our common stock with an approximate
current value of $6.5 million for the acquisition of the assets and the
assumption of the liabilities of United Audio. United is an industry leader in
combining quality products, knowledgeable sales consultants and high levels of
service. We expect to grow United Audio's presence in the greater Chicago area
over the next several years and use the Chicago marketplace as a springboard
into other surrounding cities. We expect to continue the operation of all seven
retail stores as well as the service and distribution facilities. We expect to
close this transaction in April 2000. The agreement in principle to acquire
United Audio is subject to various terms and conditions. It is possible,
therefore, that we will not complete the acquisition as planned .

Historically, our primary sources of financing have been net cash from
operations, borrowings under our credit facility, and proceeds from the sale of
equity or subordinated notes. At September 30, 1999, our working capital was
$31.5 million compared to $18.3 million at September 30, 1998.

Net cash provided by operations was $4.4 million for the fiscal year ended
September 30, 1999 comprised primarily of $9.1 million in net income, an
increase in accounts payable and accrued expenses of $8.0 million and
depreciation and amortization of $5.2 million. This was offset by increases in
inventory of $14.2 million and accounts receivable of $2.7 million and a
decrease in deferred warranty income of $1.2 million, as well as minor changes
in other operating accounts. Net cash provided by operations was $4.4 million
for the fiscal year ended September 30, 1998, comprised primarily of $5.3
million in net income, an increase in accounts payable and accrued expenses of
$2.3 million and depreciation and amortization of $3.9 million. This was offset
by increases in inventory of $7.2 million and accounts receivable of $0.7
million and a decrease in deferred warranty income of $1.5 million, as well as
minor changes in other operating accounts.

Net cash used in investing activities during fiscal 1999 was approximately
$32.1 million. Approximately $18.1 million was used to fund acquisitions, and
$6.1 million was used to open five new stores and relocate three stores. The
balance of $6.6 million was used for capital expenditures for equipment,
fixtures and leasehold improvements. Additionally, we used $1.3 million to
purchase marketable equity securities. During fiscal 1998, net cash used in
investing activities was approximately $9.0 million and was primarily used to
open five new stores and relocate two stores. In addition $5.2 million was used
to purchase a facility in Canton, Massachusetts to serve as the corporate
headquarters, service center and distribution center. There are no other
material commitments for capital expenditures other than new store openings and
remodeling or relocating existing stores in the next 12 months.

At September 30, 1999, we had outstanding approximately $5.7 million under
our credit facility. The credit facility currently has a maximum availability of
$50.0 million and is secured by our inventory and certain other assets. The
credit facility has an expiration date of July 31, 2001.

29
<PAGE> 31

In July 1998, we completed the initial public offering of our common stock
in which we received net proceeds of approximately $32.2 million. In February
1999, we completed a follow-on public offering of our common stock in which we
received net proceeds of approximately $24.3 million. We used these net
proceeds:

- to repay existing indebtedness under our credit facility of $5.9 million;

- to fund the Home Entertainment acquisition for approximately $9.6
million;

- to fund the DOW Stereo/Video acquisition for approximately $8.8 million;
and

- for working capital and general corporate purposes.

In October 1999, we formed a joint-venture with Outpost.com, organized as
Tweeter.Outpost.com, LLC, to jointly market and sell consumer electronics over
the Internet. This joint venture was capitalized with $2.5 million from each
party, primarily to fund inventory procurement. In connection with this effort,
we made an equity investment of $1.0 million in the common stock of Outpost.com.

RECENT ACCOUNTING PRONOUNCEMENTS

During 1998, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." Statements of Financial Accounting Standards No. 133
was not required to be implemented until fiscal year 2000. In June 1999, the
Financial Accounting Standards Board issued Statements of Financial Accounting
Standards No. 137, "Accounting for Derivative Instruments and Hedging
Activities -- Deferral of the Effective Date of the Financial Accounting
Standards Board Statement No. 133 -- an amendment of the Financial Accounting
Standards Board Statement No. 133." Statements of Financial Accounting Standards
No. 137 delayed the original implementation date of Statements of Financial
Accounting Standards No. 133 by one year. This will require that we implement
this statement in fiscal year 2001. We are currently evaluating the effects that
the adoption of Statements of Financial Accounting Standards No. 133 will have
on our consolidated financial statements.

On December 3, 1999, the Securities and Exchange Commission published Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." This SAB summarizes certain of the staff's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. This SAB requires, among other things, that revenues derived from
products or services in which companies typically act as an agent be reported on
a new basis. This SAB is required to be implemented by the Company in fiscal
year 2001. Had SAB No. 101 been implemented for all periods presented, total
revenue and cost of sales would have decreased by approximately $1.3 million for
the three months ended December 31, 1999 and by $0.8 million for the three
months ended December 31, 1998. The adoption of SAB No. 101 is not expected to
have any other impact on results of operations.

30
<PAGE> 32

BUSINESS

OVERVIEW

We are a leading specialty retailer of mid to high-end audio and video
consumer electronics products. We operate 76 stores under the Tweeter, etc. name
in the New England market, the Bryn Mawr Stereo & Video name in the Mid-Atlantic
market, the HiFi Buys name in the Southeast market, the Home Entertainment name
in the Texas market and the DOW Stereo/Video name in the San Diego, California
market. Our stores feature an extensive selection of home and car audio systems
and components, portable audio equipment and home video products, including
large screen televisions, DVD players, digital satellite systems, video cassette
recorders and camcorders. We differentiate our stores by focusing on consumers
who seek audio and video products with advanced features, functionality and
performance. We do not offer personal computers or home office equipment. Our
stores display products in an inviting retail environment averaging 10,000
square feet and are staffed with attentive, knowledgeable sales personnel. We
seek to build name recognition and customer loyalty by combining quality
products and knowledgable sales associates with a high level of service and
competitive prices. In 1999, we were recognized by Audio Video International
Magazine as the "Consumer Electronics Retailer of the Year," and we were
presented with the "Excellence in Retailing" award by the TWICE Consumer
Electronics Retail Registry and the "Dealer Pride" award by Dealerscope.

INDUSTRY

We believe that the following trends in the consumer electronics industry
create significant opportunities for a specialty retailer of audio and video
products such as Tweeter:

ADVENT OF NEW TECHNOLOGIES

We estimate that retail sales of audio and video products were
approximately $33.3 billion in 1999. Growth in the audio and video consumer
electronics market has historically been accelerated by the introduction of new
products based on technological innovations. For example, the proliferation of
video cassette recorders and compact disc players helped to accelerate growth in
the 1980s. We estimate that between 1980 and 1997, the audio and video segment
expanded at a compound annual growth rate of 4.3%, with faster growth of 5.6%
from 1980 to 1990 and more modest growth of 2.3% between 1990 and 1997 as these
product categories matured. More recently, growth has accelerated with the
advent of new digital products such as DVD players and high definition
televisions, as well as direct broadcast satellite systems and Internet-ready
televisions. We believe that retail sales of audio and video products grew at a
compound annual growth rate of 5.3% from 1997 to 1999. According to estimates
provided by the Consumer Electronics Association, approximately 3.95 million DVD
players were sold in 1999 compared to approximately 349,000 in 1997. We believe
that specialty retailers with sales personnel capable of understanding and
communicating the benefits of technologically advanced products to consumers are
well positioned to capture the increased sales that may result should such
products achieve market acceptance.

31
<PAGE> 33

POSITIONING OF LARGE FORMAT, HIGH VOLUME RETAILERS

Consumer electronics retailing has become increasingly dominated by large
format stores, including superstores and mass merchandisers. These stores
typically rely on high sales volumes by marketing a wide variety of products to
a broad segment of consumers, with an emphasis on introductory level products.
Many of these retailers have sought to capitalize on the growth of certain
product categories within the overall consumer electronics industry, including
personal computers, software, home office equipment and telecommunications
equipment, which we believe has contributed to a decrease in emphasis by those
stores on audio and video products. We estimate that audio and video products
accounted for 31% of total sales of consumer electronics products in 1999 versus
44% in 1990. We believe that the emphasis of these large format stores on high
volume across broad product categories makes it difficult for them to match the
product knowledge, service and shopping environment of a specialty audio and
video retailer like us.

CONSOLIDATION OF CONSUMER ELECTRONICS RETAILERS

The retail consumer electronics industry is highly fragmented, and we
estimate that the two largest superstore chains accounted for less than 25% of
the total sales attributable to the 100 largest retailers in 1998. We believe
that the expansion of large format chains has precipitated consolidation of the
industry during the 1990s by placing competitive pressure on regional broadline
consumer electronics retailers with strategies undifferentiated from consumer
electronics superstores and mass merchandisers, and smaller specialty retailers
that may be successfully differentiated but which operate at a disadvantage due
to limited scale, media inefficiencies, limited purchasing power and lack of
management depth. We believe that regional specialty retailers with strong
consumer name recognition represent attractive acquisition candidates and that
the smaller or weaker specialty retailers will continue to face significant
competitive pressures, thereby providing opportunities for retailers with scale
advantages to increase market share.

BUSINESS STRATEGY

Our goal is to become the nation's leading specialty retailer of
high-quality audio and video products. The key elements of our business strategy
are as follows:

EXTENSIVE SELECTION OF MID TO HIGH-END AUDIO AND VIDEO PRODUCTS

We concentrate on mid to high-end audio and video consumer electronics
products. This focus differentiates us from larger format superstores and mass
merchandisers, which offer a broad array of consumer electronics and
non-electronics products with a higher emphasis on products priced at
introductory price levels. Our emphasis on higher-end products positions us
attractively to manufacturers seeking to sell more advanced or limited
distribution products as part of their distribution strategy. Limited
distribution products accounted for approximately 34.5% of our product sales in
fiscal 1999. As a result of our higher-end product focus, a historical early
adopter customer base and our extensively trained sales force, we are often
among the earliest retailers to offer new product innovations on behalf of
manufacturers. In addition, we believe that our focused product offering allows
for higher gross margin opportunities, appeals to a more service-conscious
consumer and results in enhanced brand awareness of our regional names to our
targeted customer base.

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<PAGE> 34

EXCEPTIONAL CUSTOMER SERVICE

We believe that the quality and knowledge of our sales associates is
critical to our success and represents a significant competitive advantage. Our
relationship selling model encourages sales associates to promote a comfortable,
trusting, low pressure environment. We provide new sales associates with five
weeks of intensive classroom training, and all sales associates receive five to
15 days of ongoing training per year, both at the store and at our regional
training centers. Our sales force receives technical product and sales training
prior to our introduction of significant new products. In addition, we have
expanded our custom installation business by acquiring two providers with whom
we previously contracted for an aggregate consideration of approximately
$710,000. We believe that the success of our service driven model has enabled us
to engender long-term customer loyalty.

EVERY DAY COMPETITIVE PRICING

We utilize an "every day competitive pricing" strategy with fixed prices
clearly marked on our products. Store managers regularly visit local competitors
to ensure that our pricing remains competitive within the store's local market.
In addition, all product sales are backed by our patented Automatic Price
Protection program. Under this program, if a customer purchases a consumer
electronics product from one of our stores and a competitor within 25 miles of
the store advertises a lower price within 30 days of purchase, we automatically
send a check to the customer for the difference without requiring the customer
to request payment. The Automatic Price Protection program is designed to remove
pricing concerns from the purchase decision and, as a result, allows customers
and the sales staff to focus on product functionality, performance and quality.

DYNAMIC, INVITING STORES

Our stores display products in a dynamic and inviting setting intended to
encourage the customer to view and hear products in sound rooms architecturally
and acoustically designed to simulate the customer's home or car environment.
The store prototype is brightly painted, often in pastel colors, with many
stores exhibiting hand-painted murals and other decorative artwork. Innovative
and interactive product displays enable customers to sample and compare a
variety of products. Each store contains a television wall displaying an
extensive selection of televisions and related products, and many stores contain
a movie theater room, complete with theater-style seats, which showcases our
home theater products.

GROWTH STRATEGY

We opened our first store in 1972 in Boston under the Tweeter, etc. name
and over the next two decades grew exclusively through new store openings in New
England, expanding to 18 stores by 1995. In 1995, we adopted our current growth
strategy to:

- open new stores in current regional markets and relocate certain stores
to more favorable sites; and

- selectively pursue acquisitions in new regional markets and achieve
operating improvements by converting each acquired company to our core
operating model and leveraging distribution, marketing and corporate
infrastructure.

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<PAGE> 35

NEW STORES

We intend to open new stores and relocate a limited number of stores within
existing markets in order to increase penetration and leverage regional
advertising, distribution, and operating efficiencies. During fiscal 1999, we
opened two Tweeter, etc. stores, two Bryn Mawr Stereo & Video stores and one
HiFi Buys store. We also relocated two Tweeter, etc. stores and one Bryn Mawr
Stereo & Video store in fiscal 1999. In fiscal 2000, we have opened three new
stores and intend to open an additional 13 new stores and relocate four stores.
We believe that our acquisitions of Bryn Mawr Stereo & Video in May 1996, HiFi
Buys in May 1997, Home Entertainment in February 1999 and DOW Stereo/Video in
July 1999 provide us with platforms from which to open new stores within and
around their markets.

STRATEGIC ACQUISITIONS

We believe that we have obtained, and can continue to obtain, significant
benefits from the consummation of strategic acquisitions of existing specialty
retailers with a similar product mix and strong consumer reputation in
geographic markets in which we do not currently operate. We believe that we can
leverage the performance of an acquisition candidate by:

- applying our sales management and sales incentive strategies;

- adjusting the product mix to be compatible with our emphasis on higher
margin audio and video products;

- applying our advertising and marketing strategies and programs, including
our Automatic Price Protection and every day competitive pricing
programs;

- implementing our relationship selling and customer service philosophies;
and

- leveraging our purchasing and distribution capabilities and
administrative infrastructure.

We believe that acquisition opportunities are created by the fragmented
nature of the audio and video retail market, the limited exit alternatives
available to owners of local and regional specialty retailers, the competitive
pressures imposed by larger format retailers, and the insufficiency of capital
necessary to support inventory, advertising and expansion. We believe that we
are a well-positioned consolidator because we:

- are known within the industry as a leading specialty retailer;

- utilize a store size and concept which can be readily adapted to acquired
stores;

- have successfully consummated multiple strategic acquisitions;

- have developed an operational, administrative and marketing
infrastructure with the proven capability to successfully integrate
acquisitions;

- enjoy experienced and proven senior management, having an average of 14
years of tenure with us (or our acquired companies); and

- would seek to offer potential employment and managerial opportunities
within the consolidated enterprise to employees of the acquired retailer.

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<PAGE> 36

STRATEGIC ACQUISITIONS

BRYN MAWR STEREO & VIDEO

In May 1996, we completed the Bryn Mawr Stereo & Video acquisition. Like
the Tweeter, etc. stores, the Bryn Mawr Stereo & Video stores enjoyed
considerable name recognition and targeted similar service-oriented customers.
Because the Bryn Mawr Stereo & Video stores offered a product mix similar to the
Tweeter, etc. stores, we consummated the Bryn Mawr Stereo & Video acquisition
with the goal of realizing increased revenues and store contribution through the
application of our established operational strategies to the acquired stores.
Towards that goal, we:

- increased advertising expenditures and refocused advertising to emphasize
radio, television and direct marketing rather than print;

- implemented our every day competitive pricing and Automatic Price
Protection programs;

- initiated a substantial sales associate training program to improve
product knowledge and enhance relationship selling skills; and

- focused the sales staff on higher margin products, particularly audio
products.

HIFI BUYS

In May 1997, we completed the HiFi Buys acquisition. Like Tweeter, etc. and
Bryn Mawr Stereo & Video, HiFi Buys had created a strong reputation among
consumers as a specialty retailer of high quality audio and video products. The
HiFi Buys stores, at an average size of 15,000 square feet, are larger than the
average Tweeter, etc. or Bryn Mawr Stereo & Video store, which are generally
10,000 square feet. The HiFi Buys stores carried a broader product mix, however,
including more entry level product offerings and marketed heavily through
promotional newspaper advertising. Our integration strategy in the HiFi Buys
acquisition has been to increase store contribution by converting the HiFi Buys
product mix to one compatible with the Tweeter, etc. stores and to manage a
planned decrease in sales while increasing gross margins and reducing operating
expenses. Specifically, following the HiFi Buys acquisition we:

- adjusted the merchandise mix to increase the proportion of mid and
high-end products and reduce the number of lower margin introductory
products;

- altered store employee compensation to reduce the emphasis on promotional
sales and focus incentives on gross margin and store contribution;

- reduced marketing expenditures and shifted marketing emphasis from
promotional advertising toward our traditional relationship selling and
every day competitive price message;

- converted the advertising program to emphasize electronic advertising and
direct mail marketing as opposed to print media;

- implemented our Automatic Price Protection program; and

- eliminated $2.4 million of overhead by centralizing accounting,
purchasing and other support infrastructure.

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<PAGE> 37

HOME ENTERTAINMENT

In February 1999, we completed the acquisition of Home Entertainment. Home
Entertainment was a specialty consumer electronics chain with seven stores
serving the Houston and Dallas, Texas markets. Home Entertainment had created a
strong reputation among consumers with a specialized focus on audio and video
products and custom home installation. The Home Entertainment stores are smaller
than the typical Tweeter, etc. store. Our integration strategy in the Home
Entertainment acquisition has been to convert the Home Entertainment product mix
to one compatible with the Tweeter, etc. stores and to reduce operating
expenses. This strategy focused on increasing sales in order to generate
increased store contribution. Specifically, following the Home Entertainment
acquisition, we:

- adjusted the merchandise mix to expand the number of mid and high-end
products offered in the stores and to introduce several new product
categories, including camcorders and portable audio;

- increased advertising expenditures and refocused advertising to emphasize
radio and direct marketing rather than print;

- implemented our every day competitive pricing and Automatic Price
Protection programs; and

- initiated a substantial sales associate training program to improve
product knowledge and enhance relationship selling skills.

DOW STEREO/VIDEO

In July 1999, we completed the acquisition of DOW Stereo/Video. DOW
Stereo/Video was a specialty consumer electronics chain with nine stores serving
the San Diego, California market. Like the prior acquisitions, DOW Stereo/Video
had created a strong reputation among consumers as a place to view and purchase
newly introduced electronics products. As in the case of HiFi Buys, however, the
DOW Stereo/Video stores carried a broader product mix including more entry-level
product offerings and marketed heavily through promotional newspaper
advertising. We initiated a series of strategic initiatives that combined a
planned decrease of revenues with a planned increase in gross margin and a
substantial decrease in operating expenses to generate increased store
contribution. As with the HiFi Buys acquisition, we:

- adjusted the merchandise mix to expand the number of mid and high-end
products offered in the stores and eliminated entry-level products from
the merchandise mix;

- decreased advertising expenditures and refocused advertising to emphasize
radio, television and direct marketing rather than print;

- implemented our every day competitive pricing and Automatic Price
Protection programs;

- initiated a substantial sales associate training program to improve
product knowledge and enhance relationship selling skills; and

- focused the sales staff on higher margin products, particularly audio
products.

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<PAGE> 38

PENDING ACQUISITION OF UNITED AUDIO CENTERS

DEVELOPMENT OF ON-LINE PRESENCE

In October 1999, we formed a joint-venture with Outpost.com, organized as
Tweeter.Outpost.com, LLC, to jointly market and sell consumer electronics over
the Internet. This joint venture was capitalized with $2.5 million from each
party, primarily to fund inventory procurement, and profits generated from this
entity are split evenly. In connection with this effort, we made an equity
investment of $1.0 million in the common stock of Outpost.com. We chose this
method of entry into on-line retailing to:

- minimize execution risk by partnering with an experienced Internet
retailer;

- leverage the existing infrastructure and customer traffic of Outpost.com;
and

- utilize a proven fulfillment capability.

The parties expect to utilize and leverage their respective marketing
efforts to promote the Web site, by tagging the existing advertising with
information about the Web presence. The joint venture is not anticipated to
engage in marketing directly.

We provide products through our supply relationships, and have gained
"authorized dealer" status to sell on-line from approximately 18 leading
manufacturers of audio and video products, including Sony, Panasonic and Denon.

STORE FORMAT AND OPERATIONS

STORE FORMAT

We currently operate 76 stores, comprised of 26 Tweeter, etc. stores in the
New England market, 20 Bryn Mawr Stereo & Video stores in the Mid-Atlantic
market, 14 HiFi Buys stores in the Southeast market, seven Home Entertainment
stores in the Texas market and nine DOW Stereo/Video stores in the San Diego,
California market. While our stores vary in size, the current prototype is
10,000 square feet, with approximately 70% of square footage devoted to selling
space. Many stores utilize mezzanine level storage space to reduce overall
occupancy expense.

Our store concept combines the comfort of the home environment with
practical displays enabling consumers to sample and compare the features and
functions of products in various combinations. The store prototype is brightly
painted, often in pastel colors, with

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<PAGE> 39

many stores exhibiting hand painted murals and other decorative artwork. Unlike
many of our competitors, which contain large, open spaces in which many
different audio and video products are tested and sampled, our stores feature
individual sound rooms. The sound rooms architecturally and acoustically
resemble a home environment to enable the customer to see and hear how products
will perform at home. These sound rooms allow the customer to listen to and to
compare various combinations of receivers, CD players, tape decks and speakers.
In addition, each store contains a traditional television wall displaying an
extensive selection of televisions and related products, and many stores contain
a movie theater room, complete with theater-style seats, which showcases our
home theater products. Other displays, such as the "big red button," allow the
customer to change, by pushing a button, mono television sound into a five
speaker or surround sound experience. Each store also features a camcorder
gallery which allows customers to sample different camcorders, and to shoot
videos of their children within the adjacent children's play area. Some stores
display a car on the selling floor which features a state-of-the-art car stereo
system and serves to exhibit our installation capabilities. Most stores provide
car stereo installation through on-premises installation bays.

STORE OPERATIONS

Stores are typically staffed with a store manager, an assistant manager, 12
sales associates and two mobile electronics installers. We provide new sales
associates with five weeks of intensive classroom training, and all sales
associates receive five to 15 days of ongoing training per year, both at the
store and at the regional training centers. The sales force receives technical
product and sales training prior to the introduction of significant new
products. Most stores are open seven days a week.

Store managers are compensated through base pay and monthly bonuses based
on store operating income. Typically, store managers earn 25% to 45% of their
annual compensation through such bonuses. Sales associates are compensated
through a commission program that is based on the retail prices and gross margin
of products sold.

STORE ECONOMICS

We believe that we benefit from attractive store level economics. Our
average investment for the 15 new stores opened in the 39 months ended September
30, 1999, including leasehold improvements, equipment and the cost of inventory
(net of payables) was approximately $985,000. The average net sales and store
level cash flow, which excludes any pre-opening expenses, allocated corporate
overhead, depreciation and interest, but includes occupancy expense and
advertising, for fiscal 1999 was approximately $3,962,000 and $447,000,
respectively, for Tweeter, etc. and Bryn Mawr stores we owned throughout the
period. HiFi Buys stores are excluded because they are larger than our store
prototype.

SITE SELECTION

Our stores average approximately 10,000 square feet and are typically
located in free-standing buildings or strip shopping centers within high traffic
shopping areas. New store sites are selected on the basis of several factors,
including location, demographic characteristics of the local market, proximity
to superstore competitors, access to highways or other major roadways, and
available lease terms. We look for co-tenants, such as bookstores, that are
likely to draw customers whom we would otherwise target within the site's
relevant market and believe that the proximity of superstore competitors is, on
balance, a positive factor due to increased customer traffic. We lease a
majority of our stores.

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<PAGE> 40

Set forth below is a table summarizing our store locations by state as of
December 31, 1999:

<TABLE>
<CAPTION>
STATE STORES
- ----- ------
<S> <C>
Alabama..................................................... 2
California.................................................. 9
Connecticut................................................. 6
Delaware.................................................... 2
Georgia..................................................... 12
Maine....................................................... 1
Maryland.................................................... 3
Massachusetts............................................... 14
New Hampshire............................................... 4
New Jersey.................................................. 3
Pennsylvania................................................ 12
Rhode Island................................................ 1
Texas....................................................... 7
--
TOTAL.................................................. 76
==
</TABLE>

MERCHANDISE

Our stores feature:

- audio products such as speakers, cassette decks, receivers, compact disc
players and amplifiers;

- video products such as large screen televisions, digital satellite
systems, video cassette recorders, camcorders and DVD players; and

- mobile consumer electronics products such as car decks, cellular phones
and portable audio equipment.

We offer custom home and car stereo installation services and provide
warranty and non-warranty repair services through all of our stores. We also
offer insurance replacement services to insurance companies, providing
replacement products to the policyholders of those insurance companies.
Additionally, we have a corporate sales division which markets and sells to
businesses, institutions and other organizations. Our emphasis on mid to high-
end products enables us to offer limited distribution products and to be among
the earliest retailers to offer new product innovations on behalf of
manufacturers. Limited distribution products accounted for approximately 34.5%
of our sales in fiscal 1999.

We stock products from over 50 vendors, including Aiwa, Alpine, B&K, Bose,
Boston Acoustics, Denon, Eclipse, JL Audio, Kenwood, Klipsch, Mirage, Mission,
Mitsubishi, Monster Cable, Panasonic, Pioneer, Samsung, Sony, Toshiba and
Yamaha. We seek to manage our product mix to maximize gross margin performance.
Historically, video products have yielded lower gross margin than audio
products. Total sales of video products have increased at rates faster than the
increases in audio products sales during the last several years as a result of
increased customer interest in big screen televisions. Accordingly, we have
adopted a "Sell Audio with Video" strategy in order to enhance overall gross
margin through increased sales of higher margin audio products.

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<PAGE> 41

The table below sets forth the approximate percentages of revenue for each
of our primary product categories for the fiscal years ended September 30, 1997,
September 30, 1998 and September 30, 1999 and the three months ended December
31, 1998 and December 31, 1999. The percentage of revenues represented by each
product category may be affected by, among other factors, competition, economic
conditions, consumer trends, the introduction into the market of new products,
changes in our product mix, and the timing of marketing events. The percentages
are also affected by acquisitions of stores offering different mixes of
products. In particular, the increase in the percentage of revenue represented
by video products in fiscal 1998 was primarily driven by inclusion of the
acquired Hifi Buys stores. The historical percentages set forth below may not be
indicative of results for future periods:

<TABLE>
<CAPTION>
THREE MONTHS
FISCAL YEAR ENDED ENDED
SEPTEMBER 30, DECEMBER 31,
---------------------- -------------
PRODUCT CATEGORY 1997 1998 1999 1998 1999
---------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Audio Equipment.................................. 33% 33% 32% 36% 33%
Video Equipment.................................. 36% 43% 42% 43% 46%
Mobile Equipment and Other....................... 31% 24% 26% 21% 21%
</TABLE>

MERCHANDISING AND INVENTORY

Our merchandising and inventory control functions are based at our
executive offices in Canton, Massachusetts. The merchandising decisions are made
by our buying team, which has primary responsibility for product selection,
stocking levels and pricing. Merchandising decisions are facilitated by our
information systems, which analyze stocking levels and product sell-through. The
merchandising group continuously reviews new and existing products with a view
towards maintaining a wide range of high quality, brand-name consumer
electronics products within the product mix. In order to remain current with new
and developing products, we regularly host presentations by our major suppliers.

In addition to making direct purchases, we are a member of the Progressive
Retailers Organization, a volume-buying group of 15 specialty electronics
retailers across the country. This affiliation often provides us with
opportunities to obtain additional vendor rebates, product discounts and
promotional products. We are not obligated to make purchases through the
Progressive Retailers Organization. Our Chief Executive Officer serves on the
Board of Directors of the Progressive Retailers Organization.

We source products from more than 50 vendors, the largest of whom, Sony,
accounted for 25% of fiscal 1999 purchases. We do not maintain long term
commitments or exclusive contracts with any particular vendor, but instead
consider numerous factors, including price, credit terms, distribution, quality
and compatibility with our existing product mix in making our purchasing
decisions. We utilize a sophisticated automatic replenishment system for store
inventory, maintaining stock levels and minimizing total dollars invested in
inventory. 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.

We distribute products to stores through six regional distribution centers
and four service centers. The Canton, Massachusetts facility is 80,000 square
feet and currently serves as our corporate headquarters and distribution center
and services the Tweeter, etc. stores.

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<PAGE> 42

The King of Prussia, Pennsylvania distribution center is 50,000 square feet and
services the Bryn Mawr Stereo & Video stores. The Atlanta, Georgia facility is
80,000 square feet and services the HiFi Buys stores. The Houston, Texas
facility is 11,700 square feet and services the Home Entertainment stores in
Houston. The Dallas, Texas facility is 3,900 square feet and services the Dallas
area Home Entertainment stores. The San Diego, California facility is 19,700
square feet and services the DOW Stereo/Video stores. We believe that these
facilities are sufficient to support our planned expansion in these markets
through at least the next 12 months.

ADVERTISING AND MARKETING

We target consumers seeking informed advice concerning product selection
and system integration of audio and video consumer electronics products. Our
marketing strategy differs from our primary competitors in that we rely
substantially on electronic media, primarily radio and an extensive direct
marketing effort. We believe advertising on specific radio stations and at
specific times allows us the flexibility to tailor our marketing message. Our
radio advertising campaigns seek to generate name recognition and to reinforce
our identification as a source of high quality products at competitive prices,
staffed with a knowledgeable, attentive sales force. We complement our radio
strategy from time to time with television and print advertisements. 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.

We also rely on a sophisticated direct marketing campaign to reach our
customers. We have developed a comprehensive database-marketing program to match
past customer purchasing history to the next logical purchase option for that
customer. For example, we have distributed direct mail regarding surround sound
products to customers who recently purchased large screen televisions. We also
distribute an award-winning 120 page Buyer's Guide twice a year and a smaller 36
page catalog three times per year. We believe that our relatively inexpensive
direct mail activities leverage and complement our general media advertising
campaigns.

We believe that our commitment to providing competitive pricing on our
products is a critical component of our marketing and advertising strategy. In
1993, we abandoned our promotional marketing approach and adopted an every day
competitive pricing strategy, with fixed prices clearly marked on our products.
Store managers regularly visit the local competition to ensure the store's
pricing remains competitive. At the same time, our competitive prices are backed
by our Automatic Price Protection program. Under the Automatic Price Protection
program, if a customer purchases a consumer electronics product from one of our
stores and a competitor within 25 miles of that store advertises a lower price
within 30 days of the customer's purchase, we automatically send a check to the
customer for the difference. Unlike other price guarantee programs in place
within the industry, the refund process does not require the customer to call or
return to the store of purchase and request a price match refund. The Automatic
Price Protection program is intended to be hassle-free, customer friendly and
viewed as a reflection of our commitment to customer service. Most recently, in
fiscal 1997, we implemented our "Wise Buys" program. Under this program, our
buyers identify special, reduced-priced items, often closeouts or last year's
top-of-the-line models, which are purchased from the manufacturer and offered to
the consumer at a substantial discount from the original retail price. We
believe that the pricing of the Wise Buys items represents substantial value to
the consumer with little or no negative

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<PAGE> 43

impact on gross margin. Our advertisements frequently describe or refer to the
Automatic Price Protection and Wise Buys programs.

INFORMATION SYSTEMS

We utilize a sophisticated, fully integrated mainframe based management
information system which updates after every transaction, and which is
accessible on a real time basis to management, sales associates and product
buyers. Extensive sales reporting and sales tracking is provided real time on
screen to store managers and individual sales associates which enables them to
track our category sales and benchmarks key sales data. The system also enables
management and store managers to review sales volume, gross margin and product
mix on a per store or per sales associate basis, allows for the viewing of open
orders, inventory value and mix, and tracks sales by product category, by sales
associate, and by store. We provide ongoing training and support in the use of
this system and compensate and benchmark the store managers based upon this
information.

EMPLOYEES

As of December 31, 1999, we had approximately 1,700 employees, consisting
of approximately 1,600 full-time and 100 part-time employees. None of our
employees are covered by collective bargaining agreements, and we believe our
relations with our employees are good.

INTELLECTUAL PROPERTY

The "Tweeter, etc.," "Bryn Mawr Stereo," "DOW" and "DOW Stereo/Video"
service marks have been registered with the United States Patent and Trademark
Office. Tweeter has not registered the "HiFi Buys" and "Home Entertainment"
service marks. We have applications pending for registration of certain other of
our service marks.

PROPERTIES

Our corporate offices and the New England distribution and service centers
are located in an 80,000 square foot facility which we own in Canton,
Massachusetts. In addition, we lease over 165,000 square feet of regional
operating facilities including distribution and service centers in King of
Prussia, Pennsylvania; Atlanta, Georgia; Houston, Texas; Dallas, Texas; and San
Diego, California.

Our stores, most of which are leased, include selling space, inventory
storage, management offices and employee areas. The majority of our leases
provide for a fixed minimum rent with scheduled escalation dates and amounts.
Leases for 19 of our stores have percentage rent provisions that range from 1.5%
to 4% of gross sales at each location in excess of certain specified sales
amounts. The initial terms of our leases range from five to 20 years and
generally allow us to renew for up to three additional five-year terms. The
terms of a majority of our leases, including renewal options, extend beyond the
year 2020.

LITIGATION

From time to time, we are involved in litigation in the ordinary course of
business. In our opinion, no currently pending litigation is likely to have a
material adverse effect on our results of operations or financial condition.

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<PAGE> 44

MANAGEMENT

EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES

The following table sets forth certain information with respect to
executive officers, directors and certain other of our key employees as of the
date of this prospectus:

<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
EXECUTIVE OFFICERS AND DIRECTORS
Samuel Bloomberg................................ 48 Chairman of the Board and Director
Jeffrey Stone................................... 43 President, Chief Executive Officer,
Treasurer and Director
Joseph McGuire.................................. 39 Vice President, Chief Financial Officer and
Chief Information Officer
Jeffrey Bloomberg............................... 52 Director
Matthew Bronfman................................ 40 Director
Michael Cronin.................................. 46 Director
Steven Fischman................................. 58 Director
KEY EMPLOYEES
Roy Bertalotto.................................. 46 Vice President, New Store Development
Linda Christman................................. 44 Vice President, Human Resources
David Ginsburg.................................. 49 Vice President, Southeastern Region
Albert Gordon................................... 40 Vice President, Operations and Corporate
Finance
Noah Herschman.................................. 37 Vice President, Marketing
Bernard Sapienza................................ 37 Vice President, Merchandising
Paul Shindler................................... 44 Vice President, Training
</TABLE>

Samuel Bloomberg is a co-founder of Tweeter and has served as a director
and/or officer since its inception. Mr. Bloomberg served as Chief Executive
Officer of Tweeter from September 1983 to January 2000, and has been Chairman of
the Board since 1986. Mr. Bloomberg is the brother of Jeffrey Bloomberg.

Jeffrey Stone has served as President and Treasurer and as a director of
Tweeter since October 1990 and as Chief Executive Officer since January 2000.
Mr. Stone served as Chief Operating Officer of Tweeter from October 1990 to
January 2000. From 1987 to 1990 Mr. Stone served as the Executive Vice President
of Bread & Circus, a specialty natural foods supermarket chain, and from 1983 to
1987 served as Vice President of Human Resources and Training for Scandinavian
Design, a specialty furniture retailer. Mr. Stone is a Director of the
Progressive Retailers Organization, the buying group of specialty consumer
electronics retailers of which Tweeter is a member.

Joseph McGuire has been a Vice President and the Chief Financial Officer
and Chief Information Officer of Tweeter since May 1996. Prior to joining
Tweeter, Mr. McGuire was the Chief Financial Officer of Bryn Mawr Radio &
Television Centre, Inc., from 1987 to 1996.

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<PAGE> 45

Jeffrey Bloomberg has served as a director of Tweeter from 1989 to the
present. Mr. Bloomberg currently serves as Chief Executive Officer of Big League
Broadcasting, LLC, a radio station operator in Atlanta, Georgia. From 1994 to
the present, Mr. Bloomberg has also served as President of Bloomberg Associates,
Inc., an investment banking company. Prior to that, from 1985 to 1993, Mr.
Bloomberg served as a Senior Managing Director at Bear, Stearns & Co. Inc.,
specializing in corporate finance and mergers and acquisitions. Mr. Bloomberg is
the brother of Samuel Bloomberg.

Matthew Bronfman has served as a director of Tweeter since 1989. In 1990
Mr. Bronfman served as director, and from 1991 to 1995 Mr. Bronfman served as
Chairman and Chief Executive Officer of Sterling Cellular Holdings, L.P., a
private cellular telephone company. From 1995 to the present, Mr. Bronfman
founded and has served as Chairman and Chief Executive Officer of Perfumes
Isabell, a fragrance and gift company.

Michael Cronin has served as a director of Tweeter since 1995. From 1991 to
the present Mr. Cronin has served as Managing Partner of Weston Presidio
Capital. Mr. Cronin also serves as director of Tekni-plex, Inc. and Casella
Waste Systems, Inc.

Steven Fischman has served as a director of Tweeter since the completion of
Tweeter's initial public offering in July 1998. Since 1992, Mr. Fischman has
been the President of New England Development, a regional mall developer based
in New England. From 1996 to 1999, Mr. Fischman also served as a Managing
Director of the General Partner of WellsPark Group Limited Partnership, a mall
management company formed by New England Development and an unrelated partner.
Prior to joining NED, Mr. Fischman was a director and shareholder in the Boston
law firm of Goulston & Storrs, P.C., which firm is counsel to Tweeter. Mr.
Fischman is also Chairman of the Board of Trustees of Newton-Wellesley Hospital.

Roy Bertalotto has served as Vice President, New Store Development of
Tweeter since 1992. Prior to that, Mr. Bertalotto served as a District Sales
Manager from 1986 to 1988 and as Regional Vice President, Sales for eight
southern New England stores from 1988 to 1992.

Linda Christman has served as Vice President, Human Resources of Tweeter
since 1997. Prior to that time, she served as the Director of Human Resources
since 1987.

David Ginsburg has served as Vice President, Southeastern Region of Tweeter
since May 1997. Prior to joining Tweeter, Mr. Ginsburg served as a Vice
President of HiFi Buys Incorporated.

Albert Gordon has served as Vice President, Operations and Corporate
Finance of Tweeter since 1995. From 1990 to 1994, Mr. Gordon served as Chief
Financial Officer of Boston Publishing Co., Inc. From 1987 to 1991, Mr. Gordon
held several management positions at The Westwood Group, a restaurant holding
company, most recently as Vice President of Marketing and as Chief Financial
Officer of its catalog business. From 1981 to 1983 Mr. Gordon served on the
audit staff at KPMG Peat Marwick and from 1985 to 1987 Mr. Gordon was a member
of brand management at Procter & Gamble.

Noah Herschman has served as Vice President, Marketing of Tweeter since
1994. Prior to that, Mr. Herschman served as a Senior Product Buyer and
Marketing Director from 1990 to 1994 and served as a sales consultant for
Tweeter from 1988 to 1990.

Bernard Sapienza has served as Vice President, Merchandising of Tweeter
since 1994. Prior to that, from 1989 to 1994, Mr. Sapienza served as a Senior
Product Buyer of Tweeter.

44
<PAGE> 46

Paul Shindler has served as Vice President, Training of Tweeter since 1994.
Prior to that, Mr. Shindler served as Regional Vice President of Sales for the
northern region and Training Director of Tweeter from 1991 to 1994 and served in
various sales and training capacities for Tweeter from 1977 to 1987.

COMPOSITION OF THE BOARD OF DIRECTORS

Our Board of Directors currently consists of six members. The Board is
divided into three staggered classes, consisting of two Class I directors
(Messrs. Bronfman and Fischman), two Class II directors (Messrs. Samuel
Bloomberg and Cronin) and two Class III directors (Messrs. Stone and Jeffrey
Bloomberg), each of which classes is chosen for a three-year term. Class I
directors were re-elected at the end of their initial term at our 1999 annual
meeting. The initial terms of the remaining two classes will expire in 2000 and
2001. We believe that classification of the Board of Directors facilitates
continuity and stability of its business strategies and policies as determined
by the Board of Directors. Holders of common stock have no right to cumulative
voting in the election of directors. Consequently, at each annual meeting of
stockholders, the holders of a majority of the common stock will be able to
elect all of the successors of the class of directors whose terms expire at that
meeting.

45
<PAGE> 47

PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth certain information regarding the beneficial
ownership of our common stock as of December 31, 1999 and as adjusted to reflect
our sale and the selling stockholders' sale of the shares of common stock
offered hereby (assuming no exercise of the underwriters' over-allotment
option), by:

- each person (or group of affiliated persons) known by us to be the
beneficial owner of more than 5% of our outstanding common stock, based
on our review of reports on Schedule 13D and Schedule 13G filings
available on the Securities and Exchange Commission's Web site;

- each of our named executives and directors;

- all of our executive officers and directors as a group; and

- the selling stockholders.

The address of all our executive officers and directors is in care of
Tweeter Home Entertainment Group, Inc., 10 Pequot Way, Canton, Massachusetts
02021.

The table includes the number of shares and percentage ownership
represented by those shares determined to be beneficially owned by a person in
accordance with the rules of the Securities and Exchange Commission. The number
of shares beneficially owned by a person includes shares of common stock that
are subject to options or warrants held by that person that are currently
exercisable or exercisable within 60 days of December 31, 1999. These shares are
deemed outstanding for the purpose of computing the percentage of outstanding
shares owned by such person, but are not deemed outstanding for the purpose of
computing the percentage ownership of any other person.

<TABLE>
<CAPTION>
NUMBER SHARES
SHARES OF SHARES BENEFICIALLY
BENEFICIALLY OWNED BEING OWNED
PRIOR TO THE OFFERING OFFERED AFTER THE OFFERING
---------------------- --------- --------------------
NAME OF BENEFICIAL OWNER: NUMBER PERCENT NUMBER NUMBER PERCENT
- ------------------------- ----------- ------- --------- ---------- -------
<S> <C> <C> <C> <C> <C>
DIRECTORS AND NAMED EXECUTIVES
Samuel Bloomberg(1)........................... 1,494,916 9.5% 263,000 1,231,916 6.9%
Jeffrey Stone(2).............................. 523,490 3.4 100,000 423,490 2.4
Joseph McGuire(3)............................. 39,286 * 12,000 27,286 *
Michael Cronin................................ 1,400 * 0 1,400 *
Jeffrey Bloomberg(4).......................... 466,148 3.0 100,000 366,148 2.1
Matthew Bronfman(5)........................... 176,286 1.1 75,000 101,286 *
Steven Fischman............................... 9,400 * 0 9,400 *
Directors and Executive Officers as a group (7
persons)(6)................................... 2,645,466 16.3 550,000 2,095,466 11.5
5% BENEFICIAL OWNERS
Gilder, Gagnon, Howe & Co., LLC
1775 Broadway, 26th Floor New York, NY 10019.. 909,774 5.9 0 909,774 5.2
</TABLE>

46
<PAGE> 48

- -------------------------

* Represents less than 1% of class.

(1) Includes an aggregate of 65,460 shares held by trusts for the benefit of
Samuel Bloomberg's children and 15,080 shares held by Carolina Bloomberg,
Mr. Bloomberg's wife. Carolina Bloomberg's 15,080 shares include 626 shares
issuable upon the exercise of outstanding warrants. Mr. Bloomberg expressly
disclaims beneficial ownership of the shares held by trusts for the benefit
of his children and by Carolina Bloomberg. Also includes 436,262 shares
subject to options granted by Tweeter to Mr. Bloomberg.

(2) Includes 52,480 shares held by trusts for the benefit of Mr. Stone's
children. Mr. Stone expressly disclaims beneficial ownership of these
shares. Also includes 212,972 shares subject to options granted by Tweeter
to Mr. Stone.

(3) Includes 23,358 shares subject to options granted by Tweeter to Mr. McGuire,
of which 12,000 will be exercised and sold in this offering.

(4) Includes 22,896 shares held, in the aggregate, by trusts for the benefit of
Jeffrey Bloomberg's children. Mr. Bloomberg expressly disclaims beneficial
ownership of these shares. Also includes 65,460 shares held, in the
aggregate, by trusts for the benefit of Samuel Bloomberg's children, of
which Jeffrey Bloomberg is a trustee. Mr. Bloomberg expressly disclaims
beneficial ownership of these shares. Also includes 14,520 shares subject to
options granted by Tweeter to Mr. Bloomberg.

(5) Includes 166,568 shares subject to options granted by Tweeter to Mr.
Bronfman, of which 75,000 will be exercised and sold in this offering.

(6) Includes 856,480 shares subject to options granted by Tweeter to directors
and executive officers as a group, of which an aggregate of 87,000 shares
will be exercised and sold in this offering.

47
<PAGE> 49

UNDERWRITING

Subject to the terms and conditions of the underwriting agreement, the
underwriters named below, through their representatives, Deutsche Bank
Securities Inc., PaineWebber Incorporated and Dain Rauscher Incorporated, have
agreed in an underwriting agreement to purchase severally from Tweeter and the
selling stockholders the following respective numbers of shares of common stock
at the public offering price less the underwriting discounts and commissions set
forth on the cover page of this prospectus:

<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ----------- ----------
<S> <C>
Deutsche Bank Securities Inc................................
PaineWebber Incorporated....................................
Dain Rauscher Incorporated..................................

----------
Total.................................................. 2,550,000
==========
</TABLE>

The underwriting agreement provides that the obligations of the
underwriters to purchase the shares of common stock offered hereby are subject
to certain conditions precedent and that the underwriters will be obligated to
purchase all shares of the common stock offered hereby, other than those covered
by the over-allotment option described below, if any are purchased. The
underwriting agreement provides that, in the event of a default by an
underwriter, in certain circumstances, the purchase commitments of the non-
defaulting underwriters may be increased or the underwriting agreement may be
terminated.

The underwriters propose to offer the shares of common stock to the public
at the public offering price set forth on the cover of this prospectus and to
dealers at a price that represents a concession not in excess of $ per share
under the public offering price. The underwriters may allow, and these dealers
may re-allow, a concession of not more than $ per share to other dealers.
After the initial offering, the representatives of the underwriters may change
the offering price and other selling terms.

The underwriters will offer the shares subject to prior sale, withdrawal,
cancellation or modification of the offer of the shares without notice, and to
their receipt and acceptance of the shares. The underwriters may reject any
order to purchase shares.

Tweeter has granted to the underwriters an option, exercisable not later
than 30 days after the date of this prospectus, to purchase up to 382,500
additional shares of common stock at the public offering price less the
underwriting discounts and commissions set forth on the cover page of this
prospectus. The underwriters may exercise this option only to cover
over-allotments made in connection with the sale of the common stock offered
hereby. To the extent that the underwriters exercise this option, each of the
underwriters will become obligated, subject to certain conditions, to purchase
approximately the same percentage of additional shares of common stock as the
number of shares of common stock to be purchased by it in the above table bears
to 2,550,000.

The underwriting fee is equal to the public offering price per share of
common stock less the amount paid by the underwriters per share of common stock.
The underwriting fee is % of the public offering price. Tweeter and the
selling stockholders have agreed to pay

48
<PAGE> 50

the underwriters the following fees, assuming either no exercise or full
exercise by the underwriters of the underwriters' over-allotment option:

<TABLE>
<CAPTION>
TOTAL FEES
----------------------------------------------
FEE PER WITHOUT EXERCISE OF WITH FULL EXERCISE OF
SHARE OVER-ALLOTMENT OPTION OVER-ALLOTMENT OPTION
------- --------------------- ---------------------
<S> <C> <C> <C>
Fees paid by Tweeter........... $ $ $
Fees paid by the selling
stockholders................. $ $ $
</TABLE>

In addition, Tweeter estimates that its expenses for this offering,
excluding underwriting discounts and commissions, will be approximately
$900,000.

Tweeter and the selling stockholders have agreed to indemnify the
underwriters against specified types of liabilities, including liabilities under
the Securities Act, and to contribute to payments the underwriters may be
required to make in respect of any of these liabilities.

Tweeter and each of the officers and directors of Tweeter, including all of
the selling stockholders, have agreed, subject to certain exceptions, not to
offer, sell, contract to sell or otherwise dispose of any shares of common stock
for a period of 90 days after the date of this prospectus without the prior
written consent of Deutsche Bank Securities Inc. Stockholders who have agreed to
this lock-up arrangement will hold an aggregate of 1,325,192 shares of common
stock and options exercisable for 1,027,238 shares of common stock after the
offering. Consent to the release of the lock-up, in whole or in part, may be
given at any time without public notice.

The representatives of the underwriters have advised us that the
underwriters do not intend to confirm sales to any account over which they
exercise discretionary authority in excess of 5% of the shares of common stock
being offered hereby.

In order to facilitate the offering of our common stock, the underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
market price of our common stock. Specifically, the underwriters may over-allot
shares of our common stock in connection with this offering, thus creating a
short position in our common stock for their own account. A short position
results when an underwriter sells more shares of common stock than that
underwriter is committed to purchase. Additionally, to cover these over-
allotments or to stabilize the market price of our common stock, the
underwriters may bid for, and purchase, shares of our common stock in the open
market. Finally, the representatives, on behalf of the underwriters, may also
reclaim selling concessions allowed to an underwriter or dealer if the
underwriting syndicate repurchases shares distributed by that underwriter or
dealer. Any of these activities may maintain the market price of our common
stock at a level above that which might otherwise prevail in the open market.
These transactions may be effected on the Nasdaq National Market or otherwise.
The underwriters are not required to engage in these activities and, if
commenced, may end any of these activities at any time.

In connection with this offering, certain underwriters and other selling
group members or their affiliates may engage in passive market making
transactions in the common stock on the Nasdaq National Market in accordance
with Rule 103 of Regulation M under the Securities Exchange Act of 1934, as
amended. Rule 103 permits passive market making during the period when
Regulation M would otherwise prohibit market making activity by the participants
in this offering. Passive market making consists of displaying bids on the
Nasdaq National Market limited by the bid prices of independent market makers
and making purchases limited by such prices and effected in response to order
flow. Rule 103 limits the

49
<PAGE> 51

net purchases by a passive market maker on each day to a specified percentage of
the passive market maker's average daily trading volume in the common stock
during a specified period. The passive market maker must stop its passive market
making transactions for the rest of that day when such limit is reached. Passive
market making may stabilize the market price of our common stock at a level
above that which might otherwise prevail and, if commenced, may be discontinued
at any time.

Certain of the underwriters have, from time to time, provided investment
banking and other financial advisory services to Tweeter, for which they have
received customary fees.

LEGAL MATTERS

Goulston & Storrs, P.C., Boston, Massachusetts, will deliver an opinion as
to the validity of the common stock being offered hereby. Kitt Sawitsky serves
as Tweeter's Secretary and Daniel Avery serves as Tweeter's Assistant Secretary.
Mr. Sawitsky and Mr. Avery are both directors and shareholders of Goulston &
Storrs, P.C., counsel to Tweeter. Certain legal matters related to this offering
will be passed upon for the underwriters by Testa, Hurwitz & Thibeault, LLP,
Boston, Massachusetts.

EXPERTS

The consolidated financial statements and the related consolidated
financial statement schedule as of September 30, 1999 and for the three years in
the period ended September 30, 1999 included and/or incorporated by reference in
this prospectus have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their reports, which are included and/or incorporated by
reference herein, and have been so included and/or incorporated in reliance upon
the reports of such firm given upon their authority as experts in accounting and
auditing.

INFORMATION INCORPORATED BY REFERENCE

The Securities and Exchange Commission, or SEC, allows us to "incorporate
by reference" into this prospectus information in the documents we file with the
SEC, which means that we can disclose important information to you by referring
you to those documents. The information incorporated by reference is an
important part of this prospectus, and information that we file later with the
SEC will automatically update and supersede this information. We incorporate by
reference the documents listed below and any future filings we make with the SEC
under Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934
until we sell all of the securities offered by this prospectus:

- our Quarterly Report on Form 10-Q for the fiscal quarter ended December
31, 1999;

- our Current Report on Form 8-K dated January 20, 2000;

- our Annual Report on Form 10-K for the fiscal year ended September 30,
1999;

- our Proxy Statement dated December 22, 1999;

- our Current Report on Form 8-K dated October 25, 1999; and

- the description of our stock contained in our Registration Statement on
Form 8-A dated April 24, 1998 and amended June 5, 1998.

50
<PAGE> 52

You may request a copy of these filings at no cost by writing or calling us
at our principal executive offices located at the following address:

Tweeter Home Entertainment Group, Inc.
10 Pequot Way
Canton, Massachusetts 02021
Attention: Joseph McGuire, Chief Financial Officer
Telephone: (781) 830-3000

We will not provide exhibits to a document unless they are specifically
incorporated by reference in that document.

WHERE YOU CAN FIND ADDITIONAL INFORMATION

We file reports, proxy statements and other information, including the
information incorporated by reference above, with the SEC in Washington, D.C.
Investors may inspect and copy these reports, proxy statements and other
information at the SEC's Public Reference Room at 450 Fifth Street, N.W.,
Washington D.C. 20549 and at the SEC's regional offices at Seven World Trade
Center, New York, New York 10048 and 500 West Madison Street, Chicago, Illinois
60661. Investors may obtain information on the operation of the SEC's Public
Reference Room by calling the SEC at 1(800) SEC-0330. This information also is
available at the SEC's Web site at http://www.sec.gov. This information also can
be inspected at the offices of Nasdaq Operations, 1735 K Street, N.W.,
Washington, D.C. 20006.

We filed a registration statement on Form S-3 under the Securities Act of
1933 relating to the common stock offered by this prospectus with the SEC. This
prospectus does not contain all of the information set forth in the registration
statement and the exhibits and schedules to the registration statement, certain
portions having been omitted from this prospectus in accordance with the rules
and regulations of the SEC. Statements contained in this prospectus concerning
the contents of any contract or any other document referred to are not
necessarily complete; reference is made in each instance to the copy of such
contract or document filed as an exhibit to the registration statement, each
such statement being qualified in all respects by such reference. For further
information with respect to us and the common stock we are offering hereby, we
refer investors to the registration statement, the exhibits thereto and the
financial statements, notes and schedules filed as a part thereof.

51
<PAGE> 53

TWEETER HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<S> <C>
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets as of September 30, 1998 and
1999...................................................... F-3
Consolidated Statements of Income for the Years Ended
September 30, 1997, 1998 and 1999......................... F-4
Consolidated Statements of Stockholders' Equity (Deficit)
for the Years Ended September 30, 1997, 1998 and 1999..... F-5
Consolidated Statements of Cash Flows for the Years Ended
September 30, 1997, 1998 and 1999......................... F-6
Notes to Consolidated Financial Statements.................. F-7
Unaudited Condensed Consolidated Balance Sheet as of
December 31, 1999......................................... F-26
Unaudited Condensed Consolidated Statement of Operations for
the Three Months Ended December 31, 1998 and 1999......... F-27
Unaudited Condensed Consolidated Statements of Cash Flows
for the Three Months Ended December 31, 1998 and 1999..... F-28
Notes to Unaudited Condensed Consolidated Financial
Statements................................................ F-29
</TABLE>

F-1
<PAGE> 54

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of
Tweeter Home Entertainment Group, Inc.:

We have audited the accompanying consolidated balance sheets of Tweeter
Home Entertainment Group, Inc. and subsidiaries as of September 30, 1998 and
1999, and the related consolidated statements of income, stockholders' equity
(deficit), and cash flows for each of the three years in the period ended
September 30, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. 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, such consolidated financial statements present fairly, in
all material respects, the financial position of Tweeter Home Entertainment
Group, Inc. and subsidiaries as of September 30, 1998 and 1999, and the results
of their operations and their cash flows for each of the three years in the
period ended September 30, 1999, in conformity with generally accepted
accounting principles.

/s/ DELOITTE & TOUCHE LLP

Boston, Massachusetts
November 18, 1999

F-2
<PAGE> 55

TWEETER HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------------
1998 1999
----------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 776,709 $ 999,495
Accounts receivable, net of allowance for doubtful
accounts of $560,000 at September 30, 1998 and $650,000
at September 30, 1999................................... 6,207,837 9,556,846
Inventory................................................. 38,362,311 62,135,516
Deferred tax assets....................................... 1,598,352 1,899,604
Prepaid expenses and other current assets................. 590,788 678,804
----------- ------------
Total current assets.................................... 47,535,997 75,270,265
Long-term investments..................................... -- 1,846,366
Property and equipment, net............................... 23,978,118 34,243,241
Other assets, net......................................... 35,789 191,616
Goodwill, net............................................. 20,093,107 30,067,691
----------- ------------
TOTAL................................................... $91,643,011 $141,619,179
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long term debt......................... $ -- $ 35,551
Amount due to bank........................................ 4,071,310 6,023,056
Accounts payable.......................................... 10,663,216 18,377,139
Accrued expenses.......................................... 12,006,824 16,197,306
Customer deposits......................................... 1,422,557 2,440,090
Deferred warranty......................................... 1,109,325 673,139
----------- ------------
Total current liabilities............................... 29,273,232 43,746,281
----------- ------------
LONG-TERM DEBT:
Note payable to bank...................................... 5,250,000 5,716,805
----------- ------------
OTHER LONG-TERM LIABILITIES:
Rent related accruals..................................... 2,821,202 3,197,657
Deferred warranty......................................... 1,066,251 338,238
Deferred tax liabilities.................................. 1,423,283 1,095,527
Other long-term liabilities............................... 198,660 279,500
----------- ------------
Total other long-term liabilities....................... 5,509,396 4,910,922
----------- ------------
TOTAL................................................... 40,032,628 54,374,008
----------- ------------
COMMITMENTS AND CONTINGENCIES (Note 9)
STOCKHOLDERS' EQUITY
Preferred Stock, $.01 par value, 10,000,000 shares
authorized, no shares issued and outstanding............ -- --
Common Stock, $.01 par value, 30,000,000 shares
authorized; 15,043,526 shares issued in September 30,
1998 and 17,129,622 in September 30, 1999............... 75,217 85,648
Additional paid in capital................................ 46,840,737 73,287,886
Accumulated other comprehensive income.................... -- 301,520
Retained earnings......................................... 6,701,244 15,482,982
----------- ------------
Total................................................... 53,617,198 89,158,036
Less treasury stock: 2,878,146 shares in September 30,
1998, and 1,905,586 shares in September 30, 1999, at
cost.................................................... (2,006,815) (1,912,865)
----------- ------------
Total stockholders' equity.............................. 51,610,383 87,245,171
----------- ------------
TOTAL................................................... $91,643,011 $141,619,179
=========== ============
</TABLE>

See notes to consolidated financial statements.

F-3
<PAGE> 56

TWEETER HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
--------------------------------------------
1997 1998 1999
------------ ------------- -------------
<S> <C> <C> <C>
Total revenue........................... $132,525,037 $ 232,288,571 $ 283,287,075
Cost of sales........................... (86,314,918) (151,265,382) (182,747,729)
------------ ------------- -------------
Gross profit............................ 46,210,119 81,023,189 100,539,346
Selling expenses........................ 35,567,940 56,906,541 69,225,160
Corporate, general and administrative
expenses.............................. 8,102,190 11,127,540 14,821,844
Amortization of goodwill................ 487,084 917,442 1,056,470
------------ ------------- -------------
Income from operations.................. 2,052,905 12,071,666 15,435,872
Interest expense........................ 1,807,660 2,752,810 309,980
------------ ------------- -------------
Income before income taxes.............. 245,245 9,318,856 15,125,892
Income taxes............................ 98,962 3,723,969 6,050,357
------------ ------------- -------------
Income before extraordinary item........ 146,283 5,594,887 9,075,535
Extraordinary item -- early
extinguishment of debt (less
applicable income taxes of
$244,557)............................. -- 339,687 --
------------ ------------- -------------
NET INCOME.............................. 146,283 5,255,200 9,075,535
============ ============= =============
Accretion of preferred stock............ 2,156,356 2,514,043 --
------------ ------------- -------------
Net income (loss) available to common
stockholders.......................... $ (2,010,073) $ 2,741,157 $ 9,075,535
============ ============= =============
Basic earnings (loss) per share:
Income (loss) available to common
stockholders before extraordinary
item............................... $ (0.60) $ 0.62 $ 0.63
Extraordinary item.................... -- (0.07) --
------------ ------------- -------------
Net income (loss)..................... $ (0.60) $ 0.55 $ 0.63
============ ============= =============
Diluted earnings (loss) per share:
Income (loss) before extraordinary
item............................... $ (0.60) $ 0.55 $ 0.57
Extraordinary item.................... -- (0.03) --
------------ ------------- -------------
Net income (loss)..................... $ (0.60) $ 0.52 $ 0.57
============ ============= =============
Weighted-average shares outstanding:
Basic................................. 3,345,014 4,972,542 14,385,032
============ ============= =============
Diluted............................... 3,345,014 10,067,606 15,972,502
============ ============= =============
</TABLE>

See notes to consolidated financial statements.

F-4
<PAGE> 57

TWEETER HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
ACCUMULATED NOTE
COMMON STOCK ADDITIONAL RETAINED OTHER RECEIVABLE
-------------------- PAID-IN EARNINGS COMPREHENSIVE FROM
SHARES AMOUNT CAPITAL (DEFICIT) INCOME OFFICER
---------- ------- ----------- ----------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, OCTOBER 1, 1996.............. 5,510,404 $27,552 $(3,057,683) $ 627,727 $ -- $(31,500)
Issuance of warrants in connection
with subordinated debt offering..... 325,383
Accretion of Series A Convertible
Preferred Stock..................... (1,802,520)
Accretion of Series B Convertible
Preferred Stock..................... (353,836)
Comprehensive Income:
Net income.......................... 146,283
Comprehensive income..................
---------- ------- ----------- ----------- -------- --------
BALANCE, SEPTEMBER 30, 1997........... 5,510,404 27,552 (2,732,300) (1,382,346) -- (31,500)
Accretion of Series A Convertible
Preferred Stock through July 16,
1998................................ (1,640,863)
Accretion of Series B Convertible
Preferred Stock through July 16,
1998................................ (873,180)
Exercises of warrants................. (363,908)
Additional payment for Treasury
stock...............................
Conversion of Series A Convertible
Preferred Stock..................... 3,400,272 17,001 10,543,922 4,479,325
Conversion of Series B Convertible
Preferred Stock..................... 1,732,850 8,664 6,828,721 1,227,016
Issuance of common stock, net......... 4,400,000 22,000 32,200,394
Payment received on note receivable... 31,500
Comprehensive income:
Net income.......................... 5,255,200
Comprehensive income..................
---------- ------- ----------- ----------- -------- --------
BALANCE, SEPTEMBER 30, 1998........... 15,043,526 75,217 46,840,737 6,701,244 -- --
Issuance of common stock, net......... 1,794,822 8,974 25,123,557
Issuance of shares under stock option
plan................................ 291,274 1,457 604,545
Exercises of warrants................. 19,050 (293,797)
Treasury stock acquired............... 609,681
Issuance of treasury stock under
employee stock purchase plan........ 90,316
Comprehensive income:
Net income.......................... 9,075,535
Net unrealized gain on investments,
net of tax of $200,960............ 301,520
Comprehensive income..................
---------- ------- ----------- ----------- -------- --------
BALANCE, SEPTEMBER 30, 1999........... 17,129,622 $85,648 $73,287,886 $15,482,982 $301,520 $ --
========== ======= =========== =========== ======== ========

<CAPTION>
TOTAL
TREASURY STOCK STOCKHOLDERS'
------------------------ COMPREHENSIVE EQUITY
SHARES AMOUNT INCOME (DEFICIT)
---------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
BALANCE, OCTOBER 1, 1996.............. 3,397,858 $(1,550,017) $(3,983,921)
Issuance of warrants in connection
with subordinated debt offering..... 325,383
Accretion of Series A Convertible
Preferred Stock..................... (1,802,520)
Accretion of Series B Convertible
Preferred Stock..................... (353,836)
Comprehensive Income:
Net income.......................... $ 146,283 146,283
----------
Comprehensive income.................. $ 146,283
---------- ----------- ---------- -----------
BALANCE, SEPTEMBER 30, 1997........... 3,397,858 (1,550,017) (5,668,611)
Accretion of Series A Convertible
Preferred Stock through July 16,
1998................................ (1,640,863)
Accretion of Series B Convertible
Preferred Stock through July 16,
1998................................ (873,180)
Exercises of warrants................. (519,712) 363,908 --
Additional payment for Treasury
stock............................... (820,706) (820,706)
Conversion of Series A Convertible
Preferred Stock..................... 15,040,248
Conversion of Series B Convertible
Preferred Stock..................... 8,064,401
Issuance of common stock, net......... 32,222,394
Payment received on note receivable... 31,500
Comprehensive income:
Net income.......................... $5,255,200 5,255,200
----------
Comprehensive income.................. $5,225,200
---------- ----------- ---------- -----------
BALANCE, SEPTEMBER 30, 1998........... 2,878,146 (2,006,815) 51,610,383
Issuance of common stock, net......... 25,132,531
Issuance of shares under stock option
plan................................ 606,002
Exercises of warrants................. (1,006,820) 699,543 424,796
Treasury stock acquired............... 40,100 (609,681) --
Issuance of treasury stock under
employee stock purchase plan........ (5,840) 4,088 94,404
Comprehensive income:
Net income.......................... $9,075,535 9,075,535
Net unrealized gain on investments,
net of tax of $200,960............ $ 301,520 301,520
----------
Comprehensive income.................. $9,377,055
---------- ----------- ---------- -----------
BALANCE, SEPTEMBER 30, 1999........... 1,905,586 $(1,912,865) $87,245,171
========== =========== ===========
</TABLE>

See notes to consolidated financial statements.

F-5
<PAGE> 58

TWEETER HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
------------------------------------------
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.............................................. $ 146,283 $ 5,255,200 $ 9,075,535
Adjustments to reconcile net income to net cash provided
by(used in) operating activities:
Extraordinary item.................................... -- 566,145 --
Depreciation and amortization......................... 2,798,404 3,920,362 5,215,252
(Gain) loss on disposal of equipment.................. 18,845 58,749 (37,800)
Deferred income tax provision (benefit)............... 71,040 1,104,809 (829,969)
Changes in operating assets and liabilities, net of
effects from acquisition of businesses:
Increase in accounts receivable.................... (1,251,986) (703,558) (2,650,210)
Increase in inventory.............................. (6,534,336) (7,202,268) (14,167,839)
(Increase) decrease in prepaid expenses and other
assets........................................... (277,537) 185,123 (105,863)
Increase (decrease) in accounts payable and accrued
expenses......................................... (936,490) 2,306,134 8,012,555
Increase (decrease) in customer deposits........... (242,565) 167,533 632,038
Increase in deferred rent.......................... 357,195 400,120 376,455
Decrease in deferred warranty...................... (710,610) (1,509,482) (1,164,199)
Increase (decrease) in other liabilities........... 318,780 (120,120) 80,840
------------ ------------ ------------
Net cash provided by (used in) operating
activities.................................... (6,242,977) 4,428,747 4,436,795
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment...................... (3,972,465) (8,996,521) (12,698,632)
Proceeds from sale of property and equipment............ -- 13,350 37,800
Purchase of marketable equity securities................ -- -- (1,343,833)
Acquisition of businesses, net of cash acquired......... (19,539,800) -- (18,087,358)
------------ ------------ ------------
Net cash used in investing activities............ (23,512,265) (8,983,171) (32,092,023)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Amount due to bank...................................... 3,067,959 (877,392) 1,951,746
Proceeds from long-term borrowings, net of debt issue
costs................................................. 20,668,128 -- 467,954
Payments of long-term debt.............................. (100,000) (26,350,000) --
Issuance of preferred stock............................. 6,837,385 -- --
Issuance of common stock, net of issuance costs......... -- 32,222,394 24,427,516
Additional payment for treasury stock................... -- (820,706) --
Proceeds from warrants & options exercised.............. -- -- 1,030,798
------------ ------------ ------------
Net cash provided by financing activities........ 30,473,472 4,174,296 27,878,014
------------ ------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 718,230 (380,128) 222,786
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR............ 438,607 1,156,837 776,709
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR.................. $ 1,156,837 $ 776,709 $ 999,495
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest........................................... $ 1,538,077 $ 3,179,757 $ 324,523
============ ============ ============
Taxes.............................................. $ 358,000 $ 3,552,989 $ 6,090,000
============ ============ ============
</TABLE>

See notes to consolidated financial statements.

F-6
<PAGE> 59

TWEETER HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1997, 1998 AND 1999

1. BUSINESS OF THE COMPANY

Tweeter Home Entertainment Group, Inc. and subsidiaries (the "Company")
sells home audio, video, entertainment and electronic products through a chain
of seventy-three retail stores in the New England, Mid-Atlantic, Southeast,
Texas and San Diego, California markets. The Company operates under the names
"Tweeter, etc.," "Bryn Mawr Stereo & Video," "HiFi Buys," "Home Entertainment,"
and "DOW Stereo/ Video." The Company operates in a single business segment of
retailing audio and video consumer electronic products.

The consolidated financial statements include the accounts of Tweeter Home
Entertainment Group, Inc. and its wholly owned subsidiaries including New
England Audio Co., Inc., NEA Delaware, Inc., THEG USA, LP, DOW Stereo/Video,
Inc., and the Tweeter Home Entertainment Group Financing Trust.

On October 25, 1999, the Company announced a 2-for-1 stock split payable in
the form of a 100% stock dividend. The record date of the stock split was
November 18, 1999. This stock split became effective on December 2, 1999. The
accompanying consolidated financial statements reflect the effects of this
conversion.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION -- The consolidated financial statements include the
accounts of the Company. All material intercompany transactions have been
eliminated in consolidation.

CASH AND CASH EQUIVALENTS -- The Company considers all highly liquid
instruments purchased with maturities of three months or less to be cash
equivalents for balance sheet and cash flow statement purposes.

INVENTORY -- Inventory, which consists primarily of goods for resale, are
stated at the lower of cost (average cost basis) or market.

LONG-TERM INVESTMENTS -- Long-term investments consist primarily of
investments in marketable equity securities. The Company considers its
investments as available-for-sale and carries the investments at market value.
Unrealized holding gains and losses, net of the related tax effect, on
available-for-sale securities are included in other comprehensive income, which
is reflected in stockholders' equity (deficit).

PROPERTY AND EQUIPMENT -- Property and equipment are stated at cost.
Depreciation and amortization are computed by the straight-line method over the
estimated useful lives of the respective assets. Amortization of improvements to
leased properties is based upon the remaining terms of the leases or the
estimated useful lives of such improvements, whichever is shorter. Furniture and
fixtures are depreciated between three and seven years. Automobiles and trucks
are depreciated over three years. Leasehold interests are amortized over the
remaining lives of the leases. Buildings owned by the Company are depreciated
over a period of fifteen years.

F-7
<PAGE> 60
TWEETER HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

GOODWILL -- Goodwill and other acquisition costs are being amortized on a
straight-line basis over twenty-five years. All goodwill is evaluated for
impairment using the methodology described in "long-lived assets."

OTHER ASSETS -- Other assets include deferred financing costs that are
being amortized over the term of the financing, using the straight-line method,
which approximates the interest method. A portion of the deferred financing
costs were written off during 1998 (see Note 14).

FAIR MARKET VALUE OF FINANCIAL INSTRUMENTS -- The fair value of the
Company's assets and liabilities, which constitutes financial instruments as
defined in Statement of Financial Accounting Standards ("SFAS") No. 107,
"Disclosure about Fair Value of Financial Instruments," approximates their
recorded value.

LONG-LIVED ASSETS -- On an ongoing basis, the Company evaluates the
carrying value of its long-lived assets based upon estimated future
non-discounted cash flows relying on a number of factors, including operating
results, business plans and certain economic projections. In addition, the
Company's evaluation considers non-financial data such as changes in the
operating environment, competitive information, market trends and business
relationships.

ACCOUNTING FOR ESTIMATES -- In the process of preparing its consolidated
financial statements, the Company estimates the appropriate carrying value of
certain assets and liabilities that are not readily apparent from other sources.
The primary estimates underlying the Company's consolidated financial statements
include allowances for potential bad debts, obsolete inventory, goodwill, the
useful lives of its long-lived assets, the recoverability of deferred tax assets
and other matters. Management bases its estimates on certain assumptions, which
they believe are reasonable in the circumstances, and does not believe that any
change in those assumptions in the near term would have a significant effect on
the consolidated financial position or results of operations. Actual results
could differ from these estimates.

REVENUE RECOGNITION -- Revenue from merchandise sales is recognized upon
shipment or delivery of goods. Service revenue is recognized when the repair
service is completed.

AUTOMATIC PRICE PROTECTION -- Under this program, if a customer purchases a
consumer electronics product from one of the Company's stores and a competitor
within twenty-five miles of the store advertises a lower price within thirty
days, the Company automatically sends a check to the customer for the
difference. The Company records the cost of its Automatic Price Protection
policy to cost of sales and carries a reserve based on management's estimate of
future liability under the program.

EXTENDED WARRANTY SERVICE CONTRACTS -- Except as noted in the following
paragraphs, the Company offers extended warranty service contracts on behalf of
an unrelated third party (the "Warrantor") on most of its products. These
contracts are on a non-recourse basis to the Company. The Company acts solely as
an agent for the Warrantor and has no liability to the customer under the
extended service contract, nor any other material obligation to the customer or
the Warrantor. The Company includes revenue from the sale of extended warranty
contracts in net sales and records as cost of sales the amounts due to the
Warrantor

F-8
<PAGE> 61
TWEETER HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

for the cost for such contracts at the time of sale as the earnings process has
been completed.

DEFERRED WARRANTY REVENUE -- On May 13, 1996 the Company acquired
substantially all of the assets, and assumed some of the liabilities, of Bryn
Mawr Radio and Television, Inc. and affiliate ("Bryn Mawr"). Bryn Mawr sold
extended warranty contracts beyond the normal manufacturer's warranty period,
usually with terms of coverage (including the manufacturer's warranty period)
between twelve and sixty months. All revenue from the sale of extended warranty
contracts sold through July 31, 1996 was deferred and the revenue is being
amortized on a straight-line basis over the contract period. All costs related
to the contracts are charged to expense when incurred. On August 1, 1996, the
Company changed Bryn Mawr's warranty sales to a third- party provider, in
conformance with the Company's practice of selling extended warranties. As part
of the purchase, the Company assumed the liability for the deferred warranty on
Bryn Mawr's books as of the transaction date.

On May 30, 1997 the Company acquired certain assets and assumed certain
liabilities of HiFi Buys, Inc. ("HiFi Buys"). HiFi Buys sold extended warranty
contracts beyond the normal manufacturer's warranty period, usually with terms
of coverage (including the manufacturer's warranty period) between twelve and
sixty months. All revenue from the sale of extended warranty contracts sold
through August 7, 1997 was deferred and the revenue is being amortized on a
straight-line basis over the contract period. Sales commission costs related to
the contracts were also deferred and the cost is being amortized on a
straight-line basis over the contract period. On August 8, 1997, the Company
changed HiFi Buys' warranty sales to a third-party provider, in conformance with
the Company's practice of selling extended warranties. As part of the purchase,
the Company assumed the liability for the deferred warranty on HiFi Buys' books
as of the transaction date and the sales that continued through August 7, 1997.

INCOME TAXES -- The Company accounts for income taxes in accordance with
SFAS No. 109, "Accounting for Income Taxes." Under SFAS No. 109, deferred tax
liabilities or assets are recognized for the estimated tax effects of temporary
differences between financial reporting and taxable income and for loss
carry-forwards based on enacted tax laws and rates.

STORE OPENING COSTS -- Costs of a non-capital nature incurred prior to
store openings are expensed as incurred.

STOCK-BASED COMPENSATION -- The Company, for the purposes of presentation
in its consolidated financial statements, follows the precepts set forth in
Accounting Principles Board Opinion No. 25 for computing compensatory aspects of
stock-based compensation. In compliance with SFAS No. 123, "Accounting for
Stock-Based Compensation," the Company has disclosed the required pro forma
effect on net income in Note 12.

DEFERRED RENT AND RENTAL EXPENSE -- Minimum rent expense is recorded using
the straight-line method over the related lease term. The difference between
current payments required and rent expense is reflected as deferred rent.

ADVERTISING -- Net costs for advertising, including electronic media,
newspaper, buyer's guides and catalogs, which are expensed as incurred, amounted
to $3,561,573, $3,957,746 and $4,404,776 for the years ended September 30, 1997,
1998 and 1999, respectively.

F-9
<PAGE> 62
TWEETER HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

COMPREHENSIVE INCOME -- In June 1997, the FASB issued SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 130 requires that certain components
of stockholders' equity from non-owner sources be identified as "other
comprehensive income." The Company adopted SFAS No. 130 during the fiscal year
ended September 30, 1999. For the fiscal year ended September 30, 1999, the
Company's comprehensive income was comprised of net income and a net unrealized
gain on investments. The adopting of SFAS No. 130 had no impact on the fiscal
year ended September 30, 1998 and 1997. Comprehensive income is included in the
consolidated statements of stockholders' equity (deficit).

EARNINGS (LOSS) PER SHARE -- The Company computed earnings (loss) per share
in accordance with SFAS No. 128, "Earnings Per Share." Basic earnings (loss) per
share is calculated based on the weighted-average number of common shares
outstanding, adjusted for the nominal issuance of certain warrants. Diluted
earnings (loss) per share is based on the weighted average number of common
shares outstanding, adjusted for the nominal issuance of certain warrants,
shares of Preferred Stock outstanding, when dilutive, and dilutive potential
common shares (common stock options and warrants).

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

<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
---------------------------------------
1997 1998 1999
----------- ---------- ----------
<S> <C> <C> <C>
BASIC EARNINGS (LOSS) PER SHARE
("EPS"):
Numerator:
Net income.......................... $ 146,283 $5,255,200 $9,075,535
Accretion of preferred stock
dividends........................ 2,156,356 $2,514,043 $ --
----------- ---------- ----------
Net income (loss) available to common
stockholders........................ $(2,010,073) $2,741,157 $9,075,535
=========== ========== ==========
Denominator:
Weighted average common shares
outstanding...................... 2,605,752 4,233,280 14,212,598
Nominal issuance of warrants.......... 739,262 739,262 172,434
----------- ---------- ----------
Weighted average shares outstanding... 3,345,014 4,972,542 14,385,032
----------- ---------- ----------
Basic EPS............................. $ (0.60) $ 0.55 $ 0.63
=========== ========== ==========
</TABLE>

F-10
<PAGE> 63
TWEETER HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
---------------------------------------
1997 1998 1999
----------- ---------- ----------
<S> <C> <C> <C>
DILUTED EARNINGS (LOSS) PER SHARE:
Numerator............................. $(2,010,073) $5,255,200 $9,075,535
----------- ---------- ----------
Denominator:
Weighted average common shares
outstanding...................... 3,345,014 4,972,542 14,385,032
Potential common stock outstanding.. -- 5,095,064 1,587,470
----------- ---------- ----------
Total................................. 3,345,014 10,067,606 15,972,502
----------- ---------- ----------
Diluted EPS........................... $ (0.60) $ 0.52 $ 0.57
=========== ========== ==========
</TABLE>

RECENT ACCOUNTING PRONOUNCEMENTS -- During 1999, the Company implemented
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information." The Company operates in one business segment and therefore SFAS
No. 131 had no impact on the Company's consolidated financial statements.

The table below sets forth the approximate percentages of revenues for each
of the Company's primary product categories for its fiscal years ended September
30, 1997, September 30, 1998 and September 30, 1999, respectively. The
percentage of revenues represented by each product category may be affected by,
among other factors, competition, economic conditions, consumer trends, the
introduction into the market of new products, changes in the Company's product
mix, acquisitions of stores with different product mixes, and the timing of
marketing events. The historical percentages set forth below may not be
indicative of revenue percentages for future periods:

PERCENTAGE OF REVENUES

<TABLE>
<CAPTION>
FISCAL YEARS ENDED
SEPTEMBER 30,
--------------------
PRODUCT CATEGORY 1997 1998 1999
- ---------------- ---- ---- ----
<S> <C> <C> <C>
Audio Equipment(1)........................................ 33% 33% 32%
Video Equipment(2)........................................ 36% 43% 42%
Mobile Equipment and Other(3)............................. 31% 24% 26%
</TABLE>

- -------------------------

(1) Includes speakers, cassette decks, receivers, turntables, compact disc
players, mini disc players, amplifiers, preamplifiers, and portable audio
equipment.

(2) Includes video cassette players, camcorders, televisions, projection
televisions, DVD players, and satellites.

F-11
<PAGE> 64
TWEETER HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(3) Includes car decks, amplifiers and speakers, car security products,
navigation equipment, cellular phones, audio and video accessories, and
extended performance guaranties.

During 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 was not required to be
implemented until fiscal year 2000. In June 1999, the FASB issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities-Deferral of the
Effective Date of FASB Statement No. 133 -- an amendment of FASB Statement No.
133." SFAS No. 137 delayed the original implementation date of SFAS No. 133 by
one year. This will require that the Company implement this statement in fiscal
year 2001. Management is currently evaluating the effects that the adoption of
SFAS No. 133 will have on the consolidated financial statements.

RECLASSIFICATIONS -- Various financial statement amounts for 1997 and 1998
have been reclassified to conform to the classifications used in the September
30, 1999 consolidated financial statements.

3. CHANGES IN CAPITAL STRUCTURE

On July 21, 1998, the Company successfully completed an IPO of its common
stock, resulting in net proceeds to the Company of $32.2 million, which was used
to retire outstanding debt. The offering also required the mandatory conversion
of all of the outstanding Preferred Stock into common stock, thereby eliminating
significant rights enjoyed by the preferred stockholders, and significantly
changing the capital structure of the Company. Among other rights, the Preferred
Stock had redemption provisions that guaranteed the holders a minimum return on
investment of 15% if the shares were redeemed. Mandatory redemption was to begin
in 2001, if the Company had not successfully completed an IPO resulting in net
proceeds to the Company of at least $15.0 million. In periods prior to the IPO,
the Company accreted Preferred Stock to its redemption value with a charge to
retained earnings. Upon conversion of the Preferred Stock to common stock, the
Company eliminated all balances related to the Preferred Stock through retained
earnings and additional paid-in capital.

F-12
<PAGE> 65
TWEETER HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

4. PROPERTY AND EQUIPMENT

Major classifications of property and equipment are summarized below:

<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------------
1998 1999
----------- -----------
<S> <C> <C>
Leasehold improvements............................. $18,006,620 $24,445,597
Furniture and equipment............................ 10,185,549 13,941,439
Buildings.......................................... 4,000,003 4,650,762
Land............................................... 940,000 1,717,518
Automobiles and trucks............................. 370,074 616,126
Capitalized leases................................. -- 113,702
Construction in progress........................... 475,912 2,899,539
Leasehold interests................................ 165,000 165,000
----------- -----------
34,143,158 48,549,683
Less accumulated depreciation and amortization..... 10,165,040 14,306,442
----------- -----------
$23,978,118 $34,243,241
=========== ===========
</TABLE>

Depreciation and amortization (excluding amortization of goodwill) for the
fiscal years ended September 30, 1997, 1998 and 1999 aggregated $2,258,121,
$2,913,808 and $4,141,182, respectively.

5. ACCRUED EXPENSES

Accrued expenses consist of the following:

<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------------
1998 1999
----------- -----------
<S> <C> <C>
Merchandise received not invoiced.................. $ 1,748,947 $ 2,583,516
Fringe benefits.................................... 1,446,030 1,953,789
Compensation....................................... 2,465,064 1,729,685
Sales taxes payable................................ 1,069,249 1,574,034
Advertising........................................ 1,832,127 1,567,523
Federal income taxes payable....................... -- 1,159,878
Group insurance.................................... 255,000 390,948
Other.............................................. 3,190,407 5,237,933
----------- -----------
$12,006,824 $16,197,306
=========== ===========
</TABLE>

F-13
<PAGE> 66
TWEETER HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

6. DEFERRED WARRANTY REVENUE

As part of the acquisition of Bryn Mawr in May of 1996, the Company assumed
the deferred revenue on Bryn Mawr's books at that time. Amortization of the
deferred warranty revenue for the years ended September 30, 1997, 1998 and 1999
was $468,418, $326,247 and $203,163, respectively (see Note 2).

As part of the acquisition of HiFi Buys on May 30, 1997, the Company
assumed the deferred warranty revenue and expense related to the sale of
self-funded extended warranty contracts on HiFi Buys' books at the date of the
acquisition. Amortization of deferred warranty revenue for the years ended
September 30, 1997, 1998 and 1999 was $478,145, $1,183,234 and $906,163,
respectively (see Note 2). Self-funded extended warranty contract sales were
$276,720 in the fiscal year ended September 30, 1997.

7. DEBT

Long-term debt consists of the following:

<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------
1998 1999
---------- ----------
<S> <C> <C>
Revolving term bank loan............................. $5,250,000 $5,700,000
Other................................................ -- 52,356
---------- ----------
Subtotal............................................. 5,250,000 5,752,356
Less current portion................................. -- 35,551
---------- ----------
$5,250,000 $5,716,805
========== ==========
</TABLE>

The Company has a credit facility that matures on July 31, 2001. On March
22, 1999, the Company amended its loan agreement with the bank. Among other
things, this amendment changed (a) the maximum availability from $30,000,000 to
$50,000,000 and (b) certain financial covenants, the most restrictive of which
continue to be the maintenance of certain debt coverage and leverage ratios.
This facility also restricts the Company from paying cash dividends. The amount
outstanding under the agreement totaled $5,250,000 and $5,700,000 at September
30, 1998 and 1999, respectively, and is collateralized by the Company's
inventory, and certain other assets. The unpaid balances under this agreement
bear interest at the lender's base rate (8.25% at September 30, 1999), or LIBOR
plus 1% if the Company commits the balances for a period of thirty days or more.

8. EMPLOYEE SAVINGS PLAN

The Company has established an employee savings plan covering all
employees. Under the terms of the plan, which was adopted under Section 401(k)
of the Internal Revenue Code, the Company can match employee contributions. Such
matching contributions cannot exceed the employer's established annual
percentage of compensation, which was a maximum of 6% for the years ended
September 30, 1997, 1998 and 1999. The Company's

F-14
<PAGE> 67
TWEETER HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

contribution expense was $100,000, $290,000 and $425,000 for the years ended
September 30, 1997, 1998 and 1999, respectively.

9. COMMITMENTS AND CONTINGENCIES

The Company leases the majority of its stores, installation centers,
warehouses and administrative facilities under operating leases. The lives of
these leases range from five to twenty years with varying renewal options. The
leases provide for base rentals, real estate taxes, common area maintenance
charges and, in some instances, the payment of percentage rents based on sales
volume. Rent expense for the years ended September 30, 1997, 1998 and 1999 was
$5,978,819, $8,637,505 and $10,309,850, respectively. Percentage rent expense
was $47,243, $41,833 and $127,923 for the years ended September 30, 1997, 1998
and 1999, respectively.

Future minimum rental commitments under non-cancelable operating leases as
of September 30, 1999 are as follows:

<TABLE>
<S> <C>
Fiscal year ended September 30, 2000........................ $ 13,704,010
Fiscal year ended September 30, 2001........................ 12,195,255
Fiscal year ended September 30, 2002........................ 11,603,730
Fiscal year ended September 30, 2003........................ 10,967,086
Fiscal year ended September 30, 2004........................ 10,177,433
Thereafter.................................................. 45,920,380
------------
Total.................................................. $104,567,894
============
</TABLE>

On June 23, 1998 the Company completed the purchase of a facility in
Massachusetts to serve as the corporate headquarters, service center and
distribution center in Massachusetts. The purchase price for this facility was
$3,950,000, and the Company spent an additional $1,590,000 in related building
improvements.

Effective upon the consummation of the IPO, the Company entered into
employment agreements with certain key employees. These agreements provide for
continued employment with termination by either party. Under certain
circumstances, the key employees could receive an amount up to three times their
annual base salary.

F-15
<PAGE> 68
TWEETER HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

10. INCOME TAXES

The provision (benefit) for income taxes under SFAS No. 109 consisted of
the following:

<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------------------
1997 1998 1999
------- ---------- ----------
<S> <C> <C> <C>
Current:
Federal................................. $21,821 $2,081,039 $5,533,879
State................................... 6,101 538,121 1,346,447
------- ---------- ----------
27,922 2,619,160 6,880,326
Deferred:
Current deferral........................ 71,040 1,104,809 (829,969)
------- ---------- ----------
$98,962 $3,723,969 $6,050,357
======= ========== ==========
</TABLE>

The tax effects of significant temporary differences comprising the
Company's current and long-term net deferred tax assets are as follows:

<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------------
1998 1999
----------- -----------
<S> <C> <C>
Accruals and reserves.............................. $ 1,129,773 $ 1,611,959
Deferred revenue................................... 468,579 287,645
----------- -----------
Net deferred tax assets -- current................. 1,598,352 1,899,604
----------- -----------
Deferred rent...................................... 1,191,676 1,366,422
Depreciation....................................... 663,705 1,425,802
Deferred revenue................................... 450,384 144,536
Unrealized gain on marketable equity securities.... -- (200,960)
Intangible -- excess of tax amortization over book
amortization..................................... (3,729,048) (3,831,327)
----------- -----------
Net deferred tax liabilities -- long-term.......... (1,423,283) (1,095,527)
----------- -----------
Total net deferred tax assets...................... $ 175,069 $ 804,077
=========== ===========
</TABLE>

F-16
<PAGE> 69
TWEETER HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company has determined that it is more likely than not that it will
fully realize the deferred tax assets. Consequently, no valuation allowance was
established as of September 30, 1998 and 1999. A reconciliation between the
statutory and effective income tax rates is as follows:

<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
--------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Statutory income tax free................................. 34.0% 34.0% 35.0%
State income taxes, net of federal benefit................ 5.8 5.5 5.1
Other..................................................... 0.5 0.5 (0.1)
---- ---- ----
Effective income tax rate................................. 40.3% 40.0% 40.0%
==== ==== ====
</TABLE>

11. ACQUISITIONS

HIFI BUYS -- On May 30, 1997, the Company acquired the principal operating
assets and assumed certain liabilities of HiFi Buys. This transaction has been
accounted for as a purchase, and accordingly, the results of operations of the
Company's business relating to HiFi Buys have been included in the consolidated
statements of income since the acquisition date. The allocation of the purchase
price resulted in goodwill of $15,826,949, which is being amortized over
twenty-five years using the straight-line method. The net assets acquired at
fair market value on May 30, 1997 were allocated as follows:

<TABLE>
<S> <C>
Inventory................................................... $ 9,273,400
Property and equipment...................................... 2,771,700
Accounts receivable......................................... 1,428,800
Other assets................................................ 236,500
Accounts payable and accrued expenses....................... (9,483,100)
-----------
Net assets acquired......................................... 4,227,300
Total purchase price and related costs...................... 20,054,249
-----------
Goodwill.................................................... $15,826,949
===========
</TABLE>

F-17
<PAGE> 70
TWEETER HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

HOME ENTERTAINMENT, INC. -- On February 1, 1999, the Company acquired the
principal operating assets and assumed certain liabilities of Home
Entertainment, Inc. This transaction has been accounted for as a purchase, and
accordingly, the results of operations of the Company's business relating to
Home Entertainment, Inc. have been included in the consolidated statements of
income since the acquisition date. The allocation of the purchase price resulted
in goodwill of $5,358,452, which is being amortized over twenty-five years using
the straight-line method. The net assets acquired at fair market value on
February 1, 1999 were allocated as follows:

<TABLE>
<S> <C>
Inventory................................................... $3,489,009
Property and equipment...................................... 1,021,202
Accounts receivable......................................... 286,674
Other assets................................................ 41,632
Accounts payable and accrued expenses....................... (636,732)
----------
Net assets acquired......................................... 4,201,785
Total purchase price and related costs...................... 9,560,237
----------
Goodwill.................................................... $5,358,452
==========
</TABLE>

The following unaudited pro forma financial information reflects the
consolidated results of operations for the Company for the twelve months ended
September 30, 1998 and 1999 as though the acquisition had occurred on the first
day of each fiscal year. The pro forma operating results are presented for
comparative purposes only and do not purport to present the Company's actual
operating results or results which may occur in the future, had the acquisition
been consummated at the beginning of each fiscal year.

<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
SEPTEMBER 30,
----------------------------
1998 1999
------------ ------------
<S> <C> <C>
Net sales........................................ $256,981,310 $292,551,314
Net income....................................... 5,901,493 9,453,977
Net income available to common stockholders...... 3,387,450 9,453,977
Basic earnings per share......................... 0.68 0.66
Diluted earnings per share....................... 0.59 0.59
</TABLE>

F-18
<PAGE> 71
TWEETER HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

DOW STEREO/VIDEO, INC. -- On July 1, 1999, the Company acquired the capital
stock of DOW Stereo/ Video, Inc. This transaction has been accounted for as a
purchase and, accordingly, the results of operations of the Company's business
relating to DOW Stereo/ Video, Inc. have been included in the consolidated
statements of income since the acquisition date. The allocation of the purchase
price resulted in goodwill of $5,363,992, which is being amortized over
twenty-five years using the straight-line method. The net assets acquired at
fair market value on July 1, 1999 were allocated as follows:

<TABLE>
<S> <C>
Inventory................................................... $ 6,091,953
Property and equipment...................................... 503,259
Accounts receivable......................................... 383,250
Other assets................................................ 113,947
Accounts payable and accrued expenses....................... (3,650,015)
-----------
Net assets acquired......................................... 3,442,394
Total purchase price and related costs (including the
issuance of 32,290 shares of common stock for $600,000)... 8,806,386
-----------
Goodwill.................................................... $ 5,363,992
===========
</TABLE>

<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
SEPTEMBER 30,
----------------------------
1998 1999
------------ ------------
<S> <C> <C>
Net sales........................................ $272,994,316 $315,031,844
Net income....................................... 5,751,243 10,101,475
Net income available to common stockholders...... 3,237,200 10,101,475
Basic earnings per share......................... 0.65 0.70
Diluted earnings per share....................... 0.57 0.63
</TABLE>

Accumulated amortization of goodwill was approximately $2,144,000 and
$3,200,000 for the years ended September 30, 1998 and 1999, respectively.

ELECTRONIC ENVIRONMENTS -- On September 3, 1999, the Company purchased
certain assets and assumed certain liabilities of Electronic Environments, a
custom home installation company. Total purchase price and related cost amounted
to approximately $520,000, including the issuance of 12,532 shares of common
stock for $200,000. The purchase price was allocated primarily to goodwill and
property and equipment. This transaction has been

F-19
<PAGE> 72
TWEETER HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

accounted for as a purchase. The results of operations for the acquired entity
in 1999 were not significant. Accordingly, pro forma information has not been
presented.

12. STOCKHOLDERS' EQUITY (DEFICIT)

COMMON STOCK -- Holders of common stock are entitled to dividends if
declared by the Board of Directors, and each share carries one vote. Currently
the Company's credit facility contains a restriction preventing the payment of
cash dividends. The common stock has no cumulative voting, redemption or
preemptive rights.

During the period from March 7, 1997 through May 30, 1997, the Company
issued warrants to purchase 74,276 shares of common stock to certain
stockholders who participated in a Warrant and Debenture Commitment relating to
a certain bridge loan financing agreement. The warrants had a five year term and
an exercise price of $3.43 per share. The Company hired an independent appraiser
to determine the fair value of the warrants as of the issue date. The warrants
were issued at or above the fair value of the underlying stock consequently, the
Company has not assigned value to nor recorded an expense for this warrant
issuance. As of September 30, 1999 there were 16,796 warrants outstanding and
exercisable.

The weighted average exercise price for all warrants outstanding at
September 30, 1998 and 1999, respectively, is $1.07 and $3.23. The following
table summarizes information regarding stock warrants outstanding at September
30, 1999:

<TABLE>
<CAPTION>
NUMBER
OUTSTANDING AND WEIGHTED-
AVERAGE EXERCISABLE AT AVERAGE
EXERCISE SEPTEMBER 30, REMAINING
PRICES 1999 LIFE (YEARS)
- -------- --------------- ------------
<S> <C> <C>
$3.23 16,796 7.40
</TABLE>

INITIAL PUBLIC OFFERING -- On July 21, 1998, the Company completed an IPO
of 5,420,000 shares of common stock. The Company sold 4,400,000 shares, and
1,020,000 shares were sold by existing stockholders. Net proceeds received by
the Company were $32,200,000. Net proceeds were used to repay indebtedness.
There were no payments made to directors or officers of the Company, or to
persons owning ten percent or more of any class of equity securities of the
Company or to any affiliate of the Company, except that the Company repaid
approximately $5.0 million on account of a promissory note to one of the
institutional investors. This investor beneficially owned 11.2% of the Company's
common stock, immediately prior to the Offering.

SECONDARY PUBLIC OFFERING -- On February 2, 1999, the Company completed a
secondary offering of 5,000,000 shares of common stock. The Company sold
1,000,000, and existing stockholders sold 4,000,000 shares. The Company also
covered the underwriter's overallotment and issued 750,000 additional shares.
Total net proceeds received by the Company were $24,300,000. The Company used
these net proceeds to repay $5,900,000 of existing indebtedness under its
revolving credit facility, fund the Home Entertainment

F-20
<PAGE> 73
TWEETER HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

acquisition for approximately $9,600,000, and fund the DOW Stereo/Video
acquisition for approximately $8,800,000, and for working capital and general
corporate purposes.

SHELF REGISTRATION STATEMENT -- On April 13, 1999, the Company filed a
shelf registration statement on Form S-4 with the Securities and Exchange
Commission, which became effective on May 4, 1999. The registration statement
related to 4,000,000 shares of common stock of the Company. These shares may be
issued from time to time in the future by the Company in connection with the
acquisition of assets, business or securities of other companies, whether by
purchase, merger or any other form of business combination.

COMMON STOCK INCENTIVE PLANS -- In November of 1995, the Company
implemented a stock option plan, under which incentive and nonqualified stock
options may be granted to management, key employees and outside directors to
purchase shares of the Company's common stock. The exercise price for incentive
stock options for employees and nonqualified options for outside directors range
from $0.31 to $18.688 per share. Options are generally exercisable over a period
from one to ten years from the date of the grant and are dependent on the
vesting schedule associated with the grant. Options for 1,136,548, 1,316,152 and
1,283,362 shares were exercisable under the 1995 Stock Option Plan at September
30, 1997, 1998 and 1999, respectively.

On June 1, 1998, the Company terminated the 1995 Stock Option Plan and
adopted the 1998 Stock Option and Incentive Plan (the "1998 Plan") to provide
incentives to attract and retain executive officers, directors, key employees
and consultants. In addition, the number of shares of common stock issuable
under the 1998 Plan will increase, on each anniversary date of the adoption of
the 1998 Plan, to that number of shares equal to the lesser of (i) 2% of the
total number of shares of common stock that are issued and outstanding on a
fully diluted basis on each such anniversary date or (ii) 300,000 shares of
common stock.

As options granted under the 1998 Plan are exercised, the number of shares
represented by such previously outstanding options will again become available
for issuance under the 1998 Plan up to a maximum of 200,000 shares of common
stock annually. There were 135,760 shares exercisable under the 1998 Stock
Option Plan at September 30, 1999. There were 2,131,372 shares available for
future grants at September 30, 1999.

The 1998 Plan is administered by the Compensation Committee of the Board of
Directors and will allow the Company to issue one or more of the following:
stock options (incentive stock options and non-qualified options), restricted
stock awards, stock appreciation rights, common stock in lieu of certain cash
compensation, dividend equivalent rights, performance shares and performance
units (collectively, "Plan Awards"). The 1998 Plan will expire five years
following its adoption. Awards made thereunder and outstanding at the expiration
of the 1998 Plan will survive in accordance with their terms. Other than stock
options, no Plan Awards were granted during 1998 and 1999.

In any plan year no more than 25% of the shares reserved for issuance under
the 1998 Plan may be used for Plan Awards consisting of restricted stock. All
grants of restricted stock under the 1998 Plan will be subject to vesting over
seven years, subject, however, at the Administrator's discretion, to
acceleration of vesting upon the achievement of specified performance goals.

F-21
<PAGE> 74
TWEETER HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The 1998 Plan also provides for the grant or issuance of Plan Awards to
directors of the Company who are not employees of the Company. These options
will vest over a period of three years, provided such non-employee director is
not removed before the end of his or her term. On June 1, 1999, the Board of
Directors authorized the grant of options ("June 1999 Options") under the 1998
Plan, exercisable for a total of 28,000 shares of common stock, to certain
officers, directors and employees of the Company.

The following summarizes transactions under the stock option plans:

<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
NUMBER OF PER SHARE EXERCISE
SHARES OPTION PRICE PRICE
--------- ---------------- ---------
<S> <C> <C> <C>
October 1, 1996..................... 1,208,848 $ 0.31 to $ 3.55 $ 1.16
Granted........................... 465,204 $ 3.23 to $ 4.04 $ 3.69
Exercised......................... -- -- --
Canceled.......................... 22,578 $ 0.31 to $ 3.23 $ 0.89
--------- ---------------- ------
September 30, 1997.................. 1,651,474 $ 0.31 to $ 4.04 $ 1.86
Granted........................... 467,140 $ 3.62 to $ 8.50 $ 7.88
Exercised......................... -- -- --
Canceled.......................... 20,564 $ 0.31 to $ 3.62 $ 1.62
--------- ---------------- ------
September 30, 1998.................. 2,098,050 $ 0.31 to $ 8.50 $ 3.24
Granted........................... 707,300 $13.50 to $18.69 $15.89
Exercised......................... 291,274 $ 0.31 to $ 8.50 $ 2.08
Canceled.......................... 57,074 $ 0.31 to $15.31 $10.12
--------- ---------------- ------
September 30, 1999.................. 2,457,002 $ 0.31 to $18.69 $ 6.84
</TABLE>

The following summarizes information about all stock options outstanding at
September 30, 1999:

F-22
<PAGE> 75
TWEETER HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
WEIGHTED- NUMBER OF
SHARES AVERAGE OPTIONS
OUTSTANDING REMAINING EXERCISABLE
AT SEPTEMBER 30, CONTRACTUAL AT SEPTEMBER 30,
EXERCISE PRICES 1999 LIFE (YEARS) 1999
- --------------- ---------------- ------------- ----------------
<S> <C> <C> <C>
$ 4.04....................... 105,780 7.8 105,780
$ 7.11....................... 656 8.4 328
$ 8.50....................... 389,246 4.8 135,760
$13.50....................... 12,000 5.5 --
$14.50....................... 8,000 5.9 --
$14.82....................... 28,000 5.6 --
$15.32....................... 41,000 5.3 --
$15.50....................... 3,000 5.9 --
$16.07....................... 580,300 5.8 --
$16.13....................... 5,000 6.0 --
$18.69....................... 2,000 6.0 --
--------- ---------
Total........................ 2,457,002 6.2 1,419,122
========= =========
</TABLE>

The weighted-average exercise price of all options outstanding as of
September 30, 1998 and 1999 is $3.24 and $6.84, respectively.

For purposes of determining the disclosures required by SFAS No. 123, the
fair value of each stock option granted in 1997, 1998 and 1999 under the
Company's stock option plan was estimated on the date of grant using the
Black-Scholes option-pricing model. Key assumptions used to apply this pricing
model were as follows:

<TABLE>
<CAPTION>
1997 1998 1999
---- ---- -----
<S> <C> <C> <C>
Risk free interest rate................................. 5.69% 5.67% 5.53%
Expected life of option grants (years).................. 4.0 3.3 3.0
Expected volatility of underlying stock................. 54.5% 54.5% 80.57%
</TABLE>

Had compensation cost for stock option grants during the years ended
September 30, 1997, 1998 and 1999 been determined under the provisions of SFAS
No. 123, the Company's net income (before accretion on Preferred Stock) would
have been approximately $143,000, $5,197,000 and $8,873,000, respectively. Pro
forma diluted earnings (loss) per share would have been $(.60), $.52 and $.56
for the years ended September 30, 1997, 1998 and 1999, respectively.

EMPLOYEE STOCK PURCHASE PLAN -- During fiscal 1999, the Company adopted an
Employee Stock Purchase Plan (ESPP). The ESPP was effective upon approval by the
stockholders of the Company and will continue in effect for a term of twenty
(20) years, unless terminated sooner. The Company has the right to terminate the
Plan at any time. The Plan is intended to be an Employee Stock Purchase Plan
under Section 423 of the Internal

F-23
<PAGE> 76
TWEETER HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Revenue Code of 1986, as amended. Subject to adjustment pursuant to the Stock
Purchase Plan, the aggregate number of shares of Common Stock which may be sold
under the Stock Purchase Plan is 1,000,000.

13. RELATED PARTY TRANSACTIONS

In May 1996, in connection with the acquisition of Bryn Mawr, the Company
entered into a consulting agreement with Bryn Mawr's former owner and a former
director of the Company ("BMFO") for a term of four years (the "Consulting
Period"). This consulting agreement was amended as of April 23, 1997 and
currently the Company is obligated to pay BMFO a monthly salary of approximately
$21,000 for each month during the first year after the commencement date of the
agreement, and approximately $4,200 for each month during years three and four
of the Consulting Period plus out-of-pocket expenses. No compensation or
expenses were to be paid to BMFO for the second year of the Consulting Period.
The Company also entered into certain lease agreements for three facilities in
Pennsylvania with an affiliate of BMFO. Total yearly payments under these
agreements aggregates to approximately $670,000.

14. EXTRAORDINARY ITEM

In connection with the IPO completed on July 21, 1998, the Company recorded
an extraordinary charge for the early extinguishment of debt. The Company wrote
off deferred financing costs of $286,009 related to the 1997 Notes. The Company
also wrote off $280,136 representing the unamortized portion of the discount
related to the warrants issued in conjunction with the 1997 Notes. The gross
amount of the extraordinary item was $566,145. The net effect of $339,687, after
tax benefit of $244,557, was recorded in the consolidated statement of income as
an extraordinary item.

15. LONG-TERM INVESTMENTS

The cost and fair value of long-term investments at September 30, 1999 were
as follows:

<TABLE>
<CAPTION>
HISTORICAL FAIR
COST VALUE
---------- ----------
<S> <C> <C>
Marketable equity securities......................... $1,343,886 $1,846,366
</TABLE>

At September 30, 1999 the unrealized gain of $301,520 (net of tax effect)
was included in accumulated other comprehensive income reflected in
stockholders' equity (deficit).

F-24
<PAGE> 77
TWEETER HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

16. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

The following is a tabulation of the quarterly results of operations for
the fiscal years ended September 30, 1998 and 1999, respectively.

<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1997 1998 1998 1998
------------ --------- -------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
FISCAL YEAR 1998
Total revenue................... $74,617 $54,512 $49,676 $53,483
Gross profit.................... 25,381 19,468 17,419 18,754
Net income...................... 3,173 1,139 204 738
Net income (loss) available to
common stockholders........... 2,381 347 (588) 599
Basic earnings (loss) per
share......................... 0.71 0.11 (0.18) 0.06
Diluted earnings (loss) per
share......................... 0.35 0.09 (0.18) 0.06
</TABLE>

<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1998 1999 1999 1999
------------ --------- -------- -------------
<S> <C> <C> <C> <C>
FISCAL YEAR 1999
Total revenue................... $86,784 $62,236 $59,653 $74,614
Gross profit.................... 29,551 22,337 21,568 27,083
Net income...................... 4,557 1,440 969 2,110
Basic earnings per share........ 0.36 0.10 0.07 0.14
Diluted earnings per share...... 0.32 0.09 0.06 0.13
</TABLE>

17. SUBSEQUENT EVENTS

On October 4, the Company formed a joint-venture with Cyberian Outpost,
Inc. (Nasdaq: COOL), organized as Tweeter.Outpost.com, LLC, to jointly market
and sell consumer electronics over the Internet. The Tweeter.Outpost.com site
was launched on October 19, 1999, with a primary URL of Tweeter.Outpost.com. The
Company also made an equity investment of $1.0 million dollars in the common
stock of Cyberian Outpost. This 50/50 joint venture was capitalized with
$2,500,000 from each party, primarily to fund inventory procurement.

**********

F-25
<PAGE> 78

TWEETER HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEET

DECEMBER 31, 1999

(UNAUDITED)

<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 3,727,724
Accounts receivable, net of allowance for doubtful
accounts of $652,000................................... 18,597,703
Inventory................................................. 67,891,889
Deferred tax assets....................................... 1,899,604
Prepaid expenses and other current assets................. 576,809
------------
Total current assets.............................. 92,693,729
Investment in joint venture............................... 2,782,552
Long-term investments..................................... 2,602,714
Property and equipment, net............................... 37,101,112
Other assets, net......................................... 124,124
Goodwill, net............................................. 29,928,095
------------
Total............................................. $165,232,326
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt......................... $ 33,384
Amount due to bank........................................ 8,232,174
Accounts payable.......................................... 19,582,453
Accrued expenses.......................................... 32,133,124
Customer deposits......................................... 3,490,924
Deferred warranty......................................... 638,606
------------
Total current liabilities......................... 64,110,665
------------
LONG-TERM DEBT:
Notes payable to bank..................................... 27,707
------------
OTHER LONG-TERM LIABILITIES:
Rent related accruals..................................... 3,308,340
Deferred warranty......................................... 169,716
Deferred tax liabilities.................................. 1,398,066
Other long-term liabilities............................... 50,820
------------
Total other long-term liabilities................. 4,926,942
------------
Total liabilities................................. 69,065,314
------------
STOCKHOLDERS' EQUITY
Preferred Stock, $.01 par value, 10,000,000 shares
authorized, no shares issued and outstanding........... --
Common stock, $.01 par value, 30,000,000 shares
authorized; 17,225,215 shares issued................... 172,252
Additional paid in capital................................ 73,540,706
Accumulated other comprehensive income.................... 755,329
Retained earnings......................................... 23,604,885
------------
Total............................................. 98,073,172
Less treasury stock: 1,896,007 shares at cost............. (1,906,160)
------------
Total stockholders' equity........................ 96,167,012
------------
Total............................................. $165,232,326
============
</TABLE>

See notes to unaudited condensed consolidated financial statements.

F-26
<PAGE> 79

TWEETER HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

(UNAUDITED)

<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
---------------------------
1998 1999
------------ ------------
<S> <C> <C>
Total revenue............................................... $ 86,784,153 $124,813,563
Cost of sales............................................... (57,233,284) (79,165,067)
------------ ------------
Gross Profit.............................................. 29,550,869 45,648,496
Selling expenses............................................ 17,498,748 26,981,949
Corporate, general and administrative expenses.............. 4,040,692 4,647,302
Amortization of goodwill.................................... 215,400 331,892
------------ ------------
Income from operations...................................... 7,796,029 13,687,353
Income from joint venture................................... -- 107,349
Interest expense............................................ 200,498 258,197
------------ ------------
Income before income taxes.................................. 7,595,531 13,536,505
Income tax expense.......................................... 3,038,212 5,414,602
------------ ------------
NET INCOME.................................................. $ 4,557,319 $ 8,121,903
============ ============
Basic earnings per share.................................... $ 0.36 $ 0.53
============ ============
Diluted earnings per share.................................. $ 0.32 $ 0.48
============ ============
Weighted average shares outstanding
Basic..................................................... 12,713,122 15,276,825
Diluted................................................... 14,204,200 17,044,278
</TABLE>

See notes to unaudited condensed consolidated financial statements

F-27
<PAGE> 80

TWEETER HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED)

<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
--------------------------
1998 1999
------------ -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 4,557,319 $ 8,121,903
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 1,084,598 1,570,250
Equity earnings in joint venture investment............ -- (107,349)
Gain on disposal of equipment.......................... -- (10,300)
Changes in operating assets and liabilities, net of
effects from acquisition of business:
Increase in accounts receivable...................... (5,360,826) (9,040,857)
Increase in inventory................................ (5,523,537) (5,756,373)
Decrease in prepaid expenses and other current
assets............................................ 103,570 179,825
Increase in accounts payable accrued expenses........ 14,055,406 17,141,132
Increase in customer deposits........................ 1,031,643 1,050,834
Increase in deferred rent............................ 105,829 110,683
Decrease in deferred warranty........................ (311,877) (203,055)
Decrease in other liabilities........................ (27,720) (228,680)
------------ -----------
Net cash provided by operating activities......... 9,714,405 12,828,013
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment........................ (3,659,478) (4,065,582)
Proceeds from sale of property and equipment.............. -- 10,300
Acquisition of business................................... -- (100,321)
------------ -----------
Net cash used in investing activities............. (3,659,478) (4,155,603)
------------ -----------
CASH FLOWS FROM FINANCIAL ACTIVITIES:
Amount due to bank........................................ 2,331,014 2,209,118
Payments of long-term debt................................ (5,250,000) (5,714,299)
Equity transactions....................................... -- 236,203
Investment in joint venture............................... -- (2,675,203)
------------ -----------
Net cash used in financial activities............. (2,918,986) (5,944,181)
------------ -----------
INCREASE IN CASH AND CASH EQUIVALENTS....................... 3,135,941 2,728,229
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 776,709 999,495
------------ -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 3,912,650 $ 3,727,724
============ ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest............................................... $ 567,287 $ 203,003
============ ===========
Taxes.................................................. $ 1,322,936 $ 989,000
============ ===========
</TABLE>

See notes to unaudited condensed consolidated financial statements
F-28
<PAGE> 81

TWEETER HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

The unaudited condensed consolidated financial statements of Tweeter Home
Entertainment Group, Inc. and its subsidiaries ("Tweeter" or the "Company"),
included herein, should be read in conjunction with the consolidated financial
statements and notes thereto included in Tweeter's Annual Report on Form 10-K
for the fiscal year ended September 30, 1999.

2. ACCOUNTING POLICIES

The unaudited consolidated financial statements of Tweeter have been
prepared in accordance with U.S. generally accepted accounting principles. In
the opinion of management, all adjustments (consisting only of normal recurring
accruals) considered necessary for a fair presentation of the interim
consolidated financial statements have been included. Operating results for the
three-month period ended December 31, 1999 are not necessarily indicative of the
results that may be expected for the fiscal year ending September 30, 2000.
Tweeter typically records its highest revenue and earnings in this first fiscal
quarter.

3. EARNINGS PER SHARE

Tweeter computed earnings per share in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share." Basic
earnings per share is calculated based on the weighted average number of common
shares outstanding, adjusted, in 1998, for the nominal issuance of certain
warrants. Diluted earnings per share is based on the weighted average number of
common shares outstanding, adjusted for the nominal issuance of certain
warrants, shares of preferred stock outstanding, when dilutive, and dilutive
potential common shares (common stock options and warrants).

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

<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
-------------------------
1998 1999
----------- -----------
<S> <C> <C>
BASIC EARNINGS PER SHARE:
Numerator:
Net income................................................ $ 4,557,319 $ 8,121,903
Denominator:
Weighted average common shares outstanding................ 12,393,448 15,276,825
Nominal issuance of warrants.............................. 319,674 --
----------- -----------
Weighted average shares outstanding......................... 12,713,122 15,276,825
----------- -----------
Basic earnings per share.................................... $ 0.36 $ 0.53
=========== ===========
DILUTED EARNINGS PER SHARE:
Numerator................................................... $ 4,557,319 $ 8,121,903
Denominator:
Weighted average shares outstanding....................... 12,713,122 15,276,825
Potential common stock outstanding........................ 1,491,078 1,767,453
----------- -----------
Total....................................................... 14,204,200 17,044,278
----------- -----------
Diluted earnings per share.................................. $ 0.32 $ 0.48
=========== ===========
</TABLE>

F-29
<PAGE> 82

TWEETER HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

4. COMPREHENSIVE INCOME

Comprehensive income for the three months ended December 31, 1998 and
December 31, 1999 was as follows:

<TABLE>
<CAPTION>
THREE MONTHS
ENDED
DECEMBER 31,
---------------------
1998 1999
---- ----
<S> <C> <C>
Net income....................................... 4,557,319 8,121,903
Change in fair value of long-term investment (net
of tax)........................................ -- 453,809
--------- ---------
Comprehensive income............................. 4,557,319 8,575,712
========= =========
</TABLE>

5. INVESTMENT IN JOINT VENTURE

On October 4, 1999, Tweeter formed a joint venture with Outpost.com,
organized as Tweeter.Outpost.com, LLC, to jointly market and sell consumer
electronics over the Internet. The Tweeter.Outpost.com site was launched on
October 19, 1999. This joint venture was capitalized with $2.5 million from each
party, primarily to fund inventory procurement. Profits and losses generated
from this entity are split evenly. The joint venture is accounted for by the
Company under the equity method. The investment is presented on the balance
sheet as "Investment in joint venture". As of December 31, 1999, total assets
and total liabilities of the joint venture amounted to $7,233,944 and
$2,019,246, respectively. For the fiscal quarter ended December 31, 1999, the
joint venture had total revenue of $1,538,852 and net income of $214,698.

6. SOUND INSTALLATIONS

On November 1, 1999, the Company purchased certain assets and assumed
certain liabilities of Sound Installations, Inc., a custom home installation
company. Total purchase price and related cost amounted to approximately
$210,000, including the issuance of 5,124 shares of common stock with a market
value at issuance of $110,000. The purchase price was allocated primarily to
goodwill and property and equipment. This transaction has been accounted for as
a purchase. The results of operations for the acquired entity in this fiscal
quarter were not significant. Accordingly, pro forma information has not been
presented.

7. SUBSEQUENT EVENTS

On January 11, 2000, Tweeter filed a registration statement on Form S-3
with the Securities and Exchange Commission. The prospectus relates to 2,550,000
shares of Tweeter Home Entertainment Group, Inc. common stock of which 550,000
will be offered by selling stockholders and 2,000,000 will be offered by the
Company. The primary purpose of the offering is to raise cash for the Company
for working capital and for other general corporate purposes, including possible
strategic acquisitions. This registration statement has not yet been declared
effective.

F-30
<PAGE> 83
TWEETER HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

On January 25, 2000, the shareholders approved an increase in the
authorized common stock from 30,000,000 to 60,000,000 shares.

8. NEW ACCOUNTING PRONOUNCEMENTS

During 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities". SFAS No. 133 was not required to
be implemented until fiscal year 2000. In June 1999, the FASB issued SFAS No.
137, "Accounting for Derivative Instruments and Hedging Activities-Deferral of
the Effective Date of FASB Statement No. 133 -- an amendment of FASB Statement
No. 133." SFAS No. 137 delayed the original implementation date of SFAS No. 133
by one year. This will require that the Company implement this statement in
fiscal year 2001. Management is currently evaluating the effects that the
adoption of SFAS No. 133 will have on the consolidated financial statements.

On December 3, 1999, the Securities and Exchange Commission published Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." This SAB summarizes certain of the staff's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. This SAB requires, among other things, that revenues derived from
products or services in which companies typically act as an agent be reported on
a net basis. This SAB is required to be implemented by the Company in fiscal
year 2001. Had SAB No. 101 been implemented for all periods presented, total
revenue and cost of sales would have decreased by approximately $1.3 million for
the three months ended December 31, 1999 and by $0.8 million for the three
months ended December 31, 1998. The adoption of SAB No. 101 is not expected to
have any other impact on results of operations.

F-31
<PAGE> 84
DESCRIPTION OF INSIDE BACK COVER PAGE GRAPHICS

The back cover page graphics consist of a solid blue field with gold lettering
that reads "WHERE WE ARE," a geographic map which measures approximately 7.5
inch (width) by 4.75 inch (length) (based on an 8.5 inch by 11 inch page)
horizontally on the upper half of the page, and five logos vertically aligned in
the lower half of the page.

The horizontally aligned geographic map on the upper half of the page depicts
the regions of the U.S.A. in which Tweeter has stores. Blue, red, yellow, green
and purple dots mark store locations and states in which Tweeter stores are
located are offset by gold fill in the maps.

The five logos vertically aligned in the lower half of the page read from top
to bottom as follows:

1. "Tweeter, etc.;"

2. "Bryn Mawr Stereo & Video;"

3. "HiFi Buys;"

4. "Home Entertainment;" and

5. "DOW Stereo/Video."

<PAGE> 85

YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE
NOT AUTHORIZED ANYONE TO PROVIDE INFORMATION DIFFERENT FROM THAT CONTAINED IN
THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO BUY, SHARES OF
COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE PERMITTED. THE
INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF THE DATE OF THIS
PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS PROSPECTUS OR OF ANY SALE
OF OUR COMMON STOCK.

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 8
Special Note Regarding Forward-
Looking Statements.................. 13
Price Range of our Common Stock....... 14
Use of Proceeds....................... 14
Dividend Policy....................... 14
Capitalization........................ 15
Selected Consolidated Financial and
Operating Data...................... 16
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 18
Business.............................. 31
Management............................ 43
Principal and Selling Stockholders.... 46
Underwriting.......................... 48
Legal Matters......................... 50
Experts............................... 50
Information Incorporated by
Reference........................... 50
Where You Can Find Additional
Information......................... 51
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>

- -----------------------------------------------------------

[TWEETER HOME ENTERTAINMENT GROUP LOGO]
2,550,000 SHARES
COMMON STOCK

DEUTSCHE BANC ALEX. BROWN

PAINEWEBBER INCORPORATED

DAIN RAUSCHER WESSELS
PROSPECTUS

, 2000
<PAGE> 86

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The following table sets forth the various expenses to be incurred in
connection with the sale and distribution of the securities being registered.
Tweeter will pay all of these expenses.

<TABLE>
<S> <C>
SEC registration fee........................................ $ 22,403
NASD filing fee............................................. 8,987
Nasdaq listing fee.......................................... 17,500
Printing, engraving and mailing expenses.................... 350,000
Legal fees and expenses..................................... 200,000
Accounting fees and expenses................................ 250,000
Transfer agent fees and expenses............................ 5,000
Miscellaneous............................................... 46,110
--------
Total.................................................. $900,000
========
</TABLE>

ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

Tweeter's Amended and Restated Articles of Incorporation generally limits
the liability of its Directors to Tweeter to the fullest extent permitted from
time to time by Delaware law. The Delaware General Corporation Law permits, but
does not require, Tweeter to indemnify its directors, officers, employees or
agents, and expressly provides that the indemnification provided for under the
Delaware General Corporation Law shall not be deemed exclusive of any
indemnification right under any By-law, vote of stockholders or disinterested
directors, or otherwise. The Delaware General Corporation Law permits
indemnification against expenses and certain other liabilities arising out of
legal actions brought or threatened against such persons for their conduct on
behalf of a corporation; provided, however, that each such person acted in good
faith and in a manner that he reasonably believed was in or not opposed to
Tweeter's best interests and, in the case of a criminal proceeding, had no
reasonable cause to believe his or her conduct was unlawful. The Delaware
General Corporation Law does not allow indemnification of directors in the case
of an action by or in the right of a corporation (including stockholder
derivative suits) unless the directors successfully defend the action or
indemnification is ordered by the court.

Tweeter's Amended and Restated Articles of Incorporation provides that
Tweeter's directors and executive officers shall be and, in the discretion of
the Board of Directors, other officers and non-officer employees may be
indemnified by Tweeter to the fullest extent authorized by Delaware law, as it
now exists or may in the future be amended, against all expenses and liabilities
actually and reasonably incurred in connection with service for or on behalf of
Tweeter. The By-laws also provide that the right of directors and officers to
indemnification shall be a contract right and shall not be exclusive of any
other right now possessed or hereafter acquired under any By-law, agreement,
vote of stockholders, or otherwise. The Charter contains a provision permitted
by Delaware law that generally eliminates the personal liability of directors
for monetary damages for breaches of their

II-1
<PAGE> 87

fiduciary duty, including breaches involving negligence or gross negligence in
business combinations, unless the director has breached his or her duty of
loyalty, failed to act in good faith, engaged in intentional misconduct or a
knowing violation of law, paid a dividend or approved a stock repurchase in
violation of the Delaware General Corporation Law or obtained an improper
personal benefit. The provision does not alter a director's liability under the
Federal securities laws. In addition, this provision does not affect the
availability of equitable remedies, such as an injunction or rescission, for
breach of fiduciary duty.

Tweeter also has in effect a directors and officers liability insurance
policy.

Reference is also made to the underwriting agreement, which is filed as
Exhibit 1.1 to this registration statement.

ITEM 16. EXHIBITS.

(a) See the Exhibit Index included immediately preceding the exhibits to
this registration statement.

ITEM 17. UNDERTAKINGS.

(a) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.

(b) The undersigned registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to under Rule 424(b)(1)
or (4) or 497(h) under the Securities Act shall be deemed to be part of
this registration statement as of the time it was declared effective; and

(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and that offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.

II-2
<PAGE> 88

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this amendment No. 1 to
the registration statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Boston, Commonwealth of Massachusetts
on February 4, 2000.

TWEETER HOME ENTERTAINMENT
GROUP, INC.

By: /s/ JOSEPH MCGUIRE
------------------------------------
Joseph McGuire
Vice President and Chief Financial
Officer

In accordance with the requirements of the Securities Act of 1933, this
registration statement has been duly signed below by the following persons in
the capacities and on the dates indicated.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----

<C> <S> <C>
* Director and Chairman of the Board February 4, 2000
- ------------------------------------------
Samuel Bloomberg

* Director, Chief Executive Officer and President February 4, 2000
- ------------------------------------------ (Principal Executive Officer)
Jeffrey Stone

/s/ JOSEPH MCGUIRE Vice President and Chief Financial Officer February 4, 2000
- ------------------------------------------ (Principal Financial Officer and Principal
Joseph McGuire Accounting Officer)

* Director February 4, 2000
- ------------------------------------------
Jeffrey Bloomberg

* Director February 4, 2000
- ------------------------------------------
Matthew Bronfman

* Director February 4, 2000
- ------------------------------------------
Michael Cronin

* Director February 4, 2000
- ------------------------------------------
Steven Fischman
</TABLE>

<S> <C>
*By: /s/ JOSEPH MCGUIRE
--------------------------------
Joseph McGuire
Attorney-in-fact
</TABLE>

II-3
<PAGE> 89

<TABLE>
<CAPTION>
EXHIBIT INDEX

(a) EXHIBITS:

EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S>
**1.1 -- Underwriting Agreement.

*4.1 -- Specimen certificate representing the common stock.

*4.2 -- Shareholders' Rights Agreement.

**5.1 -- Opinion of Goulston & Storrs, P.C.

***23.1 -- Consent of Deloitte & Touche LLP

**23.2 -- Consent of Goulston & Storrs, P.C., counsel to Tweeter
(included in Exhibit 5.1).

**24.1 -- Power of Attorney
</TABLE>

- -------------------------

* Filed as an exhibit to the Registrant's Registration Statement on Form S-1
filed on April 24, 1998 (Registration Number 333-51015) or amendments
thereto and incorporated herein by reference.

** Filed as an exhibit to the Registrant's Registration Statement on Form S-3
filed on January 11, 2000 (Registration Number 333-94433) and incorporated
herein by reference.

*** File herewith.

II-4

<PAGE> 1

EXHIBIT 23.1

INDEPENDENT AUDITORS' CONSENT

We consent to the incorporation by reference in this Pre-Effective Amendment
No. 1 to Registration Statement No. 333-94433 of Tweeter Home Entertainment
Group, Inc. and Subsidiaries on Form S-3 of our reports dated November 18, 1999
included in the Annual Report on Form 10-K of Tweeter Home Entertainment Group,
Inc. and Subsidiaries for the year ended September 30, 1999, and to the use of
our report dated November 18, 1999, appearing in the Prospectus which is part
of this Registration Statement. We also consent to the reference to us under
the heading "Expert" in such Prospectus.

/s/ Deloitte & Touche LLP

Boston, Massachusetts
February 4, 2000