UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

Commission file number: 0-24091

Tweeter Home Entertainment Group, Inc.

(Exact name of Registrant as specified in its charter)

40 Pequot Way

Canton, MA 02021

(Address of principal executive offices)

(781) 830-3000

(Registrant’s telephone number including area code)

Securities registered pursuant to section 12(g) of the Act:

Common Stock, $.01 par value

(Title of Class)

     Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.     Yes o          No þ

      Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.     Yes þ          No o

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

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

      Indicate by check mark whether the registrant is an accelerated filer as defined in Exchange Act Rule 12b-2).     Yes  þ          No o

      Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).     Yes o          No þ

      The aggregate market value of the common stock held by non-affiliates of the registrant, based upon the last sales price for such stock on March 31, 2005, as reported by NASDAQ, was $113,882,543.

      Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

DOCUMENTS INCORPORATED BY REFERENCE

      Portions of the definitive Proxy Statement for the 2006 Annual Meeting of Stockholders to be held on January 31, 2006 are incorporated by reference into Part III.

TWEETER HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES

ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS

PART I

      In this Annual Report on Form 10-K, the “Company,” “Tweeter,” “we,” “us” and “our” mean Tweeter Home Entertainment Group, Inc. and its subsidiaries.

      This Annual Report on Form 10-K contains forward-looking statements regarding Tweeter’s performance, strategy, plans, objectives, expectations, beliefs and intentions. The actual outcome of the events described in these forward-looking statements could differ materially from our expectations. This Report, and especially the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contains a discussion of some of the factors and risks that could contribute to those differences.

General

      Tweeter is a national specialty consumer electronics retailer providing audio and video solutions for the home and mobile environment. We believe that we can apply our expertise to provide “home and mobile entertainment made easy” for our customers.

      As of September 30, 2005, we operated 159 stores in 22 states under the Tweeter, Sound Advice, hifi buys, Showcase Home Entertainment and Hillcrest High Fidelity names. Our stores are located in the following markets: New England, the Mid-Atlantic, the Southeast (including Florida), Texas, Chicago, Southern California, Phoenix, and Las Vegas. We operate in a single business segment of retailing audio, video and mobile consumer electronics products. Our stores feature a selection of quality home and mobile audio and video products including cutting edge HDTV plasma, LCD and rear-projection television sets, home theatre video and audio solutions, home theater furniture, DVD players and recorders, surround sound systems, audio components, digital video satellite systems, satellite radios, personal video recorders and digital entertainment centers. We differentiate ourselves by focusing on consumers who seek audio and video products with advanced features, functionality and performance. These products tend to be more expensive within their category of products and will often have newer or more advanced technology. We have created an inviting retail environment in each store with specially designed notional spaces, allowing our customers to visualize the technology in a more natural home setting. Our stores average approximately 11,100 square feet and are staffed with highly trained sales and installation professionals. Our goal is to ensure that each customer receives the best possible experience through their entire purchase and installation process. We believe this commitment to service, along with our competitive prices, will build customer loyalty and brand awareness.

      In September 2002, we re-launched the Tweeter website (www.tweeter.com) to market and sell consumer electronics over the Internet. The tweeter.com site is designed to mirror the in-store experience as well as the look and feel of its brick-and-mortar counterparts.

      Trade names. We currently operate under several trade names. We operate the large majority (118) of our stores as Tweeter stores. We operate 24 stores in Florida as Sound Advice stores, 11 stores in the Southeast as hifi buys stores, four stores in Arizona as Showcase Home Entertainment stores and two stores in Dallas as Hillcrest High Fidelity stores. As part of our store closing program, described below, in 2005 we closed both of our remaining Bang & Olufsen stores and exited that brand name.

      We have registered the “Tweeter etc.” service mark with the United States Patent and Trademark Office. Its registration number is 2097801 and the renewal due date is September 16, 2007. We have also registered the “AVi.d. Member”, “Slamfest”, “Wise Buys” and “Picture Perfect” service marks with the United States Patent and Trademark Office. We have not registered “hifi buys”, “Sound Advice” and some of our other service marks. We are aware that other consumer electronics retailers use the name hifi buys and Sound Advice. We have submitted applications for registration of some of our other 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.

      Competition. We are a relatively small player in the U.S. consumer electronics market. According to the Consumer Electronics Association, consumer electronics sales were $112.9 billion in 2004. Over 50% of this total was for consumer electronics products that we do not sell, such as personal computers and related equipment. Accordingly, with annual revenue in calendar year 2004 of $777.2 million, we account for less than 2% of the audio and video business in which we compete. Several large players, including Best Buy, Circuit City, Sears and Wal-Mart, dominate the industry and have significantly greater resources than we have. We do not compete with these larger players in all categories, but there is some overlap between our products. Typically, the overlap includes the higher-end (more sophisticated, with more features and options) of the larger players’ products and the lower end (more entry level, with fewer features and options) of our products. One advantage we believe we have over the larger players is the ability to provide service to our customers, because we believe that the larger players often do not offer as high a level of customer service as we do.

      Seasonality. Our business is subject to seasonal variations. The table below lists the percentage of annual revenue generated in each of our fiscal quarters for the last two fiscal years.

Percentage of Annual Revenue

      Due to the importance of the Christmas holiday shopping season, our revenues generally are highest during the fiscal quarter ending December 31. Any factor tending to adversely affect this season could have a significant impact on our revenue and profitability. 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 or changes in cooperative advertising policies from suppliers. In addition, operating results may be negatively affected by increases in merchandise costs, price reductions we institute in response to competitive factors and unfavorable local, regional or national economic developments that result in reduced consumer spending.

      Purchases and Returns. Like most of our competitors in the consumer electronics retail industry, we allow our customers to return products within a specified amount of time from the initial retail sale. This is typically 30 days, although this can vary for some product categories such as speakers, where we have a trade up policy available. We also offer extended payment terms and other promotional offers as an inducement to purchase. We partner with GE Money Bank to run our private label credit card. GE Money Bank bears all credit risk under the terms of this agreement.

Business Strategy

      Our goal is to integrate consumer electronics into our customer’s life; to deliver entertainment solutions that offer “everything that they want and all that they need.” This aligns our strategy with our marketing slogan: “Home and mobile entertainment made easy.” The key elements of our business strategy are as follows:

      Extensive Selection of Mid- to High-End Home and Mobile Products. We concentrate on delivering our customers a complete range of home and mobile consumer electronics products. This focus differentiates us from larger format superstores and mass merchandisers, who offer a broad array of consumer electronics and non-electronics products with an emphasis on products priced at introductory price levels. Our emphasis on mid- to higher-end products positions us attractively to manufacturers seeking to sell more advanced or limited distribution products as part of their distribution strategy. Our salespeople are trained to educate our customers about new technologies, in the simplest possible terms. As a result of our mid- to 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. Tweeter has a long tradition of catering to the audio and/or video enthusiast, and over the last 33 years we have introduced many new technologies to the

marketplace. We were among the first retailers to offer flat panel plasma and LCD televisions, DVD players, CD players, camcorders and VCRs. We will often hold a market share in new technology that is disproportionately large compared to our less than 2% share of audio and video consumer electronics retailing overall. Our share of these new and generally expensive technologies declines as the retail prices decrease and the technology becomes more familiar to a mainstream customer. 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 among members of our targeted customer group.

      In-Home Services Business. As consumer electronics products have become more sophisticated and complex, we are aware of a corresponding tendency for customers to be deterred from purchasing integrated audio/video systems because of the perceived difficulty in setting the systems up properly in their homes. We not only offer customers a broad home entertainment package, we also have a large team of in-home installation experts who can install the solution in the customer’s home.

      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 intensive classroom training and all sales associates receive ongoing training, 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. We believe that our superior customer service has enabled us to engender long-term customer loyalty.

      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 and other notional spaces architecturally and acoustically designed to simulate the customer’s home or mobile environment. The store prototype blends a colorful, comfortable lifestyle environment, with innovative and interactive product displays that enable customers to audition and compare a sample of products. Each store contains a flat panel technology showcase, which displays an extensive selection of plasma, LCD and related products, and every store contains a home theatre vignette, which showcases our home theater products.

      Everyday Competitive Pricing. We utilize an “everyday 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.

Growth Strategy

      Our current growth strategy is to capitalize on new technologies and home installation services to drive comparable store sales. A store is included as a comparable store after it has been in operation for 12 full months from the date of opening, acquisition, remodeling or relocation. When products such as CD players, DVD players, plasma televisions, digital televisions, mobile video and satellite radio were first introduced, we were one of the first retailers to sell these products. We expect that we will continue to be among the first retailers to offer new consumer electronics products as they are developed, and continue to put considerable effort into having a knowledgeable sales team able to explain new technologies to customers. We believe that as a result we will continue to attract buyers who wish to be “early adopters” of new products.

      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 2005, we opened five stores and closed 22 stores in the following markets:

      Store closing program. In April 2005 we announced a plan to close 19 stores, which comprised about 11% of our total number of stores. These stores generated less than 5% of our gross revenue but were responsible for nearly one-third of our operating loss over the preceding 12-month period. Six of the stores were in stand-alone markets and, in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, we classified the operating results of these stores as discontinued operations in the accompanying consolidated statements of operations. Prior year information has been reclassified to conform to current year presentation. The remaining 13 stores were deemed part of continuing operations, and the costs associated with their closing were treated as a restructuring charge. Charges to discontinued operations associated with the store closing program totaled $6.3 million in 2005, while the restructuring charges associated with the remaining stores not classified in discontinued operations totaled $16.5 million. As of September 30, 2005, we had closed 18 stores and we closed the one remaining store on October 30, 2005. As of December 29, 2005, we had completed negotiations on 12 lease termination agreements or sublet agreements, were in the process of completing negotiations on two locations and had five locations remaining to be negotiated and finalized. We believe that our restructuring charge is adequate to cover costs associated with the remaining lease terminations and professional fees.

      Additionally, in the fourth quarter of fiscal 2004 we closed or committed to close eight stores, five of which were closed as of September 30, 2004 and three of which were closed during the first quarter of fiscal 2005. These eight stores are reported in discontinued operations along with the six stores mentioned above. The incremental cost related to these store closings amounted to $166,000 in fiscal 2005 and $560,000 in fiscal 2004.

Store Format and Operations

      As of September 30, 2005, we operated 159 stores, consisting of 118 Tweeter stores in New England, the Mid-Atlantic, the Southeast, Texas, Southern California, the greater Chicago area and Las Vegas; 24 Sound Advice stores in Florida; 11 hifi buys stores in the Southeast; four Showcase Home Entertainment stores in Phoenix, Arizona and two Hillcrest stores in Dallas, Texas. While our stores vary in size, the average is 11,100 square feet, with approximately 70% of our square footage devoted to selling space.

      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. Unlike many of our competitors’ stores, which contain large, open spaces where many different audio and video products are displayed, 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 compare various combinations of receivers,

CD and DVD players and speakers. In addition, each store contains a flat panel technology showcase, which displays an extensive selection of plasma, LCD and related video products, and every store contains home theatre vignettes, which showcases our home theater products. The majority of our stores have areas that feature state-of-the-art audio and video mobile systems, which serve to exhibit our mobile installation capabilities. Most stores provide mobile systems installation through on-premises installation bays.

      Stores are typically staffed with a general sales manager, an assistant sales manager, an operations manager, approximately 12 sales associates and mobile electronics installers. Some associates specialize in either in-home or mobile systems. We provide new sales associates with intensive classroom training and all sales associates receive ongoing training, 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. All stores are open seven days a week.

      Most of our store managers are compensated through base pay, commissions and monthly bonuses based on store performance. Store managers can earn a substantial portion of their annual compensation through such bonuses. Sales associates are compensated through a commission program that is based on the revenue and gross margins of products they have sold.

      Additionally, our other operations include a corporate sales division, which markets and sells to businesses, institutions and other organizations, and an Internet-based business, whose website is located at www.tweeter.com.

Merchandise

      Our stores feature home audio systems and components, mobile audio and video systems, video products such as flat-panel plasma and LCD televisions, digital projection and tube televisions, digital satellite systems, digital video recorders, DVD players and other consumer electronics products such as wireless media devices, digital media players, home audio speakers, stereo and surround sound receivers and portable audio equipment. We offer home and mobile stereo installation services and provide warranty and non-warranty repair services through all of our stores. Our in-home installation business provides design, installation and educational services in connection with new construction and home renovations, as well as for existing homes. Products provided by our in-home installation group include whole-house music systems, home theatre systems, satellite TV, Internet access systems, and touch screen controls. 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.

      We stock products from many suppliers, including, Alpine, Apple Computer, Bose, Boston Acoustics, Clarion, Denon, Focal, Krell, Mirage, Martin Logan, Mitsubishi, Panasonic, Philips, Pioneer, Polk, Samsung, Sapphire, Sharp, Sony, Tivoli, Velodyne and Yamaha. We seek to manage our product mix to maximize gross margin performance and inventory turns. 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 product sales during the last several years as a result of the increased customer interest in big screen televisions. Accordingly, we have enhanced our in-home installation business to increase sales of higher margin audio products and in-home services. The strategy involves training and incentive programs for sales associates to work with customers to demonstrate audio products that enhance the performance of the video products they are purchasing, so that a customer purchasing a video product is more likely to purchase an audio product as well.

      The table below lists the approximate percentage of revenue for each of our primary product categories for our fiscal years ended September 30, 2003, 2004 and 2005, respectively. The percentage of revenue represented by each product category may be affected by, among other factors, competition, economic conditions, consumer trends, the introduction of new products into the market, changes in our product mix, and the timing of marketing events. The historical percentages listed below may not be indicative of revenue percentages for future periods:

Percentage of Revenue by Product

Purchasing and Inventory

      Our purchasing and inventory control functions are based out of our corporate offices in Canton, Massachusetts. The purchasing decisions are made by our buying team, which has primary responsibility for product selection, stocking levels and pricing. Purchasing decisions are facilitated by our information systems, which analyze stocking levels and product sell-through. The purchasing 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 recent years, we have traveled to the Far East to assist in product development for our class of products.

      In addition to making direct purchases, we are a member of the Progressive Retailers Organization (“PRO”) group, a volume-buying group of specialty electronics retailers across the country. This affiliation often provides us with the opportunities to obtain additional supplier rebates, product discounts and promotional products. We are not obligated to make purchases through PRO. Our Chairman also serves on the Board of Directors of PRO.

      We source products from many suppliers. Our largest supplier and our ten largest suppliers, ranked by purchasing volume, represented 19% and 78%, respectively, of our total purchases in fiscal 2005. We do not maintain long-term commitments or exclusive contracts with any particular supplier, but instead consider numerous factors, including price, credit terms, distribution, quality and compatibility within the existing product mix in making our purchasing decisions. We utilize an automatic replenishment system for store inventory, maintaining stock levels and minimizing total dollars invested in inventory. We believe that our relationships with our large suppliers are excellent and that our focused merchandising and high degree of customer service make us an important distribution channel, particularly for the introduction of new products.

      We distribute products to our stores through our regional distribution centers. The following table lists each distribution center, the region it serves and the square footage of the facility.

     We also have short-term arrangements to lease additional space at other facilities to meet seasonal needs. We believe that these distribution facilities are sufficient to accommodate any expansion in these markets through at least the year 2007.

Advertising and Marketing

      We target consumers seeking informed advice, products and services that result in the creation, integration and installation of home and mobile entertainment solutions. We began a shift in media strategy in fiscal 2004 and are now utilizing primarily electronic media and direct marketing to reach qualified customers and prospects. This is in lieu of newspaper ads and inserts, which are showing dramatic categorical declines as advertisers and readers move to the Internet and the variety offered by cable television. The direct marketing program consists of catalogs and direct mail to provide education on new technologies and to convey timely offers. In fiscal 2004 we allocated less than one-third of our overall advertising budget to broadcast media. In fiscal 2005 we increased this amount to over 50%. Radio advertisements are running in markets representing approximately 80% of retail store sales. 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.

      Providing competitive product pricing is a critical component of our marketing and advertising strategy. Store managers regularly visit the local competition to ensure that their store’s pricing remains competitive. This is supported by a 60-day price protection guarantee. We also offer financing to our customers through GE Money Bank and provide to our customers an annual calendar of available Tweeter and manufacturer finance offers.

Site Selection

      Our stores average approximately 11,100 square feet and are typically located in freestanding buildings or strip shopping centers within high traffic shopping areas. New store sites are selected on the basis of several factors, including physical 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 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 all of our stores.

Information Systems

      We utilize a sophisticated, fully integrated mainframe based management information system for recording point-of-sale transactions, managing inventory and determining commission-based wages. Our system updates after every transaction and is accessible on a real time basis to management, sales associates and product buyers. Extensive sales reporting and sales tracking are provided real time on screen to store managers and individual sales associates. They use the system to track category sales and benchmark key sales data. This system 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.

      In May 2005, we implemented a new general ledger and accounts payable system. This system interfaces with and draws data from our point-of-sale system.

Employees

      As of September 30, 2005, we had 3,359 employees, consisting of 3,298 full-time and 61 part-time employees. None of our employees are covered by collective bargaining agreements, and we believe our relations with our employees are good.

Tweeter.com Website

      Our commercial website address is www.tweeter.com. Our investor relations website is www.twtr.com. We make our Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q, our Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 available on our www.twtr.com website as soon as reasonably practicable after we electronically file such documents with, or furnish them to, the Securities and Exchange Commission.

RISK FACTORS

      The value of an investment in our company will be subject to the significant risks inherent in our business. Investors should consider carefully the risks and uncertainties described below.

      This Annual Report contains forward-looking statements regarding our performance, strategy, plans, objectives, expectations, beliefs and intentions. The actual outcome of the events described in these forward-looking statements could differ materially from our expectations. The following is a discussion of some of the factors and risks that could contribute to those differences.

We face intense competition that could reduce our market share.

      We compete against a diverse group of retailers, including several national and regional large format merchandisers and superstores, such as Best Buy and Circuit City, 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 electronics products that we sell. Certain of these competitors have substantially greater financial resources than we have, which may increase their ability to purchase inventory at lower costs or to initiate and sustain predatory price competition. In addition, the large format stores are continuing to expand their geographic markets, and this expansion may increase price competition within those markets.

We have incurred losses from continuing operations for the last four years and those losses could continue in the future.

      We have experienced losses from continuing operations for the last four years. Our net loss in 2005 amounted to $74.4 million and we used $26.7 million of cash to support operating activities. Despite efforts to improve our operations, we could incur substantial losses in the future. Our losses and the related use of cash

were funded, in part, by increased borrowings under our senior secured revolving credit facility and term loans. There can be no assurance that additional indebtedness will be available to us at all or on acceptable terms.

We may need additional capital and we may not be able to obtain it on acceptable terms, if at all.

      Financing for the opening and acquisition of new stores, as well as for the improvement of existing stores, may be in the form of debt or equity or both and may not be available on terms acceptable to us, if at all. We estimate that the average cash investment for capital expenditures required to open a store is approximately $1.4 million. The actual cost of opening a store may be significantly greater than such estimates, however, and we may need to seek additional debt and/or equity financing in order to fund our continued expansion through 2006 and beyond. We have opened some stores for as little as $500,000 and some for as much as $3.6 million. The differences in cost result from the specific circumstances relating to the store opening. In some cases, we lease stores in an existing building and incur costs for leasehold improvements to convert the space to our retail format. In other cases, we might enter into a ground lease where the site is a piece of land that has to be fully developed. In connection with some of these ground leases, we have built multi-tenant facilities in which we will only occupy one of the spaces and sublet the remaining space. Additional factors vary depending on the region in which a new store is being opened, and can therefore cause a corresponding region-to-region variation in the cost of opening a new store, including the following:

      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.

Our success depends on our ability to increase sales in our existing stores. We may not be able to do so.

      Our continued growth depends on our ability to increase sales in our existing stores. The opening of additional stores in an existing market could result in lower net sales at our existing stores in that market.

      Our ability to increase sales in existing stores may also be affected by:

Our comparable sales results may fluctuate significantly.

      “Comparable store sales” is a term we use to compare the year over year sales performance of our stores. A store is included in the comparable store sales base after it is in operation for 12 full months. An acquired store is included after 12 full months from the date of acquisition. In addition, comparable store sales include Internet-originated sales. Remodeled or relocated stores are excluded from the comparable store base until they have completed 12 full months of operation from the date the remodeling was completed or the store re-opened after relocation. In 2005 we implemented a store closing program. We removed those closing stores from the comparable store sales base in May after we determined that they would close. Stores that are part of discontinued operations are also excluded from the comparable store sales base.

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

      Recent economic conditions make forecasting comparable store sales particularly difficult. Comparable store sales may decrease in the future. Changes in our comparable store sales results could cause the price of our common stock and profitability to fluctuate substantially.

We may not be able to open new stores and, even if we do open new stores, we may not be able to operate those stores profitably.

      While the opening of new stores has slowed considerably, we expect to continue to open new stores from time to time. The opening of additional stores in new geographical markets could present competitive and merchandising challenges different from those we currently or previously faced within our existing geographic markets. In addition, we may incur higher costs related to advertising, administration and distribution as we enter new markets.

      There are a number of factors that could affect our ability to open or acquire new stores. These factors also affect the ability of any newly opened or acquired stores to achieve sales and profitability levels comparable with our existing stores, or to become profitable at all. These factors include:

We depend on key personnel and our business may be severely disrupted if we lose the services of our key executives.

      Our success depends upon the active involvement of our senior management personnel, particularly Samuel Bloomberg, Chairman of the Board, Joseph McGuire, President and Chief Executive Officer, Philo Pappas, Senior Vice President and Chief Merchandising Officer, Mark Richardson, Senior Vice President of Marketing, and Judy Quye, Senior Vice President of Sales, Operations and Installation Services. The loss of the full-time services of Messrs. Bloomberg, McGuire, Pappas, Richardson, Ms. Quye, or other members of senior management could severely disrupt our business, as we may not be able to replace them. We have employment or severance agreements with Messrs. Bloomberg, McGuire, Pappas and Ms. Quye. We have no other employment agreements with any members of our senior management team. Our Board of Directors appointed Mr. Paul Burmeister to serve as interim Chief Financial Officer on July 6, 2005, replacing Mr. McGuire, who had been Senior Vice President and Chief Financial Officer and who was then serving as interim Chief Executive Officer.

Our business is subject to quarterly fluctuations and seasonality.

      Seasonal shopping patterns affect our business. The fourth calendar quarter, which is our first fiscal quarter and which includes the Christmas holiday shopping season, has historically contributed, and is expected to continue to contribute, a significant portion of our total revenue. As a result, any factors negatively affecting us during this time of year, including adverse weather or unfavorable economic conditions, would have a materially adverse impact on our revenue and profitability for the entire year.

      More generally, our quarterly results of operations may fluctuate based upon such factors as:

We may not be able to anticipate and respond to changes in consumer demand, preference and patterns.

      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 consumer demand and preferences. Consumer spending patterns, particularly discretionary spending for products such as those we sell, are affected by, among other things, prevailing economic conditions. In addition, the periodic introduction and availability of new products and technologies at price levels that generate wide consumer interest stimulate the demand for audio and video consumer electronics products. Also, many products that incorporate the newest technologies are subject to significant technological and pricing limitations and to the actions and cooperation of third parties such as television broadcasters. It is possible that these products or other new products will never achieve widespread consumer acceptance. 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 would result in lost sales or lower margins due to the need to mark down excess inventory.

If any of our relationships with our key suppliers are terminated, we may not be able to find suitable replacements.

      The success of our business and growth strategy depends to a significant degree upon our suppliers, particularly our brand-name suppliers of audio and video equipment. We do not have any supply agreements or exclusive arrangements with any suppliers. We typically order our inventory through the issuance of individual purchase orders to suppliers. In addition, we rely heavily on a relatively small number of suppliers. Our largest supplier and our ten largest suppliers, ranked by purchasing volume, represented 19% and 78%, respectively, of our total purchases in fiscal 2005. The loss of any of these key suppliers could affect our business, as we may not be able to find suitable replacements.

Suppliers may not be willing to supply products at acceptable prices.

      It is possible that we will be unable to acquire sufficient quantities or an appropriate mix of products at acceptable prices. 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 suppliers to supply inventory at acceptable prices, and suppliers may not be willing or able to do so.

Our service marks and patents may not be effective to protect our intellectual property rights.

      Our “Tweeter etc.,” “AVi.d. Member,” “Slamfest,” “Wise Buys” and “Picture Perfect” service marks have been registered with the United States Patent and Trademark Office. We have not registered “hifi buys,” “Sound Advice” and some of our other service marks. We are aware that other consumer electronics retailers use the name “hifi buys” and “Sound Advice.” We have submitted applications for registration of some of our other 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.

Anti-takeover provisions of the Delaware General Corporation Law, our certificate of incorporation and our shareholders’ rights plan could delay or deter a change in control.

      Our corporate charter and by-laws, as well as certain provisions of the Delaware General Corporation Law, contain provisions that may deter, discourage or make more difficult a change in control of the Company, even if such a change in control would be in the interest of a significant number of our stockholders or if a change in control would provide stockholders with a substantial premium for their shares over then current market prices. For example, our charter authorizes our Board of Directors to issue one or more classes of preferred stock, having such designations, rights and preferences as they determine.

      Our stockholders have no right to take action by written consent and may not call special meetings of stockholders. Any amendment of the by-laws by the stockholders or certain provisions of the charter requires the affirmative vote of at least 75% of the shares of voting stock then outstanding. Our charter also provides for the staggered election of directors to serve for one, two and three-year terms, and for successive three-year terms thereafter, subject to removal only for cause upon the vote of not less than 75% of the shares of common stock represented at a stockholders’ meeting.

      In addition, under the terms of our shareholders’ rights plan, in general, if a person or group acquires more than 20% of the outstanding shares of our common stock, all other stockholders of the Company would have the right to purchase securities from us at a discount to such securities’ fair market value, thus causing substantial dilution to the holdings of the acquiring person or group.

      The following table lists the number and location of stores we operated at the end of each of the last three fiscal years, by state:

      Our stores range in size from 3,500 square feet to 24,000 square feet and average approximately 11,100 square feet. They include sales space, inventory storage, management offices and employee areas. All of our stores are leased. The majority of the leases provide for a fixed minimum rent with scheduled escalation dates and amounts. At the end of fiscal 2005, leases for 24 of our stores have percentage rent provisions, which range from 1.5% to 5% of gross sales in excess of certain specified sales amounts. The initial terms of our leases range from five to 25 years and generally allow us to renew for up to three additional five-year terms. The terms of our leases, including exercised renewal options, expire between December 2005 and January 2025. We currently are leasing a few locations on a month-to-month basis.

      Our corporate offices and the New England distribution and service centers are located in two owned facilities totaling 151,400 square feet in Canton, Massachusetts. In addition, we lease approximately 632,600 square feet of regional operating facilities, including distribution, service centers and offices in King of Prussia, Pennsylvania, Atlanta, Georgia, Charlotte, North Carolina, Houston, Texas, Dallas, Texas, San Diego, California, Chicago, Illinois, Pembroke Park, Florida and Phoenix, Arizona.

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

      None.

PART II

      Our common stock is traded on the NASDAQ National Market under the symbol “TWTR.” The following table lists the high, low and last sale prices for our common stock for the last eight quarters in which our common stock was publicly traded.

      The last sale price of the common stock on December 27, 2005, as reported by NASDAQ, was $5.10 per share. As of December 27, 2005, there were approximately 3,700 holders of record of our common stock.

      We do not anticipate paying any cash dividends for the foreseeable future. Please see “Liquidity and Capital Resources” below.

Recent Sales of Unregistered Securities

      None

      The following table presents our selected financial data. The table should be read in conjunction with Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K. Certain prior-year amounts have been reclassified to conform to the current-year presentation with respect to discontinued operations.

      This Annual Report contains forward-looking statements regarding our performance, strategy, plans, objectives, expectations, beliefs and intentions. The actual outcome of the events described in these forward-looking statements could differ materially. This report, and especially this section and the section entitled “Risk Factors” contains a discussion of some of the factors and risks that could contribute to those differences.

General

      We are a leading specialty retailer of mid- to high-end audio and video consumer electronics products operating under the Tweeter, Sound Advice, hifi buys, Showcase Home Entertainment and Hillcrest names. We opened our first Tweeter store in New England in 1972. Over 33 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.

      Between 1996 and 2004 we acquired 11 companies within our industry, consisting of a total of 98 stores, in 11 states. We funded these acquisitions through a combination of private equity investments, debt, an initial public offering, two follow-on offerings and the issuance of common stock.

      Over the past several years we have expanded our corporate infrastructure, including the addition of senior executives in our merchandising, marketing and retail operations functions, to strengthen our management team now responsible for supporting a larger business.

      In May 2003 we engaged RetailMasters, LLC (“RetailMasters”), a consulting company hired to aid in the development of tools and methods to drive improvements in several areas, including supply chain, sales development and store level operating disciplines. Our goal is to become “best in class” in these foundational areas. During fiscal 2004, together with RetailMasters we accomplished supply chain initiatives that allowed us to improve our inventory management.

      In 2005 we made a significant investment in new financial systems, acquiring and implementing a new general ledger and accounts payable system, which we expect will enhance our financial controls.

      Acquiring so many businesses over a nine-year span, as described above, resulted in disparate business processes during and following the acquisition periods. During the course of fiscal 2003 and continuing into fiscal 2004, we worked on establishing one common set of standards wherever practical. We made great strides toward achieving this goal during these two years but we ultimately concluded that certain stores were failing to fit our core operating strategy or meet our profit objectives. Accordingly, in the fourth quarter of fiscal 2004 we closed or committed to close eight stores that had a different business model than our core operating strategy and in the third quarter of 2005 we announced our intentions to close an additional 19 stores due to their poor operating results. By the end of fiscal 2005 we had closed all of those stores except one, which we closed on October 30, 2005.

      Our expansion plans will be limited until we feel that we are returning to operating profit levels we have achieved in the past (excluding our goodwill impairment charge in fiscal 2002, fiscal 2003 marked the first operating loss at Tweeter in more than ten years.) Nevertheless, in January of 2005 we opened a new prototype store in Las Vegas that we believe could be important to our future growth plans. Designed in a home-like setting, the store’s showroom allows consumers to experience entertainment in notional living room, kitchen, bedroom, bathroom, sports bar, home theater, office and outdoor settings, featuring systems specially designed and configured for enjoying sports, movies and music at home. Initial results from this new store have been encouraging and during fiscal 2006 we intend to continue testing this concept by applying certain aspects of this store in ten locations in other parts of the country. We intend to open three new stores utilizing the full prototype model, convert four existing stores to the full prototype model and convert just the operating procedures in three other existing stores, without investing any capital to physically remodel them.

      Toward the end of 2005 we reported a turnaround in our comparable store sales. In the fourth quarter of fiscal 2005 we generated a broad-based comparable store sales increase of 10%, with nine of our 11 sales regions experiencing comparable store sales growth. This performance allowed us to register a comparable store sales increase of 1% for the full year. As advanced televisions are becoming more affordable and HDTV content is becoming more available we feel that we are well positioned to take advantage of these trends. Accordingly, we increased our inventory for the Christmas holiday shopping season earlier than usual to prepare for what we hope will be a strong season.

Results of Operations

      The following table sets forth the percentage relationship to net sales of certain items in our consolidated statements of earnings for the fiscal periods shown below:

Fiscal 2005 as Compared to Fiscal 2004

      Total Revenue. Our total revenue includes delivered merchandise, home installation labor, commissions on service contracts sold, completed repair service work, direct business-to-business sales, delivery charges and Internet-originated sales. We use the term “comparable store sales” to compare year-over-year sales performance of our stores. We include a store in our comparable store sales after it has been in operation for 12 full months, while we include an acquired store after 12 full months from the acquisition date. In addition, comparable store sales include Internet-originated sales. We exclude remodeled or relocated stores from our comparable store sales until they have been operating for 12 full months from the date we completed the remodeling or the date the store re-opened after relocation. In 2005 we implemented a store closing program. We removed those closing stores from the comparable store sales base in May after we determined that they would close. Stores that are part of discontinued operations are also excluded from the comparable store sales base.

      Our total revenue from continuing operations increased $29.8 million, or 3.9%, to $795.1 million in the year ended September 30, 2005 from $765.3 million for the year ended September 30, 2004. The increase was primarily the result of revenues from new and acquired stores of $30.9 million, of which $13.3 million related to the NOW! Audio Video acquisition that occurred on July 1, 2004. In addition, comparable store sales increased $7.8 million, or 1.0%. The increase in revenue was partially offset by a $5.2 million reduction in sales associated with direct business-to-business sales and a $4.8 million reduction in sales related to closed stores. Within our video category, we experienced a significant increase compared to the prior year in sales from plasma TVs, LCD TVs and furniture, which largely offset a decline in sales from TV monitors, projection TVs, camcorders and DVD equipment. We experienced a decline in sales compared to the prior year from our audio and mobile categories. Our home installation business grew sharply and home installation labor revenue increased to 5.1% of total revenue, compared to 3.6% of total revenue in the previous year.

      Cost of Sales and Gross Profit. Our cost of sales includes merchandise costs, delivery costs, distribution costs, home installation labor costs, purchase discounts and vendor allowances. Our cost of sales related to

continuing operations increased $13.7 million, or 2.9%, to $481.4 million in the year ended September 30, 2005 from $467.7 million in the year ended September 30, 2004. Our gross profit increased $16.1 million, or 5.4%, to $313.7 million in the year ended September 30, 2005 from $297.6 million for the year ended September 30, 2004. Our gross profit percentages for the years ended September 30, 2005 and 2004 were 39.4% and 38.9%, respectively. This increase was primarily related to higher contribution from home installation labor and parts, plasma and LCD TVs, cables, remote control devices and furniture. We were also able to reduce the adverse impact of discount coupons on our gross profit. These increases were partially offset by lower contribution from projection TVs, TV monitors, DVD equipment and audio speakers and receivers.

      Selling Expenses. Our selling expenses include the compensation of store personnel and store specific support functions, occupancy costs, store level depreciation, advertising, pre-opening expenses and credit card fees. Our selling expenses increased $28.6 million, or 11.0%, to $289.8 million for the year ended September 30, 2005 from $261.2 million for the year ended September 30, 2004. As a percentage of total revenue, selling expenses increased to 36.5% for the year ended September 30, 2005 from 34.1% in the prior year period. The percentage increase was attributable to several factors. Payroll and fringe benefits expenses rose $9.0 million, driven by increased sales and a larger support staff associated with our growing in-home installation business. Advertising costs increased $5.0 million due to an increase in the number of advertising initiatives. Insurance expense increased $3.0 million due to an increase in our workers compensation self-insurance expenses. Bank and credit cards fees increased $2.7 million, reflecting our increase in sales and the increase in interest rates. Occupancy expense increased $2.1 million, primarily due to increases in rent and real estate taxes. Our depreciation expense increased $2.2 million as we began adding more displays in our stores. Vehicle expenses rose by $1.3 million, largely associated with increases in fuel prices and additional vehicles required to support our growing in-home installation business. Utility costs increased by $1.1 million, primarily due to increases in telephone costs.

      Corporate, General and Administrative Expenses. Our corporate, general and administrative expenses include the costs of our finance, information systems, merchandising, marketing, human resources and training departments, related support functions and executive officers. Our corporate, general and administrative expenses for the year ended September 30, 2005 increased $2.4 million, or 4.7%, to $53.7 million from $51.3 million for the year ended September 30, 2004. As a percentage of total revenue, corporate, general and administrative expenses increased to 6.8% for the year ended September 30, 2005 from 6.7% for the year ended September 30, 2004. The biggest single increase was in professional fees, which were up $1.7 million, largely due to increased spending on Sarbanes-Oxley compliance efforts.

      Amortization of Intangibles. Amortization of intangibles was $680,000 for the years ended September 30, 2005 and 2004.

      Non-cash compensation charges. We incurred non-cash compensation charges of $76,000 and $5.3 million for the years ended September 30, 2005 and 2004, respectively. The expense in fiscal 2005 is attributable to equity-based executive compensation arrangements. In fiscal 2004, $5.0 million is attributable to the value of warrants issued to RetailMasters, LLC and $332,000 represents other equity-based compensation arrangements.

      Restructuring charges. In 2005 we incurred restructuring charges totaling $16.5 million associated with the closing of 13 stores described above that are in continuing markets. Our restructuring charges included $8.1 million for lease termination fees and other related charges, $1.8 million for professional fees related to lease termination negotiations and inventory liquidation, $0.3 million for severance costs and a non-cash charge of $6.3 million related to the write-down of leasehold improvements and lease adjustments.

      Interest Income. Our interest income decreased to $26,000 for the year ended September 30, 2005 compared to $328,000 for the year ended September 30, 2004. During the year ended September 30, 2004, we received $300,000 of interest income from suppliers associated with pre-payments we made to secure inventory purchases. There was no such income received during the year ended September 30, 2005.

      Interest expense. Our interest expense was $2.7 million for the year ended September 30, 2005 compared to interest expense of $3.4 million for the year ended September 30, 2004. The decrease was primarily due to a reduction in amortization expense associated with loan financing costs.

      Gain on Sale of Equity Investment. We realized a gain on sale of equity investment of $9.9 million for the year ended September 30, 2005. On May 4, 2005, we sold 68,750 shares, representing 25% of our total investment, in Tivoli Audio, LLC (“Tivoli”) for $10.3 million. The transaction decreased our total ownership in Tivoli from 25% to 18.75% after completion of the sale.

      Income Tax Expense (Benefit). We are required to record a valuation allowance when it is “more likely than not that some portion or all of the deferred tax assets will not be realized.” At September 30, 2005, we have provided a full valuation allowance of approximately $45.9 million related to net federal and state deferred tax assets. The effective tax rate (benefit) for the years ended September 30, 2005 and 2004 was 50.8% and (38.0%), respectively. In 2005 we recorded tax expense of $25.0 million, $22.3 million of which related to the establishment of a full valuation allowance on net federal and state deferred tax assets established prior to 2005 and the balance of which related to further adjustments of our tax asset and liability accounts. We provided a valuation allowance on the tax benefit related to the 2005 operating loss because of the uncertainty of realization of such benefit.

      Income from Equity Investment, Net of Tax. Our income from equity investment, net of tax increased to $1.4 million for the year ended September 30, 2005 from $0.5 million for the year ended September 30, 2004, reflecting the increased profitability of Tivoli.

      Discontinued Operations. In the third quarter of fiscal 2005 we closed or committed to close six stores classified as discontinued operations. In the fourth quarter of fiscal 2004 we closed or committed to close eight stores classified as discontinued operations. The decision to exit these stores was primarily related to poor operating results. Prior year information has been reclassified to conform to current year presentation. Revenue from the closed stores, included in pre-tax loss from discontinued operations, amounted to $11.1 million and $26.6 million for the years ended September 30, 2005 and 2004, respectively. The revenue in 2005 from discontinued operations was lower than in 2004 because eight of the 14 stores classified as discontinued operations were closed by early 2005 whereas all 14 were open for nearly all of 2004.

Fiscal 2004 as Compared to Fiscal 2003

      Total Revenue. Our total revenue from continuing operations increased $7.1 million, or 0.9%, to $765.3 million in the year ended September 30, 2004 from $758.2 million for the year ended September 30, 2003. The increase was primarily the result of revenue from new and renovated stores of $5.1 million, of which $3.3 million related to acquisitions, as well as a $5.4 million increase in insurance replacement and corporate sales. This was offset by a decline in comparable store sales from continuing operations of $4.6 million, or 0.7%, and closed stores of $2.0 million. Home installation labor revenue as a percentage of revenue increased during the year ended September 30, 2004 from 2.8% to 3.5%.

      Cost of Sales and Gross Profit. Our cost of sales related to continuing operations decreased $30.7 million, or 6.1%, to $467.7 million in the year ended September 30, 2004 from $498.4 million in the year ended September 30, 2003. Our gross profit increased $37.8 million, or 14.5%, to $297.6 million in the year ended September 30, 2004 from $259.8 million for the year ended September 30, 2003. Our gross profit percentages for the years ended September 30, 2004 and 2003 were 38.9% and 34.3%, respectively. The increase in gross profit percentage is due primarily to the fact that Emerging Issues Task Force (“EITF”) 02-16 was effective for the entire year in fiscal 2004, in comparison to only the last nine months in fiscal 2003. The amount of reimbursement received after January 1, 2003 upon the adoption of EITF 02-16 that was treated as a reduction of cost of goods sold but which would have been recorded as a reduction of advertising expenses prior to EITF 02-16 amounted to $11.1 million for the fiscal year ended September 30, 2003. For the year ended September 30, 2004 this amount was $35.7 million. In addition, fiscal 2003 produced a lower than normal gross margin due to a variety of factors, including (i) the fact that, in 2003, we undertook a concerted effort to reduce open box and discontinued inventory, which required much higher levels of markdown than

usual, (ii) a reduction in suppliers’ program funds, due in part, to the fact that the we continued to miss stretch goals throughout fiscal 2003.

      Selling Expenses. Our selling expenses increased $33.1 million, or 14.5%, to $261.2 million for the year ended September 30, 2004 from $228.1 million for the year ended September 30, 2003. As a percentage of total revenue, selling expenses increased to 34.1% for the year ended September 30, 2004 from 30.1% in the prior year period. The percentage increase was primarily attributable to the fact that EITF 02-16 was effective for the entire year in fiscal 2004 in comparison to only the last nine months in fiscal 2003. The adoption of EITF 02-16 requires that vendor allowances associated with the purchase of inventory, which were previously recorded as a reduction of selling expenses, be treated as a reduction of cost of goods sold. In addition, our compensation and occupancy costs increased in fiscal 2004.

      Corporate, General and Administrative Expenses. Our corporate, general and administrative expenses for the year ended September 30, 2004 increased $5.6 million, or 12.2%, to $51.3 million from $45.7 million for the year ended September 30, 2003. As a percentage of total revenue, corporate, general and administrative expenses increased to 6.7% for the year ended September 30, 2004 from 6.0% for the prior year period. The increase was primarily due to increases in professional and consulting fees, compensation and miscellaneous expenses. Professional fees were up $4.3 million due to payments to consultants and other professional fees. Compensation increased by $2.4 million, due in part to the addition of a number of key senior executives and supply chain merchandising staff during fiscal 2004. Also, expenses increased $1.4 million due to hurricane damage as well as costs related to closing locations. These were offset by an $800,000 reduction in bad debt expense and a $700,000 reduction in utilities, as well as other minor changes.

      Amortization of Intangibles. Amortization of intangibles was $680,000 for the years ended September 30, 2004, and 2003.

      Non-cash compensation charges. We incurred non-cash compensation charges of $5.3 million and $1.2 million for the years ended September 30, 2004 and 2003, respectively. In fiscal 2004, $5.0 million is attributable to the value of warrants issued to RetailMasters, LLC, a consulting company hired to aid in the development of tools and methods to drive supply chain improvements. In addition, for the years ended September 30, 2004 and 2003, $332,000 and $1.2 million, respectively, represents other equity-based compensation arrangements.

      Interest Income. Our interest income was $328,000 for the year ended September 30, 2004 compared to $112,000 for the year ended September 30, 2003. The increase is mainly due to interest income paid by suppliers on prepayments to secure inventory purchases. In addition, there was $25,000 of interest income received for both overpayments on federal income taxes and interest accrued on construction escrow deposits for the year ended September 30, 2004.

      Interest Expense. Our interest expense was $3.4 million for the year ended September 30, 2004 compared to interest expense of $2.8 million for the year ended September 30, 2003. This fluctuation is due primarily to the increased average level of borrowings on our revolving credit agreement during the year ended September 30, 2004.

      Income Tax Expense (Benefit). The effective tax rate (benefit) for the years ended September 30, 2004 and 2003 was (38.0%).

      Income from Equity Investment, Net of Tax. Our income from equity investment, net of tax increased to $0.5 million for the year ended September 30, 2004 from $0.4 million for the year ended September 30, 2003, reflecting the increased profitability of Tivoli.

      Discontinued Operations. In the fourth quarter of fiscal 2004, we closed, sold or committed to close eight stores. We completed the store closures by December 31, 2004. The incremental cost related to these store closings amounted to $560,000. We incurred $166,000 of additional incremental costs related to these store closings in fiscal 2005. Prior year information has been reclassified to conform to current year presentation. Revenue from the closed stores, including six additional stores closed in 2005, amounted to $26.6 million and $28.8 million for the years ended September 30, 2004 and 2003, respectively.

Liquidity and Capital Resources

      In each of the last four fiscal years we have experienced losses from continuing operations. Further, in 2005, $26.7 million cash was used in operating activities. The losses have been funded principally by cash from bank borrowings, proceeds from the sale of a portion of our Tivoli investment (in 2005 only), the sale and leaseback of facilities and improved management of inventories and receivables. In order to return to profitability and positive cash flows from operations, we have restructured our organization, closed under-performing stores, improved our supply chain initiatives and invested in our information technology infrastructure. There can be no assurance that these initiatives will result in a return to profitability and positive cash flow.

      Our cash needs are primarily to support our inventory requirements and capital expenditures, pre-opening expenses and beginning inventory for new stores, remodeling or relocating older stores and to fund operating losses in recent years.

      Our net cash used in operating activities was $26.7 million for the year ended September 30, 2005. We incurred a net loss of $74.4 million in the year, although $55.9 million of our net loss was for non-cash charges consisting of $25.0 million for depreciation and amortization, $22.3 million for the write-off of our deferred income tax provision and $9.0 million for an impairment charge related to our closing of 19 stores during the year. We believe that we have opportunities to improve our cash from operating activities in 2006 by improving our profitability, reducing our accounts receivable and increasing our inventory turnover.

      Our net cash used in investing activities for the year ended September 30, 2005 was $9.2 million. Approximately $22.4 million was used to purchase property and equipment, which was partially offset by $10.2 million in proceeds from sale of equity investments. Capital expenditures were approximately $10.6 million for real estate projects, most of which was spent to open five new stores, $5.3 million for systems projects, including our new general ledger and accounts payable system and $4.9 million was used on other store-related capital projects, approximately half of which was spent on display fixtures. Capital expenditures for the next twelve months are projected to be $25.0 million, including $7.5 million to remodel and renovate existing stores, $5.0 million for new stores, $5.0 million for information technology, $3.0 million for vehicles to support our expanding home installation business and distribution centers, and $4.5 million for all other capital expenditure programs.

      Our net cash provided by financing activities for the year ended September 30, 2005 was $34.4 million. Proceeds of long-term debt were $27.6 million and the increase in the short-term portion of long-term debt was $6.1 million.

      Our senior secured revolving credit facility (“credit facility”), as amended July 25, 2005, provides for up to $90 million in revolving credit loans and $13 million in term loans. The credit facility is secured by substantially all of our assets and contains various covenants and restrictions, including that: (i) we cannot create, incur, assume or permit additional indebtedness, (ii) we cannot create, incur, assume or permit any lien on any property or asset, (iii) we cannot merge or consolidate with any other person or permit any other person to merge or consolidate with us, (iv) we cannot purchase, hold or acquire any investment in any other person except those specifically permitted, (v) we cannot sell, transfer, lease, or otherwise dispose of any asset except permitted exceptions, and (vi) we cannot declare or make any restricted payments, which includes any dividend or certain other distributions. Borrowings are restricted to applicable advance rates based principally on eligible receivables, inventory and real estate values, reduced by a $5 million reserve, a portion of customer deposits and outstanding letters of credit. At September 30, 2005, $15.3 million was available for future borrowings. The facility expires on April 1, 2008.

      The interest rate on our revolving credit loans ranges from 1.5% to 2% over LIBOR or 0% over the prime rate, depending on our commitment at various dates during the course of the agreement. In addition, there is a commitment fee of 0.25% for the unused portion of the line. Our term loans are in two tranches — Tranche A-1 and Tranche B. The Tranche A-1 term loan is for $5 million at an interest rate of either 0.75% over the prime rate or 3.00% over LIBOR, whichever rate we choose. The Tranche B term loan is for

$8 million at an interest rate of 4.00% over the prime rate or 10.00%, whichever is greater. Neither term loan will require any scheduled principal payments until maturity.

      Our weighted-average interest rates on all outstanding borrowings for the years ended September 30, 2005 and 2004 were approximately 5.1% and 3.7%, respectively.

      The following table lists our contractual obligations at September 30, 2005:

     In addition, at September 30, 2005 we had outstanding purchase orders totaling $10,877,949 for the acquisition of inventory that was scheduled for delivery after September 30, 2005. We are also obligated to certain officers under employment and severance agreements in the event such officers were to be terminated without cause.

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

Impact of Inflation

      We do not believe that inflation has had a material adverse effect on our results of operations. However, we cannot predict accurately the effect of inflation on future operating results.

Seasonality

      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 second 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 impacting the holiday selling season could have an adverse effect on our revenue and our ability to generate a profit. 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 or changes in cooperative advertising policies 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.

Critical Accounting Policies

      Presented below is a discussion about our application of critical accounting policies that require us to make assumptions about matters that are uncertain at the time the accounting estimate is made, and where different estimates that we reasonably could have used in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, would have a material impact on the presentation of our financial condition, changes in financial condition or results of operations. Management has identified the following accounting estimates as critical for Tweeter, and will discuss them separately below: allowance for doubtful accounts, inventory obsolescence provision, income tax accruals, self-insurance reserves, and deferred cash discounts, volume rebates and coop advertising.

      Management has discussed the development and selection of these critical accounting estimates with the audit committee of our Board of Directors and the audit committee has reviewed our disclosure relating to it in this Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Allowance for Doubtful Accounts Reserve

      Most of our accounts receivable are due from our suppliers and less than 15% are due from retail customers. Our net accounts receivable balance at September 30, 2005 of $28.2 million constitutes 9.9% of our total assets and our allowance for doubtful accounts reserve of $1.4 million is 5.0% of gross accounts receivable. We increased the reserve to $1.4 million at September 30, 2005 from $475,000 at September 30, 2004 as we fell behind in our collection efforts due to the support required to implement our new financial system.

      We categorize our accounts receivable by business type and estimate our allowance for doubtful accounts reserve using four aging classifications: current, 31-60 days, 61-90 days and over 90 days. For each business type, based on the amounts in each aging category, we apply a percentage to determine the amount of the reserve to be applied to each category. If a further review of a business type shows that this methodology needs to be adjusted, the percentage of reserve is adjusted accordingly.

      Estimating an allowance for doubtful accounts requires significant management judgment. It is possible that doubtful accounts write-offs could increase significantly in the future. We have historically estimated our allowance for doubtful accounts as a percentage of the aging categories, which could differ materially if the historical trend changed. In addition, different reserve estimates that we reasonably could have used would have had a material impact on our reported accounts receivable balance and thus would have had a material impact on the presentation of the results of operations. For those reasons, and in view of the fact that our accounts receivable balance is 9.9% of our total assets at September 30, 2005, we believe that the accounting estimate related to doubtful accounts is a critical accounting estimate.

Inventory Obsolescence Reserve

      Inventory represents $111.5 million, or 39.3% of our total assets at September 30, 2005. Our profitability and viability are highly dependent on the demand for our products. An imbalance between purchasing levels and sales could cause rapid and material obsolescence, and loss of competitive price advantage and market share. We believe that our product mix has provided sufficient diversification to mitigate this risk. At the end of each reporting period, we reduce the value of our inventory by our estimate of what we believe to be obsolete, and we recognize an expense of the same amount, which is included in cost of sales in our consolidated statement of operations.

      In our industry, merchandise models change periodically. When we replace an item in our assortment we reclassify the old model into a discontinued category. Generally, we attempt to sell these discontinued models at standard retail prices. In estimating our obsolescence reserve, we analyze the sales of discontinued merchandise by department and determine what profit or loss was recorded in the quarter. If product of the discontinued department is sold for below cost during the quarter, then we apply that negative percentage to the value of the inventory on hand as of the balance sheet date. In addition to this reserve we also identify the selling costs to be incurred in the sale of such discontinued inventory and add that to this obsolescence reserve.

We also evaluate the obsolescence of our service parts inventory based on the aging of this inventory. We apply a percentage to each aging category in order to determine the reserve amount.

      As a result of a combination of the factors described above, we have reduced our net inventory value to reflect our estimated amount of inventory obsolescence. Our inventory obsolescence reserve at September 30, 2005 is $2.7 million, compared to $2.3 million at September 30, 2004. The increase in our reserve reflects an earlier conversion to new items in our fall inventory assortment than in the prior year. Had we not done so, our discontinued inventory and our reserve for obsolete inventory would have been lower at September 30, 2005 than at September 30, 2004. It is also possible that obsolescence could rapidly become a significant issue in the future. In addition, different reserve estimates that we reasonably could have used would have had a material impact on our reported net inventory and cost of sales, and thus would have had a material impact on the presentation of our results of operations. For those reasons, we believe that the accounting estimate related to inventory obsolescence is a critical accounting estimate.

Income Taxes

      Our estimate of the expense or benefit and the sufficiency of the income tax accrual are somewhat dependent on our assessment of certain tax filing exposures. We provide for potential tax exposures arising from routine audits by taxing authorities. It is reasonably possible to assume that actual amounts payable as a result of such audits could be materially different from amounts accrued in the consolidated balance sheet.

      SFAS No. 109, Accounting for Income Taxes, requires that we record a valuation allowance when it is “more likely than not that some portion or all of the deferred tax assets will not be realized.” At March 31, 2005, we evaluated our recorded deferred tax assets and determined that it was more likely than not that we would not realize the deferred tax benefits related to those assets. Accordingly, we provided a full valuation allowance. We based that determination, in part, on our trend of continuing losses and consideration of store closings. We provided a valuation allowance of approximately $45.9 million related to net federal and state deferred tax assets as of September 30, 2005 based on our valuation at that time. In future periods we will re-evaluate the likelihood of realizing benefits from the deferred tax assets and adjust the valuation allowance as deemed necessary. Further, based on our recent history of operating losses, we did not provide any tax benefit on the 2005 losses.

Self-Insurance Reserves

      We are self-insured for workers’ compensation, auto/garage, general liability insurance and medical/dental benefits and evaluate our liability estimate on a quarterly basis based on actuarial information and experience. Historical claims are reviewed as to when they are incurred versus when they are actually paid and an average claims lag is determined. Once the average historical lag is determined, it is applied to the current level of claims being processed. Management believes, and experience has confirmed, the underwriting cost reductions outweigh the financial risk incurred by self-insurance of workers’ compensation, auto/garage, general liability and medical/dental benefits. Accounting standards require that a related loss contingency be recognized in our consolidated balance sheet.

      We determined that the total future liability related to claims that have already been incurred but have not been billed is $5.4 million compared to our estimate last year of $3.3 million. Most of this increase was due to a refinement in the estimation of the average historical lag described above.

      We believe that the accounting estimate related to assessment of future liability for current insurance claims is a critical accounting estimate because it is highly susceptible to change from period to period due to the requirement that our management make assumptions about future costs of claims based on historical costs.

Deferred Cash Discounts, Volume Rebates and Coop Advertising

      We receive cash discounts for timely payment of merchandise invoices and recognize these amounts in our statement of operations upon the sale of the inventory. The amount of the deferral for discounts received

but not yet recognized in income is $2.5 million as of September 30, 2005, compared to $2.2 million as of September 30, 2004 and is classified as a reduction in gross inventory in the consolidated balance sheet.

      We also receive substantial funds from our suppliers for volume rebates and coop advertising. These funds can be earned in two ways; the first is based on levels of inventory purchases and the second is based on performance of specific advertising activities. Amounts earned based on levels of inventory purchases are recognized in the statement of operations based on when the inventory from each supplier is sold. Amounts earned based on performance of specific advertising activities are recognized in the statement of operations as these activities are performed. The amount of the deferral for amounts received related to levels of inventory purchases is $14.7 million as of September 30, 2005, compared to $10.9 million as of September 30, 2004. No amounts were deferred as of September 30, 2005 for specific advertising activities as we did not have any unfulfilled obligations in relation to cash received prior to the year-end.

      Many of our agreements include stretch goals where the level of funds earned is dependent upon achieving certain purchase levels. We recognize these program funds in the statement of operations and as a reduction of inventory costs when we determine that we are likely to achieve the goal.

      We believe that the accounting estimate related to deferred cash discounts, volume rebates and coop advertising is a critical accounting estimate because it is highly susceptible to change from period to period due to changes in inventory levels, the supplier mix of the inventory on hand, and the timing of performance of specific advertising activities in relation to when the cash for these activities is received.

Recent Accounting Pronouncements

      In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123 (revised 2004), Share-Based Payment (“Statement 123(R)”), which requires the recognition of the cost of employee services received in exchange for an award of equity instruments in the financial statements and measurement based on the grant-date fair value of the award. It also requires the cost to be recognized over the period during which an employee is required to provide service in exchange for the award (presumptively the vesting period). Statement 123(R) replaces SFAS No. 123 and supersedes APB Opinion No. 25, and its related interpretations. Statement 123(R) is effective for periods beginning after June 15, 2005. We will adopt Statement 123(R) on October 1, 2005 as required. We have chosen the Modified Prospective Application (“MPA”) method for implementing Statement 123(R). Under the MPA method, new awards will be valued and accounted for prospectively upon adoption. Outstanding prior awards that are unvested as of October 1, 2005 will be recognized as compensation cost over the remaining requisite service period. Prior periods will not be restated.

      Adoption of Statement 123(R) will not affect our cash flow or financial position, but it will reduce our reported net income and earnings per share. Adopting Statement 123(R) will result in our recording compensation cost for employee stock options and employee share purchase rights.

      On September 30, 2005, our Board of Directors approved the full acceleration of the vesting of each otherwise unvested outstanding stock option granted under our 1995 and 1998 Stock Option and Incentive Plans and our 2004 Long Term Incentive Plan for those grants whose strike price was higher than the closing market value of a share of our common stock on that date. As a result, options to purchase approximately 867,000 shares, including approximately 374,000 options held by our executive officers and directors became immediately exercisable, effective as of September 30, 2005.

      The decision to accelerate vesting of these options was made primarily to minimize future compensation expense that we would otherwise recognize in our consolidated statements of operations upon the effectiveness of Statement 123(R). As a result of the acceleration, stock option expense will be reduced by approximately $2.0 million in 2006, $653,000 in 2007 and $63,000 in 2008.

      In March 2005, the FASB issued FASB Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations, an interpretation of FASB Statement No. 143 (“FIN 47”). FIN 47 clarifies that conditional asset retirement obligations meet the definition of liabilities and should be recognized when

incurred if their fair values can be reasonably estimated. The adoption of FIN 47 in the first quarter of fiscal 2006 is not expected to have a material effect on our consolidated results of operations and financial position.

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

      At September 30, 2005, we had $71.9 million of variable rate borrowings outstanding under our revolving credit facility and term loans. A hypothetical 10% change in interest rates for this variable rate debt, based on the September 30, 2005 balances outstanding, would have an annual impact on our interest expense of approximately $467,000.

      The response to this item is included in a separate section of this report. See “Index to Consolidated Financial Statements” on page F-1.

      None.

      Evaluation of Disclosure Controls and Procedures. The Company’s management, under the supervision of and with the participation of the Company’s Chief Executive Officer and interim Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act’), as of September 30, 2005. Based on such evaluation, the Company’s Chief Executive Officer and interim Chief Financial Officer have concluded that because of the material weaknesses described below, the Company’s disclosure controls and procedures were not effective as of that date. To address the deficiencies described below, the Company performed additional analysis and other post-closing procedures to ensure that the Company’s consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States.

      Management’s Report on Internal Control over Financial Reporting. The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as that term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s management, including the principal executive officer and principal financial officer, was unable to complete an assessment of its internal control over financial reporting as of September 30, 2005, which it had been conducting based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). While management did not complete its assessment of the effectiveness of internal control over financial reporting, management has identified certain control deficiencies that represent material weaknesses (as defined in the Public Company Accounting Oversight Board Auditing Standard No. 2, “An Audit of Internal Control Over Financial Reporting Performed in Conjunction with An Audit of Financial Statements) at September 30, 2005.

      A material weakness is a control deficiency, or a combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. As of September 30, 2005, the Company did not maintain effective controls over the financial reporting process because of the weaknesses described below.

      The weaknesses identified in internal control over financial reporting are largely the result of the Company (i) having insufficient resources in the accounting and finance function, and (ii) implementing a new Enterprise Resource Planning (“ERP”) system in the third quarter of fiscal 2005. Due to the recent implementation of the ERP system, the Company had an insufficient amount of time in fiscal 2005 to develop, implement and test internal controls and related procedures associated with the new system that supports financial reporting. The ERP system was implemented by the Company to improve the quality, timeliness and accuracy of information available to management to make decisions, to operate the business and to improve the information available to facilitate financial reporting, and management believes that these benefits will be realized in due time. The material weaknesses caused by the aforementioned conditions were as follows:

      Insufficient Staffing in Accounting and Finance, Leading to an Ineffective Control Environment. The Company did not have a sufficient number of personnel with the necessary expertise within its accounting and finance function. The lack of sufficient staff did not allow the Company to maintain an effective internal control environment. Specifically, management concluded that the Company did not have adequate internal controls in the following areas for the purposes of establishing, maintaining and communicating its control environment: (i) adequate segregation of duties, and (ii) an adequate monitoring program, including the full testing of its internal control systems. These deficiencies in the control environment also contributed to the Company’s inability to complete its documentation of controls by the as of date September 30, 2005, and to complete its testing of the design and operation of all controls within its internal control over financial reporting.

      Ineffective Controls over the Financial Close and Reporting Process. The Company’s design and operation of controls with respect to the process of preparing and reviewing the annual and interim financial statements are ineffective. Deficiencies include its ability to prepare interim and annual financial statements on a timely basis, inconsistent review and analysis of journal entries and of non-routine transactions, as well as inadequate controls over spreadsheets used in the preparation of journal entries. While these deficiencies did not result in a material misstatement of the financial statements, due to the potential pervasive effect on financial statement account balances and disclosures and the importance of the annual and interim financial closing and reporting process, management has concluded that, in the aggregate, these deficiencies in internal control result in a more than remote likelihood that an error would not have been prevented or detected, and therefore constitute a material weakness.

      Ineffective Controls over Spreadsheets Used in the Financial Close and Reporting Process. The Company did not maintain adequate access control over spreadsheets used in the financial reporting process. Among other areas, spreadsheets are utilized in preparing the Company’s period-end consolidation, to support areas of significant estimate and judgment in the financial statements, to accumulate information for footnote disclosures and to analyze balance sheet and income statement amounts. Inadequate change management and access controls were in place or such control processes lacked formal documentation to prevent unauthorized access to these spreadsheets. This control deficiency results in more than a remote likelihood that a misstatement of the Company’s financial statements might not be prevented or detected, and therefore constitutes a material weakness.

      Lack of Documentation of Controls over Reporting of Sales and Inventory Data. At September 30, 2005, the Company identified a number of deficiencies with respect to the documentation of controls surrounding sales and inventory data. Specifically, documentation of reviews of price changes, of weekly store cycle counts and of certain shipping and receiving documents were not consistently in place. In the aggregate, these control deficiencies result in a more than remote likelihood that a misstatement of the Company’s financial statements might not be prevented or detected, and therefore constitute a material weakness.

      Ineffective Control over Payroll Processing. The Company did not maintain adequate controls over access to and the maintenance of the payroll master files, including the consistent review of changes made and the documentation to support such review. In addition, the Company did not maintain adequate controls to ensure the accurate collection and approval of bi-weekly payroll data. Specifically, validation of time clock data is not performed effectively and the resolution of errors and issues that were identified during the review process was not performed on a consistent basis. Further there was not adequate segregation of duties relating

to the reconciliation of the bi-weekly payroll data collected internally to the information entered into the payroll data processing system, or adequate management level review to mitigate such lack of segregation of duties. In the aggregate, these deficiencies result in more than a remote likelihood that a misstatement of the Company’s financial statements might not be prevented or detected, and therefore constitute a material weakness.

      As a result of management’s incomplete assessment of the effectiveness of the Company’s internal control over financial reporting as of September 30, 2005, Deloitte & Touche LLP, our independent registered public accounting firm, was unable to perform auditing procedures necessary to form an opinion on management’s assessment and did not express an opinion on management’s assessment and expressed an adverse opinion on the effectiveness of internal control over financial reporting.

      Changes in Internal Control over Financial Reporting. The Company’s management, including the Chief Executive Officer and interim Chief Financial Officer, discussed the material weaknesses described above with the Audit Committee. In an effort to remediate the identified material weaknesses and other deficiencies, the Company has taken the following actions regarding internal control over financial reporting:

      Notwithstanding the assessment that our system of internal controls over financial reporting is ineffective and the list of material weaknesses identified above, management believes that our consolidated financial statements contained in our Annual Report on Form 10-K for the year ended September 30, 2005 as filed with the SEC fairly present our financial condition, results of operations and cash flows for the fiscal years covered thereby in all material respects, and the Company has received an unqualified report from our independent auditors on those consolidated financial statements.

      Our independent auditors issued the following report regarding our internal controls over financial reporting:

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

     Tweeter Home Entertainment Group, Inc.

      We were engaged to audit management’s assessment regarding the effectiveness of internal control over financial reporting of Tweeter Home Entertainment Group, Inc. and subsidiaries (the “Company”) as of September 30, 2005. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting.

      As described in the accompanying Management’s Report on Internal Control over Financial Reporting, the Company was unable to complete its assessment of the effectiveness of the Company’s internal control over financial reporting. Accordingly, we are unable to perform auditing procedures necessary to form an opinion on management’s assessment.

      A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

      Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

      A material weakness is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. The following material weaknesses have been identified and included in management’s assessment:

      Insufficient Staffing in Accounting and Finance, Leading to an Ineffective Control Environment. The Company did not have a sufficient number of personnel with the necessary expertise within its accounting and finance function. The lack of sufficient staff did not allow the Company to maintain an effective internal control environment. Specifically, management concluded that the Company did not have adequate internal controls in the following areas for the purposes of establishing, maintaining and communicating its control environment: (i) adequate segregation of duties, and (ii) an adequate monitoring program, including the full testing of its internal control systems. These deficiencies in the control environment also contributed to the Company’s inability to complete its documentation of controls by the as of date September 30, 2005, and to complete its testing of the design and operation of all controls within its internal control over financial reporting.

      Ineffective Controls over the Financial Close and Reporting Process. The Company’s design and operation of controls with respect to the process of preparing and reviewing the annual and interim financial

statements are ineffective. Deficiencies include its ability to prepare interim and annual financial statements on a timely basis, inconsistent review and analysis of journal entries and of non-routine transactions, as well as inadequate controls over spreadsheets used in the preparation of journal entries. While these deficiencies did not result in a material misstatement of the financial statements, due to the potential pervasive effect on financial statement account balances and disclosures and the importance of the annual and interim financial closing and reporting process, management has concluded that, in the aggregate, these deficiencies in internal control result in a more than remote likelihood that an error would not have been prevented or detected, and therefore constitute a material weakness.

      Ineffective Controls over Spreadsheets Used in the Financial Close and Reporting Process. The Company did not maintain adequate access control over spreadsheets used in the financial reporting process. Among other areas, spreadsheets are utilized in preparing the Company’s period-end consolidation, to support areas of significant estimate and judgment in the financial statements, to accumulate information for footnote disclosures and to analyze balance sheet and income statement amounts. Inadequate change management and access controls were in place or such control processes lacked formal documentation to prevent unauthorized access to these spreadsheets. This control deficiency results in more than a remote likelihood that a misstatement of the Company’s financial statements might not be prevented or detected, and therefore constitutes a material weakness.

      Lack of Documentation of Controls over Reporting of Sales and Inventory Data. At September 30, 2005, the Company identified a number of deficiencies with respect to the documentation of controls surrounding sales and inventory data. Specifically, documentation of reviews of price changes, of weekly store cycle counts and of certain shipping and receiving documents were not consistently in place. In the aggregate, these control deficiencies result in a more than remote likelihood that a misstatement of the Company’s financial statements might not be prevented or detected, and therefore constitute a material weakness.

      Ineffective Control over Payroll Processing. The Company did not maintain adequate controls over access to and the maintenance of the payroll master files, including the consistent review of changes made and the documentation to support such review. In addition, the Company did not maintain adequate controls to ensure the accurate collection and approval of bi-weekly payroll data. Specifically, validation of time clock data is not performed effectively and the resolution of errors and issues that were identified during the review process was not performed on a consistent basis. Further there was not adequate segregation of duties relating to the reconciliation of the bi-weekly payroll data collected internally to the information entered into the payroll data processing system, or adequate management level review to mitigate such lack of segregation of duties. In the aggregate, these deficiencies result in more than a remote likelihood that a misstatement of the Company’s financial statements might not be prevented or detected, and therefore constitute a material weakness.

      These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the consolidated financial statements and financial statement schedule as of and for the year ended September 30, 2005, of the Company and this report does not affect our report on such financial statements and financial statement schedule.

      Because of the limitation on the scope of our audit described in the second paragraph of this report, the scope of our work was not sufficient to enable us to express, and we do not express, an opinion on management’s assessment referred to above. In our opinion, because of the effect of the material weaknesses described above on the achievement of the objectives of the control criteria and the effects of any other material weaknesses, if any, that we might have identified if we had been able to perform sufficient auditing procedures relating to management’s assessment regarding the effectiveness of internal control over financial reporting, the Company has not maintained effective internal control over financial reporting as of September 30, 2005, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

      We have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule as of and for the year ended September 30, 2005, of the Company and have issued our report dated December 29, 2005 that expressed an unqualified opinion on those financial statements and financial statement schedule.

Deloitte & Touche LLP

Boston, Massachusetts

December 29, 2005

      None.

PART III

      The information required by this Item is included in the definitive Proxy Statement for the Company’s 2006 Annual Meeting of Stockholders, to be filed with the Commission on or about January 6, 2006 (the “2006 Proxy Statement”), under “Election of Directors” and is incorporated herein by reference.

      The information required by this Item is included in the 2006 Proxy Statement under “Executive Compensation” and is incorporated herein by reference.

      The information required by this Item, other than the table included below, is included in the 2006 Proxy Statement under “Security Ownership of Certain Beneficial Owners and Management” and is incorporated herein by reference.

Equity Compensation Plan Information

      The information required by this Item is included in the 2006 Proxy Statement under “Employment/ Severance Agreements” and “Related Party Transactions”, and is incorporated herein by reference.

      The information required by this Item is included in the 2006 Proxy Statement under “Principal Accountant Fees and Services” and is incorporated herein by reference.

PART IV

      (a)(1) Financial Statements. The financial statements required to be filed by Item 15 of this Annual Report on Form 10-K, and filed herewith, are as follows:

      Consolidated Balance Sheets as of September 30, 2004 and 2005

      Consolidated Statements of Operations for the Years Ended September 30, 2003, 2004 and 2005

      Consolidated Statements of Cash Flows for the Years Ended September 30, 2003, 2004 and 2005

      Notes to Consolidated Financial Statements

      (a)(2) Financial Statement Schedules.

      Schedule II attached

      (a)(3) Exhibits.

      See the Exhibit Index included immediately preceding the Exhibits to this Form 10-K.

      (b) Reports on Form 8-K.

      On July 8, 2005, we filed with the Securities and Exchange Commission a Current Report on Form 8-K to announce sales results for the quarter ended June 30, 2005.

      On July 28, 2005 we filed with the Securities and Exchange Commission a Current Report on Form 8-K to announce we had amended our credit agreement with a lenders’ syndicate led by Bank of America.

      On July 29, 2005 we filed with the Securities and Exchange Commission a Current Report on Form 8-K to announce our earnings results for the quarter ended June 30, 2005. In addition, we filed a transcript of the quarterly earnings conference call held on July 29, 2005.

SCHEDULE II

TWEETER HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES

VALUATION AND QUALIFYING ACCOUNTS

Allowance for Doubtful Accounts (amounts in thousands)

SIGNATURES

      Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: December 29, 2005

Date: December 29, 2005

      Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Tweeter Home Entertainment Group, Inc. and Subsidiaries

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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 (the “Company”) as of September 30, 2004 and 2005, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended September 30, 2005. Our audits also included the financial statement schedule listed in the Index at Item 15(a)(2). These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.

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

      In our opinion, 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, 2004 and 2005, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2005, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

      As discussed in Note 2 to the consolidated financial statements, during fiscal 2003, the Company changed its method of accounting for vendor consideration.

      We were engaged to audit, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of September 30, 2005, and our report dated December 29, 2005 disclaimed an opinion on management’s assessment of the effectiveness of the Company’s internal control over financial reporting because of a scope limitation and expressed an adverse opinion on the effectiveness of the Company’s internal control over financial reporting because of material weaknesses.

Deloitte & Touche LLP

Boston, Massachusetts

December 29, 2005

TWEETER HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

See notes to consolidated financial statements

TWEETER HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

See notes to consolidated financial statements

TWEETER HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY