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<p align="center"><font size="3"><strong>UNITED STATES</br>
SECURITIES AND EXCHANGE COMMISSION</br>
Washington, D.C. 20549</strong></font></p>

<br>
<HR WIDTH="25%">
<p align="center"><font size="4"><strong>FORM 10-K</strong></font></p>
<HR WIDTH="25%">
<br>


<p align="center"><font size="3"><strong>
[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934
</strong></font></p>
<p align="center"><font size="3" color="FF0000"><strong>
                  For the fiscal year ended July 31, 1999
</strong></font></p>

<p align="center"><font size="3"><strong> OR </strong></font></p>

<p align="center"><font size="3"><strong>
[   ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934
</strong></font></p>
<p align="center"><font size="3"><strong>
 For the transition period from 8-1-98 to 7-31-99
</strong></font></p>
<p align="center"><font size="3"><strong>
                           Commission File No. 333-54035
</strong></font></p>
<p align="center"><font size="5" color="#0000FF"><strong>
                             <u>MTS, INCORPORATED</u>
</strong></font></br>
<font size="2">
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
</font></p>

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<CENTER><u>California</u></CENTER>
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<CENTER><u> 94-1500342 </u></CENTER>
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<font size="2">
<CENTER>  (State or Other Jurisdiction of Incorporation or Organization) </CENTER>
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<font size="2">
<CENTER>(I.R.S. Employer Identification Number)</CENTER>
</font>
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<p align="center"><font size="3"><strong><u>
                                 2500 DEL MONTE STREET
       
                                WEST SACRAMENTO, CA 95691
</strong></font></u></br>

<font size="2">
                    (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
</font></p>

<p align="center"><font size="3"><strong><u>
       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (916) 373-2500
</strong></font></u></p>

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<p align="center"><font size="3"><strong>
Securities registered pursuant to Section 12(b) of the Act:
</strong></font></p>

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<font size="2">
<CENTER><u> Title of Each Class</u></CENTER>
</font>
</TD>
<TD>
<font size="2">
<CENTER><u>Name of Each Exchange on Which Registered</u></CENTER>
</font>
</TD>
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<font size="3"><strong>
<CENTER>  None </CENTER>
</font></strong>
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<CENTER>  None </CENTER>
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<p align="center"><font size="3"><strong>
Securities registered pursuant to Section 12(g) of the Act:  None
</strong></font></p>


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<br>

<p>   
     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. [   ] </p>

<p>   
     Indicate by check mark whether 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 and (2) has been subject to such filing
requirements for the past 91 days. YES [X]   NO [   ] </p>


<p align="center"><font size="3"><strong>
                      DOCUMENTS INCORPORATED BY REFERENCE
</strong></font></p>

 
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<CENTER><u> Documents</u></CENTER>
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<font size="2">
<CENTER><u>Form 10-K References</u></CENTER>
</font>
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<TR vAlign=top>
<TD>
<font size="3"><strong>
<CENTER>
Portions of the company's Definitive Proxy<br>
Statement for its Annual Meeting of<br>
Stockholders to be held on November 10, 1999
</CENTER>
</font></strong>
</TD>
<TD>
<font size="3"><strong>
<CENTER>
Part III, Items 10-13
</CENTER>
</font></strong>
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<p align="center"><strong> MTS, INCORPORATED<br>
                                    FORM 10-K<br>
                     FOR THE FISCAL YEAR ENDED JULY 31, 1999<br></p>
</strong></p>
<p align="center"><strong>
                                      INDEX
</strong></p>
<p align="center"><strong>
                                     PART I
</strong></p>

<p><A HREF="#item1">
Item 1.   Business</A><br>


<A HREF="#item2">
Item 2.   Properties</A><br>


<A HREF="#item3">
Item 3.   Legal Proceedings</A><br>





<A HREF="#item4">
Item 4.   Submission of Matters to a Vote of Security Holders</A><br>





<p align="center"><strong>
                                     PART II
</strong></p>



<p><A HREF="#item5">
Item 5.   Market for Registrant's Common Stock and Related Stockholder Matters</A><br>


<A HREF="#item6">
Item 6.   Selected Financial Data</A><br>





<A HREF="#item7">
Item 7.   Management's Discussion and Analysis of Financial Condition
          and Results of Operations</A><br>

<A HREF="#item7a">
Item 7A.      Quantitative and Qualitative Disclosure About Market Risks</A><br>

<A HREF="#item8">
Item 8.   Financial Statements and Supplementary Data</A><br>


<A HREF="#item9">
Item 9.   Changes in and Disagreements with Accountants on Accounting and
          Financial Disclosure</A><br>




<p align="center"><strong>
                                    PART III
</strong></p>


<p><A HREF="#item10">
Item 10.  Directors and Executive  Officers of the  Registrant</A><br>


<A HREF="#item11">
Item 11.  Executive  Compensation</A><br>

<A HREF="#item12">
Item 12.  Security Ownership of Certain Beneficial Owners and Management</A><br>


<A HREF="#item13">
Item 13.  Certain  Relationships and Related  Transactions</A><br>

<p align="center"><strong>
                                     PART IV
</strong></p>


<A HREF="#item14">
Item 14.  Exhibits, Financial Statement Schedules and Reports on Form 8-K<br>


<p align="left"><strong>
<A HREF="#sign">
<p>Signatures</A>
</strong></p>


<p align="center"><strong>
                                     PART I
</strong></p>

<p><i>The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for
forward-looking statements to encourage companies to provide prospective information about
their companies.  With the exception of historical information, the matters discussed  in this
Form 10-K are forward-looking statements and may be identified by the use of words such as
"believe," "expect," "anticipate," "plan," "estimate," "intend" and "potential."  Such
statements reflect the current views of the Company with respect to future events and are
subject to certain risks, uncertainties and assumptions.  A variety of factors could cause the
Company's actual results to differ materially from the anticipated results expressed in such
forward-looking statements, including, among other things, general economic conditions, sales
volumes, profit margins, the Company's and its suppliers' Year 2000 readiness, international
issues including currency exchange fluctuations and the impact of labor markets and new product
and new release  introductions, on the Company's overall profitability.  Readers are encouraged
to review all of the Company's filings with the SEC  that describe additional important
factors, including risk factors,  that could cause actual results to differ materially from
those contemplated by the statements made herein.</i>


<p><A NAME="item1">
<p><strong>Item 1.   Business</A><br></strong>

<p><strong>General</strong>

<p>Founded in 1960, MTS, Incorporated ("Tower" or "Company")is one of the  largest specialty
retailers of recorded music headquartered in the United States in terms of revenues and is one
of the largest and most widely-recognized music retailers in the world. As of July 31, 1999,
the Company operated a total of 179 stores worldwide, consisting of 113 U.S. stores in 20
states and 66 international stores in 10 countries.   The Company's business strategy is to
continue its growth and increase its profitability through (i) the continued expansion and
refinement of its store operations in the United States and internationally, (ii) to focus on
opportunistic store openings worldwide, (iii) providing order fulfillment services to and
co-marketing with, an Internet-based company and (iv) realizing synergies and economies of
scale through a combining of certain of its books and music operations.

<p>The Company offers a diversified line of music products including compact discs, recorded audio
cassettes, recorded video cassettes, DVD and other complementary products, including books,
magazines, blank tapes, software titles, personal electronics  and accessories.

<p>Tower attracts and retains customers who buy music on a year-round basis by providing an
extensive product selection in an interactive, entertaining environment. Tower stores feature
extended store hours, in-store listening stations and knowledgeable and motivated sales
personnel. These factors make Tower stores a preferred shopping destination. Tower offers one
of the broadest selections of recorded music, including recent releases, older releases and
various other music formats primarily in stand-alone locations in densely populated urban and
suburban areas.

<p>Most of the Company's domestic stores exceed 10,000 square feet and carry at least 50,000 music
titles. Flagship stores, which are located in major metropolitan areas such as Boston, Buenos
Aires, Chicago, Glasgow, Hong Kong, Honolulu, London, Los Angeles, New Orleans, New York,
Osaka, Philadelphia, San Francisco, Seattle, Singapore, Taipei, Tokyo, Toronto and Washington,
D.C., typically exceed 20,000 square feet and carry between 80,000 and 120,000 music titles.

<p>The Company's fiscal year ended July 31, 1999.  The Company's sales increased 1.8% during
fiscal 1999 to $1.03 billion from $1.01 billion during fiscal 1998.  The Company reported an
operating profit of $31.8 million, down 1.8% from last year's operating profit of $32.4
million.  Declining leverage on occupancy expenses combined with flat sales growth were the
major drivers of the 1999 operating results.  On a consolidated basis, the Company's net
earnings decreased to ($8,805.57) per diluted share compared to $9,865.72 per diluted share for
1998 due primarily to non-cash foreign currency translation loss relating to translating the
Company's yen-denominated debt to U.S. dollars at the spot rate on July 31, 1999.

<p>Due to the Company's  high per store sales volume and long-standing relationships with vendors
and music manufacturers, the Company receives substantial cooperative advertising allowances,
beneficial purchasing terms, short lead times on inventory fulfillment, product return rights
and drop shipments of orders directly to its stores. Tower monitors the quantity and mix of
inventory in each of its stores through a central inventory management system.

<p>Additionally, Tower's store managers are given discretion in managing the level and mix of the
inventory in their stores in order to most effectively market to each store's demographic
customer base.

<p>With the objective of increasing and diversifying its revenue base, Tower became the first
U.S.-based music retailer to implement an international growth strategy. This expansion, which
commenced in 1979, initially focused on the Japanese market (which is currently the world's
second largest market for recorded music),  and enabled Tower to become a market leader in
Japan for recorded music. Tower implemented a similar expansion strategy in the United Kingdom
beginning in 1986. The Company currently has more international locations than any other
U.S.-based music retailer and, for the 1999 fiscal year, derived approximately 40% of its total
net revenues from international sales. Tower currently operates 40 stores in Japan; eight  in
England; five in Mexico, four  in Singapore; two each in Argentina, Hong Kong and Taiwan;  and
one each in, Canada, Ireland and Scotland. In addition, the Company has entered into franchise
agreements with local operators in Colombia, Ecuador, Israel, Malaysia, The Philippines, South
Korea and Thailand.

<p><strong>INDUSTRY </strong>

<p>According to the Music Business International 1999 Annual Report, the worldwide market for
recorded music grew slightly from approximately $38.2 billion in calendar 1996 to approximately
$38.8 billion in calendar 1997 and forecasts $40 billion for calender 1998 marking a couple
years of relatively flat growth.  It is estimated the global value will increase at an average
annual rate of 2.9% to $47.5 billion by 2004. The top five markets, North America, Western
Europe, Japan, Latin America and Asia (outside of Japan), individually accounted for
approximately 33.2%,31.6%,17.0%,6.5% and 5.7%, respectively, and collectively accounted for
approximately 94%, of the global market in calendar 1997.

<p>According to the International Federation Photographic Institute, the U.S. retail music market
was approximately $11.9 billion in 1997, down from $12.3 billion in 1996 but was expected to
grow to $13.2 for 1998 and continue at an annual rate of 2.9% through 2004. The retail home
entertainment industry is highly competitive.  The Company's retail stores compete primarily
with other specialty retail music chains (e.g. Musicland, TransWorld and Wherehouse), as well
as mass merchants (e.g. Wal-Mart, K-Mart, Target) and consumer electronics stores (e.g.  Best
Buy, Circuit City), some of which may have greater financial or other resources than the
Company.  The Company also competes with mail order clubs (e.g. BMG Music and Columbia House)
and the Internet companies (e.g. CDnow and Amazon.com).  In addition, a uniform format is being
developed that will enable music companies to sell their products via direct Internet download.
 The Company believes that sales via the Internet will continue to become more significant over
time, and has determined to emphasize order fulfillment to, and co-marketing with, an
Internet-based affiliate company.





<p>According to the Music Business International 1999 Annual Report,  there are four primary
channels of recorded music distribution in the United States: (i) specialty music retail
stores, (ii)discount and consumer electronics stores, (iii)record clubs,(iv) and mail order,
Internet  and other, which accounted for approximately 51.8%, 26.6%, 3.0% and 18.6% of unit
shipments, respectively, in calendar 1997.


<p><strong>OPERATIONS </strong>

<p>As of July 31, 1999, Tower currently operated a total of 179 stores worldwide, consisting of
113 U.S. retail stores in 20 states and 66 international stores in 10 countries. The Company's
operating structure consists of (i) its U.S. stores and wholesaling operations, (ii) its Asian
stores and wholesaling operations, and (iii) its U.K. and Ireland stores. The Company's
operations are directed by an Executive Committee comprised of seven executive officers. See
"Management."


<p>UNITED STATES.  The Company's U.S. operations currently consist of 113 retail stores. In the
United States, Tower has organized its operations into 11 geographic regions, each headed by a
regional manager who has responsibility for sales and merchandising, day-to-day operations and
administration. Tower's corporate headquarters provides central support to each region,
including systems, distribution, accounting and national marketing programs. The corporate
headquarters also gives final approval for all new store sites and store design and oversees
quality standards and other critical elements of the Tower concept. The Company believes that
by organizing its operations in this manner, it can more effectively manage its business,
thereby enhancing its ability to achieve its expansion plans without compromising operating
standards.



<p>To pursue growth opportunities through new store formats and merchandising strategies, Tower
initiated an operating agreement with The Good Guys!, Inc. ("The Good Guys!"), a leading
electronics retailer to open stores under the "WOW!" name. The WOW! stores sell both recorded
music and consumer electronics equipment, offering the shopper both convenience and a broad
product offering.  WOW! stores operate in  Nevada and California. Under the WOW! store format,
Tower and The Good Guys! each manage, operate and lease from the landlord their respective
sections of the store.


<p>ASIA.  Tower's Asian operations consist of 40 stores in Japan, two in Hong Kong, four in
Singapore and two in Taiwan. All Asian store managers report to the Director of Asian
Operations located in Japan. A portion of the U.S.-sourced product is shipped to the Asian
stores through the Company's U.S. distribution facilities. The balance of product is shipped
through a variety of sources worldwide.


<p>UNITED KINGDOM AND IRELAND.  As of July 31, 1999, the Company operated eight stores in England,
one in Scotland, and one in Ireland. All store managers in the United Kingdom report to the
Director of European Operations located in London. A portion of U.S.-sourced product is shipped
through the Company's U.S. distribution operations. The balance of product is shipped through a
variety of sources worldwide.


<p><strong>JOINT VENTURES AND FRANCHISES </strong>

<p>The Company has a joint venture operation in Mexico. This arrangement enables Tower to enter
into the Mexican market and obtain an improved understanding of local product demand and
operating procedures while benefitting from a sharing of capital commitments. Under the  joint
venture arrangement, Tower manages store operations, utilizing input from local investors. Some
product is sourced through Tower's distribution operations. The joint venture operation is
managed from Tower's corporate headquarters. The Company anticipates that future expansion in
most international markets will be through wholly-owned subsidiaries or through franchises
rather than joint ventures.



<p>The Company has entered into franchise agreements to operate stores in Colombia, Ecuador, the
Philippines, Malaysia, South Korea and Thailand. Additional franchised stores are planned for
other countries. The Company has focused its franchising operations in developing markets where
the operating environment makes direct operations less desirable. Franchised stores are managed
by the local operator with input from the Company on store format and merchandising. The
Company benefits from these franchise agreements through the distribution of products as well
as through royalty income and trademark licensing fees.



<p><strong>TOWERRECORDS.COM</strong>

<p>The Company has determined to transfer operations of its Internet commerce site,
TowerRecords.com to Tower Direct, LLC ("Tower Direct"). Fixed assets of the TowerRecords.com
division of the Company have been  transferred at net book value to Tower Direct, LLC, a
separate company  incorporated in the State of Delaware, which will continue to operate under
the trade name, TowerRecords.com, and will use the Tower brand and trademarks under license
from the Company.  TowerRecords.com will operate as an  online retailer of music and
complementary information, and entertainment products.  TowerRecords.com has garnered high
rankings and reviews from Internet and industry experts in surveys of the Internet's best
websites.  Tower Direct plans to continue to leverage the Internet capability of
TowerRecords.com to customers in Tower stores. This site offers customers thousands of titles
of music and video items in stock and ready for immediate shipping from the Company's
state-of-the-art fulfillment and distribution center. Management expects that Tower will
provide order fulfillment services to, and will receive revenues from, Tower Direct.  Tower
will continue to focus its business on traditional brick-and-mortar retail operations.






<p><strong>STORE FORMAT AND LOCATIONS </strong>

<p>Tower has differentiated itself from competing music retailers with its strategic store
locations, which generally feature a large, centrally-located store in a densely populated
urban area complemented by nearby urban and suburban stand-alone stores. Tower's flagship
stores in major markets typically exceed 20,000 square feet, with the majority of all stores
exceeding 10,000 square feet. Newer stores range from 15,000 to 25,000 square feet, depending
on the market and location. The Company's larger, stand-alone locations provide it with various
operating efficiencies, including lower rent expenses and lower per unit costs than comparable
mall-based retailers. The Company's large base of high-volume, stand-alone stores enables it to
receive drop-shipments of product directly to store locations (thereby reducing the costs
associated with warehousing and distribution). The Company believes that the selection of
locations for its stores is critical to the success of its operations. The site-selection
process consists of an in-depth analysis of regional demographics, consumer purchasing habits
and traffic within a specific area. Senior management is actively involved in this process and
grants all final site approval, evidencing the Company's commitment to continued growth and its
focus on successful, long-lasting locations. For the fiscal year  ended July 31, 1999, the
Company opened 1 store in the United States and seven stores internationally (including 1 in
Japan), while closing five small predominately outlet stores, combining two book stores and
relocating four  existing locations. The Company plans to continue to leverage its strong brand
name and proven store format in new and existing markets in locations that meet the Company's
demographic and performance criteria.







<p><strong>PRODUCTS </strong>

<p>The Company offers a diverse line of products including compact discs, recorded audio
cassettes, recorded video cassettes, DVD and other complementary products, including books,
magazines, blank tapes, software titles, personal electronics and accessories.


<p>RECORDED MUSIC.  The Company's primary source of revenue is the sale of recorded music on
compact discs and audio cassettes. For fiscal years 1998 and 1999, recorded music sales
accounted for approximately 86.2% and 86.1%, respectively, of Tower's worldwide net revenues.
The Company's stores carry a wide selection of compact discs and audio cassettes purchased from
all major and most independent recording companies, which, except for new releases and special
promotions, are arranged in the stores by genre and alphabetically by artist or group. Tower
differentiates itself from its competitors through the breadth and depth of its product
selection. Tower's strategy is to offer the broadest selection of recorded music for its
customers, including recent BILLBOARD Top 50 releases as well as a comprehensive variety of
older releases and diverse music formats. Most of the Company's stores carry at least 50,000
music titles, while flagship stores located in major markets, such as Boston, Buenos Aires,
Chicago, Glasgow, Hong Kong, Honolulu, London, Los Angeles, New Orleans, New York, Osaka,
Philadelphia, San Francisco, Seattle, Singapore, Taipei, Tokyo, Toronto and Washington, D.C.,
usually carry between 80,000 and 120,000 music titles.





<p>VIDEO PRODUCTS.  In addition to recorded music, the majority of Tower stores sell
videocassette, and DVD products. For fiscal years 1998 and 1999, video sales accounted for
approximately 8.3%,8.6% of Tower's worldwide net revenues. Selected stores also offer video
rentals. These video products generally command larger gross margins than the Company's
recorded music products. DVD offers the consumer laser technology in a smaller disc format with
superior picture quality and audio fidelity. The Company believes that it is well-positioned to
capitalize on the growing DVD market.



<p>COMPLEMENTARY PRODUCTS.  To complement music buyers' interests, Tower stores also sell books,
magazines, blank tapes, software titles, audio electronics  and accessories. As of July 31,
1999, the Company operated 10 stand-alone book stores.


<p><strong>MARKETING, ADVERTISING AND PROMOTION </strong>
<p>Tower aggressively markets, advertises and promotes its products and its brand images to
generate customer awareness of its extensive selection of music titles, knowledgeable customer
service and interactive and entertaining store environments. Tower advertises in a variety of
national and local print and broadcast media, including television, magazines, newspapers and
billboards. Tower targets a wide range of customers, from teenagers to senior citizens, who
purchase music on a year-round basis. The Company believes that its clustering of stores in
strategic markets allows it to maximize its use of marketing, advertising and promotional U.S.
dollars. In addition, Tower attracts large corporate sponsors such as American Express, IBM and
MasterCard for promotions and events. Tower also produces several music publications under the
names PULSE (U.S.), BOUNCE (Japan), TOP (U.K.), PULSE LATINO (Latin America) and PASS (Taiwan).
Tower maintains a reputation for unique marketing through in-store appearances and live
performances by recording artists, campaigns and promotions with suppliers and other third
parties, book signs, tie-ins with local music events (e.g., Nashville's Fan Fair and the
Monterey Jazz Festival) as well as involvement in national music events, such as sponsorship of
the 1999 Lilith Tour. Tower believes that its strong focus on localized marketing provides it
with a significant advantage over many of its competitors. The Company's localized marketing
approach includes local promotions of concerts and in-store appearances by musicians, as well
as providing Tower store managers discretion (subject to parameters set by the Company's
regional and national product managers) to customize product inventory in their stores to the
demographics and buying patterns of their local market. Depending on local demographics,
merchandise mix and promotions can be shifted toward certain music genres. For example, in New
York City, Tower's Lincoln Center store places a greater emphasis on its classical music
selection than the downtown store, which emphasizes the latest trends in rock music.  As one of
the nation's largest music retailers and due to the diversity and depth of its music selection,
the Company has developed strong supplier relationships. As a result, the Company receives
substantial cooperative advertising allowances, beneficial purchasing terms, short lead times
on inventory fulfillment, product return rights (subject to certain terms and restocking fees),
and drop shipments of orders directly to its stores, all of which have contributed to Tower's
historically favorable operating margins. Cooperative advertising funds are provided to promote
recorded music products of a specific genre or on a label-wide basis. Tower advertises jointly
with recording companies worldwide in local and national media markets and receives substantial
financial support from them. Cooperative advertising offsets a significant portion of the
Company's advertising expenses.

<p><strong>SUPPLIERS </strong>

<p>RECORDED MUSIC.  The majority of Tower's music purchases come from five major suppliers with
which Tower has developed long-standing relationships. As a result of these relationships and
Tower's high sales volume, the Company receives substantial cooperative advertising allowances,
beneficial purchasing terms, short lead times on inventory fulfillment, competitive pricing
programs and drop shipments of orders directly to its stores. In addition, the Company
purchases product from numerous independent distributors and labels. Unsold music product may
be returned to the manufacturer at any time that the title remains in the current music catalog
of a manufacturer; however, restocking fees are generally assessed for returned product.
Catalog changes are generally made only after advance notice, allowing the Company to return
excess inventory before a title is discontinued. None of the Company's major suppliers limits
returns of inventory.




<p>COMPLEMENTARY PRODUCTS.  Book and magazine purchases require coordination with a greater number
of vendors than music purchases. Returned books and magazines are not subject to restocking
charges. Pre-recorded video cassettes, DVD products, audio electronics  and software titles are
purchased from a limited number of vendors for shipment through the Company's U.S. distribution
operations, or are drop-shipped directly to stores. For the most part, unsold video products
and software titles may be returned to distributors for full refunds.



<p><strong>PURCHASING, INVENTORY MANAGEMENT AND DISTRIBUTION </strong>

<p>Unlike most of its competitors, Tower's purchasing is partly decentralized. Tower store
managers are given discretion to manage the levels and mix of merchandise in their stores.
These managers work closely with regional and national product managers to customize product
inventory in their stores to the demographics and buying patterns of their local markets. The
Company's ISP (In Store Processing)system, using the IBM AS/400 computer system, enables
management to monitor up-to-the-moment levels and mix of its inventory in each of its stores.
The ISP system provides instantaneous on-line information regarding quantities on hand, turns
at the store level and on a combined basis, historical movement reports by SKU, pricing and
cost data and customer service information. The ISP system also identifies slow-moving and
deleted titles and overstocked items, and provides suggested replenishment information to store
buyers. By utilizing the ISP system, store managers are able to pre-set and adjust quantities
on hand and establish "just-in-time" reorder points. This system enables the store managers to
carry appropriate levels of deep-catalog product and to maintain sufficient inventory levels
for fast-moving product. The Company's U.S. distribution operations distribute products that
are not drop-shipped to Tower stores, and distribute a portion of the product to the Company's
international subsidiaries, joint venture and franchisees. The Company also wholesales
products, particularly independent label recorded music, to other retailers in both the U.S.
and international markets. In addition, the Company has an  established export wholesaling
branch in Japan. This enables the Company to export international catalog product to music
retailers, taking advantage of the economies of scale, while providing prompt delivery. The
Company also sells recorded music both via mail order and over the Internet. In 1999, the
Company closed its wholesaling operation in the United Kingdom. The Company has maintained a
website at http:/ /www.towerrecords.com and an online store on America Online at keyword
"TOWER." Mail order and Internet sales are fulfilled through the Company's U.S. distribution
facility allowing, in many cases, overnight delivery to customers. The Company has determined
to transfer its Internet-based operations at that website to Tower Direct.


<p><strong>COMPETITION </strong>

<p>The retail music industry is highly competitive. According to the Music Business International
1999 Annual Report, there are four primary channels of recorded music distribution in the
United States: specialty music retail stores, discount and consumer electronics stores, record
clubs, and mail order and other channels, which accounted for approximately 51.8%, 26.6%, 3.0%
and 18.6% of unit shipments, respectively, in calendar 1997. The Company competes with a wide
variety of music retailers, including regional and national mall-based music chains,
international chains, deep-discount retailers, mass merchandisers, consumer electronics
outlets, record clubs, e-commerce retailers,  mail order, and independent operators. The
Company believes the principal competitive factors in the retail music industry are brand name
recognition, merchandising, selection, pricing, inventory management, marketing, store location
and management expertise. The Company believes that it competes favorably with respect to each
of these factors.




<p>MAJOR INTERNATIONAL CHAINS.  In certain of its major, metropolitan markets, the Company
competes directly with HMV and Virgin--large, international music retailers-that, like the
Company, emphasize a broad selection of titles. Management believes that HMV and Virgin tend to
cater to a sophisticated and less price-sensitive customer base; Tower's customer base includes
not only such customers but also extends to a much broader demographic. HMV and Virgin are
expected to open additional stores, some of which may be in locations that would compete
directly with Tower.



<p>MALL-BASED MUSIC RETAILERS.  The Company also competes with various mall-based music retailers
such as Musicland, Transworld Entertainment, and Wherehouse Entertainment. These competitors
tend to occupy mall locations.


<p>DISCOUNTERS AND CONSUMER ELECTRONICS STORES.  Specialty music retailers have experienced
increased competition from the entrance into the retail music industry of large discounters and
consumer electronics stores such as Wal-Mart, Kmart, Target, Circuit City, Best Buy, Barnes and
Noble and Borders. Many of these large discounters and consumer electronics stores typically
feature BILLBOARD Top 50 recordings with minimal or no gross margin with the intent of
generating additional store traffic and cross-selling other, higher margin products, such as
consumer electronics.


<p>OTHER.  The Company expects continued growth in competing home entertainment options, including
the Internet and larger numbers of television and music channels offered by cable companies.
The further development of Internet and cable technologies, coupled with high quality digital
recording technologies, could enable direct downloading of recorded music by consumers, which
could result in significant changes in existing distribution channels for prerecorded music.
Such a development could have a material adverse effect on the Company's business, financial
condition or results of operations.



<p><strong>TRADEMARKS </strong>

<p>Tower regards its trademarks and service marks as having significant worldwide value and as
being important to its marketing efforts and brand name recognition. Tower has registered its
TOWER RECORDS-VIDEO-BOOKS trademark and variations thereof, along with numerous other
trademarks, with the United States Patent and Trademark Office on the Principal Register. The
Company has applications pending for a number of additional marks. The Company also has
registered its TOWER trademark, or variations thereof, in numerous foreign countries. The
Company's policy is to pursue the registration of its marks whenever possible and to vigorously
oppose any infringement of its trademarks and trade names.



<p><strong>EMPLOYEES </strong>

<p>As of July 31, 1999, the Company employed worldwide  approximately 7,500 persons, of whom
approximately 725  were employed on a part-time basis. None of the Company's employees is
covered by a collective bargaining agreement. The Company considers its employee relations to
be good. Increases in the minimum wage have had a significant effect on the Company's
compensation expense during prior periods.  Any future increases in the minimum wage may have a
material adverse effect on the Company's results of operations and financial condition.
relationships. As a result, the Company receives substantial cooperative advertising
allowances, beneficial purchasing terms, short lead times on inventory fulfillment, product
return rights (subject to certain terms and restocking fees), and drop shipments of orders
directly to its stores, all of which have contributed to Tower's historically favorable
operating margins. Cooperative advertising funds are provided to promote recorded music
products of a specific genre or on a label-wide basis. Tower advertises jointly with recording
companies worldwide in local and national media markets and receives substantial financial
support from them. Cooperative advertising offsets a significant portion of the Company's
advertising expenses.




<p>    The Company has also introduced an affinity MasterCard credit card which capitalizes on
the Tower brand name and enables the Company to track purchasing patterns by cardholding
customers.

<p><strong>SUPPLIERS</strong>

<p>    RECORDED MUSIC.  The majority of Tower's music purchases come from six major suppliers
with which Tower has developed long-standing relationships. As a result of these relationships
and Tower's high sales volume, the Company receives substantial cooperative advertising
allowances, beneficial purchasing terms, short lead times on inventory fulfillment, competitive
pricing programs and drop shipments of orders directly to its stores. In addition, the Company
purchases product from numerous independent distributors and labels. Unsold music product may
be returned to the manufacturer at any time that the title remains in the current music catalog
of a manufacturer; however, restocking fees are assessed for returned product. Catalog changes
are generally made only after advance notice, allowing the Company to return excess inventory
before a title is discontinued. None of the Company's major suppliers limits returns of
inventory.



<p>    COMPLEMENTARY PRODUCTS.  Book and magazine purchases require coordination with a greater
number of vendors than music purchases. Returned books and magazines are not subject to
restocking charges. Although management believes that its current book and magazine purchasing
procedures are efficient, it is considering various alternatives that would allow Tower stores
to order directly from publishers and shorten delivery time.


<p>    Pre-recorded video cassettes, DVD products, laser discs and software titles are
purchased from a limited number of vendors for shipment through the Company's U.S. distribution
operations, or are drop-shipped directly to stores. Unsold video products and software titles
may be returned to distributors for full refunds.


<p><strong>PURCHASING, INVENTORY MANAGEMENT AND DISTRIBUTION</strong>

<p>    The Company believes that it has developed state-of-the-art inventory purchasing,
management and distribution systems.

<p>    Unlike most of its competitors, Tower's purchasing is partly decentralized. Tower store
managers are given discretion to manage the levels and mix of merchandise in their stores.
These managers work closely with regional and national product managers to customize product
inventory in their stores to the demographics and buying patterns of their local markets. The
Company believes that the skill of its store managers in merchandising to local tastes is an
important factor in Tower controlling its historical product return levels, thereby reducing
restocking fees and improving margins and maintaining favorable vendor relations.



<p>    The Company's ISP system enables management to monitor up-to-the-moment levels and mix
of its inventory in each of its stores. The ISP system provides instantaneous on-line
information regarding quantities on hand, turns at the store level and on a combined basis,
historical movement reports by SKU, pricing and cost data and customer service information. The
ISP system also identifies slow-moving and deleted titles and overstocked items, and provides
suggested replenishment information to store buyers. By utilizing the ISP system, store
managers are able to pre-set and adjust quantities on hand and establish "just-in-time" reorder
points. This system enables the store managers to carry appropriate levels of deep-catalog
product and to maintain sufficient inventory levels for fast-moving product.



<p>    The Company's U.S. distribution operations distribute products that are not drop-shipped
to Tower stores, and distribute a portion of the product to the Company's international
subsidiaries, joint ventures and franchisees. The Company also wholesales products,
particularly independent label recorded music, to other retailers in both the U.S. and
international markets. In addition, the Company has established export wholesaling branches in
Japan and the United Kingdom. This enables the Company to export international catalog product
to music retailers, taking advantage of the economies of scale, while providing prompt delivery.



<p>    The Company also sells recorded music both via mail order and over the Internet. The
Company maintains a website at HTTP:/ /WWW.TOWERRECORDS.COM and an online store on America
Online at keyword "TOWER." Mail order and Internet sales are fulfilled through the Company's
U.S. distribution facility allowing overnight delivery to customers in many cases.


<p><strong>COMPETITION</strong>

<p>    The retail music industry is highly competitive. In the United States there are four
primary channels of recorded music distribution: specialty music retail stores, discount and
consumer electronics stores, record clubs, and mail order and other channels, which accounted
for approximately 49.9%, 31.5%, 14.3% and 4.3% of unit shipments, respectively, in calendar
1996. The Company competes with a wide variety of music retailers, including regional and
national mall-based music chains, international chains, deep-discount retailers, mass
merchandisers, consumer electronics outlets, record clubs, mail order, and independent
operators. The Company believes the principal competitive factors in the retail music industry
are brand name recognition, selection, pricing, inventory management, marketing, store location
and management expertise. The Company believes that it competes favorably with respect to each
of these factors.



<p>    MAJOR INTERNATIONAL CHAINS.  In certain of its major, metropolitan markets, the Company
competes directly with HMV and Virgin-large, international music retailers-that, like the
Company, emphasize a broad selection of titles. Management believes that HMV and Virgin tend to
cater to a sophisticated and less price-sensitive customer base; Tower's customer base includes
not only such customers but also extends to a much broader demographic. Further, management
believes that Tower's approach to localized marketing, advertising and merchandising, coupled
with its more competitive pricing, differentiates Tower from HMV and Virgin. In 1997, HMV had
15 stores in the United States, primarily on the East Coast, while Virgin had 11 stores in the
United States, located primarily in tourist destinations. HMV and Virgin also had 20 and eight
stores, respectively, in Japan, and 105 and 38 stores, respectively, in the United Kingdom, the
other major markets in which the Company competes. HMV and Virgin are expected to open
additional stores, some of which may be in locations that would compete directly with Tower.




<p>    MALL-BASED MUSIC RETAILERS.  The Company also competes with various mall-based music
retailers such as Musicland, Transworld Entertainment, Wherehouse Entertainment and Camelot.
These competitors tend to occupy mall locations and, in the Company's judgment, often face
significant competitive disadvantages, such as reduced inventory selection due to size
constraints on mall retail space, larger overhead costs generated by higher rent and occupancy
costs, higher per unit costs, higher costs associated with warehousing and distribution, and
lack of an international infrastructure and savvy brand-name identity. In recent years, many of
the mall-based music retailers whose revenues are heavily dependent upon BILLBOARD Top 50 sales
have had difficulty competing effectively with the selling tactics of the large discounters,
and have been closing unprofitable stores in an attempt to minimize operating losses. Several
mall-based music retailers, including Camelot Music, Peppermint, Record Giant, Peaches
Entertainment, Strawberries and Wherehouse Entertainment, have filed for bankruptcy.




<p>    DISCOUNTERS AND CONSUMER ELECTRONICS STORES.  Specialty music retailers have experienced
increased competition from the entrance into the retail music industry of large discounters and
consumer electronics stores such as Wal-Mart, Kmart, Target, Circuit City, Best Buy, Barnes and
Noble and Borders. The market share of specialty music retailers dropped from 70% in 1990 to
50% in 1996 while the market share of the large discounters and consumer electronics stores
increased over the same period. These large discounters and consumer electronics stores
typically feature BILLBOARD Top 50 recordings with minimal or no gross margin with the intent
of generating additional store traffic and cross-selling other, higher margin products, such as
consumer electronics. Tower believes that its operations have been less adversely affected than
mall-based music retailers by the selling tactics of the large discounters and consumer
electronics stores because of its emphasis on deep-catalog merchandising.



<p>    OTHER.  The Company expects continued growth in competing home entertainment options,
including the Internet and larger numbers of television and music channels offered by cable
companies. The further development of Internet and cable technologies, coupled with high
quality digital recording technologies, could enable direct downloading of recorded music by
consumers, which could result in significant changes in existing distribution channels for
prerecorded music. Such a development could have a material adverse effect on the Company's
business, financial condition or results of operations. See "Risk Factors--Trends Affecting the
Music Industry."


<p><strong>TRADEMARKS</strong>

<p>    Tower regards its trademarks and service marks as having significant worldwide value and
as being important to its marketing efforts and brand name recognition. Tower has registered
its TOWER RECORDS-VIDEO-BOOKS trademark and variations thereof, along with numerous other
trademarks, with the United States Patent and Trademark Office on the Principal Register. The
Company has applications pending for a number of additional marks. The Company also has
registered its TOWER trademark, or variations thereof, in numerous foreign countries. The
Company's policy is to pursue the registration of its marks whenever possible and to vigorously
oppose any infringement of its trademarks and trade names.



<p><strong>EMPLOYEES</strong>

<p>    As of July 31, 1999, the Company employed approximately   7,500 persons, of whom
approximately 965 were employed on a part-time basis. None of the Company's employees is
covered by a collective bargaining agreement. The Company considers its employee relations to
be good.

<p><A NAME="item2">
<strong>ITEM 2.     PROPERTIES</A></strong>

<p>The Company's headquarters are located in approximately 91,000 square feet of leased facilities
in West Sacramento, California. These facilities house the Company's management, marketing and
sales personnel. The lease for these facilities terminates on April 30, 2004. The Company
believes that there is sufficient office space available at favorable leasing terms in the
Sacramento area to satisfy any additional needs of the Company that may result from future
expansion.


<p>As of July 31, 1999, Tower's total leased space consisted of approximately 2.7 million square
feet of space worldwide. As of July 31, 1999, the Company was a party to approximately 240 real
estate leases and subleases, relating to nearly all of its store locations as well as its
administrative and warehouse facilities. Substantially all of these are recorded as operating
leases. The leases expire between 1999 and 2024, with renewal options varying between one and
20 years. Lease terms typically provide a minimum payment plus modifications for changes in the
consumer price index and/or other specified increases. Most of the U.S. stores operate as
stand-alone locations.




<p><A NAME="item3">
<strong>ITEM 3.  LEGAL PROCEEDINGS</A></strong>


<p>The Company is not a party to any material legal proceedings. The Company has received a
document request in connection with an investigation by the Federal Trade Commission into
certain trade practices by major recording companies involving the implementation of minimum
advertised price ("MAP") programs in response to the deep discounting tactics of large
discounters and consumer electronic stores and the threat of withdrawal of cooperative
advertising and promotional funds for retailers which fail to observe the MAP guidelines. The
Company does not believe it is a target of the inquiry. The Company does not expect the outcome
of this investigation to have a material effect on its business, financial condition or results
of operations.




<p><A NAME="item4">
<strong>ITEM 4.     SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS</A></strong>

<p>No matters were submitted to a vote of the company's stockholders during  the fourth quarter of
fiscal 1999.


<p align="center"><strong>
                                     PART II
</strong></p>

<p><A NAME="item5">
<strong>ITEM 5.   MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS</A></strong>

<p>There is no established public market for any class of MTS  common stock.  As of July 31, 1999,
there was one shareholder of record of the Common Stock (Tower Records, Incorporated).  See
"Item 12.  Security Ownership of Certain Beneficial Owners and Management" for a discussion of
the beneficial ownership of MTS.


<p>The Company has not paid cash dividends on its Common Stock and does not anticipate paying any
such dividends in the foreseeable future.

<p>The Credit Agreement restricts the payment of dividends by MTS on shares of Common Stock.



<p><A NAME="item6">
<strong>ITEM 6. SELECTED FINANCIAL DATA</A></strong>
<pre>
                                                 FISCAL YEAR ENDED JULY 31,
                                       -------------------------------------------------
                                         1999      1998      1997      1996      1995
                                       --------- --------- --------- --------- ---------
                                                     (DOLLARS IN MILLIONS)
INCOME STATEMENT DATA:
  Net revenues......................   $1,026.4  $1,008.1    $991.8  $1,001.0    $950.6
  Cost of sales.....................      694.9     684.2     669.3     676.1     640.6
                                       --------- --------- --------- --------- ---------
    Gross profit....................      331.5     323.9     322.5     324.9     310.0
  Selling, general and
   administrative expenses..........      276.3     269.3     267.6     270.4     255.1
  Depreciation and
    amortization....................       23.4      22.3      26.4      20.9      22.9
                                       --------- --------- --------- --------- ---------
  Income from operations............       31.8      32.3      28.5      33.6      32.0
  Other income expense:
  Interest expense..................       17.6      14.9      14.3      14.9      11.5
  Foreign currency
    translation gain (loss).........      (14.7)      1.1      (3.6)     (1.4)      5.6
  Other income (expenses)...........       (4.1)     (0.5)     (1.1)     (0.1)      0.1
                                       --------- --------- --------- --------- ---------
  Income before taxes,minority
    interest,extraordinary item,
    and cumulative effect of change
    in accounting principle                (4.6)     18.0       9.5      17.2      26.2
  Provision (benefit) for income tax        3.8       8.1       4.5       7.0      10.9
                                       --------- --------- --------- --------- ---------
  Income before minority interest,
    extraordinay item, and cummulati
    effect of change in accounting
    principle                              (8.3)      9.9       5.0      10.2      15.3
  Other items(a)....................       (0.5)      0.0      (1.5)     (0.2)     (0.2)
                                       --------- --------- --------- --------- ---------
  Net income........................      ($8.8)     $9.9      $3.5     $10.0     $15.1
                                       ========= ========= ========= ========= =========

BALANCE SHEET DATA (AT
  PERIOD END):
  Total assets......................     $586.2    $545.4    $544.6    $528.8    $505.1
  Total debt (including
    current maturities).............      283.1     231.9     211.3     202.8     199.6
  Shareholders' equity..............      115.7     120.8     134.0     135.1     127.5
</pre>

<p><strong>NOTES TO SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION </strong>

<BLOCKQUOTE>
<p>(a) Other items is comprised of minority interests in net income of subsidiaries,
cumulative effect of change in accounting principle and extraordinary item.
</BLOCKQUOTE>


</pre>

<p><A NAME="item7">
<strong>ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS</A></strong>
<p>The following discussion should be read in conjunction with "Selected Historical Consolidated
Financial Information," and the consolidated financial statements of the Company and the notes
thereto included elsewhere in this Form 10-K. The results shown herein are not necessarily
indicative of the results to be expected in any future period. The following discussion
contains forward-looking statements that involve known and unknown risks and uncertainties.
These risks include, but are not limited to, changes in the competitive environment for the
Company, including the entry of non-traditional retailers to the Company's markets; the release
schedule and quality of releases  by the music industry; general economic factors in markets
where the Company sells its products, and other factors discussed in the Company's filings with
the United States Securities and Exchange Commission.  Use of the words "anticipates,"
"believes," "estimates," "expects," "intends," "plans" and similar expressions is intended to
identify forward-looking statements. The Company's actual results could differ materially from
those expressed or implied by such forward-looking statements as a result of factors set forth
herein. Such factors include, but are not limited to, the cautionary statements set forth below
and under the captions "Forward-Looking Statements" and "Business" herein. All forward-looking
statements included in this Form 10-K are based on information available to the Company on the
date hereof, and the Company assumes no obligation to update any such forward-looking
statements.






<p><strong>GENERAL </strong>

<p>Founded in 1960, Tower is one of the  largest specialty retailers of recorded music
headquartered in the United States in terms of revenues and is one of the largest and most
widely-recognized music retailers in the world. As of July 31, 1999, the Company operated a
total of 179 stores worldwide, consisting of 113 U.S. stores in 20 states and 66 international
stores in 10 countries.


<p>The Company offers a diversified line of music products including compact discs, recorded audio
cassettes, recorded video cassettes, laser discs, DVD and other complementary products,
including books, magazines, blank tapes, software titles, personal electronics  and
accessories.

<p>Tower attracts and retains customers who buy music on a year-round basis by providing an
extensive product selection in an interactive, entertaining environment. Tower stores feature
extended store hours, in-store listening stations and knowledgeable and motivated sales
personnel. These factors, make Tower stores a preferred shopping destination. Tower offers one
of the broadest selections of recorded music, including recent releases, older releases and
various other music formats primarily in stand-alone locations in densely populated urban and
suburban areas.



<p>Most of the Company's domestic stores exceed 10,000 square feet and carry at least 50,000 music
titles. Flagship stores, which are located in major metropolitan areas such as Boston, Buenos
Aires, Chicago, Glasgow, Hong Kong, Honolulu, London, Los Angeles, New Orleans, New York,
Osaka, Philadelphia, San Francisco, Seattle, Singapore, Taipei, Tokyo, Toronto and Washington,
D.C., typically exceed 20,000 square feet and carry between 80,000 and 120,000 music titles.




<p>For the twelve month period ended July 31, 1999, Tower's net revenues were $1.03 billion.


<p><strong>RESULTS OF OPERATIONS </strong>

<p><strong>TWELVE MONTHS ENDED JULY 31, 1999  COMPARED TO TWELVE  MONTHS ENDED JULY 31, 1998 </strong>


<p>NET REVENUES.  Net revenues were $1,026.4 billion for the twelve  months ended July 31, 1999,
an increase of $18 million or 1.8% (or 2.7%) including the favorable effects of U.S.
dollar-Japanese yen exchange rate movements), from $1,008.1 billion for the twelve  months
ended July 31, 1998. The Company's net revenues were derived from U.S. sales of $616.1 million
and international sales of $410.3 million for the twelve  months ended July 31, 1999 compared
to $625.5 million in the U.S. and $382.6 million internationally for the twelve  months ended
July 31, 1998. Record and tape sales for the period ended July 31, 1999 represented 86.1% of
the Company's net revenues versus 86.2% for the period ended July 31, 1998. Retail sales
represented 96.6% of the Company's net revenues for the twelve-month period ended July 31, 1999
 versus 97.3% for the twelve-month period ended July 31, 1998. The increase in the Company's
net revenues was primarily due to an increase in new store expansion and international same
store sales growth. Comparable same store sales growth was (.9%) which was predominately a
reflection of a decline in domestic same store sales growth.





<p>GROSS PROFIT.  Gross profit was $331.5 million for the twelve months ended July 31, 1999, an
increase of $7.5 million or 2.3%, from $324.0 million for the twelve months ended July 31,
1998. Gross profit as a percentage of net revenues increased slightly to 32.3% for the twelve
months ended July 31, 1999 as compared to 32.1% for the twelve months ended July 31, 1998. The
Company believes that the primary factor contributing to the slight improvement was managements
pricing adjustments of dollar-sensitive product staying matched with the volatile Japanese yen.



<p>SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.  Selling, general and administrative expenses
were $276.3 million for the twelve months ended July 31, 1999, an increase of $7.0 million or
2.6% from $269.3 million for the twelve  months ended July 31, 1998. As a percentage of net
revenues, selling, general and administrative expenses increased .2% for the twelve months
ended July 31, 1999 as compared to the twelve months ended July 31, 1998, primarily due to
rising occupancy and wage costs resulting from lower economies of scale in relation to lower
domestic same store sales.


<p>INCOME FROM OPERATIONS.  Income from operations was $31.8 million for the twelve months ended
July 31, 1999, a decrease of $.6 million from $32.4 million for the twelve months ended July
31, 1998. As a percentage of net revenues, income from operations decreased to 3.1% for the
twelve months ended July 31, 1999  from 3.2% for the twelve months ended July 31, 1998, due
primarily from the rise in selling, general and administrative costs.


<p>OTHER EXPENSE.  Other expense (net) was ($36.4) million for the fiscal year ended July 31, 1999
compared to ($14.3) million for the fiscal year ended July 31, 1998, which represented an
increase of $22.1 million, primarily due to a net non-cash foreign currency transaction loss of
($14.7)million for the fiscal year ended July 31, 1999 compared to a net foreign currency
transaction gain of $1.1 million for the fiscal year ended July 31, 1998. This non-cash loss
largely represented the translation back to U.S. dollars at the spot rate of the Company's yen-
denominated debt. The Company does significant business transactions in currencies other than
the U.S. dollar. Exchange losses and gains result from the day- to- day fluctuations in foreign
currency exchange rates, due primarily to the volatile yen and other Asian currencies against
the U.S. dollar. Additionally, net interest expense increased $2.7 million for the
twelve-months ended July 31, 1999, as compared with the twelve- months ended July 31, 1998,
largely due to an increase in borrowings under the credit facility.


<p>NET INCOME.  As a result of the above, the Company reported a net loss of($8.8) million  for
the twelve months ended July 31, 1999, a decrease of $18.7 million from a profit of $9.9
million for the twelve months ended July 31, 1998.


<p><strong>FISCAL YEAR ENDED JULY 31, 1998 COMPARED TO FISCAL YEAR ENDED JULY 31, 1997 </strong>


<p>NET REVENUES.  Net revenues were $1,008.1 billion for the fiscal year ended July 31, 1998, an
increase of $16.3 million or 1.7% (or a 5.9% increase excluding the unfavorable effects of U.S.
dollar-Japanese yen exchange rate movements) from $991.8 million for the fiscal year ended July
31, 1997. The Company's revenues were derived from U.S. sales of $625.5 million and
international sales of $382.6 million for the fiscal year ended July 31, 1998 compared to
$597.4 million in the U.S. and $394.4 million internationally for the fiscal year ended July
31, 1997. Record and tape sales for the period ended July 31, 1998 represented 86.2% of the
Company's net revenues versus 89.6% for the period ended July 31, 1997. Retail sales
represented 97.3% of the Company's net revenues for the fiscal year ended July 31, 1998 versus
96.6% for the fiscal year ended July 31, 1997. Comparable same store sales growth was 4.5%
which reflected growth domestically and internationally.




<p>GROSS PROFIT.  Gross profit was $323.9 million for the fiscal year ended July 31, 1998, an
increase of $1.4 million or .4% from $322.5 million for the fiscal year ended July  31, 1997.
Gross profit as a percentage of net revenues decreased slightly to 32.1% for the fiscal year
ended July 31, 1998 compared to 32.5% for the fiscal year ended July 31, 1997. The Company
believes that the primary factors contributing to the slight decline in gross profit margin
during this period was continued pricing pressure domestically and the effects of the margin
pressure from the Asian market.



<p>SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.  Selling, general and administrative expenses
were $269.3 million for the fiscal year ended July 31, 1998, an increase of $1.7 million or
0.6% from $267.6 million for the fiscal year ended July 31, 1997. As a percentage of net
revenues, selling, general and administrative expenses decreased .3% for the fiscal year ended
July 31, 1998 as compared to the fiscal year ended July 31, 1997 largely as a result of greater
economies of scale realized from stronger store  performance.



<p>DEPRECIATION AND AMORTIZATION.  Depreciation and amortization was $22.3 million for the fiscal
year ended July 31, 1998 compared to $26.4 million for the fiscal year ended July 31, 1997,
decrease  of approximately $4.1 million, primarily due to a decrease in store expansion
relative to prior years.


<p>INCOME FROM OPERATIONS.  Income from operations was $32.4 million for the fiscal year ended
July 31, 1998, an increase of $3.9 million or 13.7% from $28.5 million for the fiscal year
ended July 31, 1997. As a percentage of net revenues, income from operations increased to 3.2%
for the fiscal year ended July 31, 1998 from 2.9% for the fiscal year ended July 31, 1997.


<p>OTHER EXPENSE.  Other expense (net) was ($14.3) million for the fiscal year ended July 31, 1998
as compared to ($19.0)million for the fiscal year ended July 31, 1997,which represented a
decrease  of $4.7 million which was primarily due to a net non-cash foreign currency
transaction gain of $1.1 million for the fiscal year ended July 31, 1998 compared to a net
foreign currency transaction loss of $3.6 million for the fiscal year ended July 31, 1997. The
Company does significant business transactions in currencies other than the U.S. dollar.
Exchange losses result from the day to day fluctuations in foreign currency exchange rates, due
primarily to the Japanese yen relative to the U.S. dollar.



<p>EXTRAORDINARY CHARGES.  An extraordinary charge (net of tax) of $1.2 million was incurred in
total in fiscal 1997 as a result of the early repayment of certain privately placed debt.


<p>NET INCOME.  As a result of the foregoing, net income was $9.9 million for the fiscal year
ended July 31, 1998, an increase of $6.4 million or 183% from $3.5 million for the fiscal year
ended July 31, 1997.

<p><strong>LIQUIDITY AND CAPITAL RESOURCES </strong>

<p>The Company's principal capital requirements are to fund working capital needs, the opening of
new stores, the refurbishment and expansion of stores, and continued development the Company's
technological infrastructure.


<p>Net cash provided by operating activities was $15.0 million and $33.5 million for the twelve
months ended July 31, 1999 and 1998, respectively.  Inventory build up was a result of an
increase in store expansion and special discounts for fiscal 1999. In 1999 cash used for
inventory purchases was $10.7 million versus a source of cash of $22.4 for fiscal 1998,and was
primarily related to inventory requirements associated with store and product expansion. The
decrease in cash flow from operations for the period ended July 31, 1999 compared to the
comparable period in fiscal 1998 was primarily due to the Company's net loss and an increase in
inventory build-up.



<p>Net cash used for investing activities was primarily geared to capital expenditures on stores,
including the opening of one store in the United States, seven stores internationally along
with store relocations, refurbishments and technology investments totaling approximately $32.8
million with an additional $7 million used for video rental purchase.


<p>Net cash provided by financing activities in 1999 was $26.8 million, resulting principally from
borrowings under the credit facility.  Net cash provided by financing in 1998 was $28.8
million, which resulted from net borrowings under the credit facility and the issuance of $110
million in senior subordinated notes which was used to refinance short term debt.


<p>Interest payments on the senior subordinated notes and on the credit facility will continue to
impose significant liquidity demands upon the Company. In addition to its debt service
obligations, the Company will require liquidity for capital expenditures, lease obligations and
general working capital needs. Total capital expenditures for fiscal 2000 are expected to be
approximately $40 million, of which approximately $5 million will be related to maintenance
capital requirements.


<p>The Company believes that the cash flow generated from its operations, together with amounts
available under the credit facility, should be sufficient to fund its debt service
requirements, lease obligations, working capital needs, its currently expected capital
expenditures and other operating expenses for the next twelve months. The  credit facility
provides the Company with available borrowings up to an aggregate amount of $275.0 million, of
which approximately $150.0 million can be borrowed in Japanese yen and a portion in British
pounds, subject to compliance with the borrowing base formula. As of July 31, 1999,
approximately $251.2 million was available under the credit facility based upon the borrowing
base formula, of which $161.5 million had been drawn. The $161.5 million includes an increase
of $20.1 million due to yen debt translated back to U.S. dollars at the spot rate on July 31,
1999.The Company's future operating performance and ability to service or refinance the notes
and the credit facility will be subject to future economic conditions and to financial,
business and other factors, many of which are beyond the Company's control.


<p>The credit facility and the senior subordinated notes impose certain restrictions on the
Company's ability to make capital expenditures and limit the Company's ability to incur
additional indebtedness. Such restrictions could limit the Company's ability to respond to
market conditions, to provide for unanticipated capital investments or to take advantage of
business or acquisition opportunities. The covenants contained in the  credit facility and the
senior subordinated notes also, among other things, limit the ability of the Company to dispose
of assets, repay indebtedness or amend other debt instruments, pay distributions, create liens
on assets, enter into sale and leaseback transactions, make investments, loans or advances and
make acquisitions.

<p><strong>SEASONALITY </strong>

<p>Retail music sales in the United States are typically higher during the calendar fourth quarter
as a result of consumer purchasing patterns due to increased store traffic and impulse buying
by holiday shoppers. As a result, the majority of U.S. music retailers and, more specifically,
the mall-based retailers rely heavily on the calendar fourth quarter to achieve annual sales
and profitability results. Tower's deep-catalog approach to prerecorded music appeals to
customers who purchase music on a year-round basis. Consequently, Tower has historically had
reduced seasonal reliance. In addition, international markets exhibit less fourth quarter
seasonality than U.S. markets and Tower's international presence has historically further
reduced this reliance on the U.S. holiday shopping season.   Nevertheless, the U.S. holiday
season is an important element in  the Company's financial operating performance.

<p><strong>INFLATION </strong>

<p>The Company believes that the recent low rates of inflation in the United States, Japan and the
United Kingdom, where it primarily operates, have not had a significant effect on its net sales
or operating results. The Company attempts to offset the effects of inflation through price
increases and control of expenses. However, there can be no assurance that during a period of
significant inflation, the Company's results of operations would not be adversely affected.



<p><strong>FOREIGN EXCHANGE MANAGEMENT </strong>

<p>The Company has substantial operations and assets located outside the United States, primarily
in the United Kingdom and Japan. With respect to international operations, principally all of
Tower's revenues and costs (including borrowing costs) are incurred in the local currency,
except that certain inventory purchases are tied to U.S. dollars. The Company's financial
performance on a U.S. dollar-denominated basis has historically been significantly affected by
changes in currency exchange rates. The Company believes that the matching of revenues and
expenses in local currency, as well as its foreign exchange hedging activities and borrowings
in foreign currencies, mitigate the effect of fluctuating currency exchange rates. Nonetheless,
changes in certain exchange rates could adversely affect the Company's business, financial
condition and results of operations. See "Risk Factors--Risks Relating to International
Operations" and "Quantitative and Qualitative Disclosures about Market Risk."





<p><strong>YEAR 2000 COMPLIANCE </strong>

<p>The Company understands the material nature of the business issues surrounding computer
processing of dates into and beyond the year 2000.  Many currently installed computer systems
and software products are coded to accept only two digit entries in the date code field.
Beginning in the year 2000, these date code fields will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, computer systems and/or
software used by many companies may need to be upgraded to comply with such "Year 2000"
requirements.   The company continues to assess the impact of the Year 2000 issue on its
current and future internal information systems and non-information technology systems
(equipment, escalators, systems, etc.) and has developed an overall plan to assist with the
Year 2000 problem resolution process.  The primary components of the plan are as follows:
awareness of the problem, preparation of an inventory checklist, assessment of complexity,
remediation, validation testing and implementation.




<p>With respect to information technology systems, the Company has already completed all phases
through implementation for the majority of its financial systems and anticipates full
compliance by late 1999.  The Company has also begun corrective efforts, and in many cases,
completed corrective efforts in areas of non-information technology systems and products and
the Company anticipates minimal business disruption as a result of Year 2000 issues; however,
possible consequences include, but are not limited to delays in delivery or receipt of
merchandise, inability to process transactions, loss of communications domestically and
internationally and similar interruptions of normal business activities.  MTS has contacted and
will continue to contact significant vendors, suppliers, financial institutions and other third
party providers upon which its business depends.  These efforts are designed to minimize the
impact to the Company should these third parties fail to remediate their Year 2000 issues.
However, the Company can give no assurances that such third parties will, in fact, be
successful in resolving all of their Year 2000 issues, and the failure of such third parties to
comply on a timely basis could have an adverse effect on the Company.  To the extent
practicable, the Company is evaluating contingency plans to minimize the effects on the
Company's operations in the event of any third party system or product failure.  The Company
will continue to make every effort to ensure that its business, financial condition and result
of operations will not be adversely impacted by a failure of its systems or the systems of
others.


<p>To date, approximately 100% of the Company's administrative support IT systems have at least
completed the remediation phase.  Of this amount, approximately 100% have completed the testing
and remediation phase and 85% have been replaced or upgraded.  All remaining Year 2000
compliance efforts for administrative IT functions are expected to be completed by late 1999.
Additionally, approximately 85% of non-IT systems have completed the remediation, testing, and
implementation phases with no material replacements necessary.  As of July 31, 1999, the
Company has incurred $.7 million in Year 2000 remediation costs and estimates it will require
an additional $.5 million to complete all Year 2000 compliance issues identified as a result of
remediation testing.  These costs are expensed as incurred and include, but are not limited to,
costs directly related to fixing Year 2000 issues, such as modifying software and hiring Year
2000 solution providers.  Although it is not certain what the worst case Year 2000 scenario
would be, management believes that any computer generated work, i.e.  inventory tracking, point
of sale at cash registers, could be performed manually as had been the case prior to
implementation of the in-store processing programs in 1994.  In the event that use of a
contingency plan is required due to a Year 2000 system failure, the Company intends to revert
back to manual "off line" processing of its sales and inventory systems until satisfactory
resolution of the problem has occurred.  However, the Company does not expect an impairment in
its ability to execute critical functions.


<p><A NAME="item7a">
<strong>ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK</A></strong>

<p>     The Company is exposed to the impact of interest-rate changes and foreign currency
fluctuations.  The Company does not enter into market risk sensitive instruments for trading
purposes.  In the ordinary course of its business, the Company enters into debt instruments,
including instruments with short-term maturities. The Company could be exposed to a higher
interest rate at the time such debt instruments are renewed or refinanced.  Certain of the
Company's debt instruments contain terms that permit the Company to cap the interest rate at a
maximum rate.  In the past, the Company has purchased interest rate hedges to manage the risk
associated with interest rate variations.  At present, the Company is party to a
yen-denominated interest rate swap in the amount of $19,214,000, and may enter into such
arrangements from time to time in the future.




<p>     Of the Company's current long-term debt, $110 million bears a fixed interest rate and is
payable in 2005.  The Company prepared sensitivity analyses of the balance of its financial
instruments to determine the impact of hypothetical changes in interest rates on the Company's
results of operations, cash flows, and the fair value of its financial instruments.  The
interest-rate analysis assumed a one hundred basis point adverse change in interest rates on
all financial instruments but did not consider the effects of the reduced level of economic
activity that could exist in such an environment.  Based on the results of such analysis, the
Company concluded that a one hundred basis point adverse change in interest rates from year-end
1999 levels would not materially affect the Company's results of operations, cash flows, or the
fair value of its financial instruments.

<p>     A substantial majority of the Company's revenues, expenses and capital purchasing
activities are transacted in U.S. dollars.  However, the Company does enter into these
transactions in other foreign currencies, primarily Japanese yen.  The Company uses forward
exchange contracts to hedge intercompany transactions with foreign subsidiaries and affiliates,
and in connection with certain of its Japanese subsidiary's purchases of product from third
parties.  Such instruments are short-term instruments entered into in the ordinary course of
the Company's business, in order to reduce the impact of fluctuating foreign currencies on net
income and shareholders' equity.


<p>     To finance expansion and operations in Japanese markets, the Company has entered into
yen-denominated borrowing arrangements.  Unrealized gains and losses resulting from the impact
of currency exchange rate movements on these debt instruments are recognized as other income or
expense in the period in which the exchange rates change.  Historically, the Company has not
entered into foreign exchange contracts to manage the risk associated with such currency
fluctuations, but it may do so from time to time in the future.



<p>     The Company prepared sensitivity analyses of its yen-denominated financial instruments to
determine the impact of hypothetical changes in foreign exchange rates on the Company's results
of operations, cash flows and the fair value of its financial instruments.  The analysis
assumed a 10% adverse change in exchange rates on such financial instruments but did not
consider other effects on economic activity that could exist in such an environment.  Based on
the results of such analysis, the Company concluded such an adverse change in exchange rates
from year-end 1999 levels would materially affect the Company's results of operations, cash
flows or the fair value of its financial instruments, as is the case in the current year, in
which the adverse change in the exchange rate was 21% from the rate at the end of the prior
year, resulting in a foreign currency loss of $14.7 million.


<p><A NAME="item8">
<strong>ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA</A></strong>

<p>The following are included herein:

<BLOCKQUOTE>
<p>The Financial Statements are set forth herein commencing on page F-1 of
this Report. and include herein:


<p>Report of Independent Public Accountants

<p>Report of Independent Accountants

<p>Consolidated Balance Sheets as of July 31, 1999, and 1998

<p>Consolidated Statements of Income for the fiscal years ended July 31,
1999,  1998, and 1997


<p>Consolidated Statements of Shareholders' Equity for the fiscal years ended
     July 31, 1997, 1998, and 1999

<p>Consolidated Statements of Cash Flows for the fiscal years ended July 31,
  1999, 1998, and 1997

<p>Notes to Consolidated Financial Statements

</BLOCKQUOTE>

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<p align="center"><strong>
<p><strong>                       REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS</strong>
</strong></p>
<p>To MTS, Incorporated and Subsidiaries:

<p>We have audited the accompanying consolidated balance sheets of MTS INCORPORATED and
Subsidiaries (a California corporation) as of July 31, 1999 and 1998,  and the related
consolidated statements of income, shareholders' equity and  cash flows for the years then
ended.  These financial statements are the  responsibility of the Company's management.  Our
responsibility is to express  an opinion on these financial statements based on our audits.
The statement of income of MTS, Incorporated and Subsidiaries for the year ended July 31,  1997
 was audited by other auditors whose report dated  October 29, 1997, except for Notes 2 and 3
as to which the dates are April  20, 1998 and March 20, 1998, respectively, expressed an
unqualified opinion  on those statements.



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


<p>In our opinion, the financial statements referred to above present fairly, in all material
respects, the financial position of MTS, Incorporated and Subsidiaries as of July 31, 1999 and
1998, and the consolidated results of its operations and its cash flows for the years then
ended in conformity with generally accepted accounting principles.




<p>                                        /S/ Arthur Andersen LLP

<p>Sacramento, CA<BR>
October 27, 1999


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<p>                REPORT OF INDEPENDENT ACCOUNTANTS


<p>To the Board of Directors and<BR>
Shareholders of MTS, Incorporated<BR>
and Subsidiaries<BR>
West Sacramento, California <BR>

<p>We have audited the accompanying consolidated statement of income, shareholders' equity and
cash flows, of MTS, Incorporated and Subsidiaries for the fiscal year ended July 31, 1997. This
financial statements are the responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements based  on our audit.


<p>We conducted our audit in accordance with generally accepted auditing standards. Those
standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the statement of
income. 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 audit provide a reasonable basis for our opinion.



<p>In our opinion, the financial statements referred to above present fairly, in all material
respects, the consolidated results of operations and cash flows of  MTS, Incorporated and
Subsidiaries for the fiscal year ended July 31, 1997, in conformity with generally accepted
accounting principles.



<p>                              /s/ COOPERS & LYBRAND L.L.P.



<p>Sacramento, California<BR>
October 29, 1997, except for<BR>
Notes 2 and 3 as to which the <BR>
dates are April 20, 1998 and <BR>
March 20, 1998, respectively





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<pre>
                              MTS, INCORPORATED
                          CONSOLIDATED BALANCE SHEETS
                         AS OF JULY 31, 1999 AND 1998
                                                                  July 31,
                                                             -------------------
                                                               1999      1998
                                                             --------- ---------
(DOLLARS IN THOUSANDS)
                                 ASSETS
Current Assets:
  Cash and cash equivalents.................................  $24,705   $14,609
  Receivables, net..........................................   26,378    23,095
  Merchandise inventories...................................  271,713   261,003
  Prepaid expenses..........................................   11,212     6,619
  Deferred tax assets.......................................    8,241     4,184
                                                             --------- ---------
      Total current assets..................................  342,249   309,510
Fixed assets, net...........................................  196,864   187,586
Deferred tax assets.........................................    9,794    15,076
Other assets................................................   37,250    33,219
                                                             --------- ---------
      Total assets.......................................... $586,157  $545,391
                                                             ========= =========

                    LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
  Current maturities of long-term debt......................   $2,971    $2,540
  Accounts payable..........................................  150,332   157,443
  Accrued liabilities.......................................   32,942    30,422
  Income taxes payable......................................      786     1,422
  Deferred revenue, current portion.........................    3,098     3,251
                                                             --------- ---------
      Total current liabilities.............................  190,129   195,078
Long-term Liabilities:
  Long-term debt, less current maturities...................  280,169   229,345
  Deferred revenue, less current portion....................      157       170
                                                             --------- ---------
      Total liabilities.....................................  470,455   424,593
                                                             --------- ---------

Commitments and contingencies (Notes 11 and 16)

Shareholders' Equity:
  Common stock:
    Class B, no par value; 10,000,000 shares authorized;
      1,000 shares issued and outstanding at July 31, 1999 a        6         6
  Retained earnings.........................................  136,278   145,084
  Accumulated other comprehensive income..................... (20,582)  (24,292)
                                                             --------- ---------
      Total shareholders' equity............................  115,702   120,798
                                                             --------- ---------
      Total liabilities and shareholders' equity............ $586,157  $545,391
                                                             ========= =========

    The accompanying notes are an integral part of these financial statements.

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<pre>

                              MTS, INCORPORATED
                       CONSOLIDATED STATEMENTS OF INCOME
            FOR THE YEARS ENDED JULY 31, 1999, 1998 AND 1997
                           (DOLLARS IN THOUSANDS)

                                                      FOR THE YEARS ENDED JULY 31,
                                                  -----------------------------------
                                                     1999        1998        1997
                                                  ----------- ----------- -----------
Net revenue...................................... $1,026,379  $1,008,146    $991,810
Cost of sales....................................    694,910     684,201     669,279
                                                  ----------- ----------- -----------
   Gross profit..................................    331,469     323,945     322,531
Selling, general and administrative
  expenses.......................................    276,262     269,263     267,620
Depreciation and amortization....................     23,387      22,287      26,365
                                                  ----------- ----------- -----------
    Income from operations.......................     31,820      32,395      28,546
Other income and (expenses):
  Interest expense...............................    (17,596)    (14,921)    (14,298)
  Foreign currency translation gain
    (loss).......................................    (14,713)      1,082      (3,552)
  Other expenses.................................     (4,068)       (455)     (1,154)
                                                  ----------- ----------- -----------
    Income (loss) before taxes, minority interest
      extraordinary item and cumulative effect
      of change in accounting principle.......        (4,557)     18,101       9,542
Provision for income taxes.......................      3,774       8,096       4,543
                                                  ----------- ----------- -----------
    Income (loss) before minority interest,
      extraordinary item, and cumulative effect
      of change in accounting principle..........     (8,331)     10,005       4,999

Minority interest in net income of
  subsidiaries...................................        --          139         224
                                                  ----------- ----------- -----------
    Income (loss) before extraordinary
      item and cumulative effect of change in
      accounting principle........................    (8,331)      9,866       4,775

Extraordinary loss on extinguishment of
  debt, net of income taxes of $824..............        --          --        1,236
                                                  ----------- ----------- -----------
Income (loss) before cumulative effect of
    change in accounting principle...............     (8,331)      9,866       3,539

Cumulative effect of change in accounting
    principle, net of income taxes of $317........      (475)        --          --

    Net income (loss)............................    ($7,856)     $9,866      $3,539
                                                  =========== =========== ===========

Basic and diluted earnings per share:
  On income (loss) before extraordinary
    item......................................... ($8,805.57)  $9,865.72   $4,774.83
                                                  =========== =========== ===========

  On net income (loss)........................... ($8,805.57)  $9,865.72   $3,539.31
                                                  =========== =========== ===========

    The accompanying notes are an integral part of these financial statements.

</pre>

<pre>
                                   MTS, INCORPORATED
               CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS'EQUITY
                  FOR THE YEARS ENDED JULY 31, 1999, 1998, AND 1997
                                (DOLLARS IN THOUSANDS)


                                         Common Stock
                             -----------------------------------                        Accumulated
                                Series A          Series B       Additional                Other
                             ----------------- -----------------  Paid-in    Retained   Comprehensive
                              Shares   Amount   Shares   Amount   Capital    Earnings     Income      Total
                             -------- -------- -------- -------- ---------- ----------- ----------- ---------
Balance, July 31, 1996......     500       $3      500       $3       $780    $146,825    ($12,464) $135,147
  Comprehensive income:
  Net income................      --       --       --       --         --       3,539          --     3,539
  Foreign translation
  adjustment, net of taxes..                                                                (4,529)   (4,529)
  Total comprehensive income.....                                                                       (990)
Trust Distribution                                                                (126)                 (126)
                             -------- -------- -------- -------- ---------- ----------- ----------- ---------
Balance, July 31, 1997......     500       $3      500       $3       $780    $150,238    ($16,993) $134,031
  Comprehensive income:
  Net income................                                                     9,866          --     9,866
  Foreign translation
  adjustment,net of taxes...                                                                (7,299)   (7,299)
  Total comprehensive income......                                                              --     2,567
Trust Distribution                                                    (780)    (15,020)              (15,800)
Conversion of Class A to
   Class B common shares as
    part of Reorganization..    (500)      (3)     500        3       --           --          --        --
                             -------- -------- -------- -------- ---------- ----------- ----------- ---------
Balance, July 31, 1998......       0       $0    1,000       $6         $0     145,084     (24,292) $120,798
  Comprehensive income:
  Net loss..................                                                    (8,806)        --     (8,806)
  Foreign translation
  adjustment, net of taxes..                                                       --        3,710     3,710

Total comprehensive income......                                                                      (5,096)
                             -------- -------- -------- -------- ---------- ----------- ----------- ---------
Balance, July 31, 1999......       0       $0    1,000       $6         $0    $136,278    ($20,582) $115,702
                             ======== ======== ======== ======== ========== =========== =========== =========

    The accompanying notes are an integral part of these financial statements.
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                               MTS, INCORPORATED
                    CONSOLIDATED STATEMENTS OF CASH FLOWS
            FOR THE YEARS ENDED JULY 31, 1999, 1998 AND 1997
                           (DOLLARS IN THOUSANDS)

                                                              JULY 31,
                                                --------------------------------
                                                   1999       1998       1997
                                                ---------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income (loss)............................   ($8,806)    $9,866     $3,539
  Adjustments to reconcile net income (loss)
    to net cash provided by operating
    actvities:
    Depreciation and amortization..............    27,870     28,558     32,127
    Provision (recovery) for losses on
      accounts receivable......................       286      1,087         23
    Loss on disposal of depreciable assets.....     5,547      3,011      2,678
    Exchange (gain) loss.......................    14,096     (2,626)     1,902
    Other non-cash (income) expense............      (247)       348        834
    Provision (benefit from)for deferred taxes.      (260)    (3,425)       360
    Minority interests in net income of
      subsidiaries.............................       --         139        223
    Extraordinary loss on extinguishment
      of debt..................................       --         --       1,236
    Cumulative effect of change in accounting
      principle.................................      475        --         --
    (Decrease) increase in cash resulting
      from changes in:
      Accounts receivable......................    (3,283)   (10,421)     1,551
      Inventories..............................   (10,710)    22,394     (8,290)
      Prepaid expenses.........................    (4,593)     2,740      3,711
      Accounts payable.........................    (7,111)   (21,238)    15,183
      Accrued liabilities......................     1,884      2,697     (3,549)
      Deferred revenue.........................      (166)       360        635
                                                ---------- ---------- ----------
        Net cash provided by operating
          activities...........................    14,982     33,490     52,163
                                                ---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Acquisition of fixed assets..................   (39,799)   (30,686)   (45,012)
  Acquisition of investments...................    (3,481)    (6,179)    (5,467)
  Increase in deposits.........................      (434)    (2,165)    (1,701)
  Refund of deposits...........................       247        170        121
  Increase in intangibles......................      (899)    (6,410)      (681)
                                                ---------- ---------- ----------
        Net cash used in investing activities..   (44,366)   (45,270)   (52,740)
                                                ---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Loans to shareholders, officers and
     employees.................................      (277)       (90)      (223)
  Proceeds from employee loan repayments.......       292        106        572
  Trust distributions..........................       --        (240)      (126)
  Principal payments under long-term
    financinmg agreements......................    (2,495)  (220,499)   (93,672)
  Proceeds from issuance of long-term
    financinmg agreements......................    29,306    249,493    102,169
                                                ---------- ---------- ----------
        Net cash provided by financing
          activities...........................    26,826     28,770      8,720
                                                ---------- ---------- ----------
Effect of exchange rate changes on cash........    12,654     (8,988)    (9,789)
                                                ---------- ---------- ----------
        Net increase (decrease) in cash and
          cash equivalents.....................    10,096      8,002     (1,646)
Cash and cash equivalents, beginning of period.    14,609      6,607      8,253
                                                ---------- ---------- ----------
Cash and cash equivalents, end of period.......   $24,705    $14,609     $6,607
                                                ========== ========== ==========

Cash paid for interest.........................   $17,772    $12,872    $17,434
                                                ========== ========== ==========

Cash paid for income taxes.....................   ($6,829)    $8,366     $5,440
                                                ========== ========== ==========

    The accompanying notes are an integral part of these financial statements.
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<p align="center"><font size="3"><strong><br>
                              MTS, INCORPORATED<br>

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS<br>
</strong></font></p>
<p><strong>NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES</strong>

<p>     CONSOLIDATION POLICY--The consolidated financial statements include the accounts of MTS,
INCORPORATED and its majority and wholly owned subsidiaries (Company). As the result of a
reorganization in April 1998 of the retail business assets of the shareholder and his family,
the financial statements include, on a retroactive basis for the periods prior to the
reorganization,  the accounts of businesses previously held by two trusts for the benefit of
the shareholder's sons (Trusts) as well as the accounts of two S corporations  owned by the
shareholder's sons (S Corporations) (Note 2).



<p>     The Company has a 50%  investment in a foreign joint venture that is accounted for using
the equity method. In June, 1998, the Company acquired the remaining stock of a joint venture
from its former partner;  consequently, income or loss of this operation is included in the
consolidated statement of income from the date that the Company acquired a controlling
interest. All significant intercompany balances and transactions have been eliminated in
consolidation.


<p>     GENERAL--The Company operates retail stores under the name Tower offering a diversified
line of recorded music products and other complementary products throughout the United States,
Japan, the United Kingdom and other parts of the world.

<p>     CASH AND CASH EQUIVALENTS--The Company considers all highly liquid temporary cash
investments with original maturities of three months or less when purchased to be cash
equivalents for purposes of the statement of cash flows.


<p>     INVENTORIES--Inventories are stated at the lower of cost or market. Cost is determined
principally by the first-in, first-out method. The Company does not provide an allowance for
inventory markdowns, due to music industry return policies which generally provide for full
recovery of cost upon return.


<p>     PROPERTY AND EQUIPMENT--Property and equipment are carried at cost. Depreciation is
computed using the straight-line method. Depreciation is computed on all fixed assets with the
exception of land. Buildings are depreciated over 40 years, leasehold improvements over an
average of 15 years, store fixtures over 7 to 10 years, and equipment and vehicles over 5
years. Leasehold improvements are amortized using the straight-line method over the shorter of
their estimated useful lives or the lease term. When assets are retired or otherwise disposed
of, the cost and related accumulated depreciation are removed from the accounts and any
resulting gain or loss is reflected in income for the period. The cost of maintenance and
repairs is charged to income as incurred; significant renewals and betterments are capitalized.
Amortization of video rental cassettes is calculated based on a straight line method over three
years. When the popularity of renting the new release declines (usually after approximately six
months) redundant copies are transferred from rental stock to merchandise inventories for sale
to customers at net realizable value. A write down to net realizable value is recorded in cost
of sales at the time of the transfer from rental to held-for-sale classification.


<p>     STORE PREOPENING COSTS--Costs of a noncapital nature incurred prior to opening of new
stores are expensed as incurred.

<p>     INTANGIBLES--Intangibles primarily represent the excess of cost over the fair value of
businesses acquired and debt issuance costs. The Company amortizes goodwill using the
straight-line method over 40 years. Debt issuance costs are amortized over the term of the
related debt using the effective interest rate method.


<p>     INCOME TAXES--The Company accounts for income taxes under the liability method. Deferred
taxes are recorded based on the difference between the financial statement and tax basis of
assets and liabilities. A valuation allowance would be established to reduce deferred tax
assets if it is more likely than not that all, or a portion, of the deferred tax asset will not
be realized. No allowance against deferred tax assets was provided at July 31, 1999 nor 1998.



<p>     EARNINGS PER SHARE--Effective January 31, 1998, the Company adopted the provisions of SFAS
No. 128, EARNINGS PER SHARE, which was effective for accounting periods ending after December
15, 1997. SFAS No. 128 changed the method of calculating earnings per share and requires a dual
presentation of basic and diluted earnings per share. In accordance with the provisions of SFAS
No. 128, earnings per share information for all periods presented have been stated under the
methodology and disclosures specified in SFAS No. 128.


<p>     REVENUE RECOGNITION--The Company's revenue is primarily from retail sales comprised of
recorded music (including compact discs and audio cassettes), video sales (including recorded
video cassettes, laser discs and DVD) and other complementary products (including books,
magazines, blank tapes, software titles and accessories) through the Company's stores and are
recognized at the point of the retail transaction. Reductions of revenues for returns by
customers are generally provided at the point of the return due to infrequency and occurrence
within short intervals of the sale and immateriality to the financial statements.



<p>     TRANSLATION OF FOREIGN CURRENCY--The value of the U.S. dollar rises and  falls day-to-day
on foreign currency exchanges. Since the Company does business in several foreign countries,
these fluctuations affect the Company's financial position and results of operations. In
accordance with SFAS No. 52, FOREIGN CURRENCY TRANSLATION, all foreign assets and liabilities
have been translated at the exchange rates prevailing at the respective balance sheet dates,
and all income statement items have been translated using the weighted average exchange rates
during the respective years. The net gain or loss resulting from translation upon consolidation
into the financial statements is reported as a separate component of shareholders' equity. Some
transactions of the Company and its foreign subsidiaries are  made in currencies different from
their functional currency. Gains and losses from these transactions are included in income as
they occur.

<p>     FORWARD EXCHANGE CONTRACTS  The Company enters into forward exchange contracts as an
economic hedge against liabilities denominated in foreign currency.  Market value gains and
losses on hedge contracts are recognized in the statements of income and offset forward
exchange gains and losses recognized on the liabilities denominated in foreign currency.
Counter parties to these forward exchange contracts are major financial institutions.  Credit
loss from counter party nonperformance is not anticipated.



<p>     ADVERTISING EXPENSE--Advertising expenses are recorded as an expense when  incurred.
Cooperative advertising rebates and supplier promotional and  in-store advertising
reimbursements earned are recognized as reductions to  advertising expense in the period the
advertisements are run or the merchandising programs are provided. Certain other rebates and
listening  station fees from media vendors are also credited to advertising expense in  the
period the related advertising expenses are incurred. Such rebates and reimbursements are in
consideration for ad production and placement  activities performed by the Company, and are
negotiated under contractual  agreements on a case-by-case basis. Net advertising and marketing
(revenue) was ($8,025,000), ($4,721,000) and ($1,469,000) for the years ended  July 31, 1999,
1998 and 1997, respectively.




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



<p>     GIFT CERTIFICATES--The Company offers gift certificates for sale. A deferred income
account is established for gift certificates issued. When gift certificates are redeemed at the
store level, the deferred income account is charged and revenue is credited.


<p>     RECENT ACCOUNTING PRONOUNCEMENTS The Company adopted Statement of Financial Accounting Standards
(SFAS) No. 130, REPORTING COMPREHENSIVE INCOME, and SFAS No. 131, DISCLOSURE ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION, in fiscal year 1999, as reflected in the accompanying financial
statements and notes herein.

<p>     SFAS No. 130 establishes standards for reporting and display of  comprehensive income and
its components in a financial statement that is  displayed with the same prominence as other
financial statements.  Comprehensive income is a measure of all changes in the equity of the
Company  as a result of recognized transactions and other economic events of the period other
than transactions with shareholders in their capacity as shareholders. Comprehensive income is
reflected on the consolidated statements of changes in shareholders' equity.

<p>     SFAS No. 131 requires that the Company report financial and descriptive information about
its reportable operating segments using the "management approach" model. Under the management
approach model, segments are defined based on the way the Company's management internally
evaluates segment performance and decides how to allocate resources to segments.


<p>     The Company is a worldwide speciality retailer of prerecorded music, video, books and
other related products.  Certain of the Company's stores offer video and other products for
rental.  The Company is supported by centralized corporate services and the stores have similar
economic characteristics, products, customers, and retail distribution methods, and as such are
reported as a single segment.  Geographic presentation relating to the Company's foreign
operations is disclosed in Note 14.

<p>     SFAS No. 133. In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No.133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES. The Statement establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments embedded in other contracts) be
recorded in the balance sheet as either an asset or liability measured at its fair value. The
Statement requires that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. Special accounting for qualifying
hedge allows a derivative's gains and losses to offset related results on the hedged item in
the income statement, and requires that a company must formally document, designate,  and
access the effectiveness of transactions that receive hedge accounting.

<p>     SFAS 133 is effective for fiscal years beginning after June 15, 2000. A company may also
implement the Statement as of the beginning of any  fiscal quarter after issuance (that is,
fiscal quarters beginning June 16, 1998 and thereafter). Statement 133 cannot be applied
retroactively.  Statement 133 must be applied to (a) derivative instruments and (b) certain
derivative instruments embedded in hybrid contracts that were issued, acquired, or
substantively modified after December 31, 1997 (and, at the company's election, before January 1, 1998).

<p>     The Company has not yet quantified the impacts of adopting Statement 133  on its financial
statements nor determined the timing of or method of its adoption of Statement 133. However,
the Statement could increase volatility  in earnings and other comprehensive
income.

<p>     Accounting Standards Executive Committee Statement of Position 98-1, ACCOUNTING FOR THE
COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE (SOP 98-1), issued in March
1998 and effective for fiscal years beginning after December 15, 1998, provides guidance on
accounting for the costs of computer software developed or obtained for internal use.  SOP 98-1
requires all costs related to the development of internal-use software other than those
incurred during the application development stage to be expensed as incurred.  Costs incurred
during the development stage are required to be capitalized and amortized over the estimated
useful life of the software.  The Company adopted SOP 98-1 effective August 1, 1998 and is
reflected as such in the financial statements.  The financials statements were not materially
impacted.



<p>     Accounting Standards Executive Committee Statement of Position 98-5, REPORTING ON THE
COSTS OF START-UP ACTIVITIES (SOP 98-5), issued in April 1998 and effective for fiscal years
beginning after December 15, 1998, requires an entity to expense all start-up activities,
including preopening and organizational costs, as incurred.  The Company adopted SOP 98-5 at
July 31, 1999 and accordingly recorded a cumulative change in accounting principles, net of
tax, in the amount of $475,000 in order to expense all start-up activities, including
preopening and organization costs that had been capitalized as other assets.  The Company will
continue to apply SOP 98-5 in the future by expensing all start-up activities, including
preopening and organization costs as incurred.



<p>     RECLASSIFICATIONS  Certain reclassifications have been made to conform prior years'
financial statements to the current year's presentation.


<p>     RISKS RELATING TO INTERNATIONAL OPERATIONS--The Company has substantial  operations and
assets located outside the United States, primarily in Japan  and the United Kingdom. With
respect to international operations, principally  all of the Company's revenues and costs
(including borrowing costs) are incurred in the local currency, except that certain inventory
purchases are  tied to US dollars. The Company's financial performance on a U.S.
dollar-denominated basis has historically been significantly affected by  changes in currency
exchange rates. Changes in certain exchange rates could  adversely affect the Company's
business, financial position and results of  operations.



<p>     International operations are also subject to a number of other special  risks, including
trade barriers, exchange controls, governmental  expropriation, political risks and risks of
increases in taxes. In addition,  the laws of certain foreign countries do not protect the
Company's trademark,  trade name, copyright and other intellectual property rights to the same
extent as they do the laws of the United States. Also, various jurisdictions  outside the
United States have laws limiting the right and ability of  non-U.S. subsidiaries and affiliates
to pay dividends and remit earnings to  affiliated companies unless specified conditions are
met. Earnings of  international subsidiaries are subject to income taxes of non-U.S.
jurisdictions that reduce cash flow available to meet required debt service  and other
obligations of the Company.



<p><strong>NOTE 2--REORGANIZATION</strong>


<p>     In April 1998, the Company consummated certain transactions designed to consolidate
substantially all of the business operations into the Company (such transactions collectively,
the "Reorganization") as a result of which the Company became a wholly owned subsidiary of
TOWER RECORDS, INCORPORATED (Parent). The Company also, prior to the Reorganization,
transferred certain assets to the Trusts in April 1998.


<p>     The Reorganization included an exchange by the Company's shareholders of  their common
shares in the Company for a controlling equity interest in the  Parent. As part of the
Reorganization, two irrevocable trusts established by  the Company's principal shareholder for
the benefit of his sons (the Trusts)  and the shareholders of two S corporations (the S
Corporations), contributed  certain assets, liabilities and equity ownership interests in
businesses to  the Parent in exchange for the remaining equity interest in the Parent. The
assets, liabilities and businesses contributed by the Trusts and the shareholders of the S
Corporations consist of one Tower store, land used in the Tower business, trademark rights to
the Tower name in Japan and all royalties accrued in connection therewith on and after February
1, 1998, a  recorded music wholesale operation, intercompany receivables and payables, bank
debt and the cash surrender value as of April 1998 of certain second-to-die split value life
insurance policies on the lives of the Parent's principal shareholder and his wife. The Parent
then contributed to the Company the assets and liabilities it received from the Trusts and the
shareholders of the S corporations.





<p>     The Reorganization was a combination of businesses under common control and, accordingly,
has been accounted for in a manner similar to a pooling-of-interests. Accordingly, the assets
and liabilities the Company received from the Parent in the Reorganization and the historical
results of operations of such business assets are included, on a retroactive basis, in the
Company's consolidated balance sheets and statements of income for all periods presented at the
previous accounting basis of the Trusts and shareholders of the S corporations.



<p>     Subsequent to July 31, 1998, the Company eliminated by upstream merger  the subsidiary of
T.R. Services. Additionally, the Company recently  reacquired all minority interests in certain
subsidiaries of MTS, INCORPORATED which the Company eliminated through upstream mergers into
the  Company. The Company also eliminated Tower Domestic, Inc. and Queen Anne  Record Sales,
subsidiaries of the Company, through upstream mergers into the  Company.



<p>     Prior to and apart from the Reorganization, the Company transferred to  the Trusts certain
assets valued at $2,860,000 in exchange for inventory with  an equal value. The sale price of
these assets was determined based on  independent appraisals or estimates of the fair market
value of the assets  that the Company believes to be reasonable.


<p>     In the Reorganization, the Trusts  transferred to the Parent certain business assets,
liabilities, intercompany  accounts, and the cash surrender value of certain life insurance
policies and  retained their cash, certain receivables and other assets and liabilities  with
an aggregate net book value of $15,800,000, net of related deferred  taxes. The principal asset
retained is a noninterest bearing trademark  royalty receivable from the Company amounting to
$12,891,000, offset by a  related deferred tax liability of $5,801,000. Since the Company's
consolidated financial statements include the Trust's assets and liabilities  on a retroactive
basis, the net assets retained by the Trusts are reflected  as non cash distributions of
retained earnings on the date of the  Reorganization.




<p>     In accordance with the Company's articles of incorporation, each outstanding share of its
Class A common stock automatically converted to one share of Class B common stock upon exchange
of the Company's common shares by the shareholders for shares of the Parent as part of the
Reorganization.


<p><strong>NOTE 3--EARNINGS PER SHARE</strong>

<p>     A reconciliation of the numerators and denominators of the basic and diluted earnings per
share computations  under SFAS No. 128 is as follows (in thousands, except per share
information):


<pre>
                                                  FOR THE YEARS ENDED JULY 31,
                                               -----------------------------------
                                                  1999        1998        1997
                                               ----------- ----------- -----------
(Loss)Income available to common shareholders
  before extraordinary item and cumulative
  effect of change in accounting principle...     ($8,331)     $9,866      $4,775
Extraordinary item............................       --          --        (1,236)
Cumulative effect of change in accounting
  principle....................................      (475)       --          --
                                               ----------- ----------- -----------
                                                  ($8,806)     $9,866      $3,539
                                               =========== =========== ===========


Weighted average shares outstanding for
  determination of:
  Basic earnings per share....................      1,000       1,000       1,000
                                               =========== =========== ===========

  Diluted earnings per share..................      1,000       1,000       1,000
                                               =========== =========== ===========

Basic earnings per share:
  On (loss)income before extraordinary item
   and cumulative effect of change in
   accounting principle........................($8,330.74)  $9,865.72   $4,774.83
  On extraordinary item.......................       --          --    ($1,235.52)
  On cumulative effect of change in accounting
   principle...................................  ($474.83)       --          --
                                               ----------- ----------- -----------
  On (loss) net income........................ ($8,805.57)  $9,865.72   $3,539.31
                                               =========== =========== ===========

</pre>


<p>     Diluted earnings per share is the same as basic earnings per share since the Company has a
simple capital structure with only common shares outstanding.



<p><strong>NOTE 4--RECEIVABLES</strong>

<pre>
Receivables consist (in thousands):                                 July 31,
                                                           -----------------------
                                                              1999        1998
                                                           ----------- -----------
Trade receivables, less allowance for doubtful
  accounts of $1,312 and $1,060 for 1999 and
  1998, respectively....................................      $18,449     $13,095
Officers and employee receivables, including
  notes, less allowance for doubtful accounts
  of $584 and $550 for 1999 and 1998,
  respectively.............................................       841         461
Other receivables.........................................      7,088       9,539
                                                           ----------- -----------
                                                              $26,378     $23,095
                                                           =========== ===========

</pre>


<p>     The Company has receivables of approximately $8,406,000 and $4,556,000 from sales of
product for resale and supplies to unconsolidated foreign joint ventures at July 31, 1999, and
1998 respectively.



<p><strong>NOTE 5--FIXED ASSETS</strong>
<pre>
Fixed assets consist of (in thousands):                             July 31,
                                                           -----------------------
                                                              1999        1998
                                                           ----------- -----------
Land......................................................     $9,730      $9,730
Buildings.................................................     19,057      19,049
Leasehold improvements....................................    156,506     142,856
Video rental.......................................            13,517      20,043
Store fixtures............................................     47,722      46,434
Equipment.................................................    117,870     118,298
Vehicles..................................................        508         505
                                                           ----------- -----------
                                                              364,910     356,915
Less: accumulated depreciation and amortization...........    168,046     169,329
                                                           ----------- -----------
                                                             $196,864    $187,586
                                                           =========== ===========
</pre>
<p>     The cost to build new store fixtures and improvements includes a portion of interest
expense. Interest capitalized was $382,000 and $30,000 for the years ended July 31, 1999 and
1998 respectively.

<p>     Depreciation and amortization of fixed assets was $27,280,000,  $27,113,000 and
$31,479,000 for the years ended July 31, 1999, 1998 and 1997,  respectively.



<p><strong>NOTE 6--OTHER ASSETS</strong>

<pre>
                                                                    July 31,
                                                           -----------------------
Other assets consist of (in thousands):                       1999        1998
                                                           ----------- -----------
Notes receivable, officers and employees,
  less current portion....................................     $2,320      $2,392
Investment in foreign joint ventures......................      1,129         894
Securities.........................................                10           2
Cash surrender value of officers' life insurance..........     15,650      12,129
Deposits..................................................      8,298       6,864
Goodwill, debt issuance costs and other intangible
  assets, net of accumulated amortization of
  $6,286 and $4,781 for 1999 and 1998,
  respectively............................................      9,843      10,938
                                                           ----------- -----------
                                                              $37,250     $33,219
                                                           =========== ===========

</pre>

<p>     Cash surrender value of life insurance at July 31, 1999 includes  $12,480,000 as to split
value life insurance policies on the lives of the Company's Parent's principal shareholder and
his wife for the benefit of  certain family trusts. Under the terms of the policies, the
Company will  receive the first proceeds of the policies up to the aggregate premiums paid by
the Company, except for one group of policies as to which the Company will receive the first
proceeds of the policies up to the sum of the aggregate premiums paid by the Company plus
$11,886,000 representing the cash surrender value of the policies when received by the Company
in April 1998 as part of the Reorganization. The balance of the proceeds will be paid to the
Trusts. Premiums on the policies amount to $3.6 million per year which are recorded as expense,
net of increases in the cash surrender value of the policies.  Life insurance expense related
to these policies amounted to $280,000, $279,000 and $274,000 in the years ended July 31, 1999,
1998, and 1997, respectively.





<p><strong>NOTE 7--LONG-TERM DEBT</strong>
<pre>
Long-term debt consists of (in thousands):                          July 31,
                                                           -----------------------
                                                              1999        1998
                                                           ----------- -----------
9.375% Senior Subordinated Notes,
  uncollateralized, interest payable
  semiannually, principal due May 2005....................   $110,000    $110,000
Senior Revolving Credit Facility, collateralized:
  Dollar-based, variable interest payable
    monthly (5.60% to 6.10% at July 31, 1999),
    principal due April 2001...............................    51,000      33,500
  Yen-based, variable interest payable
    monthly (.79% to 1.38% at July 31, 1999),                 110,537      76,314
    principal due April 2001...............................
Other obligations, 8.21% to 12.5%, principal
  and interest generally due in monthly
  installments, collateralized by certain
  real property, equipment and leasehold
  improvements............................................     11,603      12,071
                                                           ----------- -----------
Total Long-term Debt......................................    283,140     231,885
Less Current Portion......................................      2,971       2,540
                                                           ----------- -----------
Non-current Debt..........................................   $280,169    $229,345
                                                           =========== ===========
</pre>
<p>     In April 1998 the Company refinanced on a long-term basis certain obligations outstanding
under its revolving credit lines senior notes and term notes by consummating an offering of
$110.0 million of 9.375% senior subordinated notes (Notes) and entering into a senior revolving
credit facility ( Credit Facility) of up to $275.0 million.


<p>     The Notes have options to redeem in part at various premiums throughout the duration of
the indenture.  The  Credit Facility consists of two sub-facilities (one for a maximum of
$125.0 million and one for Japanese yen of  Y 19,810,500,000, which amounted to $150.0 million
at inception) and matures in April 2001 with two provisions to extend for an additional one
year period subject to certain terms and conditions.  Maximum borrowings under the  Credit
Facility are subject to a borrowing base formula and are collateralized by a majority of the
Company's inventory, accounts receivable and a pledge of 65% of the capital stock of its
Japanese subsidiary. Subject to borrowing base availability the Credit Facility provides for
borrowings by the Company of up to $275,000,000.  As of July 31, 1999, $89,653,000 of
additional borrowing capacity was available to the Company under the Credit Facility of which
$161,537,000 was outstanding.  The Credit Facility bears interest at various variable rates,
including (as defined in the agreements) a Money Market Rate, ABR Rate, Yen Base Rate and Euro
Rate, plus an annual facility fee payable by the Company.

<p>     There are various restrictive terms and covenants under the senior subordinate notes and
revolving credit facility relating to occurrence of material adverse financial operating
conditions, minimum levels of net worth , minimum fixed charge ratios, balance  sheet ratios
and leverage ratios, certain debt and certain limitations on additional indebtness, liens or
encumbrances on assets, long-term lease transactions, capital expenditures, and issuance of
capital stock, of which the Company is in compliance.



<p>     In connection with retirement of Senior Notes in January 1997, the Company recorded an
extraordinary loss consisting of prepayment penalties.

<p>     Maturities of long-term debt obligations are as follows (in
thousands):

<pre>


                      Year Ending July 31,                 Maturities
---------------------------------------------------------- -----------
  2000....................................................     $2,971
  2001....................................................    163,899
  2002....................................................      1,203
  2003....................................................        847
  2004....................................................        149
  Thereafter..............................................    114,071
                                                           -----------
             Total.........................................  $283,140
                                                           ===========
</pre>


<p><strong>NOTE 8--INTEREST RATE INSTRUMENTS</strong>

<p>     During 1999 and 1998 the Company was party to an interest rate swap covering debt with a
total amount of $19,214,000 (approximately Y2.200.000.000) outstanding.  This swap, currently
outstanding and expiring in March 2001, changes the floating interest rate exposure on
Y 2.200.000.000 of bank loans to a fixed interest rate exposure of 1.49%.



<p><strong>NOTE 9--DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS</strong>

<p>     The estimated fair value of the Company's  financial instruments approximates the related
carrying value.  The following methods and assumptions were used to estimate the fair value of
each class of financial instruments:


<p>     Cash and Cash Equivalents and Notes Receivable - The carrying amount approximates fair
value because of the short-term maturity of these instruments.


<p>     Long-term Debt - The fair value of the Company's fixed rate long- term debt was estimated
based upon the discounted amount of future cash flows using rates offered to the Company for
debt of a similar nature using remaining average maturities and taking into account the global
markets in which funds are available to the Company. The carrying value of the Company's
variable rate debt approximates fair value due to the variable nature of interest rates.



<p>     Risk Management Instruments - Foreign exchange and interest rate risk management
instruments are recorded at their estimated value based on quoted market prices of comparable
contracts.

<p>     Deposits - The fair value is not determinable since there is no market for these deposits
and the date of recovery of the amount on deposit depends on future events.


<p><strong>NOTE 10--SHAREHOLDERS' EQUITY</strong>


<p>     COMMON STOCK--The Company's articles of incorporation authorized issuance of two classes
of common stock: Class A and Class B. Class A (5,000,000 authorized; none outstanding) and
Class B (10,000,000 shares authorized;1,000 outstanding) Common Stock have no par value and
have the same rights and privileges except that Class A common has ten votes per share on all
matters while Class B common has one vote per share on all matters and Class B common has
priority voting rights, as a separate class, to elect twenty-five percent of the total
membership of the Board of Directors.



<p>     In accordance with the Company's Articles of Incorporation, each share of Class A common
automatically converted into one share of Class B common stock upon the exchange by the
shareholders of the Company's common shares for shares of the Parent as part of the
Reorganization (see Note 2).


<p>     PREFERRED STOCK--Preferred stock (1,000,000 shares authorized; none outstanding) may be
issued from time to time in one or more series. The Board of Directors is authorized to
determine the rights, preferences, privileges and restrictions granted to or imposed upon
unissued series of preferred stock and to fix the number of shares of any such series.




<p><strong>NOTE 11--LEASES</strong>

<p>     OPERATING LEASES--The Company leases substantially all of its retail stores, warehouses
and administrative facilities. Those operating lease agreements expire through 2023 and
generally have renewal options of one to twenty years. The terms of the leases provide for
fixed or minimum payments plus, in some cases, contingent rents based on the consumer price
index, or percentages of sales in excess of  specified minimum amounts or other specified
increases. The Company is generally responsible for maintenance, insurance and property taxes.



<p>     Minimum future obligations on noncancellable operating leases are as follows (in
thousands):
<pre>


                      Year Ending July 31,
---------------------------------------------------------- -----------
  2000....................................................    $39,040
  2001....................................................     34,231
  2002....................................................     32,671
  2003....................................................     31,714
  2004....................................................     25,228
  Thereafter..............................................    146,366
                                                           -----------
    Total Minimum Future Rental Payments..................   $309,250
                                                           ===========
</pre>
<p>     Total rental expense (including taxes and maintenance, when included in rent, contingent
rents and accruals to recognize minimum rents on the straight-line basis over the term of the
lease) relating to all operating leases for the years ended July 31, 1999, 1998 and 1997 are as
follows (in thousands):


<pre>
                                                  FOR THE YEARS ENDED JULY 31,
                                               -----------------------------------
                                                  1999        1998        1997
                                               ----------- ----------- -----------
Minimum rentals...............................    $68,507     $63,772     $64,808
Contingent rentals............................      5,392       5,136       5,141
                                               ----------- ----------- -----------
                                                  $73,899     $68,908     $69,949
                                               =========== =========== ===========
</pre>


<p><strong>NOTE 12--INCOME TAXES</strong>

<p>     The provision for income taxes is allocated between income from operations, cumulative
effect of change in accounting principle, extraordinary loss on extinguishment of debt and
cumulative translation adjustments to shareholders' equity. The provision for income taxes on
income from operations consists of (in thousands):


<pre>
                                                  FOR THE YEARS ENDED JULY 31,
                                               -----------------------------------
                                                  1999        1998        1997
                                               ----------- ----------- -----------
Current:
  U.S. Federal................................     $1,216     $10,055        $843
  State and Local.............................      1,462       1,215         424
  Foreign.....................................      1,356         251       2,916
                                               ----------- ----------- -----------
                                                    4,034      11,521       4,183
                                               ----------- ----------- -----------
Deferred:
  U.S. Federal................................       (761)        124       1,106
  State and Local.............................       (416)       (226)        237
  Foreign.....................................        917      (3,323)       (983)
                                               ----------- ----------- -----------
                                                     (260)     (3,425)        360
                                               ----------- ----------- -----------
Provision for income taxes....................     $3,774      $8,096      $4,543
                                               =========== =========== ===========
</pre>

<p>     The effective tax rates (i.e. provision for income taxes as a percent of income before
income taxes) differs from the statutory federal income tax rate as follows (in thousands,
except percentages):

<pre>
                                                         FOR THE YEARS ENDED JULY 31,
                                             -----------------------------------------------------
                                                   1999              1998              1997
                                             ----------------- ----------------- -----------------
                                              Amount  Percent   Amount  Percent   Amount  Percent
                                             -------- -------- -------- -------- -------- --------
Federal income tax, at statutory rate....... ($1,595)   -35.0%  $6,335     35.0%  $3,339     35.0%
Trust taxes in excess of C corporation rate.       --       --     246      1.4%     229      2.4%
State and local income taxes, net of
  federal income tax benefit................    (169)    -3.7%   1,023      5.7%     362      3.8%
Change in valuation allowance................  3,507     76.9%       --       --       --       --
Foreign taxes...............................   2,223     48.8%   3,073     17.0%   1,933     20.3%
Foreign tax credit recognized...............    (903)   -19.8%  (3,073)   -17.0%  (1,933)   -20.3%
Other, principally permanent
  differences...............................     711     15.6%     492      2.7%     613      6.4%
                                             ----------------- ----------------- ------------------
Provision for income taxes..................  $3,774     82.8%  $8,096     44.8%  $4,543     47.6%
                                             ======== ======== ======== ======== ======== ========
</pre>

<p>     The effective tax rate prior to the Reorganization in April 1998 was influenced by higher
statutory tax rates applicable to trust income than to C corporation income and deductibility
of distributions of trust income within certain time frames of when earned.


<p>Deferred income tax assets and liabilities consist of the tax effects of temporary differences
related to the following (in thousands):

<pre>
                                                                    July 31,
                                                              -------------------
                                                                1999      1998
                                                              --------- ---------
Deferred tax assets:
  Foreign translation.........................................  $4,596      $222
  Foreign tax credits........................................   $2,294    $1,800
  Cumulative translation adjustment to shareholders' equity..   13,740    15,353
  Tax, but not book, gain on transactions between MTS
    and Trusts...............................................    3,292     3,690
  California state franchise tax.............................      279       689
  Vacation Accrual...........................................      751       777
  Capitalized inventory costs................................      513       485
  Differences between tax and accounting in
    inclusion of income from foreign operations..............      958     1,647
  Other nondeductible expenses and accelerated
    income items.............................................      356       562
                                                              --------- ---------
    Total deferred tax assets................................   26,779    25,225
                                                              --------- ---------
Deferred tax liabilities:
  Depreciation and amortization..............................    4,426     4,108
  Other accelerated deductions and deferred
    income items.............................................      811     1,857
                                                              --------- ---------
    Total deferred tax liabilities...........................    5,237     5,965
                                                              --------- ---------
      Net deferred tax assets before valuation allowance.....  $21,542   $19,260

Valuation allowance..........................................    3,507        --
Net deffered tax asset........................................  18,035    19,260
                                                              ========= =========

</pre>


<p>     Deferred tax assets and liabilities are reflected in the Company's consolidated balance
sheets as follows (in thousands):

<p>     During the year ended July 31, 1999, the Company established a valuation allowance in the
amount of $3,507,000, against deferred tax assets resulting from operating losses incurred by
its subsidiaries in Hong Kong, Argentina, Taiwan, Singapore and Canada.


<p><strong>NOTE 13--EMPLOYEE BENEFITS</strong>

<p>     PROFIT SHARING- Substantially all full-time domestic employees with twenty-four months of
service who have attained age twenty-one participate in the Company's profit sharing retirement
programs. The plans provide for discretionary contributions as determined annually by the Board
of Directors of up to 15% of all eligible compensation. Costs under the plans are funded  on an
annual basis. The trustee of the plan is also an officer of the Company.



<p>     The Company also maintains a plan for employees of their Japanese subsidiary. The plan
covers substantially all employees of the Japanese operations. The plan provides for a lump sum
payment upon termination without cause based on term of service and compensation level. A
liability for plan  payments is accrued equal to the amount that would result from termination
of all employees based on service to date and current compensation levels. As permitted by
Japanese law, the plan is not funded Pension expense under the pension plans amounted to
$2,329,000, $2,383,000 and $1,719,000 for the years ended July 31, 1999, 1998 and 1997,
respectively.



<p>     SALARY DEFERRAL- In October 1998, the Company established a salary deferral plan (401(K)
Plan).  All employees with three months of service who have attained age eighteen may join the
401 (K) Plan on January 1st and July 1st each year.  All eligible employees may contribute up
to 15% or $10,000 of their annual compensation on a pre-tax basis.




<p><strong>NOTE 14--SEGMENT AND GEOGRAPHIC INFORMATION:</strong>

<p>     The Company operates predominantly in the recorded music retail industry.


<p>Financial information relating to the Company's principal foreign operations is as follows (in
thousands):

<pre>
                                          FOR THE YEARS ENDED JULY 31,
                                       -----------------------------------
                                          1999        1998        1997
                                       ----------- ----------- -----------
Net Revenue:
  United States:
    Unaffiliated customer sales.......   $591,946    $587,565    $553,292
    Interarea transfers...............     24,136      37,901      44,092
                                       ----------- ----------- -----------
                                          616,082     625,466     597,384
                                       ----------- ----------- -----------
  Japan:
    Unaffiliated customer sales.......    313,204     288,876     304,630
    Interarea transfers...............       --             0           0
                                       ----------- ----------- -----------
                                          313,204     288,876     304,630
                                       ----------- ----------- -----------
  Great Britain and Ireland:
    Unaffiliated customer sales.......     62,273      64,419      59,774
    Interarea transfers...............      3,308       1,215       1,858
                                       ----------- ----------- -----------
                                           65,581      65,634      61,632
                                       ----------- ----------- -----------
  Other:
    Unaffiliated customer sales.......     31,512      28,170      28,164
    Interarea transfers...............       --             0           0
                                       ----------- ----------- -----------
                                           31,512      28,170      28,164
                                       ----------- ----------- -----------
     TOTAL                             $1,026,379  $1,008,146    $991,810
                                       =========== =========== ===========

Operating income (loss):
  United States.......................    $21,657     $23,310     $12,831
  Japan...............................     11,988      10,135      14,825
  Great Britain and Ireland...........        676         951       1,081
  Other...............................     (2,501)     (2,001)       (191)
                                       ----------- ----------- -----------
                                          $31,820     $32,395     $28,546
                                       =========== =========== ===========



                                       -----------------------
                                          1999        1998
                                       ----------- -----------
Identifiable assets:
  United States.......................   $403,339    $395,785
  Japan...............................    128,910      96,996
  Great Britain and Ireland...........     30,488      29,977
  Other............................... $26,927.00      22,633
                                       ----------- -----------
                                         $589,664    $545,391
                                       =========== ===========
</pre>

<p>     United States net revenue includes export sales to non-affiliated  customers of
$2,107,000, $2,583,000 and $3,856,000 for the years ended July 31,  1999, 1998 and 1997,
respectively.

<p><strong>NOTE 15--SELECTED UNAUDITED QUARTERLY INFORMATION (in thousands, except per share)</strong>

<pre>

                        October 31,   January 31,     April 30,    July 31,       Fiscal
                               1998           1999          1999         1999          1999
                       ------------- -------------- ------------- ------------ -------------
Sales..............        $233,598       $302,788      $242,467     $247,526    $1,026,379
Gross profits......          79,111         93,019        76,029       83,310       331,469
Net (loss).........          (2,416)         2,406        (2,613)      (6,183)       (8,806)
Loss per share.....      ($2,416.00)     $2,406.00    ($2,613.00)  ($6,183.00)   ($8,806.00)


                        October 31,   January 31,     April 30,     July 31,      Fiscal
                               1997           1998          1998         1998          1998
                       ------------- -------------- ------------- ------------ -------------
Sales..............        $239,329       $293,442      $238,633     $236,742    $1,008,146
Gross profits......          80,566         90,502        75,422       77,455       323,945
Net income (loss)..           4,563          3,163          (285)       2,425         9,866
Income (loss)
  per share........       $4,563.00      $3,163.00      ($285.00)   $2,425.00     $9,866.00

</pre>


<p><strong>NOTE 16--FORWARD EXCHANGE CONTRACTS</strong>

<p>     At July 31, 1999, the Company had outstanding forward exchange contracts  maturing on
dates through April 2000, to buy approximately $9,000,000 in  foreign currency (1,069 billion
yen at the contract rate). The fair value of  the contracts as of July 31, 1999 is 1,031
billion yen.  These contracts are for the purpose of hedging liabilities denominated in U.S.
dollars.  Market value gains and losses on these contracts are recognized in the statement of
income and offset foreign exchange gains and losses recognized on the liabilities denominated
in U.S. dollars.



<p><strong>NOTE 17--RELATED PARTIES</strong>

<p>     The Company has accrued royalty fees payable to the Trusts for royalties charged to them
for the use of the Trusts' trademarks and logos.  The Company is charged interest on the unpaid
balance at current six month U.S. Treasury Bill Rates, plus 250 basis points of 7.04% at July
31, 1999.  During the year, the Company reduced its outstanding liability to the Trusts by
transferring assets with a net book value of $ 3,330,000 to Tower Direct LLC, a newly formed
limited liability company owned by Russell Solomon, Michael Solomon and David Solomon.  The
outstanding payable to the trust is approximately $8,400,000 and is included in accounts
payable.



<p>     In addition the Company had a note receivable at July 31, 1998 from the Trusts for the
purchase of the Japanese corporate headquarters office.  The note was for approximately 620
million yen ($4,283,247 at July 31, 1998) and was included in other current receivables.  The
note was paid in full during the year ended July 31, 1999.


<p>     Additional related-party transactions include royalty expense to the Trusts of $0,
$5,255,000, and $7,067,000 for the years ended July 31, 1999, 1998 and 1997, respectively, and
lease expense to an affiliate of $609,000, $588,000 and $0 for the years ended July 31, 1999,
1998 and 1997, respectively.


<p>     As of July 31, 1999, the Chairman of the Company's Board of Directors owed the Company
$153,000 under a loan from and a merchandise account, with the Company, which is interest- free.


<p>     As of July 31, 1999, the Chief Executive Officer of the Company, owed the Company $24,000
under a merchandise account with the Company which is interest- free.


<p>     As of July 31, 1999, the Chief Operating Officer of the Company, owed the Company $124,000
under a loan from the Company with $56,000 bearing interest at 9.5% per annum and the remaining
balance of $68,000 is an interest-free merchandise account with the Company.


<p>     As of July 31, 1999, the Chief Marketing Officer of the Company, owed the Company $151,000
under a home loan from the Company bearing interest at 9.5%.  He also owed the Company $17,000
under an interest-free merchandise account with the Company.



<p align="center"><strong>
                                     PART III
</strong></p>
<p><A NAME="item10">
<p><strong>Item 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT</A></strong>

<p>The following is a list of names and ages of the executive officers (within the meaning of Item
401 of Regulation S-K) of the company, indicating all positions and offices with the company
held by each such person and each such person's principal occupation or employment during the
past five years. Executive officers serve at the discretion of the Board of Directors. No
person other than those listed below has been chosen to be an executive officer of the company.



<p>The following table sets forth the name, age and position of individuals who are serving as
directors of the Company and executive officers of the Company.  Officers are elected by the
Board of Directors and serve at the discretion of the Board.


<p>The Company's operations are directed by an Executive Committee comprised of the following
listed officers except for Robert Lorber, who serves as an outside director.


<pre>
                                                                        YEARS
                                                                         WITH
         NAME          AGE                   POSITION                   TOWER
---------------------- ---- ------------------------------------------- ------
Russell M. Solomon....  74  Chairman and Board Member                      39

Michael T. Solomon....  51  President and Chief Executive Officer          12

DeVaughn D. Searson...  55  Chief Financial Officer, Executive Vice        10
                            President, Secretary, Treasurer and Director

Stanley L. Goman......  51  Chief Operating Officer and Executive          32
                            Vice President
Christopher S. Hopson.  47  Chief Advertising Officer and                  29
                            Executive Vice President

Keith Cahoon..........  43  Senior Vice President--Far East Operations     15

Andy D. Lown..........  34  Senior Vice President--European Operations     14

Robert Lorber           52  Director
</pre>
<p>RUSSELL M. SOLOMON serves as Chairman and a Director of the Company, and is a member of the
Company's Executive Committee. Mr. Solomon has served as President of the National Association
of Recording Merchandisers ("NARM") and as a Board member of the Video Software Dealers
Association. Mr. Solomon is also a member of the Board of Directors of The Good Guys!. Mr.
Solomon is the father of Michael T. Solomon.


<p>MICHAEL T. SOLOMON  serves as President and Chief Executive Officer and Director of the Company
and is a Director and a member of the Company's Executive Committee. Mr. Solomon was appointed
President and CEO of the Company in September, 1998 prior to this appointment, Mr. Solomon was
the Company's General Council since 1987.  Mr. Solomon has served on several NARM subcommittees
and is a member of the California Bar Association. Mr. Solomon is the son of Russell M.
Solomon.


<p>DEVAUGHN D. SEARSON has served as the Company's Chief Financial Officer since 1988 and was
appointed Executive Vice President in 1998.  Mr. Searson is a member of the Company's
Executive Committee. Mr. Searson has also served as a Director of the Company since May 1998.
Prior to joining the Company, Mr. Searson was President and Managing Partner of Searson &
Company, CPAs, the Company's outside accounting firm at the time, and served as the Company's
outside accountant for 11 years. Mr. Searson is a certified public accountant.



<p>STANLEY L. GOMAN has been an employee of the Company since 1967 and currently serves as Chief
Operating Officer and Executive Vice President. Mr. Goman is a member of the Company's
Executive Committee. Mr. Goman presently serves as Chairman of NARM, and has also served as
Chairman of the NARM Retail Advisory Committee.


<p>CHRISTOPHER S. HOPSON has been an employee of the Company since 1970 and has served as Chief
Marketing Officer since 1989. Mr. Hopson is also a member of the Company's Executive Committee.
 Mr. Hopson plans to retire from the Company early in the year 2000.


<p>KEITH CAHOON has served as Managing Director of the Company's Far East Operations since 1984.
Mr. Cahoon is a member of the Company's Executive Committee.


<p>ANDY D. LOWN has been an employee of the Company since 1986 and currently serves as Managing
Director of the Company's European operations. Mr. Lown is a member of the Company's Executive
Committee. Mr. Lown also serves on the Executive Committee, Operations Committee and
Supervisory Committee of the British Association of Record Dealers and on the Board of the
British Photographic Association.


<p>ROBERT LORBER became a director of the Company in 1998.  Since 1976, Mr. Lorber has been
President of Lorber-Kamai Consulting Group which advises Fortune 500 clients on productivity
improvement. He is also a professor at the Graduate School of Management at UC Davis.


<p>The Company's employees who serve as directors receive separate compensation for their services
as directors of $3,000 per each Board of Directors meeting attended. Each director has been
elected to serve until his successor has been elected and qualified at the next annual meeting
of the shareholders of the Company.


<p><strong>DIRECTORS' COMPENSATION</strong>

<p>Mr. Lorber, the Company's only non-employee director received $98,000 plus expenses for his
service as a director and consultant to MTS, Incorporated in calendar 1998 which includes a
monthly fee of $3,000 for each Board of Directors  meeting attended.  Beginning in 1999, Mr.
Lorber's monthly consulting fee was increased from $7,500 per month to $8,500 per month.


<p><A NAME="item11">
<p><strong>ITEM 11.  EXECUTIVE COMPENSATION</A></strong>

<p>The following table sets forth compensation paid by the Company for the calendar year ended
December 31, 1997 and 1998 of the Chairman, the Chief Executive Officer and the next three
highest-earning executive officers of the company for the year ended December 31, 1998, based
on the combined salary plus bonuses.

<pre>
                                       Annual Compensation
                             ---------------------------------------
                                                          Other      All
                                                          Annual     Other
     Name and Principal                                   Compensa-  Compensa-
          Position             Year    Salary     Bonus   tion       tion
---------------------------- -------- --------- --------- ---------- ---------
Russell M. Solomon .........    1996  $622,580  $300,000               $6,259
Chairman                       1997    630,180   300,000                6,259
                               1998    943,260   300,000               13,521

Michael T. Solomon .........    1996  $357,922   $85,000               $6,259
President and CEO              1997    446,300    85,000                6,259
                               1998    420,024    85,000               13,521

DeVaughn D. Searson ........    1996  $178,300  $112,500               $6,259
EVP and Chief Financial        1997    287,449    86,000                7,948
 Officer                       1998    224,445   191,732               13,521

Stanley L. Goman ...........    1996  $185,650   $80,000               $6,259
EVP and Chief Operating        1997    197,200    91,000                6,259
 Officer                       1998    224,445    85,950                7,521

Keith Cahoon ...............    1996  $124,416             $128,000    $4,935
SVP and Managing Director      1997    173,467              184,714     6,259
 Far East Operations           1998    192,897              113,732     7,521

</pre>

<BLOCKQUOTE>

<p>(a) Represents Company contributions to the Company's retirement plan on
behalf of MTS Named Executive Officers.<BR>
(b) Calculated at an exchange rate of 120 Japanese yen per U.S. dollar.<BR>
(c) Calculated at an exchange rate of 107 Japanese yen per U.S. dollar.<BR>

</BLOCKQUOTE>
<p><strong>Employment Agreements</strong>

<p>The Company does not currently have employment agreements with any of its employees.


<p><strong>Additional Agreements, Arrangements and Understandings</strong>

<p>The Company's Articles of Incorporation contain provisions that eliminate the personal
liability of its directors for monetary damages to the fullest extent permitted by law and
authorize the Company to indemnify its directors and officers to the fullest extent permitted
by law.  Such limitation of liability does not affect the availability of equitable remedies
such as injunctive relief or rescission.


<p>The Company has entered into indemnification agreements with its officers and directors
containing provisions which are in some respects broader than the specific indemnification
provisions contained in the California Corporations Code, including advancement of expenses to
the indemnities, the indemnities's right to select counsel and continuation of indemnification
after indemnities's separation from the Company.  The indemnification agreements may require
the Company, among other things, to indemnify such officers and directors against certain
liabilities arising from willful misconduct of a culpable nature and to advance their expenses
incurred as a result of any proceeding against them as to which they could be indemnified.



<p><A NAME="item12">
<p><strong>Item 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.</A></strong>

<p>The following table sets forth certain information regarding ownership of the Company's Common
Stock as of the date of this 10-K by (i) each person who is known by the Company to own
beneficially more than five percent of the Company's Common Stock, (ii) each of the Company's
directors, (iii) MTS Named Executive Officers, and (iv) all directors and MTS Named Executive
Officers as a group.  Except as otherwise indicated, the Company believes that the beneficial
owners of the Company's Common Stock listed below have sole investment and voting power with
respect to such shares, subject to community property laws.


<pre>

                                                     Amount and
                                                     Nature of
                                                    Beneficial    Percentage
Name and Address of Beneficial Owner                Ownership      Ownership
--------------------------------------------------- ------------ -------------
Russell M. Solomon.................................         620         62.00%
Michael T. Solomon.................................         372         37.20%
DeVaughn D. Searson................................
Stanley L. Goman...................................
Christopher Hopson.................................
Keith Cahoon.......................................
Robert Lorber......................................
All directors and officers as a group (7 persons)..         992         99.20%

</pre>
<BLOCKQUOTE>
<p>(a) The address of each named individual is the address of the principal executive office of
the Company as set forth herein.

<p>(b) The numbers presented indicate the number of shares beneficially owned.  Beneficial
ownership is determined in accordance with the rules of the Commission and generally includes
voting or investment power with respect to securities.  Shares of Common Stock subject to
options or warrants currently exercisable or exercisable within 60 days are deemed to be
beneficially owned by the person holding such option or warrant for computing the percentage
ownership of such person, but are not treated as outstanding for computing the percentage of
any other person.  As of the date hereof, the company had no such warrants outstanding.



<p>(c) Such share amounts solely reflect indirect ownership of the Class B Common Stock of the
Company, the only outstanding class of capital stock of the Company.  There are 1,000 shares of
Class B Common Stock of the Company outstanding, all of which are owned by Parent, and Russell
Solomon beneficially owns 620 shares, or 62% and Michael Solomon beneficially owns 372 shares,
or 37.2%, of the outstanding Common Stock of Parent


<p>(d) Russell Solomon has sole voting and investment power with respect to such shares as Trustee
of the Russell Solomon Trust.

<p>(e) Michael Solomon has sole voting and investment power with respect to 364 of such shares as
Trustee of the Michael Solomon 1994 Trust (the "Michael Solomon Trust"), the David Solomon 1994
Trust (the "David Solomon Trust"), the Andrew C. Solomon Trust, and the Aaron O. Solomon Trust,
which own 180,180, 2 and 2 of such shares, respectively.  Michael Solomon is also the
beneficiary of the Michael Solomon Trust.

</BLOCKQUOTE>

<p><A NAME="item13">
<p><strong>Item 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS</A></strong>


<p><strong>Life Insurance</strong>

<p>The Company maintains split-dollar insurance policies on the lives of Russell M. Solomon and
Doris E. Solomon for the benefit of certain family trusts.  The aggregate annual premiums on
such policies paid by the Company are approximately $3.6 million.  The Company will receive the
first proceeds of the policies up to the aggregate premiums paid by the Company or the cash
surrender value attributable thereto, whichever is greater.



<p>In addition, the Company maintains key-man life insurance policies on the lives of certain
executive officers of the Company.  Aggregate annual premiums on such policies are
approximately $.3 million.  The Company is the beneficiary of the key-man policies.


<p><strong>Certain Indebtedness of Management and Affiliates</strong>

<p>As of July 31, 1999, Russell Solomon, the Chairman and a director of the Company, owed the
Company the amounts of $139,000.00  and $13,977.00  under a loan from and a merchandise
account, respectively, with the Company, both of which are interest-free.


<p>As of July 31, 1999, Michael Solomon, President and Chief Executive Officer and a director of
the Company, owed the Company the amount of $23,742.00 under a merchandise account with the
Company which is interest- free.


<p>As of July 31, 1999, Stanley Goman, the Chief Operating Officer of the Company, owed the
Company the amounts of $56,230.00  and $67,330.00   under a loan from the Company bearing
interest at 9.5% per annum and an interest-free merchandise account, respectively, with the
Company.

<p>As of July 31, 1999, Christopher Hopson, the Chief Marketing Officer of the Company, owed the
Company the amounts of $150,605.00  and $17,269.00  under a home loan from the Company bearing
interest at 9.5% per annum and an interest-free merchandise account, respectively, with the
Company.

<p>The Company has accrued royalty fees payable to the Trusts for royalties charged to them for
the use of the Trust's trademarks and logos.  During the year, the Company reduced its
outstanding liability to the Trusts by transferring assets with a net book value of $3,330,000
to Tower Direct LLC, a newly formed limited liability company owned by Russell Solomon, Michael
Solomon and David Solomon.  The outstanding payable to the trust is approximately $8,400,000
and is included in accounts payable.


<p>In addition the Company had a note receivable at July 31, 1998 from the Trusts for the purchase
of the Japanese corporate headquarters office.  The note was for approximately 620 million yen
($4,283,247 at July 31, 1998) and was included in other current receivables.  The note was paid
in full during the year ended July 31, 1999.


<p>Additional related-party transactions include royalty expense to the Trusts for the purchase of
 $0, $5,255,000, and $7,067,000 for the years ended July 31, 1999, 1998, and 1997,
respectively, and lease expense to an affiliate of $609,000, and $588,000 and $0 for the years
ended July 31,1999,1998 and 1997, respectively.



<p align="center"><strong>
                                     PART IV
</strong></p>
<p><A NAME="item14">
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K</A>

<BLOCKQUOTE>

<p>(a)  INDEX TO FINANCIAL STATEMENTS

<p>     (1)  FINANCIAL STATEMENTS:
<BLOCKQUOTE>
<p>     Report of Management

<p>     Independent Auditors' Report

<p>     Consolidated Balance Sheets as of July 31, 1999 and 1998

<p>     Consolidated Statements of Operations for the years ended July 31, 1999,
     1998 and 1997

<p>     Consolidated Statements of Cash Flows for the years ended July 31, 1999,
     1998 and 1997

<p>     Consolidated Statements of Stockholders' Equity for the years ended
     July 31, 1999, 1998 and 1997
</BLOCKQUOTE>
     Notes to Consolidated Financial Statements

<p>     (2)  FINANCIAL STATEMENT SCHEDULES:
<BLOCKQUOTE>
<p>     Schedule II -- Valuation and Qualifying Accounts for the years ended
     July 31, 1999, 1998 1997


<p>     All other financial statement schedules have been omitted because they
     are not required or are not applicable, or the information is otherwise
     included.
</BLOCKQUOTE>
<p>(b)  REPORTS ON FORM 8-K
<p>     
      There were no reports on Form 8-K filed during the fourth quarter ended July 31, 1999.


<p>(c)  EXHIBITS
<p>     
     Reference is made to the Index of Exhibits immediately preceding the
     exhibits hereto, which index is incorporated herein by reference.


</BLOCKQUOTE>

<br>
<br>
<br>
<HR WIDTH="85%">
<br>
<br>
<br>



<p><A NAME="sign">
<p align="center"><strong>
                                     SIGNATURE</A>
</strong></p>
<p>Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

<pre>
        Signature                       Title                       Date
-------------------------  --------------------------------  ------------------
/s/ RUSSELL M. SOLOMON     CHAIRMAN AND DIRECTOR              OCTOBER 29, 1999
-----------------------
    RUSSELL M. SOLOMON


/s/ MICHAEL T. SOLOMON     PRESIDENT, CHIEF EXECUTIVE         OCTOBER 29, 1999
-----------------------    OFFICER AND DIRECTOR
    MICHAEL T. SOLOMON


/s/ DEVAUGHN D. SEARSON    EXECUTIVE VICE PRESIDENT,          OCTOBER 29, 1999
-----------------------    CHIEF FINANCIAL OFFICER AND
    DEVAUGHN D. SEARSON    DIRECTOR
</pre>


<p>            
            
            
            
            
            
            
                               <u>MTS, INCORPORATED </u><br>
            
            
            
            
            
            
            
                                    (Registrant)<br>
<p>            
            
            
            
            
            
            
                              <u>By: /s/ DEVAUGHN D. SEARSON   </u><br>
            
            
            
            
            
            
            
                              DEVAUGHN D. SEARSON<br>
            
            
            
            
            
            
            
                                EXECUTIVE VICE PRESIDENT, CHIEF FINANCIAL<br>
            
            
            
            
            
            
            
                                OFFICER AND DIRECTOR



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<p align="center"><strong>
                                INDEX OF EXHIBITS
</strong></p>
<pre>
Exhibit
<pre>
Exhibit
Number                            Description
------- ----------------------------------------------------------------
   3.1  Restated Articles of Incorporation of MTS, Incorporated filed with the
+++     California Secretary of State on September 22, 1994

   3.2  By-Laws of MTS, Incorporated
+++
   4.1  Purchase Agreement dated as of April 23, 1998 between the Registrant,
+       Chase Securities, Inc. and Merrill Lynch, Pierce, Fenner & Smith
        Incorporated

   4.2  Indenture dated as of April 23, 1998 (the "Indenture") by and between the
+       Registrant and State Street Bank and Trust Company of Califonia, N.A.,
        as Trustee

   4.3  Exchange and Registration Rights Agreement dated as of April 20, 1998 by
+       and among the Registrant and Chase Securities Inc. and Merrill Lynch,
        Pierce, Fenner & Smith Incorporated as the initial purchases

   4.4  $104,720,000 Existing 14A Global 144A Global 9 3/8% Senior Subordinated
+       Note due 2005

   4.5  $5,280,000 Existing Regulation S Global 9 3/8% Senior Subodinated Note
+       due 205

   4.6  Form of New 9 3/8% Senior Subordinated Note due 2005
+++
   5.1  Opinion of Wilson, Sonsini, Goodrich & Rosati regarding legality of
+++     securities being registered

  10.1  Credit Agreement dated as of April 23, 1998 by and among the Registrant,
+       Tower Records Kabushiki Kaisha, the Lenders party thereto, and The Chase
        manhattan Bank as Administrative Agent

  10.2  Japanese Security Agreement dated as of April 23, 1998
+++
  10.3  MTS, Incorporated Security Agreement dated as of April 23, 1998
+++
  12.1  Statement re Computation of Ratios

 21.10  List of Subsidiaries
+
 23.10  Consent of PricewaterhouseCoopers LLP
+++
 23.20  Consent of Wilson, Sonsini, Goodrich & Rosati, P.C. (included in Exhibit
+++     5.1)

 25.10  Statement of Eligibility on Form T-1 for State Street Bank and Trust
+++     Company of California, N.A., as Trustee under the Indenture

 27.10  Financial Data Schedule

 99.10  Form of Letter of Transmittal
+++
 99.20  Form of Notice of Guaranteed Delivery
+++
 99.30  Consent of Music Business International
+++


+       Previously filed with the S4 Registration Statement

++      Previously filed with Amendment No. 1 to the S-4 Registration Statement
        on July 1, 1998
+++     Previously filed with Amendment No. 2 to the S-4 Registration Statement
        on July 23, 1998


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