##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549




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Form 10-Q



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|  |  |                                                                                                 
|- |  | ------------------------------------------------------------------------------------------------
|þ |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR
    15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934 
| 
|  |  | For the quarterly period ended July 31,
    2002                                                
| 
|o |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR
    15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 0-22289



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Wherehouse Entertainment, Inc.

(Exact name of registrant as specified in its
charter)


|                                                                   |  |                                         
|------------------------------------------------------------------ |  | ----------------------------------------
|Delaware                                                           |  | 95-4608339                              
|(State or other jurisdiction of
    incorporation or organization) |  | (IRS Employer
    Identification Number)
|                                                                  
|19701 Hamilton Avenue
    Torrance, CA                             |  | 90502-1311                              
|(Address of principal executive
    offices)                       |  | (Zip code)                              

(310) 965-8300

(Registrants telephone number, including
area code)


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

Indicate by check mark whether the registrant has
filed all documents and reports required to be filed by
Section 12, 13 or 15(d) of the Securities Exchange Act of
1934 subsequent to the distribution of securities under the plan
confirmed by a court.     Yes
þ          No
o

Indicate the number of shares outstanding of each
of the issuers classes of common stock as of the latest
practicable date:

Common Stock, $.01 par value,

11,388,324 shares outstanding as of
September 16, 2002




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TABLE OF CONTENTS



|                              |                                                                                               |                                                 |  |  |  |  |  | 
|----------------------------- | --------------------------------------------------------------------------------------------- | ----------------------------------------------- |  |  |  |  |  | 
|FORWARD-LOOKING STATEMENTS   
|PART I. FINANCIAL INFORMATION
|                              | Item 1. Financial Statements                                                                 
|                              |                                                                                               | CONSOLIDATED CONDENSED BALANCE SHEETS          
|                              |                                                                                               | CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
|                              |                                                                                               | CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
|                              | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                              | Item 3. Quantitative and Qualitative Disclosures About Market Risk                           
|PART II. OTHER INFORMATION   
|                              | Item 4. Legal Proceedings                                                                    
|                              | Item 5. Other Information                                                                    
|                              | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                   
|CERTIFICATIONS               



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##### Table of Contents



INDEX

WHEREHOUSE ENTERTAINMENT, INC.

|                              |  |                                                                                                                                                                             |    |      |    | 
|----------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -- | ---- | -- | 
|                              |  |                                                                                                                                                                             |    | Page
|                              |  |                                                                                                                                                                             |    |     
|FORWARD-LOOKING STATEMENTS    |  |                                                                                                                                                                             | 2  |     
|PART I. FINANCIAL INFORMATION
|Item 1.                       |  | Financial Statements:                                                                                                                                                       |    |      |    | 
|                              |  | Consolidated Condensed Balance Sheets 
    July 31, 2002 (Unaudited) and January 31, 2002                                                                                  |    |      | 3  | 
|                              |  | Consolidated Condensed Statements of
    Operations  Three Months Ended July 31, 2002 and
    2001 (Unaudited) and Six Months Ended July 31, 2002 and
    2001 (Unaudited) |    |      | 4  | 
|                              |  | Consolidated Condensed Statements of Cash
    Flows  Six Months Ended July 31, 2002 and 2001
    (Unaudited)                                                               |    |      | 5  | 
|                              |  | Notes to Consolidated Condensed Financial
    Statements (Unaudited)                                                                                                        |    |      | 6  | 
|Item 2.                       |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations                                                                                   |    |      | 10 | 
|Item 3.                       |  | Quantitative and Qualitative Disclosures About
    Market Risk                                                                                                              |    |      | 16 | 
|PART II. OTHER INFORMATION   
|Item 4.                       |  | Legal Proceedings                                                                                                                                                           |    |      | 16 | 
|Item 5.                       |  | Other Information                                                                                                                                                           |    |      | 17 | 
|Item 6.                       |  | Exhibits and Reports on Form 8-K                                                                                                                                            |    |      | 17 | 
|SIGNATURES                    |  |                                                                                                                                                                             | 18 |     
|CERTIFICATIONS                |  |                                                                                                                                                                             | 19 |     

1



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##### Table of Contents






FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q includes
certain statements that may be deemed to be
forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. The sections
of this Quarterly Report on Form 10-Q containing such
forward-looking statements include Managements
Discussion and Analysis of Financial Condition and Results of
Operations under Item 2 of Part I below. Statements
in this Quarterly Report on Form 10-Q which address
activities, events or developments that the registrant expects
or anticipates will or may occur in the future, including such
things as future issuance of shares, future capital expenditures
(including the amount and nature thereof), expansion and other
developments and technological trends of industry segments in
which the registrant is active, business strategy, expansion and
growth of the registrants and its competitors
business and operations and other such matters are
forward-looking statements. You can find many of these
statements by looking for words like believes,
expects, anticipates, or similar
expressions in this Quarterly Report on Form 10-Q. Although
the registrant believes the expectations expressed in such
forward-looking statements are based on reasonable assumptions
within the bounds of its knowledge of its business, a number of
factors could cause actual results to differ materially from
those expressed in any forward-looking statements made by or on
behalf of the registrant.

The registrants operations are subject to
factors outside its control. Any one, or a combination, of these
factors could materially affect the results of the
registrants operations. These factors include
(a) changes in levels of competition from current
competitors and potential new competition from both
non-traditional retailers of the Companys products and
alternative methods or channels of distribution such as Internet
and television shopping services and mail order; (b) loss
of a significant vendor or prolonged disruption of product
supply; (c) the presence or absence of popular new releases
and products in the product categories the registrant
represents; (d) changes in levels of consumer spending,
especially during seasonally significant periods;
(e) changes in Federal and state income tax rules and
regulations or interpretations of existing legislation;
(f) changes in the general economic conditions in the
United States including, but not limited to, consumer sentiment
about the economy in general; (g) regulatory changes, which
may adversely affect the business in which the registrant is
engaged; (h) the ability to attract and retain key
personnel; and (i) adverse results in significant
litigation matters.

The foregoing should not be construed as an
exhaustive list of all factors which could cause actual results
to differ materially from those expressed in forward-looking
statements made by the registrant. You should consider the
cautionary statements contained in this section when evaluating
any forward-looking statements that we may make. The registrant
does not have any obligation to publicly release any revisions
to these forward-looking statements to reflect events or
circumstances after the date of this Quarterly Report or to
reflect the occurrence of unanticipated events.

2



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##### Table of Contents






PART I.     FINANCIAL
INFORMATION




Item
1.     Financial
Statements

WHEREHOUSE ENTERTAINMENT, INC.






CONSOLIDATED CONDENSED BALANCE
SHEETS


|                                              |                                                                                                                                                                                                                   |                                            |            |             |             |  |            |             |             | 
|--------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ---------- | ----------- | ----------- |  | ---------- | ----------- | ----------- | 
|                                              |                                                                                                                                                                                                                   | July 31,                                   |            | January 31,
|                                              |                                                                                                                                                                                                                   | 2002                                       |            | 2002       
|                                              |                                                                                                                                                                                                                   |                                            |            |            
|                                              |                                                                                                                                                                                                                   | (Unaudited)                                |            |            
|ASSETS                                       
|Current assets:                               |                                                                                                                                                                                                                   |                                            |            |             |             |  |            |            
|                                              | Cash and cash equivalents                                                                                                                                                                                         |                                            | $          | 1,889,000   |             |  | $          | 1,591,000   |            
|                                              | Notes and other receivables, net                                                                                                                                                                                  |                                            |            | 2,167,000   |             |  |            | 3,372,000   |            
|                                              | Inventories, net                                                                                                                                                                                                  |                                            |            | 158,446,000 |             |  |            | 148,954,000 |            
|                                              | Other current assets                                                                                                                                                                                              |                                            |            | 1,780,000   |             |  |            | 1,996,000   |            
|                                              |                                                                                                                                                                                                                   |                                            |            |             |             |  |            |            
|                                              |                                                                                                                                                                                                                   | Total current assets                       |            |             | 164,282,000 |  |            |             | 155,913,000 | 
|Property, equipment, and improvements, net    |                                                                                                                                                                                                                   |                                            | 35,149,000 |             |             |  | 44,539,000 |            
|Goodwill, net                                 |                                                                                                                                                                                                                   |                                            | 24,604,000 |             |             |  | 24,604,000 |            
|Notes receivable and other assets, net        |                                                                                                                                                                                                                   |                                            | 3,922,000  |             |             |  | 4,019,000  |            
|                                              |                                                                                                                                                                                                                   |                                            |            |             |             |  |            |            
|                                              |                                                                                                                                                                                                                   | Total assets                               |            | $           | 227,957,000 |  |            | $           | 229,075,000 | 
|                                              |                                                                                                                                                                                                                   |                                            |            |             |             |  |            |            
|LIABILITIES AND SHAREHOLDERS
    EQUITY     
|Current liabilities:                          |                                                                                                                                                                                                                   |                                            |            |             |             |  |            |            
|                                              | Accounts payable and bank overdraft                                                                                                                                                                               |                                            | $          | 98,816,000  |             |  | $          | 109,610,000 |            
|                                              | Accrued expenses and other current liabilities                                                                                                                                                                    |                                            |            | 33,979,000  |             |  |            | 36,475,000  |            
|                                              | Store closure reserves                                                                                                                                                                                            |                                            |            | 5,694,000   |             |  |            | 6,287,000   |            
|                                              | Reorganization liabilities                                                                                                                                                                                        |                                            |            | 148,000     |             |  |            | 150,000     |            
|                                              | Current portion of long-term debt                                                                                                                                                                                 |                                            |            | 137,000     |             |  |            | 2,572,000   |            
|                                              | Current portion of leases in excess of fair
    market value                                                                                                                                                      |                                            |            | 3,071,000   |             |  |            | 3,071,000   |            
|                                              | Current portion of capital lease obligations                                                                                                                                                                      |                                            |            | 3,777,000   |             |  |            | 4,588,000   |            
|                                              |                                                                                                                                                                                                                   |                                            |            |             |             |  |            |            
|                                              |                                                                                                                                                                                                                   | Total current liabilities                  |            |             | 145,622,000 |  |            |             | 162,753,000 | 
|Line of credit                                |                                                                                                                                                                                                                   |                                            | 49,890,000 |             |             |  | 10,450,000 |            
|Long-term debt                                |                                                                                                                                                                                                                   |                                            | 176,000    |             |             |  | 191,000    |            
|Capital lease obligations                     |                                                                                                                                                                                                                   |                                            | 9,470,000  |             |             |  | 11,232,000 |            
|Leases in excess of fair market value         |                                                                                                                                                                                                                   |                                            | 13,187,000 |             |             |  | 14,729,000 |            
|Deferred rent and other long-term liabilities |                                                                                                                                                                                                                   |                                            | 4,185,000  |             |             |  | 4,343,000  |            
|                                              |                                                                                                                                                                                                                   |                                            |            |             |             |  |            |            
|                                              |                                                                                                                                                                                                                   | Total liabilities                          |            |             | 222,530,000 |  |            |             | 203,698,000 | 
|                                              |                                                                                                                                                                                                                   |                                            |            |             |             |  |            |            
|Shareholders equity:                         |                                                                                                                                                                                                                   |                                            |            |             |             |  |            |            
|                                              | Preferred stock, $.01 par value; 3,000,000 shares
    authorized; shares issued, none                                                                                                                             |                                            |            |             |             |  |            |             |            
|                                              | Common stock, $.01 par value; 24,000,000 shares
    authorized; 11,413,324 and 11,171,869 shares issued; 11,388,324
    and 11,146,869 shares outstanding at July 31, 2002 and
    January 31, 2002, respectively |                                            |            | 114,000     |             |  |            | 112,000     |            
|                                              | Additional paid-in-capital                                                                                                                                                                                        |                                            |            | 95,483,000  |             |  |            | 94,873,000  |            
|                                              | Accumulated deficit                                                                                                                                                                                               |                                            |            | (82,082,000 | )           |  |            | (61,780,000 | )          
|                                              | Treasury stock, 25,000 shares                                                                                                                                                                                     |                                            |            | (338,000    | )           |  |            | (338,000    | )          
|                                              | Notes receivable                                                                                                                                                                                                  |                                            |            | (7,750,000  | )           |  |            | (7,490,000  | )          
|                                              |                                                                                                                                                                                                                   |                                            |            |             |             |  |            |            
|                                              |                                                                                                                                                                                                                   | Total shareholders equity                 |            |             | 5,427,000   |  |            |             | 25,377,000  | 
|                                              |                                                                                                                                                                                                                   |                                            |            |             |             |  |            |            
|                                              |                                                                                                                                                                                                                   | Total liabilities and shareholders equity |            | $           | 227,957,000 |  |            | $           | 229,075,000 | 
|                                              |                                                                                                                                                                                                                   |                                            |            |             |             |  |            |            

See Accompanying Notes to Unaudited Consolidated
Condensed Financial Statements.

3



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##### Table of Contents



WHEREHOUSE ENTERTAINMENT, INC.






CONSOLIDATED CONDENSED STATEMENTS OF
OPERATIONS


|                                                                                      |                                      |                    |             |                  |   |          |             |             |   |   |             |             |   |   |             |             |  
|------------------------------------------------------------------------------------- | ------------------------------------ | ------------------ | ----------- | ---------------- | - | -------- | ----------- | ----------- | - | - | ----------- | ----------- | - | - | ----------- | ----------- | -
|                                                                                      |                                      |                    |             |                 
|                                                                                      |                                      | Three Months Ended |             | Six Months Ended
|                                                                                      |                                      |                    |             |                 
|                                                                                      |                                      | July 31,           |             | July 31,         |   | July 31, |             | July 31,   
|                                                                                      |                                      | 2002               |             | 2001             |   | 2002     |             | 2001       
|                                                                                      |                                      |                    |             |                  |   |          |             |            
|                                                                                      |                                      |                    |             |                  |   |         
|                                                                                      |                                      |                    |             | (Unaudited)      |   |         
|Sale merchandise revenue                                                              |                                      | $                  | 114,790,000 |                  |   | $        | 149,709,000 |             |   | $ | 231,452,000 |             |   | $ | 298,965,000 |            
|Rental revenue, net                                                                   |                                      |                    | 230,000     |                  |   |          | 1,079,000   |             |   |   | 510,000     |             |   |   | 2,380,000   |            
|                                                                                      |                                      |                    |             |                  |   |          |             |             |   |   |             |             |   |   |             |            
|                                                                                      | Total revenues                       |                    |             | 115,020,000      |   |          |             | 150,788,000 |   |   |             | 231,962,000 |   |   |             | 301,345,000 |  
|Cost of sale merchandise revenue                                                      |                                      |                    | 74,989,000  |                  |   |          | 99,419,000  |             |   |   | 150,021,000 |             |   |   | 196,692,000 |            
|                                                                                      |                                      |                    |             |                  |   |          |             |             |   |   |             |             |   |   |             |            
|                                                                                      | Gross profit                         |                    |             | 40,031,000       |   |          |             | 51,369,000  |   |   |             | 81,941,000  |   |   |             | 104,653,000 |  
|Selling, general and administrative expenses                                          |                                      |                    | 45,525,000  |                  |   |          | 52,232,000  |             |   |   | 90,823,000  |             |   |   | 104,778,000 |            
|Depreciation and amortization                                                         |                                      |                    | 5,701,000   |                  |   |          | 7,743,000   |             |   |   | 11,502,000  |             |   |   | 15,611,000  |            
|Loss on disposition of assets                                                         |                                      |                    |             |                  |   |          | 189,000     |             |   |   | 171,000     |             |   |   | 150,000     |            
|                                                                                      |                                      |                    |             |                  |   |          |             |             |   |   |             |             |   |   |             |            
|                                                                                      | Loss from operations                 |                    |             | (11,195,000      | ) |          |             | (8,795,000  | ) |   |             | (20,555,000 | ) |   |             | (15,886,000 | )
|Interest expense                                                                      |                                      |                    | 825,000     |                  |   |          | 1,453,000   |             |   |   | 1,619,000   |             |   |   | 3,238,000   |            
|Interest income                                                                       |                                      |                    | (238,000    | )                |   |          | (101,000    | )           |   |   | (484,000    | )           |   |   | (196,000    | )          
|                                                                                      |                                      |                    |             |                  |   |          |             |             |   |   |             |             |   |   |             |            
|                                                                                      | Loss before income taxes             |                    |             | (11,782,000      | ) |          |             | (10,147,000 | ) |   |             | (21,690,000 | ) |   |             | (18,928,000 | )
|                                                                                      | (Provision) benefit for income taxes |                    |             | (90,000          | ) |          |             | 4,059,000   |   |   |             | 1,388,000   |   |   |             | 7,571,000   |  
|                                                                                      |                                      |                    |             |                  |   |          |             |             |   |   |             |             |   |   |             |            
|                                                                                      | Net loss                             |                    | $           | (11,872,000      | ) |          | $           | (6,088,000  | ) |   | $           | (20,302,000 | ) |   | $           | (11,357,000 | )
|                                                                                      |                                      |                    |             |                  |   |          |             |             |   |   |             |             |   |   |             |            
|Net loss per common share:                                                            |                                      |                    |             |                  |   |          |             |             |   |   |             |             |   |   |             |            
|                                                                                      | Basic                                |                    | $           | (1.04            | ) |          | $           | (0.55       | ) |   | $           | (1.79       | ) |   | $           | (1.03       | )
|                                                                                      |                                      |                    |             |                  |   |          |             |             |   |   |             |             |   |   |             |            
|                                                                                      | Diluted                              |                    | $           | (1.04            | ) |          | $           | (0.55       | ) |   | $           | (1.79       | ) |   | $           | (1.03       | )
|                                                                                      |                                      |                    |             |                  |   |          |             |             |   |   |             |             |   |   |             |            
|Weighted average common shares
    outstanding  Basic                                |                                      |                    | 11,388,324  |                  |   |          | 11,001,421  |             |   |   | 11,369,648  |             |   |   | 11,001,421  |            
|                                                                                      |                                      |                    |             |                  |   |          |             |             |   |   |             |             |   |   |             |            
|Weighted average common shares and common
    equivalent shares outstanding  Diluted |                                      |                    | 11,388,324  |                  |   |          | 11,001,421  |             |   |   | 11,369,648  |             |   |   | 11,001,421  |            
|                                                                                      |                                      |                    |             |                  |   |          |             |             |   |   |             |             |   |   |             |            

See Accompanying Notes to Unaudited Consolidated
Condensed Financial Statements.

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##### Table of Contents



WHEREHOUSE ENTERTAINMENT, INC.






CONSOLIDATED CONDENSED STATEMENTS OF CASH
FLOWS


|                                                                                |                                              |                                                                      |                                           |            |             |             |             |            |             |             |  
|------------------------------------------------------------------------------- | -------------------------------------------- | -------------------------------------------------------------------- | ----------------------------------------- | ---------- | ----------- | ----------- | ----------- | ---------- | ----------- | ----------- | -
|                                                                                |                                              |                                                                     
|                                                                                |                                              | Six Months Ended                                                    
|                                                                                |                                              |                                                                     
|                                                                                |                                              | July 31,                                                             |                                           | July 31,  
|                                                                                |                                              | 2002                                                                 |                                           | 2001      
|                                                                                |                                              |                                                                      |                                           |           
|                                                                                |                                              |                                                                     
|                                                                                |                                              | (Unaudited)                                                         
|Operating activities:                                                           |                                              |                                                                      |                                           |            |             |             |             |           
|Net loss                                                                        |                                              | $                                                                    | (20,302,000                               | )          |             | $           | (11,357,000 | )         
|Adjustments to reconcile net loss to net cash
    used in operating activities: |                                              |                                                                      |                                           |            |             |             |             |           
|                                                                                | Depreciation and amortization                |                                                                      |                                           | 11,502,000 |             |             |             | 15,611,000 |            
|                                                                                | Loss on disposition of assets                |                                                                      |                                           | 171,000    |             |             |             | 150,000    |            
|                                                                                | Stock option compensation                    |                                                                      |                                           | 38,000     |             |             |             | 38,000     |            
|                                                                                | Interest on notes receivable                 |                                                                      |                                           | (260,000   | )           |             |             | (185,000   | )          
|                                                                                | Deferred taxes                               |                                                                      |                                           |            |             |             |             | (7,652,000 | )          
|                                                                                | Changes in operating assets and liabilities: |                                                                      |                                           |            |             |             |             |            |            
|                                                                                |                                              | Receivables, net                                                     |                                           |            | 1,433,000   |             |             |            | (321,000    | )          
|                                                                                |                                              | Inventories, net                                                     |                                           |            | (9,492,000  | )           |             |            | 12,709,000  |            
|                                                                                |                                              | Other current assets                                                 |                                           |            | 216,000     |             |             |            | 890,000     |            
|                                                                                |                                              | Accounts payable, accrued expenses and other
    current liabilities |                                           |            | (13,290,000 | )           |             |            | (22,081,000 | )          
|                                                                                |                                              | Store closure and leases in excess of FMV reserves                   |                                           |            | (2,135,000  | )           |             |            | (2,191,000  | )          
|                                                                                |                                              | Other long-term liabilities                                          |                                           |            | (158,000    | )           |             |            | (53,000     | )          
|                                                                                |                                              |                                                                      |                                           |            |             |             |             |           
|                                                                                |                                              |                                                                      | Net cash used in operating activities     |            |             | (32,277,000 | )           |            |             | (14,442,000 | )
|                                                                                |                                              |                                                                      |                                           |            |             |             |             |           
|Investing Activities:                                                           |                                              |                                                                      |                                           |            |             |             |             |           
|Purchase of property, equipment and improvements                                |                                              |                                                                      | (2,292,000                                | )          |             |             | (3,726,000  | )         
|(Increase) decrease in other assets                                             |                                              |                                                                      | (122,000                                  | )          |             |             | 367,000     |           
|                                                                                |                                              |                                                                      |                                           |            |             |             |             |           
|                                                                                |                                              |                                                                      | Net cash used in investing activities     |            |             | (2,414,000  | )           |            |             | (3,359,000  | )
|                                                                                |                                              |                                                                      |                                           |            |             |             |             |           
|Financing Activities:                                                           |                                              |                                                                      |                                           |            |             |             |             |           
|Net borrowings under line of credit                                             |                                              |                                                                      | 39,440,000                                |            |             |             | 21,161,000  |           
|Payments on capital lease obligations and
    long-term debt                    |                                              |                                                                      | (5,023,000                                | )          |             |             | (3,213,000  | )         
|Exercise of warrants                                                            |                                              |                                                                      | 574,000                                   |            |             |             |             |           
|Settlement of pre-petition claims                                               |                                              |                                                                      | (2,000                                    | )          |             |             | (39,000     | )         
|                                                                                |                                              |                                                                      |                                           |            |             |             |             |           
|                                                                                |                                              |                                                                      | Net cash provided by financing activities |            |             | 34,989,000  |             |            |             | 17,909,000  |  
|                                                                                |                                              |                                                                      |                                           |            |             |             |             |           
|Net increase in cash and cash equivalents                                       |                                              |                                                                      | 298,000                                   |            |             |             | 108,000     |           
|Cash and cash equivalents at beginning of the
    period                        |                                              |                                                                      | 1,591,000                                 |            |             |             | 2,457,000   |           
|                                                                                |                                              |                                                                      |                                           |            |             |             |             |           
|Cash and cash equivalents at end of the period                                  |                                              | $                                                                    | 1,889,000                                 |            |             | $           | 2,565,000   |           
|                                                                                |                                              |                                                                      |                                           |            |             |             |             |           
|Supplemental disclosures of cash flow information:                              |                                              |                                                                      |                                           |            |             |             |             |           
|                                                                                | Cash paid (received) during the period for:  |                                                                      |                                           |            |             |             |             |            |            
|                                                                                |                                              | Interest                                                             |                                           | $          | 1,528,000   |             |             | $          | 2,962,000   |            
|                                                                                |                                              | Income taxes, net                                                    |                                           | $          | (1,440,000  | )           |             | $          | 138,000     |            

See Accompanying Notes to Unaudited Consolidated
Condensed Financial Statements.

5



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##### Table of Contents



WHEREHOUSE ENTERTAINMENT, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS

(Unaudited)


1.     Basis of
Presentation

The accompanying unaudited consolidated condensed
financial statements include the accounts of Wherehouse
Entertainment, Inc. and its wholly owned subsidiaries
(collectively referred to as the Company). All
material intercompany balances and transactions have been
eliminated in consolidation.

The interim unaudited consolidated condensed
financial statements of the Company have been prepared in
accordance with the instructions to Form 10-Q of the
Securities and Exchange Commission. Accordingly, they do not
include all of the information and footnotes required by
Generally Accepted Accounting Principles (GAAP) for
complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. The
Companys business is seasonal, so operating results for
the six months ended July 31, 2002 are not necessarily
indicative of the results that may be expected for the
Companys fiscal year ending January 31, 2003
(Fiscal 2003). For further information, refer to the
financial statements and footnotes thereto included in the
Companys Annual Report on Form 10-K for the
Companys fiscal year ended January 31, 2002
(Fiscal 2002).

2.     Disposition of
Assets

On August 9, 2001, the Company completed the
sale of sixty-four (64) Wherehouse Music stores to The Music
Network (TMN) for approximately $25.7 million,
which was comprised of $21.0 million in cash and
$4.7 million in notes receivable, less approximately
$0.6 million in costs to complete the transaction. In
addition, the Company received warrants to purchase 90,440
shares or approximately 1.75% of TMN for $0.01 per share.
Management has valued these warrants at a de minimusamount. The majority of the stores sold to TMN are located
in Florida, North Carolina, South Carolina and Tennessee, with a
few located in Georgia and Alabama. As part of the transaction,
the Company also granted the rights to the Turtles Music
trade brand to TMN. The subject stores accounted for
$13.0 million and $26.8 million in total revenues for
the three months and the six months ended July 31, 2001,
respectively. The net tangible book value of the assets sold
amounted to approximately $25.3 million. In addition, the
Company wrote off approximately $3.3 million of goodwill,
attributable to the sold stores, representing the approximate
loss on disposition of assets in the consolidated statements of
operations for the year ended January 31, 2002. The Company
is also obligated to fulfill certain lease commitments should
TMN default on certain of its lease obligations. In such an
event, the Company has the right to take back selected stores.

3.     Goodwill

Effective February 1, 2002, the Company
adopted Statement of Financial Accounting Standards
(SFAS) No. 142, Goodwill and Other Intangible
Assets. Under SFAS No. 142, goodwill and intangible
assets with indefinite lives are no longer amortized, but will
be tested at least annually for impairment. SFAS No. 142
also requires the Company to complete a transitional impairment
test.

In accordance with SFAS No. 142, step one of
the two-step transitional impairment test requires the Company
to compare the fair value of each reporting unit with its
respective carrying amount, including goodwill. The Company has
completed step one of the transitional impairment test required
by SFAS No. 142 and has determined that the fair value of
the Company is less than its shareholders equity at
January 31, 2002, indicating a possible impairment of
goodwill. Fair value was determined by an independent appraisal.
In accordance with SFAS No. 142, the Company has begun step
two of the transitional impairment test.

Step two of the transitional impairment test must
be completed by January 31, 2003 and the resulting
impairment loss, if any, will be recorded as a cumulative effect
of an accounting change in the consolidated statements of
operations. The amount of impairment, if any, cannot be
determined until the completion of this process. The amount of
such loss, however, could be material to the Companys
consolidated financial

6



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##### Table of Contents



WHEREHOUSE ENTERTAINMENT, INC.




NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS  (Continued)


statements. SFAS No. 142 also requires the
Company to perform an impairment test if an event occurs or
circumstances change that would more likely than not result in
an impairment loss. Such subsequent impairment losses, if any,
will be reflected in operating income in the consolidated
statements of operations in the period the event occurs.

SFAS No. 142 also requires disclosure of the
after-tax impact to reported net income and earnings per share
of the adoption of the statement for all periods presented. The
following table recognizes the after-tax impact to the
Companys operational results of the adoption of SFAS
No. 142 as if the standard had been in effect for all
periods presented:

|                                |  |                             |             |                           |  |      |            |      |  |   |             |   |  |   |             |  
|------------------------------- |  | --------------------------- | ----------- | ------------------------- |  | ---- | ---------- | ---- |  | - | ----------- | - |  | - | ----------- | -
|                                |  |                             |             |                          
|                                |  | Three Months Ended July 31, |             | Six Months Ended July 31,
|                                |  |                             |             |                          
|                                |  | 2002                        |             | 2001                      |  | 2002 |            | 2001
|                                |  |                             |             |                           |  |      |            |     
|Reported net loss               |  | $                           | (11,872,000 | )                         |  | $    | (6,088,000 | )    |  | $ | (20,302,000 | ) |  | $ | (11,357,000 | )
|Add back goodwill amortization* |  |                             |             |                           |  |      | 891,000    |      |  |   |             |   |  |   | 1,782,000   |  
|                                |  |                             |             |                           |  |      |            |      |  |   |             |   |  |   |             |  
|Adjusted net loss               |  | $                           | (11,872,000 | )                         |  | $    | (5,197,000 | )    |  | $ | (20,302,000 | ) |  | $ | (9,575,000  | )
|                                |  |                             |             |                           |  |      |            |      |  |   |             |   |  |   |             |  
|Basic earnings per share:       |  |                             |             |                           |  |      |            |      |  |   |             |   |  |   |             |  
|Reported net loss               |  | $                           | (1.04       | )                         |  | $    | (0.55      | )    |  | $ | (1.79       | ) |  | $ | (1.03       | )
|Add back goodwill amortization* |  |                             |             |                           |  |      | 0.08       |      |  |   |             |   |  |   | 0.16        |  
|                                |  |                             |             |                           |  |      |            |      |  |   |             |   |  |   |             |  
|Adjusted net loss               |  | $                           | (1.04       | )                         |  | $    | (0.47      | )    |  | $ | (1.79       | ) |  | $ | (0.87       | )
|                                |  |                             |             |                           |  |      |            |      |  |   |             |   |  |   |             |  
|Diluted earnings per share:     |  |                             |             |                           |  |      |            |      |  |   |             |   |  |   |             |  
|Reported net loss               |  | $                           | (1.04       | )                         |  | $    | (0.55      | )    |  | $ | (1.79       | ) |  | $ | (1.03       | )
|Add back goodwill amortization* |  |                             |             |                           |  |      | 0.08       |      |  |   |             |   |  |   | 0.16        |  
|                                |  |                             |             |                           |  |      |            |      |  |   |             |   |  |   |             |  
|Adjusted net loss               |  | $                           | (1.04       | )                         |  | $    | (0.47      | )    |  | $ | (1.79       | ) |  | $ | (0.87       | )
|                                |  |                             |             |                           |  |      |            |      |  |   |             |   |  |   |             |  



---



|  |                                                                                                                                                               
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | Effective February 1, 2002, the Company
    adopted SFAS No. 142 under which goodwill and intangible
    assets with indefinite lives are no longer amortized.

4.     Recently
Issued Accounting Pronouncements

In June 2002, the FASB approved SFAS
No. 146, Accounting for Costs Associated with Exit or
Disposal Activities. This statement addresses financial
accounting and reporting for costs associated with exit or
disposal activities and nullifies EITF Issue No. 94-3,
Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity. The
provisions of this statement are effective for exit or disposal
activities that are initiated after December 31, 2002, with
early application encouraged. The Company is currently
evaluating the impact that this statement may have on any
potential future exit or disposal activities.

5.     Income
Taxes

The Company accounts for income taxes under an
asset and liability approach that requires the recognition of
deferred income tax assets and liabilities for the expected
future consequences of events that have been recognized in the
Companys consolidated financial statements or income tax
returns. Management provides a valuation allowance for deferred
income tax assets when it is more likely than not that all or a
portion of such deferred income tax assets will not be realized.
In the third quarter of Fiscal 2002, the Company recorded a
valuation allowance for its total deferred income tax assets in
the amount of $34.9 million as a result of recurring losses
from operations. Such valuation allowance will be reversed when
the Company returns to profitability at levels sufficient to
realize such deferred income tax assets.

7



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##### Table of Contents



WHEREHOUSE ENTERTAINMENT, INC.




NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS  (Continued)


The Company recorded a net income tax benefit of
$1,388,000 in the first six months of Fiscal 2003 representing
the recognition of $1,568,000 of tax refunds, partially offset
by payment of certain state franchise taxes. These tax refunds
resulted from the Job Creation and Worker Assistance Act, passed
on March 6, 2002, which extended the Companys ability
to carry back net operating losses from two to five years.

6.     Credit
Facility

As of July 31, 2002, the Company had
borrowed $49.9 million against its current credit facility,
leaving availability of approximately $23 million. In
accordance with certain provisions of its revolving line of
credit facility (the Facility) with Congress
Financial (Western) (Congress), the Company will be
in default if availability under the Facility falls below
$15 million. The Company is currently in discussion with
several banks reviewing alternatives to extend the maturity of
its credit line beyond October 31, 2003. Subsequent to
July 31, 2002, the Company conducted discussions with
Congress regarding an amendment to the Facility.

In connection with such discussions, an amendment
was finalized to provide for the Companys principal
shareholder to guarantee $10 million of the amounts
outstanding under the Facility. In exchange for this guarantee,
Congress has agreed to increase the amount of availability
covered by the Facility by $10 million. In addition, the
Company is currently discussing possible financing alternatives
with other potential lenders. The outcome of such discussions
are uncertain at this time. The Company believes that the
additional availability from the Facility, cash on hand,
expected cash flow from operations, and the availability of
lease financing arrangements, will be adequate to support
existing operations and planned capital expenditures of the
Company for Fiscal 2003. Improvements in cash flow from
operations during the holiday selling season would allow the
Company to continue to meet its obligations on a timely basis
subsequent to January 31, 2003.


7.     Gift
Cards

The Company began selling gift cards to customers
in its stores and through a joint marketing program with a
grocery retailer in the latter part of 2000 and throughout the
current period of operations. During the second quarter of
Fiscal 2003, the Company reduced selling, general and
administrative expenses and its gift card liability by
$2.5 million, representing a change in such estimate due to
the historical information now available. Various states laws
are applicable to our gift card program. Interpretation of, or
changes in, these laws could materially affect our business. The
Company may be subject to claims asserted under such laws with
respect to amounts not used by customers under the gift cards.
Any such claim, if adversely determined or resolved, could have
a material adverse effect on the Companys financial
position and results of operations. At July 31, 2002 and
January 31, 2002, the liability for gift cards outstanding
included in accrued expenses amounted to $9.5 million and
$14.9 million, respectively.

8.     Litigation

In January, 2001, the Company was sued in the Los
Angeles Superior Court by a former store manager, claiming
alleged failure to pay overtime wages to herself and all
similarly situated salaried store employees. The Complaint does
not specify any amount of the claims, either individually or on
behalf of the class. Thereafter, the Complaint was amended to
add three additional named plaintiffs. The amended Complaint
seeks relief on behalf of both store managers and assistant
managers going back to 1997. The Companys motions to
strike the class action allegations have been denied. In
October, 2001, a second class action suit was filed with respect
to store managers and assistant managers by different named
plaintiffs and different lawyers. It also seeks overtime pay
and, in addition, asserts claims for meal break and rest break
penalties. The plaintiffs in the two suits have filed a
consolidated complaint. A limited amount of discovery has been
conducted to date. While the Company believes it has meritorious
defenses against the suits, the ultimate resolution of the
matter, could result in a loss in excess of the amount accrued
during the second quarter of Fiscal 2003.

8



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##### Table of Contents



WHEREHOUSE ENTERTAINMENT, INC.




NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS  (Continued)


On July 18, 2001, the Santa Clara County,
California Superior Court entered a $7.6 million judgment
against the Company in a personal injury lawsuit encaptioned
Peterson, et al. v. Shapell Industries (the
Peterson Lawsuit). While the Company was insured for
this judgment, its insurer, Reliance Insurance Company, was
ordered liquidated by the State of Pennsylvania on
October 3, 2001. As such, it is unknown at present whether,
and to what extent, assets of the insurer will be available to
the Company subsequent to a formal liquidation proceeding.
Pending this outcome, Californias Insurance Guarantee Fund
(CIGA) has engaged appellate counsel on behalf of
the Company. CIGA has also facilitated the posting of an
appellate bond to stay execution of the Peterson judgment
pending the outcome of the Companys appeal. The Company
was required by the bonding company to provide an
$11.4 million letter of credit as security for the
appellate bond. On August 9, 2002, the Company filed its
opening brief in the Court of Appeal of the State of California,
Sixth Appellate District. Based on the advice of legal counsel,
management believes that it is reasonably possible that it will
either prevail on appeal or be successful in an alternative
legal strategy and, accordingly, has not recorded a liability
for the judgment in the accompanying financial statements.

The Company is a party to various other claims,
legal actions and complaints arising in the ordinary course of
its business. In the opinion of management, all such matters are
without merit or involve such amounts that unfavorable
disposition will not have a material impact on the financial
position and results of operations of the Company.

9



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##### Table of Contents








|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 2. | Managements Discussion and Analysis
    of Financial Condition and Results of Operations

Introduction

This discussion should be read in conjunction
with the financial statements, related notes and
Managements Discussion and Analysis of Financial Condition
and Results of Operations contained in the Companys Annual
Report on Form 10-K for Fiscal 2002.

Results of Operations



| |                                                           
| | ----------------------------------------------------------
| | For the Quarters Ended July 31, 2002
    and July 31, 2001

Revenues

Total revenues were $115.0 million and
$150.8 million for the quarters ended July 31, 2002
(the second quarter of Fiscal 2003) and July 31, 2001 (the
second quarter of Fiscal 2002), respectively. The decrease of
$35.8 million was attributable to: (i) decreases in
net revenues of $14.7 million due to the closure of 18
stores since May 1, 2001 and the sale of 64 stores in the
third quarter of Fiscal 2002; (ii) same store sales
decreases in net revenues of $20.2 million; and
(iii) the reduction of net rental revenue of
$0.9 million.

A summary of total sale merchandise and rental
revenue by category is provided below:

Sale Merchandise and Rental Revenues

By Category


|                          |                                                                                                                                            |                                |     |      |       |  |     |       |       | 
|------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------ | --- | ---- | ----- |  | --- | ----- | ----- | 
|                          |                                                                                                                                            |                               
|                          |                                                                                                                                            | Quarter Ended                 
|                          |                                                                                                                                            | July 31,                      
|                          |                                                                                                                                            |                               
|                          |                                                                                                                                            | 2002                           |     | 2001
|                          |                                                                                                                                            |                                |     |     
|                          |                                                                                                                                            |                               
|                          |                                                                                                                                            | (Dollars in                   
|                          |                                                                                                                                            | millions)                     
|Sale merchandise revenue: |                                                                                                                                            |                                |     |      |       |  |     |      
|                          | Music                                                                                                                                      |                                | $   | 93.5 |       |  | $   | 125.0 |      
|                          | Other, principally sales of new videocassettes,
    DVDs, video game software and hardware, general merchandise and
    ticket commissions |                                |     | 21.3 |       |  |     | 24.7  |      
|                          |                                                                                                                                            |                                |     |      |       |  |     |      
|                          |                                                                                                                                            | Total sale merchandise revenue |     |      | 114.8 |  |     |       | 149.7 | 
|Rental revenue, net       |                                                                                                                                            |                                | 0.2 |      |       |  | 1.1 |      
|                          |                                                                                                                                            |                                |     |      |       |  |     |      
|                          |                                                                                                                                            | Total revenue                  |     | $    | 115.0 |  |     | $     | 150.8 | 
|                          |                                                                                                                                            |                                |     |      |       |  |     |      

A.     Sale
merchandise revenue. Sale merchandise revenue includes
prerecorded music, new videocassettes, DVDs, and video game
software and hardware (collectively referred to as sale
merchandise). Management defines same-store sales as sales
from stores that were open for the full period in both periods
of comparison. On a same-store basis, excluding the 18 stores
closed since May 1, 2001 and the 64 stores sold during the
third quarter of Fiscal 2002, sale merchandise revenue decreased
by approximately 15.1% during the second quarter of Fiscal 2003
as compared to the second quarter of Fiscal 2002. Management
believes the decrease in same-store sales is primarily
attributable to (i) continuing negative industry trends in
the new music category, impacted by CD burning and
the piracy of music on the Internet and a relatively weak new
music release schedule year-over-year; and (ii) continuing
competition from mass merchandisers and specialty electronics
chains selling new music and DVD releases at or below cost, all
of which was partially offset by increases in sales of DVD
product.

B.     Rental
revenue, net. Rental revenue, net includes the proceeds from
the rental of videocassettes, DVDs, video games and game
players, and from the sale of previously viewed videocassettes
and previously played video games, net of cost of rentals.
Rental revenue, net was $0.2 million in the second quarter
of Fiscal 2003 and $1.1 million in the second quarter of
Fiscal 2002, representing a decrease of $0.9 million or
81.8% as the Company continued to test alternative rental
concepts.

C.     Competition
and Economic Factors. The Company believes that, in the
future, its business and same-store revenues may be impacted by
various competitive and economic factors. These factors include,
but

10



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##### Table of Contents



are not limited to, consumer tastes, new releases
of music, DVD, videocassette and video game titles available for
sale or rental, the increasing popularity of the Internet as an
avenue for retailing and other direct-to-consumer alternatives,
and technological developments such as digital downloading and
the use of CD burners to duplicate CDs and
DVDs, as well as general economic trends impacting retailers and
consumers. In addition, in recent years the Companys sale
merchandise and rental revenues have been impacted by increased
competition from video specialty chains, consumer electronics
superstores, discounters and mass merchandisers. The Company
continues to study industry trends and issues in developing its
own strategies.


Cost
of Sale Merchandise Revenue

Cost of sale merchandise revenue was
$75.0 million for the second quarter of Fiscal 2003, as
compared with $99.4 million for the same period last year,
a decrease of $24.4 million. As a percentage of sale
merchandise revenue, cost of sale merchandise revenue was 65.3%
for the second quarter of Fiscal 2003 as compared with 66.4% for
the second quarter of Fiscal 2002. This 1.1% improvement is
primarily attributable to increased pricing of new and used
music and DVDs and an increased proportion of used product sales
with higher margins, partially offset by (i) decreases in
sales prices related to several mid-line new music promotional
events; and (ii) other changes in product line mix.

Operating
Expenses

SG&A expenses for the second quarter of
Fiscal 2003 were $45.5 million, compared to
$52.2 million for the second quarter of Fiscal 2002, a
decrease of $6.7 million. This decrease reflects (i) a
reduction of $4.9 million in operating expenses at stores
that have been closed and/or sold since the second quarter of
Fiscal 2002; and (ii) a decrease of $1.8 million
principally related to the $2.5 million reduction of
amounts accrued under the Companys gift card program
representing a change in estimate due to the historical
information now available, savings related to the impact of cost
restructuring efforts and lower variable expenses resulting from
decreased net revenues, partially offset by inflationary
increases and additional accruals for litigation losses.
SG&A expenses were 39.7% of revenue in the second quarter of
Fiscal 2003, compared to 34.6% of revenue in the second quarter
of Fiscal 2002, an increase of 5.1%. Such increase was caused by
the fixed nature of store occupancy and other expenses and
inflationary increases in payroll costs, partially offset by the
impact of cost restructuring efforts.

Depreciation and amortization expense was
$5.7 million in the second quarter of Fiscal 2003 compared
to $7.7 million in the second quarter of Fiscal 2001, a
decrease of $2.0 million. The decrease is principally
related to the sale of certain assets to TMN (see Note 2 in
Item 1 above) and the discontinuation of the amortization
of goodwill as a result of the adoption of Statement of
Financial Accounting Standards (SFAS) No. 142,
Goodwill and Other Intangible Assets, effective
February 1, 2002.

Interest
Expense

Interest expense for the three months ended
July 31, 2002 was $0.8 million, compared to
$1.5 million for the three months ended July 31, 2001,
a decrease of $0.7 million. Contributing to the decline
was: (i) a reduction in the average interest rates paid by
the Company on its borrowings under the Congress Facility of
approximately 226 basis points in the second quarter of Fiscal
2003 as compared to the second quarter of Fiscal 2002; and
(ii) slightly lower average borrowings under the Congress
Facility. Borrowings under the Congress Facility were used for
the funding of working capital.

Interest
Income

Interest income for the second quarter of Fiscal
2003 was $0.2 million compared to $0.1 million for the
second quarter of Fiscal 2002. The increase in interest income
is attributable to the notes receivable related to the sale of
64 of the Companys stores. Interest income also includes
notes receivable from shareholders.

11



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##### Table of Contents



Income
Taxes

During the second quarter of Fiscal 2002, the
Company recognized a benefit for income taxes at an effective
rate of 40%. In the third quarter of Fiscal 2002, the Company
recorded a valuation allowance of $34.9 million for its
deferred income tax assets due to a determination that it was
more likely than not that all or a portion of such deferred
income tax assets would not be realized. Such valuation
allowance will be reversed when the Company returns to
profitability at levels sufficient to realize such deferred
income tax assets. For the second quarter of Fiscal 2003, the
provision for income taxes represents payments for certain state
franchise tax expenses.



| |                                                             
| | ------------------------------------------------------------
| | For the Six Months Ended July 31, 2002
    and July 31, 2001



| |         
| | --------
| | Revenues

Total revenues were $232.0 million and
$301.3 million for the six months ended July 31, 2002
and July 31, 2001, respectively. The decrease of
$69.3 million was primarily attributable to:
(i) decreases in net revenues of $32.6 million due to the
closure of 31 stores since February 1, 2001 and the sale of
64 stores in the third quarter of Fiscal 2002;
(ii) same store sales decreases in net revenues of
$34.8 million; and (iii) the reduction of net rental
revenue of $1.9 million.

A summary of total sale merchandise and rental
revenue by category is provided below:

Sale Merchandise and Rental Revenues

By Category


|                          |                                                                                                                                            |                                |     |       |       |  |     |       |       | 
|------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------ | --- | ----- | ----- |  | --- | ----- | ----- | 
|                          |                                                                                                                                            |                               
|                          |                                                                                                                                            | Six Months Ended              
|                          |                                                                                                                                            | July 31,                      
|                          |                                                                                                                                            |                               
|                          |                                                                                                                                            | 2002                           |     | 2001 
|                          |                                                                                                                                            |                                |     |      
|                          |                                                                                                                                            |                               
|                          |                                                                                                                                            | (Dollars in                   
|                          |                                                                                                                                            | millions)                     
|Sale merchandise revenue: |                                                                                                                                            |                                |     |       |       |  |     |      
|                          | Music                                                                                                                                      |                                | $   | 183.8 |       |  | $   | 249.2 |      
|                          | Other, principally sales of new videocassettes,
    DVDs, video game software and hardware, general merchandise and
    ticket commissions |                                |     | 47.7  |       |  |     | 49.7  |      
|                          |                                                                                                                                            |                                |     |       |       |  |     |      
|                          |                                                                                                                                            | Total sale merchandise revenue |     |       | 231.5 |  |     |       | 298.9 | 
|Rental revenue, net       |                                                                                                                                            |                                | 0.5 |       |       |  | 2.4 |      
|                          |                                                                                                                                            |                                |     |       |       |  |     |      
|                          |                                                                                                                                            | Total revenue                  |     | $     | 232.0 |  |     | $     | 301.3 | 
|                          |                                                                                                                                            |                                |     |       |       |  |     |      

A.     Sale
merchandise revenue. On a same-store basis, excluding the 31
stores closed since February 1, 2001 and the 64 stores sold
during the third quarter of Fiscal 2002, sale merchandise
revenue decreased by approximately 13.2% during the six months
ended July 31, 2002 as compared to the six months ended
July 31, 2001. Management believes the decrease in
same-store sales is primarily attributable to
(i) continuing negative industry trends in the new music
category, including CD burning and free downloads of
music from the Internet; (ii) a relatively weak new music
release schedule year-over-year; and (iii) increased
competition from mass merchandisers and specialty electronics
chains selling new music and DVD releases at or below cost, all
of which was partially offset by increases in sales of DVD
product.

B.     Rental
revenue, net. Rental revenue, net was $0.5 million in
the six months ended July 31, 2002 and $2.4 million
for the six months ended July 31, 2001, representing a
decrease of $1.9 million or 79.2% as the Company continued
to test alternative rental concepts.



| |                                 
| | --------------------------------
| | Cost of Sale Merchandise Revenue

Cost of sale merchandise revenue was
$150.0 million for the six months ended July 31, 2002,
as compared with $196.7 million for the six months ended
July 31, 2001, a decrease of $46.7 million. As a
percentage of sale merchandise revenue, cost of sale merchandise
revenue was 64.8% for the six months ended

12



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##### Table of Contents



July 31, 2002 as compared with 65.8% for the
six months ended July 31, 2001. This 1.0% improvement is
primarily attributable to increased pricing of new music and
DVDs and an increased proportion of used product sales with
higher margins, partially offset by (i) decreases in sales
prices related to several mid-line new music promotional events;
and (ii) other changes in product line mix.




| |                   
| | ------------------
| | Operating Expenses

SG&A expenses for the six months ended
July 31, 2002 were $90.8 million, compared to
$104.8 million for the six months ended July 31, 2001,
a decrease of $14.0 million. This decrease reflects a
reduction of (i) $10.6 million in operating expenses
at stores that have been closed and/or sold since
February 1, 2001; and (ii) a decrease of
$3.4 million principally related to the $2.5 million
reduction of amounts accrued under the Companys gift card
program representing a change in estimate due to the historical
information now available, savings related to the impact of cost
restructuring efforts and lower variable expenses resulting from
decreased net revenues, partially offset by inflationary
increases and additional accruals for litigation losses.
SG&A expenses were 39.2% of revenue in the six months ended
July 31, 2002, compared to 34.8% of revenue in the six
months ended July 31, 2001, an increase of 4.4%. Such
increase was caused by the fixed nature of store occupancy and
other expenses and inflationary increases in payroll costs,
partially offset by the impact of cost restructuring efforts.

Depreciation and amortization expense was
$11.5 million in the six months ended July 31, 2002
compared to $15.6 million in the six months ended
July 31, 2001, a decrease of $4.1 million. The
decrease is principally related to the sale of certain assets to
TMN (see Note 2 in Item 1 above) and the
discontinuation of the amortization of goodwill as a result of
the adoption of Statement of Financial Accounting Standards
(SFAS) No. 142, Goodwill and Other Intangible
Assets, effective February 1, 2002.



| |                 
| | ----------------
| | Interest Expense

Interest expense for the six months ended
July 31, 2002 was $1.6 million, compared to
$3.2 million for the six months ended July 31, 2001, a
decrease of $1.6 million. Contributing to the decline was:
(i) a reduction in the average interest rates paid by the
Company on its borrowings under the Congress Facility of
approximately 311 basis points in the six months ended
July 31, 2002 as compared to six months ended July 31,
2001; and (ii) slightly lower average borrowings under the
Congress Facility. Borrowings under the Congress Facility were
used for the funding of working capital.



| |                
| | ---------------
| | Interest Income

Interest income for the six months ended
July 31, 2002 was $0.5 compared to $0.2 for the six months
ended July 31, 2001. The increase in interest income is
attributable to the notes receivable related to the sale of 64
of the Companys stores. Interest income also includes
notes receivable from shareholders.



| |             
| | ------------
| | Income Taxes

The income tax benefit of $1.4 million for
the six months ended July 31, 2002 reflects the recognition
of $1.6 million of tax refunds, partially offset by certain
state franchise taxes. These tax refunds resulted from the Job
Creation and Worker Assistance act, passed on March 6,
2002, which extended the Companys ability to carry back
net operating losses from two to five years. During the six
months ended July 31, 2001, the Company recognized a
benefit for income taxes at an effective rate of 40%. In the
third quarter of Fiscal 2002, the Company recorded a valuation
allowance of $34.9 million for its deferred income tax
assets due to a determination that it was more likely than not
that all or a portion of such deferred income tax assets would
not be realized. Such valuation allowance will be reversed when
the Company returns to profitability at levels sufficient to
realize such deferred income tax assets.

Liquidity and Capital Resources

During the six months ended July 31, 2002
and July 31, 2001, the Companys net cash used in
operating activities was $32.3 million and
$14.4 million, respectively. The most significant uses of
cash during this period

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were related to an increase in inventory of
$9.5 million compared to a reduction of $12.7 million
in the previous year and a decrease in accounts payable, accrued
expenses and other current liabilities of $13.3 million and
$22.1 million, respectively. Seasonal inventory purchases
typically begin during the third quarter and continue into the
fourth quarter, with significant payments typically due in the
first quarter of the fiscal year. Non-seasonal inventory
purchases are made throughout the year and fluctuate with the
timing and strength of new releases.


Net cash used in investing activities during the
six months ended July 31, 2002 and July 31, 2001 was
primarily due to capital expenditures for the acquisition of
property, equipment and improvements. Financing for capital
expenditures has generally been provided by cash from operations
and borrowings under the Facility.

Net cash provided by financing activities for the
six months ended July 31, 2002 was $35.0 million,
which included net borrowings under the Facility of
$39.4 million, the exercise of warrants of
$0.6 million and payments of $5.0 million on capital
lease obligations and long-term debt. Net cash provided by
financing activities for the six months ended July 31, 2001
was due to net borrowings under the Facility partially offset by
payments on capital lease obligations.

The Facility provides for a revolving credit line
of up to $155,000,000, including a letter of credit subfacility
of $10,000,000 (which amount can be increased at the discretion
of the financial institution), expiring on October 31,
2003, with a year-to-year renewal thereafter. The Facility bears
interest at the prime rate (4.75% at July 31, 2002) plus
0.5%, or at the Companys election, an adjusted Eurodollar
rate (1.84% at July 31, 2002) plus 1.75%. The
Companys borrowing availability under the Facility is
subject to limitations based upon, among other things, the value
of certain eligible merchandise inventory. In addition to the
interest payable, the Company pays an Unused Line Fee. The fee
is 0.375% per annum calculated upon the amount by which
$120.0 million exceeds the average daily principal balance
of the outstanding loans and letter of credit during the
immediately preceding month.

As of July 31, 2002, there was an
outstanding loan balance of $49.9 million and a letter of
credit outstanding in the amount of $11.4 million under the
Facility. On November 29, 2001, the Company was required to
post a letter of credit of $11.4 million as security for an
appellate bond issued to stay execution of the judgment in the
Peterson Lawsuit, (see Note 6 in Item 1 above.), pending
the outcome of the Companys appeal. The Company estimates
that availability under its revolving line as of
January 31, 2002 and July 31, 2002 was
$59.0 million and $23.0 million, respectively. In
accordance with the provisions of the Facility, the Company will
be in default if availability under the Facility falls below
$15 million. This decline in availability since
January 31, 2002 is mainly due to the Companys
seasonal fluctuations of merchandise inventory on which the
Facility is based.

Subsequent to July 31, 2002, the Company has
conducted discussions with Congress regarding an amendment to
the Facility. In connection with such discussions, an amendment
was finalized to provide for the Companys principal
shareholder to guarantee $10 million of the amounts
outstanding under the Facility. In exchange for this guarantee,
Congress has agreed to increase the amount of availability
covered by the Facility by $10 million. In addition, the
Company is currently discussing possible financing alternatives
with other potential lenders. The outcome of such discussions
are uncertain at this time. The Company believes that the
additional availability from the Facility, cash on hand,
expected cash flow from operations, and the availability of
lease financing arrangements, will be adequate to support
existing operations and planned capital expenditures of the
Company for Fiscal 2003. Improvements in cash flow from
operations during the holiday selling season would allow the
Company to continue to meet its obligations on a timely basis
subsequent to January 31, 2003.

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Contractual Obligations

The following is a summary of commitments of the
Company as of July 31, 2002:

|                         |                  |                                    |   |           |       |           |   |         |      |            |   |       |       |  |   |      |      |  |   |      |      | 
|------------------------ | ---------------- | ---------------------------------- | - | --------- | ----- | --------- | - | ------- | ---- | ---------- | - | ----- | ----- |  | - | ---- | ---- |  | - | ---- | ---- | 
|                         |                  |                                   
|                         |                  | Payments Due By Period            
|                         |                  |                                   
|                         |                  | Total                              |   | 1 Year(a) |       | 2-4 Years |   | 5 Years |      | Thereafter
|                         |                  |                                    |   |           |       |           |   |         |      |           
|                         |                  |                                   
|                         |                  | (Dollar amounts in millions)      
|Contractual Obligations: |                  |                                    |   |           |       |           |   |         |      |            |   |       |       |  |   |      |      |  |   |     
|                         | Long-term debt   |                                    | $ | 0.3       |       |           | $ | 0.1     |      |            | $ | 0.2   |       |  | $ |     |      |  | $ |     |     
|                         | Line of credit   |                                    |   | 49.9      |       |           |   |        |      |            |   | 49.9  |       |  |   |     |      |  |   |     |     
|                         | Capital leases   |                                    |   | 15.6      |       |           |   | 2.5     |      |            |   | 9.2   |       |  |   | 1.5  |      |  |   | 2.4  |     
|                         | Operating leases |                                    |   | 171.0     |       |           |   | 25.1    |      |            |   | 104.2 |       |  |   | 14.7 |      |  |   | 27.0 |     
|                         |                  |                                    |   |           |       |           |   |         |      |            |   |       |       |  |   |      |      |  |   |     
|                         |                  | Total contractual cash obligations |   | $         | 236.8 |           |   | $       | 27.7 |            |   | $     | 163.5 |  |   | $    | 16.2 |  |   | $    | 29.4 | 
|                         |                  |                                    |   |           |       |           |   |         |      |            |   |       |       |  |   |      |      |  |   |     



---



|    |                                                
|--- | -----------------------------------------------
|(a) | reflects remaining commitments for Fiscal 2003.

Seasonality and Inflation

The Companys business is seasonal, and
revenues and operating income are highest during the fourth
quarter of the Companys fiscal year. Working capital and
related bank borrowings in prior years were usually lowest
during the period beginning with the end of the Christmas
holiday season and ending with the close of the Companys
fiscal year. Beginning in February, working capital and related
bank borrowings have historically trended upward during the year
until the fourth quarter. Borrowings have historically been
highest between September and November due to capital
expenditures and the building of inventory for the holiday
season. The Company believes that, except for changes in the
minimum wage mandated by the Federal government, inflation has
not had a material effect on its operations and its internal and
external sources of liquidity and working capital.

Critical Accounting Policies

The Companys significant accounting
policies are described in Note 1 to our consolidated
financial statements as filed in the Companys annual
report on Form 10-K for the fiscal year ended
January 31, 2002. The Companys discussion and
analysis of financial condition and results of operations are
based upon its consolidated financial statements, which have
been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of the financial
statements requires the Company to make estimates and judgments
that affect the reported amounts of assets, liabilities,
revenues, expenses, and related disclosure of contingent assets
and liabilities. On an on-going basis, the Company will evaluate
the estimates that it has made. These estimates have been based
upon historical experience and on various other assumptions that
the Company believes to be reasonable under the circumstances.
Actual results may differ from these estimates under different
conditions or using different assumptions. The Company believes
its most critical accounting policies include its policies with
respect to inventories, intangible assets, store closure and
fair market value reserves, income taxes, litigation, and vendor
receivables. These policies are discussed in Item 7 of the
Companys annual report on Form 10-K for the fiscal
year ended January 31, 2002.

Recent Accounting Pronouncements

Effective February 1, 2002, the Company
adopted Statement of Financial Accounting Standards
(SFAS) No. 142, Goodwill and Other Intangible
Assets. Under SFAS No. 142, goodwill and intangible
assets with indefinite lives are no longer amortized, but will
be tested at least annually for impairment. SFAS No. 142
also requires the Company to complete a transitional impairment
test.

In accordance with SFAS No. 142, step one of
the two-step transitional impairment test requires the Company
to compare the fair value of each reporting unit with its
respective carrying amount, including goodwill. The Company has
completed step one of the transitional impairment test required
by SFAS No. 142

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and has determined that the fair value of the
Company is less than its shareholders equity at
January 31, 2002, indicating a possible impairment of
goodwill. Fair value was determined by an independent appraisal.
In accordance with SFAS No. 142, the Company has begun step
two of the transitional impairment test.


Step two of the transitional impairment test must
be completed by January 31, 2003 and the resulting impairment
loss, if any, will be recorded as a cumulative effect of an
accounting change in the consolidated statements of operations.
The amount of impairment, if any, cannot be determined until the
completion of this process. The amount of such loss, however,
could be material to the Companys consolidated financial
statements. SFAS No. 142 also requires the Company to
perform an impairment test if an event occurs or circumstances
change that would more likely than not result in an impairment
loss. Such subsequent impairment losses, if any, will be
reflected in operating income in the consolidated statements of
operations in the period the event occurs.

In June 2002, the FASB approved SFAS
No. 146, Accounting for Costs Associated with Exit or
Disposal Activities. This statement addresses financial
accounting and reporting for costs associated with exit or
disposal activities and nullifies EITF Issue No. 94-3,
Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity. The
provisions of this statement are effective for exit or disposal
activities that are initiated after December 31, 2002, with
early application encouraged. The Company is currently
evaluating the impact that this statement may have on any
potential future exit or disposal activities.




Item 3.     Quantitative
and Qualitative Disclosures About Market Risk

The Company is subject to risks resulting from
interest rate fluctuations since interest on the Companys
borrowings under the Congress Facility are based on variable
rates. If the Eurodollar rate were to increase 1% in Fiscal 2003
as compared to the rate at July 31, 2002, the
Companys interest expense for Fiscal 2003 would increase
$0.5 million based on the outstanding balance of the
Congress Facility at July 31, 2002. The Company does not
hold any derivative instruments and does not engage in hedging
activities.




PART II.     OTHER
INFORMATION




Item 4.     Legal
Proceedings

As discussed above, in January, 2001, the Company
was sued in the Los Angeles Superior Court by a former store
manager, claiming alleged failure to pay overtime wages to
herself and all similarly situated salaried store employees. The
Complaint does not specify any amount of the claims, either
individually or on behalf of the class. Thereafter, the
Complaint was amended to add three additional named plaintiffs.
The amended Complaint seeks relief on behalf of both store
managers and assistant managers going back to 1997. The
Companys motions to strike the class action allegations
have been denied. In October, 2001, a second class action suit
was filed with respect to store managers and assistant managers
by different named plaintiffs and different lawyers. It also
seeks overtime pay and, in addition, asserts claims for meal
break and rest break penalties. The plaintiffs in the two suits
have filed a consolidated complaint. A limited amount of
discovery has been conducted to date. While the Company believes
it has meritorious defenses against the suits, the ultimate
resolution of the matter, could result in a loss in excess of
the amount accrued during the second quarter of Fiscal 2003.

On July 18, 2001, the Santa Clara County,
California Superior Court entered a $7.6 million judgment
against the Company in a personal injury lawsuit encaptioned
Peterson, et al. v. Shapell Industries (the Peterson
Lawsuit). While the Company was insured for this judgment,
its insurer, Reliance Insurance Company, was ordered liquidated
by the State of Pennsylvania on October 3, 2001. As such,
it is unknown at present whether, and to what extent, assets of
the insurer will be available to the Company subsequent to a
formal liquidation proceeding. Pending this outcome,
Californias Insurance Guarantee Fund (CIGA)
has engaged appellate counsel on behalf of the Company. CIGA has
also facilitated the posting of an appellate bond to stay
execution of the Peterson judgment pending the outcome of the
Companys appeal. The Company was required by the bonding
company to provide an $11.4 million letter of credit as security
for the

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appellate bond. On August 9, 2002, the
Company filed its opening brief in the Court of Appeal of the
State of California, Sixth Appellate District. Based on the
advice of legal counsel, management believes that it is
reasonably possible that it will either prevail on appeal or be
successful in an alternative legal strategy and, accordingly,
has not recorded a liability for the judgment in the
accompanying financial statements.


The Company is a party to various other claims,
legal actions and complaints arising in the ordinary course of
its business. In the opinion of management, all such matters are
without merit or involve such amounts that unfavorable
disposition will not have a material impact on the financial
position and results of operations of the Company.




Item 5.     Other
Information

None.




Item 6.     Exhibits
and Reports on Form 8-K

(a) Exhibits

None.

(b) Reports on Form 8-K

None.

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SIGNATURES

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.



| |                               
| | ------------------------------
| | WHEREHOUSE ENTERTAINMENT, INC.

|                         |  |                                                                                                                     
|------------------------ |  | --------------------------------------------------------------------------------------------------------------------
|Date: September 23, 2002 |  | /s/ JERRY M. COMSTOCK, JR. Jerry M. Comstock, Jr.Chief Executive Officer(Principal Executive Officer)               
|                        
|Date: September 23, 2002 |  | /s/ MARK A. VELARDE Mark A. VelardeChief Financial Officer/Chief Administrative Officer(Principal Financial Officer)

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CERTIFICATIONS

I, Jerry M. Comstock, Jr., certify that:

1.     I have reviewed
this quarterly report on Form 10-Q of Wherehouse
Entertainment, Inc.;

2.     Based on my
knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report; and

3.     Based on my
knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in
all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report.



| |                           
| | --------------------------
| | /s/ JERRY M. COMSTOCK, JR.
| |                           
| | Jerry M. Comstock, Jr.    
| | Chief Executive Officer   

Date: September 23, 2002

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##### Table of Contents



I, Mark A. Velarde, certify that:

1.     I have reviewed
this quarterly report on Form 10-Q of Wherehouse
Entertainment, Inc.;

2.     Based on my
knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report; and

3.     Based on my
knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in
all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report.



| |                                                         
| | --------------------------------------------------------
| | /s/ MARK A. VELARDE                                     
| |                                                         
| | Mark A. Velarde                                         
| | Chief Financial Officer/Chief Administrative
    Officer

Date: September 23, 2002

20