##### Table of Contents



________________________________________________________________________________


UNITED STATES SECURITIES AND EXCHANGE
COMMISSION


Washington, D.C. 20549




---

Form 10-Q

|  |  |                                                                                           
|- |  | ------------------------------------------------------------------------------------------
|þ |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR
	15(d)
	OF THE SECURITIES EXCHANGE ACT OF 1934 
|  |  | For the quarterly period ended July 31,
	2001                                             
| 
|o |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR
	15(d)
	OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 0-22289



---

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,
	including 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,

11,001,421 shares outstanding as of
September 7, 2001










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TABLE OF CONTENTS



|                             |                                                                                              |                                                                                            |  |  |  |  |  | 
|---------------------------- | -------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------ |  |  |  |  |  | 
|INDEX                       
|FORWARD-LOOKING STATEMENTS  
|PART I.FINANCIAL INFORMATION
|                             | Item 1.Financial Statements                                                                 
|                             |                                                                                              | CONSOLIDATED CONDENSED BALANCE SHEETS                                                     
|                             |                                                                                              | WHEREHOUSE ENTERTAINMENT, INC. CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (Unaudited)
|                             |                                                                                              | WHEREHOUSE ENTERTAINMENT, INC. CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
|                             |                                                                                              | NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS                                      
|                             | 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 1.Legal Proceedings    
|                             | Item 5.Other Information                                                                    
|                             | Item 6.Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                  



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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, 2001 (Unaudited) and January 31, 2001                                                                            |    |      | 3  | 
|                               
|                               
|                               
|                               
|                                |  | Consolidated Condensed Statements of
	Operations  Three Months Ended July 31, 2001 and
	2000 (Unaudited) and Six Months Ended July 31, 2001 and
	2000 (Unaudited) |    |      | 4  | 
|                               
|                               
|                               
|                               
|                                |  | Consolidated Condensed Statements of Cash
	Flows  Six Months Ended July 31, 2001 and 2000
	(Unaudited)                                                            |    |      | 5  | 
|                               
|                               
|                               
|                               
|                                |  | Notes to Consolidated Condensed Financial
	Statements (Unaudited)                                                                                                  |    |      | 6  | 
|                               
|                               
|                               
|                               
|Item  2.                        |  | Managements Discussion and Analysis of
	Financial Condition and Results of Operations                                                                             |    |      | 8  | 
|                               
|                               
|                               
|                               
|Item  3.                        |  | Quantitative and Qualitative Disclosures About
	Market Risk                                                                                                        |    |      | 12 | 
|                               
|                               
|                               
|                               
|PART II.  OTHER
	INFORMATION   
|                               
|                               
|                               
|                               
|Item  1.                        |  | Legal Proceedings                                                                                                                                                  |    |      | 12 | 
|                               
|                               
|                               
|                               
|Item  5.                        |  | Other Information                                                                                                                                                  |    |      | 13 | 
|                               
|                               
|                               
|                               
|Item  6.                        |  | Exhibits and Reports on Form 8-K                                                                                                                                   |    |      | 13 | 
|                               
|                               
|                               
|                               
|SIGNATURES                      |  |                                                                                                                                                                    | 14 |     

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 issuances 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 registrants products and
alternative methods or channels of distribution such as Internet
and telephone 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; (i) adverse
results in significant litigation matters; and
(j) shortages of electricity in California, where the
registrant has a large number of retail stores, its corporate
office and its distribution center. Such electricity shortages
may, in the near term, subject these locations to rolling
blackouts which could interrupt the registrants business
as well as increase utility costs.

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. We do 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 on Form 10-Q 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,
|                                              |                                                                                                                           | 2001                                       |            | 2001       
|                                              |                                                                                                                           |                                            |            |            
|                                              |                                                                                                                           | (Unaudited)                                |            |            
|                                             
|                                             
|                                             
|                                             
|ASSETS                                       
|                                             
|                                             
|                                             
|                                             
|Current assets:                               |                                                                                                                           |                                            |            |             |             |  |            |            
|                                             
|                                             
|                                             
|                                             
|                                              | Cash and cash equivalents                                                                                                 |                                            | $          | 2,565,000   |             |  | $          | 2,457,000   |            
|                                             
|                                             
|                                             
|                                             
|                                              | Receivables, net                                                                                                          |                                            |            | 1,664,000   |             |  |            | 1,343,000   |            
|                                             
|                                             
|                                             
|                                             
|                                              | Inventories, net                                                                                                          |                                            |            | 184,438,000 |             |  |            | 197,147,000 |            
|                                             
|                                             
|                                             
|                                             
|                                              | Income taxes receivable                                                                                                   |                                            |            | 9,825,000   |             |  |            | 9,825,000   |            
|                                             
|                                             
|                                             
|                                             
|                                              | Other current assets                                                                                                      |                                            |            | 1,511,000   |             |  |            | 2,401,000   |            
|                                             
|                                             
|                                             
|                                             
|                                              | Deferred taxes                                                                                                            |                                            |            | 8,726,000   |             |  |            | 5,983,000   |            
|                                              |                                                                                                                           |                                            |            |             |             |  |            |            
|                                              |                                                                                                                           | Total current assets                       |            |             | 208,729,000 |  |            |             | 219,156,000 | 
|                                             
|                                             
|                                             
|                                             
|Property, equipment and improvements, net     |                                                                                                                           |                                            | 56,769,000 |             |             |  | 67,132,000 |            
|                                             
|                                             
|                                             
|                                             
|Deferred taxes                                |                                                                                                                           |                                            | 24,795,000 |             |             |  | 19,886,000 |            
|                                             
|                                             
|                                             
|                                             
|Intangible assets, net                        |                                                                                                                           |                                            | 32,728,000 |             |             |  | 34,510,000 |            
|                                             
|                                             
|                                             
|                                             
|Other assets, net                             |                                                                                                                           |                                            | 750,000    |             |             |  | 1,007,000  |            
|                                              |                                                                                                                           |                                            |            |             |             |  |            |            
|                                              |                                                                                                                           | Total assets                               |            | $           | 323,771,000 |  |            | $           | 341,691,000 | 
|                                              |                                                                                                                           |                                            |            |             |             |  |            |            
|                                             
|                                             
|                                             
|                                             
|LIABILITIES AND SHAREHOLDERS
	EQUITY        
|                                             
|                                             
|                                             
|                                             
|Current liabilities:                          |                                                                                                                           |                                            |            |             |             |  |            |            
|                                             
|                                             
|                                             
|                                             
|                                              | Accounts payable and bank overdraft                                                                                       |                                            | $          | 110,102,000 |             |  | $          | 129,042,000 |            
|                                             
|                                             
|                                             
|                                             
|                                              | Accrued expenses                                                                                                          |                                            |            | 32,327,000  |             |  |            | 35,468,000  |            
|                                             
|                                             
|                                             
|                                             
|                                              | Store closure reserves                                                                                                    |                                            |            | 7,865,000   |             |  |            | 8,421,000   |            
|                                             
|                                             
|                                             
|                                             
|                                              | Reorganization liabilities                                                                                                |                                            |            | 1,203,000   |             |  |            | 1,242,000   |            
|                                             
|                                             
|                                             
|                                             
|                                              | Current portion of long-term debt                                                                                         |                                            |            | 3,820,000   |             |  |            | 3,836,000   |            
|                                             
|                                             
|                                             
|                                             
|                                              | Current portion of leases in excess of fair
	market value                                                                 |                                            |            | 3,270,000   |             |  |            | 3,270,000   |            
|                                             
|                                             
|                                             
|                                             
|                                              | Current portion of capital lease obligations                                                                              |                                            |            | 5,958,000   |             |  |            | 6,090,000   |            
|                                              |                                                                                                                           |                                            |            |             |             |  |            |            
|                                              |                                                                                                                           | Total current liabilities                  |            |             | 164,545,000 |  |            |             | 187,369,000 | 
|                                             
|                                             
|                                             
|                                             
|Line of credit                                |                                                                                                                           |                                            | 56,284,000 |             |             |  | 35,123,000 |            
|                                             
|                                             
|                                             
|                                             
|Long-term debt                                |                                                                                                                           |                                            | 208,000    |             |             |  | 224,000    |            
|                                             
|                                             
|                                             
|                                             
|Capital lease obligations                     |                                                                                                                           |                                            | 13,244,000 |             |             |  | 16,293,000 |            
|                                             
|                                             
|                                             
|                                             
|Leases in excess of fair market value         |                                                                                                                           |                                            | 16,560,000 |             |             |  | 18,195,000 |            
|                                             
|                                             
|                                             
|                                             
|Deferred rent and other long-term liabilities |                                                                                                                           |                                            | 5,128,000  |             |             |  | 5,181,000  |            
|                                              |                                                                                                                           |                                            |            |             |             |  |            |            
|                                              |                                                                                                                           | Total liabilities                          |            |             | 255,969,000 |  |            |             | 262,385,000 | 
|                                              |                                                                                                                           |                                            |            |             |             |  |            |            
|Shareholders equity:                         |                                                                                                                           |                                            |            |             |             |  |            |            
|                                              | Preferred stock, $.01 par value; shares
	authorized, 3,000,000; shares issued, none                                       |                                            |            |             |             |  |            |             |            
|                                             
|                                             
|                                             
|                                             
|                                              | Common stock, $.01 par value; shares authorized,
	24,000,000; shares issued, 11,026,421; shares outstanding,
	11,001,421. |                                            |            | 110,000     |             |  |            | 110,000     |            
|                                             
|                                             
|                                             
|                                             
|                                              | Additional paid-in-capital                                                                                                |                                            |            | 94,491,000  |             |  |            | 94,453,000  |            
|                                             
|                                             
|                                             
|                                             
|                                              | Retained earnings (deficit)                                                                                               |                                            |            | (19,441,000 | )           |  |            | (8,084,000  | )          
|                                             
|                                             
|                                             
|                                             
|                                              | Treasury stock, 25,000 shares                                                                                             |                                            |            | (338,000    | )           |  |            | (338,000    | )          
|                                             
|                                             
|                                             
|                                             
|                                              | Notes receivable                                                                                                          |                                            |            | (7,020,000  | )           |  |            | (6,835,000  | )          
|                                              |                                                                                                                           |                                            |            |             |             |  |            |            
|                                              |                                                                                                                           | Total shareholders equity                 |            |             | 67,802,000  |  |            |             | 79,306,000  | 
|                                              |                                                                                                                           |                                            |            |             |             |  |            |            
|                                              |                                                                                                                           | Total liabilities and shareholders equity |            | $           | 323,771,000 |  |            | $           | 341,691,000 | 
|                                              |                                                                                                                           |                                            |            |             |             |  |            |            

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

(Unaudited)


|                                                                                   |                          |                    |             |                  |   |          |             |             |   |   |             |             |   |   |             |             |  
|---------------------------------------------------------------------------------- | ------------------------ | ------------------ | ----------- | ---------------- | - | -------- | ----------- | ----------- | - | - | ----------- | ----------- | - | - | ----------- | ----------- | -
|                                                                                   |                          |                    |             |                 
|                                                                                   |                          | Three Months Ended |             | Six Months Ended
|                                                                                   |                          |                    |             |                 
|                                                                                   |                          | July 31,           |             | July 31,         |   | July 31, |             | July 31,   
|                                                                                   |                          | 2001               |             | 2000             |   | 2001     |             | 2000       
|                                                                                   |                          |                    |             |                  |   |          |             |            
|Sale merchandise revenue                                                           |                          | $                  | 149,709,000 |                  |   | $        | 165,062,000 |             |   | $ | 298,965,000 |             |   | $ | 340,299,000 |            
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Rental revenue, net                                                                |                          |                    | 1,079,000   |                  |   |          | 1,526,000   |             |   |   | 2,380,000   |             |   |   | 3,056,000   |            
|                                                                                   |                          |                    |             |                  |   |          |             |             |   |   |             |             |   |   |             |            
|                                                                                   | Total revenues           |                    |             | 150,788,000      |   |          |             | 166,588,000 |   |   |             | 301,345,000 |   |   |             | 343,355,000 |  
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Cost of sale merchandise revenue                                                   |                          |                    | 99,419,000  |                  |   |          | 108,266,000 |             |   |   | 196,692,000 |             |   |   | 221,548,000 |            
|                                                                                   |                          |                    |             |                  |   |          |             |             |   |   |             |             |   |   |             |            
|                                                                                   | Gross profit             |                    |             | 51,369,000       |   |          |             | 58,322,000  |   |   |             | 104,653,000 |   |   |             | 121,807,000 |  
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Selling, general and administrative expenses                                       |                          |                    | 52,232,000  |                  |   |          | 54,883,000  |             |   |   | 104,778,000 |             |   |   | 113,000,000 |            
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Depreciation and amortization                                                      |                          |                    | 7,743,000   |                  |   |          | 7,471,000   |             |   |   | 15,611,000  |             |   |   | 14,871,000  |            
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Loss on disposition of assets                                                      |                          |                    | 189,000     |                  |   |          | 191,000     |             |   |   | 150,000     |             |   |   | 665,000     |            
|                                                                                   |                          |                    |             |                  |   |          |             |             |   |   |             |             |   |   |             |            
|                                                                                   | Loss from operations     |                    |             | (8,795,000       | ) |          |             | (4,223,000  | ) |   |             | (15,886,000 | ) |   |             | (6,729,000  | )
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Interest expense                                                                   |                          |                    | 1,453,000   |                  |   |          | 2,019,000   |             |   |   | 3,238,000   |             |   |   | 4,342,000   |            
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Interest income                                                                    |                          |                    | (101,000    | )                |   |          | (97,000     | )           |   |   | (196,000    | )           |   |   | (218,000    | )          
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Equity in loss from unconsolidated joint venture                                   |                          |                    |             |                  |   |          | 2,971,000   |             |   |   |             |             |   |   | 6,043,000   |            
|                                                                                   |                          |                    |             |                  |   |          |             |             |   |   |             |             |   |   |             |            
|                                                                                   | Loss before income taxes |                    |             | (10,147,000      | ) |          |             | (9,116,000  | ) |   |             | (18,928,000 | ) |   |             | (16,896,000 | )
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Benefit for income taxes                                                           |                          |                    | 4,059,000   |                  |   |          | 3,680,000   |             |   |   | 7,571,000   |             |   |   | 6,792,000   |            
|                                                                                   |                          |                    |             |                  |   |          |             |             |   |   |             |             |   |   |             |            
|                                                                                   | Net loss                 |                    | $           | (6,088,000       | ) |          | $           | (5,436,000  | ) |   | $           | (11,357,000 | ) |   | $           | (10,104,000 | )
|                                                                                   |                          |                    |             |                  |   |          |             |             |   |   |             |             |   |   |             |            
|Net loss per common share:                                                         |                          |                    |             |                  |   |          |             |             |   |   |             |             |   |   |             |            
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                   | Basic                    |                    | $           | (0.55            | ) |          | $           | (0.49       | ) |   | $           | (1.03       | ) |   | $           | (0.92       | )
|                                                                                   |                          |                    |             |                  |   |          |             |             |   |   |             |             |   |   |             |            
|                                                                                   | Diluted                  |                    | $           | (0.55            | ) |          | $           | (0.49       | ) |   | $           | (1.03       | ) |   | $           | (0.92       | )
|                                                                                   |                          |                    |             |                  |   |          |             |             |   |   |             |             |   |   |             |            
|Weighted average common shares
	outstanding  Basic                                |                          |                    | 11,001,421  |                  |   |          | 11,001,421  |             |   |   | 11,001,421  |             |   |   | 10,976,004  |            
|                                                                                   |                          |                    |             |                  |   |          |             |             |   |   |             |             |   |   |             |            
|Weighted average common shares and common
	equivalent shares outstanding  Diluted |                          |                    | 11,001,421  |                  |   |          | 11,001,421  |             |   |   | 11,001,421  |             |   |   | 10,976,004  |            
|                                                                                   |                          |                    |             |                  |   |          |             |             |   |   |             |             |   |   |             |            

See Accompanying Notes to Unaudited Consolidated
Condensed Financial Statements.

4



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##### Table of Contents






WHEREHOUSE ENTERTAINMENT, INC.

CONSOLIDATED CONDENSED STATEMENTS OF CASH
FLOWS

(Unaudited)


|                                                                             |                                                                           |                                                                   |                                           |            |             |             |             |            |             |             |  
|---------------------------------------------------------------------------- | ------------------------------------------------------------------------- | ----------------------------------------------------------------- | ----------------------------------------- | ---------- | ----------- | ----------- | ----------- | ---------- | ----------- | ----------- | -
|                                                                             |                                                                           |                                                                  
|                                                                             |                                                                           | Six Months Ended                                                 
|                                                                             |                                                                           |                                                                  
|                                                                             |                                                                           | July 31,                                                          |                                           | July 31,  
|                                                                             |                                                                           | 2001                                                              |                                           | 2000      
|                                                                             |                                                                           |                                                                   |                                           |           
|Operating activities:                                                        |                                                                           |                                                                   |                                           |            |             |             |             |           
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Net loss                                                                     |                                                                           | $                                                                 | (11,357,000                               | )          |             | $           | (10,104,000 | )         
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Adjustments to reconcile net loss to net cash
	used in operating activities: |                                                                           |                                                                   |                                           |            |             |             |             |           
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Depreciation and amortization                                             |                                                                   |                                           | 15,611,000 |             |             |             | 14,871,000 |            
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Loss on disposition of assets                                             |                                                                   |                                           | 150,000    |             |             |             | 665,000    |            
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Rental amortization included in cost of rentals                           |                                                                   |                                           | 1,832,000  |             |             |             | 1,849,000  |            
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Book value of rental inventory dispositions,
	included in cost of rentals |                                                                   |                                           | 217,000    |             |             |             | 368,000    |            
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Loss on investment in joint venture                                       |                                                                   |                                           |            |             |             |             | 6,043,000  |            
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Stock option compensation                                                 |                                                                   |                                           | 38,000     |             |             |             |            |            
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Interest on notes receivable                                              |                                                                   |                                           | (185,000   | )           |             |             | (186,000   | )          
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Deferred taxes                                                            |                                                                   |                                           | (7,652,000 | )           |             |             | (7,515,000 | )          
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Changes in operating assets and liabilities:                              |                                                                   |                                           |            |             |             |             |            |            
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             |                                                                           | Receivables, net                                                  |                                           |            | (321,000    | )           |             |            | 4,766,000   |            
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             |                                                                           | Inventories, net                                                  |                                           |            | 12,587,000  |             |             |            | 35,432,000  |            
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             |                                                                           | Rental inventory purchases                                        |                                           |            | (1,927,000  | )           |             |            | (1,885,000  | )          
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             |                                                                           | Other current assets                                              |                                           |            | 890,000     |             |             |            | 471,000     |            
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             |                                                                           | Accounts payable, accrued expenses and other
	current liabilities |                                           |            | (22,081,000 | )           |             |            | (44,327,000 | )          
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             |                                                                           | Store closure and leases in excess of FMV reserves                |                                           |            | (2,191,000  | )           |             |            | (3,010,000  | )          
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             |                                                                           | Other long-term liabilities                                       |                                           |            | (53,000     | )           |             |            | 356,000     |            
|                                                                             |                                                                           |                                                                   |                                           |            |             |             |             |           
|                                                                             |                                                                           |                                                                   | Net cash used in operating activities     |            |             | (14,442,000 | )           |            |             | (2,206,000  | )
|                                                                             |                                                                           |                                                                   |                                           |            |             |             |             |           
|Investing Activities:                                                        |                                                                           |                                                                   |                                           |            |             |             |             |           
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Purchase of property, equipment and improvements                             |                                                                           |                                                                   | (3,726,000                                | )          |             |             | (7,073,000  | )         
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Investment in joint venture                                                  |                                                                           |                                                                   |                                           |            |             |             | (14,896,000 | )         
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Decrease (increase) in other assets                                          |                                                                           |                                                                   | 367,000                                   |            |             |             | (21,000     | )         
|                                                                             |                                                                           |                                                                   |                                           |            |             |             |             |           
|                                                                             |                                                                           |                                                                   | Net cash used in investing activities     |            |             | (3,359,000  | )           |            |             | (21,990,000 | )
|                                                                             |                                                                           |                                                                   |                                           |            |             |             |             |           
|Financing Activities:                                                        |                                                                           |                                                                   |                                           |            |             |             |             |           
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Net borrowings under line of credit                                          |                                                                           |                                                                   | 21,161,000                                |            |             |             | 22,422,000  |           
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Payments on capital lease obligations and
	long-term debt                    |                                                                           |                                                                   | (3,213,000                                | )          |             |             | (2,992,000  | )         
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Proceeds from sale of common stock                                           |                                                                           |                                                                   |                                           |            |             |             | 5,000,000   |           
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Settlement of pre-petition claims                                            |                                                                           |                                                                   | (39,000                                   | )          |             |             | (163,000    | )         
|                                                                             |                                                                           |                                                                   |                                           |            |             |             |             |           
|                                                                             |                                                                           |                                                                   | Net cash provided by financing activities |            |             | 17,909,000  |             |            |             | 24,267,000  |  
|                                                                             |                                                                           |                                                                   |                                           |            |             |             |             |           
|Net increase in cash and cash equivalents                                    |                                                                           |                                                                   | 108,000                                   |            |             |             | 71,000      |           
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Cash and cash equivalents at beginning of the
	period                        |                                                                           |                                                                   | 2,457,000                                 |            |             |             | 4,531,000   |           
|                                                                             |                                                                           |                                                                   |                                           |            |             |             |             |           
|Cash and cash equivalents at end of the period                               |                                                                           | $                                                                 | 2,565,000                                 |            |             | $           | 4,602,000   |           
|                                                                             |                                                                           |                                                                   |                                           |            |             |             |             |           
|Supplemental disclosures of cash flow information:                           |                                                                           |                                                                   |                                           |            |             |             |             |           
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Cash paid during the period for:                                          |                                                                   |                                           |            |             |             |             |            |            
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             |                                                                           | Interest                                                          |                                           | $          | 2,962,000   |             |             | $          | 4,249,000   |            
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             |                                                                           | Income taxes, net                                                 |                                           | $          | 389,000     |             |             | $          | 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, 2001 are not necessarily
indicative of the results that may be expected for the
Companys fiscal year ending January 31, 2002
(Fiscal 2002). 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, 2001
(Fiscal 2001).

2.     Disposition of
Stores

On August 9, 2001, the Company completed the
sale of sixty-four (64) Wherehouse Music stores to The Music
Network (TMN) for approximately $26 million in
cash and notes. 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 $63.6 million in total revenues for the year
ended January 31, 2001 and $26.8 million in total
revenues for the six months ended July 31, 2001. The net
book value of the assets sold amounted to approximately
$26 million.

3.     E-Commerce

In response to the growth in electronic commerce
for prerecorded music and video product, the Company launched
its own Internet commerce site, Wherehousemusic.com,
on May 10, 1999. In November of 1999, the Company agreed to
enter into an equity investment and strategic partnership
agreement (the Agreement) with CheckOut.com, LLC
(CheckOut.com), an Internet content provider and
e-commerce retailer of music, movies and games. This Agreement
was finalized on February 16, 2000. In exchange for a 49%
interest in CheckOut.com, the Company contributed
$9.8 million in February of 2000. In addition, commencing
March 2000, amounts of up to $1.568 million per month were
contributed for a total investment of approximately
$20.0 million. Under the terms of the Agreement,
CheckOut.com was the Companys exclusive Internet website
partner for music, movies and games. As a result, the Company
merged the operation of its own Internet website,
Wherehousemusic.com, with that of CheckOut.com. CheckOut.com was
integrated into all of the Companys marketing and
advertising associated with the Companys stores
nationwide. As a part of the CheckOut.com transaction, the
Company sold 250,000 shares of its common stock to affiliates of
its partner in CheckOut.com for $5.0 million in cash. In
addition, during the year ended January 31, 2000 the
Company loaned CheckOut.com $5.0 million. The loan was
repaid by Checkout.com in Fiscal 2001.

For the six-month period ended July 31,
2000, the Company recognized a loss of $6.0 million related
to the joint venture. As of July 31, 2000, the
Companys investment in the joint venture amounted to
$14.9 million. As a result of significant operating losses
experienced by CheckOut.com subsequent to February, 2000,
CheckOut.com ceased operation of its Internet site in February,
2001. For Fiscal 2001, a $20.6 million loss on investment
in joint venture was recorded by the Company which included
$11.1 million representing the Companys share in the
joint ventures operating losses and $9.5 million
representing a loss due to the impairment in value of the
remaining investment.

6



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##### Table of Contents



WHEREHOUSE ENTERTAINMENT, INC.


NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS  (Continued)

(Unaudited)


4.     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. The Companys motion to strike the
class action allegations was denied. The plaintiffs motion
to file an amended complaint was recently granted in part to
allow for the addition of three new named plaintiffs and to
expand the plaintiffs legal theory. However, the amended
complaint has not yet been filed. The Company believes the
allegations are without merit and intends to vigorously defend
itself in this matter. However, no assurance can be provided as
to its outcome. Management does not believe an adverse judgment
against the Company would result in a material impact to the
consolidated financial statements.

On June 4, 2001, the Company received a copy
of an Order entered by a Pennsylvania state court with respect
to Reliance Insurance Company (Reliance). Reliance
was the Companys general and umbrella liability insurance
carrier for the one-year period ended August 1, 1998. The
Order stated that Reliance was placed in
Rehabilitation under Pennsylvanias Insurance
Department Act. The Company is one of several named defendants
in a personal injury lawsuit, Peterson v. Shappel Industries,
Inc., et al., which relates to an event that occurred during the
period the Company was insured by Reliance. On July 18,
2001, a $7.4 million judgment was entered against the
Company in this lawsuit. The Company is in the process of
appealing this decision. This judgment is within the scope of
the insurance policy issued by Reliance. While it is not
possible to predict the outcome of Reliances
Rehabilitation, it is the Companys understanding that, at
the present time, Reliance is continuing to honor its
obligations and pay its claims. The Company believes that
liability, if any, under this lawsuit will be funded by Reliance.

5.     Accounting
Policy Change

In June 2001, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards
(SFAS) No. 141, Business Combinations and
SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS No. 141 requires that all business
combinations initiated after June 30, 2001 be accounted for
under the purchase method of accounting and addresses the
initial recognition and measurement of goodwill and other
intangible assets acquired in a business combination. SFAS
No. 142 addresses the initial recognition and measurement
of intangible assets acquired in a business combination and the
accounting for goodwill and other intangible assets subsequent
to their acquisition. SFAS No. 142 provides that intangible
assets with finite useful lives be amortized and that goodwill
and intangible assets with indefinite lives will not be
amortized, but will be tested at least annually for impairment.
The Company is required to implement SFAS No. 141 and 142
on February 1, 2002 and, at that time, will stop amortizing
goodwill that resulted from business combinations completed
prior to the adoption of SFAS No. 141. Goodwill is
currently being amortized at approximately $3.5 million
annually. The Company is currently evaluating the provisions of
SFAS No. 141 and 142 and has not yet determined any
additional effects that adoption of these standards will have on
its financial statements.

7



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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 2001.

Results of Operations



| |                                                        
| | -------------------------------------------------------
| | For the Quarters Ended July 31, 2001
	and July 31, 2000

Revenues

Total revenues were $150.8 million and
$166.6 million for the quarters ended July 31, 2001
(the second quarter of Fiscal 2002) and July 31, 2000 (the
second quarter of Fiscal 2001), respectively. The decrease of
$15.8 million was primarily attributable to decreases in
net revenues of $6.4 million due to the closure of
34 stores since July 31, 2000, same store sales
decreases in net revenues of $9.0 million and the reduction
of net rental revenue of $0.4 million.

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

Sale Merchandise and Rental Revenues

By Category


(Dollars in millions)


|                          |                                                                                                                                      |                                |     |       |       |  |     |       |       | 
|------------------------- | ------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------ | --- | ----- | ----- |  | --- | ----- | ----- | 
|                          |                                                                                                                                      |                               
|                          |                                                                                                                                      | Quarter Ended                 
|                          |                                                                                                                                      | July 31,                      
|                          |                                                                                                                                      |                               
|                          |                                                                                                                                      | 2001                           |     | 2000 
|                          |                                                                                                                                      |                                |     |      
|Sale merchandise revenue: |                                                                                                                                      |                                |     |       |       |  |     |      
|                         
|                         
|                         
|                         
|                          | Music                                                                                                                                |                                | $   | 125.0 |       |  | $   | 143.6 |      
|                         
|                         
|                         
|                         
|                          | Other, principally sales of new videocassettes,
	DVDs, video game software and hardware, general merchandise and
	ticket commissions |                                |     | 24.7  |       |  |     | 21.5  |      
|                          |                                                                                                                                      |                                |     |       |       |  |     |      
|                          |                                                                                                                                      | Total sale merchandise revenue |     |       | 149.7 |  |     |       | 165.1 | 
|                         
|                         
|                         
|                         
|Rental revenue, net       |                                                                                                                                      |                                | 1.1 |       |       |  | 1.5 |      
|                          |                                                                                                                                      |                                |     |       |       |  |     |      
|                          |                                                                                                                                      | Total revenue                  |     | $     | 150.8 |  |     | $     | 166.6 | 
|                          |                                                                                                                                      |                                |     |       |       |  |     |      

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 6 stores
closed during the three months ended July 31, 2001, sale
merchandise revenue decreased by approximately 5.7% during the
second quarter of Fiscal 2002 as compared to the second quarter
of Fiscal 2001. The primary reasons for the decrease were a weak
new release schedule for music products that continued through
the first half of the second quarter of Fiscal 2002, and
competition from certain big-box retailers selling
selected new music releases at or below cost. Partially
offsetting these decreases were increased sales of DVD and used
music and a stronger release schedule in the later half of the
second quarter of Fiscal 2002.

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 $1.1 million in the second quarter
of Fiscal 2002 and $1.5 million in the second quarter of
Fiscal 2001, representing a decrease due to the Companys
de-emphasis of the rental portion of its business.

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

8



---



##### Table of Contents



are not limited to, consumer tastes, new releases
of music, 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, 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 other music and video specialty chains,
consumer electronics superstores, discounters and mass
merchandisers. Consolidation continues to occur in the home
entertainment industry and the Company continues to study
industry developments in developing its own strategies.




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

Cost of sale merchandise revenue was
$99.4 million for the second quarter of Fiscal 2002, as
compared with $108.3 million for the same period last year,
a decrease of $8.9 million. As a percentage of sale
merchandise revenue, cost of sale merchandise revenue was 66.4%
for the second quarter of Fiscal 2002 as compared with 65.6% for
the second quarter of Fiscal 2001. As a percentage of total
revenues for the second quarter of Fiscal 2002, sales of higher
margin new music product continued to decrease and sales of
lower margin DVD product continued to increase, which offset the
benefit from an increase of higher margin used music product. In
addition, decreases in sales prices related to several mid-line
new music promotional events also caused pressure on gross
profit margins.



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

Selling, general and administrative
(SG&A) expenses for the second quarter of Fiscal
2002 were $52.2 million, compared to $54.9 million for
the second quarter of Fiscal 2001, a decrease of
$2.7 million. The decrease is primarily attributable to a
reduction of $2.5 million in operating expenses at the
Companys stores due to store closures. In addition, cost
of living increases in payroll, CPI increases in occupancy costs
and similar inflationary increases in utility and other costs
were more than offset by improvements in operating efficiencies
and expense reductions. SG&A expenses were 34.6% of revenue
in the second quarter of Fiscal 2002, compared to 32.9% of
revenue in the second quarter of Fiscal 2001, an increase of
1.7%.

Depreciation and amortization expense was
$7.7 million in the second quarter of Fiscal 2002 compared
to $7.5 million in the second quarter of Fiscal 2001, an
increase of $0.2 million. The increase is principally
related to capital expenditures over the last twelve months for
the acquisition of property, equipment and system improvements.



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

Interest expense for the second quarter of Fiscal
2002 was $1.5 million, compared to $2.0 million for
the second quarter of Fiscal 2001, a decrease of
$0.5 million. This decrease was primarily attributable to a
reduction in the average interest rates paid by the Company on
its borrowings under the Companys revolving line of credit
with Congress Financial Corporation (Western) (the
Congress Facility) of approximately 230 basis points
in the second quarter of Fiscal 2002 as compared to the second
quarter of Fiscal 2001. Also contributing to the decline was
lower average borrowings under the Congress Facility during the
second quarter of Fiscal 2002. Borrowings under the Congress
Facility were used mainly for the funding of working capital
and, in the second quarter of Fiscal 2001, to fund the
investment in CheckOut.com.



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

Interest income for both the second quarter of
Fiscal 2002 and the second quarter of Fiscal 2001 was
$0.1 million. Interest income is related to notes
receivable from shareholders.



| |                                       
| | --------------------------------------
| | Loss from Investment in Joint
	Venture

The Company had a 49% interest in the
CheckOut.com joint venture and accounted for this investment
under the equity method of accounting. For the second quarter of
Fiscal 2001, the Company recognized a

9



---



##### Table of Contents



$3.0 million loss related to its share of
the losses of CheckOut.com. CheckOut.com continued to experience
significant operating losses and ceased operations of its
Internet site in February 2001.




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

The Company recorded a tax benefit of
$4.1 million for the second quarter of Fiscal 2002 compared
to $3.7 million for the second quarter of Fiscal 2001. The
tax benefit is commensurate with the increase in loss before
income tax.



| |                                                          
| | ---------------------------------------------------------
| | For the Six Months Ended July 31, 2001
	and July 31, 2000



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

Total revenues were $301.3 million and
$343.4 million for the six months ended July 31, 2001
and July 31, 2000, respectively. The decrease of
$42.1 million was primarily attributable to decreases in
net revenues of $12.4 million due to the closure of 34
stores since July 31, 2000, same store sales decreases in
net revenues of $29.0 million and the reduction of net
rental revenue of $0.7 million. Total revenues for the
sixty four (64) stores sold to TMN on August 9, 2001
were $26.8 million and $31.1 million for the six
months ended July 31, 2001 and July 31, 2000,
respectively.

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

Sale Merchandise and Rental Revenues

By Category


(dollars in millions)


|                          |                                                                                                                                      |                                |     |       |       |  |     |       |       | 
|------------------------- | ------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------ | --- | ----- | ----- |  | --- | ----- | ----- | 
|                          |                                                                                                                                      |                               
|                          |                                                                                                                                      | Six Months Ended              
|                          |                                                                                                                                      | July 31,                      
|                          |                                                                                                                                      |                               
|                          |                                                                                                                                      | 2001                           |     | 2000 
|                          |                                                                                                                                      |                                |     |      
|Sale merchandise revenue: |                                                                                                                                      |                                |     |       |       |  |     |      
|                         
|                         
|                         
|                         
|                          | Music                                                                                                                                |                                | $   | 249.2 |       |  | $   | 295.0 |      
|                         
|                         
|                         
|                         
|                          | Other, principally sales of new videocassettes,
	DVDs, video game software and hardware, general merchandise and
	ticket commissions |                                |     | 49.7  |       |  |     | 45.3  |      
|                          |                                                                                                                                      |                                |     |       |       |  |     |      
|                          |                                                                                                                                      | Total sale merchandise revenue |     |       | 298.9 |  |     |       | 340.3 | 
|                         
|                         
|                         
|                         
|Rental revenue, net       |                                                                                                                                      |                                | 2.4 |       |       |  | 3.1 |      
|                          |                                                                                                                                      |                                |     |       |       |  |     |      
|                          |                                                                                                                                      | Total revenue                  |     | $     | 301.3 |  |     | $     | 343.4 | 
|                          |                                                                                                                                      |                                |     |       |       |  |     |      

A.     Sale
merchandise revenue. On a same-store basis, excluding the 19
stores closed during the six months ended July 31, 2001,
sale merchandise revenue decreased by approximately 8.9% during
the six months ended July 31, 2001 as compared to the same
period last year. The primary reasons for the decrease were a
weak new release schedule for music products that continued
during most of the six month period ended July 31, 2001,
and competition from certain big-box retailers
selling selected new music releases at or below cost. Partially
offsetting these decreases were increased sales of DVD and used
music.

B.Rental
revenue, net. Rental revenue, net was $2.4 million in
the six months ended July 31, 2001 and $3.1 million in
the six months ended July 31, 2000, representing a decrease
of $0.7 million or 22.6% due to the Companys
de-emphasis of the rental portion of its business.



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

Cost of sale merchandise revenue was
$196.7 million for the six months ended July 31, 2001,
as compared with $221.5 million for the same period last
year, a decrease of $24.8 million. As a percentage of sale
merchandise revenue, cost of sale merchandise revenue was 65.8%
for the six months ended July 31, 2001 as compared with
65.1% for the six months ended July 31, 2000. As a
percentage of total revenues for the six months ended
July 31, 2001, sales of higher margin new music product
continued to decrease and sales of

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lower margin DVD product continued to increase,
which offset the benefit from an increase of higher margin used
music product In addition, decreases in sales prices related to
several mid-line new music promotional events also caused
pressure on gross profit margins.




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

SG&A expenses for the six months ended
July 31, 2001 were $104.8 million, compared to
$113.0 million for the six months ended July 31, 2000,
a decrease of $8.2 million. The decrease includes a
reduction of $5.4 million in operating expenses at the
Companys stores due to store closures. In addition, cost
of living increases in payroll, CPI increases in occupancy costs
and similar inflationary increases in utility and other costs
were more than offset by improvements in operating efficiencies
and expense reductions. SG&A expenses were 34.8% of revenue
in the six months ended July 31, 2001, compared to 32.9% of
revenue in the six months ended July 31, 2000, an increase
of 1.9%.

Depreciation and amortization expense was
$15.6 million in the six months ended July 31, 2001
compared to $14.9 million in the six months ended
July 31, 2000, an increase of $0.7 million. The
increase is principally related to capital expenditures over the
last twelve months for the acquisition of property, equipment
and system improvements.



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

Interest expense for the six months ended
July 31, 2001 was $3.2 million, compared to
$4.3 million for the six months ended July 31, 2000, a
decrease of $1.1 million. This decrease was partially
attributable to lower average borrowings under the Congress
Facility. Also contributing to the decline was a reduction in
the average interest rates paid by the Company on its borrowings
under the Congress Facility of approximately 125 basis points in
the six months ended July 31, 2001 as compared to the six
months ended July 31, 2000.



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

Interest income for both the six months ended
July 31, 2001 and the six months ended July 31, 2000
was $0.2 million. Interest income is related to notes
receivable from shareholders.



| |                                       
| | --------------------------------------
| | Loss from Investment in Joint
	Venture

For the three months ended July 31, 2000,
the Company recognized a $6.0  million loss related to its
share of the losses of CheckOut.com. CheckOut.com continued to
experience significant operating losses and ceased operations of
its Internet site in February 2001.



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

The Company recorded a tax benefit of
$7.6 million for the six months ended July 31, 2001,
compared to $6.8 million for the six months ended
July 31, 2000. The tax benefit is commensurate with the
increase in loss before income tax.

Liquidity and Capital Resources

During the six months ended July 31, 2001
and the six months ended July  31, 2000, the Companys
net cash used in operating activities was $14.4 million and
$2.2 million, respectively. The most significant use of
cash during this period was related to the reduction of accounts
payable, accrued expenses and other current liabilities of
$22.1 million which was partially offset by a reduction in
inventories, net of $12.6 million. Seasonal inventory
purchases typically begin during the third quarter and continue
into the fourth quarter, while payment is 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, 2001 was $3.4 million
primarily due to capital expenditures totaling $3.7 million for
the acquisition of property, equipment and improvements.
Financing of capital expenditures has generally been provided by
cash by operations and borrowings under the

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Congress Facility. During the six months ended
July 31, 2000, net cash used in investing activities
included $14.9 million invested in the Companys joint
venture with CheckOut.com.


Net cash provided by financing activities for the
six months ended July 31, 2001 was $17.9 million due to net
borrowings under the Congress Facility of $21.2 million,
offset partially by payments of $3.2 million on capital
lease obligations and long-term debt.

As of July 31, 2001, there was an
outstanding loan balance of $56.3 million and there were no
outstanding letters of credit under the Congress Facility. The
Company estimates that its availability under its revolving line
of credit at July 31, 2001 was $47.3 million.
Subsequent to the sale of the 64 stores to TMN discussed above,
the outstanding balance under the Congress Facility was
$34.9 million on August 31, 2001 and the availability
under the Companys revolving line of credit was
$58.6 million.

The Company believes that cash on hand, cash flow
from operations, including planned inventory reductions during
Fiscal 2002, and the availability of lease financing, together
with borrowings available under the Congress Facility, will be
adequate to support existing operations and the planned capital
expenditures of the Company for Fiscal 2002.

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 in October 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.






|        |                                                            
|------- | -----------------------------------------------------------
|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 2002
as compared to the rate at July 31, 2001, the
Companys interest expense for Fiscal 2002 would increase
$0.6 million based on the outstanding balance of the
Congress Facility at July 31, 2001. The Company does not
hold any derivative instruments and does not engage in hedging
activities.




PART II.     OTHER
INFORMATION




Item 1.     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 salaried similarly situated store employees. The
Complaint does not specify any amount of the claims, either
individually or on behalf of the class. The Companys
motion to strike the class action allegations was denied. The
plaintiffs motion to file an amended complaint was
recently granted in part to allow for the addition of three new
named plaintiffs and to expand the plaintiffs legal
theory. However, the amended complaint has not yet been filed.
The Company believes the allegations are without merit and
intends to vigorously defend itself in this matter. However, no
assurance can be provided as to its outcome. Management does not
believe an adverse judgment against the Company would result in
a material impact to the consolidated financial statements.

On June 4, 2001, the Company received a copy
of an Order entered by a Pennsylvania state court with respect
to Reliance Insurance Company (Reliance). Reliance
was the Companys general and umbrella liability insurance
carrier for the one-year period ended August 1, 1998. The
Order stated that Reliance was placed in
Rehabilitation under Pennsylvanias Insurance
Department Act. The Company is one of several

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named defendants in a personal injury lawsuit,
Peterson v. Shappel Industries, Inc., et al., which relates to
an event that occurred during the period the Company was insured
by Reliance. On July 18, 2001, a $7.4 million judgment
was entered against the Company in this lawsuit. The Company is
in the process of appealing this decision. This judgment is
within the scope of the insurance policy issued by Reliance.
While it is not possible to predict the outcome of
Reliances Rehabilitation, it is the Companys
understanding that, at the present time, Reliance is continuing
to honor its obligations and pay its claims. The Company
believes that liability, if any, under this lawsuit will be
funded by Reliance.


In addition, 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 or results of operations of the Company.




Item 5.     Other Information

None.




Item 6.     Exhibits and Reports on Form 8-K

(a)  Exhibits

|        |       |             |  | 
|------- | ----- | ----------- |  | 
|Exhibit |       |            
|Number  |       | Description
|        |       |            
|        | 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. 
|
| | /s/ ANTONIO C. ALVAREZ, II     
| |                                
| | Antonio C. Alvarez, II         
| | Chairman of the Board and Chief
| | Executive Officer, and Director
| | (Principal Executive Officer)  

Date: September 14, 2001



| |                              
| | -----------------------------
| | /s/ MARK A. VELARDE          
| |                              
| | Mark A. Velarde              
| | Executive Vice President,    
| | Chief Financial Officer and  
| | Chief Administrative Officer 
| | (Principal Financial Officer)

Date: September 14, 2001



| |                               
| | ------------------------------
| | /s/ MEHDI MAHDAVI             
| |                               
| | Mehdi Mahdavi                 
| | Vice President, Controller    
| | (Principal Accounting Officer)

Date: September 14, 2001

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