<PAGE>   1
 
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
 
                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                            ------------------------
 
                                   FORM 10-Q
                            ------------------------
 
     [X]   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
           SECURITIES EXCHANGE ACT OF 1934
 
                  FOR THE QUARTERLY PERIOD ENDED JULY 31, 1998
 
     [ ]   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)
 
<TABLE>
<S>                                            <C>
                   DELAWARE                                      95-4608339
       (STATE OR OTHER JURISDICTION OF                         (IRS EMPLOYER
        INCORPORATION OR ORGANIZATION)                     IDENTIFICATION NUMBER)
 
 19701 HAMILTON AVENUE, TORRANCE, CALIFORNIA                     90502-1334
   (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                      (ZIP CODE)
</TABLE>
 
                                 (310) 538-2314
              (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 required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.  Yes [X]  No [ ]
 
     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 a plan
confirmed by a court.  Yes [X]  No [ ]
 
     As of August 31, 1998, 10,744,829 shares of the registrant's common stock
were issued and outstanding and approximately 77,727 additional shares are
expected to be issued pursuant to the bankruptcy plan of reorganization
discussed in Item 1 below.
 
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>   2
 
                                     INDEX
 
                         WHEREHOUSE ENTERTAINMENT, INC.
 
<TABLE>
<CAPTION>
                                                                        PAGE
                                                                        ----
<S>       <C>                                                           <C>
FORWARD LOOKING STATEMENTS............................................    3
                       PART I. FINANCIAL INFORMATION
Item 1.   Financial Statements........................................    4
          Condensed Balance Sheets -- July 31, 1998 (Unaudited) and
          January 31, 1998............................................    4
          Condensed Statements of Income -- Three months ended July
          31, 1998 and 1997 (Unaudited) and six months ended July 31,
          1998 and 1997 (Unaudited)...................................    5
          Condensed Statements of Cash Flows -- Six months ended July
          31, 1998 and 1997 (Unaudited)...............................    6
          Notes to Condensed Financial Statements.....................    7
Item 2.   Management's Discussion and Analysis of Financial Condition
          and Results of Operation....................................    9
 
                         PART II. OTHER INFORMATION
Item 1.   Legal Proceedings...........................................   15
Item 2.   Exhibits and Reports on Form 8-K............................   15
SIGNATURES............................................................   16
</TABLE>
 
                                        2
<PAGE>   3
 
                           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 report containing
such forward-looking statements include "Management's Discussion and Analysis of
Financial Condition and Results of Operation," under Item 2 of Part I below.
Statements in this Report which address activities, events or developments that
the registrant expects or anticipates will or may occur in the future, including
such things as the future issuance of shares, future capital expenditures
(including the amount and nature thereof), expansion and other developments and
technological trends of industry segments in which the registrant is active,
business strategies, growth of the registrant's and its competitor's business
and operations and other such matters are forward-looking statements. 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,
whether oral or written, 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
retail stores and alternative methods or channels of distribution such as
electronic 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 the Federal and state
income tax rules and regulations or interpretations of existing legislation; (f)
changes in the general economic conditions in the United States, and in
particular the eight major markets served by the registrant, including, but not
limited to consumer sentiment about the economy in general; (g) changes in
availability or terms of working capital financing from vendors and lending
institutions; (h) adverse results in significant litigation matters; and (i) the
ability to attract and retain key personnel. 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. Forward-looking statements made by or on behalf of the
registrant are based on a knowledge of its business and the environment in which
it operates, but because of the factors listed above, actual results may differ
from those anticipated results described in those forward-looking statements.
Consequently, all of the forward-looking statements made are qualified by these
cautionary statements and there can be no assurance that the actual results or
developments anticipated by the registrant will be realized or, even if
substantially realized, that they will have the expected consequences to or
effects on the registrant or its business or operations.
 
                                        3
<PAGE>   4
 
                         PART 1. FINANCIAL INFORMATION
 
ITEM I. FINANCIAL STATEMENTS
 
                         WHEREHOUSE ENTERTAINMENT, INC.
 
                            CONDENSED BALANCE SHEETS
 
                                     ASSETS
 
<TABLE>
<CAPTION>
                                                                JULY 31,      JANUARY 31,
                                                                  1998            1998
                                                              ------------    ------------
                                                              (UNAUDITED)
<S>                                                           <C>             <C>
Current Assets
  Cash and cash equivalents.................................  $ 46,838,000    $ 54,720,000
  Receivables...............................................       927,000       1,296,000
  Merchandise inventory.....................................    71,765,000      62,472,000
  Other current assets......................................       865,000       1,237,000
  Rental inventory, net.....................................     3,171,000       4,278,000
  Deferred taxes............................................     1,799,000       1,799,000
                                                              ------------    ------------
          Total current assets..............................   125,365,000     125,802,000
Equipment and improvements, net.............................    16,574,000      17,627,000
Reorganization value in excess of amounts allocable to
  identifiable
  assets, net...............................................    13,560,000      14,358,000
Deferred taxes..............................................     3,017,000       2,952,000
Other assets................................................       604,000         255,000
                                                              ------------    ------------
          Total assets......................................  $159,120,000    $160,994,000
                                                              ============    ============
 
                           LIABILITIES AND SHAREHOLDERS' EQUITY
 
Current Liabilities
  Accounts payable and accrued expenses.....................  $ 54,859,000    $ 60,339,000
  Current maturities of capital lease obligations and
     long-term debt.........................................       194,000         193,000
                                                              ------------    ------------
          Total current liabilities.........................    55,053,000      60,532,000
                                                              ------------    ------------
  Capital lease obligations and long-term debt..............       284,000         294,000
  Notes payable.............................................     3,933,000       4,048,000
  Other long-term liabilities...............................     4,949,000       4,648,000
Shareholders' equity
  Common stock, $.01 par value, 24,000,000 authorized,
     10,655,205 and 10,257,808 issued and outstanding at
     July 31, 1998 and January 31, 1998, respectively.......       106,000         106,000
  Additional paid-in capital................................    89,377,000      89,377,000
  Retained earnings.........................................    11,317,000       7,702,000
  Notes receivable..........................................    (5,899,000)     (5,713,000)
                                                              ------------    ------------
          Total shareholders' equity........................    94,901,000      91,472,000
                                                              ------------    ------------
          Total liabilities and shareholders' equity........  $159,120,000    $160,994,000
                                                              ============    ============
</TABLE>
 
           See accompanying notes to Condensed Financial Statements.
                                        4
<PAGE>   5
 
                         WHEREHOUSE ENTERTAINMENT, INC.
 
                         CONDENSED STATEMENTS OF INCOME
                                  (UNAUDITED)
 
<TABLE>
<CAPTION>
                                                THREE MONTHS ENDED            SIX MONTHS ENDED
                                             -------------------------   ---------------------------
                                              JULY 31,      JULY 31,       JULY 31,       JULY 31,
                                                1998          1997           1998           1997
                                             -----------   -----------   ------------   ------------
<S>                                          <C>           <C>           <C>            <C>
Sales......................................  $66,087,000   $63,773,000   $127,361,000   $123,701,000
Rental revenue.............................    8,798,000    14,111,000     18,056,000     27,362,000
                                             -----------   -----------   ------------   ------------
                                              74,885,000    77,884,000    145,417,000    151,063,000
Cost of sales..............................   42,039,000    41,471,000     80,192,000     79,753,000
Costs of rentals, including amortization...    4,581,000     7,891,000      9,353,000     15,720,000
                                             -----------   -----------   ------------   ------------
                                              46,620,000    49,362,000     89,545,000     95,473,000
Selling, general and administrative
  expenses.................................   23,943,000    26,131,000     47,569,000     52,106,000
Depreciation and amortization..............    1,649,000     1,617,000      3,292,000      3,233,000
                                             -----------   -----------   ------------   ------------
Income from operations.....................    2,673,000       774,000      5,011,000        251,000
Interest expense...........................      125,000       111,000        219,000        223,000
Interest income............................     (664,000)     (349,000)    (1,361,000)      (538,000)
                                             -----------   -----------   ------------   ------------
Income before income taxes.................    3,212,000     1,012,000      6,153,000        566,000
                                             -----------   -----------   ------------   ------------
Provision for income taxes.................    1,324,000       424,000      2,538,000        265,000
                                             -----------   -----------   ------------   ------------
Net income.................................  $ 1,888,000   $   588,000   $  3,615,000   $    301,000
                                             ===========   ===========   ============   ============
Basic net income per share.................  $      0.18   $      0.06   $       0.34   $       0.03
                                             ===========   ===========   ============   ============
Diluted net income per share...............  $      0.16   $      0.05   $       0.32   $       0.03
                                             ===========   ===========   ============   ============
Weighted average number of common shares
  outstanding -- Basic.....................   10,651,188    10,311,109     10,637,844     10,284,458
                                             ===========   ===========   ============   ============
Weighted average number of common shares
  and common equivalent shares
  outstanding -- Diluted...................   11,695,848    10,828,893     11,402,248     10,745,670
                                             ===========   ===========   ============   ============
</TABLE>
 
           See accompanying notes to Condensed Financial Statements.
                                        5
<PAGE>   6
 
                         WHEREHOUSE ENTERTAINMENT, INC.
 
                       CONDENSED STATEMENTS OF CASH FLOWS
                                  (UNAUDITED)
 
<TABLE>
<CAPTION>
                                                                     SIX MONTHS ENDED
                                                              ------------------------------
                                                              JULY 31, 1998    JULY 31, 1997
                                                              -------------    -------------
<S>                                                           <C>              <C>
OPERATING ACTIVITIES:
  Net income................................................   $ 3,615,000     $    301,000
  Adjustments to reconcile net income to net cash provided
     by (used in) operating activities:
     Depreciation and amortization..........................     3,292,000        3,233,000
     Rental amortization, included in cost of rental........     6,965,000       12,176,000
     Book value of rental inventory dispositions, included
       in cost of rental....................................     1,054,000        2,291,000
     Changes in operating assets and liabilities:
       Receivables..........................................       369,000          460,000
       Prepaid inventory deposits...........................             0        4,486,000
       Merchandise inventory................................    (9,293,000)       3,130,000
       Other current assets.................................       372,000          852,000
       Accounts payable, accrued expenses and other
          liabilities.......................................    (4,733,000)      10,513,000
       Rental inventory purchases...........................    (7,423,000)     (12,668,000)
                                                               -----------     ------------
          Net cash (used in) provided by operating
            activities......................................    (5,782,000)      24,774,000
INVESTING ACTIVITIES:
  Acquisition of property, equipment and improvements.......    (1,441,000)      (1,727,000)
  (Increase) decrease in other assets and intangibles.......      (349,000)          62,000
                                                               -----------     ------------
          Net cash used in investing activities.............    (1,790,000)      (1,665,000)
FINANCING ACTIVITIES:
  Interest on note receivable...............................      (186,000)        (185,000)
  Principal payments on capital lease obligations and
     long-term debt.........................................      (124,000)        (370,000)
                                                               -----------     ------------
          Net cash used in financing activities.............      (310,000)        (555,000)
                                                               -----------     ------------
Net (decrease) increase in cash.............................    (7,882,000)      22,554,000
Cash at beginning of the period.............................    54,720,000        6,178,000
                                                               -----------     ------------
Cash at end of the period...................................   $46,838,000     $ 28,732,000
                                                               ===========     ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
     Interest...............................................   $   168,000     $     60,000
     Income taxes...........................................   $ 7,709,000     $  1,413,000
</TABLE>
 
           See accompanying notes to Condensed Financial Statements.
                                        6
<PAGE>   7
 
                         WHEREHOUSE ENTERTAINMENT, INC.
 
                    NOTES TO CONDENSED FINANCIAL STATEMENTS
                                  (UNAUDITED)
 
 1. BASIS OF PRESENTATION
 
     The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles 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. Operating results for the six-month period ended July 31, 1998
are not necessarily indicative of the results that may be expected for the year
ended January 31, 1999. Certain reclassifications of balances have been made to
the 1997 amounts to conform to the 1998 presentation. For further information,
refer to the financial statements and footnotes thereto included in the
Company's reports on Form 10-K for the year ended January 31, 1998.
 
 2. REORGANIZATION UNDER CHAPTER 11
 
     The Company's Plan of Reorganization, (the "Plan") was confirmed by an
order of the Bankruptcy Court entered on January 7, 1997. The effective date of
the Plan occurred on January 31, 1997 (the "Effective Date").
 
     Since the Plan Effective Date, the Bankruptcy Court has retained
jurisdiction over certain claims and other matters relating to the Bankruptcy
estates of the Company's predecessor, but the Company has been and is free to
carry out its business without oversight by the Bankruptcy Court.
 
     For a summary of the Plan of Reorganization, reference is made to the
Company's Annual Report on Form 10-K for the year ended January 31, 1998.
 
     On January 31, 1997, the Company implemented the recommended accounting
principles for entities emerging from Chapter 11 set forth in the American
Institute of Certified Public Accountants Statement of Position 90-7 on
Financial Reporting by Entities in Reorganization under the Bankruptcy Code (SOP
90-7). This resulted in the use of fresh start reporting, since the
reorganization value, as defined, was less than the total of all post-petition
liabilities and pre-petition claims, and holders of voting shares immediately
before confirmation of the Plan received less than fifty percent of the voting
shares of the emerging entity. Under this concept, all assets and liabilities
were restated to reflect the reorganization value of the reorganized entity,
which approximated its fair value at the date of reorganization. In addition,
the accumulated deficit of the Company was eliminated and its capital structure
was recast in conformity with the Plan.
 
 3. REVOLVING CREDIT FACILITY
 
     Pursuant to the Plan, the Company entered into a loan and security
agreement with Congress Financial Corporation (Western) (the "Congress
Facility"), which provides a borrowing capacity of up to $30,000,000, with a
letter of credit subfacility of $10,000,000, subject to borrowing base
limitations based upon, among other things, the value of certain eligible
merchandise inventory. The Congress Facility prohibits the Company from
declaring or paying dividends on its classes of capital stock, including the
common stock, in excess of an aggregate of $6.0 million plus excess cash flow
(subject to certain tests set forth in the Congress Facility) and subject to
satisfying certain financial performance targets set forth in the Congress
Facility. As of July 31, 1998, there were no borrowings outstanding under the
Congress Facility, although $0.4 million of letters of credit were outstanding.
 
 4. NET INCOME PER SHARE
 
     During the fiscal year ended January 31, 1998, the Company adopted
Statement of Financial Accounting Standard No. 128 ("SFAS 128"), "Earnings Per
Share". In accordance with SFAS 128, primary earnings per
                                        7
<PAGE>   8
                         WHEREHOUSE ENTERTAINMENT, INC.
 
              NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
                                  (UNAUDITED)
 
share has been replaced with basic earnings per share, and fully diluted
earnings per share have been replaced with diluted earnings per share which
includes potentially dilutive securities such as outstanding options. Prior
periods have been presented to conform to SFAS 128. There is no established
trading market for the voting stock of the Company. The Company, in order to
arrive at an average market price for the diluted earnings per share
computation, obtains market data of stock transactions from an independent
stockbroker including the number of shares and the bid or asked price of the
shares during the period.
 
     The weighted average number of common shares and common equivalent shares
include outstanding stock options granted on April 7, 1998 pursuant to the
Wherehouse Entertainment, Inc. 1998 Stock Incentive Plan (the "Stock Plan"),
which was approved by the Board of Directors subject to stockholder approval and
qualification of the offering by the California Commission of Corporations.
 
                                        8
<PAGE>   9
 
                         WHEREHOUSE ENTERTAINMENT, INC.
 
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND
RESULTS OF OPERATION
 
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 Operation contained in the Company's Report on Form
10-K for the year ended January 31, 1998.
 
RESULTS OF OPERATIONS
 
     FOR THE QUARTERS ENDED JULY 31, 1998 AND JULY 31, 1997
 
  Revenues
 
     Net revenues were $74.9 million and $77.9 million for the quarters ended
July 31, 1998 and July 31, 1997, respectively. The decrease of $3.0 million, or
3.9%, results from an increase in merchandise sales of $2.3 million offset with
a decrease in rental revenue of $5.3 million. The company believes the decrease
in rental revenue is primarily attributable to an increasingly competitive
environment , and a reduction in the number of stores offering rental product.
 
     A summary of total net merchandise sales and rental revenues, by product
category, is provided below:
 
                   NET MERCHANDISE SALES AND RENTAL REVENUES
                            BY MERCHANDISE CATEGORY
                          (DOLLAR AMOUNTS IN MILLIONS)
 
<TABLE>
<CAPTION>
                                                                QUARTER ENDED
                                                                   JULY 31,
                                                                --------------
                                                                1998     1997
                                                                -----    -----
<S>                                                             <C>      <C>
Net Merchandise Sales:
  Music.....................................................    $57.4    $55.8
  Other, principally sales of new video cassettes, video
     game software and hardware, general merchandise and
     ticket commissions.....................................      8.7      8.0
                                                                -----    -----
          Total merchandise sales...........................     66.1     63.8
Rental Revenue
  Video cassette and other rental revenues..................      8.8     14.1
                                                                -----    -----
          Total revenues....................................    $74.9    $77.9
                                                                =====    =====
</TABLE>
 
     The sale of pre-recorded music, new video cassettes, digital versatile
disks ("DVD's"), video game software and hardware and general merchandise
continue to represent the largest portion of the Company's revenues. For the
quarter ended July 31, 1998, net merchandise sales represented 88.3% of
aggregate revenues, an increase of 6.4% from 81.9% for the quarter ended July
31, 1997. Net merchandise sales were $66.1 million versus $63.8 million for the
quarters ended July 31, 1998 and July 31, 1997, respectively, representing an
overall increase of 3.6%. On a same-store basis, net merchandise sales increased
by 7.8% during the quarter ended July 31, 1998, as compared to the quarter ended
July 31, 1997. Management believes that the increase of 7.8% for same store net
merchandise sales was largely the result of an improved product offering and the
favorable impact of competitor's store closures.
 
     Rental revenue includes the rental of video cassettes, DVD's, video games
and game players, and audio cassette books, and sales of previously viewed video
cassettes and previously played video games. As of July 31, 1998, approximately
133 of the Company's stores offered rental products with approximately 50 of the
stores offering DVD's for rental. Rental revenue was $8.8 million versus $14.1
million during the quarters ended July 31, 1998 and July 31, 1997, respectively,
representing a decrease of $5.3 million or 37.6%. On a same-store basis, rental
revenue decreased approximately 31.4% as compared to the prior year. The Company
 
                                        9
<PAGE>   10
 
believes that the decrease in same-store rental revenue was primarily
attributable to an increasingly competitive environment.
 
  Cost of Revenues
 
     Costs of sales increased $0.5 million to $42.0 million for the quarter
ended July 31, 1998 versus $41.5 million for the quarter ended July 31, 1997. As
a percentage of net merchandise sales, costs of sales decreased 1.4% to 63.6%
during the quarter ended July 31, 1998 versus 65.0% during the quarter ended
July 31, 1997. The 1.4% decrease in costs of sales as a percentage of net
merchandise sales was principally due to lower obsolescence and other costs of
sales resulting from improved inventory efficiencies
 
     Costs of rental, including amortization, decreased to $4.6 million during
the quarter ended July 31, 1998, a decrease of $3.3 million or 41.8%, versus
$7.9 million during the quarter ended July 31, 1997. As a percentage of rental
revenue, costs of rentals decreased to 52.1% during the quarter ended July 31,
1998 versus 55.9% during the quarter ended July 31, 1997, representing a
decrease of 3.8%, primarily the result of decreased purchases of video rental
product. Specifically, during the quarter ended July 31, 1998 in response to the
decline in rental revenues, the reduction in the number of stores offering
rentals, and an increase in revenue sharing programs, the Company decreased its
purchases of video rental product by $3.1 million or 49% versus the same quarter
of the prior year.
 
  Operating Expenses
 
     Selling, general and administrative expenses, were $23.9 million versus
$26.1 million for the quarters ended July 31, 1998 and 1997, respectively, a
decrease of $2.2 million or 8.4%. As a percentage of net revenues, selling,
general and administrative expenses, were 32.0% during the quarter ended July
31, 1998 versus 33.6% during the quarter ended July 31, 1997, representing a
decrease of 1.6%. The 1.6% decrease was principally due to reductions in payroll
and other store and corporate expenses.
 
  Income From Operations
 
     Income from operations for the quarter ended July 31, 1998 was $2.7 million
as compared to $0.8 million for the quarter ended July 31, 1997, an improvement
of $1.9 million. The improvement in income from operations was primarily the
result of lower costs of sales, lower cost of rental revenue, and lower SG&A
expenses which resulted from the successful implementation of various expense
reduction initiatives. During the quarter ended July 31, 1998 the company closed
one store and opened one store. As of July 31, 1998 the Company operated 220
stores in seven states.
 
  EBITDA
 
     EBITDA represents income from operations, plus depreciation and
amortization. It is management's belief that due to the combined format of
rental product and sale merchandise, a more appropriate calculation of EBITDA
(hereafter referred to as Adjusted EBITDA) should include the net difference
between rental amortization plus the book value of rental dispositions, versus
rental inventory purchased during the period. The Company has included certain
information concerning Adjusted EBITDA because management believes it would be
useful information for certain investors and analysts to analyze operating
performance and to determine the Company's ability to service debt. Adjusted
EBITDA for the quarter ended July 31, 1998, is $4.9 million versus $2.7 million
for the quarter ended July 31, 1997. Adjusted EBITDA excludes the non-cash
impact of rent expense accrued to recognize minimum rents in a straight-line
basis over the term of the lease. Adjusted EBITDA for the quarter ended July 31,
1997, includes a non-recurring cash benefit of $0.4 million resulting from the
impact of one-time credits received from landlord concessions. The method of
calculating Adjusted EBITDA set forth above may be different from calculations
of EBITDA employed by other companies and, accordingly may not be directly
comparable to such other computations. Adjusted EBITDA should not be viewed as a
substitute for Generally Accepted Accounting Principles (GAAP) measurements such
as net income or cash flow from operations. Rather it is presented as
supplementary information.
 
                                       10
<PAGE>   11
 
  Income Taxes
 
     The Company recorded a tax provision of $1.3 million for the quarter ended
July 31, 1998, versus a tax provision of $0.4 million for the quarter ended July
31, 1997. The provision represents an effective tax rate of 41.3%, which the
Company estimates will be its effective tax rate for the year ended January 31,
1999.
 
     The Company is currently under audit by the California Franchise Tax Board
("FTB") for tax years ended January 31, 1992, 1993 and 1994. The Company
believes that it has made adequate provision in the financial statements for
this audit.
 
     FOR THE SIX MONTHS ENDED JULY 31, 1998 AND JULY 31, 1997
 
  Revenues
 
     Net revenues were $145.4 million and $151.1 million for the six months
ended July 31, 1998 and 1997, respectively. The decrease of $5.7 million, or
3.8% in total revenue results from an increase in merchandise sales of $3.6
million offset by a decrease in rental revenue of $9.3 million. The Company
believes that the decrease in rental revenue was primarily attributable to an
increasingly competitive environment and a reduction in the number of stores
offering rental product. A summary of total net merchandise sales and rental
revenues, by product category, is provided below:
 
                   NET MERCHANDISE SALES AND RENTAL REVENUES
                            BY MERCHANDISE CATEGORY
                          (DOLLAR AMOUNTS IN MILLIONS)
 
<TABLE>
<CAPTION>
                                                              SIX MONTHS ENDED
                                                                  JULY 31,
                                                              ----------------
                                                               1998      1997
                                                              ------    ------
<S>                                                           <C>       <C>
Net Merchandise Sales:
  Music.....................................................  $111.2    $107.6
  Other, principally sales of new video cassettes, video
     game software and hardware, general merchandise and
     ticket commissions.....................................    16.1      16.1
                                                              ------    ------
          Total merchandise sales...........................   127.3     123.7
Rental Revenue
  Video cassette and other rental revenue...................    18.1      27.4
                                                              ------    ------
          Total revenues....................................  $145.4    $151.1
                                                              ======    ======
</TABLE>
 
     The sale of pre-recorded music, new video cassettes, DVD's, video game
software and hardware and general merchandise continue to represent the largest
portion of the Company's revenues. For the six months ended July 31, 1998, net
merchandise sales represented 87.6% of aggregate revenues, an increase of 5.7%
from 81.9% during the six months ending July 31, 1997. Net merchandise sales
were $127.3 million versus $123.7 million for the six months ended July 31, 1998
and July 31, 1997, respectively, representing an overall increase of 2.9%. On a
same-store basis, net merchandise sales increased by 6.9% during the six months
ended July 31, 1998, as compared to the six months ended July 31, 1997.
Management believes that the increase of 6.9% was largely the result of an
improved product offering and the favorable impact of competitor's store
closures.
 
     Rental revenue includes the rental of video cassettes, DVD's, video games
and game players, and audio cassette books, and sales of previously viewed video
cassettes and previously played video games. As of July 31, 1998 approximately
133 of the Company's stores offered rental products. Rental revenue was $18.1
million versus $27.4 million during the six months ended July 31, 1998 and July
31, 1997, respectively, representing a decrease of $9.3 million or 33.9%. On a
same-store basis rental revenue decreased approximately 28.1% as compared to the
prior year. The Company believes that the decrease in same-store rental revenue
was primarily attributable to an increasingly competitive environment.
 
                                       11
<PAGE>   12
 
  Cost of Revenues
 
     Cost of sales increased $0.4 million to $80.2 million for the six months
ended July 31, 1998 versus $79.8 million for the six months ended July 31, 1997,
representing an increase of 0.5%. As a percentage of net merchandise sales,
costs of sales decreased 1.5% to 63.0% during the six months ended July 31, 1998
versus 64.5% during the six months ended July 31, 1997. The 1.5% decrease in
cost of sales as a percentage of net merchandise sales was principally due to
lower obsolescence and other costs of sales resulting from improved inventory
efficiencies.
 
     Cost of rentals, including amortization, decreased to $9.4 million during
the six months ended July 31, 1998, a decrease of $6.3 million or 40.1%, versus
$15.7 million during the six months ended July 31, 1997. As a percentage of
rental revenue, cost of rentals decreased to 51.8% during the six months ended
July 31, 1998 versus 57.5% during the six months ended July 31, 1997,
representing a decrease of 5.7%, primarily the result of decreased purchases of
video rental product. Specifically, during the six months ended July 31, 1998 in
response to the decline in rental revenues, the reduction in the number of
stores offering rentals, and an increase in revenue sharing programs, the
Company decreased its purchases of video rental product by $5.2 million or 41.4%
versus the same six months of the prior year.
 
  Operating Expenses
 
     Selling, general and administrative expenses, were $47.6 million versus
$52.1 million for the six months ended July 31, 1998 and July 31, 1997,
respectively, a decrease of $4.5 million or 8.6%. As a percentage of net
revenues, selling, general and administrative expenses, were 32.7% during the
six months ended July 31, 1998 versus 34.5% during the six months ended July 31,
1997, representing a decrease of 1.8%. The 1.8% decrease was principally due to
reductions in payroll and other store and corporate expenses.
 
  Income From Operations
 
     Income from operations for the six months ended July 31, 1998 was $5.0
million as compared to $0.3 million for July 31, 1997, an improvement of $4.7
million. The improvement in income from operations was primarily the result of
lower cost of sales, lower cost of rental revenue, and lowered SG&A expenses
which resulted from the successful implementation of expense reduction
initiatives. During the period ended July 31, 1998 the Company closed four
stores and opened one new store. As of July 31, 1998 the Company operated 220
stores in seven states.
 
  EBITDA
 
     EBITDA represents income from operations, plus depreciation and
amortization. It is management's belief that due to the combined format of
rental product and sale merchandise, a more appropriate calculation of EBITDA
(hereafter referred to as Adjusted EBITDA) should include the net difference
between rental amortization plus the book value of rental dispositions, versus
rental inventory purchased during the period. The Company has included certain
information concerning Adjusted EBITDA because management believes it would be
useful information for certain investors and analysts to analyze operating
performance and to determine the Company's ability to service debt. Adjusted
EBITDA for the period ended July 31, 1998, was $9.2 million versus $5.9 million
for the period ended July 31,1997. Adjusted EBITDA excludes the non-cash impact
of rent expense accrued to recognize minimum rents in a straight-line basis over
the term of the lease. Adjusted EBITDA for the period ended July 31, 1997,
includes a non-recurring cash benefit of $1.3 million resulting from the impact
of one-time credits received from landlord concessions. The method of
calculating Adjusted EBITDA set forth above may be different from calculations
of EBITDA employed by other companies and, accordingly may not be directly
comparable to such other computations. Adjusted EBITDA should not be viewed as a
substitute for Generally Accepted Accounting Principles (GAAP) measurements such
as net income or cash flow from operations. Rather it is presented as
supplementary information.
 
                                       12
<PAGE>   13
 
  Income Taxes
 
     The Company recorded a tax provision of $2.5 million for the six months
ended July 31, 1998 versus a tax provision of $0.3 for the period ended July 31,
1997. The tax provision represents an effective tax rate of 41.3%, which the
Company estimates will be its effective tax rate for the year ended January 31,
1999.
 
LIQUIDITY AND CAPITAL RESOURCES
 
     During the six months ended July 31, 1998, the Company's net cash used in
operating activities was $5.8 million as compared to $24.8 million that was
provided by operations for the corresponding six months of the prior fiscal
year, primarily due to an increase in inventory, and a decrease in accounts
payables.
 
     Cash used in investing activities was $1.8 million for the six months ended
July 31, 1998 as compared to $1.7 million for the six months ended July 31,
1997.
 
     Cash used in financing activities was $0.3 million for the six months ended
July 31, 1998 as compared to $0.6 for the six months ended July 31, 1997.
 
     The Company believes that the current borrowing facility (see Note 3 under
Notes to Condensed Financial Statements) is adequate to support existing
operations for the remainder of the current fiscal year.
 
     The Company expects to make additional payments to creditors, professionals
and others of up to $3.2 million through the end of the fiscal year under the
Plan of Reorganization.
 
     As of July 31, 1998 the Company had signed ten new lease commitments to
open new stores during the next twelve months.
 
SEASONALITY
 
     The Company's business is seasonal, and revenues and operating income are
highest during the fourth quarter. Bank borrowings have historically been
highest in October and November due to 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.
 
IMPACT OF THE YEAR 2000
 
     The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs that have time-sensitive software may recognize a date having
the last two digits of "00", as the year 1900, rather than the year 2000. This
could result in a system failure or miscalculations causing a disruption of
operations, including among other things, a temporary inability to process
transactions, issue purchase orders, or engage in similar normal business
activities.
 
     The Company is planning to replace its financial and merchandising system
software and related hardware during 1999 as part of its business strategy. As a
contingency plan, in the event the new systems are not completed on schedule,
the Company is in the process of finalizing a remediation plan for its existing
financial and merchandising systems which would be performed by a third party
software developer, and which would address the Year 2000 deficiencies in such
systems. The Company has substantially completed remediation of its store
point-of-sale software, and has prepared a plan to remediate the point-of-sale
system hardware during 1999.
 
     Formal communications have been established with the Company's vendors on
their millennium compliance plans. The Company will continue to address the
readiness of its suppliers in these areas.
 
                                       13
<PAGE>   14
 
     Based on information available at this time, the Company estimates that the
cost associated with Year 2000 remediation will be between $2.5 million and $3.0
million. This estimate is subject to further revision based on facts and
circumstances encountered during the project.
 
     The Company anticipates completion of its new system conversion and system
remediation, where required, prior to any anticipated impact on its operating
systems. There can be no assurance that the modifications made to the Company's
systems will be adequate to avoid operational problems related to Year 2000
issues. Likewise, there can be no assurance that the systems of other companies
on which the Company's systems rely, will be timely converted, and would not
have a material adverse effect on the Company's systems.
 
SUBSEQUENT EVENT
 
     On August 10, 1998, the Company entered into agreements with Viacom
International, Inc. to acquire certain subsidiaries of Viacom (the "Blockbuster
Music Subsidiaries") for $115.0 million, subject to adjustment. The agreements
involve 378 Blockbuster Music stores in 33 states and are subject to customary
closing conditions, including governmental regulatory approvals. It is expected
the transaction will be closed in October 1998. The Company is currently in
negotiations with lenders to secure permanent financing for the acquisition. The
Company has signed a back up financing agreement with Cerberus Partners, L.P.
 
                                       14
<PAGE>   15
 
                           PART II. OTHER INFORMATION
 
ITEM 1. LEGAL PROCEEDINGS
 
     The Company is a party to various other claims, legal actions and
complaints arising in the ordinary course of its business. In the opinion of
management, all such matters are without merit or involve such amounts that
unfavorable disposition will not have a material impact on the financial
position and results of operations of the Company.
 
ITEM 2. EXHIBITS AND REPORTS ON FORM 8-K
 
(a) Exhibits
 
<TABLE>
<CAPTION>
EXHIBIT
NUMBER                           DESCRIPTION
-------                          -----------
<S>      <C>
2        Stock Purchase Agreement, dated August 10, 1998, between
         Viacom International, Inc. and the Company
27.0     Financial Data Schedule
</TABLE>
 
(b) Current Reports on Form 8-K
 
     None.
 
                                       15
<PAGE>   16
 
                                   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.
 
<TABLE>
<S>                                            <C>
Date: September 14, 1998                                      /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, 1998                                        /s/ ROBERT S. KELLEHER
                                               --------------------------------------------------------
                                                                  Robert S. Kelleher
                                                              Senior Vice President and
                                                               Chief Financial Officer
                                                     (Principal Financial and Accounting Officer)
</TABLE>
 
                                       16
<PAGE>   17
 
                                   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.
 
<TABLE>
<S>                                            <C>
Date: September 14, 1998                                      /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, 1998                                        /s/ ROBERT S. KELLEHER
                                               --------------------------------------------------------
                                                                  Robert S. Kelleher
                                                              Senior Vice President and
                                                               Chief Financial Officer
                                                     (Principal Financial and Accounting Officer)
</TABLE>
 
                                       17