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UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549




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Form 10-K

|  |  |                                                                                           
|- |  | ------------------------------------------------------------------------------------------
|þ |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
	15(d)
	OF THE SECURITIES EXCHANGE ACT OF 1934    
| 
|  |  | For the fiscal year ended January 31,
	2002                                               
| 
|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(State or other jurisdiction of
	incorporation or organization) |  | 95-4608339(I.R.S. Employer
	Identification Number)

19701 Hamilton Avenue

Torrance, California 90502-1334


(Address of principal executive offices
including ZIP code)


(310) 965-8300

(Registrants telephone number, including
area code)


Securities registered pursuant to
Section 12(b) of the Act:

None


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

Common Stock, $0.01 par value


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

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

As of April 19, 2002, the aggregate book
value of the estimated voting and non-voting stock held by
non-affiliates of the registrant was $5,180,679.(1)

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 þ          No o

As of April 19, 2002, 11,413,324 shares of
the registrants common stock were issued and 11,388,324
were outstanding and approximately 23,850 additional shares
were expected to be issued pursuant to a bankruptcy plan of
reorganization (see Item 1 
Business  Reorganization Under
Chapter 11 below) and a related anti-dilution
provision of a stock subscription agreement with
A&M Investment Associates #3, LLC.



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|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | There is no established trading market for the
	voting stock of the registrant. Accordingly, the registrant has
	utilized book value per share for purposes of the foregoing
	calculations concerning voting and non-voting stock held by
	non-affiliates. This calculation of book value per share is not
	intended to represent the price at which those shares trade. As
	of April 19, 2002, 11,413,324 shares of the
	registrants voting stock were issued and 11,388,324 were
	outstanding. All but 1,329,236 of those shares were issued
	pursuant to a bankruptcy plan of reorganization. See
	Item 1  Business 
	Reorganization Under Chapter 11 below. At
	April 19, 2002, the registrant estimates that approximately
	23,850 additional shares of its voting stock may be issued
	pursuant to the plan of reorganization and a related
	anti-dilution provision of a stock subscription agreement with
	A&M Investment Associates #3, LLC, after which a total
	of approximately 11,437,174 shares of the registrants
	voting stock will be issued and 11,412,174 will be outstanding.
	The registrant estimates that of the number of total outstanding
	shares, approximately 2,272,228 shares will be held by
	non-affiliates of the registrant. The book value of voting and
	non-voting stock held by non-affiliates of the registrant
	specified above assumes the issuance of all
	11,437,174 shares.



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TABLE OF CONTENTS



|                           |                                                                                               |                                                            |  |  |  |  |  | 
|-------------------------- | --------------------------------------------------------------------------------------------- | ---------------------------------------------------------- |  |  |  |  |  | 
|FORWARD-LOOKING STATEMENTS
|PART I                    
|                           | Item 1. Business                                                                             
|                           | Item 2. Properties                                                                           
|                           | Item 3. Legal Proceedings                                                                    
|                           | Item 4. Submission of Matters to a Vote of Security Holders                                  
|PART II                   
|                           | Item 5. Market for Registrants Common Equity and Related Stockholder Matters                
|                           | Item 6. Selected Financial Data                                                              
|                           | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                           | Item 7A. Quantitative and Qualitative Disclosures About Market Risk                          
|                           | Item 8. Financial Statements and Supplementary Data                                          
|                           | Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure 
|PART III                  
|                           | Item 10. Directors and Executive Officers of the Registrant                                  
|                           | Item 11. Executive Compensation                                                              
|SUMMARY COMPENSATION TABLE
|                           | Item 12. Security Ownership of 5% Holders, Directors and Executive Officers                  
|                           | Item 13. Certain Relationships and Related Transactions                                      
|PART IV                   
|                           | Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K                    
|SIGNATURES                
|                           |                                                                                               | CONSOLIDATED BALANCE SHEETS                               
|                           |                                                                                               | CONSOLIDATED STATEMENTS OF OPERATIONS                     
|                           |                                                                                               | CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
|                           |                                                                                               | CONSOLIDATED STATEMENTS OF CASH FLOWS                     
|                           |                                                                                               | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                



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FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K 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 Annual Report on Form 10-K containing such
forward-looking statements include Business 
Acquisition of Blockbuster Music,
Business  Reorganization Under
Chapter 11, Business  Merchandise
Sale Products, Business  Video and Other
Product Rentals, Business  Industry
Competitive Environment under Item 1 below;
Holders under Item 5 below; and
Managements Discussion and Analysis of Financial
Condition and Results of Operations under Item 7
below. Statements in this Annual Report on Form 10-K which
address activities, events or developments that the registrant
expects or anticipates will or may occur in the future,
including such things as future issuance of shares, future
capital expenditures (including the amount and nature thereof),
expansion and other developments and technological trends of
industry segments in which the registrant is active, business
strategy, expansion and growth of the registrants and its
competitors business and operations and other such matters
are forward-looking statements. You can find many of these
statements by looking for words like believes,
expects, anticipates, or similar
expressions in this Annual Report on Form 10-K. Although
the registrant believes the expectations expressed in such
forward-looking statements are based on reasonable assumptions
within the bounds of its knowledge of its business, a number of
factors could cause actual results to differ materially from
those expressed in any forward-looking statements made by or on
behalf of the registrant.

The registrants operations are subject to
factors outside its control. Any one, or a combination, of these
factors could materially affect the results of the
registrants operations. These factors include
(a) changes in levels of competition from current
competitors and potential new competition from both
non-traditional retailers of the Companys products and
alternative methods or channels of distribution such as Internet
and 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 we are engaged; (h) the ability to
attract and retain key personnel; and (i) adverse results
in significant litigation matters.

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

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PART I




Item 1.     Business

General

Wherehouse Entertainment, Inc
(Wherehouse), in terms of both revenues and store
count, is one of the largest retailers of prerecorded music in
the United States. Wherehouse sells prerecorded music,
videocassettes, DVDs, video games, personal electronics
(including personal stereos, portable stereos, headphones and
related merchandise), blank audiocassettes and videocassettes,
and accessories. In Fiscal 2002, on a consolidated basis, sales
of prerecorded music, videocassettes, DVDs, video games,
accessories and personal electronics accounted for 99.3% of the
Companys revenues.

As of January 31, 2002, Wherehouse operated
407 stores in 23 states. Since January 31, 2002,
the Company closed two stores and opened one store. All but
13 of Wherehouses stores operate under the name
The Wherehouse, Wherehouse Music or
Wherehouse Entertainment. The remaining stores
operate under the names Tu Musica,
Xchange, Wherehouse Outlet and
Odyssey.

The Companys fiscal year ends on
January 31. References to Fiscal 2002,
Fiscal 2001 and Fiscal 2000
refer to the fiscal years ended January 31, 2002,
January 31, 2001, and January 31, 2000, respectively.

Industry Overview

The Recording Industry Association of America
(RIAA) reported that domestic unit sales for all
music products declined by 10.3% from 2000 to 2001, with total
U.S. shipments dropping from 1.08 billion units
shipped in 2000 to 968.6 million in 2001. RIAA attributed
this decline in large part to online piracy and CD-burning.
According to an RIAA commissioned survey, 23% of music consumers
surveyed confirmed they are forgoing purchases of music because
they are downloading and or copying their music for free. In the
survey, over 50% of those that have downloaded music for free
have made copies of it. This compares to 13% just two years ago.
Supporting this increase, the study found ownership of
CD burners has nearly tripled since 1999. According to the
International Federation of the Phonographic Industry, global
piracy costs the recording industry over $4 billion per
year. Shipments of cassettes declined sharply during 2001 to
$363 million, down 41.9% from 2000, as the format continued
to lose favor with music consumers.

History

The registrant, Wherehouse Entertainment, Inc.
(New Wherehouse) was incorporated under the laws of
the State of Delaware on November 15, 1996 as
WEI Acquisition Co. On January 31, 1997, New
Wherehouse acquired substantially all the assets of Wherehouse
Dissolution Co. (Old Wherehouse), a Delaware
corporation, and Old Wherehouses parent company, WEI
Holdings, Inc., a Delaware corporation (WEI),
pursuant to a Chapter 11 plan of reorganization (as
described in Reorganization Under Chapter 11
below). Prior to such acquisition, Old Wherehouse was known as
Wherehouse Entertainment, Inc., and, after such
acquisition, Old Wherehouse changed its name to Wherehouse
Dissolution Co. After acquiring substantially all the
assets of Old Wherehouse, New Wherehouse changed its name to
Wherehouse Entertainment, Inc., and, as the
successor to Old Wherehouse, has undertaken to continue the
obligations of Old Wherehouse to file all reports under
Section 13 or 15(d) of the Securities Exchange Act of
1934, as amended. Except as expressly indicated or unless the
context otherwise requires, the Company,
Wherehouse, we, our, or
us means Wherehouse Entertainment, Inc. and its
subsidiaries and, where the discussion relates to the continuing
business operations of Old Wherehouse and New Wherehouse and its
subsidiaries, New Wherehouse and Old Wherehouse, collectively.

Acquisition of Blockbuster Music

On October 26, 1998, pursuant to a Stock
Purchase Agreement dated as of August 10, 1998 (the
Purchase Agreement), the Company acquired (the
Acquisition) from Viacom International Inc.

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(Seller) all of the capital stock of
certain retail music subsidiaries of the Seller (the
Acquired Business). The Acquired Business operated
under the name Blockbuster Music and is referred to
as Blockbuster Music throughout this Report on
Form 10-K. The Acquired Business consisted of
378 Blockbuster Music stores (the Acquired
Stores) in 33 states. In June 1999, the Company
completed the systems integration of the Acquired Stores, and
all of the Acquired Stores are currently operating under the
Wherehouse Music name. The initial purchase price
was subject to a purchase price adjustment mechanism based on
working capital as set forth in the Purchase Agreement. On
September 8, 1999, the Company reached an agreement with
the Seller with respect to this purchase price adjustment based
on working capital plus a settlement of certain other issues.
The final purchase price was $122.3 million, including
direct acquisition costs of $4.7 million.


The Acquisition was accounted for under the
purchase method of accounting. Accordingly, the purchase price
has been allocated to the assets acquired and liabilities
assumed based on their respective fair values at the Acquisition
date based on valuations and other studies.

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
$25.7 million, which was comprised of $21.0 million in
cash and $4.7 million in notes receivable, less
approximately $0.6 million in costs to complete the
transaction. In addition, the Company received warrants to
purchase 90,440 shares or approximately 1.75% of TMN for
$0.01 per share. Management has valued these warrants at a
de minimusamount. The majority of the stores sold to TMN
are located in Florida, North Carolina, South Carolina and
Tennessee, with a few located in Georgia and Alabama. As part of
the transaction, the Company also granted the rights to the
Turtles Music trade brand to TMN. The subject stores
accounted for $63.6 million in total revenues for the
fiscal year ended January 31, 2001 and $26.8 million
in total revenues for the fiscal year ended January 31,
2002. The net tangible book value of the assets sold amounted to
approximately $25.3 million. In addition, the Company also
wrote off approximately $3.3 million of goodwill,
representing the approximate loss on disposition of assets
attributable to the sold stores. The Company is also obligated
to fulfill lease commitments should TMN default on certain
obligations.

Merchandise Sale Products

Wherehouses primary revenue source is the
sale of merchandise. Wherehouse stores generally sell a broad
array of entertainment products, including prerecorded music,
videocassettes, DVDs, video games, accessories and personal
electronics. The percentage of total revenue contributed by
merchandise sales was 99.3% in Fiscal 2002. Wherehouses
other revenue source is the rental of prerecorded
videocassettes, DVDs and other products.

With input from store management and a product
allocation team, Wherehouses inventory management systems
are intended to tailor each stores product selections and
merchandise mix to local market demand and maximize the
availability of the most popular titles at each store, subject
to store size constraints. Wherehouses stores have been
designed to facilitate quick service and to accommodate changes
in industry trends and product offerings. Each product line is
monitored for profitability.

The Company sells used products, including used
CDs, DVDs and games in the majority of its stores. Prior to the
Acquisition, the Blockbuster Music stores did not sell used CDs.
During Fiscal 2000, the Company expanded the used
CD product line to most of the non-mall Blockbuster Music
stores.

Prerecorded videocassettes and DVDs (feature
films, music videos, and self-improvement programming)
represent, after music, Wherehouses second largest sale
product category. As of January 31, 2002, all but one of
the Companys stores sold prerecorded videocassettes and
all stores sold DVDs. As box-office hit motion
pictures continue to be released to the videocassette and DVD
sell-through market at reduced prices, industry-wide sales of
this category have increased.

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Wherehouse sells video game hardware and
software, blank audio and videocassette tapes, music and video
maintenance care products, carrying cases, storage units, and
personal electronics. Wherehouse also collects commissions on
event tickets sold under an affiliation with Ticketmaster.

Advertising and Promotion

Wherehouse employs advertising, promotion,
pricing, and presentation in a coordinated manner to generate
customer awareness of its breadth of product and value pricing
on selected items, and to induce trial and repeat purchases of
its products and video rental services. Wherehouse advertises on
a regular and frequent basis in a variety of broadcast and print
media, including radio, television, newspaper, direct mail and
freestanding inserts. The advertising generally emphasizes
immediate availability of hit products at competitive prices, as
well as access to a broad array of catalog products. With its
current operations covering 23 states, the Company
continues to expand its marketing relationships to pursue
national promotional opportunities.

Wherehouse also seeks to take advantage of
cooperative advertising payments from suppliers, which are
generally available to the industry. Music and video companies
generally provide funds on a title-by-title basis and,
occasionally, on a label-wide basis to promote new releases.
When Wherehouse runs pre-authorized advertising that contains
reference to a specific title or label, the related supplier
generally reimburses 100% of the pro rata cost of that
advertising.

Trade Customs and Practices

Most of the Companys music purchases are
protected by return policies offered by major manufacturers. The
return privilege generally exists for each music title as long
as that title remains in the current music catalog of a
manufacturer. Catalog changes are generally made only after
advance notice, allowing the Company to return excess inventory
before a title is discontinued. Most of the Companys major
pre-recorded music suppliers provide unlimited returns of
unopened items, but generally charge return penalties of varying
amounts. The major suppliers do not accept returns of opened
merchandise on the same basis as unopened items, but do
generally provide the Company with certain additional return
allowances. As of January 31, 2002, the Company enjoyed
normal return privileges with all of its vendors. Pricing and
return policies of the Companys major distributors are
subject to change.

Store and Site Selection

As of January 31, 2002, the Company operated
407 stores in 23 states. The table below sets forth
store openings, store acquisitions, store closings and the total
number of the Companys stores for the last three fiscal
years:

|                              |  |              |     |        |  |               |   |        |  |      |   |           |  |  |    |  |  |  |    |  |  |  |     | 
|----------------------------- |  | ------------ | --- | ------ |  | ------------- | - | ------ |  | ---- | - | --------- |  |  | -- |  |  |  | -- |  |  |  | --- | 
|                              |  |              |     |        |  |              
|                              |  | Total Stores |     | Stores |  |              
|                              |  | at Beginning |     |        |  | Stores at End
|Fiscal Year Ended January 31, |  | of Period    |     | Opened |  | Acquired      |   | Closed |  | Sold |   | of Period
|                              |  |              |     |        |  |               |   |        |  |      |   |          
|2002                          |  |              | 497 |        |  |               | 2 |        |  |      | 0 |           |  |  | 28 |  |  |  | 64 |  |  |  | 407 | 
|2001                          |  |              | 529 |        |  |               | 3 |        |  |      | 0 |           |  |  | 35 |  |  |  | 0  |  |  |  | 497 | 
|2000                          |  |              | 579 |        |  |               | 1 |        |  |      | 0 |           |  |  | 51 |  |  |  | 0  |  |  |  | 529 | 

The Company evaluates growth opportunities within
the context of its strategies and evaluates future store closing
decisions, principally at lease expiration, based upon
individual store performance.

As of January 31, 2002, the Company operated
407 stores comprising approximately 3,286,545 square feet,
a decrease of approximately 559,855 square feet compared to
January 31, 2001.

Store Operations and Distribution

Store Location.As
of January 31, 2002, the Company had 349 stores
located in strip centers or freestanding buildings and
58 stores located in malls. Strip center and freestanding
locations range in size from 1,200 to 20,200 square
feet and mall stores range in size from 700 to
10,200 square feet.

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Retail Presentation.Prior to the Acquisition, the Company
had updated its retail presentation through the use of new
in-store signage, expansion of several product categories and,
in certain stores, the introduction of new product lines.

Subsequent to the Acquisition, and as an integral
part of the process of converting the former Blockbuster Music
stores into Wherehouse stores, the Company introduced a new
logo, Wherehouse Music. This change is a part of the
Companys brand awareness program, which has been
introduced in all markets.

Distribution.Central to Wherehouses strategy
of providing a broad merchandise selection to its customers
(e.g., multiple copies of hits, select copies of catalog
products, and high quality in-stock condition) is its ability to
distribute product quickly and cost-effectively to its stores.
Approximately 20% of the Companys inventory is shipped to
store locations directly from manufacturers and distributors
(primarily in the case of new releases), while the remaining 80%
is delivered from the Companys distribution center. The
Company uses common carriers for deliveries from its
distribution center. Generally, the Companys centralized
distribution system fills orders to all stores at least once a
week. Inventory at the Companys distribution center is
automatically sorted based on individual store demand data
generated by the Companys store-level inventory systems.
Such data is captured by the Companys point-of-sale
(POS) system and forwarded to the distribution
center for fulfillment. At its distribution center, the Company
continues to enhance the new distribution system that was
installed in Fiscal 2000.

E-Commerce

In February, 2001, as a result of significant
operating losses experienced by CheckOut.com, an Internet
content provider and e-commerce retailer of music, movies and
games in which the Company had a 49% equity investment,
CheckOut.com ceased operation of its Internet site. 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. To maintain its online retail presence,
the Company re-launched its Internet e-commerce site,
Wherehousemusic.com in November, 2001. The
Wherehousemusic.com Internet site provides its customers with
the same online retail offering that was previously provided by
CheckOut.com as well as used CDs and DVDs.

Competition

The retail home entertainment industry is highly
competitive. The Company competes with other brick-and-mortar
retailers and a growing number of direct-to-consumer
alternatives.

Brick-and-Mortar
Retailers.The Company competes with
large, established music and video chains, such as those
operated by Trans World Entertainment Corporation, Musicland and
Tower Records; consumer electronics superstores, such as Best
Buy and Circuit City; mass merchants, such as Wal-Mart, Kmart
and Target and other specialty retail stores, such as
Barnes & Noble and Borders. Some of these competitors
may have greater financial or other resources than the Company.
In addition, the Company also faces competition from video
rental stores, variety discounters and warehouse clubs.

Direct-to-Consumer.The Internet has become an established avenue for retailing. The
purchase of music and video, in particular, through the Internet
is increasing in popularity with consumers. The Companys
e-commerce competitors include Amazon.com, CDnow.com,
Barnesandnoble.com, mp3.com and others, most of which have one
or more marketing alliances. In addition to the Internet,
consumers receive television and mail order offers and have
access to mail order clubs. The largest mail order clubs are
affiliated with major manufacturers of prerecorded music and
video and may have advantageous marketing relationships with
their affiliates. Consumers also have access to cable television
and digital satellite systems, including pay-per-view
television. Many retailers as well as certain distributors are
testing technology that allows for the purchase of music through
a digital download via the Internet. Consumer interest in this
form of distribution is increasing as the technology improves
and the assortment of titles available for download widens (see
Industry Overview, above).

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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. Revenues in the
fourth quarter of Fiscal 2002 were approximately 30.0% of total
annual revenues, adjusted to exclude store closures and the sale
of 64 stores. Working capital and related bank borrowings
in prior years were usually lowest during the period beginning
with the end of the Christmas holiday 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 cumulative capital expenditures and the building
of inventory for the holiday season.

The Company believes that, except for changes in
the minimum wage mandated by regulators, inflation has not had a
material effect on its operations and its internal and external
sources of liquidity and working capital.

Organization and Employees

As of January 31, 2002, Wherehouse employed
approximately 5,260 persons. Approximately 33% were full-time
employees, and approximately 67% percent were part-time
employees. The Companys labor requirements vary based on
seasonal business fluctuations, with between 1,500 and
2,000 additional store and distribution center employees
added during the peak holiday season. Wherehouses
corporate office staff, which consists of approximately 247
employees, is responsible for executive and general operating
management, buying, merchandising, advertising, finance,
accounting, human resources, legal, information systems and real
estate.

Trademarks

The Company owns and maintains registrations for
The Wherehouse trademark and variations thereof in
the United States, Mexico, Taiwan, Thailand, Hong Kong, and
Korea and has filed trademark applications in China. The Company
also owns and maintains registrations in the United States and
Mexico for the name Tu Musica. Trademark
applications have been filed and are pending in the United
States for the names Wherehouse Music,
Wherehouse.com, Wherehousemusic.com,
Digital Wherehouse, XChange, .com
by Wherehouse, Earmail, Songmail,
Bandography, and GameSpace.

Reorganization Under Chapter 11

On August 2, 1995, WEI and Old Wherehouse
filed voluntary petitions for relief under Chapter 11 of
Title 11 of the United States Code
(Chapter 11) in the United States Bankruptcy
Court for the District of Delaware (the Bankruptcy
Court), seeking to reorganize under Chapter 11. Old
Wherehouse and WEI continued to manage their respective affairs
and operate their businesses as debtors-in-possession while they
worked to develop a reorganization plan that would restructure
their businesses and allow their emergence from Chapter 11.

The Plan of Reorganization for the Companys
predecessors (the Reorganization Plan) was confirmed
by an order of the Bankruptcy Court entered on January 7,
1997. The effective date of the Reorganization Plan occurred on
January 31, 1997 (the Effective Date). Since
the Effective Date, the Bankruptcy Court has retained
jurisdiction over certain claims and other matters relating to
the bankruptcy estates of the Companys predecessors, but
New Wherehouse has been and is free to carry out its business
without oversight by the Bankruptcy Court.

On January 31, 1997, the Company implemented
the accounting principles for entities emerging from
Chapter 11 set forth in the American Institute of Certified
Public Accountants Statement of Position 90-7
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
Reorganization Plan received less than fifty percent of the
voting shares of the emerging entity. All assets and

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liabilities were restated to reflect the
reorganization value of the reorganized entity, which
approximated its fair value at the Effective Date. In addition,
the accumulated deficit of the Company was eliminated and its
capital structure was recast in conformity with the
Reorganization Plan.





Item 2.     Properties

The Companys executive offices, which are
located in Torrance, California, are subject to a lease covering
66,775 square feet of space at a current annual base rent of
approximately $600,972 which is subject to periodic adjustment.
The executive office lease expires on January 31, 2004. The
Company also maintains regional offices for its field managers
within existing store locations or in separate office facilities.

The Company operates a 198,292 square-foot
distribution center in Carson, California. The Company recently
exercised a 5-year option on the lease for this property,
extending the expiration date from April 30, 2002 to
April 30, 2007. The lease is subject to one remaining
5-year renewal option. The annual base rent for Fiscal 2002 was
approximately $809,000. The monthly base rent will increase
beginning May 1, 2002 effective with the extension of the
lease discussed above. The annual base rent for Fiscal 2003 is
anticipated to be approximately $932,700.

As of January 31, 2002, the Company owned
one of its stores and leased space for the remaining 406 stores.
Since January 31, 2002, the Company has closed two of these
407 stores and opened one store. Lease terms generally range
from month-to-month to 30 years, including renewal options.
If no leased stores renewal options were exercised, 58
leases would expire on or before January 31, 2003, 81 would
expire between February 1, 2003 and January 31, 2004,
99 would expire between February 1, 2004 and
January 31, 2005, and the remainder would expire subsequent
to February 1, 2005. The Company has the right to terminate
a number of its store leases prior to the lease termination
date, depending upon certain conditions, as defined in each
lease. The Company does not depend on the continued existence of
any one or several of its lease agreements or store locations
for the operation of its business.




Item 3.     Legal
Proceedings

(i) Bankruptcy
filing

See Item 1 
Business  Reorganization Under
Chapter 11 above for a description of the bankruptcy
filing of Old Wherehouse and WEI.

(ii) Other

In January, 2001, the Company was sued in the Los
Angeles Superior Court by a former store manager, claiming
alleged failure to pay overtime wages to herself and all
similarly situated salaried store employees. The Complaint does
not specify any amount of the claims, either individually or on
behalf of the class. Thereafter, the Complaint was amended to
add three additional named plaintiffs. The amended Complaint
seeks relief on behalf of both store managers and assistant
managers going back to 1997. The Companys motions to
strike the class action allegations have been denied. A limited
amount of discovery has been conducted to date. In October,
2001, a second class action suit was filed with respect to store
managers and assistant managers by different named plaintiffs
and different lawyers. It also seeks overtime pay and, in
addition, asserts claims for meal break and rest break
penalties. The plaintiffs in the two suits are currently in the
process of filing a consolidated complaint. The Company believes
the allegations in both suits are without merit and intends to
vigorously defend itself in these matters. 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 July 18, 2001, the Santa Clara County,
California Superior Court entered a $7.6 million judgment
against the Company in a personal injury lawsuit encaptioned
Peterson, et al. v. Shapell Industries (the
Peterson Lawsuit). While the Company was insured for
this judgment, its insurer, Reliance Insurance Company, was
ordered liquidated by the State of Pennsylvania on
October 3, 2001. As such, it is unknown at present whether,
and to what extent, assets of the insurer will be available to
the Company subsequent to a

7



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##### Table of Contents



formal liquidation proceeding. Pending this
outcome, Californias Insurance Guarantee Fund
(CIGA) has engaged appellate counsel on behalf of
the Company. CIGA has also facilitated the posting of an
appellate bond to stay execution of the Peterson judgment
pending the outcome of the Companys appeal. The Company
was required by the bonding company to provide an
$11.4 million letter of credit as security for the
appellate bond. Management, based on the advice of legal
counsel, believes that it is reasonably possible that it will
either prevail on appeal or be successful in an alternative
legal strategy and, accordingly, has not recorded a liability
for the judgment in the accompanying financial statements.


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




Item 4.     Submission
of Matters to a Vote of Security Holders

None.




PART II




Item 5.     Market
for Registrants Common Equity and Related Stockholder
Matters

Market Information

The Company has one class of common equity
outstanding, its Common Stock. See Item 12 
Security Ownership of 5% Holders, Directors and Executive
Officers. There is no established public trading market
for the Common Stock.

Holders

As of January 31, 1997, after the effective
date of the Reorganization Plan, there were eight holders of
Common Stock, seven of whom were senior lenders under Old
Wherehouses bank credit agreement (the Senior
Lenders), led by Cerberus Partners, L.P. as the agent for
the Senior Lenders. As of April 19, 2002, the Company had
issued 11,413,324 shares of Common Stock, and there were
830 holders of record of the Common Stock. The Company
estimates that approximately 23,850 additional shares of Common
Stock will be issued to A&M Investment Associates #3,
LLC (A&M #3) under the provisions of a
Stock Subscription Agreement dated as of January 31, 1997
(the Stock Subscription Agreement).

Dividends

No dividends have been paid to the holders of the
Common Stock since its issuance. The Companys amended loan
agreement with Congress Financial Corporation (Western)
restricts the ability of Wherehouse to pay dividends. See
Item 7  Managements Discussion and
Analysis of Financial Condition and Results of
Operation  Liquidity and Capital Resources and
Note 6 to the financial statements included elsewhere in
this report. There are no plans by Wherehouse to pay cash
dividends on the Common Stock in the foreseeable future.

8



---



##### Table of Contents






Item 6.Selected
Financial Data

Set forth below are selected financial data as of
and for the periods indicated below. The financial data are
derived from financial statements of Old Wherehouse and New
Wherehouse. The selected financial data should be read in
conjunction with the discussion under Item 7 
Managements Discussion and Analysis of Financial
Condition and Results of Operation and with the financial
statements, including the notes thereto, included elsewhere in
this report.

|                                             |                                                                            |                              |       |            |       |      |       |            |       |      |       |            |       |  |       |            |       |  |       |            |       | 
|-------------------------------------------- | -------------------------------------------------------------------------- | ---------------------------- | ----- | ---------- | ----- | ---- | ----- | ---------- | ----- | ---- | ----- | ---------- | ----- |  | ----- | ---------- | ----- |  | ----- | ---------- | ----- | 
|                                             |                                                                            |                             
|                                             |                                                                            | Years Ended January 31,     
|                                             |                                                                            |                             
|                                             |                                                                            | 2002                         |       | 2001       |       | 2000 |       | 1999       |       | 1998
|                                             |                                                                            |                              |       |            |       |      |       |            |       |     
|                                             |                                                                            |                             
|                                             |                                                                            | (Dollar amounts in millions)
|Income Statement Data:                       |                                                                            |                              |       |            |       |      |       |            |       |      |       |            |       |  |       |            |       |  |       |           
|Revenue:                                     |                                                                            |                              |       |            |       |      |       |            |       |      |       |            |       |  |       |            |       |  |       |           
|                                             | Sale merchandise revenue                                                   |                              | $     | 599.9      |       |      | $     | 700.6      |       |      | $     | 756.1      |       |  | $     | 464.5      |       |  | $     | 276.1      |      
|                                             | Rental revenue, net                                                        |                              |       | 4.4        |       |      |       | 5.8        |       |      |       | 9.8        |       |  |       | 16.0       |       |  |       | 23.9       |      
|                                             |                                                                            |                              |       |            |       |      |       |            |       |      |       |            |       |  |       |            |       |  |       |           
|                                             |                                                                            | Total revenues               |       |            | 604.3 |      |       |            | 706.4 |      |       |            | 765.9 |  |       |            | 480.5 |  |       |            | 300.0 | 
|Cost of sale merchandise revenue(1)          |                                                                            |                              | 396.7 |            |       |      | 457.8 |            |       |      | 495.6 |            |       |  | 309.7 |            |       |  | 176.1 |           
|Selling, general and administrative expenses |                                                                            |                              | 194.9 |            |       |      | 219.5 |            |       |      | 237.7 |            |       |  | 140.1 |            |       |  | 104.7 |           
|Depreciation and amortization                |                                                                            |                              | 30.4  |            |       |      | 31.1  |            |       |      | 25.5  |            |       |  | 11.8  |            |       |  | 7.1   |           
|System integration costs(2)                  |                                                                            |                              |       |            |       |      |       |            |       |      |       |            |       |  | 0.8   |            |       |  |       |           
|Store closure costs  existing stores(3)     |                                                                            |                              |       |            |       |      |       |            |       |      |       |            |       |  | 2.9   |            |       |  |       |           
|Year 2000 remediation costs(4)               |                                                                            |                              |       |            |       |      |       |            |       |      | 0.2   |            |       |  | 1.8   |            |       |  |       |           
|Other costs                                  |                                                                            |                              | 0.6   |            |       |      | 2.3   |            |       |      | 0.2   |            |       |  |       |            |       |  |       |           
|Loss on disposition of assets                |                                                                            |                              | 3.3   |            |       |      |       |            |       |      |       |            |       |  |       |            |       |  |       |           
|                                             |                                                                            |                              |       |            |       |      |       |            |       |      |       |            |       |  |       |            |       |  |       |           
|                                             | Income (loss) from operations                                              |                              |       | (21.5      | )     |      |       | (4.3       | )     |      |       | 6.7        |       |  |       | 13.3       |       |  |       | 12.0       |      
|Interest (income) expense, net               |                                                                            |                              | 4.7   |            |       |      | 8.1   |            |       |      | 7.3   |            |       |  | 1.2   |            |       |  | (1.1  | )         
|                                             |                                                                            |                              |       |            |       |      |       |            |       |      |       |            |       |  |       |            |       |  |       |           
|                                             | Income (loss) before loss on investment in
	joint venture and income taxes |                              |       | (26.2      | )     |      |       | (12.4      | )     |      |       | (0.6       | )     |  |       | 12.1       |       |  |       | 13.1       |      
|                                             | Loss on investment in joint venture                                        |                              |       |            |       |      |       | 20.6       |       |      |       |            |       |  |       |            |       |  |       |            |      
|                                             |                                                                            |                              |       |            |       |      |       |            |       |      |       |            |       |  |       |            |       |  |       |           
|                                             | Income (loss) before income taxes                                          |                              |       | (26.2      | )     |      |       | (33.0      | )     |      |       | (0.6       | )     |  |       | 12.1       |       |  |       | 13.1       |      
|Provision (benefit) for income taxes(5)      |                                                                            |                              | 27.5  |            |       |      | (11.4 | )          |       |      | 0.6   |            |       |  | 5.0   |            |       |  | 5.4   |           
|                                             |                                                                            |                              |       |            |       |      |       |            |       |      |       |            |       |  |       |            |       |  |       |           
|                                             | Net income (loss)                                                          |                              | $     | (53.7      | )     |      | $     | (21.6      | )     |      | $     | (1.2       | )     |  | $     | 7.1        |       |  | $     | 7.7        |      
|                                             |                                                                            |                              |       |            |       |      |       |            |       |      |       |            |       |  |       |            |       |  |       |           
|Net income (loss) per common
	share         |                                                                            |                              |       |            |       |      |       |            |       |      |       |            |       |  |       |            |       |  |       |           
|                                             | Basic                                                                      |                              | $     | (4.88      | )     |      | $     | (1.97      | )     |      | $     | (0.11      | )     |  | $     | 0.66       |       |  | $     | 0.74       |      
|                                             | Diluted                                                                    |                              | $     | (4.88      | )     |      | $     | (1.97      | )     |      | $     | (0.11      | )     |  | $     | 0.61       |       |  | $     | 0.71       |      
|Weighted average shares outstanding          |                                                                            |                              |       |            |       |      |       |            |       |      |       |            |       |  |       |            |       |  |       |           
|                                             | Basic                                                                      |                              |       | 11,007,000 |       |      |       | 10,989,000 |       |      |       | 10,750,000 |       |  |       | 10,690,000 |       |  |       | 10,421,000 |      
|                                             | Diluted                                                                    |                              |       | 11,007,000 |       |      |       | 10,989,000 |       |      |       | 10,750,000 |       |  |       | 11,552,000 |       |  |       | 10,895,000 |      
|Other data                                   |                                                                            |                              |       |            |       |      |       |            |       |      |       |            |       |  |       |            |       |  |       |           
|                                             | Adjusted EBITDA(6)                                                         |                              | $     | 13.4       |       |      | $     | 29.8       |       |      | $     | 45.2       |       |  | $     | 34.8       |       |  | $     | 24.3       |      
|                                             | Cash flows provided by operating activities                                |                              |       | 18.5       |       |      |       | 28.5       |       |      |       | 33.4       |       |  |       | 55.0       |       |  |       | 59.9       |      
|                                             | Cash flows provided by (used in) investing
	activities                     |                              |       | 11.6       |       |      |       | (31.8      | )     |      |       | (30.8      | )     |  |       | (128.7     | )     |  |       | (4.6       | )    
|                                             | Cash flows (used in) provided by financing
	activities                     |                              | $     | (31.0      | )     |      | $     | 1.2        |       |      | $     | (13.1      | )     |  | $     | 34.0       |       |  | $     | (6.7       | )    

9



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##### Table of Contents



|                                                                             |  |                              |       |      |  |      |       |      |  |      |       |  |  |   |       |  |  |   |       | 
|---------------------------------------------------------------------------- |  | ---------------------------- | ----- | ---- |  | ---- | ----- | ---- |  | ---- | ----- |  |  | - | ----- |  |  | - | ----- | 
|                                                                             |  |                             
|                                                                             |  | Years Ended January 31,     
|                                                                             |  |                             
|                                                                             |  | 2002                         |       | 2001 |  | 2000 |       | 1999 |  | 1998
|                                                                             |  |                              |       |      |  |      |       |      |  |     
|                                                                             |  |                             
|                                                                             |  | (Dollar amounts in millions)
|Balance Sheet Data:                                                          |  |                              |       |      |  |      |       |      |  |      |       |  |  |   |       |  |  |   |       | 
|Working capital                                                              |  | $                            | (6.8  | )    |  | $    | 31.8  |      |  | $    | 47.7  |  |  | $ | 70.8  |  |  | $ | 65.3  | 
|Total assets                                                                 |  |                              | 229.1 |      |  |      | 341.7 |      |  |      | 413.7 |  |  |   | 387.7 |  |  |   | 161.0 | 
|Line of credit                                                               |  |                              | 10.5  |      |  |      | 35.1  |      |  |      | 32.0  |  |  |   | 37.3  |  |  |   |       | 
|Capital lease obligations and long-term debt
	(including current portion)(7) |  |                              | 18.6  |      |  |      | 26.4  |      |  |      | 31.5  |  |  |   | 31.6  |  |  |   | 4.5   | 
|Total shareholders equity(8)                                                |  | $                            | 25.4  |      |  | $    | 79.3  |      |  | $    | 96.3  |  |  | $ | 98.2  |  |  | $ | 91.5  | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The Company incurred incremental cost of sales of
	approximately $2.5 million and $2.7 million for the
	fiscal years ended January 31, 2000 and 1999, respectively,
	relating to third-party distribution costs for music
	replenishment from one of its suppliers. These incremental costs
	resulted from the Sellers inability to support fulfillment
	of music product from its distribution facility. These
	incremental costs were discontinued by July 1999.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   
|(2) | System integration costs relate to the
	Acquisition.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   
|(3) | The charge for Store closure costs-existing
	stores in Fiscal 1999 represents costs related to the closure of
	19 Wherehouse stores that operated in the same trade areas
	as acquired Blockbuster Music stores.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   
|(4) | The Company recorded charges of $0.2 million
	and $1.8 million during Fiscal 2000 and 1999, respectively,
	in connection with the Year 2000 remediation of its computer
	systems.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   
|(5) | The income tax expense of $27.5 million for
	the year ended January 31, 2002, reflects the valuation
	allowance provided against the Companys deferred income
	tax assets.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   
|(6) | EBITDA represents income (loss) from
	operations plus depreciation and amortization. Management
	believes that, due to the combined format of rental product and
	sale merchandise and certain non-recurring costs, a more
	appropriate calculation of EBITDA (hereafter referred to as
	Adjusted EBITDA) should include an adjustment for
	such non-recurring costs and the net difference between rental
	amortization plus the book value of rental dispositions less
	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 evaluate operating performance and to
	determine the Companys ability to service debt. 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,
	and is presented as supplementary information.
|   
|    | Adjusted EBITDA for Fiscal 2002 excludes other
	costs of $0.6 million, loss on disposition of assets of
	$3.3 million and $0.6 million of Internet related
	costs.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   
|    | Adjusted EBITDA for Fiscal 2001 excludes other
	costs of $2.3 million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   
|    | Adjusted EBITDA for Fiscal 2000 excludes certain
	incremental costs related to the Acquired Stores and costs
	associated with the remediation of its computer systems to
	comply with Y2K readiness requirements, as follows: incremental
	non-recurring distribution costs of approximately
	$4.6 million; non-recurring integration costs of
	approximately $5.5 million (including $2.5 million of
	replenishment costs in cost of sale merchandise revenue); and
	$0.2 million of Y2K remediation costs. Also, Adjusted
	EBITDA excludes Internet related costs of $2.3 million,
	which are included in SG&A expenses.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   
|    | Adjusted EBITDA for Fiscal 1999 excludes certain
	incremental costs related to the Acquired Stores and costs
	associated with the remediation of its computer systems to
	comply with Y2K readiness requirements, as follows: costs
	related to the closure of existing stores of $2.9 million;
	non-recurring merchandise replenishment costs of
	$2.7 million included in cost of sale merchandise revenue;
	Y2K remediation costs of $1.8 million; and systems
	integration costs of $0.8 million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

10



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|    |                                                                                                                                                                                                                                                                                                                                                                                                  
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    | Adjusted EBITDA for Fiscal 1998 includes a
	non-recurring cash benefit of $1.7 million resulting from
	the impact of one-time credits received from landlord
	concessions.                                                                                                                                                                                                                       
|   
|(7) | Includes $15.8 million, $22.4 million,
	$27.4 million and $27.6 million of capital lease
	obligations in Fiscal 2002, 2001, 2000 and 1999, respectively
	that are real estate leases related to the Acquisition
	($14.4 million, $18.5 million, $22.0 million and
	$25.8 million, respectively) and equipment leases
	($1.4 million, $3.9 million, $5.4 million and
	$1.8 million, respectively).
|   
|(8) | There were no cash dividends declared during any
	of the periods presented above.                                                                                                                                                                                                                                                                                                                




Item 7.     Managements
Discussion and Analysis of Financial Condition and Results of
Operations

Results of Operations



| |                           
| | --------------------------
| | Forward-Looking Statements

Certain statements contained in Managements
Discussion and Analysis of Financial Condition and Results of
Operations, particularly in the paragraph entitled
Liquidity and Capital Resources, and elsewhere in
this Annual Report on Form 10-K are forward-looking
statements. These statements discuss, among other things,
expected growth, future revenues and future performance. You can
find many of these statements by looking for words like
believes, expects,
anticipates, or similar expressions in this Annual
Report on Form 10-K. Although the Company 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 Company.

The Companys operations are subject to
factors outside its control. Any one, or a combination, of these
factors could materially affect the results of the
registrants operations. These factors include
(a) changes in levels of competition from current
competitors and potential new competition from both
non-traditional retailers of the Companys products and
alternative methods or channels of distribution such as Internet
and 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 we are engaged; (h) the ability to
attract and retain key personnel; and (i) adverse results
in significant litigation matters.

The foregoing should not be construed as an
exhaustive list of all factors which could cause actual results
to differ materially from those expressed in forward-looking
statements made by the Company. 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 Annual Report or to reflect the
occurrence of unanticipated events.



| |                                                                     
| | --------------------------------------------------------------------
| | Year Ended January 31, 2002 Compared
	to Year Ended January 31, 2001

Total revenues were $604.3 million and
$706.4 million for the fiscal years ended January 31,
2002 and January 31, 2001, respectively. The decrease of
$102.1 million was primarily attributable to decreases in
net revenues of $64.7 million due to the closure of 63
stores since February 1, 2000 and the sale of 64 stores in
the third quarter of Fiscal 2002, same store sales decreases in
net revenues of $37.3 million and the reduction of net
rental revenue of $1.4 million.

11



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##### Table of Contents



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

Sale Merchandise and Rental Revenues

By Category


|                          |                                                                                                                                      |                                |     |       |       |  |     |       |       | 
|------------------------- | ------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------ | --- | ----- | ----- |  | --- | ----- | ----- | 
|                          |                                                                                                                                      |                               
|                          |                                                                                                                                      | Fiscal Years Ended            
|                          |                                                                                                                                      | January 31,                   
|                          |                                                                                                                                      |                               
|                          |                                                                                                                                      | 2002                           |     | 2001 
|                          |                                                                                                                                      |                                |     |      
|                          |                                                                                                                                      |                               
|                          |                                                                                                                                      | (Dollars in                   
|                          |                                                                                                                                      | millions)                     
|Sale merchandise revenue: |                                                                                                                                      |                                |     |       |       |  |     |      
|                          | Music                                                                                                                                |                                | $   | 486.2 |       |  | $   | 593.5 |      
|                          | Other, principally sales of new videocassettes,
	DVDs, video game software and hardware, general merchandise and
	ticket commissions |                                |     | 113.7 |       |  |     | 107.1 |      
|                          |                                                                                                                                      |                                |     |       |       |  |     |      
|                          |                                                                                                                                      | Total sale merchandise revenue |     |       | 599.9 |  |     |       | 700.6 | 
|Rental revenue, net       |                                                                                                                                      |                                | 4.4 |       |       |  | 5.8 |      
|                          |                                                                                                                                      |                                |     |       |       |  |     |      
|                          |                                                                                                                                      | Total revenue                  |     | $     | 604.3 |  |     | $     | 706.4 | 
|                          |                                                                                                                                      |                                |     |       |       |  |     |      

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 63 stores
closed since February 1, 2000 and the 64 stores sold
during the third quarter of Fiscal 2002, sale merchandise
revenue decreased by approximately 6.4% during Fiscal 2002 as
compared to Fiscal 2001. Same store sales were trending
positively in the period immediately proceeding the events of
September, 11, 2001. Since September 11, 2001, sales
have been adversely impacted by the general economic environment
during the remainder of the fiscal year. Also contributing to
the decrease in same-store sales is (i) continuing competition
from certain big-box retailers selling selected new
music releases near cost; (ii) a weak new release schedule
for music products that continued during most of Fiscal 2002;
and (iii) on-line piracy and CD burning. Partially
offsetting these decreases were increased sales of DVD and used
music.

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 $4.4 million in Fiscal 2002 and
$5.8 million in Fiscal 2001, representing a decrease of
$1.4 million or 24.1% 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 are not limited to, consumer tastes, new releases of music,
DVD, videocassette and video game titles available for sale or
rental, the increasing popularity of the Internet as an avenue
for retailing and other direct-to-consumer alternatives, and
technological developments such as digital downloading and the
use of CD burners to copy, 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
$396.7 million for the year ended January 31, 2002, as
compared with $457.8 million for the same period last year,
a decrease of $61.1 million. As a percentage of sale
merchandise revenue, cost of sale merchandise revenue was 66.1%
for Fiscal 2002 as compared with 65.3% for Fiscal 2001. As a
percentage of total revenues for the year ended January 31,
2002, sales of higher margin new music product continued to
decrease and sales of lower margin DVD product continued to
increase, which

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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
caused pressure on gross profit margins.




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

SG&A expenses for Fiscal 2002 were
$194.9 million, compared to $219.5 million for Fiscal
2001, a decrease of $24.6 million. The decrease includes a
reduction of $19.3 million in operating expenses at the
Companys stores due to store closures and the sale of 64
of the Companys stores. 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 32.3% of revenue in
Fiscal 2002, compared to 31.1% of revenue in Fiscal 2001, an
increase of 1.2%.

Depreciation and amortization expense was
$30.4 million in Fiscal 2002 compared to $31.1 million
in Fiscal 2001, a decrease of $0.7 million. The decrease is
principally related to the sale of certain assets to TMN (see
Disposition of Stores in Item 1 above).



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

Interest expense for the year ended
January 31, 2002 was $5.4 million, compared to
$8.5 million for the year ended January 31, 2001, a
decrease of $3.1 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 252 basis points in
Fiscal 2002 as compared to Fiscal 2001. Borrowings under the
Congress Facility were used mainly for the funding of working
capital and, in Fiscal 2001, to fund the investment in
CheckOut.com.



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

Interest income for Fiscal 2002 was $0.7 compared
to $0.4 for Fiscal 2001. The increase in interest income is
attributable to the notes receivable related to the sale of
certain assets to TMN. Interest income also includes notes
receivable from shareholders.



| |                              
| | -----------------------------
| | Loss on Disposition of Assets

Loss on disposition of assets for Fiscal 2002
represents the loss recognized on the sale of 64 Wherehouse
Music stores to TMN.



| |                                       
| | --------------------------------------
| | 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. Subsequent to February
2000, CheckOut.com experienced significant operating losses and
ceased operations of its Internet site in February 2001. For the
year ended January 31, 2001, the $20.6 million loss on
investment in joint venture includes $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.



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

The income tax expense of $27.5 million for
the year ended January 31, 2002, reflects the valuation
allowance provided against the Companys deferred income
tax assets due to recurring losses from the Companys
operations. Such valuation allowance will be reversed when the
Company returns to profitability at levels sufficient to realize
such deferred income tax assets.



| |                                                                     
| | --------------------------------------------------------------------
| | Year Ended January 31, 2001 Compared
	to Year Ended January 31, 2000

Total revenues were $706.4 million and
$765.9 million for the fiscal years ended January 31,
2001 and January 31, 2000, respectively. The decrease of
$59.5 million was primarily attributable to decreases in net

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revenues of $36.9 million due to store
closures since January 31, 1999, same-store sale decreases
of $18.6 million and the reduction of net rental revenue of
$4.0 million.


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

Sale Merchandise and Rental Revenues

By Category


|                          |                                                                                                                                      |                                |     |       |       |  |     |       |       | 
|------------------------- | ------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------ | --- | ----- | ----- |  | --- | ----- | ----- | 
|                          |                                                                                                                                      |                               
|                          |                                                                                                                                      | Fiscal Years Ended            
|                          |                                                                                                                                      | January 31,                   
|                          |                                                                                                                                      |                               
|                          |                                                                                                                                      | 2001                           |     | 2000 
|                          |                                                                                                                                      |                                |     |      
|                          |                                                                                                                                      |                               
|                          |                                                                                                                                      | (Dollars in                   
|                          |                                                                                                                                      | millions)                     
|Sale merchandise revenue: |                                                                                                                                      |                                |     |       |       |  |     |      
|                          | Music                                                                                                                                |                                | $   | 593.5 |       |  | $   | 663.2 |      
|                          | Other, principally sales of new videocassettes,
	DVDs, video game software and hardware, general merchandise and
	ticket commissions |                                |     | 107.1 |       |  |     | 92.9  |      
|                          |                                                                                                                                      |                                |     |       |       |  |     |      
|                          |                                                                                                                                      | Total sale merchandise revenue |     |       | 700.6 |  |     |       | 756.1 | 
|Rental revenue, net       |                                                                                                                                      |                                | 5.8 |       |       |  | 9.8 |      
|                          |                                                                                                                                      |                                |     |       |       |  |     |      
|                          |                                                                                                                                      | Total revenue                  |     | $     | 706.4 |  |     | $     | 765.9 | 
|                          |                                                                                                                                      |                                |     |       |       |  |     |      

A.     Sale
merchandise revenue. For Fiscal 2001, sale merchandise
revenue represented 99.2% of aggregate revenues, compared to
98.7% during Fiscal 2000, an increase of 0.5%. This increase
resulted from the continuing decline in rental revenue, net
discussed below. Negatively impacting revenues were the decline
in same store sales, also discussed below, and the closure of
35 stores since January 31, 2000.

On a same-store basis, excluding the
35 stores closed and the three stores opened during Fiscal
2001, sale merchandise revenue decreased by approximately 2.6%
as compared Fiscal 2000. The primary reasons for this decrease
were a weak new release schedule for new music products in
Fiscal 2001, the favorable sales impact of grand opening
promotions, which took place at all the Acquired Stores during
the second quarter of Fiscal 2000, and certain big
box retailers selling selected new music releases at or
below cost. Partially offsetting these decreases were
improvements in music category inventory management,
re-merchandising activities which occurred in certain stores and
increased sales of DVD and used music.

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 $5.8 million in Fiscal 2001 and
$9.8 million in Fiscal 2000, representing a decrease of
$4.0 million or 40.8% due to increased competition in the
rental market and fewer of the Companys stores offering
rental products.



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

Cost of sale merchandise revenue was
$457.8 million for Fiscal 2001 as compared with
$495.6 million for Fiscal 2000, a decrease of
$37.8 million. As a percentage of sale merchandise revenue,
cost of sale merchandise revenue, or gross profit margins,
stayed approximately the same in Fiscal 2001 as compared to
Fiscal 2000. Cost of sale merchandise revenue was 65.3% for
Fiscal 2001 as compared to 65.5% for Fiscal 2000. Sales of
higher margin new music product as a percentage of total
revenues decreased in Fiscal 2001, while sales of lower gross
profit margin DVD product increased in Fiscal 2001. In addition,
increases in unit costs for various music products and decreases
in DVD sales prices were offset principally by decreases in
Fiscal 2001 in slow moving and obsolete inventory provisions and
inventory shrinkage.



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

SG&A expenses for Fiscal 2001 were
$219.5 million, compared to $237.7 million in Fiscal
2000. The decrease includes a reduction of $9.8 million in
operating expenses at the Companys stores due to store
closures. The decrease is also due to certain non-recurring
costs incurred in the prior year including

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$7.6 million related to the integration of
the Acquired Stores and certain other non-recurring incremental
distribution costs and $2.3 million of Internet related
expenses. In addition, increases in distribution payroll costs
were partially offset by a reduction in other variable expenses
due to the decline in sales merchandise revenue in Fiscal 2001.
SG&A expenses were 31.1% of total revenue in Fiscal 2001,
compared to 31.0% of total revenue for the same period last year.


Other costs of $2.3 million during the year
ended January 31, 2001 include $0.9 million related to
the write-off of system development costs for computer software
no longer utilized by the Company and $1.4 million related
principally to additional store closure expenses.

Depreciation and amortization expense was
$31.1 million in Fiscal 2001 compared to $25.5 million
in Fiscal 2000, an increase of $5.6 million. The increase
is principally related to capital expenditures over the last two
years for the acquisition of property, equipment and systems
improvements.



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

Interest expense for Fiscal 2001 was
$8.5 million, compared to $7.8 million for Fiscal
2000, an increase of $0.7 million. This increase was
primarily attributable to interest expense incurred due to
borrowings under the Companys revolving line of credit
agreement with Congress Financial Corporation (Western) (the
Congress Facility). Such borrowings were used for
the funding of working capital and, in Fiscal 2001, to fund the
investment in CheckOut.com.



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

Interest income for Fiscal 2001 was
$0.4 million, as compared to $0.5 million for Fiscal
2000. Interest income is related to short-term investments of
excess cash. Such cash is used mainly to pay down the
Companys borrowings under the Congress Facility.



| |                                    
| | -----------------------------------
| | Loss on Investment in Joint Venture

Subsequent to February 2000, CheckOut.com
experienced significant operating losses and ceased operations
of its Internet site in February 2001. For the year ended
January 31, 2001, the $20.6 million loss on investment
in joint venture includes $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.



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

The Company recorded a tax benefit of
$11.4 million for Fiscal 2001 compared to a tax provision
of $0.6 million for Fiscal 2000. The tax benefit is
commensurate with the decrease in income (loss) before
income tax.



| |                
| | ---------------
| | Adjusted EBITDA

See Selected Financial Data for a discussion
regarding the computation of Adjusted EBITDA.

Liquidity and Capital Resources

During Fiscal 2002 and Fiscal 2001, the
Companys net cash provided by operating activities was
$18.5 million and $28.5 million, respectively. The
most significant use of cash during Fiscal 2002 was related to a
decrease in accounts payable, accrued expenses and other current
liabilities of $18.1 million which was offset by a
reduction in inventories, net of $26.1 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.

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Net cash provided by investing activities during
Fiscal 2002 was $11.6 million primarily due to
$20.5 million in proceeds received from the sale of assets
to TMN, partially offset by capital expenditures totaling
$8.7 million for the acquisition of property, equipment and
improvements. Financing of capital expenditures has generally
been provided by cash from operations and borrowings under the
Congress Facility (the Facility). During Fiscal
2001, net cash used in investing activities included
$19.0 million invested in the Companys joint venture
with CheckOut.com.

Net cash used in financing activities for the
year ended January 31, 2002 was $31.0 million due to
the repayment of borrowings under the Congress Facility of
$24.7 million and payments of $6.6 million on capital
lease obligations and long-term debt.

As of January 31, 2002, there was an
outstanding loan balance of $10.5 million and
$11.4 million in an outstanding letter of credit under the
Facility. On November 29, 2001, the Company was required to
post a letter of credit of $11.4 million as security for an
appellate bond issued to stay execution of the judgment in the
Peterson Lawsuit, (see Part I, Item 3. Legal
Proceedings), pending the outcome of the Companys appeal.
The Company estimates that availability under its revolving line
as of January 31, 2002 and April 19, 2002 was
$59.0 million and $37.0 million, respectively. This
decline in availability since January 31, 2002 is mainly
due to the Companys seasonal fluctuations of merchandise
inventory on which the Facility is based.

The Facility provides for a revolving credit line
of up to $155,000,000, including a letter of credit subfacility
of $10,000,000 (which amount can be increased at the discretion
of the financial institution), expiring on October 31,
2003, with a year-to-year renewal thereafter.

The Facility bears interest at the prime rate
(4.75% at January 31, 2002) plus 0.5%, or at the
Companys election, an adjusted Eurodollar rate (1.85% at
January 31, 2002) plus 1.75%. The Companys borrowing
availability under the Facility is subject to limitations based
upon, among other things, the value of certain eligible
merchandise inventory.

In addition to the interest payable, the Company
pays an Unused Line Fee. The fee is 0.375% per annum calculated
upon the amount by which $120.0 million exceeds the average
daily principal balance of the outstanding loans and letter of
credit during the immediately preceding month.

The Company believes that cash on hand, cash flow
from operations, 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 2003.

Contractual Obligations

The following is a list of commitments and
contingencies of the Company as of January 31, 2002:

|                         |                  |                                    |   |                              |       |           |   |         |      |            |   |       |       |  |   |      |      |  |   |      |      | 
|------------------------ | ---------------- | ---------------------------------- | - | ---------------------------- | ----- | --------- | - | ------- | ---- | ---------- | - | ----- | ----- |  | - | ---- | ---- |  | - | ---- | ---- | 
|                         |                  |                                   
|                         |                  | Payments Due By Period,           
|                         |                  |                                   
|                         |                  | Total                              |   | 1 Year                       |       | 2-4 Years |   | 5 Years |      | Thereafter
|                         |                  |                                    |   |                              |       |           |   |         |      |           
|                         |                  |                                    |   |                              |       |          
|                         |                  |                                    |   | (Dollar amounts in millions) |       |          
|Contractual Obligations: |                  |                                    |   |                              |       |           |   |         |      |            |   |       |       |  |   |      |      |  |   |     
|                         | Long-term debt   |                                    | $ | 2.8                          |       |           | $ | 2.6     |      |            | $ | 0.2   |       |  | $ |     |      |  | $ |     |     
|                         | Capital leases   |                                    |   | 18.6                         |       |           |   | 5.5     |      |            |   | 9.2   |       |  |   | 1.5  |      |  |   | 2.4  |     
|                         | Operating leases |                                    |   | 198.7                        |       |           |   | 52.8    |      |            |   | 104.1 |       |  |   | 14.8 |      |  |   | 27.0 |     
|                         |                  |                                    |   |                              |       |           |   |         |      |            |   |       |       |  |   |      |      |  |   |     
|                         |                  | Total contractual cash obligations |   | $                            | 220.1 |           |   | $       | 60.9 |            |   | $     | 113.5 |  |   | $    | 16.3 |  |   | $    | 29.4 | 
|                         |                  |                                    |   |                              |       |           |   |         |      |            |   |       |       |  |   |      |      |  |   |     

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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 the building of inventory
for the holiday season. The Company believes that, except for
changes in the minimum wage mandated by the Federal government,
inflation has not had a material effect on its operations and
its internal and external sources of liquidity and working
capital.

Critical Accounting Policies

The Companys discussion and analysis of its
financial condition and results of operations are based upon the
Companys consolidated financial statements, which have
been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these
financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. Management bases its
estimates and assumptions on historical experience and on
various other factors that are believed to be reasonable under
the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and
liabilities. Actual results may differ from these estimates
under different assumptions or conditions.

Management believes the following critical
accounting policies and accounting estimates have been used in
the preparation of its consolidated financial statements.

Inventories.The
Company values its inventory, consisting primarily of
pre-recorded music products, videocassettes, DVDs, video games,
and other merchandise held for sale, using the last-in,
first-out (LIFO) method. Changes in unit prices for
products purchased by the Company could cause significant
differences between the inventory valuation using the LIFO
method compared to what the valuation would be using the
first-in, first-out method of accounting.

The Company identifies slow moving inventories
and estimates appropriate loss provisions related thereto. In
addition, the majority of the Companys inventories are
eligible for return under various vendor return programs, which
mitigates the risk of loss due to returns. While the Company has
no reason to believe its inventory return privileges will be
discontinued in the future, its risk of loss associated with
obsolete or slow moving inventories would increase if such were
to occur.

Intangible Assets.Intangible assets, consisting principally of goodwill, are
reviewed for impairment. The carrying value of intangible assets
would be impaired if the best estimate of future undiscounted
cash flows over their remaining amortization period is less than
the carrying value. As of January 31, 2002, the carrying
value of the Companys intangible assets was
$24.6 million.

The Company is required to implement Statement of
Accounting Standards (SFAS) No. 142, Goodwill
and Other Intangible Assets on February 1, 2002. SFAS
No. 142 requires that goodwill and other intangible assets
with indefinite useful lives will no longer be amortized. This
statement also requires that intangible assets be tested for
impairment and that, if any impairment is indicated from the
testing, it should be measured and recorded. Because of the
extensive effort needed to comply with the application of SFAS
No. 142, the impairment loss, if any, related to the
Companys goodwill and intangible assets upon adoption of
this statement cannot be estimated at this time.

Store Closure and Fair Market Value Lease
Reserves.Upon consummation of the
Blockbuster Music acquisition in 1998, a plan was formulated to
close 70 stores which competed in the same trade areas as
other of the Companys stores. As a result, store closure
reserves, primarily estimated lease termination costs and fair
market value lease reserves, were established. The accrual for
lease liabilities could be materially affected by factors such
as the Companys ability to secure subleases, the
creditworthiness of sublessees and the

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Companys success in negotiating early
termination agreements with lessors. The factors are
significantly dependent on the general health of the economy and
resultant demand for commercial property.


Income taxes.The
Company had losses from operations in Fiscal 2001 and Fiscal
2002. Generally accepted accounting principles require that a
valuation allowance be recorded against deferred income tax
assets if it is more likely than not that the
Company will not be able to utilize such deferred income tax
assets to offset future income tax liabilities. Due to the
recent history of unprofitable operations and the uncertainty of
generating taxable income in the future, a valuation allowance
against all of the Companys deferred income tax assets was
recorded in Fiscal 2002.

It is possible, however, that the Company could
be profitable in the future at levels which cause management to
conclude that it is more likely than not that all or a portion
of the deferred income tax assets will be realized. Upon
reaching such a conclusion, the Company would immediately record
the estimated net realizable value of the deferred income tax
asset at that time and would then provide for income taxes at a
rate equal to the combined federal and state effective rates.

Litigation.The
Company is involved in litigation incidental to its business,
the disposition of which is expected to have no material effect
on the Companys financial position or results of
operations. It is possible, however, that future results of
operations for any particular quarterly or annual period could
be materially affected by changes in the Companys
assumptions related to these proceedings. The Company accrues
its best estimate of the probable cost for the resolution of
legal claims. Such estimates are developed in consultation with
outside counsel handling these matters and are based upon a
combination of litigation and settlement strategies. To the
extent additional information arises or the Companys
strategies change, it is possible that the Companys best
estimate of its probable liability in these matters may change.

Vendor Receivables.In the normal course of business, the Company provides
advertising and promotional services on behalf of its vendors.
Such vendors reimburse the Company for the costs incurred to
provide these services. The Company records receivables, as a
reduction of accounts payable, net of estimated uncollectible
reimbursement requests.

The above listing is not intended to be a
comprehensive list of all of the Companys accounting
policies. In many cases, the accounting treatment of a
particular transaction is specifically dictated by generally
accepted accounting principles, with no need for
managements judgment in their application. See the audited
consolidated financial statements and notes thereto beginning on
page F-1 of this Annual Report on Form 10-K, which
contain accounting policies and other disclosures required by
generally accepted accounting principles.

Recently Issued Financial Standards

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 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. SFAS No. 142 also requires
the Company to complete a transitional impairment test six
months from the date of adoption. The Company is required to
implement SFAS No. 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 and intangible assets are currently being
amortized at approximately $3.5 million annually. The
Company is currently evaluating the provisions of SFAS
No. 142 and has not yet determined any additional effects
that adoption of this standard will have on its financial
position or results of operations.

In August 2001, the FASB issued SFAS
No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, which addresses financial accounting
and reporting for the impairment or disposal of long-lived
assets and supersedes SFAS No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-

18



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Lived Assets to be Disposed Of, and the
accounting and reporting provisions of APB Opinion No. 30,
Reporting the Results of Operations for a disposal
of a segment of a business. SFAS 144 is effective for
fiscal years beginning after December 15, 2001. The Company
adopted SFAS 144 as of February 1, 2002 and such
adoption did not have a significant impact on the Companys
financial position and results of operations.





Item 7A.     Quantitative
and Qualitative Disclosures About Market Risk

The Company is subject to risks resulting from
interest rate fluctuations since interest on the Companys
borrowings under the Congress Facility are based on variable
rates. If the Eurodollar rate were to increase 1% in Fiscal 2003
as compared to the rate at January 31, 2002, the
Companys interest expense for Fiscal 2003 would increase
$0.1 million based on the outstanding balance of the
Congress Facility at January 31, 2002. The Company does not
hold any derivative instruments and does not engage in hedging
activities. Information about the fair value of financial
instruments is included in Note 3 of the Notes to
Consolidated Financial Statements.

The Company believes that, except for changes in
the minimum wage mandated by regulators, inflation has not had a
material effect on its operations and its internal and external
sources of liquidity and working capital.




Item 8.     Financial
Statements and Supplementary Data

See Index to Financial Statements appearing on
page F-1 of this report.






|        |                                                                                      
|------- | -------------------------------------------------------------------------------------
|Item 9. | Changes In and Disagreements with
	Accountants on Accounting and Financial Disclosure

Not applicable.

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##### Table of Contents






PART III






Item 10.     Directors
and Executive Officers of the Registrant


The following table sets forth certain
information concerning the persons who were directors and
executive officers of Wherehouse as of April 25, 2002:

|                       |  |                                                                                                          |  |           |    | 
|---------------------- |  | -------------------------------------------------------------------------------------------------------- |  | --------- | -- | 
|                       |  |                                                                                                          |  | Age at   
|                       |  |                                                                                                          |  | April 25,
|Name                   |  | Position                                                                                                 |  | 2001     
|                       |  |                                                                                                          |  |          
|Antonio C. Alvarez, II |  | Non-Executive Chairman of the Board and Director                                                         |  |           | 53 | 
|Larry C. Gaines        |  | President and Chief Operating Officer                                                                    |  |           | 54 | 
|Mark A. Velarde        |  | Executive Vice President, Chief Financial
	Officer, Chief Administrative Officer and Assistant Secretary |  |           | 45 | 
|Barbara C. Brown       |  | Senior Vice President, Store Operations                                                                  |  |           | 50 | 
|Mehdi Mahdavi          |  | Vice President and Controller                                                                            |  |           | 50 | 
|Robert C. Davenport    |  | Director                                                                                                 |  |           | 35 | 
|Jonathan Gallen        |  | Director                                                                                                 |  |           | 42 | 
|Joseph B. Smith        |  | Director                                                                                                 |  |           | 74 | 
|Joseph J. Radecki, Jr. |  | Director                                                                                                 |  |           | 44 | 

Antonio C. Alvarez,
II,Non-Executive Chairman of the
Board. Mr. Alvarez commenced serving as Chairman of the
Board and Chief Executive Officer of Wherehouse on
January 30, 1997. Effective October 15, 2001, pursuant
to an amendment to the Management Services Agreement, described
below, Mr. Alvarez is currently Non-Executive Chairman of
the Board of Wherehouse. Mr. Alvarez is a Founding Managing
Director of Alvarez & Marsal, Inc., a New York
based management consulting company (A&M).
Mr. Alvarez also serves as Chief Executive Officer of The
Warnaco Group, Inc., a manufacturer of apparel, fragrances and
accessories, headquartered in New York. Mr. Alvarezs
experience includes acting as adviser to the bank lenders to
Camelot Music, Inc., a mall-based music retailer with over 300
stores. Mr. Alvarez served as Phar-Mor, Inc.s
President and Chief Operating Officer from September 1992
through February 1993, as acting Chief Financial Officer from
August 1992 to December 1992, and as Chief Executive Officer
from February 1993 through Phar-Mors emergence from
Chapter 11 bankruptcy in October 1995. Mr. Alvarez
serves as the Non-Executive Chairman of the Board and Director
of Wherehouse pursuant to a Management Services Agreement, dated
as of January 31, 1997, as amended February 1, 1998,
April 30, 1998, May 13, 1999, April 13, 2000, and
April 25, 2002 (the Management Services
Agreement), among Wherehouse, A&M, Antonio C.
Alvarez, II, the Support Employees described therein,
A&M #3, and Cerberus Partners, L.P. See
Item 11  Executive
Compensation  Description of Employment Contracts,
Termination of Employment and Change in Control
Arrangements below.

Larry C. Gaines,President and Chief Operating Officer. Mr. Gaines commenced
serving as President and Chief Operating Officer in May 2001.
Mr. Gaines joined Wherehouse in October 1998 with the
Acquisition of Blockbuster Music. He was appointed Executive
Vice President and Chief Operating Officer of Wherehouse in
March 1999 and since January 2000 has served as Executive Vice
President, Advertising, Marketing and Merchandising. From
January 1998 through October 1998, Mr. Gaines served as
President of Blockbuster Music. From 1981 through 1997,
Mr. Gaines was with the Musicland Group, serving in several
senior management positions, most recently as President of Media
Play, a 90-store, big box, full media chain. Previously, he was
with Cole National Corporation. Mr. Gaines is a member of
the board of directors for the National Association of Recording
Merchants (NARM).

Mark A. Velarde,Executive Vice President, Chief Financial Officer, Chief
Administrative Officer and Assistant Secretary. Mr. Velarde
was a managing director of Alvarez & Marsal, Inc. which
he joined in 1992. On October 1, 1999, Mr. Velarde
became Chief Financial Officer and Assistant Secretary of
Wherehouse Entertainment, Inc. and, in May 2001, was also
appointed Chief Administrative Officer. Mr. Velarde served
as Chief Financial Officer and later Chief Operating Officer, of
Telegroup, Inc., a publicly traded telecommunications company
during its Chapter 11 reorganization from 1998 to 1999.
From 1994 to 1998, he served in the

20



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##### Table of Contents



capacities of Chief Financial Officer and Acting
Chief Operating Officer of Anthony Manufacturing Company, Inc.,
a privately held manufacturer of commercial refrigeration
components. During 1992 and 1993, Mr. Velarde was Acting
Chief Executive Officer of Affiliated Medical Enterprises, a
debtor-in-possession which owned and operated a chain of acute
care hospitals. From 1988 to 1992, he was cofounder and
Executive Vice President of HVK, Inc., a California-based
real estate consulting and investment advisory firm. Prior to
HVK, he was Senior Vice President  Acquisitions of
the pension fund advisory arm of First Interstate Bancorp, where
he worked in acquisitions for five years.


Barbara C. Brown,Senior Vice President, Store Operations. Ms. Brown joined
Old Wherehouse in 1973. She became Vice President, Sales and
Operations and in 1986, was promoted to Senior Vice President in
1991. Prior to 1986, Ms. Brown served in a variety of store
operations positions including Store Manager, District Manager,
Assistant Vice President, Store Operations, and Associate Vice
President, Store Operations.

Mehdi Mahdavi,Vice
President, Controller. Mr. Mahdavi joined Wherehouse in
June, 1997 after having served as a consultant to Wherehouse
from A&M. Prior to joining A&M, he worked more than
eight years with the Cherokee Group, a shoe and apparel
manufacturing and licensing company in a variety of management
roles including Assistant Controller, Controller and Senior Vice
President of Finance.

Robert C. Davenport,Director since November 15, 1996. Mr. Davenport is a
Managing Director of Cerberus Capital Management, L.P., a
New York based investment fund management firm, a position
he has held since February 1996. From March 1994 until February
1996, he was a private investor. From 1990 through 1994, he was
with Vestar Capital Partners, Inc. (Vestar), an
investment fund, where he served as a vice president. Prior to
joining Vestar in 1990, Mr. Davenport was an analyst in the
Mergers and Acquisitions Group at Drexel Burnham Lambert in
New York.

Jonathan Gallen,Director since January 30, 1997. Mr. Gallen is the
sole managing member of Pequod LLC, the general partner of
Pequod Investments, L.P. Pequod Investments, L.P. is a
distressed securities fund which invests in publicly traded
debt, private debt, trade claims, large and middle-market bank
loans, distressed real estate and public and private equity.
Mr. Gallen has served as a member of the Board of Directors
of Harvest Foods and Fruehauf Trailer Corporation.

Joseph B. Smith,Director since January 30, 1997. Mr. Smith is
currently the Chairman of Unison Productions, a consulting and
production company, a position he has held since April 1994.
Mr. Smith served as President and Chief Executive Officer
of Capitol Industries  EMI Music, Inc. from 1987
until 1993. Mr. Smith also serves as a director of
Westwood One, Inc.

Joseph J. Radecki
Jr.,Director since February 20,
1997. Mr. Radecki is a Managing Director of CIBC World
Markets Corp., an investment bank. From 1990 to 1998,
Mr. Radecki was an Executive Vice President and Director of
Financial Restructurings of Jefferies & Company, Inc.
From 1983 until 1990, Mr. Radecki was First Vice President
in the International Capital Markets Group at Drexel Burnham
Lambert, Inc., where he specialized in financial restructurings
and recapitalizations. Mr. Radecki has also served as a
member of the Board of Directors of Service America Corporation,
American Rice, Inc., Bucyrus International, Inc. and ECO-Net and
currently serves as a director of RBX Group Inc.

Section 16(a) Beneficial Ownership
Reporting Compliance

Under the securities laws of the United States,
the Companys directors, its executive officers, and
persons holding more than 10% of the Common Stock are required
to report their initial ownership of Common Stock and any
subsequent changes in that ownership to the Securities and
Exchange Commission (the Commission). Specific due
dates for these reports have been established and the Company is
required to disclose any failure to file by these dates. All of
these filing requirements were satisfied during Fiscal 2000.

21



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##### Table of Contents






Item 11.     Executive
Compensation

Summary of Cash and Certain Other
Compensation

The following table sets forth, for Fiscal 2002,
certain compensation paid by Wherehouse or accrued for such
fiscal year, to the Chief Executive Officer and the four next
most highly compensated executive officers of the Company (the
Named Executive Officers). All cash compensation
with respect to Antonio C. Alvarez, II was paid to
A&M, a consulting firm of which Antonio C.
Alvarez, II is a principal. All other compensation paid
with respect to Antonio C. Alvarez, II was paid to
A&M #3, an affiliate of A&M.




SUMMARY COMPENSATION TABLE

|                          |                                                       |             |      |                     |  |              |         |              |  |              |        |              |  |  |         |         |     |  |   |        |  |  |        |        |     
|------------------------- | ----------------------------------------------------- | ----------- | ---- | ------------------- |  | ------------ | ------- | ------------ |  | ------------ | ------ | ------------ |  |  | ------- | ------- | --- |  | - | ------ |  |  | ------ | ------ | ----
|                          |                                                       |             |      |                     |  |              |         |              |  | Long Term    |        |             
|                          |                                                       |             |      |                     |  |              |         |              |  | Compensation |        |             
|                          |                                                       |             |      |                     |  | Awards       |         |             
|                          |                                                       |             |      | Annual Compensation |  |              |         |             
|                          |                                                       |             |      |                     |  | Securities   |         |             
|                          |                                                       | Fiscal      |      |                     |  | Other Annual |         | Underlying   |  | All Other   
|                          |                                                       | Year Ended  |      | Salary              |  | Bonus        |         | Compensation |  | Options      |        | Compensation
|Name & Principal Position |                                                       | January 31, |      | ($)                 |  | ($)          |         | ($)(1)       |  | (#)          |        | ($)         
|                          |                                                       |             |      |                     |  |              |         |              |  |              |        |             
|Antonio C. Alvarez, II    |                                                       |             | 2002 |                     |  |              |        |              |  |              |       |              |  |  | 330,000 | (2)     |     |  |  |        |  |  | 36,356 | (3)   
|                          | Non-Executive Chairman                                |             |      | 2001                |  |              |         |             |  |              |        |             |  |  |         | 600,000 | (2) |  |   |       |  |  |        | 48,748 | (4) 
|                          | of the Board                                          |             |      | 2000                |  |              |         |             |  |              |        |             |  |  |         | 600,000 | (2) |  |   |       |  |  |        |       |     
|Larry C. Gaines           |                                                       |             | 2002 |                     |  |              | 315,146 |              |  |              |       |              |  |  |        |         |     |  |  |        |  |  | 16,319 | (5)   
|                          | President and Chief                                   |             |      | 2001                |  |              |         | 286,139      |  |              |        | 10,807       |  |  |         |        |     |  |   |       |  |  |        | 11,077 | (6) 
|                          | Operating Officer                                     |             |      | 2000                |  |              |         | 280,000      |  |              |        | 112,000      |  |  |         |        |     |  |   | 50,000 |  |  |        | 3,796  | (7) 
|Mark A. Velarde           |                                                       |             | 2002 |                     |  |              | 274,862 |              |  |              |       |              |  |  |        |         |     |  |  |        |  |  | 30,074 | (8)   
|                          | Executive Vice President,                             |             |      | 2001                |  |              |         | 227,219      |  |              |        | 3,722        |  |  |         |        |     |  |   | 50,000 |  |  |        | 22,674 | (9) 
|                          | Chief Financial Officer,                              |             |      | 2000                |  |              |         |             |  |              |        |             |  |  |         |        |     |  |   |       |  |  |        |       |     
|                          | Chief Administrative Officer
	and Assistant Secretary |             |      |                     |  |              |         |              |  |              |        |              |  |  |         |         |     |  |   |        |  |  |        |        |     
|Barbara C. Brown          |                                                       |             | 2002 |                     |  |              | 177,556 |              |  |              |       |              |  |  |        |         |     |  |  |        |  |  | 21,396 | (10)  
|                          | Senior Vice President,                                |             |      | 2001                |  |              |         | 183,946      |  |              |        | 8,090        |  |  |         |        |     |  |   |       |  |  |        | 21,968 | (11)
|                          | Store Operations                                      |             |      | 2000                |  |              |         | 178,654      |  |              |        | 54,000       |  |  |         |        |     |  |   |       |  |  |        | 22,575 | (12)
|Mehdi Mahdavi             |                                                       |             | 2002 |                     |  |              | 141,616 |              |  |              | 25,000 |              |  |  |        |         |     |  |  |        |  |  | 16,557 | (13)  
|                          | Vice President and                                    |             |      | 2001                |  |              |         | 136,961      |  |              |        | 28,500       |  |  |         |        |     |  |   |       |  |  |        | 16,273 | (14)
|                          | Controller                                            |             |      | 2000                |  |              |         | 125,224      |  |              |        | 25,500       |  |  |         |        |     |  |   |       |  |  |        | 12,213 | (15)



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | In accordance with Commission rules, the
	compensation described in this table does not include medical,
	group life insurance or other benefits received by the Named
	Executive Officers which are available generally to all salaried
	employees of the Company, and certain perquisites and other
	personal benefits received by the Named Executive Officers that
	do not in the aggregate exceed the lesser of $50,000 or 10% of
	any such officers salary and bonus disclosed in this table.
|   
|(2) | Mr. Alvarez commenced serving as Chairman of
	the Board and Chief Executive Officer of Wherehouse in January,
	1997 pursuant to the Management Services Agreement dated as of
	January 31, 1997. He currently serves as Non-Executive
	Chairman of the Board. The present term of the Management
	Services Agreement will expire on October 14, 2002 pursuant
	to an extension and amendment thereof dated as of April 25,
	2002.                                                                   
|   
|(3) | Includes $1,256 paid on behalf of
	Mr. Alvarez and his family for medical expenses not covered
	by the Companys group medical insurance plan. Also
	included are a $5,400 automobile allowance and $29,700 for
	reimbursement of certain expenses as provided for under the
	terms of the Management Services Agreement.                                                                                                                                                                           
|   
|(4) | Includes $1,948 paid on behalf of
	Mr. Alvarez and his family for medical expenses not covered
	by the Companys group medical insurance plan. Also
	included are a $7,200 automobile allowance and $39,600 for
	reimbursement of certain expenses as provided for under the
	terms of the Management Services Agreement.                                                                                                                                                                           

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##### Table of Contents





|    |                                                                                                                                                                                                                                                                                                                       
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(5) | Includes $4,453 paid on behalf of Mr. Gaines
	and his family for medical expenses not covered by the
	Companys group medical insurance plan. Also included are a
	$7,200 automobile allowance, $468 of premiums paid for term life
	insurance and $4,198 for matching contributions to the
	Companys 401(k) plan.   
|   
|(6) | Includes $1,895 paid on behalf of Mr. Gaines
	and his family for medical expenses not covered by the
	Companys group medical insurance plan. Also included are a
	$7,200 automobile allowance, $651 of premiums paid for term life
	insurance and $1,331 for matching contributions to the
	Companys 401(k) plan.   
|   
|(7) | Includes $673 paid on behalf of Mr. Gaines
	and his family for medical expenses not covered by the
	Companys group medical insurance plan. Also included are a
	$2,492 automobile allowance and $631 of premiums paid for term
	life insurance.                                                                      
|   
|(8) | Includes $18,153 paid on behalf of
	Mr. Velarde and his family for medical expenses not covered
	by the Companys group medical insurance plan. Also
	included are a $7,250 automobile allowance, $432 of premiums
	paid for term life insurance, and $4,239 for matching
	contributions to the Companys 401(k) plan.
|   
|(9) | Includes $13,782 paid on behalf of
	Mr. Velarde and his family for medical expenses not covered
	by the Companys group medical insurance plan. Also
	included are a $7,200 automobile allowance, $222 of premiums
	paid for term life insurance, and $1,470 for matching
	contributions to the Companys 401(k) plan.



|     |                                                                                                                                                                                                                                                                                                                     
|---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(10) | Includes $3,013 paid on behalf of Ms. Brown
	and her family for medical expenses not covered by the
	Companys group medical insurance plan. Also included are a
	$7,200 automobile allowance, $7,428 of premiums paid for term
	life insurance and $3,755 for matching contributions to the
	Companys 401(k) plan.
|    
|(11) | Includes $3,467 paid on behalf of Ms. Brown
	and her family for medical expenses not covered by the
	Companys group medical insurance plan. Also included are a
	$7,200 automobile allowance, $7,353 of premiums paid for term
	life insurance and $3,948 for matching contributions to the
	Companys 401(k) plan.
|    
|(12) | Includes $4,415 paid on behalf of Ms. Brown
	and her family for medical expenses not covered by the
	Companys group medical insurance plan. Also included are a
	$7,200 automobile allowance, $7,387 of premiums paid for term
	life insurance and $3,573 for matching contributions to the
	Companys 401(k) plan.
|    
|(13) | Includes $6,315 paid on behalf of
	Mr. Mahdavi and his family for medical expenses not covered
	by the Companys group medical insurance plan. Also
	included are a $7,200 automobile allowance, $207 of premiums
	paid for term life insurance and $2,835 for matching
	contributions to the Companys 401(k) plan.
|    
|(14) | Includes $6,134 paid on behalf of
	Mr. Mahdavi and his family for medical expenses not covered
	by the Companys group medical insurance plan. Also
	included are a $7,200 automobile allowance, $191 of premiums
	paid for term life insurance and $2,748 for matching
	contributions to the Companys 401(k) plan.
|    
|(15) | Includes $2,271 paid on behalf of
	Mr. Mahdavi and his family for medical expenses not covered
	by the Companys group medical insurance plan. Also
	included are a $7,200 automobile allowance, $185 of premiums
	paid for term life insurance and $2,557 for matching
	contributions to the Companys 401(k) plan.

23



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##### Table of Contents



Stock Options

In connection with the Management Services
Agreement and consummation of the Reorganization Plan,
Wherehouse entered into the Option Agreement (amended on
April 30, 1998 to conform the agreement to the intention of
the parties, and on June 27, 2000 and April 25, 2002
to extend the expiration date) with A&M #3, an
affiliate of A&M, of which Antonio C. Alvarez, II
is a principal. The Option Agreement provides for the grant to
A&M #3 of options (the A&M #3
Options) representing in the aggregate the right to
purchase 10% of (i) the shares of Common Stock issued under
the Reorganization Plan, (ii) certain shares purchased by
A&M #3, and (iii) the shares underlying these
options. The A&M #3 Options vested monthly in equal
installments through October 31, 1998, and all unexercised
A&M #3 Options expire on January 31, 2005, subject
to prior termination as set forth in the Management Services
Agreement. The exact number of shares underlying these options
and the exercise prices will depend on the final resolution of
claims under the Reorganization Plan. The Option Agreement
provides that such adjustments will be made periodically as
deemed practicable. An interim adjustment was made on
December 10, 1998 to reflect the resolution of claims as of
September 30, 1998. After such adjustment, the
A&M #3 Options consisted of (i) options to acquire
399,717 shares at an exercise price of $8.80, (ii) options
to acquire 399,717 shares at an exercise price of $10.66, and
(iii) options to acquire 399,717 shares at an exercise
price of $12.97. The Company presently estimates that after all
adjustments, the A&M #3 Options will consist of
(i) options to acquire 407,667 shares at an exercise price
of $8.63 per share, (ii) options to acquire 407,667
shares at an exercise price of $10.45 per share, and
(iii) options to acquire 407,667 shares at an exercise
price of $12.72 per share.

On April 7, 1998 and on September 18
and 22, 1998, the Companys Compensation Committee granted,
and the entire Board of Directors approved grants of
Nonqualified Stock Options under the Wherehouse 1998 Stock
Incentive Plan for a total of 339,500 shares of Common Stock.
Additional grants of Non-Qualified Stock Options totaling
197,000 and 254,500 were made during Fiscal 2001 and Fiscal
2000, respectively. On April 13, 2000, the Board of
Directors authorized the granting of an additional 264,500
options. No grants of Non-Qualified Stock Options were made in
Fiscal 2002. As of April 24, 2002, net of forfeitures,
there were 413,000 options outstanding under the Wherehouse 1998
Stock Incentive Plan.

On August 7, 2001 the Board approved the
2001 Stock Incentive Plan (as amended, the 2001 Stock
Incentive Plan). Similar to the 1998 Stock Incentive Plan,
the 2001 Stock Incentive Plan authorizes the grant of incentive
and non-qualified stock options and SARs to employees, officers
and directors at the discretion of the Board of Directors.
Generally speaking, an option or SAR granted under the 2001
Stock Incentive Plan will expire not more than ten years
after the date of grant. Under the provisions of the 2001 Stock
Incentive Plan, the Compensation Committee of the Board of
Directors determines the applicable vesting schedule for each
Award, subject to any minimum vesting requirements. The maximum
number shares of Common Stock that may be issued under the 2001
Stock Incentive Plan and the Companys 1998 Stock Incentive
Plan may not exceed, in the aggregate, 800,000 shares. No
options have been granted under the 2001 Stock Incentive Plan.

24



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##### Table of Contents



Fiscal Year-End Option Values

No options were exercised by any of the Named
Executive Officers during Fiscal 2002. The following table sets
forth certain information with respect to the Named Executive
Officers of the Company concerning the number of shares covered
by both exercisable and unexercisable stock options held as of
January 31, 2002. None of the Named Executive Officers held
any stock appreciation rights at such time. No established
trading market exists for the Common Stock. As of
January 31, 2002, the Company calculated the book value of
each share of Common Stock to be $2.28. This book value of $2.28
per share is utilized to calculate the value of unexercised
in-the-money options in the table below. The value used is not
intended to represent the price at which shares of the Common
Stock trade. Using a book value of $2.28 per share, there were
no in-the-money options as of January 31, 2002.

Fiscal Year-End Option Values

|                    |  |                           |               |                           |  |   |     |    
|------------------- |  | ------------------------- | ------------- | ------------------------- |  | - | --- | ---
|                    |  | Number of Securities      |               | Value of Unexercised     
|                    |  | Underlying Unexercised    |               | In-the-Money Options     
|                    |  | Options at FY-End(#)      |               | at FY-End($)(1)          
|Name                |  | Exercisable/Unexercisable |               | Exercisable/Unexercisable
|                    |  |                           |               |                          
|Antonio Alvarez, II |  |                           | 1,199,151/0   | (2)                       |  | $ | 0/0 | (2)
|Larry C. Gaines     |  |                           | 20,000/30,000 | (3)                       |  |   | 0/0 |    
|Mark A. Velarde     |  |                           | 10,000/50,000 | (4)/(5)                   |  |   | 0/0 |    
|Barbara C. Brown    |  |                           | 16,800/11,200 | (6)                       |  |   | 0/0 |    
|Mehdi Mahdavi       |  |                           | 6,000/4,000   | (6)                       |  |   | 0/0 |    



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | As noted above, book value was used to calculate
	the value of unexercised in-the-money options. If a higher stock
	value were used to calculate the value of unexercised options at
	fiscal year-end, the value of unexercised options would be
	higher, as (i) more options would be
	in-the-money, and (ii) each in-the-money option
	would have a higher value.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   
|(2) | Wherehouse entered into the Option Agreement with
	A&M #3, an affiliate of A&M, of which
	Antonio C. Alvarez, II is a principal. Pursuant to the
	terms of the Option Agreement, on January 31, 1997,
	Wherehouse granted to A&M #3 three tranches of options
	to acquire, in the aggregate, 993,380 shares of Common
	Stock, subject to adjustment upon certain events. On
	April 30, 1998, the Option Agreement was amended to conform
	the agreement to the intent of the parties. Pursuant to the
	Option Agreement, as amended, and based upon distributions and
	cash settlements pursuant to the Reorganization Plan, on
	December 10, 1998, the number of options granted to
	A&M #3 was adjusted such that the total shares subject
	to such options was 1,199,151, comprised of: (i) options to
	acquire 399,717 shares at an exercise price of $8.80,
	(ii) options to acquire 399,717 shares at an exercise
	price of $10.66, and (iii) options to acquire
	399,717 shares at an exercise price of $12.97. See
	Certain Relationships and Related Transactions under
	Item 13 below.
|   
|(3) | These ten year options vest, subject to
	acceleration in certain circumstances, in five equal annual
	installments beginning on March 9, 2000 and have an
	exercise price of $18.00 per share.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   
|(4) | In connection with the Management Services
	Agreement, as amended, Wherehouse issued options to purchase
	993,380 shares, subject to adjustment and subsequently increased
	to 1,199,151 shares as described in Note 2 above, of Common
	Stock to A&M #3 pursuant to the Option Agreement.
	Mr. Velarde possesses a pecuniary interest in
	A&M #3. See Item 13  Certain
	Relationships and Related Transactions.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   
|(5) | These ten year options vest, subject to
	acceleration in certain circumstances, in five equal annual
	installments beginning on April 13, 2001 and have an
	exercise price of $18.00 per share.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   
|(6) | These ten year options vest, subject to
	acceleration in certain circumstances, in five equal annual
	installments beginning on April 7, 1999 and have an
	exercise price of $12.00 per share.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

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##### Table of Contents



Compensation of Directors

Two non-employee members of the Board of
Directors, Messrs. Radecki and Smith, each received a fee
of $5,000 per attended meeting for his services and were
reimbursed for reasonable expenses incurred in connection with
their attendance at Board meetings. Messrs. Alvarez, Gallen
and Davenport were not paid any additional compensation for
their services as directors.

Description of Employment Contracts,
Termination of Employment and Change in Control
Arrangements

As of April 19, 2002, Antonio C.
Alvarez, II serves as Chairman of the Board pursuant to the
Management Services Agreement, as amended. Under the Management
Services Agreement, A&M currently does not receive
compensation for the services of Antonio C.
Alvarez, II. The Management Services Agreement, as amended,
now provides that it will expire on October 14, 2002,
subject to further extension or earlier termination under
certain conditions.

Compensation Committee Interlocks and Insider
Participation

The Companys Compensation Committee
consists of Messrs. Davenport, Radecki, and Smith. None of
the members of the Compensation Committee is or has been an
officer or employee of the Company. Mr. Radecki is
currently Managing Director of CIBC World Markets Corp., an
investment bank. CIBC Oppenheimer Corp., a predecessor company
of CIBC World Markets Corp., acted as a financial advisor
to the Company during 1998 with respect to the Acquisition of
Blockbuster Music, and, pursuant to an engagement letter dated
September 22, 1998, received a fee of $600,000, plus
expenses, upon completion of the Acquisition.

Mr. Davenport is a Managing Director of
Cerberus Capital Management, L.P. In 1998, the Company paid a
one-time fee of $0.9 million to Cerberus Capital
Management, L.P., an affiliate of Cerberus Partners, L.P., for a
commitment to provide a bridge loan to finance the acquisition
of Blockbuster Music in the event that permanent financing was
not in place at the time of the Acquisition.




Item 12.Security
Ownership of 5% Holders, Directors and Executive
Officers

The Common Stock is the only outstanding class of
voting securities of the Company. The following table sets
forth, as of April 19, 2002, the number and percentage of
shares of Common Stock beneficially owned by (i) each
person known to Wherehouse to be the beneficial owner of more
than 5% of the outstanding shares of Common Stock,
(ii) each director of Wherehouse, (iii) each Named
Executive Officer, and (iv) all directors and executive
officers of Wherehouse as a group. Unless otherwise indicated in
a footnote, each person listed below possesses sole voting and
investment power with respect to the shares indicated as
beneficially owned by him or her, subject to community property
laws where applicable. The percentage of ownership in the

26



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##### Table of Contents



following table does not include the additional
estimated 23,850 shares that may be issued to A&M #3
pursuant to the Stock Subscription Agreement.


|                                                                                             |                                                   |                    |           |                   |        |  |      |      |  
|-------------------------------------------------------------------------------------------- | ------------------------------------------------- | ------------------ | --------- | ----------------- | ------ |  | ---- | ---- | -
|                                                                                             |                                                   | Number of Shares   |           | Percentage of all
|                                                                                             |                                                   | Beneficially Owned |           | Common Stock     
|Name                                                                                         |                                                   | (1)(2)             |           | Outstanding(3)   
|                                                                                             |                                                   |                    |           |                  
|Stephen Feinberg                                                                             |                                                   |                    | 7,207,695 | (4)               |        |  | 55.3 | %   
|450 Park Avenue, 28th Floor
	New York, New York 10022                                        |                                                   |                    |           |                   |        |  |      |     
|Antonio C. Alvarez, II                                                                       |                                                   |                    |           | (5)               |        |  |      |     
|c/o Wherehouse Entertainment, Inc.
	19701 Hamilton Avenue
	Torrance, California 90502-1334   |                                                   |                    |           |                   |        |  |      |     
|AND                                                                                          |                                                   |                    |           |                   |        |  |      |     
|Bryan Marsal                                                                                 |                                                   |                    |           | (6)               |        |  |      |     
|c/o Alvarez & Marsal, Inc.
	599 Lexington Avenue, Suite #2700
	New York, New York 10022-4802 |                                                   |                    |           |                   |        |  |      |     
|A&M Investment Associates #3, LLC                                                            |                                                   |                    | 2,278,387 | (7)               |        |  | 17.5 | %   
|c/o Alvarez & Marsal, Inc.
	599 Lexington Avenue, Suite #2700
	New York, New York 10022-4802 |                                                   |                    |           |                   |        |  |      |     
|A&M Investment Associates #4, LLC                                                            |                                                   |                    | 385,542   | (8)               |        |  | 3.0  | %   
|A&M Investment Associates #8, LLC                                                            |                                                   |                    | 16,000    | (9)               |        |  | *    |     
|                                                                                             |                                                   |                    |           |                   |        |  |      |     
|                                                                                             | Total for Antonio C. Alvarez, II and Bryan Marsal |                    |           | 2,679,929         | (5)(6) |  |      | 20.6 | %
|Robert C. Davenport                                                                          |                                                   |                    | 0         | (10)              |        |  | 0    |     
|Jonathan Gallen                                                                              |                                                   |                    | 520,395   | (11)              |        |  | 4.0  | %   
|Joseph B. Smith                                                                              |                                                   |                    | 0         |                   |        |  | 0    |     
|Joseph J. Radecki, Jr.                                                                       |                                                   |                    | 0         |                   |        |  | 0    |     
|Larry Gaines                                                                                 |                                                   |                    | 30,000    | (12)              |        |  | *    |     
|Mark A. Velarde                                                                              |                                                   |                    | 20,000    | (13)(7)           |        |  |      |     
|Barbara C. Brown                                                                             |                                                   |                    | 22,400    | (14)              |        |  | *    |     
|Mehdi Mahdavi                                                                                |                                                   |                    | 8,000     | (14)              |        |  | *    |     
|All Directors and Executive Officers, as a group
	(9 persons)                                |                                                   |                    | 3,280,724 |                   |        |  | 25.2 | %   



---



|  |              
|- | -------------
|* | Less than 1%.



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Beneficial ownership is determined in accordance
	with the rules of the Commission and generally includes sole or
	shared voting or investment power with respect to securities.
	Except as otherwise noted below and subject to community
	property laws where applicable, each person named reportedly has
	sole voting and dispositive power with respect to all shares of
	Common Stock shown as beneficially owned by such person. On
	April 19, 2002, there were 11,413,324 shares of Common
	Stock issued and 11,388,324 outstanding.

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|    |                                                                                                                                                                                                                                                                                                             
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | The number of shares listed as beneficially owned
	by each named person (and the directors and executive officers
	as a group) includes shares of Common Stock underlying options,
	warrants and rights (including conversion rights) exercisable as
	of or within 60 days after April 19, 2002, as follows:

|                                                             |                                      |  |           |  | 
|------------------------------------------------------------ | ------------------------------------ |  | --------- |  | 
|A&M Investment Associates #3, LLC                            |                                      |  | 1,199,151 | 
|                                                             | Antonio C. Alvarez, II, Bryan Marsal |  |           |  | 
|Jonathan Gallen                                              |                                      |  | 22,461    | 
|Stephen Feinberg                                             |                                      |  | 72,687    | 
|Larry C. Gaines                                              |                                      |  | 30,000    | 
|Mark A. Velarde                                              |                                      |  | 20,000    | 
|Barbara C. Brown                                             |                                      |  | 22,400    | 
|Mehdi Mahdavi                                                |                                      |  | 8,000     | 
|                                                             |                                      |  |           | 
|All Directors and Executive Officers as a Group
	(9 persons) |                                      |  | 1,374,699 | 



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(3) | The percent of Common Stock outstanding is based
	upon (i) the 11,388,324 shares of Common Stock
	outstanding at April 19, 2002, plus (ii) the 200,000
	Tranche B and Tranche C warrants issued under the
	Reorganization Plan, plus (iii) the 1,199,151 shares
	underlying the A&M Options, plus (iv) all employee
	stock options that are exercisable within 60 days of
	April 19, 2002. In connection with the Reorganization Plan,
	holders of Old Wherehouses Senior Subordinated Notes
	received three tranches of warrants to purchase shares of Common
	Stock (the Warrants). The Tranche A Warrants
	represent the right to purchase 576,000 shares of Common
	Stock at an exercise price of $2.38 per share and have a five
	year maturity. The Tranche A warrants matured on
	January 31, 2002 with 386,903 warrants being exercised
	resulting in 145,448 shares of common stock being issued on
	January 17, 2002 and 241,455 shares of common stock
	being issued on February 15, 2002. The Tranche B
	Warrants represent the right to purchase 100,000 shares of
	Common Stock at an exercise price of $9.00 per share and have a
	seven year maturity. The Tranche C Warrants represent the
	right to purchase 100,000 shares of Common Stock at an
	exercise price of $11.00 per share and have a seven year
	maturity. Each Warrant is exercisable for one share of the
	Common Stock.
|   
|(4) | This information was obtained from a Form 4
	filed with the Commission regarding Mr. Feinbergs
	beneficial ownership as of February 11, 2002. Ownership is
	described as follows: Cerberus Partners, L.P., a Delaware
	limited partnership, owns 1,689,741 shares of Common Stock
	and 11,161 Warrants and Cerberus International, Ltd., a
	corporation organized under the laws of the Bahamas, owns
	2,161,428 shares of Common Stock and 29,606 Warrants,
	all over which Mr. Feinberg possesses sole voting and
	dispositive power. Various other private investment funds for
	which Mr. Feinberg possesses dispositive authority over the
	securities of the Company own in the aggregate 3,286,215 shares
	of the Common Stock and 29,544 Warrants.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   
|(5) | As disclosed on a Schedule 13D 
	Amendment No. 2 filed with the Commission on April 13,
	1999, and on a Form 5 filed with the Commission on
	March 17, 1999, Antonio C. Alvarez, II is a
	managing member of A&M #3, A&M #4 (as defined
	below), and A&M #8 (as defined below), and therefore
	may be deemed to be the beneficial owner of Common Stock held by
	any one or more of these entities. Mr. Alvarez disclaims
	beneficial ownership of the shares held by A&M #3,
	A&M #4, and A&M #8, except to the extent of
	his pecuniary interest therein.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   
|(6) | As disclosed on a Schedule 13D 
	Amendment No. 2 filed with the Commission on April 13,
	1999, and on a Form 5 filed with the Commission on
	March 17, 1999, Bryan Marsal is a managing member of
	A&M #3, A&M #4 (as defined below), and
	A&M #8 (as defined below), and therefore may be deemed
	to be the beneficial owner of Common Stock held by any one or
	more of these entities. Mr. Marsal disclaims beneficial
	ownership of the shares held by A&M #3,
	A&M #4, and A&M #8, except to the extent of
	his pecuniary interest therein.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   
|(7) | A&M #3 is a Delaware limited liability
	company. The share total includes A&M #3 Options to
	purchase 1,199,151 shares of Common Stock, exercisable
	within 60 days of April 19, 2002. The A&M #3
	Options are subject to adjustment. Pursuant to the adjustment
	provisions of the Option                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

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|    |                                                                                                                                                                                                                                                                                                                                                              
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    | Agreement, on December 10, 1998, an interim
	adjustment was made as is described in Item 13 
	Certain Relationships and Related Transactions
	below. Mr. Velarde possesses a pecuniary interest in
	A&M #3. Mr. Velarde disclaims beneficial ownership
	of shares of Common Stock held by A&M #3, except to the
	extent of his pecuniary interest therein.
|   
|(8) | A&M Investment Associates #4, LLC is a
	Delaware limited liability Company (A&M #4).                                                                                                                                                                                                                                                                       
|   
|(9) | A&M Investment Associates #8, LLC is a
	Delaware limited liability Company (A&M #8).                                                                                                                                                                                                                                                                       



|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(10) | Mr. Davenport is a managing director of
	Cerberus Capital Management, L.P., an affiliate of Cerberus
	Partners, L.P., and may be deemed to be the beneficial owner of
	all of the shares of Common Stock held by Cerberus Partners,
	L.P. Mr. Davenport disclaims any beneficial ownership in
	the shares of Common Stock held by Cerberus Partners, L.P.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    
|(11) | Mr. Gallen is the managing member of Pequod
	LLC, the general partner of Pequod Investments, L.P. and the
	President of Ahab Capital Management, Inc., which is an
	investment advisor to Pequod International, Ltd. Pequod
	Investments, L.P. and Pequod International, Ltd. beneficially
	own, in the aggregate, 497,934 shares of Common Stock,
	including 22,461 Warrants. As such, Mr. Gallen may be
	deemed to be the beneficial owner of the shares of Common Stock
	and Warrants held by Pequod Investments, L.P. and Pequod
	International, Ltd. Mr. Gallen has sole voting and
	investment power over Common Stock owned by Pequod Investments,
	L.P. and Pequod International, Ltd. Mr. Gallen disclaims
	beneficial ownership in the shares of Common Stock held by
	Pequod Investments, L.P. and Pequod International, Ltd., except
	to the extent of his pecuniary interest therein.
|    
|(12) | Mr. Gaines has a right to acquire 30,000
	shares of Common Stock pursuant to stock options exercisable as
	of or within 60 days after April 19, 2002 that were
	issued pursuant to the Wherehouse Entertainment, Inc.
	1998 Stock Incentive Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    
|(13) | Mr. Velarde has a right to acquire 20,000
	shares of Common Stock pursuant to stock options exercisable as
	of or within 60 days after April 19, 2002 that were
	issued pursuant to the Wherehouse Entertainment, Inc.
	1998 Stock Incentive plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    
|(14) | Ms. Brown has a right to acquire 22,400
	shares of Common Stock pursuant to stock options exercisable as
	of or within 60 days after April 19, 2002 that were
	issued pursuant to the Wherehouse Entertainment, Inc.
	1998 Stock Incentive Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  




Item 13.     Certain
Relationships and Related Transactions

Antonio C. Alvarez, II serves as
Non-Executive Chairman of the Board pursuant to the Management
Services Agreement, as amended. On April 25, 2002, the
Management Services Agreement was amended to (i) provide
that Antonio C. Alvarez, II serve as Non-Executive
Chairman of the Board of Wherehouse, effective October 15,
2001; (ii) eliminate the compensation A&M previously
received for Mr. Alvarezs services as Chairman of the
Board and Chief Executive Officer, effective November 1,
2001; and (iii) extend the term of the Management Services
Agreement to October 14, 2002, subject to further extension
or earlier termination under certain conditions.

Pursuant to the Management Services Agreement and
a Stock Subscription Agreement dated as of January 31, 1997
(the Stock Subscription Agreement), Wherehouse
agreed to sell, and A&M #3 agreed to buy at a purchase price
of $6,340,000 ($1,000,000 in cash from A&M #3s funds,
plus a secured recourse promissory note in the principal amount
of $335,000 and a secured non-recourse promissory note in the
amount of $5,005,000 (collectively, as amended, the
Promissory Notes)) 1,100,000 shares of the Common
Stock (the A&M Shares) (subject to
adjustment upward or downward to represent 10% of the sum of
(i) the shares of Common Stock ultimately issued under the
Reorganization Plan plus (ii) the number of shares of
Common Stock issued to A&M #3). The Management Services
Agreement provides that the number of A&M Shares are to be
adjusted periodically, as practicable, based on the shares
issued under the Reorganization Plan. An interim adjustment was
made on December 10, 1998 to reflect the issuance of shares
under the Reorganization Plan based on the resolution of claims
as of September 30, 1998. Based on this interim adjustment,
the number of A&M Shares was reduced to 1,079,236. The
Company estimates that approximately 23,850 additional A&M
Shares will be issued in the future based on the adjustment
formula.

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The Promissory Notes bear interest at 7% per
annum during the first six years and 11% per annum during the
seventh through ninth years, mature on January 31, 2006 and
have no scheduled interest or principal amortization until their
maturity date. The Promissory Notes are secured by a
first-priority pledge of the A&M Shares pursuant to a Stock
Pledge Agreement dated as of January 31, 1997.


In addition, in connection with the Management
Services Agreement and consummation of the Reorganization Plan,
Wherehouse and A&M #3 entered into a Non-Transferable Stock
Option Agreement dated as of January 31, 1997, (as amended,
the Stock Option Agreement), pursuant to which the Company
issued to A&M #3 three tranches of options to purchase
shares of common stock (the A&M Options; and, together with
the A&M Shares, the A&M Securities) representing in the
aggregate the right to purchase an additional 10% of the shares
of common stock issued under the Reorganization Plan. The first
tranche of options represents the right to purchase 399,717
shares of common stock at an exercise price of $8.80. The second
tranche of options represents the right to purchase 399,717
shares of common stock at an exercise price of $10.66. The third
tranche of options represents the right to purchase 399,717
shares of common stock at an exercise price of $12.97. The
A&M Options are fully vested and all unexercised
A&M Options expire on January 31, 2005, subject to
prior vesting or termination as set forth in the Management
Services Agreement. The A&M Options are subject to
upward adjustment on a quarterly basis as additional shares of
common stock related to the Reorganization are issued and are
entitled to certain other anti-dilution provisions as set forth
in the Stock Option Agreement. The above option amounts and
exercise prices have been adjusted for anti-dilution effects
through January 31, 2002. The Company presently estimates
that after all adjustments, the A&M #3 Options will
consist of (i) options to acquire 407,667 shares at an
exercise price of $8.63 per share, (ii) options to acquire
407,667 shares at an exercise price of $10.45 per share, and
(iii) options to acquire 407,667 shares at an exercise
price of $12.72 per share.

Wherehouse also granted certain registration
rights to A&M #3 with respect to the A&M Shares
pursuant to a Registration Rights Agreement dated as of
January 31, 1997 (the A&M Registration
Rights Agreement). Under the A&M Registration
Rights Agreement, A&M #3 has the right to make one
demand registration and two piggyback registrations in respect
of the A&M Shares and shares subject to the
A&M #3 Options.

Jefferies & Company, Inc., of which
Mr. Radecki was an Executive Vice President and Director of
Financial Restructurings, served as the financial consultant to
Old Wherehouse in the Bankruptcy Case, and, prior to
Mr. Radecki leaving Jefferies & Company, Inc., it
also served as financial advisor to New Wherehouse.
Mr. Radecki is currently Managing Director of
CIBC World Markets Corp., an investment bank.
CIBC Oppenheimer Corp., a predecessor company of CIBC World
Markets Corp., acted as a financial advisor to the Company
during 1998 with respect to the Acquisition of Blockbuster
Music, and, pursuant to an engagement letter dated
September 22, 1998, received a fee of $600,000, plus
expenses, upon completion of the Acquisition.

In 1998, the Company paid a one-time fee of
$0.9 million to Cerberus Capital Management, L.P. for
a commitment to provide a bridge loan to finance the acquisition
of Blockbuster Music in the event that permanent financing was
not in place at the time of the Acquisition. Cerberus Capital
Management, L.P. is a limited partnership controlled by
Mr. Feinberg, who is a beneficial owner of greater than 5%
of the Common Stock of Wherehouse. Mr. Davenport, a
Managing Director of Cerberus Capital Management, L.P., is
a director of Wherehouse.

Madeleine LLC, a Delaware limited liability
company (Madeleine), entered into a participation
agreement with Congress Financial Corporation (Western),
pursuant to which Madeleine agreed to purchase a 100% undivided
interest in all of Congress Financial Corporation
(Western)s right, title and interest in and to any
Tranche B loans under the Congress Facility. On
October 26, 1998, Madeleine received $100,000 of the
closing fee for the Congress Facility. Madeleine received
$100,000 annually from Congress Financial Corporation (Western)
as its portion of the annual commitment fee and unused line fee
for Tranche B. On December 6, 2000, the Congress
Facility was amended to, among other things, eliminate the
Tranche B line effective October 26, 2001. Stephen
Feinberg is the managing member of Madeleine and the general
partner of Cerberus Partners, L.P.

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##### Table of Contents






PART IV




Item 14.     Exhibits,
Financial Statement Schedules, and Reports on
Form 8-K

(a) Financial statements and financial
statement schedule

Financial statements are submitted as a separate
section of this Annual Report on Form 10-K beginning on
page F-1.

All other schedules are omitted as the required
information is inapplicable or the information is presented in
the consolidated financial statements or related notes.

(b) Current Reports on Form 8-K.

None

(c) Exhibits

The following exhibits are filed as part of, or
are incorporated by reference into, this Annual Report on
Form 10-K:

| |     |  |  |                                                                                                                                                                                                                                                                                                                         
| | --- |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 2.1 |  |  | Debtors First Amended Chapter 11 Plan,
	as Revised for Technical Corrections dated October 4, 1996
	and Supplemental Amendments on December 2, 1996 and
	December 13, 1996. (Incorporated by reference to
	Exhibits A, B and C of Exhibit 3.1 of Old
	Wherehouses Current Report on Form 8-K dated
	January 22, 1997.)
| | 2.2 |  |  | Asset Purchase Agreement dated as of
	January 31, 1997 among Old Wherehouse, WEI and New
	Wherehouse. (Incorporated by reference to Exhibit 1.4 of
	Old Wherehouses Current Report on Form 8-K dated
	February 12, 1997.)                                                                                              
| | 2.3 |  |  | Stock Purchase Agreement dated as of
	August 10, 1998 by and among New Wherehouse and Viacom
	International Inc. (Incorporated herein by reference to
	Exhibit 2 of New Wherehouses Quarterly Report on
	Form 10-Q dated September 14, 1998).                                                                          
| | 3.1 |  |  | Certificate of Incorporation of New Wherehouse
	filed with the Delaware Secretary of State on November 15, 1997.
	(Incorporated by reference to Exhibit C of Exhibit A
	of Exhibit 3.1 of Old Wherehouses Current Report on
	Form 8-K dated January 22, 1997.)                                                         
| | 3.2 |  |  | Certificate of Amendment of Certificate of
	Incorporation of New Wherehouse filed with the Delaware
	Secretary of State on January 31, 1997. (Incorporated by
	reference to Exhibit 1.3 of Old Wherehouses Current
	Report on Form 8-K dated February 12, 1997.)                                                       
| | 3.3 |  |  | Certificate of Amendment of Certificate of
	Incorporation of Old Wherehouse filed with the Delaware
	Secretary of State on January 31, 1997. (Incorporated by
	reference to Exhibit 1.2 of Old Wherehouses Current
	Report on Form 8-K dated February 12, 1997.)                                                       
| | 3.4 |  |  | By-laws of New Wherehouse. (Incorporated by
	reference to Exhibit B of Exhibit A of
	Exhibit 3.1 of Old Wherehouses Current Report on
	Form 8-K dated January 22, 1997.)                                                                                                                                               
| | 3.5 |  |  | Amendment to By-laws of New Wherehouse adopted
	January 30, 1997, adopted by Unanimous Written Consent of
	the Sole Director of New Wherehouse. (Incorporated by reference
	to Exhibit 3.5 of New Wherehouses Annual Report on
	Form 10-K dated May 16, 1997.)                                                         
| | 4.1 |  |  | Tranche A Warrant Agreement dated as of
	January 31, 1997 between New Wherehouse and
	United States Trust Company of New York, as the Warrant
	Agent. (Incorporated by reference to Exhibit 4.1 of New
	Wherehouses Annual Report on Form 10-K dated
	May 16, 1997.)                                                   
| | 4.2 |  |  | Tranche B Warrant Agreement dated as of
	January 31, 1997 between New Wherehouse and United States
	Trust Company of New York, as the Warrant Agent. (Incorporated
	by reference to Exhibit 4.2 of New Wherehouses Annual
	Report on Form 10-K dated May 16, 1997.)                                                    
| | 4.3 |  |  | Tranche C Warrant Agreement dated as of
	January 31, 1997 between New Wherehouse and United States
	Trust Company of New York, as the Warrant Agent. (Incorporated
	by reference to Exhibit 4.3 of New Wherehouses Annual
	Report on Form 10-K dated May 16, 1997.)                                                    

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| |       |  |  |                                                                                                                                                                                                                                                                                                                                          
| | ----- |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 4.4   |  |  | Registration Rights Agreement dated as of
	January 31, 1997 among New Wherehouse, Cerberus
	Partners, L.P., CS First Boston Securities Corporation and
	Bank of America, Illinois. (Incorporated by reference to
	Exhibit 1.14 of Old Wherehouses Current Report on
	Form 8-K dated February 12, 1997.)                                 
| | 10.1  |  |  | Single Tenant Industrial Lease, dated
	November 5, 1991, by and between Watson Land Company, as
	lessor, and Old Wherehouse, as lessee. (Incorporated by
	reference to Exhibit 10.6 of the Old Wherehouses
	Annual Report on Form 10-K for the fiscal year ended
	January 31, 1992.)                                                    
| | 10.2  |  |  | Management Services Agreement dated as of
	January 31, 1997 among New Wherehouse Alvarez & Marsal,
	Inc., Antonio C. Alvarez II, A&M #3, Cerberus
	Partners, L.P. and the Support Employees. (Incorporated by
	reference to Exhibit 1.5 of Old Wherehouses Current
	Report on Form 8-K dated February 12, 1997.)                        
| | 10.3  |  |  | Extension and Amendment to Management Services
	Agreement dated as of February 1, 1998 among New
	Wherehouse, Alvarez & Marsal, Inc.,
	Antonio C. Alvarez, II and A&M #3.
	(Incorporated by reference to Exhibit 10.3 of New
	Wherehouses Annual Report on Form 10-K dated
	May 1, 1998.)                                               
| | 10.4  |  |  | Second Amendment to Management Services Agreement
	dated as of April 30, 1998 among New Wherehouse,
	Alvarez & Marsal, Inc., Antonio C.
	Alvarez, II and A&M #3. (Incorporated by reference
	to Exhibit 10.4 of New Wherehouses Annual Report on
	Form 10-K dated May 1, 1998.)                                                         
| | 10.5  |  |  | Secured Recourse Promissory Note dated
	January 31, 1997 by A&M #3 in favor of New
	Wherehouse in the principal amount of $335,000. (Incorporated by
	reference to Exhibit 1.6 of Old Wherehouses Current
	Report on Form 8-K dated February 12, 1997.)                                                                                 
| | 10.6  |  |  | Secured Non-Recourse Promissory Note dated
	January 31, 1997 by A&M #3 in favor of New
	Wherehouse in the principal amount of $5,005,000. (Incorporated
	by reference to Exhibit 1.7 of Old Wherehouses
	Current Report on Form 8-K dated February 12, 1997.)                                                                           
| | 10.7  |  |  | Stock Pledge Agreement dated as of
	January 31, 1997 between A&M #3 and New
	Wherehouse. (Incorporated by reference to Exhibit 1.8 of
	Old Wherehouses Current Report on Form 8-K dated
	February 12, 1997.)                                                                                                                            
| | 10.8  |  |  | Stock Subscription Agreement dated as of
	January 31, 1997 between New Wherehouse and
	A&M #3. (Incorporated by reference to Exhibit 1.9
	of Old Wherehouses Current Report on Form 8-K dated
	February 12, 1997.)                                                                                                                      
| | 10.9  |  |  | Non-Transferable Stock Option Agreement dated as
	of January 31, 1997 between New Wherehouse and
	A&M #3. (Incorporated by reference to Exhibit 1.10
	of Old Wherehouses Current Report on Form 8-K dated
	February 12, 1997.)                                                                                                          
| | 10.10 |  |  | First Amendment to Non-Transferable Stock Option
	Agreement dated as of April 30, 1998 between New Wherehouse
	and A&M #3. (Incorporated by reference to
	Exhibit 10.10 of New Wherehouses Annual Report on
	Form 10-K dated May 1, 1998.)                                                                                              
| | 10.11 |  |  | Registration Rights Agreement dated as of
	January 31, 1997 between New Wherehouse and
	A&M #3. (Incorporated by reference to Exhibit 1.12
	of Old Wherehouses Current Report on Form 8-K dated
	February 12, 1997.)                                                                                                                    
| | 10.12 |  |  | Letter agreement dated as of October 14,
	1996 among Cerberus Partners, L.P., CS First Boston
	Securities Corporation and Bank of America, Illinois regarding
	fees to be paid to Alvarez & Marsal, Inc.
	(Incorporated by reference to Exhibit 1.13 of Old
	Wherehouses Current Report on Form 8-K dated
	February 12, 1997.           
| | 10.13 |  |  | Letter agreement dated as of January 31,
	1997 between New Wherehouse and Cerberus Partners, L.P.
	regarding the reimbursement of fees paid by Cerberus on behalf
	of the senior lenders to Alvarez & Marsal, Inc.
	(Incorporated by reference to Exhibit 1.11 of Old
	Wherehouses Current Report on Form 8-K dated
	February 12, 1997.)
| | 10.14 |  |  | Loan and Security Agreement dated as of
	January 31, 1997 between New Wherehouse and Congress
	Financial Corporation (Western). (Incorporated by reference to
	Exhibit 1.15 of Old Wherehouses Current Report on
	Form 8-K dated February 12, 1997.)                                                                                    
| | 10.15 |  |  | Security Agreement dated as of January 31,
	1997 between New Wherehouse and United States Trust Company of
	New York, as Collateral Agent for certain trade creditors.
	(Incorporated by reference to Exhibit 1.16 of Old
	Wherehouses Current Report on Form 8-K dated
	February 12, 1997.)                                            

32



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| |       |  |  |                                                                                                                                                                                                                                                                                                                                                                                                    
| | ----- |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 10.16 |  |  | Intercreditor and Collateral Agency Agreement
	dated as of January 31, 1997 among New Wherehouse, the
	Trade Creditors named therein and United States Trust Company of
	New York, as Collateral Agent. (Incorporated by reference to
	Exhibit 1.17 of Old Wherehouses Current Report on
	Form 8-K dated February 12, 1997.)                                                                      
| | 10.17 |  |  | Intercreditor and Subordination Agreement dated
	as of January 31, 1997 among the Trade Creditors named
	therein, United States Trust Company of New York, as Collateral
	Agent for the Trade Creditors and Congress Financial Corporation
	(Western). (Incorporated by reference to Exhibit 1.18 of
	Old Wherehouses Current Report on Form 8-K dated
	February 12, 1997.)                       
| | 10.18 |  |  | Security Agreement dated as of January 20,
	1997, by and between Mellon US Leasing, a division of
	Mellon Leasing Corporation, successor to United States Leasing
	Corporation, as Secured Party, and Reorganized Wherehouse.
	(Incorporated by reference to Exhibit 10.15 of New
	Wherehouses Annual Report on Form 10-K dated
	May 16, 1997.)                                                   
| | 10.19 |  |  | Change of Control Agreements, dated as of
	July 10, 1995, between Old Wherehouse and each of its
	executive officers, with schedule required by instruction
	(2) to item 601(a) of Regulation S-K identifying
	the parties thereto and certain other details. (Incorporated by
	reference to Exhibit 10.1 of Old Wherehouses
	Quarterly Report on Form 10-Q for the quarter ended
	July 31, 1995.)
| | 10.20 |  |  | Transition License Agreement dated as of
	October 26, 1998 between Wherehouse Entertainment, Inc.,
	the Blockbuster Music subsidiaries, and Blockbuster
	Entertainment Inc. (Incorporated by reference to
	Exhibit 2.2 of New Wherehouses Current Report on
	Form 8-K dated November 10, 1998.)                                                                                                   
| | 10.21 |  |  | Transition Services Agreement dated as of
	August 10, 1998 between Wherehouse Entertainment, Inc. and
	Viacom International Inc. (Incorporated by reference to
	Exhibit 2.3 of New Wherehouses Current Report on
	Form 8-K dated November 10, 1998.)                                                                                                                                              
| | 10.22 |  |  | Amended and Restated Loan and Security Agreement
	dated as of October 26, 1998 between New Wherehouse and its
	subsidiaries and Congress Financial Corporation (Western).
	(Incorporated by reference to Exhibit 10.22 of New
	Wherehouses Annual Report on Form 10-K dated
	May 17, 1999.)                                                                                                       
| | 10.23 |  |  | Intercreditor and Subordination Agreement dated
	as of October 26, 1998 among the Trade Creditors named
	therein, United States Trust Company of New York, as Collateral
	Agent for the Trade Creditors, and Congress Financial
	Corporation (Western). (Incorporated by reference to
	Exhibit 10.23 of New Wherehouses Annual Report on
	Form 10-K dated May 17, 1999.)                          
| | 10.24 |  |  | Security Agreement dated as of October 26,
	1998 between New Wherehouse and United States Trust Company
	of New York, as Collateral Agent for certain trade creditors.
	(Incorporated by reference to Exhibit 10.24 of New
	Wherehouses Annual Report on Form 10-K dated
	May 17, 1999.)                                                                                                          
| | 10.25 |  |  | Intercreditor and Collateral Agency Agreement
	dated as of October 26, 1998 among certain subsidiaries of
	New Wherehouse, the Trade Creditors named therein and United
	States Trust Company of New York, as Collateral Agent.
	(Incorporated by reference to Exhibit 10.25 of New
	Wherehouses Annual Report on Form 10-K dated
	May 17, 1999.)                                                 
| | 10.26 |  |  | Wherehouse Entertainment, Inc. 1998 Stock
	Incentive Plan. (Incorporated by reference to Appendix A of
	the Companys definitive proxy statement dated
	September 25, 1998.) (Incorporated by reference to
	Exhibit 10.26 of New Wherehouses Annual Report on
	Form 10-K dated May 17, 1999.)                                                                                                     
| | 10.27 |  |  | First Amendment to the Amended and Restated Loan
	and Security Agreement dated as of November 30, 1998
	between New Wherehouse and its subsidiaries and Congress
	Financial Corporation (Western). (Incorporated by reference to
	Exhibit 10.27 of New Wherehouses Annual Report on
	Form 10-K dated May 17, 1999.)                                                                               
| | 10.28 |  |  | Extension and Third Amendment to Management
	Services Agreement dated as of May 13, 1999 among
	Wherehouse, Alvarez & Marsal, Inc.,
	Antonio C. Alvarez II and A&M #3.
	(Incorporated by reference to Exhibit 10.28 of New
	Wherehouses Annual Report on Form 10-K dated
	May 17, 1999.)                                                                                                          
| | 10.29 |  |  | Second Amendment to the Amended and Restated Loan
	and Security Agreement dated as of May 14, 1999 between
	Wherehouse and its subsidiaries and Congress Financial
	Corporation (Western). (Incorporated by reference to
	Exhibit 10.29 of New Wherehouses Annual Report on
	Form 10-K dated May 17, 1999.)                                                                                       

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| |       |  |  |                                                                                                                                                                                                                                                                                                                                      
| | ----- |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 10.30 |  |  | Third Amendment to the Amended and Restated Loan
	and Security Agreement dated as of August 31, 1999 between
	Wherehouse and its subsidiaries and Congress Financial
	Corporation (Western). (Incorporated by reference to
	Exhibit 10.1 of New Wherehouses Quarterly Report on
	Form 10-Q for the quarter ended July 31, 1999.)    
| | 10.31 |  |  | Fourth Amendment to the Amended and Restated Loan
	and Security Agreement dated as of August 31, 1999 between
	Wherehouse and its subsidiaries and Congress Financial
	Corporation (Western). (Incorporated by reference to
	Exhibit 10.1 of New Wherehouses Quarterly Report on
	Form 10-Q for the quarter ended October 31, 1999.)
| | 10.32 |  |  | Fourth Amendment to Management Services Agreement
	dated as of April 13, 1999 among Wherehouse,
	Alvarez & Marsal, Inc., Antonio C.
	Alvarez II and A&M #3. (Incorporated by reference
	to Exhibit 10.32 of New Wherehouses Annual Report on
	Form 10-K dated May 1, 2000.)                                                         
| | 10.33 |  |  | Contribution Agreement dated as of
	November 16, 1999, between CheckOut.com, LLC and
	Wherehouse. (Incorporated by reference to Exhibit 10.33 of
	New Wherehouses Annual Report on Form 10-K dated
	May 1, 2000.)                                                                                                                   
| | 10.34 |  |  | Fifth Amendment to the Amended and Restated Loan
	and Security Agreement dated as of December 6, 2000 between
	Wherehouse and its subsidiaries and Congress Financial
	Corporation (Western). (Incorporated by reference to
	Exhibit 10.1 of New Wherehouses Quarterly Report on
	Form 10-Q for the quarter ended October 31, 2000.)
| | 10.35 |  |  | Fifth Amendment to Management Services Agreement
	dated as of June 30, 2000 among Wherehouse,
	Alvarez & Marsal, Inc., Antonio C.
	Alvarez II and A&M #3. (Incorporated by reference
	to Exhibit 10.35 of Wherehouses Annual Report on
	Form 10-K dated April 27, 2001.)                                                            
| | 10.36 |  |  | Amended and Restated Fifth Amendment to the
	Amended and Restated Loan and Security Agreement dated as of
	January 10, 2001 between Wherehouse and its subsidiaries
	and Congress Financial Corporation (Western). (Incorporated by
	reference to Exhibit 10.36 of Wherehouses Annual
	Report on Form 10-K dated April 27, 2001.)   
| | 10.37 |  |  | Wherehouse Entertainment, Inc. 2001 Stock
	Incentive Plan. (Incorporated by reference to Exhibit B of
	the Companys definitive proxy statement dated
	August 20, 2001.)                                                                                                                                                             

34



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SIGNATURES

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

Date: April 25, 2002

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



| |     |                    
| | --- | -------------------
| | By: | /s/ LARRY C. GAINES

| |                                       
| | --------------------------------------
| |                                       
| | Larry C. Gaines                       
| | President and Chief Operating
	Officer
| | (Principal Executive Officer)         

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

|                                                 |  |                                                                                      |  |               
|------------------------------------------------ |  | ------------------------------------------------------------------------------------ |  | --------------
|Signature                                        |  | Title                                                                                |  | Date          
|                                                 |  |                                                                                      |  |               
|/s/ MARK A. VELARDEMark A. Velarde               |  | Executive Vice President,
	Chief Financial Officer and
	Chief Administrative Officer |  | April 25, 2002
|                                                
|/s/ MEHDI MAHDAVIMehdi Mahdavi                   |  | Vice President, Controller
	(Principal Accounting Officer)                           |  | April 25, 2002
|                                                
|/s/ ANTONIO C. ALVAREZ, IIAntonio C. Alvarez, II |  | Non-Executive Chairman of the Board
	and Director                                    |  | April 25, 2002
|                                                
|/s/ ROBERT C. DAVENPORTRobert C. Davenport       |  | Director                                                                             |  | April 25, 2002
|                                                
|/s/ JONATHAN GALLENJonathan Gallen               |  | Director                                                                             |  | April 25, 2002
|                                                
|/s/ JOSEPH J. RADECKIJoseph J. Radecki           |  | Director                                                                             |  | April 25, 2002
|                                                
|/s/ JOSEPH B. SMITHJoseph B. Smith               |  | Director                                                                             |  | April 25, 2002

35



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WHEREHOUSE ENTERTAINMENT, INC.

INDEX TO FINANCIAL STATEMENTS

CONTENTS

|                                                      |                                                                                                                  |      |     |     | 
|----------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------- | ---- | --- | --- | 
|                                                      |                                                                                                                  | Page
|                                                      |                                                                                                                  |     
|Independent Auditors Report 
	Deloitte & Touche LLP |                                                                                                                  |      | F-2 |    
|Financial Statements:                                 |                                                                                                                  |      |     |    
|                                                      | Consolidated Balance Sheets at January 31,
	2002 and 2001                                                        |      |     | F-3 | 
|                                                      | Consolidated Statements of Operations for the
	years ended January 31, 2002, 2001 and 2000                       |      |     | F-4 | 
|                                                      | Consolidated Statements of Changes in
	Shareholders Equity for the years ended January 31,
	2002, 2001 and 2000 |      |     | F-5 | 
|                                                      | Consolidated Statements of Cash Flows for the
	years ended January 31, 2002, 2001 and 2000                       |      |     | F-6 | 
|                                                      | Notes to Consolidated Financial Statements                                                                       |      |     | F-7 | 

All schedules have been omitted because they are
not required under the related instructions, are inapplicable or
because the required information is included elsewhere in the
consolidated financial statements.

F-1



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##### Table of Contents



INDEPENDENT AUDITORS REPORT

To the Board of Directors and Shareholders of

Wherehouse Entertainment, Inc.:


We have audited the accompanying consolidated
balance sheets of Wherehouse Entertainment, Inc. and
subsidiaries as of January 31, 2002 and 2001, and the
related consolidated statements of operations, changes in
shareholders equity, and cash flows for each of the three
years in the period ended January 31, 2002. These financial
statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

In our opinion, such consolidated financial
statements present fairly, in all material respects, the
financial position of Wherehouse Entertainment, Inc. and
subsidiaries at January 31, 2002 and 2001, and the results
of their operations and their cash flows for each of the three
years in the period ended January 31, 2002, in conformity
with accounting principles generally accepted in the United
States of America.

DELOITTE & TOUCHE LLP

Los Angeles, California


April 24, 2002


F-2



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##### Table of Contents



WHEREHOUSE ENTERTAINMENT, INC.






CONSOLIDATED BALANCE SHEETS


|                                                |                                                                    |                           |                                            |             |             |             |   |             |             |             | 
|----------------------------------------------- | ------------------------------------------------------------------ | ------------------------- | ------------------------------------------ | ----------- | ----------- | ----------- | - | ----------- | ----------- | ----------- | 
|                                                |                                                                    |                          
|                                                |                                                                    | January 31,              
|                                                |                                                                    |                          
|                                                |                                                                    | 2002                      |                                            | 2001       
|                                                |                                                                    |                           |                                            |            
|ASSETS                                         
|Current assets (Note 6):                        |                                                                    |                           |                                            |             |             |             |   |            
|                                                | Cash and cash equivalents                                          |                           | $                                          | 1,591,000   |             |             | $ | 2,457,000   |            
|                                                | Notes and other receivables, net                                   |                           |                                            | 3,066,000   |             |             |   | 1,343,000   |            
|                                                | Inventories, net (Note 3)                                          |                           |                                            | 148,954,000 |             |             |   | 197,147,000 |            
|                                                | Income taxes receivable                                            |                           |                                            | 306,000     |             |             |   | 9,825,000   |            
|                                                | Other current assets                                               |                           |                                            | 1,996,000   |             |             |   | 2,401,000   |            
|                                                | Deferred taxes (Note 7)                                            |                           |                                            |             |             |             |   | 5,983,000   |            
|                                                |                                                                    |                           |                                            |             |             |             |   |            
|                                                |                                                                    |                           | Total current assets                       |             |             | 155,913,000 |   |             |             | 219,156,000 | 
|                                                | Property, equipment and improvements, net
	(Notes 4 and 6)         |                           |                                            | 44,539,000  |             |             |   | 67,132,000  |            
|                                                | Deferred taxes (Note 7)                                            |                           |                                            |             |             |             |   | 19,886,000  |            
|                                                | Intangible assets, net (Notes 1, 2, 3 and 6)                       |                           |                                            | 24,604,000  |             |             |   | 34,510,000  |            
|                                                | Notes receivable and other assets, net                             |                           |                                            | 4,019,000   |             |             |   | 1,007,000   |            
|                                                |                                                                    |                           |                                            |             |             |             |   |            
|                                                |                                                                    |                           | Total assets                               |             | $           | 229,075,000 |   |             | $           | 341,691,000 | 
|                                                |                                                                    |                           |                                            |             |             |             |   |            
|LIABILITIES AND SHAREHOLDERS
	EQUITY          
|Current liabilities:                            |                                                                    |                           |                                            |             |             |             |   |            
|                                                | Accounts payable and bank overdraft                                |                           | $                                          | 109,610,000 |             |             | $ | 129,042,000 |            
|                                                | Accrued expenses (Note 5)                                          |                           |                                            | 33,229,000  |             |             |   | 31,675,000  |            
|                                                | Sales taxes payable                                                |                           |                                            | 3,246,000   |             |             |   | 3,793,000   |            
|                                                | Store closure reserves (Note 1)                                    |                           |                                            | 6,287,000   |             |             |   | 8,421,000   |            
|                                                | Reorganization liabilities (Note 2)                                |                           |                                            | 150,000     |             |             |   | 1,242,000   |            
|                                                | Current portion of long-term debt (Note 2)                         |                           |                                            | 2,572,000   |             |             |   | 3,836,000   |            
|                                                | Current portion of leases in excess of fair
	market value (Note 1) |                           |                                            | 3,071,000   |             |             |   | 3,270,000   |            
|                                                | Current portion of capital lease obligations
	(Notes 4 and 9)      |                           |                                            | 4,588,000   |             |             |   | 6,090,000   |            
|                                                |                                                                    |                           |                                            |             |             |             |   |            
|                                                |                                                                    | Total current liabilities |                                            |             | 162,753,000 |             |   |             | 187,369,000 |            
|                                                | Line of credit (Note 6)                                            |                           |                                            | 10,450,000  |             |             |   | 35,123,000  |            
|                                                | Long-term debt (Note 2)                                            |                           |                                            | 191,000     |             |             |   | 224,000     |            
|                                                | Capital lease obligations (Notes 4 and 9)                          |                           |                                            | 11,232,000  |             |             |   | 16,293,000  |            
|                                                | Leases in excess of fair market value
	(Note 1)                    |                           |                                            | 14,729,000  |             |             |   | 18,195,000  |            
|                                                | Deferred rent and other long-term liabilities
	(Note 3)            |                           |                                            | 4,343,000   |             |             |   | 5,181,000   |            
|                                                |                                                                    |                           |                                            |             |             |             |   |            
|                                                |                                                                    |                           | Total liabilities                          |             |             | 203,698,000 |   |             |             | 262,385,000 | 
|                                                |                                                                    |                           |                                            |             |             |             |   |            
|Commitments and contingencies (Notes 9 and
	10) |                                                                    |                           |                                            |             |             |             |   |            
|Shareholders equity (Note 10):                 |                                                                    |                           |                                            |             |             |             |   |            
|                                                | Preferred stock                                                    |                           |                                            |             |             |             |   |             |            
|                                                | Common stock                                                       |                           |                                            | 112,000     |             |             |   | 110,000     |            
|                                                | Additional paid-in-capital                                         |                           |                                            | 94,873,000  |             |             |   | 94,453,000  |            
|                                                | Accumulated deficit                                                |                           |                                            | (61,780,000 | )           |             |   | (8,084,000  | )          
|                                                | Treasury stock                                                     |                           |                                            | (338,000    | )           |             |   | (338,000    | )          
|                                                | Notes receivable                                                   |                           |                                            | (7,490,000  | )           |             |   | (6,835,000  | )          
|                                                |                                                                    |                           |                                            |             |             |             |   |            
|                                                |                                                                    |                           | Total shareholders equity                 |             |             | 25,377,000  |   |             |             | 79,306,000  | 
|                                                |                                                                    |                           |                                            |             |             |             |   |            
|                                                |                                                                    |                           | Total liabilities and shareholders equity |             | $           | 229,075,000 |   |             | $           | 341,691,000 | 
|                                                |                                                                    |                           |                                            |             |             |             |   |            

See accompanying notes to consolidated financial
statements.

F-3



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##### Table of Contents



WHEREHOUSE ENTERTAINMENT, INC.






CONSOLIDATED STATEMENTS OF
OPERATIONS


|                                                           |                               |                         |             |             |             |      |             |             |             |   |             |             |             | 
|---------------------------------------------------------- | ----------------------------- | ----------------------- | ----------- | ----------- | ----------- | ---- | ----------- | ----------- | ----------- | - | ----------- | ----------- | ----------- | 
|                                                           |                               |                        
|                                                           |                               | Years Ended January 31,
|                                                           |                               |                        
|                                                           |                               | 2002                    |             | 2001        |             | 2000
|                                                           |                               |                         |             |             |             |     
|Sale merchandise revenue                                   |                               | $                       | 599,857,000 |             |             | $    | 700,614,000 |             |             | $ | 756,055,000 |            
|Rental revenue, net                                        |                               |                         | 4,455,000   |             |             |      | 5,797,000   |             |             |   | 9,836,000   |            
|                                                           |                               |                         |             |             |             |      |             |             |             |   |             |            
|                                                           | Total revenues                |                         |             | 604,312,000 |             |      |             | 706,411,000 |             |   |             | 765,891,000 |            
|Cost of sale merchandise revenue                           |                               |                         | 396,652,000 |             |             |      | 457,775,000 |             |             |   | 495,596,000 |            
|                                                           |                               |                         |             |             |             |      |             |             |             |   |             |            
|                                                           |                               | Gross profit            |             |             | 207,660,000 |      |             |             | 248,636,000 |   |             |             | 270,295,000 | 
|Selling, general and administrative expenses               |                               |                         | 194,932,000 |             |             |      | 219,465,000 |             |             |   | 237,749,000 |            
|Year 2000 remediation costs (Note 12)                      |                               |                         |             |             |             |      |             |             |             |   | 176,000     |            
|Other costs (Note 4)                                       |                               |                         | 621,000     |             |             |      | 2,335,000   |             |             |   | 153,000     |            
|Depreciation and amortization                              |                               |                         | 30,389,000  |             |             |      | 31,101,000  |             |             |   | 25,506,000  |            
|Loss on disposition of assets (Note 1)                     |                               |                         | 3,266,000   |             |             |      |             |             |             |   |             |            
|                                                           |                               |                         |             |             |             |      |             |             |             |   |             |            
|                                                           | Income (loss) from operations |                         |             | (21,548,000 | )           |      |             | (4,265,000  | )           |   |             | 6,711,000   |            
|Interest expense                                           |                               |                         | 5,439,000   |             |             |      | 8,563,000   |             |             |   | 7,796,000   |            
|Interest income                                            |                               |                         | (752,000    | )           |             |      | (414,000    | )           |             |   | (526,000    | )          
|Equity in loss from unconsolidated joint venture
	(Note 1) |                               |                         |             |             |             |      | 20,594,000  |             |             |   |             |            
|                                                           |                               |                         |             |             |             |      |             |             |             |   |             |            
|                                                           | Loss before income taxes      |                         |             | (26,235,000 | )           |      |             | (33,008,000 | )           |   |             | (559,000    | )          
|Provision (benefit) for income taxes                       |                               |                         | 27,461,000  |             |             |      | (11,362,000 | )           |             |   | 637,000     |            
|                                                           |                               |                         |             |             |             |      |             |             |             |   |             |            
|                                                           | Net loss                      |                         | $           | (53,696,000 | )           |      | $           | (21,646,000 | )           |   | $           | (1,196,000  | )          
|                                                           |                               |                         |             |             |             |      |             |             |             |   |             |            
|Net loss per common share (Note 8):                        |                               |                         |             |             |             |      |             |             |             |   |             |            
|                                                           | Basic                         |                         | $           | (4.88       | )           |      | $           | (1.97       | )           |   | $           | (0.11       | )          
|                                                           |                               |                         |             |             |             |      |             |             |             |   |             |            
|                                                           | Diluted                       |                         | $           | (4.88       | )           |      | $           | (1.97       | )           |   | $           | (0.11       | )          
|                                                           |                               |                         |             |             |             |      |             |             |             |   |             |            

See accompanying notes to consolidated financial
statements.

F-4



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##### Table of Contents



WHEREHOUSE ENTERTAINMENT, INC.






CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS EQUITY


|                             |  |              |            |            |  |          |         |           |  |       |            |            |  |       |             |   |  |   |          |   |  |   |            |   |  |   |             |  
|---------------------------- |  | ------------ | ---------- | ---------- |  | -------- | ------- | --------- |  | ----- | ---------- | ---------- |  | ----- | ----------- | - |  | - | -------- | - |  | - | ---------- | - |  | - | ----------- | -
|                             |  |              |            |            |  |          |         |           |  |       |            |           
|                             |  | Common Stock |            | Additional |  | Retained |         |           |  |       |            |           
|                             |  |              |            | Paid-in    |  | Earnings |         | Treasury  |  | Notes |            |           
|                             |  | Shares       |            | Amount     |  | Capital  |         | (Deficit) |  | Stock |            | Receivable |  | Total
|                             |  |              |            |            |  |          |         |           |  |       |            |            |  |      
|Balance, January 31, 1999    |  |              | 10,729,710 |            |  | $        | 108,000 |           |  | $     | 89,400,000 |            |  | $     | 14,758,000  |   |  |   |          |   |  | $ | (6,088,000 | ) |  | $ | 98,178,000  |  
|Issuance of common stock     |  |              | 31,096     |            |  |          |         |           |  |       |            |            |  |       |             |   |  |   |          |   |  |   |            |   |  |   |             |  
|Purchase of treasury stock   |  |              |            |            |  |          |         |           |  |       |            |            |  |       |             |   |  | $ | (338,000 | ) |  |   |            |   |  |   | (338,000    | )
|Interest on notes receivable |  |              |            |            |  |          |         |           |  |       |            |            |  |       |             |   |  |   |          |   |  |   | (373,000   | ) |  |   | (373,000    | )
|Net loss                     |  |              |            |            |  |          |         |           |  |       |            |            |  |       | (1,196,000  | ) |  |   |          |   |  |   |            |   |  |   | (1,196,000  | )
|                             |  |              |            |            |  |          |         |           |  |       |            |            |  |       |             |   |  |   |          |   |  |   |            |   |  |   |             |  
|Balance, January 31, 2000    |  |              | 10,760,806 |            |  |          | 108,000 |           |  |       | 89,400,000 |            |  |       | 13,562,000  |   |  |   | (338,000 | ) |  |   | (6,461,000 | ) |  |   | 96,271,000  |  
|Issuance of common stock     |  |              | 265,615    |            |  |          | 2,000   |           |  |       | 4,998,000  |            |  |       |             |   |  |   |          |   |  |   |            |   |  |   | 5,000,000   |  
|Interest on notes receivable |  |              |            |            |  |          |         |           |  |       |            |            |  |       |             |   |  |   |          |   |  |   | (374,000   | ) |  |   | (374,000    | )
|Stock option compensation    |  |              |            |            |  |          |         |           |  |       | 55,000     |            |  |       |             |   |  |   |          |   |  |   |            |   |  |   | 55,000      |  
|Net loss                     |  |              |            |            |  |          |         |           |  |       |            |            |  |       | (21,646,000 | ) |  |   |          |   |  |   |            |   |  |   | (21,646,000 | )
|                             |  |              |            |            |  |          |         |           |  |       |            |            |  |       |             |   |  |   |          |   |  |   |            |   |  |   |             |  
|Balance, January 31, 2001    |  |              | 11,026,421 |            |  |          | 110,000 |           |  |       | 94,453,000 |            |  |       | (8,084,000  | ) |  |   | (338,000 | ) |  |   | (6,835,000 | ) |  |   | 79,306,000  |  
|Exercise of warrants         |  |              | 145,448    |            |  |          | 2,000   |           |  |       | 345,000    |            |  |       |             |   |  |   |          |   |  |   |            |   |  |   | 347,000     |  
|Interest on notes receivable |  |              |            |            |  |          |         |           |  |       |            |            |  |       |             |   |  |   |          |   |  |   | (655,000   | ) |  |   | (655,000    | )
|Stock option compensation    |  |              |            |            |  |          |         |           |  |       | 75,000     |            |  |       |             |   |  |   |          |   |  |   |            |   |  |   | 75,000      |  
|Net loss                     |  |              |            |            |  |          |         |           |  |       |            |            |  |       | (53,696,000 | ) |  |   |          |   |  |   |            |   |  |   | (53,696,000 | )
|                             |  |              |            |            |  |          |         |           |  |       |            |            |  |       |             |   |  |   |          |   |  |   |            |   |  |   |             |  
|Balance, January 31, 2002    |  |              | 11,171,869 |            |  | $        | 112,000 |           |  | $     | 94,873,000 |            |  | $     | (61,780,000 | ) |  | $ | (338,000 | ) |  | $ | (7,490,000 | ) |  | $ | 25,377,000  |  
|                             |  |              |            |            |  |          |         |           |  |       |            |            |  |       |             |   |  |   |          |   |  |   |            |   |  |   |             |  

See accompanying notes to consolidated financial
statements.

F-5



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##### Table of Contents



WHEREHOUSE ENTERTAINMENT, INC.






CONSOLIDATED STATEMENTS OF CASH
FLOWS


|                                                                                 |                                              |                                                                       |                                                      |            |             |             |             |            |             |             |             |            |             |             |  
|-------------------------------------------------------------------------------- | -------------------------------------------- | --------------------------------------------------------------------- | ---------------------------------------------------- | ---------- | ----------- | ----------- | ----------- | ---------- | ----------- | ----------- | ----------- | ---------- | ----------- | ----------- | -
|                                                                                 |                                              |                                                                      
|                                                                                 |                                              | Years Ended January 31,                                              
|                                                                                 |                                              |                                                                      
|                                                                                 |                                              | 2002                                                                  |                                                      | 2001       |             | 2000       
|                                                                                 |                                              |                                                                       |                                                      |            |             |            
|Operating activities:                                                            |                                              |                                                                       |                                                      |            |             |             |             |            |             |             |             |           
|Net loss                                                                         |                                              | $                                                                     | (53,696,000                                          | )          |             | $           | (21,646,000 | )          |             | $           | (1,196,000  | )         
|Adjustments to reconcile net loss to net cash
	provided by operating activities: |                                              |                                                                       |                                                      |            |             |             |             |            |             |             |             |           
|                                                                                 | Depreciation and amortization                |                                                                       |                                                      | 30,389,000 |             |             |             | 31,101,000 |             |             |             | 25,506,000 |            
|                                                                                 | Loss on disposition of assets                |                                                                       |                                                      | 3,266,000  |             |             |             |            |             |             |             |            |            
|                                                                                 | Other costs                                  |                                                                       |                                                      | 621,000    |             |             |             | 2,335,000  |             |             |             | 153,000    |            
|                                                                                 | Loss on investment in joint venture          |                                                                       |                                                      |            |             |             |             | 20,594,000 |             |             |             |            |            
|                                                                                 | Stock option compensation                    |                                                                       |                                                      | 75,000     |             |             |             | 55,000     |             |             |             |            |            
|                                                                                 | Interest on notes receivable                 |                                                                       |                                                      | (655,000   | )           |             |             | (374,000   | )           |             |             | (373,000   | )          
|                                                                                 | Deferred taxes                               |                                                                       |                                                      | 25,869,000 |             |             |             | 636,000    |             |             |             | 432,000    |            
|                                                                                 | Changes in operating assets and liabilities: |                                                                       |                                                      |            |             |             |             |            |             |             |             |            |            
|                                                                                 |                                              | Receivables, net                                                      |                                                      |            | 223,000     |             |             |            | 6,451,000   |             |             |            | (1,518,000  | )          
|                                                                                 |                                              | Inventories, net                                                      |                                                      |            | 26,063,000  |             |             |            | 50,653,000  |             |             |            | (27,750,000 | )          
|                                                                                 |                                              | Other current assets                                                  |                                                      |            | 386,000     |             |             |            | (105,000    | )           |             |            | 501,000     |            
|                                                                                 |                                              | Accounts payable, accrued expenses and other
	liabilities             |                                                      |            | (18,102,000 | )           |             |            | (47,640,000 | )           |             |            | 56,909,000  |            
|                                                                                 |                                              | Income taxes receivable/payable                                       |                                                      |            | 9,519,000   |             |             |            | (7,477,000  | )           |             |            | (6,955,000  | )          
|                                                                                 |                                              | Other long-term liabilities                                           |                                                      |            | (802,000    | )           |             |            | 13,000      |             |             |            | (1,373,000  | )          
|                                                                                 |                                              | Store closure reserve  Existing stores                               |                                                      |            | (445,000    | )           |             |            | (564,000    | )           |             |            | (767,000    | )          
|                                                                                 |                                              | Store closure and leases in excess of FMV
	reserves  Acquired stores |                                                      |            | (4,207,000  | )           |             |            | (5,483,000  | )           |             |            | (10,120,000 | )          
|                                                                                 |                                              |                                                                       |                                                      |            |             |             |             |            |             |             |             |           
|                                                                                 |                                              |                                                                       | Net cash provided by operating activities            |            |             | 18,504,000  |             |            |             | 28,549,000  |             |            |             | 33,449,000  |  
|                                                                                 |                                              |                                                                       |                                                      |            |             |             |             |            |             |             |             |           
|Investing activities:                                                            |                                              |                                                                       |                                                      |            |             |             |             |            |             |             |             |           
|Purchase of property, equipment and improvements                                 |                                              |                                                                       | (8,730,000                                           | )          |             |             | (13,267,000 | )          |             |             | (30,617,000 | )         
|Proceeds from sale of stores                                                     |                                              |                                                                       | 20,461,000                                           |            |             |             |             |            |             |             |             |           
|Investment in joint venture                                                      |                                              |                                                                       |                                                      |            |             |             | (19,033,000 | )          |             |             |             |           
|(Increase) decrease in other assets                                              |                                              |                                                                       | (124,000                                             | )          |             |             | 496,000     |            |             |             | (229,000    | )         
|                                                                                 |                                              |                                                                       |                                                      |            |             |             |             |            |             |             |             |           
|                                                                                 |                                              |                                                                       | Net cash provided by (used in) investing
	activities |            |             | 11,607,000  |             |            |             | (31,804,000 | )           |            |             | (30,846,000 | )
|                                                                                 |                                              |                                                                       |                                                      |            |             |             |             |            |             |             |             |           
|Financing activities:                                                            |                                              |                                                                       |                                                      |            |             |             |             |            |             |             |             |           
|Net (payments) borrowings under line of
	credit                                  |                                              |                                                                       | (24,673,000                                          | )          |             |             | 3,140,000   |            |             |             | (5,366,000  | )         
|Payments on capital lease obligations and
	long-term debt                        |                                              |                                                                       | (6,601,000                                           | )          |             |             | (6,634,000  | )          |             |             | (6,835,000  | )         
|Exercise of warrants                                                             |                                              |                                                                       | 347,000                                              |            |             |             |             |            |             |             |             |           
|Purchase of treasury stock                                                       |                                              |                                                                       |                                                      |            |             |             |             |            |             |             | (338,000    | )         
|Proceeds from sale of common stock                                               |                                              |                                                                       |                                                      |            |             |             | 5,000,000   |            |             |             |             |           
|Settlement of pre-petition claims                                                |                                              |                                                                       | (50,000                                              | )          |             |             | (325,000    | )          |             |             | (542,000    | )         
|                                                                                 |                                              |                                                                       |                                                      |            |             |             |             |            |             |             |             |           
|                                                                                 |                                              |                                                                       | Net cash (used in) provided by financing
	activities |            |             | (30,977,000 | )           |            |             | 1,181,000   |             |            |             | (13,081,000 | )
|                                                                                 |                                              |                                                                       |                                                      |            |             |             |             |            |             |             |             |           
|Net decrease in cash and cash equivalents                                        |                                              |                                                                       | (866,000                                             | )          |             |             | (2,074,000  | )          |             |             | (10,478,000 | )         
|Cash and cash equivalents, beginning of year                                     |                                              |                                                                       | 2,457,000                                            |            |             |             | 4,531,000   |            |             |             | 15,009,000  |           
|                                                                                 |                                              |                                                                       |                                                      |            |             |             |             |            |             |             |             |           
|Cash and cash equivalents, end of year                                           |                                              | $                                                                     | 1,591,000                                            |            |             | $           | 2,457,000   |            |             | $           | 4,531,000   |           
|                                                                                 |                                              |                                                                       |                                                      |            |             |             |             |            |             |             |             |           
|Supplemental disclosures of cash flow
	information:                              |                                              |                                                                       |                                                      |            |             |             |             |            |             |             |             |           
|Cash paid (received) during the year for:                                        |                                              |                                                                       |                                                      |            |             |             |             |            |             |             |             |           
|                                                                                 | Interest                                     |                                                                       | $                                                    | 4,913,000  |             |             | $           | 7,921,000  |             |             | $           | 6,815,000  |            
|                                                                                 | Income taxes, net                            |                                                                       | $                                                    | (7,953,000 | )           |             | $           | (4,824,000 | )           |             | $           | 7,465,000  |            

Non-cash investing and financing
activities:

The Company incurred capital lease obligations of
$377,000, $1,556,000 and $6,518,000 for the purchase of certain
equipment during the years ended January 31, 2002, 2001 and
2000, respectively.

During the year ended January 31, 2002, the
Company wrote off excess reorganization liabilities of
$1,042,000 and excess tax liabilities of $1,055,000 relating to
the Reorganization by reducing intangible assets. Additionally,
the Company wrote off excess store closing reserves of $630,000
and excess accrued liabilities of $416,000 relating to the
Acquisition by reducing intangible assets.

In connection with the disposition of
64 stores to The Music Network, the Company recorded notes
receivable of $4.7 million.

See accompanying notes to consolidated financial
statements.

F-6



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##### Table of Contents



WHEREHOUSE ENTERTAINMENT, INC.






NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS


1.     Basis of
Presentation and Acquisition

Basis of
Presentation

The consolidated financial statements include the
accounts of Wherehouse Entertainment, Inc. and its wholly owned
subsidiaries. All intercompany balances and transactions have
been eliminated. Wherehouse Entertainment, Inc. and all of its
subsidiaries are collectively referred to as the Company.

Acquisition

On October 26, 1998, pursuant to a Stock
Purchase Agreement dated as of August 10, 1998 (the
Purchase Agreement), the Company acquired (the
Acquisition) from Viacom International Inc.
(Seller) all of the capital stock of certain retail
music subsidiaries of the Seller (the Acquired
Business). The Acquired Business operated under the name
Blockbuster Music and is referred to as
Blockbuster Music. The Acquired Business consisted
of 378 Blockbuster Music stores in 33 states. In June
1999, the Company completed the systems integration of the
Acquired Stores, and all of the Acquired Stores are currently
operating under the Wherehouse Music name. The
initial purchase price was subject to a purchase price
adjustment mechanism based on working capital as set forth in
the Purchase Agreement.

On September 8, 1999, the Company reached an
agreement with the Seller with respect to a purchase price
adjustment based on working capital plus a settlement of certain
other issues. The final purchase price was $122.3 million,
including direct acquisition costs of $4.7 million.

The Acquisition was accounted for under the
purchase method of accounting. Accordingly, the purchase price
has been allocated to the assets acquired and liabilities
assumed based upon their respective fair values at the
Acquisition date based on valuations and other studies. The
following is a summary of the acquired assets and liabilities:

|                                      |                     |   |             |             | 
|------------------------------------- | ------------------- | - | ----------- | ----------- | 
|Current assets                        |                     | $ | 189,180,000 |            
|Property, equipment & improvements    |                     |   | 45,982,000  |            
|Deferred tax assets, net              |                     |   | 19,861,000  |            
|Goodwill                              |                     |   | 29,361,000  |            
|Accounts payable and accrued expenses |                     |   | (87,015,000 | )          
|Store closure and other reserves      |                     |   | (20,042,000 | )          
|Capital lease obligations             |                     |   | (26,430,000 | )          
|Leases in excess of fair market value |                     |   | (28,551,000 | )          
|                                      |                     |   |             |            
|                                      | Total consideration |   | $           | 122,346,000 | 
|                                      |                     |   |             |            

The results of operations of the Acquisition are
reflected in the accompanying consolidated financial statements
from October 26, 1998. Goodwill arising out of the
Acquisition is being amortized over 15 years.

Upon the consummation of the Acquisition, the
Companys senior management began formulating its plan to
close certain stores which, due to the Acquisition, competed in
the same trade areas as other stores (the Store Closure
Plan). The Store Closure Plan, which was finalized during
January 1999, anticipated the closing of 70 stores (51
Acquired Stores and 19 existing Wherehouse stores) located
in 17 states. The Company has closed 64 of these stores
(46 Acquired Stores and 18 existing Wherehouse stores)
as of January 31, 2002. The Company is negotiating with
landlords to terminate the leases on the remaining 6 stores.

During the fiscal year ended January 31,
1999 (Fiscal 1999), the Company recorded accruals in
the purchase price allocation for store closure
reserve  Acquired Stores and leases in excess of fair
market value.

F-7



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##### Table of Contents



WHEREHOUSE ENTERTAINMENT, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following is a rollforward of the activity of
the store closure reserve  Acquired Stores(1):

|                            |  |   |            | 
|--------------------------- |  | - | ---------- | 
|Balance at October 26, 1998 |  | $ | 24,126,000 | 
|Charges against reserve     |  |   | 1,514,000  | 
|                            |  |   |            | 
|Balance at January 31, 1999 |  |   | 22,612,000 | 
|Charges against reserve     |  |   | 8,782,000  | 
|Adjustment(2)               |  |   | 4,084,000  | 
|                            |  |   |            | 
|Balance at January 31, 2000 |  |   | 9,746,000  | 
|Charges against reserve     |  |   | 2,207,000  | 
|                            |  |   |            | 
|Balance at January 31, 2001 |  |   | 7,539,000  | 
|Charges against reserve     |  |   | 1,059,000  | 
|Write-off excess reserve    |  |   | 630,000    | 
|                            |  |   |            | 
|Balance at January 31, 2002 |  | $ | 5,850,000  | 
|                            |  |   |            | 



---



|    |                                                                                     
|--- | ------------------------------------------------------------------------------------
|(1) | Consists substantially of lease termination costs.                                  
|   
|(2) | Adjustments relate primarily to the finalization
	of certain lease settlement costs.

The following is a rollforward of the activity of
the reserve for leases in excess of fair market value:

|                            |  |   |            | 
|--------------------------- |  | - | ---------- | 
|Balance at October 26, 1998 |  | $ | 29,981,000 | 
|Charges against reserve     |  |   | 781,000    | 
|                            |  |   |            | 
|Balance at January 31, 1999 |  |   | 29,200,000 | 
|Charges against reserve     |  |   | 3,029,000  | 
|Adjustment(1)               |  |   | 1,430,000  | 
|                            |  |   |            | 
|Balance at January 31, 2000 |  |   | 24,741,000 | 
|Charges against reserve     |  |   | 3,276,000  | 
|                            |  |   |            | 
|Balance at January 31, 2001 |  |   | 21,465,000 | 
|Charges against reserve     |  |   | 3,148,000  | 
|Disposition of stores       |  |   | 517,000    | 
|                            |  |   |            | 
|Balance at January 31, 2002 |  | $ | 17,800,000 | 
|                            |  |   |            | 



---



|    |                                                                                     
|--- | ------------------------------------------------------------------------------------
|(1) | Adjustments relate primarily to the finalization
	of certain lease settlement costs.

F-8



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##### Table of Contents



WHEREHOUSE ENTERTAINMENT, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

During Fiscal 1999, the Company recorded accruals
related to the planned closing of 19 existing Wherehouse
stores. The following is a rollforward of the activity of the
store closure reserve  existing stores:

|                               |  |   |           | 
|------------------------------ |  | - | --------- | 
|Balance at October 26, 1998(1) |  | $ | 2,869,000 | 
|Charges against reserve        |  |   | 276,000   | 
|                               |  |   |           | 
|Balance at January 31, 1999    |  |   | 2,593,000 | 
|Charges against reserve        |  |   | 1,147,000 | 
|                               |  |   |           | 
|Balance at January 31, 2000    |  |   | 1,446,000 | 
|Charges against reserve        |  |   | 564,000   | 
|                               |  |   |           | 
|Balance at January 31, 2001    |  |   | 882,000   | 
|Charges against reserve        |  |   | 126,000   | 
|Write-off excess reserve       |  |   | 319,000   | 
|                               |  |   |           | 
|Balance at January 31, 2002    |  | $ | 437,000   | 
|                               |  |   |           | 



---



|    |                                                   
|--- | --------------------------------------------------
|(1) | Consists substantially of lease termination costs.

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
$25.7 million, which was comprised of $21.0 million in
cash and $4.7 million in notes receivable, less
approximately $0.6 million in costs to complete the
transaction. In addition, the Company received warrants to
purchase 90,440 shares or approximately 1.75% of TMN for
$0.01 per share. Management has valued these warrants at a de
minimusamount. The majority of the stores sold to TMN are
located in Florida, North Carolina, South Carolina and
Tennessee, with a few located in Georgia and Alabama. As part of
the transaction, the Company also granted the rights to the
Turtles Music trade brand to TMN. The subject stores
accounted for $63.6 million in total revenues for the
fiscal year ended January 31, 2001 and $26.8 million
in total revenues for the fiscal year ended January 31,
2002. The net tangible book value of the assets sold amounted to
approximately $25.3 million. In addition, the Company also
wrote off approximately $3.3 million of goodwill,
attributable to the sold stores, representing the approximate
loss on disposition of assets in the accompanying consolidated
statements of operations. The Company is also obligated to
fulfill lease commitments should TMN default on certain
obligations.

E-Commerce

In February, 2001, as a result of significant
operating losses experienced by CheckOut.com, an Internet
content provider and e-commerce retailer of music, movies and
games in which the Company had a 49% equity investment,
CheckOut.com ceased operation of its Internet site. 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. To maintain its online retail presence,
the Company re-launched its Internet e-commerce site,
Wherehousemusic.com in November, 2001.

2.     Reorganization
Under Chapter 11

Wherehouse Entertainment, Inc. (New
Wherehouse also the Company) was incorporated under the
laws of the state of Delaware on November 15, 1996, as
WEI Acquisition Co. On January 31, 1997, New
Wherehouse acquired substantially all of the assets of
Wherehouse Dissolution Co. (Old Wherehouse), a
Delaware corporation, and its parent company, WEI Holdings,
Inc., a Delaware corporation (WEI, and

F-9



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##### Table of Contents



WHEREHOUSE ENTERTAINMENT, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

together with Old Wherehouse, the
Debtor), pursuant to a Chapter 11 plan of
reorganization (the Reorganization).

On August 2, 1995 (the Petition
Date), the Debtor filed voluntary petitions for relief
under Chapter 11 of Title 11 of the United States Code
in the United States Bankruptcy Court for the District of
Delaware (the Bankruptcy Court), seeking to
reorganize under Chapter 11 (the Bankruptcy
Case). Old Wherehouse and WEI continued to manage their
respective affairs and operate their businesses as
debtors-in-possession while they worked to develop a
reorganization plan that would restructure their businesses and
allow their emergence from Chapter 11.

The Plan of Reorganization for the Companys
predecessors (the Reorganization Plan) was confirmed
by an order of the Bankruptcy Court entered on January 7,
1997. The effective date of the Reorganization Plan occurred on
January 31, 1997 (the Effective Date). Since
the Effective Date, the Bankruptcy Court has retained
jurisdiction over certain claims and other matters relating to
the bankruptcy estates of the Companys predecessors, but
New Wherehouse has been and is free to carry out its business
without oversight by the Bankruptcy Court.

Several state and local taxing authorities
received promissory notes for their claims, due generally six
years after the tax assessment date together with interest at
5%. The promissory notes, which amounted to $2,542,000 and
$3,812,000 at January 31, 2002 and 2001, respectively, are
included in long-term debt and current portion of long-term debt
in the accompanying consolidated balance sheets. During Fiscal
2002, excess tax liabilities of $1,055,000 were written off
against intangible assets.

3.     Significant
Accounting Policies

Description of Business

The Company is a national specialty retailer of
pre-recorded music, video and other entertainment-related
products. Certain of the Companys stores offer video and
other products for rental. At January 31, 2002, the Company
operated 407 stores in 23 states. The Company is
supported by centralized corporate services and the stores have
similar economic characteristics, products, customers and retail
distribution methods, and as such are reported as a single
segment.

Fiscal Year

The Companys fiscal year ends on
January 31. References made to 2002, 2001, and 2000 are to
the fiscal years ended January 31, 2002, 2001 and 2000,
respectively.

Use of Accounting Estimates

The preparation of financial statements in
conformity with accounting principles generally accepted in the
United States of America requires management to make certain
estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from these estimates.

Cash and Cash Equivalents

Cash and cash equivalents consist of highly
liquid investments with a maturity of three months or less when
purchased.

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WHEREHOUSE ENTERTAINMENT, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Financial Instruments

The carrying amounts of cash and cash
equivalents, accounts receivable, and accounts payable
approximate fair value because of the short-term maturities of
these instruments. The carrying value of the Revolving Credit
Facility approximates fair value because the interest rates are
based upon variable reference rates. The carrying value of notes
receivable approximates fair value based upon notes with similar
terms.

Concentration of Credit Risk

Financial instruments, which potentially expose
the Company to concentrations of credit risk, consist primarily
of cash and cash equivalents. It is the Companys practice
to place its cash equivalents in high quality securities with a
financial institution.

Inventory

Wherehouse carries inventory at the lower of cost
or market using the last-in, first-out (LIFO) method.
Inventory consists primarily of resaleable pre-recorded music,
videocassettes, DVDs, video games and other products. At
January 31, 2002 and 2001, inventory valued using LIFO is
$3,657,000 and $1,977,000, respectively, less than the value of
the inventory if valued using the first-in, first-out method.

Rental Inventory

The Company amortizes video rental inventory
using the straight-line method over a three-month period with a
$3 salvage value. Rental inventory has been classified as a
current asset in the accompanying consolidated balance sheets as
substantially all revenue and cash flow from rentals on hand is
expected to be derived within a one-year period. The
sell-through of such rental inventory in the year purchased
results in additional amortization, which is included in rental
revenue, net.

Depreciation and Amortization

Fixed assets are stated at cost less accumulated
depreciation and amortization, which includes the amortization
of assets recorded under capital leases. Fixed assets purchased
under capital leases are amortized on a straight-line basis over
the lesser of the estimated useful life of the asset or the
lease term. Depreciation and amortization of equipment and
leasehold improvements is computed on the straight-line method
over the following periods:

|                                        |  |       |        | 
|--------------------------------------- |  | ----- | ------ | 
|                                        |  | Years
|                                        |  |      
|Leasehold improvements                  |  |       | 2  10 | 
|Data processing equipment and software  |  |       | 3  5  | 
|Store and office fixtures and equipment |  |       | 1  10 | 
|Buildings and improvements              |  |       | 5  30 | 

Intangible Assets

Goodwill resulting from the Acquisition (see Note
1), is being amortized on a straight-line basis over
15 years. Accumulated amortization was $5,508,000 and
$4,423,000 at January 31, 2002 and 2001, respectively.
Reorganization value in excess of amounts allocable to
identifiable assets resulting from the Reorganization (see
Note 2) is being amortized on a straight-line basis over a
period of 10 years.

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WHEREHOUSE ENTERTAINMENT, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Acquisition goodwill consisted of the following
at January 31, 2002 and January 31, 2001:

|                                   |  |          |            |              |  |     |            |   |  |   |            |  
|---------------------------------- |  | -------- | ---------- | ------------ |  | --- | ---------- | - |  | - | ---------- | -
|                                   |  | Original |            | Accumulated  |  |    
|                                   |  | Value    |            | Amortization |  | Net
|                                   |  |          |            |              |  |    
|Balance at January 31, 2000        |  | $        | 29,361,000 |              |  | $   | (2,453,000 | ) |  | $ | 26,908,000 |  
|Amortization                       |  |          |            |              |  |     | (1,970,000 | ) |  |   | (1,970,000 | )
|                                   |  |          |            |              |  |     |            |   |  |   |            |  
|Balance at January 31, 2001        |  |          | 29,361,000 |              |  |     | (4,423,000 | ) |  |   | 24,938,000 |  
|Amortization                       |  |          |            |              |  |     | (1,902,000 | ) |  |   | (1,902,000 | )
|Disposition of assets              |  |          | (4,083,000 | )            |  |     | 817,000    |   |  |   | (3,266,000 | )
|Write-off store closing reserve    |  |          | (630,000   | )            |  |     |            |   |  |   | (630,000   | )
|Write-off transaction cost reserve |  |          | (416,000   | )            |  |     |            |   |  |   | (416,000   | )
|                                   |  |          |            |              |  |     |            |   |  |   |            |  
|Balance at January 31, 2002        |  | $        | 24,232,000 |              |  | $   | (5,508,000 | ) |  | $ | 18,724,000 |  
|                                   |  |          |            |              |  |     |            |   |  |   |            |  

Reorganization goodwill consisted of the
following at January 31, 2002 and January 31, 2001:

|                                            |  |      |            |      |  |   |            |  
|------------------------------------------- |  | ---- | ---------- | ---- |  | - | ---------- | -
|                                            |  | 2002 |            | 2001
|                                            |  |      |            |     
|Original value                              |  | $    | 15,953,000 |      |  | $ | 15,953,000 |  
|Write-off excess reorganization liabilities |  |      | (2,097,000 | )    |  |   |            |  
|Accumulated amortization                    |  |      | (7,976,000 | )    |  |   | (6,381,000 | )
|                                            |  |      |            |      |  |   |            |  
|Net                                         |  | $    | 5,880,000  |      |  | $ | 9,572,000  |  
|                                            |  |      |            |      |  |   |            |  

Deferred Rent

The Company recognizes rent expense on a
straight-line basis over the life of the leases. At
January 31, 2002 and 2001, deferred rent of $3,039,000 and
$3,181,000, respectively, is included in the accompanying
consolidated balance sheets.

Impairment of Long-Lived Assets

The Company follows the provisions of Statement
of Financial Accounting Standards (SFAS)
No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of.
Long-lived assets are reviewed for impairment, based on
undiscounted cash flows, whenever events or changes in
circumstances indicate that the carrying amount of such assets
may not be recoverable from cash flows. If future cash flows
(undiscounted and without interest charges) are less than the
carrying value, a write-down would be recorded to reduce the
asset to its estimated fair value.

Store Pre-Opening and Advertising
Costs

Store pre-opening and advertising costs are
charged to expense as they are incurred.

Earnings Per Share

Basic earnings per share is based on the weighted
average number of shares of common stock outstanding. Diluted
earnings per share is based on the weighted average number of
shares of common stock outstanding and dilutive potential common
shares from stock options and warrants (using the treasury stock
method).

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WHEREHOUSE ENTERTAINMENT, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Stock-Based Compensation

The Company has elected to follow Accounting
Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees (APB 25), which requires
compensation expense for stock options to be recognized when the
market price of the underlying security exceeds the exercise
price on the date of grant. SFAS No. 123,
Accounting for Stock-Based Compensation, permits
companies to apply the principles of APB 25 and to
additionally provide pro forma disclosures of net income and
earnings per share as if the fair value method, as defined in
SFAS No. 123, had been applied.

Income Taxes

The Company accounts for income taxes under an
asset and liability approach that requires the recognition of
deferred income tax assets and liabilities for the expected
future consequences of events that have been recognized in the
Companys consolidated financial statements or income tax
returns. Management provides a valuation allowance for deferred
income tax assets when it is more likely than not that all or a
portion of such deferred income tax assets will not be realized.

The Company recorded a valuation allowance for
its total deferred income tax assets in the amount of
$34.9 million as a result of recurring losses from
operations. Such valuation allowance will be reversed when the
Company returns to profitability at levels sufficient to realize
such deferred income tax assets (see Note 7).

New Accounting Standards

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 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. SFAS No. 142 also requires
the Company to complete a transitional impairment test six
months from the date of adoption. The Company is required to
implement SFAS No. 142 on February 1, 2002 and, at
that time, will stop amortizing goodwill. Goodwill is currently
being amortized at approximately $3.5 million annually. The
Company is currently evaluating the provisions of SFAS
No. 142 and has not yet determined any additional effects
that adoption of this standard will have on its financial
position or results of operations.

In August 2001, the FASB issued SFAS
No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, which addresses financial accounting
and reporting for the impairment or disposal of long-lived
assets and supersedes SFAS No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of, and the accounting and reporting
provisions of APB Opinion No. 30, Reporting the
Results of Operations for a disposal of a segment of a
business. The Company adopted SFAS No. 144 as of
February 1, 2002 and such adoption did not have a
significant impact on the Companys results of operations
or financial position.

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WHEREHOUSE ENTERTAINMENT, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

4.     Property,
Equipment and Improvements

Property, equipment and improvements consist of
the following at January 31, 2002 and 2001:

|                                               |  |      |             |      |  |   |             | 
|---------------------------------------------- |  | ---- | ----------- | ---- |  | - | ----------- | 
|                                               |  | 2002 |             | 2001
|                                               |  |      |             |     
|Land                                           |  | $    | 141,000     |      |  | $ | 141,000     | 
|Buildings and leasehold improvements           |  |      | 24,142,000  |      |  |   | 24,178,000  | 
|Store and office fixtures and equipment        |  |      | 44,173,000  |      |  |   | 47,599,000  | 
|Data processing equipment and software         |  |      | 26,167,000  |      |  |   | 25,776,000  | 
|Capital leases                                 |  |      | 27,491,000  |      |  |   | 29,391,000  | 
|                                               |  |      |             |      |  |   |             | 
|                                               |  |      | 122,114,000 |      |  |   | 127,085,000 | 
|Less accumulated depreciation and amortization |  |      | 77,575,000  |      |  |   | 59,953,000  | 
|                                               |  |      |             |      |  |   |             | 
|Property and equipment, net                    |  | $    | 44,539,000  |      |  | $ | 67,132,000  | 
|                                               |  |      |             |      |  |   |             | 

Accumulated amortization related to capital lease
assets amounted to $16,555,000 and $12,072,000 at
January 31, 2002 and 2001, respectively.

Other costs of $621,000 for the year ended
January 31, 2002 related to additional store closure
expenses. Other costs of $2,335,000 during the year ended
January 31, 2001, include $931,000 related to the write-off
of system development costs for computer software no longer
utilized by the Company and $1,404,000 related principally to
additional store closure expenses.

5.     Accrued
Expenses

Accrued expenses consists of the following at
January 31, 2002 and 2001:

|                                            |  |      |            |      |  |   |            | 
|------------------------------------------- |  | ---- | ---------- | ---- |  | - | ---------- | 
|                                            |  | 2002 |            | 2001
|                                            |  |      |            |     
|Gift certificate and credit slips liability |  | $    | 21,155,000 |      |  | $ | 18,552,000 | 
|Payroll and related costs                   |  |      | 7,508,000  |      |  |   | 7,488,000  | 
|Accrued property taxes                      |  |      | 1,957,000  |      |  |   | 1,844,000  | 
|Other                                       |  |      | 2,609,000  |      |  |   | 3,791,000  | 
|                                            |  |      |            |      |  |   |            | 
|                                            |  | $    | 33,229,000 |      |  | $ | 31,675,000 | 
|                                            |  |      |            |      |  |   |            | 

6.     Revolving
Credit Facility

The Company maintains a financing agreement (the
Facility) with a financial institution which
provides for a revolving credit line of up to $155,000,000,
including a letter of credit subfacility of $10,000,000 (which
amount can be increased at the discretion of the lender,
Congress Financial Corporation), expiring on October 31,
2003, with year to year renewal options thereafter.

The Facility bears interest at the prime rate
(4.75% at January 31, 2002) plus 0.5%, or at the
Companys election, an adjusted Eurodollar rate (1.85% at
January 31, 2002) plus 1.75%. The Companys borrowing
availability is subject to limitations based upon, among other
things, the value of certain eligible merchandise inventory. At
January 31, 2002, the Companys estimated availability
under the Facility was $59.0 million.

The Company pays an unused line fee of 0.375% per
annum calculated upon the amount by which $120,000,000 exceeds
the average daily principal balance of the outstanding loans and
letter of credit outstanding during the immediately preceding
month. As of January 31, 2002, there was an outstanding
loan balance of $10,450,000 and an outstanding letter of credit
of $11,396,000.

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WHEREHOUSE ENTERTAINMENT, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The Facility contains certain financial
covenants, including the maintenance of minimum adjusted net
worth (as defined) and debt service coverage ratios, and is
collateralized by substantially all of the assets of the Company.

Under the Facility, dividends may only be paid
if, after the dividend payment, the sum of (i) the
Companys cash and (ii) availability under the
Facility, less outstanding and unpaid obligations and certain
trade payables, exceeds $20,000,000.

7.     Income
Taxes

The provision (benefit) for income taxes is
summarized as follows:

|          |                     |                        |   |            |            |      |   |             |             |   |   |         |         | 
|--------- | ------------------- | ---------------------- | - | ---------- | ---------- | ---- | - | ----------- | ----------- | - | - | ------- | ------- | 
|          |                     |                       
|          |                     | Year Ended January 31,
|          |                     |                       
|          |                     | 2002                   |   | 2001       |            | 2000
|          |                     |                        |   |            |            |     
|Current:  |                     |                        |   |            |            |      |   |             |             |   |   |        
|          | Federal             |                        | $ | 1,260,000  |            |      | $ | (12,350,000 | )           |   | $ | 45,000  |        
|          | State               |                        |   | 332,000    |            |      |   | 352,000     |             |   |   | 160,000 |        
|          |                     |                        |   |            |            |      |   |             |             |   |   |        
|          |                     | Total current          |   |            | 1,592,000  |      |   |             | (11,998,000 | ) |   |         | 205,000 | 
|          |                     |                        |   |            |            |      |   |             |             |   |   |        
|Deferred: |                     |                        |   |            |            |      |   |             |             |   |   |        
|          | Federal             |                        |   | (7,767,000 | )          |      |   | 1,998,000   |             |   |   | 459,000 |        
|          | State               |                        |   | (1,278,000 | )          |      |   | (1,362,000  | )           |   |   | (27,000 | )      
|          | Valuation allowance |                        |   | 34,914,000 |            |      |   |             |             |   |   |         |        
|          |                     |                        |   |            |            |      |   |             |             |   |   |        
|          |                     | Total deferred         |   |            | 25,869,000 |      |   |             | 636,000     |   |   |         | 432,000 | 
|          |                     |                        |   |            |            |      |   |             |             |   |   |        
|          |                     | Total                  |   | $          | 27,461,000 |      |   | $           | (11,362,000 | ) |   | $       | 637,000 | 
|          |                     |                        |   |            |            |      |   |             |             |   |   |        

A reconciliation of the difference between the
federal statutory tax rate and the effective tax rate is
summarized as follows:

|                                     |  |                        |        |      |  |      |       |    |  |  |        |   
|------------------------------------ |  | ---------------------- | ------ | ---- |  | ---- | ----- | -- |  |  | ------ | --
|                                     |  |                       
|                                     |  | Year Ended January 31,
|                                     |  |                       
|                                     |  | 2002                   |        | 2001 |  | 2000
|                                     |  |                        |        |      |  |     
|Statutory tax rate                   |  |                        | (35.0  | )%   |  |      | (35.0 | )% |  |  | (35.0  | )%
|Valuation allowance                  |  |                        | 133.1  |      |  |      |       |    |  |  |        |   
|Non-deductible goodwill amortization |  |                        | 2.9    |      |  |      | 2.1   |    |  |  | 123.0  |   
|Other permanent tax differences      |  |                        | 6.0    |      |  |      | 0.5   |    |  |  | 11.0   |   
|State taxes, net of federal benefit  |  |                        | (2.3   | )    |  |      | (2.0  | )  |  |  | 14.9   |   
|                                     |  |                        |        |      |  |      |       |    |  |  |        |   
|                                     |  |                        | 104.7% |      |  |      | (34.4 | )% |  |  | 113.9% |   
|                                     |  |                        |        |      |  |      |       |    |  |  |        |   

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##### Table of Contents



WHEREHOUSE ENTERTAINMENT, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The components of net deferred income taxes at
January 31, 2002 and 2001 are as follows:

|                                                         |                                      |               |                                      |             |   |   |   |            |           |            | 
|-------------------------------------------------------- | ------------------------------------ | ------------- | ------------------------------------ | ----------- | - | - | - | ---------- | --------- | ---------- | 
|                                                         |                                      | 2002          |                                      | 2001       
|                                                         |                                      |               |                                      |            
|Net current deferred income tax assets
	(liabilities):   |                                      |               |                                      |             |   |   |   |           
|                                                         | Merchandise inventory                |               | $                                    | 3,296,000   |   |   | $ | (1,095,000 | )        
|                                                         | Losses from equity investment        |               |                                      | 1,961,000   |   |   |   | 3,723,000  |          
|                                                         | Other accrued liabilities            |               |                                      | 163,000     |   |   |   | 679,000    |          
|                                                         | Other taxes                          |               |                                      | (435,000    | ) |   |   | (1,434,000 | )        
|                                                         | Business Acquisition                 |               |                                      | 2,322,000   |   |   |   | 4,110,000  |          
|                                                         | Valuation allowance                  |               |                                      | (7,307,000  | ) |   |   |            |          
|                                                         |                                      |               |                                      |             |   |   |   |           
|                                                         |                                      | Total current |                                      |             |  |   |   |            | 5,983,000 |           
|                                                         |                                      |               |                                      |             |   |   |   |           
|Net long-term deferred income tax assets
	(liabilities): |                                      |               |                                      |             |   |   |   |           
|                                                         | Reorganization value                 |               |                                      | 1,854,000   |   |   |   | 1,854,000  |          
|                                                         | Deferred rent                        |               |                                      | 1,222,000   |   |   |   | 1,279,000  |          
|                                                         | Property, equipment and improvements |               |                                      | 9,813,000   |   |   |   | 5,422,000  |          
|                                                         | Business Acquisition                 |               |                                      | 3,843,000   |   |   |   | 5,890,000  |          
|                                                         | Net operating loss                   |               |                                      | 10,875,000  |   |   |   | 5,441,000  |          
|                                                         | Valuation allowance                  |               |                                      | (27,607,000 | ) |   |   |            |          
|                                                         |                                      |               |                                      |             |   |   |   |           
|                                                         |                                      |               | Total long-term                      |             |   |  |   |            |           | 19,886,000 | 
|                                                         |                                      |               |                                      |             |   |   |   |           
|                                                         |                                      |               | Total net deferred income tax assets |             | $ |  |   |            | $         | 25,869,000 | 
|                                                         |                                      |               |                                      |             |   |   |   |           

The Company is currently undergoing an audit by
the Internal Revenue Service for Fiscal 1998. Management
believes that it has made adequate provision in the accompanying
consolidated financial statements for this audit and required
adjustments, if any, would not have a significant impact on the
consolidated financial statements included.

The Company has approximately $25.0 million
of federal net operating losses which can be carried forward to
offset future federal taxable income. The ability to use these
loss carryforwards will expire beginning in the fiscal year
ending January 31, 2021 and ending in the fiscal year
ending January 31, 2022. The Company has various state net
operating losses that can be carried forward to offset future
state taxable income. The ability to use these state loss
carryforwards will begin to expire at various times depending
upon specific state law.

On March 6, 2002, the Job Creation and
Worker Assistance Act was passed. Among other things, the act
temporarily extends the net operating loss carryback from two to
five years. The provision is effective for net operating losses
generated after December 31, 2000. As a result, the Company
expects to recognize approximately $1,500,000 of tax refunds
during the quarter ending April 30, 2002.

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WHEREHOUSE ENTERTAINMENT, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

8.     Earnings Per
Share

The following table is a reconciliation of the
basic and diluted earnings per share computations:

|                         |              |                                            |       |             |            |      |       |             |            |   |       |            |            | 
|------------------------ | ------------ | ------------------------------------------ | ----- | ----------- | ---------- | ---- | ----- | ----------- | ---------- | - | ----- | ---------- | ---------- | 
|                         |              |                                           
|                         |              | Year Ended January 31,                    
|                         |              |                                           
|                         |              | 2002                                       |       | 2001        |            | 2000
|                         |              |                                            |       |             |            |     
|Basic EPS Computation:   |              |                                            |       |             |            |      |       |             |            |   |       |           
|                         | Numerator    |                                            | $     | (53,696,000 | )          |      | $     | (21,646,000 | )          |   | $     | (1,196,000 | )         
|                         | Denominator: |                                            |       |             |            |      |       |             |            |   |       |            |           
|                         |              | Weighted average common shares outstanding |       |             | 11,007,000 |      |       |             | 10,989,000 |   |       |            | 10,750,000 | 
|                         |              |                                            |       |             |            |      |       |             |            |   |       |           
|Basic EPS                |              | $                                          | (4.88 | )           |            | $    | (1.97 | )           |            | $ | (0.11 | )         
|                         |              |                                            |       |             |            |      |       |             |            |   |       |           
|Diluted EPS Computation: |              |                                            |       |             |            |      |       |             |            |   |       |           
|                         | Numerator    |                                            | $     | (53,696,000 | )          |      | $     | (21,646,000 | )          |   | $     | (1,196,000 | )         
|                         | Denominator: |                                            |       |             |            |      |       |             |            |   |       |            |           
|                         |              | Weighted average common shares outstanding |       |             | 11,007,000 |      |       |             | 10,989,000 |   |       |            | 10,750,000 | 
|                         |              |                                            |       |             |            |      |       |             |            |   |       |           
|Diluted EPS              |              | $                                          | (4.88 | )           |            | $    | (1.97 | )           |            | $ | (0.11 | )         
|                         |              |                                            |       |             |            |      |       |             |            |   |       |           

Options and warrants were not included in the
computation of diluted earnings per share because, during each
of the years ended January 31, 2002, 2001 and 2000, there
was a net loss and therefore, all options and warrants would be
antidilutive.

9.     Commitments
and Contingencies

Leases

The Company leases all of its retail stores and
other facilities under non-cancelable lease agreements that
expire on various dates and provide for renewal options. Certain
of these leases have scheduled rent increases or require rent
escalations based on the consumer price index and/or provide for
payment of the real estate taxes and additional rents based on a
percentage of sales. Leases related to certain stores acquired
(see Note 1) are reflected as capital leases in the
accompanying consolidated balance sheets at January 31,
2002 and 2001. In addition, the Company leases certain equipment
under capital lease agreements.

Future minimum annual lease payments under
operating and capital leases at January 31, 2002 are
payable as follows:

|                        |                                         |           |            |             |  |   |           |            | 
|----------------------- | --------------------------------------- | --------- | ---------- | ----------- |  | - | --------- | ---------- | 
|Year Ending January 31, |                                         | Operating |            | Capital    
|                        |                                         |           |            |            
|2003                    |                                         | $         | 52,788,000 |             |  | $ | 5,500,000 |           
|2004                    |                                         |           | 47,172,000 |             |  |   | 3,710,000 |           
|2005                    |                                         |           | 34,505,000 |             |  |   | 3,178,000 |           
|2006                    |                                         |           | 22,483,000 |             |  |   | 2,347,000 |           
|2007                    |                                         |           | 14,740,000 |             |  |   | 1,475,000 |           
|Thereafter              |                                         |           | 27,023,000 |             |  |   | 2,381,000 |           
|                        |                                         |           |            |             |  |   |           |           
|                        | Total minimum lease payments            |           | $          | 198,711,000 |  |   |           | 18,591,000 | 
|                        |                                         |           |            |             |  |   |           |           
|                        | Less amounts representing interest      |           |            |             |  |   |           | 2,771,000  | 
|                        |                                         |           |            |             |  |   |           |           
|                        | Present value of minimum lease payments |           |            |             |  |   | $         | 15,820,000 | 
|                        |                                         |           |            |             |  |   |           |           

F-17



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##### Table of Contents



WHEREHOUSE ENTERTAINMENT, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Rental expense charged to operations was
$54,629,000, $58,257,000, and $59,205,000 during Fiscal 2002,
2001 and 2000, respectively. In addition, real estate taxes and
additional rents based on percentage of sales were $6,966,000,
$7,751,000, and $8,272,000 during Fiscal 2002, 2001, and 2000,
respectively.

Other

In January, 2001, the Company was sued in the Los
Angeles Superior Court by a former store manager, claiming
alleged failure to pay overtime wages to herself and all
similarly situated salaried store employees. The Complaint does
not specify any amount of the claims, either individually or on
behalf of the class. Thereafter, the Complaint was amended to
add three additional named plaintiffs. The amended Complaint
seeks relief on behalf of both store managers and assistant
managers going back to 1997. The Companys motions to
strike the class action allegations have been denied. A limited
amount of discovery has been conducted to date. In October,
2001, a second class action suit was filed with respect to store
managers and assistant managers by different named plaintiffs
and different lawyers. It also seeks overtime pay and, in
addition, asserts claims for meal break and rest break
penalties. The plaintiffs in the two suits are in the process of
filing a consolidated complaint. The Company believes the
allegations in both suits are without merit and intends to
vigorously defend itself in these matters. 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 July 18, 2001, the Santa Clara County,
California Superior Court entered a $7.6 million judgment
against the Company in a personal injury lawsuit encaptioned
Peterson, et al. v. Shapell Industries (the
Peterson Lawsuit). While the Company was insured for
this judgment, its insurer, Reliance Insurance Company, was
ordered liquidated by the State of Pennsylvania on
October 3, 2001. As such, it is unknown at present whether,
and to what extent, assets of the insurer will be available to
the Company subsequent to a formal liquidation proceeding.
Pending this outcome, Californias Insurance Guarantee Fund
(CIGA) has engaged appellate counsel on behalf of
the Company. CIGA has also facilitated the posting of an
appellate bond to stay execution of the Peterson judgment
pending the outcome of the Companys appeal. The Company
was required by the bonding company to provide an
$11.4 million letter of credit as security for the
appellate bond. Management, based on the advice of legal
counsel, believes that it is reasonably possible that it will
either prevail on appeal or be successful in an alternative
legal strategy and, accordingly, has not recorded a liability
for the judgment in the accompanying financial statements.

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.

10.     Shareholders
Equity

The Company has the following classes of stock:

Preferred Stock  $.01 par value;
3,000,000 shares authorized; none issued.

Common Stock  $.01 par value;
24,000,000 shares authorized; 11,171,869 and 11,026,421 shares
issued; and 11,146,869 and 11,001,421 shares outstanding at
January 31, 2002 and 2001, respectively.

Pursuant to a Management Services Agreement dated
as of January 31, 1997 and as subsequently amended (the
Management Services Agreement), and a Stock
Subscription Agreement dated as of January 31, 1997 (the
Stock Subscription Agreement), the Company agreed to
sell, and A&M Investment Associates #3, LLC
(A&M #3), an affiliate of Alvarez and
Marsal, Inc. agreed to buy at a purchase price of $6,340,000
($1,000,000 in cash from A&M #3s funds, plus a
secured recourse promissory note in the principal amount of
$335,000 and a secured non-recourse promissory note in the
amount of $5,005,000

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##### Table of Contents



WHEREHOUSE ENTERTAINMENT, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(collectively, as amended, the Promissory Notes),
1,100,000 shares of the common stock (the A&M Shares)
(subject to adjustment upward or downward to represent 10% of
the sum of (i) the shares of common stock ultimately issued
under the Reorganization Plan plus (ii) the number of
shares of common stock issued to A&M #3). On
December 10, 1998, the A&M Shares were adjusted
downward by 20,764, which reduced the total shares to A&M as
of January 31, 1999 to 1,079,236. The Promissory Notes bear
interest at 7% per annum during the first six years and 11% per
annum during the seventh through ninth years, mature on
January 31, 2006, and have no scheduled interest and
principal amortization until their maturity date. The Promissory
Notes are secured by a first priority pledge of the A&M
Shares pursuant to a Pledge Agreement dated as of
January 31, 1997.

In addition, New Wherehouse and A&M #3
entered into a Non-Transferable Stock Option Agreement dated as
of January 31, 1997, (as amended, the Stock Option
Agreement), pursuant to which the Company issued to
A&M #3 three tranches of options to purchase shares of
common stock (the A&M Options; and, together with the
A&M Shares, the A&M Securities) representing in the
aggregate the right to purchase an additional 10% of the shares
of common stock issued under the Reorganization Plan. The first
tranche of options represents the right to purchase 399,717
shares of common stock at an exercise price of $8.80. The second
tranche of options represents the right to purchase 399,717
shares of common stock at an exercise price of $10.66. The third
tranche of options represents the right to purchase 399,717
shares of common stock at an exercise price of $12.97. The
A&M Options are fully vested and all unexercised
A&M Options expire on January 31, 2004, subject to
prior vesting or termination as set forth in the Management
Services Agreement. The A&M Options are subject to
upward adjustment on a quarterly basis as additional shares of
common stock related to the Reorganization are issued and are
entitled to certain other anti-dilution provisions as set forth
in the Stock Option Agreement. The above option amounts and
exercise prices have been adjusted for anti-dilution effects
through January 31, 2002.

Under the Reorganization Plan, the Company issued
three Tranches of warrants to purchase shares of common stock
(the Warrants). The Tranche A warrants
represented the right to purchase 576,000 shares of common stock
at an exercise price of $2.38 per share and had a five year
maturity. The Tranche A warrants matured on
January 31, 2002 with 386,903 warrants being exercised
resulting in 145,448 shares of common stock being issued on
January 17, 2002 and 241,455 shares of common stock being
issued on February 15, 2002. The remaining Tranche A
warrants expired. The Tranche B warrants represent the
right to purchase 100,000 shares of common stock at an exercise
price of $9.00 per share and have a seven year maturity expiring
in Fiscal 2004. The Tranche C warrants represent the right
to purchase 100,000 shares of common stock at an exercise price
of $11.00 per share and have a seven year maturity expiring in
Fiscal 2004.

During April 1998, the Board of Directors adopted
the Wherehouse 1998 Stock Incentive Plan (1998 Stock
Incentive Plan), which was amended on September 22,
1998 and April 13, 2000 to increase the number of shares
available to 600,000 and 800,000, respectively. Under the
provisions of the 1998 Stock Incentive Plan, the Company may
grant incentive and non-qualified stock options and stock
appreciation rights (SARs) to employees, officers and directors
at the discretion of the Board of Directors. Options granted
under the 1998 Stock Option Plan vest ratably over a five year
period and expire ten years from the date of the grant.

Non-qualified options are granted at an exercise
price of no less than 85% of fair market value at the date of
the grant. Incentive options are granted at no less than 100%
(110% for holders of more than 10% of the voting stock) of the
fair market value at the date of the grant. During 2001, the
Company granted 197,000 options to purchase shares of common
stock to officers and employees at $18 per share, an amount
that was less than the $20 per share price paid by
affiliates of the Companys partner in CheckOut.com (See
Note 1). Accordingly, the difference will be recorded as
compensation expense over the vesting period of the options.

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##### Table of Contents



WHEREHOUSE ENTERTAINMENT, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

There were no options or SARs granted during
2002. A summary of activity in the 1998 Stock Incentive Plan is
as follows:

|                                              |  |        |          |                  |  |   |       | 
|--------------------------------------------- |  | ------ | -------- | ---------------- |  | - | ----- | 
|                                              |  |        |          | Weighted Average
|                                              |  | Shares |          | Exercise Price  
|                                              |  |        |          |                 
|Options outstanding at January 31, 1999       |  |        | 339,500  |                  |  | $ | 13.60 | 
|Options granted at $12.00  $18.00 per
	share |  |        | 254,500  |                  |  | $ | 18.00 | 
|Options cancelled                             |  |        | (182,000 | )                |  | $ | 15.51 | 
|                                              |  |        |          |                  |  |   |       | 
|Options outstanding at January 31, 2000       |  |        | 412,000  |                  |  | $ | 15.52 | 
|Options granted at $18.00 per share           |  |        | 197,000  |                  |  | $ | 18.00 | 
|Options cancelled                             |  |        | (83,000  | )                |  | $ | 17.49 | 
|                                              |  |        |          |                  |  |   |       | 
|Options outstanding at January 31, 2001       |  |        | 526,000  |                  |  | $ | 16.11 | 
|Options cancelled                             |  |        | (113,000 | )                |  | $ | 17.63 | 
|                                              |  |        |          |                  |  |   |       | 
|Options outstanding at January 31, 2002       |  |        | 413,000  |                  |  | $ | 15.60 | 
|                                              |  |        |          |                  |  |   |       | 

At January 31, 2002, there were 182,400
options exercisable under the 1998 Stock Incentive Plan.

Had compensation expense for grants under the
1998 Stock Incentive Plan been determined based on the fair
value method of SFAS 123, using the assumptions described
below, the Companys net income and earnings per share
would not have been materially different.

The pro forma compensation expense related to the
fair value of options issued was estimated using the
Black-Scholes model with the following assumptions: expected
volatility  none (minimum value method); risk
free-interest rate  5.510%; average life 
6 years and expected dividends  none.

On August 7, 2001, the Board approved the
2001 Stock Incentive Plan (as amended, the 2001 Stock
Incentive Plan). Similar to the 1998 Stock Incentive Plan,
the 2001 Stock Incentive Plan authorizes the grant of incentive
and non-qualified stock options and SARs to employees, officers
and directors at the discretion of the Board of Directors.
Generally speaking, an option or SAR granted under the 2001
Stock Incentive Plan will expire not more than 10 years
after the date of grant. Under the provisions of the 2001 Stock
Incentive Plan, the Compensation Committee of the Board of
Directors determines the applicable vesting schedule for each
Award, subject to any minimum vesting requirements. The maximum
number shares of Common Stock that may be issued under the 2001
Stock Incentive Plan and the Companys 1998 Stock Incentive
Plan may not exceed, in the aggregate, 800,000 shares. No
options have been granted under the 2001 Stock Incentive Plan.



|    |                  
|--- | -----------------
|11. | Employee Benefits

Employees Savings Retirement Plan:All employees who have completed one
year of service and at least 1,000 hours of service in that
year with the Company are eligible to join the tax qualified
401(k) Savings Retirement Plan (the 401(k) Plan) on
the first day of each calendar quarter. All eligible employees
may contribute from 1% to 10% of their annual compensation, up
to defined limitations, on a pre-tax basis. The Company
contributes to the 401(k) Plan based upon employee
contributions. Matching contributions made by the Company vest
25% per year beginning with the employees second year of
employment. The Company recognized expense of $369,000 in 2002,
$376,000 in 2001, and $386,000 in 2000 for matching costs and
administrative costs under the 401(k) Plan.

Employment Agreements:In connection with the Management
Services Agreement (see Note 10), certain specified
executive services are provided to the Company in exchange for
annual fees, plus incentive

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##### Table of Contents



WHEREHOUSE ENTERTAINMENT, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

fees up to $230,000, if certain financial targets
are achieved. Expenses, including incentives, amounted to
$305,000, $670,000, and $1,495,000 during the years ended
January 31, 2002, 2001 and 2000, respectively.

In the event that the Companys Chairman of
the Board, under the Management Services Agreement, is
terminated other than for cause (as defined in the Management
Services Agreement), prior to October 14, 2002, the
Management Services Agreement provides that
(i) A&M #3 will have the right to require the
Company to purchase the shares of common stock and options
(whether or not vested), owned by A&M #3, and
(ii) the Company will pay A&M cash in a lump sum amount
equal to $20,000 multiplied by the number of months remaining
from the time of termination to October 14, 2002. The price
to be paid by the Company in purchasing the shares of common
stock and options to acquire common stock owned by
A&M #3 will depend on the fair market value (as defined
in the Management Services Agreement) of the common stock at the
time of purchase. Any payments made to A&M #3 in
purchasing the shares of common stock and options to acquire
common stock from A&M #3 are required to be applied to
reduce the outstanding amounts under the Promissory Notes.



|    |                            
|--- | ---------------------------
|12. | Year 2000 Remediation Costs

Non-recurring costs of $176,000 relating to the
Companys remediation of its computer systems to comply
with Year 2000 readiness requirements were recorded during 2000.

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##### Table of Contents



WHEREHOUSE ENTERTAINMENT, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

13.     Quarterly
Results of Operations (Unaudited)

The following is a summary of the quarterly
results of operations for the years ended January 31, 2002
and 2001 (in thousands, except per share amounts):

|                                     |         |               |         |         |   |            |         |            |   |   |         |        |   |   |         |        |  
|------------------------------------ | ------- | ------------- | ------- | ------- | - | ---------- | ------- | ---------- | - | - | ------- | ------ | - | - | ------- | ------ | -
|                                     |         |              
|                                     |         | Quarter Ended
|                                     |         |              
|                                     |         | April 30      |         | July 31 |   | October 31 |         | January 31
|                                     |         |               |         |         |   |            |         |           
|2002                                 |         |               |         |         |   |            |         |            |   |   |         |        |   |   |         |       
|Total revenues                       |         | $             | 150,557 |         |   | $          | 150,788 |            |   | $ | 129,407 |        |   | $ | 173,560 |       
|Gross profit                         |         |               | 53,284  |         |   |            | 51,369  |            |   |   | 44,405  |        |   |   | 58,602  |       
|Income (loss) from operations        |         |               | (7,091  | )       |   |            | (8,795  | )          |   |   | (14,402 | )      |   |   | 8,740   |       
|Net income (loss)                    |         |               | (5,269  | )       |   |            | (6,088  | )          |   |   | (47,502 | )      |   |   | 5,163   |       
|Net income (loss) per common share:  |         |               |         |         |   |            |         |            |   |   |         |        |   |   |         |       
|                                     | Basic   |               |         | (.48    | ) |            |         | (.55       | ) |   |         | (4.32  | ) |   |         | .47    |  
|                                     | Diluted |               |         | (.48    | ) |            |         | (.55       | ) |   |         | (4.32  | ) |   |         | .46    |  
|Weighted average shares outstanding: |         |               |         |         |   |            |         |            |   |   |         |        |   |   |         |       
|                                     | Basic   |               |         | 11,001  |   |            |         | 11,001     |   |   |         | 11,001 |   |   |         | 11,025 |  
|                                     | Diluted |               |         | 11,001  |   |            |         | 11,001     |   |   |         | 11,001 |   |   |         | 11,280 |  
|2001                                 |         |               |         |         |   |            |         |            |   |   |         |        |   |   |         |       
|Total revenues                       |         | $             | 176,767 |         |   | $          | 166,588 |            |   | $ | 148,796 |        |   | $ | 214,260 |       
|Gross profit                         |         |               | 63,485  |         |   |            | 58,322  |            |   |   | 54,914  |        |   |   | 71,915  |       
|Income (loss) from operations        |         |               | (2,506  | )       |   |            | (4,223  | )          |   |   | (7,425  | )      |   |   | 9,889   |       
|Net loss                             |         |               | (4,668  | )       |   |            | (5,436  | )          |   |   | (7,583  | )      |   |   | (3,959  | )     
|Net loss per common share:           |         |               |         |         |   |            |         |            |   |   |         |        |   |   |         |       
|                                     | Basic   |               |         | (.43    | ) |            |         | (.49       | ) |   |         | (.69   | ) |   |         | (.36   | )
|                                     | Diluted |               |         | (.43    | ) |            |         | (.49       | ) |   |         | (.69   | ) |   |         | (.36   | )
|Weighted average shares outstanding: |         |               |         |         |   |            |         |            |   |   |         |        |   |   |         |       
|                                     | Basic   |               |         | 10,950  |   |            |         | 11,001     |   |   |         | 11,001 |   |   |         | 11,001 |  
|                                     | Diluted |               |         | 10,950  |   |            |         | 11,001     |   |   |         | 11,001 |   |   |         | 11,001 |  

F-22