<PAGE>
                    SECURITIES AND EXCHANGE COMMISSION
                          Washington, D.C.  20549

                                 FORM 10-K

    [X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934 (FEE REQUIRED)
         For the fiscal year ended January 31, 1997

    [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
         THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)

                       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) 538-2314
                 (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:  None

    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
registrants was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.   Yes [  ]  No [ x ]

    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.     [ X ]

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    The aggregate market value of the voting stock held by non-affiliates of
the registrant is $5,446,000(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   X    No
    -----     -----

    As of January 31, 1997, 10,257,808 shares of the registrant's common stock
were issued and outstanding and 917,515 additional shares are expected to be
issued pursuant to the bankruptcy plan of reorganization discussed in Item 1
below.

(1) There is no established trading market for the voting stock of the
    registrant.  As of January 31, 1997, 10,257,808 shares of the registrant's
    voting stock was issued and outstanding.  All but 1,100,000 of those shares
    were issued pursuant to a bankruptcy plan of reorganization.  See
    "Reorganization Under Chapter 11" in Item 1 below.  The registrant
    estimates that 917,515 additional shares of its voting stock may be issued
    pursuant to the plan of reorganization, after which a total of 11,175,323
    shares of the registrant's voting stock will be issued and outstanding.
    The registrant estimates that of that number of total outstanding shares,
    approximately 680,162 shares will be held by non-affiliates of the
    registrant.  The registrant estimates that the net equity value of the
    registrant on a pro forma basis as of January 31, 1997 after giving effect
    to the plan of reorganization is $89,483,000.  This estimate is based on a
    valuation prepared by American Appraisal Associates, Inc. ("AAA") in
    connection with the confirmation of the Reorganization Plan.  Certain
    Senior Subordinated Noteholders and the Official Committee of Unsecured
    Creditors in the Bankruptcy Case initially contested the Reorganization
    Plan.  Their arguments in opposition to the Reorganization Plan included
    their contention that the value of the Company is higher than estimated by
    AAA.  Since this matter was resolved consensually, the Bankruptcy Court
    never ruled on this issue.  The market value of voting stock held by
    non-affiliates of the registrant specified above assumes the issuance of
    all 11,175,323 shares and was calculated by dividing the pro forma net
    equity value of the registrant of $89,483,000 by 11,175,323 outstanding
    shares, and multiplying the resulting quotient by 680,162 the approximate
    number of shares expected to be held by non-affiliates of the registrant.

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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,"
"Reorganization Under Chapter 11," "Merchandise Sale Products and Supply,"
"Video and Other Product Rentals," and "Competition" under Item I below,
"Holders" under Item 5 below, and "Management's Discussion and Analysis of
Financial Condition and Results of Operation," 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 issuances of shares, future capital expenditures
(including the amount and nature thereof), expansion and other development 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.
Although the registrant believes the expectations expressed in such
forward-looking statements are based on reasonable assumptions within the bounds
of its knowledge of its business, a number of factors could cause actual results
to differ materially from those expressed in any forward-looking statements,
whether oral or written, made by or on behalf of the registrant.

    The registrant's operations are subject to factors outside its control.
Any one, or a combination, of these factors could materially affect the results
of the registrant's operations.  These factors include:  (a) changes in levels
of competition from current competitors and potential new competition from both
retail stores and alternative methods or channels of distribution such as
electronic and telephone shopping services and mail order; (b) loss of a
significant vendor or prolonged disruption of product supply; (c) the presence
or absence of popular new releases and products in the product categories the
registrant represents; (d) changes in levels of consumer spending, especially
during seasonally significant periods; (e) changes in the Federal and state
income tax rules and regulations or interpretations of existing legislation; (f)
changes in the general economic conditions in the United States, and in
particular the eight major markets served by the registrant, including, but not
limited to consumer sentiment about the economy in general; (g) changes in
availability or terms of working capital financing from vendors and lending
institutions; (h) adverse results in significant litigation matters; and (i) the
ability to attract and retain key personnel.  The foregoing should not be
construed as an exhaustive list of all factors which could cause actual results
to differ materially from those expressed in forward-looking statements made by
the registrant.  Forward-looking statements made by or on behalf of the
registrant are based on a knowledge of its business and the environment in which
it operates, but because of the factors listed above, actual results may differ
from those anticipated results described in these forward-looking statements.
Consequently, all of the forward-looking statements made are qualified by these
cautionary statements and there can be no assurance that the actual results or
developments anticipated by the registrant will be realized or, even if
substantially realized, that they will have the expected consequences to or
effects on the registrant or its business or operations.

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                                        PART I

ITEM 1.  BUSINESS

    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 (the
"Acquisition") substantially all the assets of Wherehouse Dissolution Co. ("Old
Wherehouse"), a Delaware corporation, and its parent company, WEI Holdings,
Inc., a Delaware corporation ("WEI"; and together with Old Wherehouse, the
"Debtors"), pursuant to a Chapter 11 plan of reorganization (as described in
"Reorganization Under Chapter 11" below).  Prior to the Acquisition, Old
Wherehouse was known as "Wherehouse Entertainment, Inc.," and, after the
Acquisition, Old Wherehouse changed its name to Wherehouse Dissolution Co.
After the Acquisition, New Wherehouse changed its name to "Wherehouse
Entertainment, Inc."  New Wherehouse is the successor to Old Wherehouse, and New
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.  New Wherehouse and Old Wherehouse will be collectively referred to in
this Annual Report as the "Company" or "Wherehouse" where the discussion relates
to the continuing business operations of Old Wherehouse and New Wherehouse.

    Based upon published and other information available to its management,
Wherehouse is, in terms of both revenues and store count, one of the largest
retailers of prerecorded music and videocassette rentals in the western United
States.  Old Wherehouse was founded in 1970 as a music retailer.  Since then,
Wherehouse has evolved into a diversified entertainment retailer with a broad
range of prerecorded music, videocassettes and other products.  As Wherehouse
has grown, its product lines and product mix have been adapted to respond to
changes in electronic technology and consumer tastes.


REORGANIZATION UNDER CHAPTER 11

    On August 2, 1995 (the "Petition Date"), WEI and Old Wherehouse 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 and 
allow their emergence from Chapter 11.

    The Debtors' plan of reorganization, entitled the "Debtors' First Amended
Chapter 11 Plan, as Revised for Technical Corrections on October 4, 1996 and
Supplemental Amendments on December 2, 1996 and December 13, 1996" (the
"Reorganization Plan"), was confirmed by an order of the Bankruptcy Court
entered on January 7, 1997 entitled "Findings of Fact, Conclusions of Law and
Order Confirming Debtors' First Amended Chapter 11 Plan Under Chapter 11 of the
Bankruptcy Code" (the "Confirmation Order").  The effective date of the
Reorganization Plan occurred on January 31, 1997 (the "Plan Effective Date").
New

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Wherehouse (as opposed to Old Wherehouse and WEI) was never the subject of a
bankruptcy case.  Since the Plan Effective Date, the Bankruptcy Court has
retained jurisdiction over certain claims and other matters relating to the
Debtors' bankruptcy estates, but New Wherehouse has been and is free to carry
out its business without oversight by the Bankruptcy Court.

    As of the Petition Date, payment of pre-petition liabilities to the
creditors of the Debtors, and pending litigation against the Debtors were stayed
while they continued their business operations as debtors-in-possession.

    IMPLEMENTATION OF THE REORGANIZATION PLAN

    Pursuant to the Reorganization Plan, substantially all of the assets of the
Debtors and certain liabilities were transferred to New Wherehouse.  The Debtors
have assigned to New Wherehouse all of their executory contracts and unexpired
leases assumed during the Bankruptcy Case (not otherwise assigned to third
parties).  The Reorganization Plan provides that the Debtors' bankruptcy estates
will be liquidated by New Wherehouse.

    DISTRIBUTIONS UNDER THE REORGANIZATION PLAN

    Under the Reorganization Plan, substantially all of the Debtors'
indebtedness held by their creditors was cancelled in exchange for cash, shares
of the Common Stock of New Wherehouse, par value $0.01 per share (the "New
Common Stock"), and/or warrants to purchase New Common Stock or for no
consideration.  The Debtors' major groups of creditors were (1) senior lenders
under Old Wherehouse's bank credit agreement (the "Senior Lenders") led by
Cerberus Partners, L.P. ("Cerberus") as the agent for the Senior Lenders, (2)
trade creditors (the "Trade Creditors"), (3) holders of Old Wherehouse's Senior
Subordinated Notes (the "Senior Subordinated Noteholders"), (4) holders of Old
Wherehouse's 6 3/4% Convertible Subordinated Debentures (the "Convertible
Debentureholders"), (5) other general unsecured creditors (the "General
Unsecured Creditors") and (6) Federal and state taxing authorities.

    As of the Plan Effective Date and following the exercise of the Exchange 
Option (as described below) by certain Trade Creditors whose claims had been 
resolved as of the Plan Effective Date, the Senior Lenders received 9,157,808 
shares of New Common Stock under the Reorganization Plan on account of their 
claims, representing approximately 89% of the issued and outstanding shares 
of New Common Stock as of such date prior to dilution for the Warrants 
described below but after dilution for the A&M Shares (as defined in Item 13 
below under "Certain Relationships and Related Transactions").  The Senior 
Lenders were paid approximately $2.8 million of adequate protection payments 
during the Bankruptcy Case and also received approximately $256,000 in cash 
subsequent to the Plan Effective Date.  The Senior Lenders are likely to 
receive additional shares of New Common Stock and cash as the claims of 
unsecured creditors (including Trade Creditors) are resolved.  Based upon New 
Wherehouse's estimate of the resolution of Trade Claims, New Wherehouse 
estimates that the Senior Lenders (or their assigns) will receive 
approximately 9.4 million shares of New Common Stock in total.  This total 
may increase based on an anti-dilution feature in the Reorganization Plan. 
Approximately $94.6 million of indebtedness held by the Senior Lenders was 
cancelled in exchange for the issuance of such shares of New Common Stock and 
cash.

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    Under the Reorganization Plan, those Trade Creditors identified by Old 
Wherehouse as continuing suppliers of certain inventory products and who 
agreed to provide normal trade credit terms to the Company after the Plan 
Effective Date were give the option (the "Exchange Option") to receive 27% of 
their allowed claims in cash in lieu of shares of New Common Stock.  The 
source of the cash payments to the Trade Creditors exercising the Exchange 
Option was $11,610,000 in cash otherwise distributable to the Senior Lenders 
under the Reorganization Plan.  If a Trade Creditor elected to receive cash 
instead of shares of New Common Stock, the shares of New Common Stock such 
Trade Creditor would have received had it not exercised the Exchange Option 
were distributed to the Senior Lenders.  Substantially all of the Trade 
Creditors elected to exercise the Exchange Option and, as a result, the 
Company estimates that once all claims are resolved, $11,302,000 in cash will 
have been distributed to the Trade Creditors. Approximately $41,900,000 of 
the claims of Trade Creditors who exercised the Exchange Option were 
cancelled in consideration for the cash distributable in respect of such 
claims.  Most of the Company's vendors including its six major distributors 
of pre-recorded music, Warner/Elektra/Atlantic Corporation ("WEA"), Uni 
Distribution Corp. ("UNI"), Sony Music ("SONY"), Polygram Group Distribution, 
Inc. ("PGD"), BMG Distribution ("BMG") and EMI Music Distribution ("EMD"), 
elected to exercise the Exchange Option and have agreed to provide normal 
trade credit terms to the Company.

    Under the Reorganization Plan, the Senior Subordinated Noteholders receive
$2,350,000 of cash from New Wherehouse (plus $1,550,000 of cash from a third
party) and three tranches of warrants to purchase shares of New Common Stock
(the "Warrants").  The Tranche A Warrants represent the right to purchase
576,000 shares of New Common Stock at an exercise price of $2.38 per share and
have a five year maturity.  The Tranche B Warrants represent the right to
purchase 100,000 shares of New 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 New Common Stock at an exercise price of
$11.00 per share and have a seven year maturity.  The Warrants have been issued
and are being distributed by the indenture trustee for the Senior Subordinated
Notes upon the return of letters of transmittal from such Senior Subordinated
Noteholders.  Under the Reorganization Plan, $117,189,722.22 of allowed senior
subordinated note claims were cancelled in consideration of the cash and
Warrants being distributed to the Senior Subordinated Noteholders as described
in this paragraph.

    The Convertible Debentureholders will receive no distribution under the
Reorganization Plan.  Approximately $5,344,000 of outstanding 6 3/4% Convertible
Subordinated Debentures were cancelled.

    Many of the claims of the General Unsecured Creditors have not yet been
adjudicated and allowed by the Bankruptcy Court.  Under the Reorganization Plan,
any claims of the General Unsecured Creditors (including claims of Trade
Creditors who did not elect the Exchange Option) that become allowed by the
Bankruptcy Court will receive approximately 31.92 shares of New Common Stock per
$1,000 in such allowed claims.  Wherehouse presently estimates that
approximately 663,000 shares of New Common Stock will be issued to General
Unsecured Creditors (including Trade Creditors who did not elect the Exchange
Option.)

                                          6

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    Several state and local taxing authorities received on account of their 
claims, Company obligations to pay these claims, with interest, generally six 
years after the tax assessment date in an aggregate principal amount of 
approximately $4.0 million.

    The Reorganization Plan also provides that post-petition claims are to be
paid in full.  The Confirmation Order established procedures for the resolution
of disputed post-petition claims and presently there are a number of disputes
before the Bankruptcy Court concerning such post-petition claims.

    Pursuant to the Reorganization Plan, the Company entered into a loan and
security agreement with Congress Financial Corporation (Western) (the "Congress
Facility"), which provides a borrowing capacity of up to $30,000,000 with a
letter of credit subfacility of $10,000,000, subject to borrowing base
limitations based upon, among other things, the value of certain eligible
merchandise inventory.  As of January 31, 1997, there were no borrowings
outstanding under the Congress Facility, although $0.4 million of letters of
credit were outstanding.

GENERAL

    Wherehouse operated 243 stores at January 31, 1997 in seven states under 
the names "The Wherehouse," "Wherehouse Entertainment," "Record Shop," "Rocky 
Mountain Records" and "Odyssey."  All but three of Wherehouse's stores 
operate under "The Wherehouse" or "Wherehouse Entertainment" names. 
Subsequent to January 31, 1997, the Company closed 3 additional stores. The 
Company also intends to close each of its 9 stores located within Lucky 
Supermarkets by June 30, 1997.

    Wherehouse sells prerecorded music and videocassettes, video games,
personal electronics (including personal stereos, portable stereos, headphones
and related merchandise), blank audiocassettes and videocassettes, and
accessories.  Approximately 84% of Wherehouse's stores also rent both
videocassettes and video games.  Wherehouse believes that this combination
entertainment store format offers competitive advantages relative to those
competitors that operate stores offering only merchandise products for sale or
products for rent.  The merchandise sale and video rental lines complement one
another and offer cross-selling opportunities.  A video rental customer visits a
store at least once, and possibly twice, for each transaction and is presented
each time with Wherehouse's merchandise offerings.

    In the fiscal year ended January 31, 1997 ("fiscal 1997"), sales of
prerecorded music, videocassettes, video games, and accessories accounted for
80.9% of revenues, and rentals of videocassettes, video games, and other
products accounted for 19.1% of revenues.

    Of the 243 stores operating as of January 31, 1997, 210 stores were located
in strip centers or freestanding buildings and 33 were located in malls.
Approximately 89% of Wherehouse's stores are concentrated in eight major
marketing areas (Los Angeles, San Francisco, San Diego, Sacramento, Seattle,
Phoenix, Fresno and Las Vegas) and approximately 83% of the stores are located
in California.  Wherehouse has focused its operations on its eight major
marketing areas in order to create competitive advantages in operations,
advertising and marketing, and distribution.

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                             SALES AND RENTAL REVENUE BY
                                 MERCHANDISE CATEGORY
                                (DOLLARS IN MILLIONS)


                                       Fiscal Years Ended January 31
                            -----------------------------------------------

                                1997      1996      1995      1994      1993
                                ----      ----      ----      ----      ----
 Merchandise Sales

 Total music                  $252.7    $292.2    $333.9    $305.6    $287.0

 New videocassettes             17.9      24.1      25.8      24.3      26.9

 Video game software and
    hardware, general
     merchandise,
    accessories, ticket
     commissions,
    and other                   25.2      34.4      49.8      50.3      40.6
                              ------    ------    ------    ------    ------

 Total merchandise sales      $295.8    $350.7    $409.5    $380.2    $354.5
                              ------    ------    ------    ------    ------
                              ------    ------    ------    ------    ------



 Video and other product        69.7      82.5      90.1      91.6      94.0
                              ------    ------    ------    ------    ------
 rentals


      TOTAL MERCHANDISE       $365.5    $433.2    $499.6    $471.8    $448.5
                              ------    ------    ------    ------    ------
                              ------    ------    ------    ------    ------
      REVENUE




MERCHANDISE SALE PRODUCTS

    Wherehouse stores generally sell a broad array of entertainment products,
including prerecorded music and videocassettes, video game software, accessories
and personal electronics.  The table above summarizes Wherehouse's dollar volume
of sale revenue by merchandise category from fiscal 1993 through fiscal 1997.
The percentage of total revenues contributed by merchandise sales has risen from
79.0% in 1993 to 80.9% in 1997.  The number of different new music titles per
store ranges from approximately 6,000 to 60,000, representing a range of 12,000
to 120,000 individual stock-keeping units in inventory per store.

    Wherehouse's most important product strategy is to ensure constant
availability of the most popular music and video titles while maximizing the
selection of catalog titles of lasting popularity.  With input from store
management and a product allocation team, Wherehouse's inventory management
systems tailor each store's product selections and merchandise mix to local
market demand and maximize the availability of the most popular items 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.

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    Wherehouse also buys and sells used products, principally used CD's, in the
majority of its stores.  The sale of used CDs was first tested in certain of
Wherehouse's stores in fiscal 1993.  Based upon strong consumer acceptance,
Wherehouse began buying used CDs from customers and expanded upon its used
product business significantly in fiscal 1995, 1996 and 1997.  Wherehouse
continues to seek to expand this line of business.

    Prerecorded videocassettes (feature films, music videos, and
self-improvement programming) represented, after music, Wherehouse's second
largest sale product category in fiscal 1996 and fiscal 1997.  As box-office
"hit" motion pictures continue to be released to the videocassette sell-through
market at reduced prices, industry-wide sales of this category have increased.
Wherehouse's revenues from the sales of videocassettes, however, decreased from
fiscal 1993 through 1997 with the proliferation of competitors' outlets selling
videocassettes and the highly competitive pricing of the product, particularly
from discounters and mass merchandisers and the closing of stores during the
Bankruptcy Case.

    Wherehouse sells video game hardware and software, blank audio and
videocassette tapes, music and tape care products, carrying cases, storage
units, and personal electronics.  Wherehouse also collects commissions on event
tickets sold under affiliations with Bay Area Seating Service (BASS) and
Ticketmaster.

VIDEO AND OTHER PRODUCT RENTALS

    Wherehouse's other principal revenue source is the rental of prerecorded
videocassettes and other products, chiefly feature films.  Although most
videocassette rentals are feature films, approximately 12% of Wherehouse's
rentals in fiscal 1997 were nontheatrical titles, such as children's videos,
adult videos, workout videos, music videos, educational videos, and
do-it-yourself videos.  Audiocassette books, video game players and laser discs
are also offered for rent in a few select stores.  As of January 31, 1997, 204
of Wherehouse's 243 stores offered videocassettes and other products for rent.
On average, stores that rent videocassettes carry approximately 5,200 units,
although units can range from as few as 2,400 units to as many as 14,100 units,
representing from approximately 1,700 to 7,100 individual titles.

    Wherehouse purchases prerecorded videocassettes from a variety of
distributors and other suppliers.  As with recording companies, the film
studios, or their videocassette distribution operations, each controls a certain
portion of available titles and seeks to promote those titles.  As of
January 31, 1997, Wherehouse's leading suppliers of prerecorded videocassettes
are Ingram Entertainment, Warner Home Video and UNI.  Wherehouse has not
experienced, and does not anticipate having in the future, any material problems
obtaining its products.

    The Company believes that an important element of efficient video
operations is the disposition of used rental videocassettes to maximize the
productivity of its inventory.  Wherehouse's systems monitor the rental
efficiency of its inventory on an individual title and unit basis.  As a title's
efficiency declines, used rental videocassettes are sold on a clearance basis in
Wherehouse's stores, and, where appropriate, the Company may sell excess used
video inventory to third-party distributors.

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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 purchase 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,
newspaper, direct mail and freestanding inserts.  Advertising generally
emphasizes immediate availability of hit product at competitive prices, as well
as access to a broad array of catalog product.  Wherehouse believes its strategy
of clustering its stores in major markets allows it to optimize the use of its
advertising expenditures.

    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 to promote new
releases and, occasionally, on a label-wide basis.  When Wherehouse runs
pre-authorized advertising that contains reference to a specific title or label,
the related supplier will generally reimburse 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 allowances.  Returns to vendors were suspended following the
bankruptcy filing but were reinstated several months later for most of the
Company's vendors.  Pricing and return policies of the Company's major
distributors are subject to change.


STORE AND SITE SELECTION

    The table below sets forth store openings, closings, total number of
stores, and aggregate square footage under lease for the last five fiscal years:

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                             Stores                            Approximate
                        ------------------
          Total Stores                       Total Stores       Aggregate
Fiscal    at Beginning                         at End         Square Footage
Year      of Period     Opened    Closed     of Period       at End of Period
-----    ------------   ------    ------    -----------      -----------------


1997          297         9         63           243            1,630,000
1996          347         3         53           297            1,994,000
1995          347         4         4            347            2,159,000
1994          313         49        15           347            2,117,000
1993          301         15        3            313            2,011,000

    The Company's strategy of clustering stores in marketing areas has achieved
economies of scale and scope in several business functions, including
advertising, personnel, management and distribution.  During the years prior to
the bankruptcy filing, the Company pursued growth opportunities in existing
marketing areas and selectively grew through acquisition if such growth was
consistent with the Company's strategies.  The Company will continue to take
advantage of opportunities to consolidate or close stores in areas where the
market becomes less favorable.


STORE OPERATIONS AND DISTRIBUTION

    STORE LOCATION.  As of January 31, 1997, the Company had 210 stores located
in strip centers or freestanding buildings and 33 stores located in malls.  The
standard size of strip center or freestanding locations is approximately 6,000
square feet, with an approximate range of 1,500 to 29,500 square feet.  Mall
stores range in size from 1,750 to 10,160 square feet of space, and most do not
offer video rental service due to the importance of convenience in the video
rental business.

    RETAIL PRESENTATION.  The Company has developed a contemporary store design
approach that employs light interior colors, attractive lighting, modified
exterior signage and a minimum of fixed interior walls.  The design maximizes
flexibility in lighting and use of floor space (e.g., to accommodate changes in
product format) and focuses customer attention primarily on the products.  The
Company maintains an active store remodeling program to keep older stores up to
date.

    DISTRIBUTION.  Central to Wherehouse's strategy of providing broad
merchandise selection to its customers (i.e. multiple copies of hits, select
copies of catalog product, and high quality in-stock condition) is its ability
to distribute product quickly and cost-effectively to its stores.  Generally,
the Company's central distribution system fills orders to all stores twice a
week.  Inventory at the Company's distribution center (located in Carson,
California) is automatically

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sorted based on individual store demand data generated by the Company's
store-level inventory systems.

    Approximately 30% of the Company's inventory is shipped to store locations
directly from manufacturers and distributors (chiefly in the case of new
releases), and the remainder is shipped from the Company's distribution center.
The Company uses common carriers for deliveries from its distribution center.


COMPETITION

    Both the prerecorded music and the video rental markets are highly
competitive.  In the prerecorded music market, the Company competes with other
chain retailers who specialize in prerecorded music, discounters and other mass
merchandisers, direct mail programs such as record clubs, and local operators.
The video rental market is a more fragmented industry, with many small operators
and two significant competitors, Blockbuster Entertainment and Hollywood Video.
Grocery and convenience stores also account for a portion of the video rental
market.  In the Company's judgment, small operators may be well located, but
usually have significant disadvantages in inventory selection and cost relative
to chain retailers.  Additionally, the Company's combination entertainment store
format gives the Company cross-selling opportunities in music and rental video.

    In both the music and video rental markets, there has been a trend 
towards consolidation, and several large regional retail chains -- many 
similar to or direct competitors of the Company -- have been acquired by 
large national retail chains.  In addition, several major retail chains, 
including Best Buy, Blockbuster Entertainment and Hollywood Video continue to 
open stores or expand their retail store presence in the Company's markets.  
Accordingly, it can be expected that the Company will in future periods 
experience increased competition from companies with greater financial 
resources than the Company, and that such competition may result in continued 
pressure on revenues and gross profit margins.

    The Company also competes with cable television and DSS (Digital Satellite
Systems), which includes pay-per-view television.  Currently, pay-per-view
provides less viewing flexibility to the consumer than videocassette rentals,
and at a higher cost.  Also, under current entertainment industry distribution
practices, movies are generally available on videocassette prior to appearing on
pay-per-view.  However, viewing flexibility may increase with improved
technology which could negatively impact the retail store delivery of home video
and Wherehouse's business.  Notwithstanding potential technological advances,
Wherehouse believes that video rental should, in the near future, continue to be
the first source of filmed in-the-home entertainment, before pay-per-view, and a
primary source of filmed entertainment for the consumer.

    Several major companies have announced that they are developing other
technologies which, if successful, could constitute significant competition.
These include technologies which would provide movies or interactive games "on
demand" over fiber optic telephone or cable lines, other in-the-home
entertainment which may some day be provided over the "information

                                          12

<PAGE>

 superhighway", and in-store kiosks that would provide on-site transcription of
compact discs.  While none of these technologies is yet commercially available,
and it appears that significant technical, economic, and other obstacles to
their introduction remain to be resolved, if and when these or other new
technologies are introduced, it can be anticipated that Wherehouse's business
could be significantly impacted; and Wherehouse may need to develop and
implement new marketing strategies in order for its business to remain viable.

    Wherehouse is one of the largest retailers of prerecorded music and
videocassette rentals in the western U.S.  The Company believes that its major
competitive advantages lie in its convenient store locations and in its ability
to offer a wide and up-to-date selection of inventory, as well as to provide
better customer service.


ORGANIZATION AND EMPLOYEES

    Wherehouse's corporate offices are located in Torrance, California. 
Wherehouse maintains offices for its two regional divisions within the 
corporate offices and in Redwood City, California.  The Company's 
distribution center is in Carson, California.

    As of January 31, 1997, Wherehouse employed approximately 4,450 persons.
Approximately 40% were full-time employees and approximately 60% were part-time
employees.  The Company's labor complement depends on seasonal requirements,
with up to 1,000 additional store and distribution center employees added during
the peak holiday season.  Wherehouse's headquarters staff, which numbers
approximately 173, is responsible for executive and general operating
management, buying, merchandising, advertising, finance, accounting, information
systems and real estate.


TRADEMARKS

    All but three of Wherehouse's stores operate under the name "The
Wherehouse" or "Wherehouse Entertainment."  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 registrations in China. The Company monitors the status of its
trademark registrations to maintain them in force and to renew them as required.


SEASONALITY

    The Company's business is seasonal, and, as is typical for most retailers,
its revenues peak during the Christmas holiday season.  Revenues in the fourth
quarter of fiscal 1997 were slightly more than 30.7% of total annual revenues.

                                          13

<PAGE>

ITEM 2.  PROPERTIES

    The Company's executive offices, which are located in Torrance, California,
are governed by a lease covering 39,855 square feet of space at a current annual
base rent of approximately $167,000.  The lease expires on May 31, 1999, 
however, either party may terminate this lease at any time after January 31, 
1998.

    The Company operates a 200,000 square foot distribution center in Carson,
California.  The lease for this property expires on April 30, 2002, subject to
two five-year renewal options.  The base rent for fiscal 1997 was $732,000,
although rent is subject to periodic adjustment.

    As of January 31, 1997, the Company owned 1 of its retail locations and 
leased space for the remaining 242 stores.  Lease terms generally range from 
month to month to 25 years, including renewal options.  If no leased stores' 
renewal options were exercised, 39 leases would expire on or before January 
31, 1998, 102 would expire between February 1, 1998 and January 31, 2002, and 
the remainder would expire between February 1, 2001 and January 31, 2013.  
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.

    As of January 31, 1997, the Company had no outstanding lease commitments to
open new stores.  During fiscal 1997, the Company entered into nine short-term
leases with the Lucky's Division of American Stores, Inc. to operate sale and
rental businesses within Lucky's supermarkets, under the "Wherehouse" name.  The
Company intends to close these stores by June 30, 1997.


ITEM 3.  LEGAL PROCEEDINGS

    (i)  Bankruptcy filing

    See Item 1 -- "Reorganization Under Chapter 11" above for a description of
the bankruptcy filing of Old Wherehouse and WEI.

    (ii) Bankers Trust Litigation

    IN RE WHEREHOUSE ENTERTAINMENT, INC., AND WEI HOLDINGS, INC.; WHEREHOUSE
ENTERTAINMENT, INC., AND WEI HOLDINGS, INC. V. BANKERS TRUST COMPANY, United
States Bankruptcy Court for the District of Delaware, Case No. 95-911 (HSB);
Adv. Pro. No. A-95-105.  On November 9, 1995, Old Wherehouse filed an adversary
proceeding in the Bankruptcy Court against Bankers Trust Company, one of Old
Wherehouse's secured creditors.  Old Wherehouse asserted claims against Bankers
Trust, including for reformation of the security agreement between Old
Wherehouse and Bankers Trust to provide that Bankers Trust's security interest
does not extend to Old Wherehouse's merchandise (sale) inventory and/or
equitable subordination of Bankers Trust's entire security interest to that of
other creditors.  Pursuant to

                                          14

<PAGE>

the Reorganization Plan and the Confirmation Order, this adversary proceeding
was dismissed with prejudice on the Plan Effective Date.

    (iii)     McMahan and Related Actions.

    In January 1988, holders of approximately $17 million in principal amount 
of the Company's 6-1/4% Convertible Subordinated Debentures commenced an 
action entitled McMahan & Company, et al. v. Wherehouse Entertainment, Inc., 
et al., 88 Civ. 0321 (S.D.N.Y.). This lawsuit, and a related lawsuit filed in 
January 1989 and consolidated with the McMahan lawsuit, alleges that the 
Company, six of its former directors, the former controlling shareholder of 
the Company and others, issued a prospectus in connection with the offering 
of the Convertible Debentures that violated Section 10(b) of the Securities 
Exchange Act of 1934. According to the plaintiffs, the prospectus failed to 
disclose that the Company's independent directors retained the right to 
approve any merger proposal, and thereby prevent any right of holders to 
redeem the Convertible Debentures from arising, whether or not such proposal 
was in the best interests of the Debentureholders.  On December 23, 1996, the 
parties entered into a Settlement Agreement pursuant to which the lawsuits 
have been settled.  This settlement, which is subject to court approval, 
provides for the release of all claims against the Company and the other 
defendants in exchange for a payment of $7 million to plaintiffs. Under the 
terms of the Settlement Agreement, none of the settlement consideration will 
be paid by the Company.  On December 31, 1996, the Court preliminarily 
approved the settlement and scheduled a hearing for June 3, 1997 to consider 
whether the proposed settlement is fair, reasonable and adequate to the 
plaintiff class.

    (iv) Other.

    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.

    Not applicable.

                                          15

<PAGE>
                                       PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.


MARKET INFORMATION

    The Company has one class of common equity, the New Common Stock,
outstanding.  See Item 12 - "Security Ownership of Certain Beneficial Owners and
Management".  There is no established public trading market for the New Common
Stock.

    Prior to the Plan Effective Date, Old Wherehouse had only one class of
common equity outstanding, all of which was owned by WEI.  WEI had only one
class of common equity outstanding, which was owned exclusively by affiliates of
Merrill Lynch Capital Partners and certain members of management of Old
Wherehouse.  Pursuant to the Reorganization Plan, the common equity of Old
Wherehouse and WEI were cancelled without any distributions being made to the
holders thereof.


HOLDERS

    As of January 31, 1997, after the effectiveness of the Reorganization 
Plan, there were eight holders of New Wherehouse's New Common Stock, seven of 
whom were Senior Lenders.  The Company estimates that approximately 918,000 
additional shares of New Common Stock in total will be distributed to the 
Senior Lenders, A&M Investment Associates and to approximately 1,500 holders 
of unsecured claims as their claims are allowed by the Bankruptcy Court.  See 
"Forward-Looking Statements" immediately prior to Part I above.

DIVIDENDS

    No dividends have been paid to the holders of the New Common Stock since
their issuance.  The Congress Facility restricts the ability of New Wherehouse
to pay dividends.  See Item 7 - "Management's Discussion and Analysis of
Financial Condition and Results of Operation."  There are no plans by New
Wherehouse to pay cash dividends on its common stock in the foreseeable future.


ITEM 6.  SELECTED FINANCIAL DATA

    Set forth below are selected consolidated financial data as of and for the
periods indicated below.  The financial data was derived from financial
statements of the Predecessor (see Note (1) below), 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

                                          16

<PAGE>
Financial Condition and Results of Operation" and with the financial statements,
including the notes thereto, included elsewhere in this report.

 <TABLE>
<CAPTION>

                                                                (Dollar amounts in millions)
                           ----------------------------------------------------------------------------------------------------
                                                           Old Wherehouse                                 Predecessor(1)
                           ------------------------------------------------------------------------  --------------------------
                                                                                        8 Months      4 Months
                            Year Ended      Year Ended    Year Ended     Year Ended       Ended        Ended      Year Ended
                            January 31,     January 31,   January 31,    January 31,    January 31,    May 31      January 3,
Income statement data(1)        1997           1996          1995           1994           1993         1992           1992
                            -----------     -----------   -----------    -----------    -----------    -------     ----------
<S>                             <C>             <C>           <C>           <C>             <C>        <C>            <C>
Revenue:
   Sales                        $295.8          $350.7        $409.5         $380.2         $249.1     $105.3         $358.6
   Rental                         69.7            82.5          90.1           91.6           64.3       29.8           98.8
                                ------          ------        ------         ------         ------     ------         ------
                                 365.5           433.2         499.6          471.8          313.4      135.1          457.4

Cost and expenses:
   Cost of sales                 195.5           230.4         262.6          248.0          155.2       66.9          225.5
   Cost of rentals including
     amortization                 33.5            40.0          35.0           50.8           24.8        7.3           30.9
   Selling, general and
     administrative expenses     146.0           167.2         188.7          196.6          122.9       59.9          179.1
   Restructuring charges            --              --            --           14.3             --         --             --
   Write-down of long-lived
     assets                          -             1.5         139.5             --             --         --             --
   Interest expense, net of
     other income                  0.6            14.7          23.0           23.2           15.6        4.8           17.9
                                ------          ------        ------          -----         ------     ------         ------
                                 375.6           453.8         648.8          532.9          318.5      138.9          453.4
                                ------          ------        ------          -----         ------     ------         ------

(Loss) income before
   reorganization items and
    income taxes                 (10.1)          (20.6)       (149.2)         (61.1)          (5.1)      (3.8)           3.9
Reorganization items(2)           19.9            23.2            --             --             --         --             --
                                ------          ------       -------         ------          -----      -----           ----
(Loss) income before income
   taxes                         (30.0)          (43.8)       (149.2)         (61.1)          (5.1)      (3.8)           3.9
(Benefit) provision for
   income taxes                    0.0             0.0          13.0         (19.1)          (1.3)      (1.9)            1.0
                                ------          ------        ------         ------          -----      -----           ----
(Loss) income before
   extraordinary item(3)         (30.0)          (43.8)       (162.2)         (42.1)          (3.8)      (2.0)           2.9
Extraordinary item(4)(5)         173.7              --            --             --             --       (4.5)            --
                                ------         -------       -------        -------          -----     ------          -----
Net (loss) income(3)            $143.7          ($43.8)      ($162.2)        ($42.1)         ($3.8)     ($6.5)          $2.9
                                ------         -------       -------        -------          -----     ------          -----
                                ------         -------       -------        -------          -----     ------          -----

Balance Sheet Data(1)              New
                                Wherehouse                               Old Wherehouse                          Predecessor (1)
                                ----------       -------------------------------------------------     -------------------------

Working capital (deficiency)/
   excess (excl. liabilities
     subject to compromise
     in 1996)(6)                  59.4           $83.7        ($13.2)         $ 4.9         ($ 0.5)                   ($30.7)

Total assets(6)                  131.7           168.5         197.7          351.4          374.4                     225.7

Liabilities subject to
   compromise                        -           278.9            --             --             --                        --
Long-term debt (including
   current portion, excluding
   long-term debt deemed
   subject to compromise (6)(7)    5.4            4.2         167.4           175.1          185.1                     110.0

Total shareholder's (deficit)
   /equity(8)                     84.1         (156.3)       (112.4)           50.0           62.5                       3.7

-------------------------
</TABLE>
                                                                     17
<PAGE>

(1)  The Company was acquired in June 1992 by the purchase of all of WEI's 
     ownership interest in the Company through a merger transaction in which 
     Grammy Corp. was merged with and into WEI.  The transaction was 
     accounted for using the purchase method and the term "Predecessor" 
     refers to the predecessor to the Company for the period from fiscal year 
     1989 through May 31, 1992.  The transaction caused changes in the basis 
     of accounting thereby making periods of the Predecessor not comparable 
     to those of the Company.

(2)  See Item 7 - "Management's Discussion and Analysis of Financial 
     Condition and Results of Operations - Results of Operations."

(3)  Earnings per share are omitted for the Company since it was a 
     wholly-owned subsidiary of WEI during the fiscal years 1993, 1994, 1995, 
     1996 and 1997.

(4)  The extraordinary item in the four-month period ended May 31, 1992 
     represents the write-off of unamortized financing costs and prepayment 
     penalties paid related to the debt of the Predecessor that was 
     refinanced at the time of the Acquisition.  The loss was $4.5 million, 
     net of an income tax benefit of $3.0 million.

(5)  The extraordinary item in fiscal year ended January 31, 1997 represents 
     gain due to the extinguishment of debt pursuant to the Company's plan of 
     reorganization.

(6)  Certain prior year balances have been reclassified to  conform to 
     current classifications.

(7)  Includes convertible subordinated debentures for all fiscal years 
     through 1995.  For fiscal year 1996, convertible subordinated debentures 
     are included in liabilities subject to compromise.

(8)  There were no cash dividends declared during any of the periods 
     presented above, except for cash dividends in the amount of $.2 million, 
     $.5 million and $.3 million paid to WEI, the Company's sole stockholder, 
     in fiscal years 1995, 1994 and 1992, respectively.


                                          18

<PAGE>

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
              CONDITION AND RESULTS OF OPERATION


RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

    Certain statements contained in Management's Discussion and Analysis of 
Financial Condition and Results of Operation, 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.  The forward-looking statements are subject to risks and 
uncertainties, including the following:  (a) changes in levels of competition 
from current competitors and potential new competition from both retail 
stores and alternative methods or channels of distribution such as electronic 
and telephone shopping services and mail order; (b) loss of a significant 
vendor or prolonged disruption of product supply; (c) the presence or absence 
of popular new releases and products in the product categories the registrant 
represents; (d) changes in levels of consumer spending, especially during 
seasonally significant periods; (e) changes in the Federal and state income 
tax rules and regulations or interpretations of existing legislation; (f) 
changes in the general economic conditions in the United States, and in 
particular the eight major markets served by the registrant, including, 
but not limited to, consumer sentiment about the economy in general; (g) 
changes in availability or terms of working capital financing from vendors 
and lending institutions; (h) adverse results in significant litigation 
matters; and (i) the ability to attract and retain key personnel. The 
foregoing should not be construed as an exhaustive list of all factors which 
could cause actual results to differ materially from those expressed in 
forward-looking statements made by the registrant.  Actual results may 
materially differ from anticipated results described in these statements.

    The following Management's Discussion and Analysis of Results of Operation
include the operations of Old Wherehouse through January 31, 1997.  The
discussion of financial conditions includes cash flow resulting from the
operations of Old Wherehouse and a liquidity analysis based on the balance sheet
of New Wherehouse after the reorganization, which reflects "Fresh Start"
Accounting adjustments.  See note  2   to the financial statements.

YEAR ENDED JANUARY 31, 1997 COMPARED TO YEAR ENDED JANUARY 31, 1996

    Revenues were $365.5 million and $433.2 million for the fiscal years ended
January 31, 1997 and January 31, 1996, respectively.  This decrease of $67.7
million was principally due to a 5.0% decrease in same-store revenues (stores
open for at least 13 months) and the closing of 63 stores during the year.

    Merchandise sales were $295.8 million and $350.7 million during the 
fiscal years ended January 31, 1997 and 1996, respectively, representing an 
aggregate decrease of 15.7% and a decrease of 4.1% on a same-store basis.  
(See table in Item 1 -- "Business - Merchandise Sale Products.")  The 
decrease in same-store merchandise sales was principally due to decreased 
customer traffic caused by

                                          19

<PAGE>

continued competitive and economic pressures in certain of the Company's markets
and, to a lesser extent, by a lack of new, "hit" release music product.

    Rental revenue includes the rental of videocassettes, video games and game
players, audiocassette books and laser discs.  At January 31, 1997 approximately
84% of the Company's stores offered videocassettes and other products for rent
versus approximately 81% at January 31, 1996.  Rental revenue for the fiscal
year ended January 31, 1997 was $69.7 million, a decrease of 15.5% from the
previous fiscal year and a decrease of 8.7% on a same-store basis.  The Company
believes that decreases in both total and same-store rental income are
attributable to a number of factors, including a lack of "hit" releases in all
rental categories, continued competition and a general softening in rental
consumer spending nationwide.

    The Company believes that in the future its business and same-store
revenues may be impacted by various competitive and economic factors, including,
but not limited to, consumer tastes, new releases of music, videocassette and
video game titles available for sale or rental, and general economic trends
impacting retailers and consumers.  In addition, in recent years the Company's
merchandise sales and rental revenues have been impacted by increased
competition from other music and video specialty retail chains, as well as
discounters and mass merchandisers.  Further, future revenues may be reduced as
a result of the closure of 63 stores in fiscal 1997 and 53 stores in fiscal
1996, and as a result of the closure of any additional stores that may occur in
the future.

    The Company's business is seasonal, and as is typical for most retailers,
its revenues tend to peak during the Christmas holiday season.  See
"Seasonality," below.

    Cost of sales decreased $34.8 million to $195.5 million for the fiscal 
year ended January 31, 1997, as compared with $230.4 million for the fiscal 
year ended January 31, 1996.  As a percentage of merchandise sales, cost of 
sales increased 0.4% to 66.1% for the fiscal year ended January 31, 1997 
versus 65.7% for the fiscal year ended January 31, 1996.  The gross profit 
percentage for merchandise sale product was 33.9% and 34.3% for the fiscal 
years ended January 31, 1997 and 1996, respectively.  The 0.4% increase in 
cost of sales as a percentage of merchandise sales was principally due to (i) 
higher obsolescence resulting from the Company's inability, during the 
bankruptcy, to rapidly dispose of returnable goods and (ii) decreased prompt 
payment discounts on merchandise inventory purchases, also as a result of the 
bankruptcy filing, offset by decreases in the cost of merchandise inventory.

    Cost of rentals, including amortization, decreased $6.5 million to $33.5
million for the fiscal year ended January 31, 1997, as compared with $40.0
million for the fiscal year ended January 31, 1996.  As a percentage of rental
revenue, cost of rentals decreased to 48.0% for the fiscal year ended January
31, 1997 from 48.5% for the fiscal year ended January 31, 1996, a decrease of
0.5%.  The gross profit percentage for rental revenue was 52.0% and 51.5% for
the fiscal years ended January 31, 1997 and 1996, respectively.  The 0.5%
decrease in the cost of rentals is primarily attributable to decreased rental
inventory shrinkage offset by an increase in rental amortization.  Old
Wherehouse amortized rental inventory over three years for video cassettes and
two years for video games.  New Wherehouse will amortize rental inventory using
the straight-line method over a three-month period with a salvage value of $3.

                                          20

<PAGE>

    Merchandise sales, including ticket commissions, as a percentage of 
aggregate net revenues, decreased slightly from 81.0% in the fiscal year 
ended January 31, 1996 to 80.9% in the fiscal year ended January 31, 1997.  
Historically, the margin on rentals has been higher than the margin on 
merchandise sales.  Should the product mix shift to lower margin merchandise 
sales from higher margin rental revenue, it can be expected that the change 
in the mix of revenue contribution could have an impact on profitability.  
Several major retail chains, including Best Buy, Blockbuster Entertainment, 
Hollywood Video and Virgin Megastores increased their retail store presence 
in the Company's markets.  This trend is expected to continue and it is 
anticipated that the Company will in future periods experience increased 
competition in both rentals and merchandise sales from companies with greater 
financial resources than its own, and that such competition may result in 
continued pressure on revenues and gross profit margins.  Part of the 
Company's reduction in the volume of rentals has resulted from such 
competition.

    Selling, general and administrative expenses were $146.0 million and $167.2
million for the fiscal years ended January 31, 1997 and 1996, respectively, a
decrease of $21.2 million, or 12.7%.  As a percentage of aggregate net revenues,
selling, general and administrative expenses were 40.0% and 38.6% for the fiscal
years ended January 31, 1997 and 1996, respectively, an increase of 1.4%. The
change was primarily due to increases, as a percentage of revenue, in payroll
and rent and other occupancy costs, and to a lesser extent, other variable
expenses.  Reductions in absolute dollars may occur in rent and occupancy costs
in fiscal year 1998 as a result of the rejection of certain real property leases
during the Bankruptcy Case.

    The loss from operations was $9.4 million for the fiscal year ended January
31, 1997, as compared with a loss of $5.8 million for the fiscal year ended
January 31, 1996.  The increase in the operating loss resulted primarily from a
decrease in the amount of gross profit dollars for the year partially offset by
decreases in selling, general and administrative expenses and a decrease in the
amount of write-down of long-lived assets.  Excluding the effect of the
write-down of long-lived assets, loss from operations in fiscal year 1996, would
have been $4.3 million.

    Interest expense (net of other income) decreased $14.1 million to $0.6 
million for the year ended January 31, 1997 versus $14.7 million for the 
year-ended January 31, 1996.  The decrease was primarily due to the 
suspension of the accrual of interest on the Company's revolving line of 
credit, variable rate term note, Senior Subordinated Notes and Convertible 
Debentures following the bankruptcy filing.  The amount of interest that 
ceased to accrue during the Bankruptcy Case was $26.0 million and $13.3 
million for fiscal 1997 and fiscal 1996, respectively.

    Reorganization items for the year ended January 31, 1997 include costs 
related to the Bankruptcy Case including professional fees for legal and 
financial advisors, costs related to the closing of stores (including the 
write-down of inventory resulting from the closing of stores), and the 
estimated cost associated with the rejection of certain executory contracts 
and other reorganization costs.  For the year, the Company reported total 
reorganization items of $19.9 million which is comprised of $7.2 million of 
professional fees, $7.0 million related to the closing of stores, $3.3 
million associated with the rejection of certain executory contracts and $2.4 
million of other reorganization costs.

    The Company did not record an income tax provision for the year ended 
January 31, 1997 but did record a tax provision of $17,000 for the year ended 
January 31, 1996.  While the Company

                                          21

<PAGE>

experienced a pre-tax loss in fiscal 1996, it was unable to record a tax benefit
because of an offsetting increase in the valuation allowance for deferred tax
assets.

    The net operating losses of Old Wherehouse will not be available to New
Wherehouse to offset future operating income of New Wherehouse.

    The Company is currently under audit by the California Franchise Tax Board
for tax years January 31, 1992, 1993 and 1994.  The Company believes that it has
made adequate provision in the financial statements for this audit.

RESULTS OF OPERATIONS

YEAR ENDED JANUARY 31, 1996 COMPARED TO YEAR ENDED JANUARY 31, 1995

    Revenues were $433.2 million and $499.6 million for the fiscal years ended
January 31, 1996 and January 31, 1995, respectively.  This decrease of $66.4
million was principally due to a 12.2% decrease in same-store revenues (stores
open for at least 13 months) and the closing of 53 stores during the year.

    Merchandise sales were $350.7 million and $409.5 million during the fiscal
years ended January 31, 1996 and 1995, respectively, representing an aggregate
decrease of 14.4% and a decrease of 13.0% on a same-store basis.  (See table in
Item 1 -- "Business - Merchandise Products and Supply.")  The decrease in
same-store merchandise sales was principally due to decreased customer traffic
caused by a lack of new, "hit" release music product, continued competitive and
economic pressures in certain of the Company's markets and, in the opinion of
the Company, a shift in consumer spending from traditional entertainment
products to home computer hardware and software products.

    Rental revenue includes the rental of videocassettes, video games and game
players, audiocassette books and laser discs.  At January 31, 1996 approximately
81% of the Company's stores offered videocassettes and other products for rent
versus approximately 76% at January 31, 1995.  Rental revenue for the fiscal
year ended January 31, 1996 was $82.5 million, a decrease of 8.4% from the
previous fiscal year and a decrease of 8.7% on a same-store basis.  Decreases in
both total and same-store rental income were attributable to a number of
factors, including the difficulties resulting from the Company's liquidity
problems in attempting to purchase large quantities of certain "hit" titles, a
lack of "hit" releases in all rental categories, continued competition and a
general softening in rental consumer spending nationwide.

    Cost of sales decreased $32.2 million to $230.4 million for the fiscal year
ended January 31, 1996, as compared with $262.6 million for the fiscal year
ended January 31, 1995.  As a percentage of merchandise sales revenues, cost of
sales increased 1.6% to 65.7% for the fiscal year ended January 31, 1996 versus
64.1% for the fiscal year ended January 31, 1995.  The gross profit percentage
for merchandise sale product was 34.3% and 35.9% for the fiscal years ended
January 31, 1996 and 1995, respectively.  The 1.6% increase in cost of sales as
a percentage of merchandise sales revenues was principally due to increased
costs attributable to merchandise returns and inventory shrink, and decreased
prompt payment discounts on merchandise inventory purchases as a result of the
bankruptcy filing.

                                          22

<PAGE>

    Cost of rentals, including amortization, increased $5.0 million to $40.0
million for the fiscal year ended January 31, 1996, as compared with $35.0
million for the fiscal year ended January 31, 1995.  As a percentage of rental
revenue, cost of rentals increased to 48.5% for the fiscal year ended January
31, 1996 from 38.8% for the fiscal year ended January 31, 1995, an increase of
9.7%.  The gross profit percentage for rental revenue was 51.5% and 61.2% for
the fiscal years ended January 31, 1996 and 1995, respectively.  The 9.7%
increase in cost of rentals, including amortization, was primarily attributable
to costs related to increased sales of used rental inventory and to a lesser
extent, higher rental inventory shrinkage.  Sales of used rental inventory
increased over last year as a byproduct of the Company's strategy of carrying
more rental "hit" titles.  The sale of used rental product yields lower margins
than the rental of such product.

    Merchandise sales, as a percentage of aggregate net revenues, decreased
from 82.0% in the fiscal year ended January 31, 1995 to 81.0% in the fiscal year
ended January 31, 1996.

    Selling, general and administrative expenses, excluding  amortization of 
purchase price adjustments resulting from acquisitions, were $167.9 million 
and $185.3 million for the fiscal years ended January 31, 1996 and 1995, 
respectively, a decrease of $17.4 million, or 9.4%.  As a percentage of 
aggregate net revenues, selling, general and administrative expenses, 
excluding amortization of purchase price adjustments, were 38.8% and 37.1% 
for the fiscal years ended January 31, 1996 and 1995, respectively, an 
increase of 1.7%.  The change was primarily due to increases as a percentage 
of revenue, in rent and other occupancy costs, and to a lesser extent, 
payroll and advertising expense.

    During the fourth quarter of fiscal 1995 the Company adopted Statement of
Financial Accounting Standards No. 121, "Accounting of the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("Statement No.
121").  In connection with the adoption of Statement No. 121 in the fiscal year
ended January 31, 1995, the Company wrote-off its remaining excess cost over the
fair value of the net assets acquired (or "goodwill") due to an impairment in
the carrying value.  Accordingly, no goodwill amortization was included in
selling, general and administrative expenses during the year ended January 31,
1996 while $3.7 million was included during the year ended January 31, 1995.

    The Company evaluated the ongoing value of its equipment and improvements 
on a store-by-store basis during fiscal year 1996 as required by Statement 
No. 121 above.  Based on this evaluation, the Company determined that store 
equipment and improvements with a carrying amount of $1.8 million were 
impaired and wrote them down by $1.5 million to their fair value.  Fair value 
was based on estimated future cash flows to be generated by the individual 
stores, discounted at a market rate of interest.

    The loss from operations was $5.9 million for the fiscal year ended January
31, 1996, as compared with a loss of $126.2 million for the fiscal year ended
January 31, 1995.  The decrease in the operating loss resulted primarily from a
decrease in the amount of write-down of long-lived assets of $138.0 million.
Excluding the effect of the write-down of long-lived assets in both fiscal
years, loss from operations would have been $4.4 million for fiscal year ended
January 31, 1996 as compared to income from operations of $13.3 million for
fiscal year ended January 31, 1995, a decrease of $17.7 million.

                                          23

<PAGE>

    Interest expense (net of interest income) decreased $8.3 million to $14.7
million for the year ended January 31, 1996 versus $23.0 million for the
year-ended January 31, 1995.  The decrease was primarily due to the suspension
of the accrual of interest on the Company's revolving line of credit, variable
rate term note, Senior Subordinated Notes and Convertible Debentures following
the bankruptcy filing.

    Reorganization items for the year ended January 31, 1996, include costs 
related to the Bankruptcy Case including professional fees for legal and 
financial advisors, costs related to the closing of stores, and the estimated 
cost associated with the rejection of certain executory contracts.  For the 
year, the Company reported total reorganization items of $23.2 million which 
was comprised of $2.5 million of professional fees, $6.2 million related to 
the closing of stores, $6.0 million associated with the rejection of certain 
executory contracts and $8.5 million connected with the write off of 
financing costs and debt discounts.

    The Company recorded an income tax provision of $17,000 for year ended
January 31, 1996 versus a tax provision of $13.0 million for year ended January
31, 1995.  While the Company experienced a pre-tax loss in fiscal 1996, it was
unable to record a tax benefit because of an offsetting increase in the
valuation allowance for deferred tax assets.  Although such tax assets are
available to reduce taxes payable, historical losses in fiscal years 1995 and
1996 and a projected tax loss for fiscal year 1997 necessitated the increase in
the reserve allowance.


LIQUIDITY AND CAPITAL RESOURCES

    Net cash provided by (used in) operating activities was $15.9 million for 
fiscal year 1997 as compared to $(10.6) million for fiscal year 1996, an 
increase of $26.5 million over the previous year.  The increase was due to 
(i) an increase in payables and a decrease in prepaid inventory as a result 
of greater vendor support following tentative approval of the Reorganization 
Plan in December, and (ii) a decrease in rental video purchases as compared to 
the previous year, offset by, a reduction in merchandise inventory and other 
factors.

    Net cash used in investing activities totaled $1.3 million for the year 
ended January 31, 1997 consisting of capital expenditures of $3.8 million 
offset by proceeds from the sale of a building no longer used by the Company 
of $2.5 million.  Capital expenditures were predominantly used for the 
remodeling of selected stores.

    Net cash (used in) provided by financing activities was $(15.8) million for
the year ended January 31, 1997.  These financing activities consisted of the
settlement of certain pre-petition claims of $(14.1) million, principal payments
made on capital lease obligations and other long-term debt of $(2.7) million,
offset by proceeds from the sale of new common stock to A&M Investment
Associates of $1.0 million.  See Item 13 - "Certain Relationships and Related
Transactions" for a more detailed description of the transaction.

    New Wherehouse has established the Congress Facility, which is a revolving
line of credit in the amount of $30.0 million, which includes a letter of credit
subfacility of $10.0 million.  Borrowings under the facility bear interest, at
New Wherehouse's option, at either: (a) the prime rate; or (b) the applicable
eurodollar rate plus 2.50%.  New Wherehouse had no outstanding borrowings
against the

                                          24

<PAGE>

facility at January 31, 1997.  At January 31, 1997, New Wherehouse had $0.4
million of letters of credit outstanding.  New Wherehouse is subject to various
financial and other covenants under the terms of the facility including,
covenants relating to net worth, mergers or consolidations, liens, indebtedness
and other matters.  As of January 31, 1997, the Company was in compliance with
all financial covenants required by this facility.  The facility is available
through January 31, 2000 and is renewable annually thereafter.

    As of January 31, 1997, the Company had no new significant outstanding 
commitments for future capital expenditures. New Wherehouse is required to 
make future payments of up to $14.0 million during the next fiscal year, 
pursuant to the Reorganization Plan. Management believes that the current 
borrowing facility is adequate to support current operations for the fiscal 
year. However, there can be no assurance as to the effect which any future 
changes in the Company's operations or results could have on its liquidity.

SEASONALITY

    The Company's business is seasonal, and revenues and operating income are
highest during the fourth quarter.  Working capital deficiencies and related
bank borrowings are lowest during the period commencing with the end of the
Christmas holidays and ending with the close of the Company's fiscal year.
Beginning in February, working capital deficiencies and related bank borrowings
have historically trended upward during the year until the fourth quarter.  Bank
borrowings have historically been highest in October and November due to
cumulative capital expenditures for new stores and the building of inventory for
the holiday season.


INFLATION

    The Company believes that inflation has not had a material effect on its
results of operations and its internal and external sources of liquidity and
working capital.


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

    See Index to Financial Statements and Financial Statement Schedules
appearing on page F-0 of this report.


ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
         ACCOUNTING AND FINANCIAL DISCLOSURE.

         None.

                                         25

<PAGE>

                                       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 New Wherehouse as of the Plan Effective
Date upon the effectiveness of the Reorganization Plan:


                                    NEW WHEREHOUSE

                                                               Age at
    Name                          Position                April 30, 1997
    ----                          --------                --------------
Antonio C. Alvarez, II     Chief Executive Officer,                48
                           Chairman of the Board and
                           Director                                

Barbara C. Brown           Senior Vice President, Sales            45
                           and Operations                          

Stephen P. Brown           Senior Vice President, General          39
                           Merchandising Manager                   

Henry Del Castillo(1)      Senior Vice President, Chief            58
                           Financial Officer and Secretary         

Michael T. Buskey          Vice President, Regional Manager        48

Robert C. Davenport        Director                                30

Jonathan Gallen            Director                                37

Joseph B. Smith            Director                                69

Bruce Ogilvie(1)           Director                                39

Joseph Radecki(2)          Director                                39

(1) Bruce Ogilvie is no longer a director of New Wherehouse, and Henry Del
    Castillo is no longer employed by New Wherehouse. Effective April 7, 1997,
    Mr. Robert Kelleher became Senior Vice President and Chief Financial
    Officer of New Wherehouse.

(2) Mr. Radecki was elected a director of New Wherehouse on February 20, 1997.

    ANTONIO C. ALVAREZ, II, Chief Executive Officer, Chairman of the Board and
Director of New Wherehouse.  Mr. Alvarez commenced serving as Chief Executive
Officer, Chairman of the Board and Director of New Wherehouse on January 31,
1997.  Mr. Alvarez is a principal of Alvarez & Marsal, Inc., a New York based
management consulting company.  Mr. Alvarez's recent experience includes acting
as adviser to the bank lenders to Camelot Music, Inc. ("Camelot Music") and
serving as the senior executive of Phar-Mor, Inc. ("Phar-Mor").  Camelot Music
is a mall-based music retailer with

                                          26

<PAGE>

over 300 stores.  Phar-Mor is a retail chain that sells pharmaceuticals and a
wide range of other merchandise.  Mr. Alvarez served as Phar-Mor'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 Chief Executive
Officer, Chairman of the Board and Director of New Wherehouse pursuant to a
Management Services Agreement between New Wherehouse and Alvarez & Marsal, Inc.
See Item 11- "Employment Agreements" below.

    BARBARA C. BROWN, Senior Vice President, Sales and Operations of New
Wherehouse.  Ms. Brown joined Old Wherehouse in 1973.  She became Vice
President, Sales and Operations in 1986 and 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.
Ms. Brown is the spouse of Mr. Stephen P. Brown, Senior Vice President, General
Merchandise Manager.

    STEPHEN P. BROWN, Senior Vice President, General Merchandise Manager of New
Wherehouse.  Mr. Brown joined Old Wherehouse in 1980.  He became Vice President,
Merchandise Allocation and Distribution in 1993 and was promoted to Senior Vice
President, General Merchandise Manager in 1994.  Prior to 1993, Mr. Brown served
in a variety of store operations positions including Store Manager, District
Manager, Regional Manager, and Assistant Vice President, Store Operations.  Mr.
Brown is the spouse of Ms. Barbara C. Brown, Senior Vice President, Sales and
Operations.

    HENRY DEL CASTILLO, Senior Vice President, Chief Financial Officer and
Secretary of the Company.  Mr. Del Castillo joined Old Wherehouse in August
1995, following a twenty year career as a financial executive and Chief
Financial Officer of Powerine Oil Company.  Previously, he served as Chief
Financial Officer of Carte Blanche Corporation, an international credit card and
travel services provider.  Mr. Del Castillo tendered his resignation as an
officer of New Wherehouse effective March 3, 1997.

    MICHAEL T. BUSKEY, Vice President, Regional Manager of New Wherehouse.  Mr.
Buskey joined Old Wherehouse in 1993.  Prior to joining Old Wherehouse he was
General Manager for Circuit City Stores, Inc.

    ROBERT C. DAVENPORT, Director of New Wherehouse.  Mr. Davenport commenced
serving as a director of New Wherehouse on January 31, 1997.  Mr. Davenport is a
Managing Director of Cerberus Partners, L.P., a New York based investment fund,
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., 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 of New Wherehouse.  Mr. Gallen commenced serving
as a director of New Wherehouse on January 31, 1997.  Mr. Gallen is the sole
managing member of Pequod LLC, the general partner of Pequod Investments, L.P.
("Pequod").  Pequod 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.  Prior to opening Pequod,
from February 1993

                                         27

<PAGE>

through February 1994, Mr. Gallen worked for Cerberus Partners, L.P.  Mr. Gallen
has served on the Board of Directors of Harvest Foods since April 1995 and the
Board of Directors of Fruehauf Trailer Corporation since October 1996.  From
1990 through early 1993 Mr. Gallen owned and operated Gallen Sports Productions,
a business engaged in the acquisition, distribution and sale of autographed
sports memorabilia.  Mr. Gallen continues to be the sole owner of Gallen Sports
Productions.

    JOSEPH B. SMITH, Director of New Wherehouse.  Mr. Smith commenced serving
as a director of New Wherehouse on January 31, 1997.  Mr. Smith is currently the
Chairman of Unison Productions, a consulting and production company, a position
he has held since April, 1994.  During his career, Mr. Smith has held a variety
of positions in the music industry, including holding senior positions with
three major record companies.  He most recently served as President and Chief
Executive Officer of Capitol Industries-EMI Music, Inc., a position he held from
1987 until 1993, when he retired and began his consulting work with Unison
Productions.  In 1961, Mr. Smith joined Warner Bros. Records as its National
Promotion Manager.  In 1970, he became Executive Vice President and General
Manager of Warner Bros./Reprise Records and in 1972 was appointed President of
Warner Bros./Reprise Records.  In 1975, he became Chairman of Electra/Asylum/
Nonesuch Records.  Mr. Smith left Electra/Asylum in 1983 and served for two
years as President and CEO of Home Sports Entertainment, a division of Warner/
Amex Cable.  Following this he became the first full-time President of the
National Academy of Recording Arts and Sciences.  Mr. Smith serves as a director
of Westwood One, Inc., a radio syndications company, and serves on its
Compensation Committee.

    BRUCE OGILVIE, Director of New Wherehouse.  Mr. Ogilvie served as Old
Wherehouse's and WEI's President and Chief Executive Officer from June 1996
through January 31, 1997.  Mr. Ogilvie was elected a director of New Wherehouse
on January 31, 1997 and resigned as a director on February 20, 1997.  In 1978,
Mr. Ogilvie founded a music distributor known as Boulevard Sales, dba Abbey Road
Distribution.  In 1994, Mr. Ogilvie sold Abbey Road to Alliance Entertainment
Corp. and from February 1994 to February 1995, Mr. Ogilvie served as Senior Vice
President, Operations for Alliance Entertainment Corp.  Mr. Ogilvie left
Alliance Entertainment Corp. in early 1995 to help found Contour Design, Inc., a
business engaged in the design and manufacture of computer peripheral equipment.

    JOSEPH RADECKI, Director of New Wherehouse.  Mr. Radecki commenced serving
as a director of New Wherehouse on February 20, 1997.  Mr. Radecki is currently
Executive Vice President and Director of Financial Restructurings of Jefferies &
Company, Inc., an investment bank.  Prior to joining Jefferies & Company, Inc.,
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.  Over the past nine years, Mr. Radecki has
been involved in 50 transactions totaling over $15 billion in recapitalized
securities.  Mr. Radecki has served as a member of the Board of Directors of
Service America Corporation and is currently on the Board of Directors of
Bucyrus International, Inc, a mining equipment manufacturer and ECO-Net, a
non-profit engineering related network firm.


                                    OLD WHEREHOUSE

    The following table sets forth certain information concerning the persons
who were directors and executive officers of Old Wherehouse as of January 31,
1997 immediately prior to the effectiveness of

                                          28

<PAGE>

the Reorganization Plan.  Of the officers listed below, only Barbara C. 
Brown, Stephen P. Brown and Michael T. Buskey remain employed by New 
Wherehouse. Their biographies are set forth above in this Item 10.  None of 
the directors of Old Wherehouse listed below became directors of New 
Wherehouse upon the effectiveness of the Reorganization Plan.

                                                           Age at
    Name                          Position            April 30, 1997
    ----                          --------            --------------

Jerry E. Goldress       Chief Executive Officer,            66
                        Chairman of the Board and
                        Director                           

Barbara C. Brown        Senior Vice President, Sales        45
                        and Operations                      

Stephen P. Brown        Senior Vice President,              39
                        General Merchandising
                        Manager                            

Henry Del Castillo      Senior Vice President, Chief        58
                        Financial Officer and
                        Secretary                          

Michael T. Buskey       Vice President, Regional            48
                        Manager                             

James J. Burke, Jr.     Director                            45

Gerald S. Armstrong     Director                            53

Rupinder S. Sidhu       Director                            40

Bradley J. Hoecker      Director                            34



ITEM 11. EXECUTIVE COMPENSATION

         SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION.

    NEW WHEREHOUSE.  The following table sets forth, for the fiscal year ended
January 31, 1997, certain compensation paid by New Wherehouse or accrued for
such fiscal year, to Antonio C. Alvarez, II in all capacities in which he
served, upon the effectiveness of the Reorganization Plan.  New Wherehouse paid
no cash or other compensation to any of the other officers or directors of New
Wherehouse in fiscal 1997.  The cash and certain other compensation paid to the
officers and directors of New Wherehouse and Old Wherehouse by Old Wherehouse
for the fiscal years ended January 31, 1997, January 31, 1996 and January 31,
1995 are set forth in the second succeeding table below.  All cash compensation
with respect to Mr. Alvarez was paid to Alvarez & Marsal, Inc., a consulting
firm in which Mr. Alvarez is a principal.  All other compensation paid to Mr.
Alvarez was paid to A&M Investments #3 LLC, an affiliate of Alvarez & Marsal,
Inc.

                                          29

<PAGE>

                      NEW WHEREHOUSE SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------
                                                                           Long-Term
                                     Annual Compensation                 Compensation
                               ---------------------------------  ---------------------------
                                                                    No. of
                                                    Other Annual   Securities     All Other
    Name and            Fiscal   Salary     Bonus   Compensation   Underlying   Compensation
Principal Position       Year      ($)       ($)       ($)(b)        Options         ($)
---------------------------------------------------------------------------------------------
<S>                      <C>      <C>       <C>      <C>            <C>             <C>
Antonio C. Alvarez II    1997      --        --      389,452(b)     993,380(c)       --
  Chairman, Chief 
  Executive Officer(a)
---------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------
</TABLE>

(a) Mr. Alvarez commenced serving as Chairman of the Board and Chief Executive
    Officer of New Wherehouse pursuant to a Management Services Agreement dated
    as of January 31, 1997.  See "Employee Agreements" under this Item 11
    below.

(b) This amount represents consulting fees paid by the Senior Lenders to 
    Alvarez & Marsal, Inc. prior to the Plan Effective Date, which amount was 
    reimbursed by New Wherehouse to the Senior Lenders.  See "Employment 
    Agreements" under this Item 11 below.

(c) In connection with the Management Services Agreement, New Wherehouse issued
    options to purchase 993,380 shares of New Common Stock to an affiliate of
    Alvarez & Marsal, Inc., of which Mr. Alvarez is a principal, pursuant to a
    Non-Transferrable Stock Option Agreement.  See "Stock Options and Stock
    Appreciation Rights" under this Item 11 below.


    OLD WHEREHOUSE.  The following table sets forth, for the fiscal years ended
January 31, 1997, January 31, 1996, and January 31, 1995, the cash compensation
paid by Old Wherehouse, as well as certain other compensation paid or accrued
for each such fiscal year, to each of the six most highly compensated executive
officers of Old Wherehouse (considering Ms. Brown, Mr. Brown, and Mr. Del
Castillo, Senior Vice Presidents of Old Wherehouse and Mr. Buskey, Vice
President of Old Wherehouse to be executive officers of WEI) who were officers
as of January 31, 1997 (collectively, the "named executive officers") in all
capacities in which they served.  All compensation with respect to Mr. Goldress
was paid to Grisanti, Galef & Goldress, Inc., a management consulting firm in
which Mr. Goldress is a principal.


                                          30


<PAGE>

                      OLD WHEREHOUSE SUMMARY COMPENSATION TABLE

 
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------
                                                                                 Long-Term
                                           Annual Compensation                  Compensation
                                    ------------------------------------------ --------------
                                                                                  No. of
                                                                  Other Annual   Securities     All Other
      Name and              Fiscal     Salary         Bonus       Compensation   Underlying    Compensation
  Principal Position         Year       ($)            ($)            ($)         Options          ($)
-------------------------------------------------------------------------------------------------------------
<S>                          <C>       <C>            <C>            <C>        <C>           <C>
Jerry E. Goldress(a)         1997      265,278          --              --          --        734,722(f)
    Chairman, Chief          1996      445,883        50,000            --          --             --
    Executive Officer        1995      375,000          --              --          --             --
-------------------------------------------------------------------------------------------------------------
Bruce Ogilvie(b)1997         1997      172,116          --           4,596(e)       --        250,292(g)
    President and Chief      1996         --            --              --          --             --
    Executive Officer        1995         --            --              --          --             --
-------------------------------------------------------------------------------------------------------------
Barbara C. Brown             1997      175,000          --           7,200(e)       --          3,598(h)
    Senior Vice President    1996      171,538        16,000         7,200(e)       --          6,847(i)
    Sales and Operations     1995      165,000        11,257(c)      7,200(e)       --          7,212(j)
-------------------------------------------------------------------------------------------------------------
Stephen P. Brown             1997      165,000          --           7,200(e)       --          1,998(k)
    Senior Vice President,   1996      159,808        16,000         7,200(e)       --          4,613(l)
    General Merchandise      1995      114,615         1,499(d)      7,200(e)       --          4,242(m)
    Manager
-------------------------------------------------------------------------------------------------------------
Henry Del Castillo           1997      175,000          --           7,200(e)       --          5,086(n)
    Senior Vice President,   1996       80,769          --           3,221(e)       --         18,375(o)
    Chief Financial Officer  1995         --            --               --         --             --
    and Secretary
-------------------------------------------------------------------------------------------------------------
Michael T. Buskey            1997      136,382        --             7,200(e)       --          3,695(p)
    Vice President,          1996      132,685         1,154         7,200(e)       --          2,470(q)
    General Manager -        1995      106,962        21,962         7,200(e)       --          1,930(r)
    Los Angeles Region
-------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------
</TABLE>

(a) Mr. Goldress was elected Chairman and Chief Executive Officer on March 1,
    1995.  Mr. Goldress resigned as Chief Executive Officer on June 14, 1996
    and resigned as Chairman on January 31, 1997.  During all of fiscal 1995
    and until March 1, 1995, he served as President and Chief Operating
    Officer.  From June 1994 until March 1, 1995, he served as Acting Chief
    Financial Officer.

(b) Mr. Ogilvie was elected President and Chief Executive Officer on June 14,
    1996.  Mr. Ogilvie resigned as President and Chief Executive Officer on
    January 31, 1997.  Mr. Ogilvie was elected director of New Wherehouse on
    January 31, 1997 and resigned as director on February 20, 1997.

                                          31

<PAGE>

(c) Includes an $11,257 bonus to cover interest expense on a promissory note
    which has been cancelled, and a "gross-up" to reimburse Ms. Brown for
    income taxes payable as a result of the bonus.

(d) Includes a $1,499 bonus to cover interest expense on a promissory note
    which has been cancelled, and a "gross-up" to reimburse Mr. Brown for
    income taxes payable as a result of the bonus.

(e) Includes payment of an auto allowance to the named executive officer at a
    rate of $600 per month.

(f) Mr. Goldress received a payment of $562,500 on July 2, 1996 following his
    resignation as Chief Executive Officer, pursuant to the terms of his
    employment contract.  Mr. Goldress also received a payment of $172,222 on
    January 31, 1997 following his resignation as Chairman of the Board,
    pursuant to his subsequent employment contract dated June 14, 1996.

(g) Mr. Ogilvie received a payment of $250,292 on January 31, 1997 following
    his resignation as Chief Executive Officer, pursuant to the terms of his
    employment contract dated June 14, 1996, as amended.

(h) Includes $1,538 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 $310 of premiums paid for term life insurance and $1,750 for
    matching contributions to the Company's 401(k) plan made on behalf of
    Ms. Brown.

(i) Includes $3,236 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 $1,828 of premiums paid for term life insurance and $1,783 for
    matching contributions to the Company's 401(k) plan made on behalf of Ms.
    Brown.

(j) Includes $3,622 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 $1,828 of premiums paid for term life insurance and $1,764 for
    matching contributions to the Company's 401(k) plan made on behalf of Ms.
    Brown.

(k) Includes $56 paid on behalf of Mr. Brown and his family for medical
    expenses not covered by the Company's group medical insurance plan.  Also
    included are $292 of premiums paid for term life insurance and $1,650 for
    matching contributions to the Company's 401(k) plan made on behalf of Mr.
    Brown.

(l) Includes $179 paid on behalf of Mr. Brown and his family for medical
    expenses not covered by the Company's group medical insurance plan.  Also
    included are $2,772 of premiums paid for term life insurance and $1,660 for
    matching contributions to the Company's 401(k) plan made on behalf of Mr.
    Brown.

                                          32

<PAGE>

(m) Includes $1,032 paid on behalf of Mr. Brown and his family for medical
    expenses not covered by the Company's group medical insurance plan.  Also
    included are $2,079 of premiums paid for term life insurance and $1,131 for
    matching contributions to the Company's 401(k) plan made on behalf of Mr.
    Brown.

(n) Included $4,776 paid on behalf of Mr. Del Castillo and his family for
    medical expenses not covered by the Company's group medical insurance plan.
    Also included are $310 of premiums paid for term life insurance made on
    behalf of Mr. Del Castillo.

(o) Included is  $18,375 of premiums paid for term life insurance made on
    behalf of Mr. Del Castillo.

(p) Includes $2,090 paid on behalf of Mr. Buskey and his family for medical
    expenses not covered by the Company's group medical insurance plan.  Also
    included are $242 of premiums paid for term life insurance and $1,363 for
    matching contributions to the Company's 401(k) plan made on behalf of
    Mr. Buskey.

(q) Includes $1,091 paid on behalf of Mr. Buskey and his family for medical
    expenses and $1,379 for matching contributions to the Company's 401(k) plan
    made on behalf of Mr. Buskey.

(r) Includes $826 paid on behalf of Mr. Buskey and his family for medical
    expenses not covered by the Company's group and $1,104 for matching
    contributions to the Company's 401(k) plan made on behalf of Mr. Buskey.

                                          33

<PAGE>

STOCK OPTIONS AND STOCK APPRECIATION RIGHTS

    In connection with the consummation of the Reorganization Plan, New
Wherehouse entered into a Non-Transferrable Stock Option Agreement with A&M
Investment Associates #3 LLP ("Investment Associates"), an affiliate of Alvarez
& Marsal, Inc., of which Mr. Alvarez is a principal.  Pursuant to the terms of
the agreement, New Wherehouse granted to Investment Associates three tranches of
options (the "A&M Options") to acquire 331,127, 331,127 and 331,126 shares of
the New Common Stock, respectively, at exercise prices of $9.56, $11.58 and
$14.10, respectively.  The A&M Options are subject to upward adjustment on a
quarterly basis as additional shares of New Common Stock are issued and are
entitled to certain other anti-dilution provisions as set forth in the Stock
Option Agreement.  See "Certain Relationships and Related Transactions" under
Item 13 below.  New Wherehouse has not granted any options to acquire New Common
Stock to any other officer or director of New Wherehouse.

FISCAL YEAR-END OPTION VALUES

    NEW WHEREHOUSE.  No options were exercised by any of the named executive 
officers during fiscal 1997.  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, 1997.  No established trading market 
exists for the New Common Stock.  New Wherehouse estimates that as of January 
31, 1997, assuming the issuance of all the shares of New Common Stock 
estimated to be issued pursuant to the Reorganization Plan, the fair market 
value of each share of New Common Stock was $8.01.  This estimate is based on 
a valuation prepared by American Appraisal Associates, Inc. ("AAA") in 
connection with the confirmation of the Reorganization Plan.  Certain Senior 
Subordinated Noteholders and the Official Committee of Unsecured Creditors in 
the Bankruptcy Case initially contested the Reorganization Plan.  Their 
arguments in opposition to the Reorganization Plan included their contention 
that the value of the Company is higher than estimated by AAA.  Since this 
matter was resolved consensually, the Bankruptcy Court never ruled on this 
issue.  See footnote (1) to the cover of this Annual Report on Form 10-K.

                            FISCAL YEAR-END OPTION VALUES

                                 Number of Securities
                                      Underlying
                                 Unexercised Options
                                  at Fiscal Year End

         Name                         Exercisable            Unexercisable
    ---------------------           ---------------          ---------------

    Antonio C. Alvarez, II             94,608(1)                888,814


(1) Exercisable within 60 days of January 31, 1997.

                                          34

<PAGE>

    OLD WHEREHOUSE.  All of the options held by the directors and officers of
Old Wherehouse and WEI were cancelled as of the Plan Effective Date pursuant to
the Reorganization Plan.

COMPENSATION OF DIRECTORS

    NEW WHEREHOUSE.  Two non-employee members of the Board of Directors 
of New Wherehouse receive as compensation for their services $5,000 per 
attended meeting of the Board of Directors.  The directors are also 
reimbursed for reasonable expenses incurred in attending Board meetings.

    OLD WHEREHOUSE.  The directors of Old Wherehouse and WEI did not receive
compensation for their services as directors or as members of the committees of
the boards of directors of Old Wherehouse and WEI.

EMPLOYMENT AGREEMENTS

    NEW WHEREHOUSE.  Mr. Alvarez serves as Chairman of the Board and Chief 
Executive Officer of New Wherehouse pursuant to a Management Services 
Agreement dated as of January 31, 1997 among New Wherehouse, Alvarez & 
Marsal, Inc. ("A&M"), Antonio C. Alvarez II, the Support Employees described 
therein, Investment Associates and Cerberus Partners, L.P. (the "Management 
Agreement"). Under the Management Agreement, A&M currently receives $600,000 
annually as compensation for Mr. Alvarez' services and the services of other 
personnel supplied by A&M.  The Management Agreement expires on October 14, 
1998.

    Prior to the Plan Effective Date, Mr. Alvarez served as a consultant to the
Senior Lenders pursuant to a letter agreement dated as of October 14, 1996
between A&M, Mr. Alvarez and the Senior Lenders (the "Interim Agreement").
Pursuant to the Interim Agreement, the Senior Lenders agreed to pay A&M a
consulting fee of $50,000 per month plus the hourly fees of those employees of
A&M providing assistance to Mr. Alvarez in the performance of his consulting
responsibilities.  The Senior Lenders paid $389,452 to A&M pursuant to the
Interim Agreement prior to January 31, 1997.  Under the Management Agreement,
New Wherehouse agreed to reimburse, and has reimbursed, the Senior Lenders for
the amounts paid by the Senior Lenders to A&M pursuant to the Interim Agreement.

    In the event that Mr. Alvarez is terminated other than for cause (as 
defined in the Management Agreement) or there is a change-in-control (as 
defined in the Management Agreement) to which A&M has not, through Mr. 
Alvarez, consented the Management Agreement provides that (i) a payment of 
$1,500,000 will be made to A&M, (ii) the options to purchase New Common Stock 
held by Investment Associates will immediately vest, and (iii) Investment 
Associates will have the right to require New Wherehouse to purchase the 
shares of New Common Stock and options to acquire New Common Stock owned by 
Investment Associates.  Additionally, only in the event Mr. Alvarez is 
terminated other than for cause, the Company will also pay Investment 
Associates cash in lump sum amount equal to $50,000 multiplied by the number 
of months remaining from the time of Mr. Alvarez' termination to October 14, 
1998. The $1,500,000 payment referred to above will be payable by Cerberus if 
a change-in-control results solely from the sale by Cerberus of more than 50% 
of the shares of New Common Stock owned by Cerberus immediately prior to the 
sale.  For any other change-in-control, the $1,500,000 payment is to be made 
by New Wherehouse.  The price to be paid by New Wherehouse in purchasing the 
shares of New Common Stock and options to acquire New Common Stock owned by 
Investment Associates will depend on the fair market value (as defined in the 
Management Agreement) of the New Common Stock at the time of purchase.  Any 
payments made to Investment Associates in purchasing the shares of New Common 
Stock and options to acquire New

                                          35

<PAGE>

Common Stock from Investment Associates are required to be applied to reduce the
outstanding amounts under the Promissory Notes (as defined in Item 13 below).

    OLD WHEREHOUSE.  Jerry E. Goldress served as Chairman of the Board,
President and Chief Executive Officer of Old Wherehouse and WEI until June 14,
1996 pursuant to an agreement dated May 11, 1994, as amended on April 5, 1995
and on December 13, 1995, between Old Wherehouse and GGG, Inc.  This Management
Agreement was terminated on July 2, 1996 and Old Wherehouse paid GGG $562,500 
in connection with its termination and Mr. Goldress' resignation from his 
positions as President and Chief Executive Officer.  Upon termination of the 
Management Agreement, Old Wherehouse entered into a new employment agreement 
with Mr. Goldress.  Such new employment was terminated on January 31, 1997 and 
Mr. Goldress was paid $172,000 on that date in connection with such 
termination.

    In order to retain its key management employees during the period of 
deteriorating financial condition and instability prior to the bankruptcy 
filing date, in July of 1995, Old Wherehouse entered into agreements with 13 
of its officers that provide certain security in the event of a "Change of 
Control" and the subsequent termination of such employee's employment or a 
significant reduction in such employee's responsibilities (the "Change of 
Control Agreements").  Since the bankruptcy filing date, Old Wherehouse 
entered into Change of Control Agreements with five additional officers.  The 
Change of Control Agreements were approved by the Bankruptcy Court on 
December 1, 1995. As of January 31, 1997, 15 agreements were in effect and 
those agreements called for payments of up to $1.9 million if certain events 
(as described therein) occurred.  On March 3, 1997, Mr. Henry Del Castillo 
resigned and was paid $350,000 pursuant to the terms of his Change of Control 
agreement.  In addition, Bruce Ogilvie received $250,000 on January 31, 1997 
in connection the termination of his employment pursuant to the terms of his 
employment agreement.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

    NEW WHEREHOUSE.  As of January 31, 1997, New Wherehouse did not have a
compensation committee.  A compensation committee and an audit committee were
created on April 8, 1997.  The current members of the compensation committee of
New Wherehouse's Board of Directors are Messrs. Davenport, Radecki and Smith and
the current members of the audit committee of New Wherehouse's Board of
Directors are Messrs. Radecki, Davenport and Gallen.

    OLD WHEREHOUSE.  The members of Old Wherehouse's and WEI's compensation
committees were Messrs. Burke, Armstrong and Sidhu.

                                          36

<PAGE>

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
              AND MANAGEMENT.


THE COMPANY

    The common stock of New Wherehouse is the only outstanding class of its
voting securities. The following table sets forth, as of January 31, 1997, the
number and percentage of shares of New Common Stock beneficially owned by (i)
each person known to New Wherehouse to be the beneficial owner of more than 5%
of the outstanding shares of New Common Stock, (ii) each director of New
Wherehouse, (iii) each named executive officer, and (iv) all directors and
executive officers of New 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 them, subject to
community property laws where applicable.  The percentage of ownership in the
following table does not include the additional 917,515 shares expected to be
issued pursuant to the Reorganization Plan after January 31, 1997.

                                          37

<PAGE>

Name and Address of                    Share of WEI             Percentage of
  Beneficial Owner                     Common Stock               Ownership
-------------------                    ------------             -------------

Cerberus Partners, L.P.                 5,712,558                   55.7%(1)
450 Park Avenue, 28th Floor
New York, New York  10022

A&M Investment Associates #3            1,204,566(3)                11.7%(3)
LLC (2)
c/o Alvarez & Marsal, Inc.
885 Third Avenue, Suite 1700
New York, New York  10022-4834

Credit Suisse First Boston Corp.         2,041,246                     19.9%
5 World Trade Center
New York, New York  10048-0205

Seneca Capital, L.P. (4)                   602,879                      5.9%
c/o 450 Park Avenue, 28th Floor
New York, New York  10022

Antonio C. Alvarez II (2)                        0                        0
c/o Wherehouse Entertainment, Inc.
19701 Hamilton Avenue
Torrance, California 90502-1334

Barbara C. Brown                                 0                        0
c/o Wherehouse Entertainment, Inc.
19701 Hamilton Avenue
Torrance, California 90502-1334

Stephen P. Brown                                 0                        0
c/o Wherehouse Entertainment, Inc.
19701 Hamilton Avenue
Torrance, California 90502-1334

Henry Del Castillo*                            N/A                       N/A
c/o Wherehouse Entertainment, Inc.
19701 Hamilton Avenue
Torrance, California 90502-1334

Michael T. Buskey                                0                         0
c/o Wherehouse Entertainment, Inc.
19701 Hamilton Avenue
Torrance, California 90502-1334

                                          38

<PAGE>

Robert C. Davenport (5)                          0                          0
c/o Cerberus Partners, L.P.
450 Park Avenue, 28th Floor
New York, New York  10022

Jonathan Gallen                             82,421(6)                       0
c/o Pequod Investments, L.P.
450 Park Avenue, 28th Floor
New York, New York  10022

Joseph B. Smith                                  0                          0
c/o Unison Productions
1015 Gayley Avenue
Los Angeles, California 90024

Joseph Radecki                                   0                          0
c/o Jeffries & Co.
11100 Santa Monica Boulevard
10th Floor
Los Angeles, California 90025


*   Mr. Del Castillo is no longer employed by Wherehouse.

(1) The percentages expressed in this table are a percentage of 10,257,808
    shares, which is the actual number of shares issued and outstanding as of
    January 31, 1997.

(2) A&M Investment Associates #3, LLC is a Delaware limited liability company
    created for purpose of acquiring shares of New Common Stock.  Mr. Alvarez
    is the managing member, and as such, may be deemed to be the beneficial
    owner of all the shares of New Common Stock held by Investment Associates.
    Mr. Alvarez disclaims beneficial ownership of shares of New Common Stock
    held by Investment Associates.

(3) Includes 1,100,000 shares of New Common Stock held by A&M Investment
    Associates #3 LLC and 94,608 shares of New Common Stock subject to options
    exercisable within 60 days of January 31, 1997 (the "Exercisable Options").
    The 1,100,000 shares of New Common Stock held by Investment Associates may
    be adjusted upward or downward to represent 10% of the sum of (i) the
    shares of New Common Stock ultimately issued under the Reorganization Plan
    plus (ii) the number of shares of New Common Stock issued to Investment
    Associates.  The 1,100,000 shares of New Common Stock represents 10.7% of
    the aggregate issued and outstanding shares of New Common Stock as of
    January 31, 1997 prior to dilution for the 94,608 shares of New Common
    Stock subject to the Exercisable Options.

(4) Seneca Capital, L.P. was a participant of the senior debt of Old Wherehouse
    held by Cerberus Partners, L.P.  Seneca Capital, L.P. disclaims any
    beneficial interest in the shares of New

                                          39

<PAGE>

    Common Stock held by Cerberus Partners, L.P. and Cerberus Partners, L.P.
    disclaims any beneficial interest in the shares of New Common Stock held by
    Seneca Capital, L.P.

(5) Mr. Davenport is a managing director of Cerberus Partners, L.P. and may be
    deemed to be the beneficial owner of all of the shares of New Common Stock
    held by Cerberus Partners, L.P.  Mr. Davenport disclaims any beneficial
    interest in the shares of New Common Stock held by Cerberus Partners, L.P.

(6) Mr. Gallen is the managing member of Pequod LLC, which is the general
    partner of Pequod Investments, L.P., which is the record and beneficial
    holder of 82,421 shares of New Common Stock.  As such, Mr. Gallen may be
    deemed to be the beneficial owner of the shares of New Common Stock held by
    Pequod Investments, L.P.

    OLD WHEREHOUSE.  All of the common stock of Old Wherehouse and WEI were
cancelled on the Plan Effective Date pursuant to the Reorganization Plan.



ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

    Pursuant to the Management Agreement and a Stock Subscription Agreement
dated as of January 31, 1997 (the "Stock Subscription Agreement"), New
Wherehouse agreed to sell, and Investment Associates agreed to buy at a purchase
price of $6,340,000 ($1,000,000 in cash from Investment Associates' 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,
the "Promissory Notes")), 1,100,000 shares of the New Common Stock (the "A&M
Shares") (subject to adjustment upward or downward to represent 10% of the sum
of (i) the shares of New Common Stock ultimately issued under the Reorganization
Plan plus (ii) the number of shares of New Common Stock issued to Investment
Associates).  The Promissory Notes bear interest at 7% per annum during the
first four years and 11% per annum during the fifth through seventh years,
mature on January 31, 2004 and have no scheduled 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 Investment Associates entered into a
Non-Transferrable Stock Option Agreement dated as of January 31, 1997 (the
"Stock Option Agreement"), pursuant to which New Wherehouse issued to Investment
Associates three tranches of options to purchase shares of New 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 New Common Stock and the shares subject to warrants issued under the
Reorganization Plan.  The first tranche of options represents the right to
purchase 331,127 shares of New Common Stock at an exercise price of $9.56.  The
second tranche of options represents the right to purchase 331,127 shares of New
Common Stock at an exercise price of $11.58.  The third tranche of options
represents the right to purchase 331,126 shares of New Common Stock at an
exercise price of $14.10.  The A&M Options vest monthly in equal installments
through October 31, 1998 and all unexercised A&M Options expire on January 31,
2003, 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 New

                                          40

<PAGE>

Common Stock are issued and are entitled to certain other anti-dilution
provisions as set forth in the Stock Option Agreement.

    New Wherehouse also granted certain registration rights to Investment
Associates with respect to the A&M Securities 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, Investment Associates
has the right to make one demand registration and two piggy-back registrations
in respect of the A&M Securities.

    New Wherehouse also granted certain registration rights to the Senior
Lenders as of the Plan Effective Date with respect to the New Common Stock
acquired by such Senior Lenders, pursuant to a Registration Rights Agreement
dated as of January 31, 1997 (the "Senior Lenders Registration Rights
Agreement").  Under the Senior Lenders Registration Rights Agreement, the
holders of a requisite number of shares acquired by the Senior Lenders have the
right to make two demand registrations and to participate in two piggy-back
registrations in respect of the such shares of New Common Stock.

    Jeffries & Company, Inc., of which Mr. Radecki is an Executive Vice
President and Director of Financial Restructurings, served as the financial
consultant to Old Wherehouse in the Bankruptcy Case, and currently serve as
financial advisors to New Wherehouse.

                                          41

<PAGE>

                                       PART IV

ITEM 14.      EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

(a) Documents filed as part of this report.

    1.   Financial statements.

    See Index to Financial Statements and Financial Statement Schedules.

    2.   Financial statement schedules.

    See Index to Financial Statements and Financial Statement Schedules.

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

    3.   Exhibits

         2.1  Merger Agreement, dated as of May 5, 1992, by and among Grammy
              Corp., WEI, Old Wherehouse and A&S.  (Incorporated by reference
              to Exhibit 1 of Old Wherehouse's Current Report on Form 8-K dated
              May 6, 1992.)

         2.2  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.)

         2.3  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.)

         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. (Incorported 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. 


-------------
* Filed herewith
                                          42

<PAGE>

         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.

         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.

         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.

         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,
              Investment Associates, 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 Secured Recourse Promissory Note dated January 31, 1997 by
              Investment Associates 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.)

         10.4 Secured Non-Recourse Promissory Note dated January 31, 1997 by
              Investment Associates 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.)

         10.5 Stock Pledge Agreement dated as of January 31, 1997 between
              Investment Associates and New Wherehouse.  (Incorporated by
              reference to Exhibit 1.8 of Old Wherehouse's Current Report on
              Form 8-K dated February 12, 1997.)

         10.6 Stock Subscription Agreement dated as of January 31, 1997 between
              New Wherehouse and Investment Associates.  (Incorporated by
              reference to Exhibit 1.9 of Old Wherehouse's Current Report on
              Form 8-K dated February 12, 1997.)

-------------
* Filed herewith
                                          43
<PAGE>

         10.7 Non-Transferrable Stock Option Agreement dated as of January 31,
              1997 between New Wherehouse and Investment Associates.
              (Incorporated by reference to Exhibit 1.10 of Old Wherehouse's
              Current Report on Form 8-K dated February 12, 1997.)

         10.8 Registration Rights Agreement dated as of January 31, 1997
              between New Wherehouse and Investment Associates.  (Incorporated
              by reference to Exhibit 1.12 of Old Wherehouse's Current Report
              on Form 8-K dated February 12, 1997.)

         10.9 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.)

        10.10 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.)

        10.11 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.)

        10.12 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.)

        10.13 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.)

        10.14 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.)

                                          44

<PAGE>

        10.15* 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.

        10.16  Equipment Lease Agreement dated December 21, 1992, between
               General Electric Capital Corporation, as Lessor, and Old
               Wherehouse, as Lessee.  (Incorporated by reference to Exhibit
               10.43 of Old Wherehouse's Annual Report on Form 10-K for the
               fiscal year ended January 31, 1993.)

        10.17  Change of Control Agreements, dated as of July 10, 1995, between
               Registrant 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.)

        27.0*  Financial Data Schedule.

(b) Current Reports on Form 8-K.

    (1)  A Current Report on Form 8-K was filed on January 22, 1997 discussing
         the reorganization of the Predecessors.

    (2)  A Current Report on Form 8-K was filed on February 12, 1997 discussing
         the various transactions consummated on the Plan Effective Date
         pursuant to the Reorganization Plan.

    (3)  A Current Report on Form 8-K was filed on March 10, 1997 pursuant to
         which New Wherehouse became the successor issuer to Old Wherehouse and
         undertook to continue the filing obligations of Old Wherehouse under
         the Securities Exchange Act of 1934, as amended.

    (4)  A Current Report on Form 8-K/A was filed on April 16, 1997 pursuant to
         which New Wherehouse filed pro forma financial statements not filed
         with the Current Report on Form 8-K filed on February 12, 1997.


---------------

*   Filed herewith

                                          45

<PAGE>

                                      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, there-unto duly authorized.

                                       WHEREHOUSE ENTERTAINMENT, INC.


Date:    May 16, 1997                  By: /s/ ANTONIO C. ALVAREZ, II
                                          -----------------------------
                                       Antonio C. Alvarez, II
                                       Chairman of the Board,
                                       Chief Executive Officer and Director
                                       (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
Registrants and in the capacities and on the dates indicated:


                            WHEREHOUSE ENTERTAINMENT, INC.

    Signature                          Title                         Date
------------------------      ----------------------------       -----------



/s/ ANTONIO C. ALVAREZ, II      Chairman of the Board, Chief      5/16 1997
-------------------------   
Antonio C. Alvarez, II          Executive Officer

/s/ ROBERT C. DAVENPORT         Director                        May 16, 1997
-------------------------    
Robert C. Davenport

/s/ JONATHAN GALLEN             Director                        May 16, 1997
-------------------------    
Jonathan Gallen

/s/ JOSEPH RADECKI              Director                        May 16, 1997
-------------------------    
Joseph Radecki

/s/ JOSEPH B. SMITH             Director                        May 16, 1997
-------------------------    
Joseph B. Smith

                                          46

<PAGE>

SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FIELD PURSUANT TO SECTION
15(d) OF THE ACT BY REGISTRANT WHICH HAS NOT REGISTERED SECURITIES PURSUANT TO
SECTION 12 OF THE ACT.

No annual report or proxy materials have been sent to the security holders of
the registrant.


                                          47
<PAGE>

                         Wherehouse Entertainment, Inc.

                          Index to Financial Statements
                        and Financial Statement Schedule
                                January 31, 1997

                                    CONTENTS

Report of Independent Auditors . . . . . . . . . . . . . . . . . . . .     F-1

Financial Statements

Balance Sheets at January 31, 1997 (New Wherehouse) and 1996
  (Old Wherehouse) . . . . . . . . . . . . . . . . . . . . . . . . . .     F-2
Statements of Operations for the year ended
  January 31, 1997 (Old Wherehouse). . . . . . . . . . . . . . . . . .     F-4
Statements of Changes in Shareholders' Equity (Deficit)
  for each of the three years in the period ended
  January 31, 1997 (Old Wherehouse). . . . . . . . . . . . . . . . . .     F-5
Statements of Cash Flows for each of the three years in
  the period ended January 31, 1997 (Old Wherehouse) . . . . . . . . .     F-6
Notes to Financial Statements. . . . . . . . . . . . . . . . . . . . .     F-8

Financial Statement Schedule for each of the three years ended January 31, 1997

II   Valuation and Qualifying Accounts . . . . . . . . . . . . . . . .     F-29

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

                                       F-0

<PAGE>

                         REPORT OF INDEPENDENT AUDITORS


Board of Directors
Wherehouse Entertainment, Inc.

We have audited the accompanying balance sheets of Wherehouse
Entertainment, Inc. as of January 31, 1997 (New Wherehouse), and January 31,
1996 (Old Wherehouse), and the related statements of operations, shareholders'
equity (deficit), and cash flows for each of the three years in the period ended
January 31, 1997. Our audits also included the financial statement schedule
listed in the Index at Item 14(a). These financial statements and schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and schedule based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Wherehouse Entertainment, Inc.
at January 31, 1997 (New Wherehouse), and January 31, 1996 (Old Wherehouse), and
the results of its operations and its cash flows for each of the three years in
the period ended January 31, 1997 (Old Wherehouse), in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.

As discussed in Note 1, the Bankruptcy Court approved and confirmed Old
Wherehouse's Plan of Reorganization on January 7, 1997. As described in Note 2,
New Wherehouse accounted for the reorganization using "Fresh Start Reporting" as
recommended by the American Institute of Certified Public Accountants Statement
of Position 90-7 on "Financial Reporting by Entities in Reorganization Under the
Bankruptcy Code." As a result, the January 31, 1997, balance sheet is not
comparable with the Old Wherehouse's pre-reorganization balance sheet since it
presents the financial position of the reorganized entity.


                                                               ERNST & YOUNG LLP
Los Angeles, California
May 8, 1997


                                       F-1
<PAGE>

                         Wherehouse Entertainment, Inc.

                                 Balance Sheets

                                                       NEW              OLD
                                                    WHEREHOUSE      WHEREHOUSE
                                                    JANUARY 31      JANUARY 31
                                                        1997            1996
                                                   ------------    ------------
ASSETS (NOTES 1 AND 4)
Current assets:
  Cash                                            $   6,178,000    $  7,353,000
  Receivables                                         1,932,000       1,583,000
  Prepaid inventory deposits                          4,486,000      10,880,000
  Merchandise inventory                              75,800,000      90,951,000
  Other current assets                                2,259,000       4,628,000
  Rental inventory (NOTE 3)                           9,686,000               -
                                                   ------------    ------------
Total current assets                                100,341,000     115,395,000



Rental inventory, net of accumulated amortization
of $38,906,000 (1996) (NOTE 3)                                -      14,004,000

Equipment and improvements, at cost (NOTES 1 AND 9):
  Leasehold improvements                              5,952,000      24,908,000
  Data processing equipment and software              6,153,000      26,289,000
  Store and office fixtures and equipment             8,960,000      13,969,000
  Buildings and improvements                            131,000       1,590,000
  Land                                                  141,000         683,000
                                                   ------------    ------------
                                                     21,337,000      67,439,000
Accumulated depreciation and amortization                     -      29,752,000
                                                   ------------    ------------
                                                     21,337,000      37,687,000


Reorganization value in excess of amounts
  allocable to identifiable assets                    9,724,000               -


Financing costs and leasehold interests, net of
accumulated amortization of $11,263,000 (1996)                -         641,000

Other assets                                            340,000         800,000
                                                   ------------    ------------
Total assets                                      $ 131,742,000    $168,527,000
                                                  -------------    ------------
                                                  -------------    ------------

SEE ACCOMPANYING NOTES.


                                       F-2
<PAGE>

                                                       NEW             OLD
                                                   WHEREHOUSE       WHEREHOUSE
                                                   JANUARY 31       JANUARY 31
                                                       1997            1996
                                                 --------------   -------------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and bank overdraft               $  13,034,000    $  8,099,000
Sales taxes payable                                   2,192,000       2,332,000
Other accrued expenses (NOTE 7)                      10,461,000      18,609,000
Current portion of capital lease obligations and
long-term debt, secured (NOTE 9)                        729,000       2,655,000
Reorganization liabilities                           14,481,000               -
                                                 --------------   -------------
Total current liabilities                            40,897,000      31,695,000

Notes payable (NOTE 1)                                3,980,000               -

Capital lease obligations and long-term
  debt, secured (NOTE 9)                                722,000       1,498,000

Other long-term liabilities                           2,000,000       9,494,000

Liabilities subject to compromise
  (NOTES 1 AND 6)                                             -     278,857,000

Deferred income taxes (NOTE 8)                                -       3,270,000

Commitments and contingencies (NOTES 9, 10 AND 11)

Shareholders' equity (deficit):
New preferred stock $.01 par value:
Authorized shares - 3,000,000
Issued and outstanding shares - none
New common stock, $.01 par value:
Authorized shares - 24,000,000
Issued and outstanding shares - 10,257,808              103,000               -
Old common stock, $.01 par value:
Authorized shares - 1,000
Issued and outstanding shares - 10                            -               -
Additional paid-in capital                           89,380,000      95,671,000
Accumulated deficit                                           -   (251,958,000)
Notes receivable                                    (5,340,000)               -
                                                 --------------   -------------
Total shareholders' equity (deficit)                 84,143,000   (156,287,000)
                                                 --------------   -------------
Total liabilities and shareholders'
   equity (deficit)                               $ 131,742,000   $ 168,527,000
                                                 --------------   -------------
                                                 --------------   -------------

SEE ACCOMPANYING NOTES.


                                       F-3
<PAGE>

                         Wherehouse Entertainment, Inc.

                            Statements of Operations

<TABLE>
<CAPTION>

                                                                                        OLD WHEREHOUSE
                                                                  ------------------------------------------------------
                                                                                     YEAR ENDED JANUARY 31
                                                                         1997                1996                1995
                                                                  ------------------------------------------------------
<S>                                                               <C>                 <C>                 <C>
Sales                                                             $  295,765,000      $  350,646,000      $  409,484,000
Rental revenue                                                        69,739,000          82,547,000          90,141,000
                                                                  ------------------------------------------------------
                                                                     365,504,000         433,193,000         499,625,000

Cost of sales                                                        195,489,000         230,347,000         262,616,000
Cost of rentals, including amortization                               33,475,000          40,049,000          34,973,000
                                                                  ------------------------------------------------------
                                                                     228,964,000         270,396,000         297,589,000

Selling, general and administrative expenses                         145,968,000         167,161,000         188,740,000
Write-down of long-lived assets (NOTE 2)                                       -           1,476,000         139,493,000
Interest expense (contractual interest of
  $25,980,000 (1997) and $28,135,000 (1996)) (NOTES 1 AND  6)          1,019,000          15,045,000          23,194,000
Other income                                                           (338,000)           (283,000)           (153,000)
                                                                  ------------------------------------------------------
Loss before reorganization items and income taxes                   (10,109,000)        (20,602,000)       (149,238,000)

Reorganization items (NOTES 1, 2 AND 3):
  Professional fees                                                    7,207,000           2,470,000                   -
  Write-off of financing costs and debt discount                               -           8,512,000                   -
  Provision for store closing costs                                    6,969,000           6,237,000                   -
  Provision for rejected executory contracts                           3,331,000           6,000,000                   -
  Provision for other reorganization costs                             2,429,000                   -                   -
                                                                  ------------------------------------------------------
                                                                      19,936,000          23,219,000                   -
                                                                  ------------------------------------------------------
Loss before income taxes and extraordinary item                     (30,045,000)        (43,821,000)       (149,238,000)

Provision for income taxes (NOTE 8)                                            -              17,000          13,007,000
                                                                  ------------------------------------------------------
Loss before extraordinary item                                      (30,045,000)        (43,838,000)       (162,245,000)

Extraordinary item:
Gain on extinguishment of debt                                       173,765,000                   -                   -
                                                                  ------------------------------------------------------
Net income (loss)                                                 $  143,720,000     $  (43,838,000)    $  (162,245,000)
                                                                  ------------------------------------------------------
                                                                  ------------------------------------------------------
</TABLE>

SEE ACCOMPANYING NOTES.


                                       F-4
<PAGE>

                         Wherehouse Entertainment, Inc.

            Statements of Changes in Shareholders' Equity (Deficit)

<TABLE>
<CAPTION>

                                      COMMON STOCK                ADDITIONAL
                                    $.01 PAR VALUE                 PAID-IN           ACCUMULATED           NOTE
                                   SHARES        AMOUNT            CAPITAL            DEFICIT           RECEIVABLE        TOTAL
                              -----------------------------------------------------------------------------------------------------
<S>                           <C>                <C>          <C>                 <C>                   <C>           <C>
Balance, January 31, 1994             10    $        -        $  95,855,000       $  (45,875,000)   $           -     $  49,980,000
Dividend                               -             -            (184,000)                     -               -         (184,000)
Net loss                               -             -                    -         (162,245,000)               -     (162,245,000)
                              -----------------------------------------------------------------------------------------------------
Balance, January 31, 1995             10             -           95,671,000         (208,120,000)               -     (112,449,000)
Net loss                               -             -                    -          (43,838,000)               -      (43,838,000)
                              -----------------------------------------------------------------------------------------------------
Balance, January 31, 1996             10             -           95,671,000         (251,958,000)               -     (156,287,000)
Net income                             -             -                    -           143,720,000               -       143,720,000
Recapitalization and fresh
   start adjustments
   (NOTES 1 AND 2):
Recapitalization adjustment         (10)             -         (95,671,000)           108,238,000               -        12,567,000
Issuance of New Common Stock   9,157,808        92,000           83,051,000                     -               -        83,143,000
Sale of New Common Stock       1,100,000        11,000            6,329,000                     -     (5,340,000)         1,000,000
                              -----------------------------------------------------------------------------------------------------
New Wherehouse balance,
  January 31, 1997            10,257,808    $  103,000        $  89,380,000       $             -   $ (5,340,000)     $  84,143,000
                              -----------------------------------------------------------------------------------------------------
                              -----------------------------------------------------------------------------------------------------
</TABLE>

SEE ACCOMPANYING NOTES


                                        F-5



<PAGE>

                         Wherehouse Entertainment, Inc.

                            Statements of Cash Flows

<TABLE>
<CAPTION>
                                                                             OLD WHEREHOUSE
                                                         ------------------------------------------------------
                                                                          YEAR ENDED JANUARY 31
                                                              1997                1996                1995
                                                         -------------------------------------------------------
<S>                                                      <C>                  <C>                <C>
OPERATING ACTIVITIES
Net income (loss)                                        $ 143,720,000        $(43,838,000)      $(162,245,000)
Adjustments to reconcile net income (loss) to net cash
  provided by (used in) operating activities:
    Depreciation and amortization                           35,304,000          41,403,000          47,139,000
    Book value of rental inventory dispositions              9,528,000          14,448,000           8,866,000
    Write-down of long-lived assets                                  -           1,476,000         139,493,000
    Deferred taxes                                                   -            (207,000)         14,653,000
    Gain on extinguishment of debt                        (173,765,000)                  -                   -
    Changes in operating assets and liabilities:
      Receivables                                             (349,000)          1,572,000            (353,000)
      Taxes receivable                                               -           1,500,000           3,500,000
      Prepaid inventory deposits                             6,394,000         (10,880,000)                  -
      Merchandise inventory                                 10,730,000          24,688,000          (2,047,000)
      Other current assets                                   2,352,000          (1,885,000)           (170,000)
      Accounts payable, accrued expenses and other
        liabilities not separately identified                2,401,000         (20,528,000)          1,497,000
      Rental inventory purchases                           (32,709,000)        (37,962,000)        (39,201,000)
    Changes due to reorganization activities:
      Accrued professional fees                              3,227,000            (668,000)                  -
      Write-off of financing costs and debt discount                 -           8,512,000                   -
      Provision for store closing costs                      3,767,000           5,743,000                   -
      Provision for rejected executory contracts             3,331,000           6,000,000                   -
      Other reorganization items                             2,015,000                   -                   -
                                                         -----------------------------------------------------
Net cash provided by (used in) operating activities         15,946,000         (10,626,000)         11,132,000

INVESTING ACTIVITIES
Proceeds from sale of assets                                 2,464,000                   -               4,000
Acquisition of property, equipment and improvements         (3,785,000)        (10,252,000)        (15,667,000)
Purchase of certain assets of The Record Shop, Inc.                  -                   -            (735,000)
 (Increase) decrease in other assets and intangibles                 -            (415,000)            262,000
                                                         -----------------------------------------------------
Net cash used in investing activities                       (1,321,000)        (10,667,000)        (16,136,000)

FINANCING ACTIVITIES
Short-term borrowings (payments), net                                -          29,020,000          11,800,000
Principal payments on capital lease obligations and
  long-term debt                                            (2,702,000)         (2,336,000)         (7,769,000)
Sale of New Common Stock                                     1,000,000                   -                   -
Dividend paid to WEI Holdings, Inc.                                  -                   -            (185,000)
Settlement of pre-petition claims                          (14,098,000)                  -                   -
                                                         -----------------------------------------------------
Net cash (used in) provided by financing activities        (15,800,000)         26,684,000           3,846,000
</TABLE>


                                       F-6
<PAGE>


                         Wherehouse Entertainment, Inc.

                      Statements of Cash Flows (continued)


<TABLE>
<CAPTION>
                                                                             OLD WHEREHOUSE
                                                           ---------------------------------------------------
                                                                          YEAR ENDED JANUARY 31
                                                              1997                1996                1995
                                                           ---------------------------------------------------
<S>                                                        <C>               <C>                   <C>
REORGANIZATION ACTIVITIES
Reclassification of liabilities subject to compromise      $         -       $ 278,857,000         $         -
Decrease in accounts payable, accrued expenses and
  other liabilities
                                                                               (71,343,000)

Reduction of debt                                                    -        (207,514,000)                  -
                                                           ---------------------------------------------------
Net cash effect of reorganization activities                         -                   -                   -
                                                           ---------------------------------------------------
Net (decrease) increase in cash                             (1,175,000)          5,391,000          (1,158,000)
Cash at beginning of year                                    7,353,000           1,962,000           3,120,000
                                                           ---------------------------------------------------
Cash at end of year                                        $ 6,178,000       $   7,353,000         $ 1,962,000
                                                           ---------------------------------------------------
                                                           ---------------------------------------------------

Supplemental disclosure of cash flow information:
  Cash paid (received) during the year for:
    Interest                                               $   765,000       $  11,993,000         $20,554,000
    Income taxes                                                     -          (1,276,000)         (5,146,000)
    Reorganization items                                     5,687,000           2,297,000                   -
</TABLE>



SEE ACCOMPANYING NOTES.


                                       F-7
<PAGE>


                         Wherehouse Entertainment, Inc.

                          Notes to Financial Statements

                                January 31, 1997


1. REORGANIZATION UNDER CHAPTER 11

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 (the Acquisition) substantially all the assets
of Wherehouse Dissolution Co. (Old Wherehouse), a Delaware corporation, and its
parent company, WEI Holdings, Inc., a Delaware corporation (WEI, and together
with Old Wherehouse, the Debtors), pursuant to a Chapter 11 plan of
reorganization (the Reorganization). Prior to the Acquisition, Old Wherehouse
was known as "Wherehouse Entertainment, Inc.," and after the Acquisition, Old
Wherehouse changed its name to Wherehouse Dissolution Co. After the Acquisition,
New Wherehouse changed its name to "Wherehouse Entertainment, Inc." New
Wherehouse and Old Wherehouse are collectively referred to as the Company or
Wherehouse where the discussion relates to the continuing business operations of
Old Wherehouse and New Wherehouse.

On August 2, 1995 (the petition date), Old Wherehouse filed voluntary petitions
for reorganization under Chapter 11 of the United States Bankruptcy Code
(Chapter 11 or the Bankruptcy Code) in the United States Bankruptcy Court for
the District of Delaware (the Bankruptcy Court). The Chapter 11 proceedings were
jointly administered, with the Company managing the business in the ordinary
course as debtor-in-possession subject to the control and supervision of the
Bankruptcy Court.

The Debtors' plan of reorganization, entitled the "Debtors' First Amended
Chapter 11 Plan, as Revised for Technical Corrections on October 4, 1996, and
Supplemental Amendments on December 2, 1996, and December 13, 1996" (the
Reorganization Plan), was confirmed by an order of the Bankruptcy Court entered
on January 7, 1997, entitled "Findings of Fact, Conclusions of Law and Order
Confirming Debtors' First Amended Chapter 11 Plan Under Chapter 11 of the
Bankruptcy Code" (the Confirmation Order). The effective date of the
Reorganization Plan occurred on January 31, 1997 (the Plan Effective Date). New
Wherehouse (as opposed to Old Wherehouse and WEI) was never the subject of a
bankruptcy case. Since the Plan Effective Date, the Bankruptcy Court has
retained jurisdiction over certain claims and other matters relating to the
Debtors' bankruptcy estates, but New Wherehouse has been and is free to carry
out its business without oversight by the Bankruptcy Court.

Pursuant to the Reorganization Plan, substantially all of the assets of the
Debtors and certain liabilities were transferred to New Wherehouse. The Debtors
have assigned to New Wherehouse all of their executory contracts and unexpired
leases assumed during the Bankruptcy Case (not otherwise assigned to third
parties). The Reorganization Plan provides that the Debtors' bankruptcy estates
will be liquidated by New Wherehouse.


                                       F-8
<PAGE>

                         Wherehouse Entertainment, Inc.

                    Notes to Financial Statements (continued)


1. REORGANIZATION UNDER CHAPTER 11 (CONTINUED)

Under the Reorganization Plan, substantially all of the Debtors' indebtedness
held by their creditors was cancelled in exchange for cash, shares of the Common
Stock of New Wherehouse, par value $0.01 per share (the New Common Stock),
and/or warrants to purchase New Common Stock or for no consideration. The
Debtors' major groups of creditors were (1) senior lenders under Old
Wherehouse's bank credit agreement (the Senior Lenders) led by Cerberus
Partners, L.P. (Cerberus) as the agent for the Senior Lenders, (2) trade
creditors (the Trade Creditors), (3) holders of Old Wherehouse's Senior
Subordinated Notes (the Senior Subordinated Noteholders), (4) holders of Old
Wherehouse's 6  3/4% Convertible Subordinated Debentures (the Convertible
Debentureholders), (5) other general unsecured creditors (the General Unsecured
Creditors) and (6) federal and state taxing authorities.

As of the Plan Effective Date and following the exercise of the Exchange Option
(as described below) by certain Trade Creditors whose claims had been resolved
as of the Plan Effective Date, the Senior Lenders received 9,157,808 shares of
New Common Stock under the Reorganization Plan on account of their claims,
representing approximately 89% of the issued and outstanding shares of New
Common Stock as of such date prior to dilution for the Warrants described below
but after dilution for the A&M Shares (see Note 5). The Senior Lenders were also
paid approximately $2.8 million of adequate protection payments during the
bankruptcy case and also received approximately $256,000 in cash subsequent to
the Plan Effective Date. The Senior Lenders are likely to receive additional
shares of New Common Stock and cash as the claims of unsecured creditors
(including Trade Creditors) are resolved. Based upon New Wherehouse's estimate
of the resolution of Trade Claims, New Wherehouse estimates that the Senior
Lenders (or their assigns) will receive approximately 9.4 million shares of New
Common Stock in total. This total may increase based on an anti-dilution feature
in the Reorganization Plan. Approximately $94.6 million of indebtedness held by
the Senior Lenders was cancelled in exchange for the issuance of such shares of
New Common Stock and cash.

Under the Reorganization Plan, those Trade Creditors identified by Old
Wherehouse as continuing suppliers of certain inventory products and who agreed
to provide normal trade credit terms to the Company after the Plan Effective
Date were given the option (the Exchange Option) to receive 27% of their allowed
claims in cash in lieu of shares of New Common Stock. The source of the cash
payments to the Trade Creditors exercising the Exchange Option is $11,610,000 in
cash otherwise distributable to the Senior Lenders under the Reorganization
Plan. If a Trade Creditor elected to receive cash instead of shares of New
Common Stock, the shares of New Common Stock such Trade Creditor


                                       F-9
<PAGE>

                         Wherehouse Entertainment, Inc.

                    Notes to Financial Statements (continued)


1. REORGANIZATION UNDER CHAPTER 11 (CONTINUED)

would have received had it not exercised the Exchange Option were distributed to
the Senior Lenders. Substantially all of the Trade Creditors elected to exercise
the Exchange Option and, as a result, the Company estimates that once all claims
are resolved, $11,302,000 in cash will have been distributed to the Trade
Creditors. Approximately $41,900,000 of the claims of Trade Creditors who
exercised the Exchange Option were cancelled in consideration for the cash
distributable in respect of such claims. Most of the Company's vendors,
including its six major distributors of pre-recorded music, elected to exercise
the Exchange Option and have agreed to provide normal trade credit terms to the
Company.

Under the Reorganization Plan, the Senior Subordinated Noteholders receive
$2,350,000 of cash from New Wherehouse (plus $1,550,000 of cash from a third
party) and three tranches of warrants to purchase shares of New Common Stock
(the Warrants). The Tranche A Warrants represent the right to purchase 576,000
shares of New Common Stock at an exercise price of $2.38 per share and have a
five-year maturity. The Tranche B Warrants represent the right to purchase
100,000 shares of New 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 New Common Stock at an exercise price of $11.00 per
share and have a seven-year maturity. The Warrants have been issued and are
being distributed by the indenture trustee for the Senior Subordinated Notes
upon the return of letters of transmittal from such Senior Subordinated
Noteholders. Under the Reorganization Plan, $117,190,000 of allowed senior
subordinated note claims were cancelled in consideration of the cash and
Warrants being distributed to the Senior Subordinated Noteholders as described
in this paragraph.

The Convertible Debentureholders will receive no distribution under the
Reorganization Plan. Approximately $5,344,000 of outstanding 6  3/4% Convertible
Subordinated Debentures were cancelled.

Many of the claims of the General Unsecured Creditors have not yet been
adjudicated and allowed by the Bankruptcy Court. Under the Reorganization Plan,
any claims of the General Unsecured Creditors (including claims of Trade
Creditors who did not elect the Exchange Option) that become allowed by the
Bankruptcy Court will receive approximately 31.92 shares of New Common Stock per
$1,000 in such allowed claims. Wherehouse estimates that approximately 663,000
shares of New Common Stock will be issued to General Unsecured Creditors
(including Trade Creditors who did not elect the Exchange Option).


                                      F-10
<PAGE>


                         Wherehouse Entertainment, Inc.

                    Notes to Financial Statements (continued)


1. REORGANIZATION UNDER CHAPTER 11 (CONTINUED)

Several state and local taxing authorities received on account of their claims,
promissory notes due generally six years after the tax assessment date, in the
approximate aggregate principal amount of $4.0 million.

The Reorganization Plan also provides that post-petition claims are to be paid
in full. The Confirmation Order established procedures for the resolution of
disputed post-petition claims and presently there are a number of disputes
before the Bankruptcy Court concerning such post-petition claims.

2. BASIS OF PRESENTATION

COMPANY OPERATIONS

Wherehouse is a retailer of prerecorded music, videocassette rentals and other
entertainment-oriented products. At January 31, 1997, the Company operated 243
stores in seven states. Approximately 89% of the Company's stores are
concentrated in eight major marketing areas (Los Angeles, San Francisco, San
Diego, Sacramento, Fresno, Seattle, Phoenix and Las Vegas) and approximately 83%
of the stores are located in California.

Prior to the Reorganization, WEI held all of the capital stock of Old
Wherehouse. WEI was owned by affiliates of Merrill Lynch Capital Partners, Inc.
(MLCP) and certain members of management.

Pursuant to the Reorganization, the Company operates as a single Delaware
corporation.

For financial reporting purposes, the effective date of the Reorganization was
assumed to be January 31, 1997, the last day of the Company's fiscal year.

The Company has implemented the recommended accounting principles for entities
emerging from Chapter 11 set forth in the American Institute of Certified Public
Accountants Statement of Position 90-7 on Financial Reporting by Entities in
Reorganization under the Bankruptcy Code (SOP 90-7). This results in the use of
fresh start reporting, since the reorganization value, as defined, was less than
the total of all post-petition liabilities and pre-petition claims, and holders
of voting shares immediately before confirmation of the Plan received less than
fifty percent of the voting shares of the emerging entity. Under this concept,
all assets and liabilities are restated to reflect the reorganization value of
the reorganized entity, which approximates its fair value at the date of
reorganization. In addition, the accumulated deficit of the Company was
eliminated


                                      F-11

<PAGE>


                            Wherehouse Entertainment, Inc.

                      Notes to Financial Statements (continued)

2. BASIS OF PRESENTATION (CONTINUED)

and its capital structure was recast in conformity with the Plan. As such, the
accompanying Company balance sheet as of January 31, 1997, represents that of a
successor company which, in effect, is a new entity with assets, liabilities and
a capital structure having carrying values not comparable with prior periods and
with no beginning retained earnings or deficit.

The reorganization value of $83,643,000 was determined by the Company with the
assistance of its financial advisors. The net present value approach was used in
the determination of the reorganization value. The significant factors used
were: (a) the projected discounted cash flows of the company through fiscal year
2001 and (b) the terminal equity value at the end of fiscal 2001 discounted to
the present.

The effect of the consummation of the Plan, including the gain on extinguishment
of pre-petition debt of $173,765,000 and adjustments to record assets at their
estimated fair values, has been reflected in the accompanying balance sheet as
of January 31, 1997, as follows:

<TABLE>
<CAPTION>
                                         OLD             (1)           (2)            (3)            NEW
                                     WHEREHOUSE                                                   WHEREHOUSE
                                    -------------                                               -------------
                                      PRE-FRESH                                                     FRESH
                                    START BALANCE                                               START BALANCE
                                        SHEET       CANCELLATION                  FRESH START      SHEET
                                     JANUARY 31          OF            DEBT        FAIR VALUE     JANUARY 31
                                         1997           STOCK        DISCHARGE     ADJUSTMENT         1997
                                     -------------------------------------------------------------------------
<S>                                 <C>            <C>             <C>           <C>            <C>
ASSETS
Current assets:
  Cash                              $   6,178,000  $           -   $          -  $           -  $   6,178,000
  Receivables                           1,932,000              -              -              -      1,932,000
  Prepaid inventory deposits            4,486,000              -              -              -      4,486,000
  Merchandise inventory                77,321,000              -              -     (1,521,000)    75,800,000
  Other current assets                  2,259,000              -              -              -      2,259,000
  Rental inventory                     13,650,000              -              -     (3,964,000)     9,686,000
                                     -------------------------------------------------------------------------
Total current assets                  105,826,000              -              -     (5,485,000)   100,341,000

Equipment and improvements, at cost    54,634,000              -              -    (33,297,000)    21,337,000

Accumulated depreciation and
  amortization                        (31,195,000)             -              -     31,195,000              -
                                     -------------------------------------------------------------------------
                                       23,439,000              -              -     (2,102,000)    21,337,000
Reorganization value in excess of
  amounts allocable to identifiable
  assets                                        -    (95,671,000)             -    105,395,000      9,724,000

Other assets                              340,000              -              -              -        340,000
                                     -------------------------------------------------------------------------
Total assets                        $ 129,605,000  $ (95,671,000)  $          -  $  97,808,000  $ 131,742,000
                                     -------------------------------------------------------------------------
                                     -------------------------------------------------------------------------

</TABLE>
 
                                         F-12

<PAGE>

                            Wherehouse Entertainment, Inc.

                      Notes to Financial Statements (continued)
 
2. BASIS OF PRESENTATION (CONTINUED)

<TABLE>
<CAPTION>
                                                        OLD             (A)            (B)            (C)           NEW
                                                    WHEREHOUSE                                                   WHEREHOUSE
                                                   -------------                                               -------------
                                                     PRE-FRESH                                                     FRESH
                                                   START BALANCE                                               START BALANCE
                                                       SHEET       CANCELLATION                   FRESH START      SHEET
                                                    JANUARY 31          OF            DEBT        FAIR VALUE     JANUARY 31
                                                        1997           STOCK        DISCHARGE     ADJUSTMENT         1997
                                                    -------------------------------------------------------------------------
<S>                                                <C>            <C>             <C>           <C>            <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
  (DEFICIT)
Current liabilities:
 Accounts payable and bank overdraft               $  13,034,000  $           -   $          -  $           -  $  13,034,000
 Sales taxes payable                                   2,192,000              -              -              -      2,192,000
 Other accrued expenses                               10,461,000              -              -              -     10,461,000
 Current portion of capital lease
  obligations and long-term debt,
  secured                                                729,000              -              -              -        729,000
 Reorganization liabilities                           (3,769,000)             -     18,250,000              -     14,481,000
                                                    -------------------------------------------------------------------------
Total current liabilities                             22,647,000              -     18,250,000              -     40,897,000

Notes payable                                                  -              -      3,980,000              -      3,980,000
Capital lease obligations and long-term
  debt, secured                                          722,000              -              -              -        722,000

Other long-term liabilities                           11,160,000              -              -     (9,160,000)     2,000,000

Liabilities subject to compromise                    279,138,000              -   (279,138,000)             -              -

Deferred income taxes                                  1,270,000              -              -     (1,270,000)             -

Commitments and contingencies

Shareholders' equity (deficit):
 New common stock, $.01 par value                         11,000              -         92,000              -        103,000
 Old common stock, $.01 par value                              -              -              -              -              -
 Additional paid-in capital                          102,000,000    (95,671,000)    83,051,000              -     89,380,000
 Accumulated deficit                                (282,003,000)             -    173,765,000    108,238,000              -
 Notes receivable                                     (5,340,000)             -              -              -     (5,340,000)
                                                    -------------------------------------------------------------------------
Total shareholders' equity (deficit)                (185,332,000)   (95,671,000)   256,908,000    108,238,000     84,143,000
                                                    -------------------------------------------------------------------------
Total liabilities and shareholders' equity
 (deficit)                                         $ 129,605,000  $ (95,671,000)  $          -  $  97,808,000  $ 131,742,000
                                                    -------------------------------------------------------------------------
                                                    -------------------------------------------------------------------------

</TABLE>

                                         F-13

<PAGE>

                            Wherehouse Entertainment, Inc.

                      Notes to Financial Statements (continued)

2. BASIS OF PRESENTATION (CONTINUED)

(1) Issuance of New Common Stock and warrants and cancellation of Old Common
    Stock.

(2) Exchange of pre-petition debt for New Common Stock and related gain on debt
    extinguishment.

(3) Record assets and liabilities at their fair value pursuant to the
    reorganization value of the Company and eliminate retained deficit.

The fresh start balance sheet at January 31, 1997, includes estimated
liabilities for the settlement of certain prepetition claims including payments
to landlords for leases rejected during the reorganization proceedings for which
the amount payable by the Company had not yet been determined and allowed by the
bankruptcy court. Differences between the amounts recorded by the Company at
January 31, 1997, and amounts ultimately paid will be included in income or loss
from continuing operations of the Company when resolved.

In addition to the 10,257,808 shares of New Common Stock issued and outstanding,
917,515 shares are issuable under the Reorganization Plan but had not been
issued as of January 31, 1997. Such shares may be issued to certain General
Unsecured Creditors provided the full amount of their claims become allowed by
the Bankruptcy Court. Should an amount less than the full claim become allowed,
a portion of the New Common Shares will be issued to the Senior Leaders (see
Note 1).

3. SIGNIFICANT ACCOUNTING POLICIES

INVENTORY

Inventories are carried at the lower of cost or market using the first-in,
first-out (FIFO) method. Inventory consists primarily of resaleable prerecorded
music, videocassettes, video games and other products.

RENTAL INVENTORY

New Wherehouse amortizes video rental inventory using the straight-line method
over a three-month period with a $3 salvage value. At January 31, 1997, the fair
value of rental inventory has been classified as a current asset as
substantially all revenue and cash flow from rental on hand is expected to be
derived within a one-year period.


                                         F-14


<PAGE>

                            Wherehouse Entertainment, Inc.

                      Notes to Financial Statements (continued)


3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Prior to the Reorganization, rental inventory was amortized over a period of two
years for video games and three years for videocassettes.

The Company sells rental cassettes and games in excess of ongoing needs after
the initial rental period at prices which are often less than net book value.
The sell-through of such rental inventory in the year purchased results in
additional amortization, which is included in the cost of rentals. Although
rental inventory generated a portion of Old Wherehouse's current revenue and
cash flow, the rental inventory was classified as a noncurrent asset because not
all inventory was expected to be realized as cash or sold in the normal business
cycle.

DEPRECIATION AND AMORTIZATION

In accordance with fresh start reporting, the pre-effective date accumulated
depreciation and amortization of $31,195,000 has been eliminated, and a new
depreciation and amortization base has been established equal to the appraised
value of the existing fixed assets, which reflects their fair market value.
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                           5
    Store and office fixtures and equipment                       5 - 10
    Buildings and improvements                                    5 - 30

    *Amortization over related lease periods

REORGANIZATION VALUE IN EXCESS OF AMOUNTS ALLOCABLE TO IDENTIFIABLE ASSETS

Reorganization value in excess of amounts allocable to identifiable assets
resulting from the Reorganization will be amortized using the straight-line
method over 10 years.


                                         F-15

<PAGE>

                            Wherehouse Entertainment, Inc.

                      Notes to Financial Statements (continued)


3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

FAIR VALUE OF LONG-LIVED ASSETS

The Company adopted Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of," in the year ended January 31, 1995. Accordingly, the Company
records impairment losses on long-lived assets used in operations, and the
related goodwill, when events and circumstances indicate that the assets might
be impaired and the undiscounted cash flows estimated to be generated by those
assets are less than the carrying amounts of those assets.

Management identified significant adverse changes in the Company's business
climate late in the fourth quarter of the year ended January 31, 1995, that
persisted subsequent to year end. These changes were largely due to increasing
competition in the Company's marketplace, which led to operating results and
forecasted future results that were less than previously planned. These factors
led to the conclusion that there was a potential impairment in the recorded
value of goodwill and fixed assets. Accordingly, management reviewed the
recoverability of the carrying value of long-lived assets, primarily goodwill
and fixed assets, based upon a 20-year cash flow analysis. While goodwill was
being amortized on a straight-line basis over 40 years, management's estimate of
undiscounted cash flows over the reduced life amounted to less than the recorded
value of goodwill, indicating impairment of the goodwill under the provisions of
Statement No. 121. Management's estimate, however, indicated that the carrying
value of fixed assets at January 31, 1995, was recoverable over their remaining
useful lives.

An impairment loss of $139,493,000 is included in the accompanying 1995
statement of operations, representing the difference between the estimated
discounted cash flows (at 11.5% per year) and the recorded value of goodwill.
The discount rate of 11.5% represents the Company's weighted average interest
rate in effect on the revolving line of credit, variable rate term note, and the
13% senior subordinated notes at January 31, 1995.


                                         F-16


<PAGE>

                            Wherehouse Entertainment, Inc.

                      Notes to Financial Statements (continued)


3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

FAIR VALUE OF LONG-LIVED ASSETS (CONTINUED)

As a result of the Company's financial performance and the Chapter 11
proceedings, the Company closed 63 locations during 1997, and 53 locations
during 1996. In addition, during fiscal 1996, the Company evaluated the ongoing
value of its equipment and improvements on a store-by-store basis. Based on this
evaluation, the Company determined that store equipment and improvements with a
carrying amount of $1,843,000 were impaired and wrote them down by $1,476,000 to
their fair value. Fair value was based on estimated future cash flows to be
generated by the individual stores, discounted at a market rate of interest.

ADVERTISING COSTS

The Company expenses nonreimbursable advertising costs as costs are incurred.
The amount charged to advertising expense during the years ended January 31,
1997, 1996, and 1995, was $5,282,000, $5,596,000, and $5,704,000, respectively.

PRE-OPENING COSTS

Expenditures associated with opening new stores are charged to expense as
incurred.

EARNINGS PER SHARE

Earnings per share for Old Wherehouse have been omitted since it was a wholly
owned subsidiary of WEI.

REORGANIZATION ITEMS

Reorganization items include: (a) professional fees relating to legal,
accounting and consulting services provided in connection with the Chapter 11
proceedings, (b) costs and expenses associated with the closing of locations,
including an estimated accrual for the expected allowed claims related to
rejected executory contracts, and estimated losses from the liquidation of
inventory from closed stores, (c) the write off of unamortized financing costs
and debt discount in order to record debt subject to the Chapter 11 proceedings
at par value, (d) employee severance costs and an estimated accrual for
contractual obligations under employee change of control agreements and (e)
United States trustee fees and other costs of the Chapter 11 proceedings.

                                         F-17


<PAGE>

                            Wherehouse Entertainment, Inc.

                      Notes to Financial Statements (continued)


3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

STOCK-BASED COMPENSATION

The Company accounts for its stock compensation arrangements under the
provisions of APB 25, "Accounting for Stock Issued to Employees," and intends to
continue to do so.

In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123). SFAS 123 established a fair value-based method of
accounting for compensation cost related to stock options and other forms of
stock-based compensation plans. However, SFAS 123 allows an entity to continue
to measure compensation costs using the principles of APB 25 if certain pro
forma disclosures made. The effect on the Company of the adoption of the
provisions for pro forma disclosure requirements of SFAS 123 was not material at
January 31, 1997.

USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS

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

INCOME TAXES

The Company utilizes the liability method of accounting for income taxes. Under
the liability method, deferred taxes are determined based on the difference
between the financial statement and tax basis of assets and liabilities and are
measured at the enacted tax rates that will be in effect when these differences
reverse.

4. REVOLVING CREDIT FACILITY

Pursuant to the Reorganization Plan, the Company entered into a loan and
security agreement with Congress Financial Corporation (Western) (the Congress
Facility), which provides a borrowing capacity of up to $30,000,000 with a
letter of credit subfacility of $10,000,000, subject to borrowing base
limitations based upon, among other things, the value of certain eligible
merchandise inventory. As of January 31, 1997, there were no borrowings
outstanding under the Congress Facility, although $400,000 of letters of credit
were outstanding.

                                         F-18


<PAGE>

                            Wherehouse Entertainment, Inc.

                      Notes to Financial Statements (continued)


4. REVOLVING CREDIT FACILITY (CONTINUED)

The Congress Facility is available through January 31, 2000. Borrowings bear
interest at the prime rate or the Eurodollar rate plus 2.50 percentage points at
the option of the Company.

In connection with the closing of the Congress Facility, the Company incurred a
closing fee in the amount of $150,000 payable $75,000 upon closing and $75,000
on January 31, 1998.

The Congress Facility is secured by cash, credit card receivables, general
intangible assets, and inventory and requires that the Company maintain net
worth (as defined) of not less than $60 million dollars and subjects the Company
to other operating and compliance covenants.

5. STOCKHOLDERS' EQUITY

Pursuant to the Management Agreement (see Note 11) and a Stock Subscription
Agreement dated as of January 31, 1997 (the Stock Subscription Agreement), New
Wherehouse agreed to sell, and Investment Associates an affiliate of Alvarez and
Marsal, Inc. (A&M) agreed to buy at a purchase price of $6,340,000 ($1,000,000
in cash from Investment Associates' 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, the Promissory Notes), 1,100,000
shares of the New Common Stock (the A&M Shares) (subject to adjustment upward or
downward to represent 10% of the sum of (i) the shares of New Common Stock
ultimately issued under the Reorganization Plan plus (ii) the number of shares
of New Common Stock issued to Investment Associates). The Promissory Notes bear
interest at 7% per annum during the first four years and 11% per annum during
the fifth through seventh years, mature on January 31, 2004, and have no
scheduled 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 Investment Associates entered into a
Non-Transferrable Stock Option Agreement dated as of January 31, 1997 (the Stock
Option Agreement), pursuant to which New Wherehouse issued to Investment
Associates three tranches of options to purchase shares of New 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 New
Common Stock and the shares subject to


                                         F-19

<PAGE>

                         Wherehouse Entertainment, Inc.

                    Notes to Financial Statements (continued)


5.   STOCKHOLDERS' EQUITY (CONTINUED)

warrants issued under the Reorganization Plan. The first tranche of options
represents the right to purchase 331,127 shares of New Common Stock at an
exercise price of $9.56. The second tranche of options represents the right to
purchase 331,127 shares of New Common Stock at an exercise price of $11.58. The
third tranche of options represents the right to purchase 331,126 shares of New
Common Stock at an exercise price of $14.10. The A&M Options vest monthly in
equal installments through October 31, 1998, and all unexercised A&M Options
expire on January 31, 2003, 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 New Common Stock are
issued and are entitled to certain other anti-dilution provisions as set forth
in the Stock Option Agreement.

New Wherehouse also granted certain registration rights to Investment Associates
with respect to the A&M Securities 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, Investment Associates has the right to make
one demand registration and two piggy-back registrations in respect of the A&M
Securities.

New Wherehouse also granted certain registration rights to the Senior Lenders as
of the Plan Effective Date with respect to the New Common Stock acquired by such
Senior Lenders, pursuant to a Registration rights Agreement dated as of January
31, 1997 (the Senior Lenders Registration Rights Agreement). Under the Senior
Lenders Registration Rights Agreement, the holders of a requisite number of
shares acquired by the Senior Lenders have the right to make two demand
registrations and to participate in two piggy-back registrations in respect of
the such shares of New Common Stock.


                                      F-20

<PAGE>

                         Wherehouse Entertainment, Inc.

                    Notes to Financial Statements (continued)


6.   LIABILITIES SUBJECT TO COMPROMISE

Liabilities subject to compromise at January 31, 1996, include the following:

     13% senior subordinated notes                           $  110,000,000
     Variable rate term note and revolving line of credit        92,170,000
     Accrued interest                                             8,507,000
     Lease rejection claims                                       6,000,000
     Convertible subordinated debentures                          5,344,000
     Trade and other miscellaneous claims                        56,836,000
                                                             --------------
                                                             $  278,857,000
                                                             --------------
                                                             --------------

Liabilities subject to compromise under the Chapter 11 proceedings include
substantially all current and long-term debt and trade and other payables as of
the petition date.

As a result of the Chapter 11 proceedings, the unpaid principal of, and interest
on, all of the indebtedness of the Company as of the petition date became
immediately due and payable in accordance with the terms of the instruments
governing such indebtedness.

While the Chapter 11 proceedings were pending, however, the Company was
prohibited from making any payments of obligations owing as of the petition
date, except as permitted by the Bankruptcy Court and contractual terms of debt
obligations have been suspended subject to settlement. 

During the Chapter 11 proceeding the Company obtained a debtor-in-possession
financing arrangement with a financial institution whereby a $30,000,000
revolving credit facility (DIP facility), which includes a letter of credit
subfacility of $10,000,000, was available to fund working capital, issue letters
of credit and make certain other payments during the Chapter 11 proceedings.
Borrowings under the DIP facility bore interest, at the Company's option, at
either: (a) the Base Rate (defined as the higher of the Prime Rate or the
Federal Funds Effective Rate plus 1/2%) plus 1% (9.5% at January 31, 1996); or
(b) the Eurodollar Rate (defined as the rate to first-class banks for dollar
deposits in the Eurodollar Market) plus 2.75% (8.125% at January 31, 1996). The
Company had no outstanding borrowings against the DIP facility at January 31,
1996. At January 31, 1996, the Company had $400,000 of letters of credit
outstanding. 

For the disposition of liabilities subject to compromise see Note 1.


                                      F-21

<PAGE>

                         Wherehouse Entertainment, Inc.

                    Notes to Financial Statements (continued)


7.   OTHER ACCRUED EXPENSES

Other accrued expenses consists of the following:

                                               NEW            OLD
                                            WHEREHOUSE     WHEREHOUSE
                                           ---------------------------
                                               1997           1996
                                           ---------------------------

     Gift certificate liability            $  4,249,000   $  5,138,000
     Payroll and related costs                3,414,000      4,799,000
     Store closing costs                        621,000      1,780,000
     Other                                    2,177,000      6,892,000
                                           ---------------------------
                                           $ 10,461,000   $ 18,609,000
                                           ---------------------------
                                           ---------------------------


8.   INCOME TAXES

As a result of the Acquisition by New Wherehouse of substantially all of the
assets of Old Wherehouse, a new tax basis equivalent to the fair value of net
assets acquired was established. The net operating loss carryovers and other
deferred tax assets were used by Old Wherehouse to offset a portion of the gain
on the extinguishment of debt. Under the provisions of the Internal Revenue
Code, no provision for income taxes was recorded on the remaining gain on the
extinguishment of debt.

No deferred tax assets or liabilities were recorded by New Wherehouse at
January 31, 1997.

The provision for income taxes includes:

                                                 PREDECESSOR
                                ---------------------------------------------
                                            YEAR ENDED JANUARY 31
                                     1997            1996            1995
                                ---------------------------------------------
     Current:
       Federal                  $           -   $           -    $ (1,500,000)
       State                                -          17,000               -
                                ---------------------------------------------
                                            -          17,000      (1,500,000)
     Deferred:
       Federal                              -     (14,187,000)     (5,057,000)
       State                                -      (2,695,000)     (2,249,000)
       Valuation allowance                  -      16,882,000      21,813,000
                                ---------------------------------------------
                                            -               -      14,507,000
                                ---------------------------------------------
                                $           -   $      17,000   $  13,007,000
                                ---------------------------------------------
                                ---------------------------------------------


                                      F-22

<PAGE>

                         Wherehouse Entertainment, Inc.

                    Notes to Financial Statements (continued)


8.   INCOME TAXES (CONTINUED)

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

                                                          OLD WHEREHOUSE
                                                  ------------------------------
                                                       YEAR ENDED JANUARY 31
                                                    1997       1996       1995
                                                  ------------------------------
     Statutory tax rate                             34.0%     (34.0)%    (34.0)%
     Permanent tax differences for 
       deductions (primarily amortization 
       of excess of cost over fair value of 
       net assets acquired)                          -          -         30.5
     Job tax credits                                 -          -         (2.1)
     State taxes, net of federal benefit             -          -         (1.0)
     Valuation allowance and other                 (34.0)      34.0       15.3
                                                  ------------------------------
                                                     -   %      -  %       8.7%
                                                  ------------------------------
                                                  ------------------------------

The components of net deferred income taxes at 1996 are as follows:

     Net current deferred income tax assets (liabilities):
       Merchandise inventory                                      $  3,596,000
       Vacation liability                                              894,000
       Other accrued liabilities                                       115,000
       Prepaid expenses                                               (143,000)
                                                                  ------------
                                                                     4,462,000
     Net long-term deferred income tax assets (liabilities):
       Video rental inventory                                        1,312,000
       Equipment and improvements                                    3,251,000
       Store closure liability                                         717,000
       Average rent liability                                        3,810,000
       Federal/state operating loss carryovers                      11,651,000
       Federal/state credit carryovers                               8,588,000


                                      F-23

<PAGE>

                         Wherehouse Entertainment, Inc.

                    Notes to Financial Statements (continued)


8.   INCOME TAXES (CONTINUED)

       Deferred compensation                                      $    564,000
       Other accrued liabilities                                    (4,147,000)
       Capital leases                                                  469,000
       Goodwill                                                      3,243,000
       Loan fees                                                     2,708,000
       Rejected executory contracts                                  2,408,000
                                                                  ------------
                                                                    34,574,000
                                                                  ------------
                                                                    39,036,000
       Valuation allowance for deferred tax assets                 (42,306,000)
                                                                  ------------
     Net deferred income tax liability                            $ (3,270,000)
                                                                  ------------
                                                                  ------------

During the year ended January 31, 1996, the valuation allowance for deferred tax
assets increased by $16,882,000 from $25,424,000 at January 31, 1995 to
$42,306,000 at January 31, 1996.

The Company is currently undergoing an audit by the State of California for the
years ended January 31, 1992, 1993 and 1994. Management believes that it has
made adequate provision in the accompanying financial statements for these
audits. In connection with the Chapter 11 case, the Company agreed to pay
certain priority tax claims, including amounts payable to the state of
California, and other state taxing authorities, six years from the assessment
date of the tax claim. At January 31, 1997, these amounts are reflected in the
balance sheet of New Wherehouse as non-current notes payable.

9.   COMMITMENTS

LEASES

The Company leases substantially all of its data processing equipment, retail
stores and other facilities. The capital and operating lease agreements expire
on various dates through 2013 with renewal options for certain leases. Certain
leases provide for payment of real estate taxes and additional rents based on a
percentage of sales. During the Chapter 11 case, the Company renegotiated the
terms of numerous leases and in certain cases has the right to terminate leases
prior to the original lease expiration date.


                                      F-24

<PAGE>

                         Wherehouse Entertainment, Inc.

                    Notes to Financial Statements (continued)


9.   COMMITMENTS (CONTINUED)

LEASES (CONTINUED)

Future minimum annual lease payments under capital and operating leases at
January 31, 1997, including the modifications resulting from the Chapter 11
proceedings, are payable as follows:

                                                      CAPITAL       OPERATING
                                                      LEASES         LEASES
                                                     --------------------------
     1998                                            $ 556,000    $  23,701,000
     1999                                               58,000       21,296,000
     2000                                                    -       18,088,000
     2001                                                    -       16,149,000
     2002                                                    -       13,990,000
     Thereafter                                              -       38,094,000
                                                     --------------------------
     Total future minimum lease payments               614,000    $ 131,318,000
                                                                  -------------
                                                                  -------------
     Less amounts representing interest                 23,000
                                                     ---------
     Present value of future minimum lease payments    591,000
     Less current portion                              536,000
                                                     ---------
     Long-term obligations under capital leases      $  55,000
                                                     ---------
                                                     ---------

Rental expense charged to operations was approximately $33,159,000 in fiscal
1997, $38,892,000 in fiscal 1996, and $43,331,000 in fiscal 1995. In addition,
real estate taxes and additional rents based on percentage of sales were
approximately $2,434,000 in fiscal 1997, $2,871,000 in fiscal 1996, and
$3,158,000 in fiscal 1995.

Included in equipment and improvements are assets held under capital leases with
an original cost to the Company of $2,993,000 and $4,067,000 at January 31, 1997
and 1996. Capital lease obligations are assumed to be fully secured by the value
of the related equipment and improvements.

In connection with the Reorganization, the Company converted an equipment lease,
previously accounted for as a capital lease, to a note payable, with monthly
installments of $12,750 through September 1999.


                                      F-25

<PAGE>

                         Wherehouse Entertainment, Inc.

                    Notes to Financial Statements (continued)


9.   COMMITMENTS (CONTINUED)

MANAGEMENT CONSULTING AGREEMENTS

As part of the re-engineering project begun in June 1993, the Company entered 
into a management consulting agreement with a company whose chairman provided 
services first by leading the re-engineering project and then as chairman of 
the board and chief executive officer of the Company. The agreement was 
terminated on July 2, 1996. In connection with the termination, the Company 
paid $562,000. The Company then entered into a new employment agreement which 
was terminated January 31, 1997. Additional payments in connection with the 
employment agreements during the fiscal year ended January 31, 1997, 
aggregated $437,000. Amounts paid under the initial agreement were $496,000 
and $375,000 during fiscal 1996 and 1995, respectively.

10.  CONTINGENCIES 

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.

11.  EMPLOYEE BENEFITS

EXECUTIVE OFFICERS' RETIREMENT PLAN: The Company provides life insurance for the
executive officers of the Company, with face values of such policies ranging
from $250,000 to $500,000. Upon retirement at the normal retirement age of 65,
covered executives are entitled to receive annual payments equal to 10% of the
face amount of their life insurance policies for each of the 15 years following
retirement. The Company recognized expense of $25,000 in 1997, $60,000 in 1996,
and $27,000 in fiscal 1995, under this plan.

EMPLOYEES' SAVINGS RETIREMENT PLAN: In March 1992, the Company established a tax
qualified 401(k) Savings Retirement Plan (401(k) 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 401(k) Plan on the first day of each
calendar quarter. All eligible employees may contribute from 1% to 10% of their
annual compensation on a pre-tax basis. The Company makes a matching
contribution in an amount equal to 50% of the employees' contributions of 1% to
3% of their annual compensation and 25% of the employees' contributions of 4% to
5% of their annual compensation. Matching 


                                      F-26

<PAGE>

                         Wherehouse Entertainment, Inc.

                    Notes to Financial Statements (continued)


11.  EMPLOYEE BENEFITS (CONTINUED)

contributions made by the Company vest 25% per year beginning with the
employee's second year of employment. The Company recognized expense of $257,000
in 1997, $305,000 in 1996, and $381,000 in 1995 for matching costs and
administrative costs under the 401(k) Plan.

SEVERANCE AGREEMENTS: In order to retain certain key management employees prior
to and during the Chapter 11 proceedings, the Company has established severance
agreements with such employees. These agreements would take effect in the event
of a change in control of the Company (as defined), which would result in such
employees' termination of employment or in a significant reduction in such
employees' responsibilities. If such an event occurred, the Company would be
liable for payments of up to $1,900,000 (at January 31, 1997) under the various
severance agreements. In addition, the salary of the chairman of the board and
chief executive officer of Old Wherehouse had been guaranteed through October 1,
1997. In accordance with the terms of the above agreements, the Company paid
$350,000 to one of its officers subsequent to January 31, 1997.

EMPLOYMENT AGREEMENTS

In connection with the Reorganization plan, the Company entered into a
Management Services Agreement dated as of January 31, 1997, with A&M, Antonio C.
Alvarez II, the Support Employees described therein, Investment Associates and
Cerberus Partners, L.P. (the Management Agreement). Under the Management
Agreement Mr. Alvarez serves as chairman of the board and chief executive
officer of New Wherehouse with A&M receiving $600,000 annually as compensation
for Mr. Alvarez' services. The Management Agreement expires on October 14, 1998.

Prior to the Plan Effective Date, Mr. Alvarez served as a consultant to the
Senior Lenders pursuant to a letter agreement dated as of October 14, 1996,
between A&M, Mr. Alvarez and the Senior Lenders (the Interim Agreement).
Pursuant to the Interim Agreement, the Senior Lenders agreed to pay A&M a
consulting fee of $50,000 per month plus the hourly fees of those employees of
A&M providing assistance to Mr. Alvarez in the performance of his consulting
responsibilities. The Senior Lenders paid $389,000 to A&M pursuant to the
Interim Agreement prior to January 31, 1997. Under the Management Agreement, New
Wherehouse agreed to reimburse, and has reimbursed, the Senior Lenders for the
amounts paid by the Senior Lenders to A&M pursuant to the Interim Agreement.


                                      F-27

<PAGE>

                         Wherehouse Entertainment, Inc.

                    Notes to Financial Statements (continued)


11.  EMPLOYEE BENEFITS (CONTINUED)

The Management Agreement provides that a payment of $1,500,000 will be made to
A&M, the options to purchase New Common Stock held by Investment Associates will
immediately vest and Investment Associates will have the right to require New
Wherehouse to purchase the shares of New Common Stock and options to acquire New
Common Stock owned by Investment Associates in the event that Mr. Alvarez is
terminated other than for cause (as defined in the Management Agreement) or
there is a change-in-control (as defined in the Management Agreement) to which
A&M has not, through Mr. Alvarez, consented. The $1,500,000 payment referred to
above will be payable by Cerberus if a change-in-control results solely from the
sale by Cerberus of more than 50% of the shares of New Common Stock owned by
Cerberus immediately prior to the sale. For any other change-in-control, the
$1,500,000 payment is to be made by New Wherehouse. The price to be paid by New
Wherehouse in purchasing the shares of New Common Stock and options to acquire
New Common Stock owned by Investment Associates will depend on the fair market
value (as defined in the Management Agreement) of the New Common Stock at the
time of purchase. Any payments made to Investment Associates in purchasing the
shares of New Common Stock and options to acquire New Common Stock from
Investment Associates are required to be applied to reduce the outstanding
amounts under the Promissory Notes.

12.  QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

Quarterly financial information (unaudited) is as follows (in thousands):

                              NET REVENUE     GROSS PROFIT     NET INCOME (LOSS)
                              --------------------------------------------------
1997 - QUARTER ENDED
     April 30                  $  87,490        $  35,472         $  (2,266)
     July 31                      87,670           31,833            (8,010)
     October 31                   78,144           28,723            (7,456)
     January 31*                 112,200           40,512           161,452
1996 - QUARTER ENDED
     April 30                 $  103,976        $  43,106         $  (7,438)
     July 31                     105,036           41,076           (10,151)
     October 31                   93,100           34,823           (12,048)
     January 31                  131,081           43,792           (14,201)
1995 - QUARTER ENDED
     April 30                 $  113,863        $  46,505         $  (5,648)
     July 31                     114,324           47,904            (3,729)
     October 31                  112,651           45,919            (6,052)
     January 31                  158,787           61,708          (146,816)

*Net loss includes an extraordinary gain of $173,765, resulting from the 
 extinguishment of debt in connection with the Reorganization.


                                      F-28



<PAGE>

                       Wherehouse Entertainment, Inc.

              Schedule II -- Valuation and Qualifying Accounts

<TABLE>
<CAPTION>
                                                     Additions
                                     Balance at      Charged to
                                     Beginning        Costs and                        Balance at
   Description                        of Year         Expenses    Deductions(1)(2)    End of Year
-------------------------------------------------------------------------------------------------
<S>                                  <C>             <C>           <C>                 <C>

Accumulated amortization deducted
 from video rental inventory:
   Company:
     Year ended January 31, 1997      $38,906,000     $23,535,000   $62,441,000          $         -

     Year ended January 31, 1996       40,984,000      24,213,000    26,291,000           38,906,000

     Year ended January 31  1995       38,966,000      26,831,000    24,813,000           40,984,000

</TABLE>

----------------

(1) Accumulated amortization on dispositon of video rental tapes.
(2) The deduction in 1997 resulted from the elimination of the accumulated
    amortization in conjunction with Fresh Start accounting adjustments.







                                    F-29