<PAGE>
                                   UNITED STATES
                          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 
          For the fiscal year ended January 31, 1998

     [ ]  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                              95-4608339
        (State or other jurisdiction of      (I.R.S. Employer Identification 
         incorporation or organization)                    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: 

                           Common Stock, $0.01 par value
                                          
     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.  Yes [ X ] No [   ]


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<PAGE>

     Indicate by check mark if disclosure of delinquent filers pursuant to 
Item 405 of Regulation S-K (Section 229.405 of this chapter) 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. /  /

The aggregate book value of the estimated voting stock to be held by
non-affiliates of the registrant is $18,408,021. (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 April 22, 1998, 10,650,643 shares of the registrant's common stock
were issued and outstanding and 171,923 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.  Accordingly, the registrant has utilized book value per 
     share for purposes of the foregoing calculations concerning voting stock 
     held by non-affiliates.  This calculation of book value per share is not
     intended to represent the price at which those shares trade.  As of 
     January 31, 1998, 10,619,201 shares of the registrant's voting stock were 
     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.  At January 31, 1998, the registrant estimates
     that 203,365 additional shares of its voting stock may be issued pursuant 
     to the plan of reorganization, after which a total of 10,822,566 shares of 
     the registrant's voting stock will be issued and outstanding. The 
     registrant estimates that of the number of total outstanding shares, 
     approximately 2,178,464 shares will be held by non-affiliates of the 
     registrant.   The book value of voting stock held by non-affiliates of the 
     registrant specified above assumes the issuance of all 10,822,566 shares. 
     


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<PAGE>

                             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", "Video and Other
Product Rentals" and "Competition" under Item 1 below, "Holders" under Item 5
below, and "Management's Discussion and Analysis of Financial Condition and
Results of Operation" under  Item 7 below.  Statements in this Annual Report on
Form 10-K which address activities, events or developments that the registrant
expects or anticipates will or may occur in the future, including such things as
future 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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<PAGE>

                                       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.  Since then, Wherehouse has evolved
into a diversified entertainment retailer offering a broad range of prerecorded
music, videocassettes and other products.  As Wherehouse has grown, its product
lines and product mix have updapted 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
(collectively the "Debtors") filed voluntary petitions for relief  under Chapter
11 of Title 11 of the United States Code in the United States Bankruptcy Court
for the District of Delaware (the "Bankruptcy Court"), seeking to reorganize
under Chapter 11 (the "Bankruptcy Case").  Old Wherehouse and WEI continued to
manage their respective affairs and operate their businesses as
debtors-in-possession while they worked to develop a reorganization plan that
would restructure their businesses and allow their emergence from Chapter 11.

     The 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 


                                       4
<PAGE>

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.

     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 canceled 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
Debenture holders"), (5) other general unsecured creditors (the "General
Unsecured Creditors") and (6) Federal and state taxing authorities.

     The Senior Lenders received 9,157,808 shares of New Common Stock under 
the Reorganization Plan on account of their claims as of January 31, 1997 and 
an additional  141,455 shares  as of January 31, 1998, for a total of 
9,299,263, representing 87.6% 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.  Based on the terms of the 
Reorganization Plan, 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 Creditor's claims, the Senior Lenders (or 
their assigns) will receive approximately 9,387,130 shares of New Common 
Stock in total.  This total may increase or decrease based on the final 
resolutions of open unsecured creditors claims.  Approximately $94.6 million 
of indebtedness held by the Senior Lenders was canceled 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 


                                       5
<PAGE>

receive 27% of their allowed claims in cash in lieu of shares of New Common
Stock.  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, approximately $11,250,000 in cash will have been distributed to the
Trade Creditors.  As of January 31, 1998, approximately $10,975,000 had been 
paid.  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 been providing normal trade 
credit terms to the Company.

     Under the Reorganization Plan, the Senior Subordinated Noteholders received
$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 Convertible Debenture holders received no distribution under the
Reorganization Plan.  Approximately $5,344,000 of outstanding 6 3/4% Convertible
Subordinated Debentures were canceled.

     Some 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 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.  The Company estimates that, including shares already
issued, approximately 335,120 shares of New Common Stock will be issued to
General Unsecured Creditors (including Trade Creditors who did not elect the
Exchange Option in order to resolve the remaining claims.)

     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 up to $10,000,000, subject to borrowing base
limitations based upon, among other things, the value of certain eligible
merchandise 


                                       6
<PAGE>

inventory.  As of January 31, 1998, there were no borrowings outstanding under
the Congress Facility, although $0.7 million of letters of credit were
outstanding.

GENERAL

     Wherehouse operated 223 stores at January 31, 1998 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, 1998, the Company closed 3 stores.  

     Wherehouse sells prerecorded music, videocassettes and digital versatile
disc's ("DVD's"), video games, personal electronics (including personal stereos,
portable stereos, headphones and related merchandise), blank audiocassettes and
videocassettes, and accessories.  Approximately 72% 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, 1998, sales of prerecorded music,
videocassettes, video games, and accessories accounted for 84.3% of revenues,
and rentals of videocassettes, video games, and other products (including 
revenue from the sale of previously viewed videocasettes) accounted for 15.7% 
of revenues.

     Of the 223 stores operating as of January 31, 1998, 190 stores were located
in strip centers or freestanding buildings and 33 were located in malls. 
Approximately 89.2%  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, marketing and distribution.


                                       7
<PAGE>

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

<TABLE>
<CAPTION>
                                    Fiscal Years Ended January 31,
                                    ------------------------------
                                         New           Old
                                      Wherehouse    Wherehouse
                                     ----------   --------------
                                        1998      1997      1996
                                        ----      ----      ----
<S>                                    <C>       <C>       <C>  
Merchandise sales

     Total music                       $239.2    $252.7    $292.2

     New videocassettes and DVDs        13.1      17.9      24.1

     Video game software and
     hardware, general merchandise,
     accessories, ticket commissions,
     and other                           23.8      24.9      34.0
                                       ------    ------    ------
Total merchandise sales                $276.1    $295.5    $350.3


     Video and other product rentals     51.3      70.0      82.9
                                       ------    ------    ------

TOTAL MERCHANDISE REVENUE              $327.4    $365.5    $433.2
                                       ------    ------    ------
                                       ------    ------    ------
</TABLE>

MERCHANDISE SALE PRODUCTS

     Wherehouse stores generally sell a broad array of entertainment products,
including prerecorded music, videocassettes and DVD's, video game software,
accessories and personal electronics.  The table above summarizes Wherehouse's
dollar volume of sale revenue by merchandise category for fiscal year ended
January 31, 1996 through fiscal year ended January 31, 1998.  The percentage of
total revenues contributed by merchandise sales has risen from 80.9% in 1996 to
84.3% in 1998.  The number of different new music titles per store ranges from
approximately 9,500 to 60,000, representing a range of 25,000 to 90,000
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.  


                                       8
<PAGE>

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.
     
     Wherehouse also buys and sells used products, principally used CDs, 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 1996, 1997 and 1998.  The Company feels
that the increases achieved in the used CD business in the prior years have
stabilized and the used CD business will, in the future, perform at a more
stable growth rate.
     
      Prerecorded videocassettes and DVDs (feature films, music videos, and 
self-improvement programming) represented, after music, Wherehouse's second 
largest sale product category in the fiscal year ended January 31, 1997 and the 
fiscal year ended January 31, 1998.  As of January 31, 1998, 80 of the 
Wherehouse stores sold DVDs with each store having a range of 150 to 350 
titles per store.  As box-office "hit" motion pictures continue to be released 
to the videocassette and DVDs 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 the fiscal year ended 
January 31, 1996 through the fiscal year ended January 31, 1998 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 Wherehouse 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 10% of Wherehouse's
rentals in the fiscal year ended January 31, 1998 were non-theatrical titles,
such as children's videos, adult videos, fitness videos, music videos and
educational videos.  Audiocassette books and video game players are also
offered for rent in a few select stores.  As of January 31, 1998, 161 of
Wherehouse's 223 stores offered videocassettes and other products for rent.  On
average, stores that rent videocassettes carry approximately 3,500 units,
although the number of units can range from as few as 1,500 units to as many as
9,200 units, representing approximately 1,000 to 6,500 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 control a certain portion
of available titles and seek to promote those titles.  As of January 31, 1998,
Wherehouse's leading suppliers of prerecorded videocassettes were Warner Home
Video, 


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<PAGE>

Ingram Entertainment 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 rental 
operations is the disposition of previously viewed 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, previously viewed 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.  The revenues 
from the clearance of previously viewed videocassettes are included in the 
revenue from video and other product rentals.

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.  The 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 and, occasionally,
on a label-wide basis to promote new releases.  When Wherehouse runs
pre-authorized advertising that contains reference to a specific title or label,
the related supplier 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 Old Wherehouse's bankruptcy filing but were 
reinstated several months later for most of the Company's vendors.  As of 
January 31, 1998, the Company has normal return privileges with all of its 
vendors.  Pricing and return policies of the Company's major distributors are 
subject to change.

                                       10
<PAGE>

STORE AND SITE SELECTION

     The table below sets forth store openings, closings and the total number of
the Company's stores for the last five fiscal years:


<TABLE>
<CAPTION>
          Fiscal Year    Total Stores       Stores          Stores
          Ended          at Beginning   ----------------    at End
          January 31,    of Period      Opened    Closed    of Period
          -----------    ------------   ------    ------    ---------
          <S>            <C>            <C>       <C>       <C>

          1998           243            0         20        223


          1997           297            9         63        243


          1996           347            3         53        297


          1995           347            4         4         347


          1994           313            49        15        347


</TABLE>

     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
Old Wherehouse's bankruptcy filing, Old Wherehouse pursued growth opportunities
in existing marketing areas and selectively grew through acquisition if such
growth was consistent with the Old Wherehouse's strategies.  The Company will
continue to evaluate growth opportunities within the context of its strategies
and will evaluate future store closing decisions, principally at lease
expiration, based upon individual store performance. 

     As of January 31, 1998, the Company operates 223 stores comprising
approximately 1,361,000 square feet, a reduction of approximately 382,000 
square feet compared to the square footage at January 31, 1997.  The reduction
is principally the result of the closing of 20 stores.


STORE OPERATIONS AND DISTRIBUTION

     STORE LOCATION.  As of January 31, 1998, the Company had 190 stores located
in strip centers or freestanding buildings and 33 stores located in malls.  The
average size of strip center and 


                                       11
<PAGE>

freestanding locations is approximately 6,100 square feet, with an approximate
range of 1,500 to 15,000 square feet.  Mall stores range in size from 2,000 to
10,000 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, modified exterior signage and a
minimum of fixed interior walls.  The design maximizes flexibility in lighting
and use of floor space (to accommodate changes in product format) and is
intended to focus customer attention primarily on the products.  The Company has
invested in merchandise fixtures and an updated in-store signing program to
improve merchandise presentation.

     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 is automatically 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 (primarily in the case of new
releases) and the remainder is shipped from the Company's distribution center. 
The Company generally 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, internet-based
retailers 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.


                                       12
<PAGE>

     The Company also competes in video business with cable television and DSS 
("Digital Satellite Systems"), which includes pay-per-view television.  
Currently, pay-per-view television 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 consequently, the Company's 
business. Notwithstanding potential technological advances, Wherehouse believes 
that video rental should, in the near future, continue to be the first source 
of in-the-home filmed 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, provide other in-the-home 
entertainment over the internet, or provide on-site transcription of compact 
discs through in-store kiosks.  While most of these technologies are not 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.

ORGANIZATION AND EMPLOYEES

     As of January 31, 1998, Wherehouse employed approximately 3,625 persons. 
Approximately 39% were full-time employees and approximately 61% were part-time 
employees.  The Company's labor requirements vary based on seasonal business 
fluctuations, with up to 1,000 additional store and distribution center 
employees added during the peak holiday season.  Wherehouse's corporate office 
staff, which consists of approximately 161 employees, 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 applications in China.  The Company has also filed a trademark 
application in the United States for the name "Tu Musica."  The Company 
monitors the status of its trademark registrations to maintain them in force 
and to renew them as required.

                                       13
<PAGE>

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 the fiscal year ended January 31, 1998 were approximately 31.9% of
total annual revenues.

ITEM 2.   PROPERTIES

     The Company's executive offices, which are located in Torrance, 
California, are subject to a lease covering 50,776 square feet of space at a 
current annual base rent of approximately $232,356.  The lease expires on May 
31, 1999, however, either party may terminate this lease upon four months' 
notice at any time after January 31, 1998.  The Company is engaged in 
discussions with its landlord to extend the term of its lease.

     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 annual base rent for the fiscal year ended
January 31, 1998 was $738,000, although rent is subject to periodic adjustment.

     As of January 31, 1998, the Company owned one of its retail locations and 
leased space for the remaining 222 stores.  Subsequent to January 31, 1998, the 
Company closed 3 of these 222 stores.  Lease terms generally range from month 
to month to 23 years, including renewal options.  If no leased stores' renewal 
options were exercised, 22 leases would expire on or before January 31, 1999, 
96 would expire between February 1, 1999 and January 31, 2003, and the 
remainder would expire between February 1, 2003 and January 31, 2014.  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, 1998, the Company was involved in leasing discussions
with various landlords regarding the opening of 10 additional stores.  As of
January 31, 1998 no lease had been signed on any of these locations.  Subsequent
to January 31, 1998 the Company has signed 1 lease.  During the fiscal year
ended January 31, 1998, the Company closed all of the nine locations in which it
had 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.  



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.


                                       14
<PAGE>

     (ii) 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.


     None.


                                       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 canceled 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 Common Stock, seven of whom were Senior Lenders.
As of January 31, 1998, the Company had issued 10,619,201 shares of New Common
Stock and the Company estimates that approximately 203,365 additional shares of
New Common Stock will be distributed among the Senior Lenders, A&M Investment
Associates #3, LLC and approximately 1,500 holders of unsecured claims as
their claims are allowed by the Bankruptcy Court.  See "Reorganization under
Chapter 11" in Part I, Item 1, Business.  As of January 31, 1998, there were 826
holders of record of the New Common Stock.


DIVIDENDS

     No dividends have been paid to the holders of the New Common Stock since
its 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 the New Common Stock in the foreseeable
future.


ITEM 6.   SELECTED FINANCIAL DATA

     Set forth below are selected financial data as of and for the periods
indicated below.  The financial data are derived from financial statements of
Old Wherehouse and New Wherehouse.  The 


                                       16
<PAGE>

selected financial data should be read in conjunction with the discussion under
Item 7 - "Management's Discussion and Analysis of Financial Condition and
Results of Operation" and with the financial statements, including the notes
thereto, included elsewhere in this report.

<TABLE>
<CAPTION>
                                                                      (Dollar amounts in millions)
                                         ---------------------------------------------------------------------------------------

                                         New Wherehouse                               Old Wherehouse
                                         ---------------   ---------------------------------------------------------------------
                                               Year
                                               Ended                               Year ended January 31
                                            January 31,    ----------------------------------------------------------------------
 INCOME STATEMENT DATA                         1998               1997              1996             1995                1994
                                         ---------------    --------------  -----------------  ----------------  ----------------
<S>                                      <C>                <C>             <C>                <C>               <C>
 Revenue:                                                                                                                
      Sales                                   $276.1            $295.5           $350.3            $409.0               $379.7
      Rental                                    51.3              70.0             82.9              90.6                 92.1
                                         ---------------    --------------  -----------------  ----------------  ----------------
                                              $327.4            $365.5           $433.2            $499.6               $471.8
 Cost and expenses:                                                                                                           
      Cost of sales                            176.1             195.5            230.3             262.6                248.0
      Cost of rentals including                                                                                               
      amortization                              27.4              34.0             40.4              35.4                 51.3
      Selling, general and                                                                                                    
      administrative expenses                  111.9             145.4            166.8             188.3                196.1
      Restructuring charges                      ---               ---              ---               ---                 14.3
      Write-down of long-lived assets            ---               ---              1.5             139.5                  ---
                                         ---------------    --------------  -----------------  ----------------  ----------------
 Income (loss) from operations                  12.0              (9.4)            (5.8)           (126.2)               (37.9)
      Interest (income )expense, net            (1.1)              0.7             14.8              23.0                 23.2
                                         ---------------    --------------  -----------------  ----------------  ----------------
                                                                                                                         
 Income (loss) before reorganization                                                                                          
      items and income taxes                    13.1             (10.1)           (20.6)           (149.2)               (61.1)
 Reorganization items                            ---              19.9             23.2               ---                  ---
                                         ---------------    --------------  -----------------  ----------------  ----------------
 Income (loss) before income taxes             $13.1            $(30.0)          $(43.8)          $(149.2)              $(61.1)

 Provision (benefit) for income taxes            5.4               ---             ---               13.0                (19.0)
                                         ---------------    --------------  -----------------  ----------------  ----------------
 Income (loss) before extraordinary             $7.7            $(30.0)          $(43.8)          $(162.2)              $(42.1)
      item 
 Extraordinary item (2)                          ---             173.7              ---               ---                  ---
                                         ---------------    --------------  -----------------  ----------------  ----------------
 Net income (loss)                              $7.7            $143.7           $(43.8)          $(162.2)              $(42.1)
                                         ---------------    --------------  -----------------  ----------------  ----------------
                                         ---------------    --------------  -----------------  ----------------  ----------------
                                                                                                                              
 Net income per common share(1)                                                                                               
      Basic                                    $0.74                                                                          
      Diluted                                  $0.71                                                                          
 Weighted Average shares Outstanding                                                                                          
      Basic                               10,420,557                                                                          
      Diluted                             10,894,862                                                                          

 OTHER DATA                                                                                                                   
      Adjusted EBITDA (5)                      $24.3              $1.6                                                        

                                         ---------------------------------   ---------------------------------------------------
 BALANCE SHEET DATA                                 New Wherehouse                              Old Wherehouse
                                         ---------------------------------   ---------------------------------------------------
 Working capital (deficiency)/excess          $ 65.3            $ 59.4           $ 83.7            $(13.2)              $  4.9
 Total assets                                  161.0             131.7            168.5             197.7                351.4
 Liabilities subject to compromise                --                --            278.9               ---                   --
 Long-term debt (including current                                                                                            
      portion) (3)                               4.5               5.4              4.2             167.4                175.1
 Total shareholders' equity/
      (deficit) (4)                             91.5              84.1           (156.3)           (112.4)                50.0

                                                                                                                              

</TABLE>


                                       17
<PAGE>

(1)  Net income per common share is omitted for the Company for the fiscal years
     ended January 31, 1994, 1995 1996 and 1997 since it was a wholly-owned 
     subsidiary of WEI during those periods.

(2)  The extraordinary item in fiscal year ended January 31, 1997 represents
     gain from the extinguishment of debt pursuant to the Company's Plan of
     Reorganization.

(3)  Includes 6 3/4% Convertible Subordinated Debentures for fiscal year ended
     January 31, 1994 and fiscal year ended January 31, 1995.  For fiscal year
     ended January 31, 1996, the 6 3/4% Convertible Subordinated Debentures are
     included in liabilities subject to compromise.  Liabilities subject to
     compromise for the fiscal year ended January 31, 1996 are excluded from
     working capital and long-term debt.

(4)  There were no cash dividends declared during any of the periods presented
     above, except for cash dividends in the amount of $.2 million and  $.5
     million paid to WEI, the Company's sole stockholder in the fiscal years
     ended January 31, 1995 and January 31, 1994 respectively.

(5)  EBITDA represents income from operations, plus depreciation and
     amortization.  It is management's belief that due to the combined
     format of rental product and sale merchandise, a more appropriate
     calculation of EBITDA (hereafter referred to as Adjusted EBITDA) should
     include the net difference between rental amortization plus the book value
     of rental dispositions, versus rental inventory purchased during the
     period.  The Company has included certain information concerning Adjusted
     EBITDA because management believes it would be useful information for
     certain investors and analysts to analyze operating performance and to 
     determine the Company's ability to service debt.  Adjusted EBITDA for 
     January 31, 1998, includes a non-recurring cash benefit of $1.7 million 
     resulting from the impact of one-time credits received from landlord 
     concessions and a charge that represents the portion of rent expense 
     accrued to recognize minimum rents in a straight-line basis over the term 
     of the leases, in excess of cash rent expense.  The method of calculating 
     Adjusted EBITDA set forth above may be different from calculations of 
     EBITDA employed by other companies and, accordingly may not be directly 
     comparable to such other computations.  Adjusted EBITDA should not be 
     viewed as a substitute for Generally Accepted Accounting Principles (GAAP) 
     measurements such as net income or cash flow from operations.  Rather it 
     is presented as supplementary information.


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 


                                       18
<PAGE>

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 Financial Condition
and Results of Operation include the operations of Old Wherehouse through
January 31, 1997 and New Wherehouse through January 31, 1998.  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, 1998 COMPARED TO YEAR ENDED JANUARY 31, 1997

     Revenues were $327.4 million and $365.5 million for the fiscal years ended
January 31, 1998 and January 31, 1997, respectively.  The decrease of $38.1
million or 10.4% was principally due to the closing of 20 stores and the
elimination of rental activity in an additional 25 stores during the year.  On a
same store basis (stores open for at least 13 months) overall revenues were
approximately flat as increases in same store merchandise sales revenues were
off-set by decreases in same store rental revenues.

     Merchandise sales (which includes new and used merchandise, ticket sales
commissions and other revenue) were $276.1 million and $295.5 million during the
fiscal years ended January 31, 1998 and 1997, respectively, representing a
decrease of 6.5% which was largely due to the closing of unprofitable stores. 
On a same store basis there was a 4.5% increase for merchandise sale revenues.
(See table in Item 1 -- "Business--Merchandise Sale Products.")  The increase 
in same store merchandise sales was principally due to better industry-wide new 
"hit" releases and the favorable impact of competitor store closures.

     Rental revenue includes the rental of videocassettes, video games and game
players and audiocassette books.  At January 31, 1998 approximately 72% of the
Company's stores offered videocassettes and other products for rent versus
approximately 84% at January 31, 1997.  Rental revenue for the fiscal year ended
January 31, 1998 was $51.3 million, a decrease of 26.8% from the previous fiscal
year and a decrease of 20.6% on a same store basis.  The Company believes that
these decreases are attributable to a number of factors, including the reduction
in the number of stores offering rental products, lack of strength in "hit"
releases in all rental categories, continued competition and a general softening
in rental consumer spending nationwide.


                                       19
<PAGE>

     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 chains, as well as discounters
and mass merchandisers.
     
     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 $19.4 million to $176.1 million for the fiscal year
ended January 31, 1998, as compared with $195.5 million for the fiscal year
ended January 31, 1997.  As a percentage of merchandise sales, cost of sales
decreased 2.4 % to 63.8% for the fiscal year ended January 31, 1998 versus 66.2%
for the fiscal year ended January 31, 1997.  The gross profit percentage for
merchandise sale product was 36.2% and 33.8% for the fiscal years ended January
31, 1998 and 1997, respectively.  The 2.4% decrease in cost of sales as a
percentage of merchandise sales was principally due to lower obsolescence costs
and higher prompt payment discounts on merchandise inventory purchases.

     Cost of rentals, including amortization, decreased $6.6 million to $27.4
million for the fiscal year ended January 31, 1998 as compared with $34.0
million for the fiscal year ended January 31, 1997.  As a percentage of rental
revenue, cost of rentals increased to 53.4 % for the fiscal year ended January
31, 1998 from 48.5% for the fiscal year ended January 31, 1997, an increase of
4.9%. The gross profit percentage for rental revenue was 46.6% and 51.5% for the
fiscal years ended January 31, 1998 and 1997, respectively.  The 4.9% increase
in cost of rentals is primarily due to higher amortization costs incurred due 
to the change in amortization policy adopted by the Company as of January 31,
1997 and, to a lesser extent, the decline in rental efficiency resulting from 
rental revenue decreases.  New Wherehouse amortizes rental inventory using the 
straight-line method over a three-month period with a salvage value of $3.00 per
videocassette.  Old Wherehouse amortized rental inventory over three years for 
videocassettes and two years for video games for the fiscal year ended January 
31, 1997.  If Old Wherehouse had adopted the more accelerated method of 
amortization as of January 31, 1996, amortization costs would have been higher 
(and gross profit would have been lower) for the fiscal year ended January 31, 
1997.

     Merchandise sales, including ticket commissions, as a percent of aggregate
net revenues increased to 84.3% in the fiscal year ended January 31, 1998 from
80.8% in the fiscal year ended January 31, 1997, principally due to the
reduction in the number of stores offering videocassettes and other products for
rent.  Historically, the margin on rentals has been higher than the margin on
merchandise sales.  Should the product mix continue to 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 
and Hollywood Video 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 


                                       20
<PAGE>

its own, and that such competition may result in continued pressure on revenues
and gross profit margins.

     Selling, general and administrative expenses were $111.9 million and $145.4
million for the fiscal years ended January 31, 1998 and 1997, respectively, a
decrease of $33.5 million, or 23.0%. As a percentage of aggregate net revenues,
selling, general and administrative expenses were 34.2% and 39.8% for the fiscal
years ended January 31, 1998 and 1997, respectively, a decrease of 5.6%. The
change was primarily due to decreases, as a percentage of revenue, in rent,
payroll, other occupancy costs, and other store and corporate expenses.  
     
     Income from operations was $12.0 million for the fiscal year ended January
31, 1998, as compared with a loss of $9.4 million for the fiscal year ended
January 31, 1997.  The increase in the operating profit resulted primarily from
the decrease in selling, general and administrative expenses, combined with the
decrease in cost of sales, both of which were partially offset by a higher cost
of rentals as a percent of rental revenue.

     Interest expense  decreased $0.5 million to $0.5 million for the fiscal
year ended January 31, 1998 versus $1.0 million for the fiscal  year ended
January 31, 1997.  

     Interest income for the fiscal year ended January 31, 1998 was $1.6
million, an increase of $1.3 million from $0.3 million for the year ended
January 31, 1997 due to the improved operating profits which generated
sufficient cash flow to fund operations without utilizing the Congress Facility.

     The Company recorded an income tax provision of $5.4 million for the fiscal
year ended January 31, 1998 but did not record a tax provision for the fiscal
year ended January 31, 1997.

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

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.


                                       21
<PAGE>

     Merchandise sales were $295.5 million and $350.3 million during the fiscal
years ended January 31, 1997 and January 31, 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 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 alternative products including home computer hardware and software
products.

     Rental revenue includes the rental of videocassettes, video games and game
players and audiocassette books.  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 $70.0 million compared to $82.9 million for the fiscal year
ended January 31, 1996, a total rental revenue decrease of 15.5%, and a decrease
of 8.7 % on a same-store basis.  The  Company believes that decreases in both
total and same-store rental revenue are 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 $34.9 million to $195.5 million for the fiscal year
ended January 31, 1997, as compared with $230.3 million for the fiscal year
ended January 31, 1996.  As a percentage of merchandise sales revenues, cost of
sales increased 0.4% to 66.2% for the fiscal year ended January 31, 1997 versus
65.8% for the fiscal year ended January 31, 1996.  The gross-profit percentage
for merchandise sale product was 33.8% and 34.2% for the fiscal years ended
January 31, 1997 and January 31, 1996, respectively.  Gross profit for both 
years was negatively impacted by higher merchandise writedowns resulting from 
the Company's inability, during the bankruptcy, to rapidly dispose of 
returnable goods and decreased prompt payment discounts on merchandise 
inventory purchases, also as a result of the bankruptcy filing.

     Cost of rentals, including amortization, decreased $6.4 million to $34.0 
million for the fiscal year ended January 31, 1997, as compared with $40.4 
million for the fiscal year ended January 31, 1996.  As a percentage of rental 
revenue, cost of rentals decreased to 48.5% for the fiscal year ended January 
31, 1997, from 48.7% for the fiscal year ended January 31, 1996 a decrease of 
0.2%.  The gross profit percentage for rental revenue was 51.5% and 51.3% for 
the fiscal years ended January 31, 1997 and January 31, 1996 respectively.  The 
0.2% decrease in cost of rentals, was primarily attributable to decreased 
rental inventory shrinkage offset by an increase in rental amortization.  
Rental amortization for both years reflected Old Wherehouse's policy whereby 
rental inventory was amortized over three years for videocassettes and two 
years for video games.

     Merchandise sales, including ticket commissions, as a percentage of
aggregate net revenues, decreased slightly from 80.9% in the fiscal year ended
January 31, 1996 to 80.8% 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 


                                       22
<PAGE>

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, and Hollywood Video
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
margin.  The Company believes that part of the reduction in rental volume has
resulted from such competition.

     Selling, general and administrative expenses, were $145.4 million and
$166.8 million for the fiscal years ended January 31, 1997 and  January 31,
1996, respectively, a decrease of $21.4 million, or 12.8%. As a percentage of
aggregate net revenues, selling, general and administrative expenses were 39.8%
and 38.5% for the fiscal years ended January 31, 1997 and January 31, 1996,
respectively, an increase of 1.3%.   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 store and corporate expenses.

     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.
     
     Interest expense  decreased $14.0 million to $1.0 million for the fiscal
year ended January 31, 1997 versus $15.0 million for the fiscal 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 Old
Wherehouse's bankruptcy filing.  The amount of interest that ceased to accrue
during the Bankruptcy Case was $26.0 million and $13.3 million for the fiscal
year ended January 31, 1997 and for the fiscal year ended January 31, 1996,
respectively.
     
     Reorganization items for the fiscal 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 contract and other
reorganization costs.  For the fiscal year ended January 31, 1997, 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 fiscal year
ended January 31, 1997 but did record a tax provision of $17,000 for the fiscal
year ended January 31, 1996.  While the Company experienced a pre-tax loss in
the fiscal year ended January 31, 1996, it was unable to record a tax benefit
because of an offsetting increase in the valuation allowance for deferred tax
assets.


                                       23
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

     Due to the improved operating results for the fiscal year ending January 
31, 1998, the Company generated $59.9 million in net cash from operating 
activities as compared to $15.9 million for the fiscal year ending January 31, 
1997, an increase of $44.0 million or 277%.  The increase in cash flow from 
operations resulted primarily  from increased profitability, a decrease in 
merchandise inventory of $11.8 million and an increase in accounts payable and 
other accrued liabilities of $23.9 million.  Net cash used in investing 
activities was $4.6 million, an increase of $3.3 million or 254% over the prior 
period.  Cash used in investing activities primarily resulted from the 
acquisition of equipment and improvements.   Cash used in financing activities 
of $6.7 million, a decrease of $9.1 million from the prior year, was primarily 
related to the payment of $5.6 million of pre-petition claims.
     
     New Wherehouse has established the Congress Facility, which is a revolving 
line of credit for up to $30.0 million based upon certain formulas, including a 
letter of credit subfacility of up to $10.0 million.  Borrowings under the 
Congress 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 facility at January 31, 1998.  At 
January 31, 1998, New Wherehouse had $0.7 million of letters of credit 
outstanding.  New Wherehouse is subject to various financial and other 
covenants under the terms of the Congress Facility including, covenants 
relating to net worth, mergers or consolidations, liens, indebtedness and other 
matters.  As of January 31, 1998, the Company was in compliance with all 
financial covenants required by this facility.  The Congress Facility is 
available through January 31, 2000 and is renewable annually thereafter.

     The Company believes that cash on hand, cash flow from operations as well
as borrowings available under the Congress Facility will be adequate to fund
operations and remaining obligations under the Reorganization Plan.

     As of January 31, 1998, the Company had no new significant outstanding
commitments for future capital expenditures. The Company is exploring future
expansion and acquisition strategies and is confident that it will be able to
fund these activities through the existing Congress Facility and other available
financing.   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 in prior years were usually lowest during the period commencing
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.  During the fiscal year ended January 31,
1998, the Company was able to fund all of its activities from cash flow from
operations and did not have to borrow funds available under the Congress
Facility.


                                       24
<PAGE>

IMPACT OF YEAR 2000

     The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year.  Any of the Company's
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000.  This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, issue purchase
orders, or engage in similar normal business activities.

     The Company has determined that it will be required to modify or replace
portions of its software so that its computer systems will function properly
with respect to dates in the year 2000 and thereafter.  The Company also has
initiated formal communications with its significant suppliers and large
customers to determine the extent to which the Company's interface systems are
vulnerable to those third parties' failure to remediate their own Year 2000
issues.  The Company is in the process of completing estimates and confirming
its systems strategy.  Based upon information available at this time, the
Company estimates that the cost associated with replacing or modifying its
systems in order to comply with Year 2000 requirements will be between $2.0
million and $3.0 million.  This estimate is subject to further revision based on
facts and circumstances encountered during the project.  The Company presently
believes that with modifications to existing software and conversions to new
software, the Year 2000 issue will not pose significant operational problems for
its computer systems.  The Company will use both internal and external resources
to reprogram, or replace, and test the software for Year 2000 modifications. 
The Company anticipates completing the Year 2000 project prior to any
anticipated impact on its operating systems.  However, if such modifications and
conversions are not made, or are not completed timely, the Year 2000 issues
could have a material effect on the operations of the Company.  Likewise, there
can be no assurance that the systems of other companies on which the Company's
systems rely will be timely converted and would not have a material adverse
effect on the Company's systems


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.

     Changes to federal minimum wage laws in each of 1996 and 1997 raised the
mandatory minimum wage.  California and other states have also enacted increases
in State required minimum wages that are higher than the Federal requirements. 
statutory increases in Federal and state minimum wages could adversely affect
the Company's profitability.  The recent Federal and state increase and any
other such increases will raise minimum wages above current wage rates of
certain of the Company's employees, and competitive factors could require
corresponding increases in higher employee wage rates, any of which increase the
Company's expenses and adversely affect results of operations.


                                       25
<PAGE>

ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

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

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

          None.

                                       26

<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 January 31, 1998:


                                                                   Age at
     Name                        Position                      April 30, 1998
     ----                        --------                      --------------

Antonio C. Alvarez, II   Chief Executive Officer, Chairman            49
                         of the Board and Director

Hugh G. Hilton           Senior Vice President, Chief Operating       47
                         Officer

Robert S. Kelleher       Senior Vice President, Chief Financial       48
                         Officer and Assistant Secretary 

Barbara C. Brown         Senior Vice President, Store                 46
                         Operations

Robert C. Davenport      Director                                     31   

Jonathan Gallen          Director                                     38

Joseph B. Smith          Director                                     70

Joseph J. Radecki, Jr.   Director                                     40


     ANTONIO C ALVAREZ, II, Chief Executive Officer, Chairman of the Board and 
Director.  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. and serving as the senior executive 
of Phar-Mor, Inc. ("Phar-Mor").  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, 


                                       27
<PAGE>

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.
           
     HUGH G. HILTON, Senior Vice President and Chief Operating Officer.  Mr. 
Hilton commenced serving as Chief Operating Officer in January, 1998.  Mr. 
Hilton is a Managing Director of Alvarez & Marsal, Inc., a New York based 
management consulting company which he joined in June, 1992.  Mr. Hilton's 
most recent experience while at Alvarez and Marsal, Inc. includes serving as 
Chief Executive Officer at Fedco between April, 1996 and April, 1997.  Prior to 
joining Alvarez & Marsal, Inc., Mr. Hilton was President of Trinity Pacific 
Real Estate Services, a commercial real estate consulting firm, which he 
founded in May, 1988.  Prior to founding Trinity Pacific, he served as 
President of Karsten Institutional Realty Advisors (a subsidiary of First  
Interstate Bancorp), a pension fund advisory firm with $1.2 billion in real 
estate assets under management.
           
     ROBERT S. KELLEHER, Senior Vice President, Chief Financial Officer and
Assistant Secretary.  Mr. Kelleher joined New Wherehouse in
April, 1997 as Senior Vice President and Chief Financial Officer and was
appointed Assistant Secretary in September, 1997.  From July, 1995 to January,
1997, Mr. Kelleher served as Chief Operating Officer and Chief Financial Officer
for Kids Mart, Inc., a 180 store chain of children's specialty apparel stores. 
Kids Mart, Inc. filed for Chapter 11 bankruptcy on January 10, 1997.  Prior to
that, from November, 1980 to June, 1995, Mr. Kelleher held various executive
positions, most recently President, Chief Operating Officer and Chief Financial
Officer with Contempo Casuals, Inc., a 340 store chain of specialty women's
apparel stores, then a subsidiary of the Neiman Marcus Group, Inc.

     BARBARA C. BROWN, Senior Vice President, Store Operations.  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. 

     ROBERT C. DAVENPORT, Director.  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.  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 
through February, 1994, Mr. Gallen worked with Stephen Feinberg, the principal 
of Feinberg Management, L.P. ("FMLP"), observing, training and learning 
investment techniques, procedures and philosophies.  Mr. Gallen received no 
compensation from FMLP.  Mr. Gallen 


                                       28
<PAGE>

served as a Director on the Board of Directors of Harvest Foods, Inc. from 
April, 1995 to March, 1997 and the Board of Directors of Fruehauf Trailer 
Corporation, Inc. from November, 1996 to March, 1997.

     JOSEPH B. SMITH, Director.  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.  Mr. Smith serves as a director of Westwood One, Inc.
          
     JOSEPH J. RADECKI, Jr., Director.  Mr. Radecki commenced serving
as a director of New Wherehouse on February 20, 1997.  Mr. Radecki is currently
Managing Director of CIBC Oppenheimer Corp., an investment bank.  Prior to
joining CIBC Oppenheimer Corp., Mr. Radecki was an Executive Vice President and
Director of Financial Restructurings of  Jefferies & Company, Inc. from 1990 to
1998.  From 1983 until 1990, Mr. Radecki was First Vice President in the
International Capital Markets Group at Drexel Burnham Lambert, Inc. where he
specialized in financial restructurings and recapitalizations.  Mr. Radecki has
served as a member of the Board of Directors of Service America Corporation,
Bucyrus International, Inc. and ECO-Net. 

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

     Under the securities laws of the United States, the Company's directors, 
its executive officers, and persons holding more than 10% of the New Common 
Stock are required to report their initial ownership of the New Common Stock 
and any subsequent changes in that ownership to the Securities and Exchange 
Commission (the "Commission").  Specific due dates for these reports have been 
established and the Company is required to disclose any failure to file by 
these dates.  All of these filing requirements were satisfied during the year 
ended January 31, 1998, except that Antonio C. Alvarez, II and Bryan Marsal (an 
individual who may be deemed to beneficially own more than 10% of the New 
Common Stock because he is a principal of A&M Investment Associates #3, LLC, - 
see Item 12 "Security Ownership of Certain Beneficial Owners and Management" 
below) inadvertently were late in filing one report each, relating to one 
transaction.

ITEM 11.  EXECUTIVE COMPENSATION

          SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION.

     The following table sets forth for the fiscal year ended January 31, 1998, 
certain compensation paid by New Wherehouse or accrued for such fiscal year, to 
the Chief Executive Officer ("CEO") and the four next most highly compensated 
executive officers.   All cash compensation with respect to Antonio C. Alvarez, 
II was paid to Alvarez & Marsal, Inc., a consulting firm of which  Antonio C. 
Alvarez, II is a principal.  All other compensation paid with respect to 
Antonio C. Alvarez, II was paid to A&M Investments #3, LLC, an affiliate of 
Alvarez & Marsal, Inc.


                                       29
<PAGE>

<TABLE>
<CAPTION>
                                                 SUMMARY COMPENSATION TABLE
                                                 --------------------------

-----------------------------------------------------------------------------------------------------------------------------------
                                                                                                   Long-Term
                                                               Annual Compensation                Compensation
                                                    ----------------------------------------- -------------------
                                                                                                    No. of 
                                      Fiscal Year                              Other Annual       Securities         All Other
             Name and                ended January    Salary       Bonus       Compensation       Underlying        Compensation
         Principal Position               31,           ($)          ($)            ($)             Options             ($)
----------------------------------------------------------------------------------------------------------------------------------
<S>                                 <C>              <C>          <C>         <C>             <C>                  <C>
 Antonio C. Alvarez, II                  1998           ---          ---          600,000 (1)       ---                  ---
      Chairman, Chief Executive          1997           ---          ---          389,452 (2)     993,380 (4)            ---
      Officer                            1996           ---          ---            ---             ---                  ---
----------------------------------------------------------------------------------------------------------------------------------
Hugh G. Hilton                           1998           ---          ---            ---             ---                  ---
      Senior Vice President, Chief       1997           ---          ---            (3)             (4)                  ---
      Operating Officer                  1996           ---          ---            ---             ---                  ---
----------------------------------------------------------------------------------------------------------------------------------
 Robert S. Kelleher                      1998         141,346     122,000           ---             ---                    158 (5)
      Senior Vice President, Chief       1997           ---          ---            ---             ---                  ---
      Financial Officer                  1996           ---          ---            ---             ---                  ---
----------------------------------------------------------------------------------------------------------------------------------
 Barbara C. Brown                        1998         175,000      75,000           ---             ---                 12,270 (6)
      Senior Vice President,             1997         175,000        ---            ---             ---                  3,598 (7)
      Store Operations                   1996         171,538      16,000           ---             ---                  6,847 (8)
----------------------------------------------------------------------------------------------------------------------------------
 Michael Buskey (12)                     1998         137,000        ---            ---             ---                  8,787 (9)
      Vice President, Regional           1997         136,382        ---            ---             ---                  3,696 (10)
      Manager                            1996         132,685        ---            ---             ---                  2,460 (11)
-----------------------------------------------------------------------------------------------------------------------------------

</TABLE>

(1)  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.  The Management Services Agreement has been
     extended for one year pursuant to an extension and amendment thereof dated 
     as of February 1, 1998.  See "Employment Agreements" under this Item 11
     below.  
     
(2)  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.
     
(3)  Mr. Hilton serves the Company under the Management Services Agreement 
     with Alvarez & Marsal, Inc.  In January, 1998, Mr. Hilton was appointed 
     Chief Operating Officer by the Board of Directors.  The Company did not 
     pay any separate compensation for Mr. Hilton to Alvarez & Marsal, Inc. 
     for the year ended January 31, 1998.  Effective February 1, 1998, the 
     Company has agreed to compensate separately Alvarez & Marsal, Inc. for 
     Mr. Hilton's services pursuant to an amendment to the Management 
     Services Agreement.
     
(4)  In connection with the Management Services Agreement, New Wherehouse issued
     options to purchase 993,380 shares of New Common Stock, subject to
     adjustment, to A&M Investment Associates #3, LLC (an affiliate of Alvarez &
     Marsal, Inc.) of which Mr. Alvarez is a principal, 


                                       30
<PAGE>

     pursuant to a Non-Transferable Stock Option Agreement dated as of January
     31, 1997.  Mr. Hilton possesses a pecuniary interest in A&M Investment 
     Associates #3, LLC.  See "Stock Options" under this Item 11 below.
     
(5)  Includes $158 paid on behalf of Mr. Kelleher and his family for medical
     expenses not covered by the Company's group medical insurance plan.
     
(6)  Includes $1,895 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 $7,153 of premiums paid for term life insurance and $3,222 for
     matching contributions to the Company's 401(k) plan made on behalf of Ms.
     Brown.
     
(7)  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.
     
(8)  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.
     
(9)  Includes $6,407 paid on behalf of Mr. Buskey and his family for medical
     expenses not covered by the Company's group medical insurance plan.  Also 
     included is $2,380 for matching contributions to the Company's 401(k) plan
     made on behalf of Mr. Buskey.
     
(10) 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.
     
(11) 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.
     
(12) Mr. Buskey is no longer with the Company.
     

STOCK OPTIONS 

     In connection with the consummation of the Reorganization Plan, New 
Wherehouse entered into a Non-Transferable Stock Option Agreement (the 
"Option Agreement") with A&M Investment Associates #3, LLC ("Investment 
Associates"), an affiliate of Alvarez & Marsal, Inc., of which Antonio C. 
Alvarez, II is a principal.  Pursuant to the terms of the Option Agreement, 
on January 31, 1997, New Wherehouse granted to Investment Associates three 
tranches of options (the "A&M Options") to acquire, in the aggregate, 993,380 
shares of the New Common Stock, at 

                                       31
<PAGE>

exercise prices of $9.56, $11.58 and $14.10, respectively.  The A&M Options 
are subject to certain anti-dilution provisions as set forth in the Option 
Agreement.  See "Certain Relationships and Related Transactions" under Item 
13 below.  (New Wherehouse has not granted any options to acquire New Common 
Stock with respect to any other executive officer or director of New 
Wherehouse.)

FISCAL YEAR-END OPTION VALUES

     No options were exercised by any of the named executive officers during 
the fiscal year ended January 31, 1998.  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, 1998.  No established 
trading market exists for the New Common Stock.  As of January 31, 1998, the 
Company calculates the book value of each share of New Common Stock to be 
$8.45.  This book value of $8.45 per share is utilized to calculate the value 
of unexercised in-the-money options. It is not intended to represent the 
price at which shares of the New Common Stock trade.

<TABLE>
<CAPTION>
                          FISCAL YEAR-END OPTION VALUES
                                          
                                     Number of Securities   Value of Unexercised
                                          Underlying             in-the-money
                                      Unexercised options           options
                                      at fiscal year end     at fiscal year end

           Name                          Exercisable/            Exercisable/
           ----                        --------------           -------------
                                        Unexercisable           Unexercisable
                                       --------------           -------------
<S>                                    <C>                      <C>
     Antonio C. Alvarez, II             567,646(1)/                0/0
                                        425,734(1)                 
     Hugh G. Hilton                       (1)                      0/0
                                                                   
     Robert S. Kelleher                   0/0                      0/0

     Barbara C.  Brown                    0/0                      0/0
     
     Michael Buskey                       0/0                      0/0     

</TABLE>

     (1)  In connection with the Management Services Agreement, New 
          Wherehouse issued options to purchase 993,380 shares of New Common 
          Stock to Investment Associates pursuant to the Option Agreement 
          dated as of January 31, 1997.  Mr. Hilton possesses a pecuniary 
          interest in Investment Associates.  The number of securities 
          underlying unexercised A&M Options is subject to adjustment. See 
          "Certain Relationships and Related Transactions" under Item 13 
          below.

COMPENSATION OF DIRECTORS

     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. 


                                       32
<PAGE>

EMPLOYMENT AGREEMENTS

     Antonio C. Alvarez, II serves as Chairman of the Board and Chief 
Executive Officer, Hugh Hilton serves as Senior Vice President and Chief 
Operating Officer, Karen Marsal serves as Vice President Administrative 
Services and Special Projects and Mark Alvarez serves as Vice President, 
Latin Merchandising of New Wherehouse pursuant to a Management Services 
Agreement, dated as of January 31, 1997, as amended February 1, 1998,  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 (i) $600,000 annually as compensation for the services 
of Antonio C. Alvarez, II and the services of other personnel supplied by A&M 
as needed, and (ii) $450,000 annually as compensation for the services of Mr. 
Hilton, Ms. Marsal and Mr. Mark Alvarez.  A&M is also eligible to receive 
discretionary incentive bonuses for the services of Mr. Hilton, Ms. Marsal 
and Mr. Mark Alvarez, not to exceed an annual aggregate amount of $180,000 
payable to A&M for the services of all such persons.  The Management 
Agreement, as amended, now provides that it will expire on October 14, 1999, 
subject to further extension or earlier termination under certain conditions.

     Prior to the Plan Effective Date, Antonio C. Alvarez, II  served as a
consultant to the Senior Lenders pursuant to a letter agreement dated as of
October 14, 1996 between A&M, Antonio C. Alvarez, II 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 Antonio C. Alvarez, II 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 Antonio C. Alvarez, II is terminated other than for cause
(as defined in the Management Agreement), prior to October 14, 1998, the
Management Agreement provides that (i) Investment Associates will have the right
to require New Wherehouse to purchase the shares of New Common Stock and options
(whether or not vested), owned by Investment Associates, and (ii) New Wherehouse
will pay A&M cash in a lump sum amount equal to $50,000 multiplied by the number
of months remaining from the time of termination to October 14, 1998.  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 (as defined in Item 13
below).

     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 provided 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 


                                       33
<PAGE>

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.  During the period ended 
January 31, 1998, an aggregate amount of $928,000 was paid pursuant to the 
terms of such Change of Control agreements.  As of February 1998, the Change 
of Control agreements provided to the remaining officers were no longer in 
effect. 

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

     The common stock of New Wherehouse is the only outstanding class of its 
voting securities.  The following table sets forth, as of April 22, 1998, 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 estimated 
171,923 shares that may have to be issued pursuant to the Reorganization Plan 
after April 22, 1998.

<TABLE>
<CAPTION>

     Name and Address of                Amount Beneficially                Percent of
      Beneficial Owner                        Owned                         Class(1)
     -------------------                -------------------                ----------
<S>                                     <C>                                <C>
     Cerberus Partners, L.P.                 6,824,756 (2)                 56.0%
     450 Park Avenue, 28th Floor
     New York, New York 10022

     A&M Investment Associates #3,           1,856,861 (3)                 15.2%
     LLC 
     c/o Alvarez & Marsal, Inc.
     885 Third Avenue, Suite 1700
     New York, New York 10022-4834

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

             A&M Investment Associates       1,856,861 (3)                15.2%
             #3, LLC

             A&M Investment Associates         385,542 (4)                 3.2%
             #4, LLC
                                            --------------                 -------
                              Total          2,242,403                    18.4%


                                       34
<PAGE>

     Bryan Marsal                            2,242,403 (5)                 18.4%
     c/o Alvarez & Marsal, Inc.
     885 Third Avenue, Suite 1700
     New York, New York 10022-4834

     Robert C. Davenport                          0 (6)                      0
     c/o Cerberus Partners, L.P.
     450 Park Avenue, 28th Floor
     New York, New York 10022

     Jonathan Gallen                           183,695 (7)                 1.5%
     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 J. Radecki, Jr.                       0                          0
     c/o CIBC
     425 Lexington Avenue,
     3rd Floor
     New York, NY  10017
     
     Hugh G. Hilton                               0                          0
     c/o Wherehouse Entertainment, Inc.
     19701 Hamilton Avenue
     Torrance, California 90502-1334
     
     Robert S. Kelleher                           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

     Michael Buskey                               0                          0
     c/o Wherehouse Entertainment, Inc.
     19701 Hamilton Avenue
     Torrance, California 90502-1334
     
     All Directors and Executive Officers, 
     as a group (8 persons)                  2,426,098                    19.9%

</TABLE>


                                       35
<PAGE>

(1)  The percent of New Common Stock is based upon the 10,650,643 shares of 
     New Common Stock issued and outstanding at April 22, 1998 and (i) the 
     776,000 warrants issued under the Reorganization Plan plus (ii) the 
     shares underlying the A&M Options that are exercisable within 60 days 
     of April 22, 1998.  The A&M Options are subject to adjustment, see 
     "Certain Relationships, and Related Transactions" under Item 13 below.

(2)  This information was obtained from a Schedule 13D filed with the 
     Securities and Exchange Commission (the "Commission") regarding 
     ownership as of September 2, 1997 by the managing member of Cerberus 
     Associates, LLC, the general partner of Cerberus Partners, L.P., a 
     limited partnership organized under the laws of Delaware ("Cerberus").  
     Ownership is described as follows: Cerberus owns 1,607,919 shares of the 
     New Common Stock and 3,528 warrants (the "Warrants") of the Company 
     (each of which are exercisable for one share of the Common Stock). 
     Cerberus International, Ltd., a corporation organized under the laws of 
     the Bahamas ("International"), owns 1,894,173 shares of the New Common 
     Stock and 23,280 Warrants.  Ultra Cerberus Fund, Ltd., a corporation 
     organized under the laws of the Bahamas ("Ultra"), owns 150,648 shares 
     of the New Common Stock and 5,291 Warrants.  Various other private 
     investment funds for which the reporting person possesses voting and 
     investment authority over the securities of the Company (the "Funds") 
     own in the aggregate 3,118,760 shares of the Common Stock and 21,157 
     Warrants.  The Managing member of Cerberus Associates, LLC is the 
     general partner of Cerebus and the investment manager for International, 
     Ultra and the Funds.

(3)  Includes A&M Options to purchase 756,861 shares of New Common Stock 
     exercisable within 60 days of April 22, 1998.  The A&M Options are 
     subject to adjustment, see "Certain Relationship and Related 
     Transactions" under Item 13 below.  Investment Associates is a Delaware 
     limited liability company created for the purpose of acquiring shares of 
     New Common Stock. Antonio C. Alvarez, II is a 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 Hilton possesses a 
     pecuniary interest in Investment Associates.  Both Mr. Hilton and Mr. 
     Alvarez disclaim beneficial ownership of shares of New Common Stock held 
     by Investment Associates except to the extent of their pecuniary 
     interest therein.

(4)  A&M Investment Associates #4, LLC., is a Delaware limited liability 
     company ("A&M #4") of which Antonio C. Alvarez, II is a managing member.  
     As disclosed on a Schedule 13D-Amendment No. 2 filed with the Commission 
     on September 16, 1997, Mr. Alvarez shares voting and investment power 
     over all of the shares of New Common Stock beneficially owned by 
     Investment Associates and A&M #4.  Mr. Alvarez disclaims beneficial 
     ownership of the New Common Stock held by A&M #4 except to the extent of 
     his pecuniary interest therein.

(5)  Includes 1,856,861 shares of New Common Stock beneficially owned by 
     Investment Associates as described in footnote (3) above and 385,542 
     shares of New Common Stock beneficially owned by A&M #4 as described in 
     footnote (4) above. As disclosed on a Schedule 13D-Amendment No. 2
     filed with the Commission on September 16, 1997, Bryan Marsal is a 
     managing member of A&M #3 and A&M #4, and therefore may be deemed to 
     be the beneficial owner of the New Common Stock held by either 
     or both entities. Bryan Marsal disclaims beneficial ownership of 
     the shares held by both A&M #3 and A&M #4 except to the extent of 
     his pecuniary interest therein.

(6)  Mr. Davenport is a managing director of Cerberus Partners 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 ownership in
     the shares of New Common Stock held by Cerberus Partners, L.P.

(7)  Mr. Gallen is the managing member of Pequod LLC, which is the general 
     partner of Pequod Investments, L.P. which beneficially owns 128,695 
     shares of New Common Stock.  Mr. Gallen is also President of Ahab 
     Capital Management, Inc. which is investment advisor to Pequod 
     International, Ltd. Pequod International, Ltd. is the beneficial owner 
     of 55,000 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 and Pequod International, Ltd.  Mr. Gallen has 
     sole voting and investment power over the New Common Stock of Pequod 
     Investments, L.P. and Pequod International, Ltd.  Mr.  Gallen disclaims 
     beneficial ownership in the shares of New Common Stock held by Pequod 
     Investments, L.P. and Pequod International, Ltd. except to the extent of 
     his pecuniary interest therein.
                                       36
<PAGE>

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 interest or principal amortization until their maturity date.  
The Promissory Notes are secured by a first priority pledge of the A&M Shares 
pursuant to a Stock Pledge Agreement dated as of January 31, 1997.

     In addition, New Wherehouse and Investment Associates entered into a 
Non-Transferable Stock Option Agreement dated as of January 31, 1997, as 
amended, (the "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").  The Option Agreement, as amended, provides for the grant to 
Investment Associates of options representing in the aggregate the right to 
purchase 10% of (i) the shares of New Common Stock issued under the 
Reorganization Plan,  (ii) the A&M Shares, and (iii) the shares underlying 
these options.  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 
Agreement. The Company presently estimates that after all adjustments, the 
A&M options will consist of (i) options to acquire 407,667 shares at an 
exercise price of $8.63 per share, (ii) options to acquire 407,667 shares at 
an exercise price of $10.45 per share, and (iii) options to acquire 407,667 
shares at an exercise price of $12.72 per share.  The exact number of shares 
underlying these options and the exercise price will depend on the final 
resolution of claims under the Reorganization Plan.  The Option Agreement 
provides that such adjustments will be made periodically as deemed 
practicable and that an interim adjustment will be made on September 30, 
1998. 

     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 piggyback registrations in
respect of the A&M Securities.


                                       37
<PAGE>

     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 issued to the Senior Lenders have the
right to make two demand registrations and to participate in two piggyback
registrations in respect of the such shares of New Common Stock.

     Jefferies & Company, Inc., of which Mr. Radecki was an Executive Vice 
President and Director of Financial Restructurings, served as the financial 
consultant to Old Wherehouse in the Bankruptcy Case, and served as financial 
advisor to New Wherehouse.

                                       38

<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 Schedule.

     2.     Financial statement schedule.

     See Index to Financial Statements and Financial Statement Schedule.

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    Debtors' First Amended Chapter 11 Plan, as Revised for 
                   Technical Corrections dated October 4, 1996 and 
                   Supplemental Amendments on December 2, 1996 and December 
                   13, 1996. (Incorporated by reference to Exhibits A, B and 
                   C of Exhibit 3.1 of Old Wherehouse's Current Report on 
                   Form 8-K dated January 22, 1997.)
     
            2.2    Asset Purchase Agreement dated as of January 31, 1997 
                   among Old Wherehouse, WEI and New Wherehouse. 
                   (Incorporated by reference to Exhibit 1.4 of Old 
                   Wherehouse's Current Report on Form 8-K dated February 12, 
                   1997.)
     
            3.1    Certificate of Incorporation of New Wherehouse filed with 
                   the Delaware Secretary of State on November 15, 1997. 
                   (Incorporated by reference to Exhibit C of Exhibit A of 
                   Exhibit 3.1 of Old Wherehouse's Current Report on Form 8-K 
                   dated January 22, 1997.)
     
            3.2    Certificate of Amendment of Certificate of Incorporation 
                   of New Wherehouse filed with the Delaware Secretary of 
                   State on January 31, 1997. (Incorporated by reference to 
                   Exhibit 1.3 of Old Wherehouse's Current Report on Form 8-K 
                   dated February 12, 1997.)
     
            3.3    Certificate of Amendment of Certificate of Incorporation 
                   of Old Wherehouse filed with the Delaware Secretary of 
                   State on January 31, 1997. (Incorporated 


                                       39
<PAGE>

                   by reference to Exhibit 1.2 of Old Wherehouse's Current 
                   Report on Form 8-K dated February 12, 1997.)
     
            3.4    By-laws of New Wherehouse. (Incorporated by reference to 
                   Exhibit B of Exhibit A of Exhibit 3.1 of Old Wherehouse's 
                   Current Report on Form 8-K dated January 22, 1997.)
     
            3.5    Amendment to By-laws of New Wherehouse adopted January 30, 
                   1997, adopted by Unanimous Written Consent of the Sole 
                   Director of New Wherehouse. (Incorporated by reference to 
                   Exhibit 3.5 of New Wherehouse's Annual Report on Form 10-K 
                   dated May 16, 1997.)
     
            4.1    Tranche A Warrant Agreement dated as of January 31, 1997 
                   between New Wherehouse and United States Trust Company of 
                   New York, as the Warrant Agent. (Incorporated by reference 
                   to Exhibit 4.1 of New Wherehouse's Annual Report on Form 
                   10-K dated May 16, 1997.)
     
            4.2    Tranche B Warrant Agreement dated as of January 31, 1997 
                   between New Wherehouse and United States Trust Company of 
                   New York, as the Warrant Agent. (Incorporated by reference 
                   to Exhibit 4.2 of New Wherehouse's Annual Report on Form 
                   10-K dated May 16, 1997.)
     
            4.3    Tranche C Warrant Agreement dated as of January 31, 1997 
                   between New Wherehouse and United States Trust Company of 
                   New York, as the Warrant Agent. (Incorporated by reference 
                   to Exhibit 4.3 of New Wherehouse's Annual Report on Form 
                   10-K dated May 16, 1997.)
     
            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.)


                                       40
<PAGE>

     
            10.3*  Extension and Amendment to Management Services Agreement 
                   dated as of February 1, 1998 among New Wherehouse, Alvarez 
                   & Marsal, Inc., Antonio C. Alvarez, II and Investment 
                   Associates.
     
            10.4*  Second Amendment to Management Services Agreement dated as 
                   of April 30, 1998 among New Wherehouse, Alvarez & Marsal, 
                   Inc., Antonio C. Alvarez, II and Investment Associates.
     
            10.5   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.)
     
            10.6   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.)
     
            10.7   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.)
     
            10.8   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.)
     
            10.9   Non-Transferable 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.)
     
            10.10* First Amendment to Non-Transferable Stock Option Agreement 
                   dated as of April 30, 1998 between New Wherehouse and 
                   Investment Associates.
     
            10.11  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.)

            10.12  Letter agreement dated as of October 14, 1996 among 
                   Cerberus Partners, L.P., CS First Boston Securities 
                   Corporation and Bank of America, Illinois regarding fees 
                   to be paid to Alvarez & Marsal, Inc. (Incorporated by 
                   reference to Exhibit 1.13 of Old Wherehouse's Current 
                   Report on Form 8-K dated February 12, 1997.)


                                       41
<PAGE>

            10.13  Letter agreement dated as of January 31, 1997 between New 
                   Wherehouse and Cerberus Partners, L.P. regarding the 
                   reimbursement of fees paid by Cerberus on behalf of the 
                   senior lenders to Alvarez & Marsal, Inc. (Incorporated by 
                   reference to Exhibit 1.11 of Old Wherehouse's Current 
                   Report on Form 8-K dated February 12, 1997.)

            10.14  Loan and Security Agreement dated as of January 31, 1997 
                   between New Wherehouse and Congress Financial Corporation 
                   (Western). (Incorporated by reference to Exhibit 1.15 of 
                   Old Wherehouse's Current Report on Form 8-K dated February 
                   12, 1997.)
     
            10.15  Security Agreement dated as of January 31, 1997 between 
                   New Wherehouse and United States Trust Company of New 
                   York, as Collateral Agent for certain trade creditors. 
                   (Incorporated by reference to Exhibit 1.16 of Old 
                   Wherehouse's Current Report on Form 8-K dated February 12, 
                   1997.)
     
            10.16  Intercreditor and Collateral Agency Agreement dated as of 
                   January 31, 1997 among New Wherehouse, the Trade Creditors 
                   named therein and United States Trust Company of New York, 
                   as Collateral Agent. (Incorporated by reference to Exhibit 
                   1. 17 of Old Wherehouse's Current Report on Form 8-K dated 
                   February 12, 1997.)
     
            10.17  Intercreditor and Subordination Agreement dated as of 
                   January 31, 1997 among the Trade Creditors named therein, 
                   United States Trust Company of New York, as Collateral 
                   Agent for the Trade Creditors and Congress Financial 
                   Corporation (Western). (Incorporated by reference to 
                   Exhibit 1.18 of Old Wherehouse's Current Report on Form 
                   8-K dated February 12, 1997.)
     
            10.18  Security Agreement dated as of January 20, 1997, by and 
                   between Mellon US Leasing, a division of Mellon Leasing 
                   Corporation, successor to United States Leasing 
                   Corporation, as Secured Party, and Reorganized Wherehouse. 
                   (Incorporated by reference to Exhibit 10.15 of New 
                   Wherehouse's Annual Report on Form 10-K dated May 16, 
                   1997.)
     
            10.19  Change of Control Agreements, dated as of July 10, 1995, 
                   between 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.


                                       42
<PAGE>

(b)  Current Reports on Form 8-K.

            None.


                                       43

*    Filed herewith


<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, thereunto duly authorized.


                                   WHEREHOUSE ENTERTAINMENT, INC.


Date: April 30, 1998               By: /s/ Antonio C. Alvarez
                                      --------------------------
                                   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
registrant and in the capacities and on the dates indicated.

<TABLE>
<S><C>

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

     /s/ Antonio C. Alvarez        Chairman of the Board, Chief      April 30, 1998
     --------------------------    Executive Officer
     Antonio C. Alvarez, II  

     /s/ Bob Davenport                 Director                      April 30, 1998
     --------------------------
     Robert C. Davenport

     /s/ Jonathan Gallen               Director                      April 30, 1998
     --------------------------
     Jonathan Gallen

     /s/ Joseph J. Radecki, Jr.        Director                      April 30, 1998
     --------------------------
     Joseph Radecki

     /s/ Joseph B. Smith               Director                      April 30, 1998
     --------------------------
     Joseph B. Smith

</TABLE>

                                       44
<PAGE>

SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED 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.


                                       45
<PAGE>

                         Wherehouse Entertainment, Inc.

                         Index to Financial Statements
                        and Financial Statement Schedule

                          Year ended January 31, 1998


                                      CONTENTS

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

Financial Statements

Balance Sheets at January 31, 1998 and 1997. . . . . . . . . . . . . . . . F-2
Statements of Operations for the year ended January 31, 1998
  (New Wherehouse) and the years ended January 31, 1997
  and 1996 (Old Wherehouse). . . . . . . . . . . . . . . . . . . . . . . . F-4
Statements of Changes in Shareholders' Equity for the year ended
  January 31, 1998 (New Wherehouse) and the years ended
  January 31, 1997 and 1996 (Old Wherehouse) . . . . . . . . . . . . . . . F-5
Statements of Cash Flows for the year ended January 31, 1998
  (New Wherehouse) and the years ended January 31, 1997
  and 1996 (Old Wherehouse). . . . . . . . . . . . . . . . . . . . . . . . F-6
Notes to Financial Statements. . . . . . . . . . . . . . . . . . . . . . . F-8

Financial Statement Schedule for each of the three years ended January 31, 1998

II  Valuation and Qualifying Accounts  . . . . . . . . . . . . . . . . . . F-31

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.

<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, 1998 and 1997 (New Wherehouse), and the related 
statements of operations, shareholders' equity, and cash flows for the year 
ended January 31, 1998 (New Wherehouse) and the years ended January 31, 1997 
and 1996 (Old Wherehouse). 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, 1998 and 1997 (New Wherehouse), and the results of its 
operations and its cash flows for the year ended January 31, 1998 (New 
Wherehouse) and the years ended January 31, 1997 and 1996 (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.


                                                  Ernst & Young LLP


Los Angeles, California
April 17, 1998

<PAGE>

                            Wherehouse Entertainment, Inc.

                                    Balance Sheets

<TABLE>
Caption>
                                                          January 31
                                                    1998               1997
                                               -------------       ------------
<S>                                            <C>                 <C>
ASSETS (NOTES 1 AND 4)
Current assets:
  Cash                                         $  54,720,000       $  6,178,000
  Receivables                                      1,296,000          1,932,000
  Prepaid inventory deposits                              --          4,486,000
  Merchandise inventory                           62,472,000         75,800,000
  Other current assets                             1,237,000          2,259,000
  Rental inventory                                 4,278,000          9,686,000
  Deferred taxes (NOTE 7)                          1,799,000                 --
                                               -------------       ------------
Total current assets                             125,802,000        100,341,000

Equipment and improvements, at cost:
  Leasehold improvements                           7,852,000          5,952,000
  Data processing equipment and software           5,722,000          6,153,000
  Store and office fixtures and equipment          8,970,000          8,960,000
  Buildings and improvements                         131,000            131,000
  Land                                               141,000            141,000
                                               -------------       ------------
                                                  22,816,000         21,337,000
  Accumulated depreciation and amortization       (5,189,000)                --
                                               -------------       ------------
                                                  17,627,000         21,337,000

Deferred taxes (NOTE 7)                            2,952,000                 --


Reorganization value in excess of amounts allocable
  to identifiable assets, net of accumulated
  amortization of $1,595,000 at January 31, 1998
  and $0 at January 31, 1997 (NOTE 2)             14,358,000          9,724,000

Other assets                                         255,000            340,000
                                               -------------       ------------
Total assets                                  $  160,994,000     $  131,742,000
                                               -------------       ------------
                                               -------------       ------------

</TABLE>

SEE ACCOMPANYING NOTES.


                                      F-2
<PAGE>

<TABLE>
<CAPTION>
                                                                 January 31
                                                            1998             1997
                                                        ------------     ------------
<S>                                                     <C>              <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
     Accounts payable and bank overdraft                $ 30,693,000     $ 13,034,000
     Sales taxes payable                                   5,621,000        1,973,000
     Other accrued expenses (NOTE 6)                      13,458,000       10,680,000
     Income taxes payable (NOTE 7)                         6,312,000               --
     Reorganization liabilities                            4,255,000       14,481,000
     Current portion of capital lease obligations 
       and long-term debt (NOTE 9)                           193,000          729,000
                                                        ------------     ------------
Total current liabilities                                 60,532,000       40,897,000

Notes payable (NOTE 1)                                     4,048,000        3,980,000

Capital lease obligations and long-term debt (NOTE 9)        294,000          722,000

Other long-term liabilities                                4,648,000        2,000,000

Commitments and contingencies (NOTES 9 AND 10)

Shareholders' equity:
     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 -- 10,619,201 
       (1998) and 10,257,808 (1997)                          106,000          103,000
     Additional paid-in capital                           89,377,000       89,380,000
     Retained earnings                                     7,702,000               --
     Notes receivable (NOTE 5)                            (5,713,000)      (5,340,000)
                                                        ------------     ------------
Total shareholders' equity                                91,472,000       84,143,000
                                                        ------------     ------------
Total liabilities and shareholders' equity              $160,994,000     $131,742,000
                                                        ------------     ------------
                                                        ------------     ------------

</TABLE>

SEE ACCOMPANYING NOTES.


                                     F-3
<PAGE>

                        WHEREHOUSE ENTERTAINMENT, INC.

                          STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>

                                                    New Wherehouse           Old Wherehouse
                                                    --------------    -----------------------------
                                                      Year ended               Year ended 
                                                      January 31               January 31
                                                         1998             1997            1996
                                                     ------------     -----------------------------
<S>                                                  <C>              <C>              <C>
Sales                                                $276,147,000     $295,453,000     $350,272,000
Rental revenue                                         51,278,000       70,051,000       82,921,000
                                                     ------------     -----------------------------
                                                      327,425,000      365,504,000      433,193,000

Cost of sales                                         176,137,000      195,489,000      230,347,000
Cost of rentals, including amortization                27,397,000       33,955,000       40,392,000
                                                     ------------     -----------------------------
                                                      203,534,000      229,444,000      270,739,000

Selling, general and administrative expenses          111,868,000      145,488,000      166,818,000
Write-down of long-lived assets (NOTE 2)                       --               --        1,476,000
                                                     ------------     -----------------------------
Income (loss) from operations                          12,023,000       (9,428,000)      (5,840,000)
                                                                                                    
Other (income) expense:                                                                             
     Interest expense (contractual interest of                                                      
       $25,980,000 (1997)) (NOTES 1 AND 6)                531,000        1,019,000       15,045,000
     Interest income                                   (1,583,000)        (338,000)        (283,000)
                                                     ------------     -----------------------------
                                                       (1,052,000)         681,000       14,762,000
                                                     ------------     -----------------------------
Income (loss) before reorganization items and
      income taxes                                     13,075,000      (10,109,000)     (20,602,000)
                                                                                                    
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
                                                     ------------     -----------------------------
Income (loss) before income taxes and 
  extraordinary item                                   13,075,000      (30,045,000)     (43,821,000)

Provision for income taxes (NOTE 7)                     5,373,000               --           17,000
                                                     ------------     -----------------------------
Income (loss) before extraordinary item                 7,702,000      (30,045,000)     (43,838,000)

Extraordinary item:
     Gain on extinguishment of debt                            --      173,765,000               --
                                                     ------------     -----------------------------
Net income (loss)                                    $  7,702,000     $143,720,000     $(43,838,000)
                                                     ------------     -----------------------------
                                                     ------------     -----------------------------
Net income per common share:
     Basic                                           $       0.74
                                                     ------------     -----------------------------
                                                     ------------     -----------------------------
     Diluted                                         $       0.71
                                                     ------------     -----------------------------
                                                     ------------     -----------------------------
Weighted average common shares outstanding:
     Basic                                             10,420,557
                                                     ------------     -----------------------------
                                                     ------------     -----------------------------
     Diluted                                           10,894,862
                                                     ------------     -----------------------------
                                                     ------------     -----------------------------
</TABLE>

SEE ACCOMPANYING NOTES.


                                     F-4
<PAGE>

                           Wherehouse Entertainment, Inc.

                 Statements of Changes in Shareholders' Equity

<TABLE>
<CAPTION>
                                                                                 Retained
                                                                 Additional      Earnings
                                             Common Stock         Paid-in      (Accumulated      Notes   
                                           Shares     Amount       Capital        Deficit)     Receivable         Total
                                        ------------------------------------------------------------------------------------
<S>                                     <C>          <C>        <C>            <C>             <C>            <C>
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                            (10)        --    (95,671,000)    108,238,000            --       12,567,000
   adjustment
   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
   Net income                                   --         --             --       7,702,000            --        7,702,000
   Issuance of New Common Stock            361,393      3,000         (3,000)             --            --               --
   Interest on note receivable                  --         --             --              --      (373,000)        (373,000)
                                        ------------------------------------------------------------------------------------
New Wherehouse balance,
   January 31, 1998                     10,619,201   $106,000   $ 89,377,000   $   7,702,000   $(5,713,000)   $  91,472,000
                                        ------------------------------------------------------------------------------------
                                        ------------------------------------------------------------------------------------

</TABLE>

SEE ACCOMPANYING NOTES.





                                        F-5
<PAGE>

                         Wherehouse Entertainment, Inc.

                            Statements of Cash Flows


<TABLE>
<CAPTION>
                                                        New Wherehouse            Old Wherehouse
                                                        --------------     -----------------------------
                                                          Year ended                Year ended
                                                          January 31                January 31
                                                             1998              1997             1996
                                                         ------------      ------------     ------------
<S>                                                     <C>                <C>              <C>
OPERATING ACTIVITIES
Net income (loss)                                        $  7,702,000      $143,720,000     $(43,838,000)
Adjustments to reconcile net income (loss) to net cash
  provided by (used in) operating activities:
    Rental amortization                                    21,113,000        23,535,000       24,213,000
    Depreciation and amortization                           7,130,000        11,769,000       17,190,000
    Book value of rental inventory
    dispositions                                            4,886,000         9,454,000       14,448,000
    Write-down of long-lived assets                                --                --        1,476,000
    Deferred taxes                                         (4,751,000)               --         (207,000)
    Gain on extinguishment of debt                                 --      (173,765,000)              --
    Changes in operating assets and liabilities:
      Receivables                                             636,000          (349,000)       1,572,000
      Taxes receivable                                             --                --        1,500,000
      Prepaid inventory deposits                            4,486,000         6,394,000      (10,880,000)
      Merchandise inventory                                11,841,000        10,730,000       24,688,000
      Other current assets                                  1,022,000         2,352,000       (1,885,000)
      Accounts payable, accrued expenses and
        other liabilities not separately identified        23,894,000         2,401,000      (20,528,000)
      Income tax payable                                    6,312,000                --               --
      Rental inventory purchases                          (21,195,000)      (33,367,000)     (37,962,000)
      Other long-term liabilities                           2,648,000                --               --
    Changes due to reorganization activities: 
      Accrued professional fees                            (3,079,000)        3,227,000         (668,000)
      Write-off of financing costs and debt discount               --                --        8,512,000
      Provision for store closing costs                      (328,000)        3,767,000        5,743,000
      Provision for rejected executory contracts                   --         3,331,000        6,000,000
      Other reorganization items                           (2,460,000)        2,747,000               --
                                                         ------------      ------------     ------------
Net cash provided by (used in) operating activities        59,857,000        15,946,000      (10,626,000)

INVESTING ACTIVITIES
Proceeds from sale of assets                                       --         2,464,000               --
Acquisition of equipment and improvements                  (4,699,000)       (3,785,000)     (10,252,000)
Decrease (increase) in other assets and intangibles            85,000                --         (415,000)
                                                         ------------      ------------     ------------
Net cash used in investing activities                      (4,614,000)       (1,321,000)     (10,667,000)

FINANCING ACTIVITIES
Short-term borrowings (payments), net                              --                --       29,020,000
Principal payments on capital lease obligations and
  long-term debt                                             (696,000)       (2,702,000)      (2,336,000)
Sale of New Common Stock                                           --         1,000,000               --
Interest on notes receivable                                 (373,000)               --               --
Settlement of pre-petition claims                          (5,632,000)      (14,098,000)              --
                                                         ------------      ------------     ------------
Net cash (used in) provided by financing activities        (6,701,000)      (15,800,000)      26,684,000
</TABLE>




                                       F-6
<PAGE>

                           Wherehouse Entertainment, Inc.
                 
                       Statements of Cash Flows (continued)

<TABLE>
<CAPTION>
                                                                New Wherehouse                    Old Wherehouse
                                                                --------------            -------------------------------
                                                                  Year Ended                         Year Ended
                                                                  January 31                         January 31
                                                                     1998                      1997              1996
                                                                 -----------               ------------------------------
<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 increase (decrease) in cash                                   48,542,000                (1,175,000)         5,391,000
Cash at beginning of year                                          6,178,000                 7,353,000          1,962,000
                                                                 -----------               ------------------------------
Cash at end of year                                              $54,720,000               $ 6,178,000      $   7,353,000
                                                                 -----------               ------------------------------
                                                                 -----------               ------------------------------
Supplemental disclosure of cash flow information:
  Cash paid (received) during the year for:
    Interest                                                     $   254,000               $   765,000      $  11,993,000
    Income taxes                                                   3,783,000                        --         (1,276,000)
    Reorganization items                                           9,214,000                 5,687,000          2,297,000

</TABLE>

SEE ACCOMPANYING NOTES.




                                       F-7
<PAGE>

                          Wherehouse Entertainment, Inc.

                           Notes to Financial Statements

                                  January 31, 1998

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 



                                     F-8
<PAGE>

                      Wherehouse Entertainment, Inc.

                Notes to Financial Statements (continued)


1. REORGANIZATION UNDER CHAPTER 11 (CONTINUED)

provides that the Debtors' bankruptcy estates will be liquidated by New 
Wherehouse.  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 initially received 
9,157,808 shares of New Common Stock under the Reorganization Plan on account 
of their claims. During the year ended January 31, 1998, the Senior Lenders 
received additional shares of 141,455 for an aggregate of 9,299,263 shares 
representing approximately 87.6% of the issued and outstanding shares of New 
Common Stock as of January 31, 1998, 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 9,387,130 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


                                      F-9
<PAGE>

                       Wherehouse Entertainment, Inc.

                  Notes to Financial Statements (continued)


1. REORGANIZATION UNDER CHAPTER 11 (CONTINUED)

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 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, $11,250,000 in cash will 
have been distributed to the Trade Creditors. As of January 31, 1998, 
approximately $10,975,000 had been paid. 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 were 
distributed by the indenture trustee for the Senior Subordinated Notes. 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 received no distribution under the 
Reorganization Plan. Approximately $5,344,000 of outstanding 6 3/4% 
Convertible Subordinated Debentures were cancelled.

Certain 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.

                                       F-10
<PAGE>

                   Wherehouse Entertainment, Inc.

              Notes to Financial Statements (continued)


1. REORGANIZATION UNDER CHAPTER 11 (CONTINUED)

At January 31, 1998, 219,906 shares had been issued to General Unsecured
Creditors. The Company estimates that approximately 115,214 shares of New Common
Stock will be issued to General Unsecured Creditors (including Trade Creditors
who did not elect the Exchange Option) in the future. If the Unsecured
Creditors' claims are settled for  115,214 shares of New Common Stock,
approximately 88,151 additional shares of New Common Stock would then be
issuable to the Senior Lenders.

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 promissory notes
have been classified as notes payable in the accompanying balance sheets.

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 pre-recorded music, videocassette rentals and other
entertainment-oriented products. At January 31, 1998, the Company operated 223
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.


                                   F-11
<PAGE>

                   Wherehouse Entertainment, Inc.

              Notes to Financial Statements (continued)


2. BASIS OF PRESENTATION (CONTINUED)

COMPANY OPERATIONS (CONTINUED)

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 Reorganization 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 and its capital structure was recast in conformity with
the Reorganization Plan. As such, the accompanying Company balance sheet
commencing 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 Reorganization 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:


                                       F-12
<PAGE>

                   Wherehouse Entertainment, Inc.

              Notes to Financial Statements (continued)


2. BASIS OF PRESENTATION (CONTINUED)

COMPANY OPERATIONS (CONTINUED)

<TABLE>
<CAPTION>
                                                   Old              (1)          (2)            (3)                New 
                                                Wherehouse                                                      Wherehouse
                                             ----------------                                                 ---------------
                                                Pre-Fresh                                                          Fresh
                                              Start Balance                                                    Start Balanceh
                                                  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-13
<PAGE>

                   Wherehouse Entertainment, Inc.

              Notes to Financial Statements (continued)


2. BASIS OF PRESENTATION (CONTINUED)

COMPANY OPERATIONS (CONTINUED)

<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       Dischargeh      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-14
<PAGE>

                         Wherehouse Entertainment, Inc.

                     Notes to Financial Statements (continued)


2. BASIS OF PRESENTATION (CONTINUED)

COMPANY OPERATIONS (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 pre-petition 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.

During the year ended January 31, 1998, the Company revised the preliminary
allocation of the fair value of assets and liabilities recorded in the fresh
start balance sheet at January 31, 1997. Revisions to the fresh start balance
sheet amounts included a decrease to equipment and improvements of approximately
$2.7 million, an increase to the reorganization value in excess of amounts
allocable to identifiable assets of approximately $6.2 million and an increase
of approximately $3.5 million to the recorded amount of reorganization
liabilities. The decrease in the carrying amount of equipment and improvements
resulted primarily from final appraisals and additional analysis performed
during the year ended January 31, 1998.

3. SIGNIFICANT ACCOUNTING POLICIES

CASH AND CASH EQUIVALENTS

Cash equivalents consist of highly liquid investments with an original maturity
of three months or less when purchased.


                                    F-15
<PAGE>

                         Wherehouse Entertainment, Inc.

                     Notes to Financial Statements (continued)


3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

FINANCIAL INSTRUMENTS

The fair value of financial instruments is determined by reference to various
market data and other valuation techniques as appropriate. Unless otherwise
described, the fair values of financial instruments approximate their recorded
values.

INVENTORY

New Wherehouse carries inventory at the lower of cost or market using the 
last-in, first-out (LIFO) method. Inventory consists primarily of resaleable 
pre-recorded music, video cassettes, video games and other products. At 
January 31, 1998, inventory valued using LIFO is $201,000 less than the value 
of the inventory if valued using the first-in, first-out (FIFO) method. Old 
Wherehouse inventories are carried at the lower of cost or market using the 
FIFO method.

RENTAL INVENTORY

New Wherehouse amortizes video rental inventory using the straight-line method
over a three-month period with a $3 salvage value. Rental inventory has been
classified as a current asset in the accompanying balance sheet as substantially
all revenue and cash flow from rental on hand is expected to be derived within a
one-year period. 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.

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


                                   F-16

<PAGE>

                        Wherehouse Entertainment, Inc.

                  Notes to Financial Statements (continued)



3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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:

<TABLE>
<CAPTION>
                                                                          Years
                                                                         -------
<S>                                                                     <C>
    Leasehold improvements                                               2 - 10*
    Data processing equipment and software                               3 - 5
    Store and office fixtures and equipment                              1 - 10
    Buildings and improvements                                           5 - 30
</TABLE>

*Amortization over the lesser of related lease term or useful life of the 
asset.

Depreciation and amortization of equipment and leasehold improvements was 
$5,535,000, $11,769,000 and $17,190,000 for the years ended January 31, 1998, 
1997 and 1996, respectively.

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.

FAIR VALUE OF LONG-LIVED ASSETS

The Company follows the provisions of Statement of Financial Accounting 
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and 
for Long-Lived Assets to be Disposed Of." Accordingly, the Company records 
impairment losses on long-lived assets used in operations, and the related 
reorganization value in excess of amounts allocable to identifiable assets, 
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. 

As a result of the Company's financial performance and the Chapter 11 
proceedings, the Company closed 20 locations during fiscal 1998, 63 locations 
during fiscal 1997 and 53 locations during fiscal 1996. In addition, before 
the Reorganization, during fiscal 1996,

                                     F-17
<PAGE>

                        Wherehouse Entertainment, Inc.

                  Notes to Financial Statements (continued)



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.

CONCENTRATION OF CREDIT RISK

Financial instruments which potentially expose the Company to concentration 
of credit risk consist primarily of cash and cash equivalents. It is the 
Company's practice to place its cash equivalents in high quality securities 
with two financial institutions.

                                     F-18
<PAGE>

                        Wherehouse Entertainment, Inc.

                  Notes to Financial Statements (continued)


3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

ADVERTISING COSTS

The Company expenses nonreimbursable advertising costs as costs are incurred. 
The amount charged to advertising expense, net of co-op recoveries, during 
the years ended January 31, 1998, 1997 and 1996 was $2,017,000, $6,185,000 
and $5,228,000, respectively.

PRE-OPENING COSTS

Store pre-opening costs, including store employee labor costs and 
advertising, incurred prior to the opening of a new store are expensed as 
incurred.

EARNINGS PER SHARE

The Company adopted SFAS No. 128, "Earnings per Share," effective December 
15, 1997, which specifies the computation, presentation, and disclosure 
requirements for earnings per share. The statement requires that the Company 
disclose both basic and diluted earnings per share on the face of the 
statement of operations and reconcile the numerator and denominator of the 
basic and diluted per share calculation in the notes to the financial 
statements (see Note 8). Earnings per share for Old Wherehouse have been 
omitted since it was a wholly owned subsidiary of WEI.

REORGANIZATION ITEMS

Reorganization items recorded in the statements of operations at January 31, 
1997 and 1996 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-19
<PAGE>

                        Wherehouse Entertainment, Inc.

                  Notes to Financial Statements (continued)


3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

STOCK-BASED COMPENSATION

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 are made. 

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 in 
accordance with SFAS No. 109, "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.

RECLASSIFICATIONS

Certain reclassifications of balances have been made to the 1996 and 1997 
amounts to conform to the 1998 presentation.

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, 1998, there were no borrowings 
outstanding under the Congress Facility, although $700,000 of letters of 
credit were outstanding.

                                     F-20
<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 and subjects the Company to 
other covenants. On January 31, 1998, the Company was in compliance with the 
covenants.

5. STOCKHOLDERS' EQUITY

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 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 interest and principal amortization 
until their maturity date. The Promissory Notes are secured by a first 
priority pledge of the A&M Shares pursuant to a Pledge Agreement dated as of 
January 31, 1997.

                                     F-21
<PAGE>

                        Wherehouse Entertainment, Inc.

                  Notes to Financial Statements (continued)


5. STOCKHOLDERS' EQUITY (CONTINUED)

In addition, New Wherehouse and Investment Associates entered into a 
Non-Transferrable Stock Option Agreement dated as of January 31, 1997, as 
amended, (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 issued under the 
Reorganization Plan and the A&M Securities. The first tranche of options 
represents the right to purchase 393,299 shares of New Common Stock at an 
exercise price of $8.95. The second tranche of options represents the right 
to purchase 393,299 shares of New Common Stock at an exercise price of 
$10.83. The third tranche of options represents the right to purchase 393,300 
shares of New Common Stock at an exercise price of $13.18. 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.  The 
above option amounts and exercise prices have been adjusted for anti-dilution 
effects through January 31, 1998.

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-22
<PAGE>
                         Wherehouse Entertainment, Inc.
 
                    Notes to Financial Statement (continued)
 
5. STOCKHOLDERS' EQUITY (CONTINUED)

    The following is a summary of outstanding options and warrants at January
31, 1998:

<TABLE>
<CAPTION>
                                      Number    Exercise Price   Exercisable
                                     ---------  --------------   -----------
     <S>                             <C>        <C>              <C>
     Options:                          393,299      $ 8.95         224,742
                                       393,299       10.83         224,742
                                       393,300       13.18         224,743
                                     ---------                   -----------
                                     1,179,898                     674,227
                                     ---------                   -----------
                                     ---------                   -----------
     Weighted average exercise
       price                                        $10.99

     Warrants:                         576,000      $ 2.38         576,000
                                       100,000        9.00         100,000
                                       100,000       11.00         100,000
                                     ---------      ------       -----------
                                       776,000                     776,000
                                     ---------                   -----------
                                     ---------                   -----------
     Weighted average exercise
       price                                        $ 4.34
</TABLE>

6. OTHER ACCRUED EXPENSES

    Other accrued expenses consists of the following:

<TABLE>
<CAPTION>
                                                        1998         1997
                                                     -----------  -----------
     <S>                                             <C>          <C>
     Gift certificate and credit slips liability     $ 5,475,000  $ 5,446,000
     Payroll and related costs                         6,307,000    3,820,000
     Store closing costs                                  27,000      621,000
     Other                                             1,649,000      793,000
                                                     -----------  -----------
                                                     $13,458,000  $10,680,000
                                                     -----------  -----------
                                                     -----------  -----------
</TABLE>
 
                                      F-23
<PAGE>
                         Wherehouse Entertainment, Inc.
 
                    Notes to Financial Statement (continued)
 
7. 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.
 
    The provision for income taxes includes:
 
<TABLE>
<CAPTION>
                                         New                Old
                                     Wherehouse          Wherehouse
                                     -----------  -------------------------
                                     Year ended         Year ended
                                     January 31         January 31
                                        1998         1997          1996
                                     -----------  -----------  ------------
     <S>                             <C>          <C>          <C>
     Current:
       Federal                       $8,243,000   $        --  $         --
       State                          1,881,000            --        17,000
                                     -----------  -----------  ------------
                                     10,124,000            --        17,000
     Deferred:
       Federal                       (3,920,000)           --   (14,187,000)
       State                           (831,000)           --    (2,695,000)
       Valuation allowance                   --            --    16,882,000
                                     -----------  -----------  ------------
                                     (4,751,000)           --            --
                                     -----------  -----------  ------------
                                     $5,373,000   $        --  $     17,000
                                     -----------  -----------  ------------
                                     -----------  -----------  ------------
</TABLE>
 
    A reconciliation of the difference between the federal statutory rate and
the effective tax rate is summarized as follows:
 
<TABLE>
<CAPTION>
                                             Year Ended January 31
                                     --------------------------------------
                                        1998         1997          1996
                                     -----------  -----------  ------------
     <S>                             <C>          <C>          <C>
     Statutory tax rate                 35.0%         34.0%        (34.0)%
     Permanent tax differences           0.3            --           --
     State taxes, net of federal
       benefit                           5.2            --            --
     Other                               0.6            --            --
     Valuation allowance                  --         (34.0)         34.0
                                     -----------  -----------  ------------
                                        41.1%           --%           --%
                                     -----------  -----------  ------------
                                     -----------  -----------  ------------
</TABLE>
 
                                      F-24
<PAGE>
                         Wherehouse Entertainment, Inc.
 
                    Notes to Financial Statement (continued)
 
7. INCOME TAXES (CONTINUED)
 
    The components of net deferred income taxes at 1998 are as follows:
 
<TABLE>
     <S>                                                         <C>
     Net current deferred income tax assets (liabilities):
       Merchandise inventory                                     $2,382,000
       Vacation and bonus liabilities                               814,000
       Other accrued liabilities                                    164,000
       Prepaid expenses                                            (125,000)
       Video rental inventory                                    (1,022,000)
       Reorganization expenses                                     (568,000)
       Cash discounts                                              (432,000)
       State taxes                                                  586,000
                                                                 ----------
                                                                  1,799,000
 
     Net long-term deferred income tax assets (liabilities):
       Reorganization value                                         505,000
       Average rent liability                                     1,079,000
       Equipment and improvements                                 1,368,000
                                                                 ----------
                                                                  2,952,000
                                                                 ----------
     Total net deferred tax assets                               $4,751,000
                                                                 ----------
                                                                 ----------
</TABLE>
 
    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. These amounts are reflected in the balance sheet of New
Wherehouse as non-current notes payable.
 
                                      F-25
<PAGE>
                         Wherehouse Entertainment, Inc.
 
                    Notes to Financial Statement (continued)
 
8. EARNINGS PER SHARE
 
    The following table is a reconciliation of the basic and diluted earnings
per share computations:
 
<TABLE>
<CAPTION>
                                                      Year ended
                                                      January 31
                                                         1998
                                                      -----------
     <S>                                              <C>
     Basic EPS Computation:
       Numerator                                      $ 7,702,000
       Denominator:
         Weighted average common shares outstanding    10,420,557
                                                      -----------
           Total shares                                10,420,557
                                                      -----------
     Basic EPS                                        $      0.74
                                                      -----------
                                                      -----------
     Diluted EPS Computation:
       Numerator                                      $ 7,702,000
       Denominator:
         Weighted average common shares outstanding    10,420,557
         Incremental shares from assumed exercise of
           warrants                                       439,401
         Incremental shares from assumed exercise of
           options                                         34,904
                                                      -----------
           Total shares                                10,894,862
                                                      -----------
     Diluted EPS                                      $      0.71
                                                      -----------
                                                      -----------
</TABLE>
 
    Options to purchase 393,300 shares of common stock outstanding during the
year ended January 31, 1998 were not included in the computation of diluted
earnings per share because the options' exercise price was greater than the
average market price of the common shares and, therefore, the effect would be
antidilutive.
 
    Earnings per share for Old Wherehouse have been omitted since it was a
wholly owned subsidiary of WEI.
 
                                      F-26
<PAGE>
                         Wherehouse Entertainment, Inc.
 
                    Notes to Financial Statement (continued)
 
9. COMMITMENTS AND CONTINGENCIES
 
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.
 
    Future minimum annual lease payments under operating leases at January 31,
1998, including the modifications resulting from the Chapter 11 proceedings, are
payable as follows:
 
<TABLE>
     <S>                                                        <C>
     1999                                                       $23,093,000
     2000                                                        20,730,000
     2001                                                        19,037,000
     2002                                                        16,634,000
     2003                                                        12,600,000
     Thereafter                                                  30,918,000
                                                                -----------
     Total future minimum lease payments                        $123,012,000
                                                                -----------
                                                                -----------
</TABLE>
 
    Rental expense charged to operations was approximately $25,365,000 in fiscal
1998, $33,159,000 in fiscal 1997 and $38,892,000 in fiscal 1996. In addition,
real estate taxes and additional rents based on percentage of sales were
approximately $2,392,000 in fiscal 1998, $2,434,000 in fiscal 1997 and
$2,871,000 in fiscal 1996.
 
    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-27
<PAGE>

                        Wherehouse Entertainment, Inc.

                  Notes to Financial Statements (continued)


9. COMMITMENTS AND CONTINGENCIES (CONTINUED)

OTHER

In June 1993, the Company entered into a management consulting agreement with 
a company whose chairman provided services first by leading a 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 
payment in connection with the employment agreements during the year ended 
January 31, 1998 aggregated $250,000. Amounts paid under the initial 
agreement were $437,000 and $496,000 during fiscal 1997 and 1996, 
respectively.

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

10. EMPLOYEE BENEFITS

EXECUTIVE OFFICERS' RETIREMENT PLAN: The Company provides life insurance for 
certain executive officers of the Company with face values of $250,000. 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 $52,000 in 1998, $25,000 in 1997 and $60,000 in 
1996, 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 
contributions made by the Company vest 25% per year beginning with the 
employee's second year of employment. The Company recognized expense of 
$235,000 in 1998, $257,000 in 1997 and $305,000 in 1996 for matching costs 
and administrative costs


                                    F-28
<PAGE>

                        Wherehouse Entertainment, Inc.

                  Notes to Financial Statements (continued)



10. EMPLOYEE BENEFITS (CONTINUED)

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 established 
severance agreements with such employees. The Company paid $928,000 in 
severance payments during the year ended January 31, 1998. Such agreements 
expired on January 31, 1998.

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 Antonio C. Alvarez, II serves as Chairman of the Board 
and Chief Executive Officer of New Wherehouse with A&M receiving $600,000 
annually as compensation for Antonio C. Alvarez, II services and certain 
support employees' services. The Management Agreement had an expiration date 
of October 14, 1998. The Management Agreement was extended for one year with 
an expiration date of October 14, 1999. The amended agreement continued the 
$600,000 as annual compensation for Antonio C. Alvarez, II and certain 
support employees. In addition, the amended agreement was expanded to include 
three additional employees at an annual cost of $450,000. The amended 
agreement also established incentive fees of up to $180,000, to be paid to 
the additional support employees provided that certain financial targets are 
reached, and commencing with the year ended January 31, 1999, the fees are 
approved by the Board of Directors.

Prior to the Plan Effective Date, Antonio C. Alvarez, II served as a 
consultant to the Senior Lenders pursuant to a letter agreement dated as of 
October 14, 1996, between A&M, Antonio C. Alvarez, II 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 Antonio C. 
Alvarez, II 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-29



<PAGE>

                        Wherehouse Entertainment, Inc.

                  Notes to Financial Statements (continued)



10. EMPLOYEE BENEFITS (CONTINUED)

EMPLOYMENT AGREEMENTS (CONTINUED)

In the event that Antonio C. Alvarez, II is terminated other than for cause 
(as defined in the Management Agreement), prior to October 14, 1998, the 
Management Agreement provides that (i) Investment Associates will have the 
right to require New Wherehouse to purchase the shares of New Common Stock 
and options (whether or not vested), owned by Investment Associates, and (ii) 
New Wherehouse will pay A&M cash in a lump sum amount equal to $50,000 
multiplied by the number of months remaining from the time of termination to 
October 14, 1998.  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.

During the year ended January 31, 1998, the aggregate amount of fees and 
expenses paid or payable to A&M was $953,000.



                                    F-30


<PAGE>

                        Wherehouse Entertainment, Inc.

                  Notes to Financial Statements (continued)



11. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

The following is a summary of the quarterly results of operations for the 
years ended January 31, 1998 (New Wherehouse) and 1997 (Old Wherehouse):

<TABLE>
<CAPTION>

                                               Quarter Ended
                           ----------------------------------------------------
                             April 30     July 31    October 31     January 31
                           ----------------------------------------------------
<S>                        <C>          <C>         <C>            <C>
1998
Net sales                  $   73,183   $  77,884   $    71,961    $   104,397
Gross profit                   27,071      28,522        28,050         40,248
Operating income (loss)          (523)        774         1,239         10,533
Net income (loss)                (286)        588           970          6,430
Net income per common
 share (1):
  Basic                         (0.03)       0.06          0.09           0.61
  Diluted                       (0.03)       0.05          0.09           0.58
Weighted average shares
 outstanding (1):
  Basic                        10,258      10,311        10,546         10,567
  Diluted                      10,258      10,829        10,970         11,116
1997
Net sales                      87,490      87,670        78,144        112,200
Gross profit                   35,472      31,833        28,723         40,032
Operating income (loss)        (1,245)     (5,891)       (6,397)         4,105
Net income (loss)              (2,266)     (8,010)       (7,456)       161,452

</TABLE>

(1)  Pursuant to the adoption of FASB Statement No. 128, "Earnings Per 
     Share," basic and diluted earnings per share have been presented for the 
     year ended January 31, 1998. Earnings per share are not presented for 
     the year ended January 31, 1997 as Old Wherehouse was a wholly owned 
     subsidiary of WEI.



                                      F-31

<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, 1998            $         -       $ 21,113,000      $ 10,970,000       $  10,143,000

     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

</TABLE>

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

(1)  Accumulated amortization on disposition 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-32