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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q/A


(Amendment No. 2)


(MARK ONE)

|                                                |  |                                                                                    
|----------------------------------------------- |  | -----------------------------------------------------------------------------------
|[x]                                             |  | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act    
|of 1934                                         | 
|                                                |  |                                                                                    
|For the Quarterly Period Ended October 31, 2002
|                                                |  |                                                                                    
|or                                             
|                                                |  |                                                                                    
|[  ]
1934                                       |  | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of

For the Transition Period
from ________ to ________



Commission File Number
333-54035


MTS, INCORPORATED


(Exact name of registrant as specified in its charter)


|                                                                          |  |                                                
|------------------------------------------------------------------------- |  | -----------------------------------------------
|California
(State or other jurisdiction of
incorporation or organization) |  | 94-1500342
(I.R.S. Employer
Identification No.)

2500 Del Monte Street, West Sacramento, CA 95691
(Address of principal executive office)

916-373-2500
(Registrants telephone number, including area code)

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

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes  [  ] No [x]

Shares outstanding of the Registrants common stock:

|                                         |  |                                             
|---------------------------------------- |  | --------------------------------------------
|Class
Class B Common Stock, no par value |  | Outstanding at October 31, 2002
1,000 shares





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TABLE OF CONTENTS



|                                         |                                                                                               |                                                        |  |  |  |  |  | 
|---------------------------------------- | --------------------------------------------------------------------------------------------- | ------------------------------------------------------ |  |  |  |  |  | 
|PART I  FINANCIAL INFORMATION          
|                                         | Item 1. Consolidated Financial Statements                                                    
|                                         |                                                                                               | CONSOLIDATED BALANCE SHEETS                           
|                                         |                                                                                               | CONSOLIDATED STATEMENTS OF OPERATIONS                 
|                                         |                                                                                               | CONSOLIDATED STATEMENTS OF CASH FLOWS                 
|                                         |                                                                                               | CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
|                                         |                                                                                               | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS            
|                                         | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                         | Item 3. Quantitative and Qualitative Disclosures About Market Risk                           
|                                         | Item 4. Controls and Procedures                                                              
|PART II  OTHER INFORMATION             
|                                         | ITEM 1. LEGAL PROCEEDINGS                                                                    
|                                         | ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                                                     
|SIGNATURES                              
|CERTIFICATION OF CHIEF EXECUTIVE OFFICER
|CERTIFICATION OF CHIEF FINANCIAL OFFICER
|INDEX OF EXHIBITS                       



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MTS, INCORPORATED
TABLE OF CONTENTS

|                                         |                                                                                               |                                                                                                                                    |    |       |      | 
|---------------------------------------- | --------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------- | -- | ----- | ---- | 
|                                         |                                                                                               |                                                                                                                                    |    | Page 
|                                         |                                                                                               |                                                                                                                                    |    |      
|Part I. Financial Information            |                                                                                               |                                                                                                                                    |    |      
|                                         | Item 1. Consolidated Financial Statements                                                     |                                                                                                                                    |    |       |     
|                                         |                                                                                               | Consolidated Balance Sheets (unaudited) as of October 31, 2002 (restated), 2001, and
July 31, 2002                                 |    |       | 4    | 
|                                         |                                                                                               | Consolidated Statements of Operations (unaudited) for the three months ended October 31,
2002 (restated) and 2001                  |    |       | 5    | 
|                                         |                                                                                               | Consolidated Statements of Cash Flows (unaudited) for the three months ended October 31,
2002 (restated) and 2001                  |    |       | 6    | 
|                                         |                                                                                               | Consolidated Statements of Comprehensive Income (Loss) (unaudited) for the three months
ended October 31, 2002 (restated) and 2001 |    |       | 7    | 
|                                         |                                                                                               | Notes to Consolidated Financial Statements (unaudited)                                                                             |    |       | 8-15 | 
|                                         | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations |                                                                                                                                    |    | 16-23 |     
|                                         | Item 3. Quantitative and Qualitative Disclosures about Market Risk                            |                                                                                                                                    |    | 24    |     
|                                         | Item 4. Controls and Procedures                                                               |                                                                                                                                    |    | 25    |     
|Part II. Other Information               |                                                                                               |                                                                                                                                    |    |      
|                                         | Item 1. Legal Proceedings                                                                     |                                                                                                                                    |    | 26    |     
|                                         | Item 6. Exhibits and Reports on Form 8-K                                                      |                                                                                                                                    |    | 26-27 |     
|Signatures                               |                                                                                               |                                                                                                                                    | 28 |      
|Certification of Chief Executive Officer |                                                                                               |                                                                                                                                    | 29 |      
|Certification of Chief Financial Officer |                                                                                               |                                                                                                                                    | 30 |      
|Index of Exhibits                        |                                                                                               |                                                                                                                                    | 31 |      

Explanatory Note

The purpose of this Amendment No. 2 to Quarterly Report on Form 10-Q is to
restate the unaudited consolidated financial statements of MTS, Incorporated
and its subsidiaries (the Company) for the three months ended October 31,
2002 to reflect the Companys adjustments related to the disposal of the
Companys Japanese subsidiary and certain employee severance costs (see Note 1
to the consolidated financial statements).

This Amendment No. 2 to Quarterly Report on Form 10-Q does not reflect events
occurring after the December 16, 2002 filing of the Companys Quarterly Report
on Form 10-Q for the three months ended October 31, 2002, or modify or update
those disclosures as set forth in that Quarterly Report on Form 10-Q in any
way, except to reflect the effect of the restatements as described above.

The items of the Companys Quarterly Report on Form 10-Q for the three months
ended October 31, 2002, which are amended and restated herein, are:



| | 1. |  | Part I, Item 1  Consolidated Financial Statements, have been
restated.                                                    
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------
|
| | 2. |  | Part I, Item 2   Managements Discussion and Analysis of Financial
Condition and Results of Operations, have been revised.

2



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| | 3. |  | The certifications required by Section 302 of the Sarbanes-Oxley
Act of 2002 have been refiled.
| | -- |  | -----------------------------------------------------------------------------------------------

The remaining Items contained within this Amendment No. 2 to the Companys
Quarterly Report on Form 10-Q consist of all other Items originally contained
in the Companys Quarterly Report on Form 10-Q for the three months ended
October 31, 2002 in the form filed with the Commission on December 16, 2002.
These remaining Items are not amended hereby, but are included for the
convenience of the reader. In order to preserve the nature and character of
the disclosures set forth in such Items as originally filed, except as
expressly noted herein, this report contains disclosures as of the date of the
original filing, and the Company has not updated the disclosures in this report
to reflect events subsequent to the original filing date, December 16, 2002.
While this report primarily relates to the historical periods covered, events
may have taken place since the original filing that might have been reflected
in this report if they had taken place prior to the original filing date. All
information contained in this Amendment No. 2 to Quarterly Report on Form 10-Q
may be updated or supplemented by disclosures contained in the Companys
reports filed with the Commission subsequent to the date of the original filing
of the Quarterly Report on Form 10-Q, including but not limited to the
Companys Quarterly Reports on Form 10-Q for the three months ended January 31,
2003 and April 30, 2003.

3



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PART I  FINANCIAL INFORMATION




Item 1. Consolidated Financial Statements




MTS, INCORPORATED
CONSOLIDATED BALANCE SHEETS
AS OF OCTOBER 31, 2002, 2001 AND JULY 31, 2002
(DOLLARS IN THOUSANDS)
(UNAUDITED)

|                                        |                                                                                                                                                  |                                      |                                      |                                                      |         |               |         |             |         |          |         |         |         |         |         | 
|--------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------ | ------------------------------------ | ---------------------------------------------------- | ------- | ------------- | ------- | ----------- | ------- | -------- | ------- | ------- | ------- | ------- | ------- | 
|                                        |                                                                                                                                                  |                                      |                                      |                                                      |         | (AS RESTATED, |         |             |         |          |         |         |         |        
|                                        |                                                                                                                                                  |                                      |                                      |                                                      |         | SEE NOTE 1)   |         |             |         |          |         |         |         |        
|                                        |                                                                                                                                                  |                                      |                                      |                                                      |         | OCTOBER 31,   |         | OCTOBER 31, |         | JULY 31,
|                                        |                                                                                                                                                  |                                      |                                      |                                                      |         | 2002          |         | 2001        |         | 2002    
|                                        |                                                                                                                                                  |                                      |                                      |                                                      |         |               |         |             |         |         
|                                        |                                                                                                                                                  |                                      |                                      | Assets                                               |         |               |         |             |         |          |         |         |         |         |         | 
|Current assets:                         |                                                                                                                                                  |                                      |                                      |                                                      |         |               |         |             |         |          |         |        
|                                        |                                                                                                                                                  | Cash and cash equivalents            |                                      | $                                                    | 12,180  |               |         | $           | 8,723   |          |         | $       | 7,477   |        
|                                        |                                                                                                                                                  | Receivables, net                     |                                      |                                                      | 13,893  |               |         |             | 23,701  |          |         |         | 21,710  |        
|                                        |                                                                                                                                                  | Merchandising inventories            |                                      |                                                      | 189,714 |               |         |             | 197,657 |          |         |         | 167,609 |        
|                                        |                                                                                                                                                  | Prepaid expenses                     |                                      |                                                      | 7,359   |               |         |             | 6,260   |          |         |         | 8,055   |        
|                                        |                                                                                                                                                  |                                      |                                      |                                                      |         |               |         |             |         |          |         |         |         |        
|                                        |                                                                                                                                                  |                                      |                                      | Total current assets                                 |         |               | 223,146 |             |         |          | 236,341 |         |         |         | 204,851 | 
|Fixed assets, net                       |                                                                                                                                                  |                                      | 110,683                              |                                                      |         |               | 141,113 |             |         |          | 114,894 |        
|Other assets                            |                                                                                                                                                  |                                      | 16,274                               |                                                      |         |               | 15,424  |             |         |          | 13,210  |        
|Assets of discontinued operations       |                                                                                                                                                  |                                      |                                     |                                                      |         |               | 139,883 |             |         |          | 145,049 |        
|                                        |                                                                                                                                                  |                                      |                                      |                                                      |         |               |         |             |         |          |         |         |         |        
|                                        |                                                                                                                                                  |                                      |                                      | Total assets                                         |         | $             | 350,103 |             |         | $        | 532,761 |         |         | $       | 478,004 | 
|                                        |                                                                                                                                                  |                                      |                                      |                                                      |         |               |         |             |         |          |         |         |         |        
|                                        |                                                                                                                                                  |                                      |                                      | Liabilities and Shareholders (Deficit) Equity       |         |               |         |             |         |          |         |         |         |         |         | 
|Current liabilities:                    |                                                                                                                                                  |                                      |                                      |                                                      |         |               |         |             |         |          |         |        
|                                        |                                                                                                                                                  | Current maturities of long-term debt |                                      | $                                                    | 4,667   |               |         | $           | 75,844  |          |         | $       | 82,776  |        
|                                        |                                                                                                                                                  | Accounts payable                     |                                      |                                                      | 128,722 |               |         |             | 130,097 |          |         |         | 112,904 |        
|                                        |                                                                                                                                                  | Reserve for restructuring costs      |                                      |                                                      | 10,508  |               |         |             | 481     |          |         |         | 6,839   |        
|                                        |                                                                                                                                                  | Accrued liabilities                  |                                      |                                                      | 32,315  |               |         |             | 31,058  |          |         |         | 28,664  |        
|                                        |                                                                                                                                                  | Deferred revenue, current portion    |                                      |                                                      | 1,990   |               |         |             | 2,233   |          |         |         | 2,286   |        
|                                        |                                                                                                                                                  |                                      |                                      |                                                      |         |               |         |             |         |          |         |         |         |        
|                                        |                                                                                                                                                  |                                      |                                      | Total current liabilities                            |         |               | 178,202 |             |         |          | 239,713 |         |         |         | 233,469 | 
|Long-term debt, less current maturities |                                                                                                                                                  |                                      | 204,739                              |                                                      |         |               | 117,406 |             |         |          | 115,771 |        
|Deferred revenue, less current portion  |                                                                                                                                                  |                                      | 115                                  |                                                      |         |               | 128     |             |         |          | 118     |        
|Liabilities of discontinued operations  |                                                                                                                                                  |                                      |                                     |                                                      |         |               | 165,982 |             |         |          | 169,433 |        
|                                        |                                                                                                                                                  |                                      |                                      |                                                      |         |               |         |             |         |          |         |         |         |        
|                                        |                                                                                                                                                  |                                      |                                      | Total liabilities                                    |         |               | 383,056 |             |         |          | 523,229 |         |         |         | 518,791 | 
|                                        |                                                                                                                                                  |                                      |                                      |                                                      |         |               |         |             |         |          |         |         |         |        
|Shareholders (deficit) equity:         |                                                                                                                                                  |                                      |                                      |                                                      |         |               |         |             |         |          |         |        
|                                        | Class B common stock, no par value; 10,000,000 shares
authorized;1,000 shares issued and outstanding at
October 31, 2002, 2001 and July 31, 2002 |                                      |                                      | 6                                                    |         |               |         | 6           |         |          |         | 6       |        
|                                        | Retained (deficit) earnings                                                                                                                      |                                      |                                      | (22,479                                              | )       |               |         | 24,576      |         |          |         | (21,355 | )      
|                                        | Accumulated other comprehensive loss                                                                                                             |                                      |                                      | (10,480                                              | )       |               |         | (15,050     | )       |          |         | (19,438 | )      
|                                        |                                                                                                                                                  |                                      |                                      |                                                      |         |               |         |             |         |          |         |         |         |        
|                                        |                                                                                                                                                  |                                      | Total shareholders (deficit) equity |                                                      |         | (32,953       | )       |             |         | 9,532    |         |         |         | (40,787 | )      
|                                        |                                                                                                                                                  |                                      |                                      |                                                      |         |               |         |             |         |          |         |         |         |         |        
|                                        |                                                                                                                                                  |                                      |                                      | Total liabilities and shareholders (deficit) equity |         | $             | 350,103 |             |         | $        | 532,761 |         |         | $       | 478,004 | 
|                                        |                                                                                                                                                  |                                      |                                      |                                                      |         |               |         |             |         |          |         |         |         |        

See accompanying notes to consolidated financial statements.

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MTS, INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED OCTOBER 31, 2002 AND 2001
(DOLLARS IN THOUSANDS)
(UNAUDITED)

|                                  |                                                  |                                                                                                                                                                                                 |                                              |        |                    |         |         |        |         |         |  
|--------------------------------- | ------------------------------------------------ | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------- | ------ | ------------------ | ------- | ------- | ------ | ------- | ------- | -
|                                  |                                                  |                                                                                                                                                                                                 |                                              |        | THREE MONTHS ENDED
|                                  |                                                  |                                                                                                                                                                                                 |                                              |        | OCTOBER 31,       
|                                  |                                                  |                                                                                                                                                                                                 |                                              |        | 2002               |         | 2001   
|                                  |                                                  |                                                                                                                                                                                                 |                                              |        |                    |         |        
|                                  |                                                  |                                                                                                                                                                                                 |                                              |        | (AS RESTATED,      |         |         |        |        
|                                  |                                                  |                                                                                                                                                                                                 |                                              |        | SEE NOTE 1)        |         |         |        |        
|Net revenue                       |                                                  | $                                                                                                                                                                                               | 130,122                                      |        |                    | $       | 140,120 |       
|Cost of sales (a) (b)             |                                                  |                                                                                                                                                                                                 | 89,786                                       |        |                    |         | 96,435  |       
|                                  |                                                  |                                                                                                                                                                                                 |                                              |        |                    |         |         |       
|                                  |                                                  |                                                                                                                                                                                                 | Gross profit                                 |        |                    | 40,336  |         |        |         | 43,685  |  
|Operating expenses:               |                                                  |                                                                                                                                                                                                 |                                              |        |                    |         |         |       
|                                  | Selling, general and administrative expenses (c) |                                                                                                                                                                                                 |                                              | 43,255 |                    |         |         | 44,172 |        
|                                  | Restructuring and asset impairment costs, net    |                                                                                                                                                                                                 |                                              | 3,910  |                    |         |         | 83     |        
|                                  | Depreciation and amortization                    |                                                                                                                                                                                                 |                                              | 5,328  |                    |         |         | 5,733  |        
|                                  |                                                  |                                                                                                                                                                                                 |                                              |        |                    |         |         |       
|                                  |                                                  |                                                                                                                                                                                                 | Loss from operations                         |        |                    | (12,157 | )       |        |         | (6,303  | )
|Other income and (expense):       |                                                  |                                                                                                                                                                                                 |                                              |        |                    |         |         |       
|                                  | Interest expense                                 |                                                                                                                                                                                                 |                                              | (5,848 | )                  |         |         | (6,143 | )      
|                                  | Foreign currency translation gain (loss)         |                                                                                                                                                                                                 |                                              | 28     |                    |         |         | (301   | )      
|                                  | Other                                            |                                                                                                                                                                                                 |                                              | (328   | )                  |         |         | (30    | )      
|                                  |                                                  |                                                                                                                                                                                                 |                                              |        |                    |         |         |       
|                                  |                                                  |                                                                                                                                                                                                 | Loss from continuing operations before taxes |        |                    | (18,305 | )       |        |         | (12,777 | )
|Provision for income taxes        |                                                  |                                                                                                                                                                                                 | 47                                           |        |                    |         | 131     |       
|                                  |                                                  |                                                                                                                                                                                                 |                                              |        |                    |         |         |       
|                                  |                                                  | Loss from continuing operations                                                                                                                                                                 |                                              |        | (18,352            | )       |         |        | (12,908 | )      
|Discontinued operations (Note 3): |                                                  |                                                                                                                                                                                                 |                                              |        |                    |         |         |       
|                                  |                                                  | Income from operations of discontinued Japanese subsidiary
(including gain on disposal of $15,847, net of U.S.
income and
foreign taxes of $6,512, for the three months ended
October 31, 2002) |                                              |        | 17,228             |         |         |        | 1,636   |        
|                                  |                                                  |                                                                                                                                                                                                 |                                              |        |                    |         |         |       
|                                  |                                                  | Net loss                                                                                                                                                                                        |                                              | $      | (1,124             | )       |         | $      | (11,272 | )      
|                                  |                                                  |                                                                                                                                                                                                 |                                              |        |                    |         |         |       



|(a) |  | Includes $0 and $1.5 million of inventory write-downs
related to the Restructuring Plan (Note 6) for the three months
ended October 31, 2002 and 2001, respectively.                                                                       
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(b) |  | Excludes depreciation and amortization related to retail and
distribution assets of $3.4 million and $3.6 million for the
three months ended October 31, 2002 and 2001, respectively,
which have been included below in operating expenses.
|   
|(c) |  | Includes $0.8 million and $1.4 million in professional fees
related to the Restructuring Plan (Note 6) for the three months
ended October 31, 2002 and 2001, respectively.                                                                 

See accompanying notes to consolidated financial statements.

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MTS, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED OCTOBER 31, 2002 AND 2001
(DOLLARS IN THOUSANDS)
(UNAUDITED)

|                                                             |                                                                                                    |                                                                                                                                |                                 |                                                     |         |                    |          |         |        |         |         |  
|------------------------------------------------------------ | -------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------ | ------------------------------- | --------------------------------------------------- | ------- | ------------------ | -------- | ------- | ------ | ------- | ------- | -
|                                                             |                                                                                                    |                                                                                                                                |                                 |                                                     |         | THREE MONTHS ENDED
|                                                             |                                                                                                    |                                                                                                                                |                                 |                                                     |         | OCTOBER 31,       
|                                                             |                                                                                                    |                                                                                                                                |                                 |                                                     |         | 2002               |          | 2001   
|                                                             |                                                                                                    |                                                                                                                                |                                 |                                                     |         |                    |          |        
|                                                             |                                                                                                    |                                                                                                                                |                                 |                                                     |         | (AS RESTATED,      |          |         |        |        
|                                                             |                                                                                                    |                                                                                                                                |                                 |                                                     |         | SEE NOTE 1)        |          |         |        |        
|Cash flows from operating activities:                        |                                                                                                    |                                                                                                                                |                                 |                                                     |         |                    |          |        
|                                                             | Net loss                                                                                           |                                                                                                                                | $                               | (1,124                                              | )       |                    | $        | (11,272 | )     
|                                                             | Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities: |                                                                                                                                |                                 |                                                     |         |                    |          |         |       
|                                                             |                                                                                                    | Income from discontinued operations, net of tax                                                                                |                                 |                                                     | (17,228 | )                  |          |         | (1,636 | )      
|                                                             |                                                                                                    | Depreciation and amortization                                                                                                  |                                 |                                                     | 6,697   |                    |          |         | 7,665  |        
|                                                             |                                                                                                    | Restructuring and asset impairment costs, net                                                                                  |                                 |                                                     | 3,910   |                    |          |         | (83    | )      
|                                                             |                                                                                                    | Allowance for doubtful accounts                                                                                                |                                 |                                                     | (10     | )                  |          |         | (79    | )      
|                                                             |                                                                                                    | Inventory write-downs due to restructuring                                                                                     |                                 |                                                     |        |                    |          |         | 1,472  |        
|                                                             |                                                                                                    | Loss on disposal of depreciable assets                                                                                         |                                 |                                                     | 99      |                    |          |         | 301    |        
|                                                             |                                                                                                    | Foreign exchange loss (gain)                                                                                                   |                                 |                                                     | 266     |                    |          |         | (603   | )      
|                                                             |                                                                                                    | Other non-cash expense                                                                                                         |                                 |                                                     | 220     |                    |          |         | 228    |        
|                                                             |                                                                                                    | Increase (decrease) in cash resulting from changes in operating assets and
liabilities, net of effect from sale of subsidiary: |                                 |                                                     |         |                    |          |         |        |        
|                                                             |                                                                                                    |                                                                                                                                | Receivables                     |                                                     |         | 7,817              |          |         |        | 2,246   |        
|                                                             |                                                                                                    |                                                                                                                                | Merchandising inventories       |                                                     |         | (22,105            | )        |         |        | (16,436 | )      
|                                                             |                                                                                                    |                                                                                                                                | Prepaid expenses                |                                                     |         | 696                |          |         |        | (1,311  | )      
|                                                             |                                                                                                    |                                                                                                                                | Accounts payable                |                                                     |         | 15,818             |          |         |        | 9,270   |        
|                                                             |                                                                                                    |                                                                                                                                | Reserve for restructuring costs |                                                     |         | (241               | )        |         |        | (1,770  | )      
|                                                             |                                                                                                    |                                                                                                                                | Accrued liabilities             |                                                     |         | 3,651              |          |         |        | 1,169   |        
|                                                             |                                                                                                    |                                                                                                                                | Deferred revenue                |                                                     |         | (299               | )        |         |        | (459    | )      
|                                                             |                                                                                                    |                                                                                                                                |                                 |                                                     |         |                    |          |        
|                                                             |                                                                                                    |                                                                                                                                |                                 | Net cash used in operating activities               |         |                    | (1,833   | )       |        |         | (11,298 | )
|                                                             |                                                                                                    |                                                                                                                                |                                 |                                                     |         |                    |          |        
|Cash flows from investing activities:                        |                                                                                                    |                                                                                                                                |                                 |                                                     |         |                    |          |        
|                                                             | Net proceeds from sale of Japanese subsidiary                                                      |                                                                                                                                |                                 | 109,532                                             |         |                    |          |        |       
|                                                             | Acquisition of fixed assets                                                                        |                                                                                                                                |                                 | (1,094                                              | )       |                    |          | (1,448  | )     
|                                                             | Acquisition of investments                                                                         |                                                                                                                                |                                 |                                                    |         |                    |          | (140    | )     
|                                                             | Change in deposits, net                                                                            |                                                                                                                                |                                 | (2                                                  | )       |                    |          | (84     | )     
|                                                             | Change in intangibles, net                                                                         |                                                                                                                                |                                 | (52                                                 | )       |                    |          | (56     | )     
|                                                             |                                                                                                    |                                                                                                                                |                                 |                                                     |         |                    |          |        
|                                                             |                                                                                                    |                                                                                                                                |                                 | Net cash provided by (used in) investing activities |         |                    | 108,384  |         |        |         | (1,728  | )
|                                                             |                                                                                                    |                                                                                                                                |                                 |                                                     |         |                    |          |        
|Cash flows from financing activities:                        |                                                                                                    |                                                                                                                                |                                 |                                                     |         |                    |          |        
|                                                             | Proceeds from life insurance loans                                                                 |                                                                                                                                |                                 |                                                    |         |                    |          | 3,526   |       
|                                                             | Proceeds from employee loan payments                                                               |                                                                                                                                |                                 |                                                    |         |                    |          | 105     |       
|                                                             | Change in debt issuance costs, net                                                                 |                                                                                                                                |                                 | (4,163                                              | )       |                    |          | (907    | )     
|                                                             | Net proceeds from long-term line of credit                                                         |                                                                                                                                |                                 | 64,841                                              |         |                    |          |         |       
|                                                             | Repayments on other long-term debt                                                                 |                                                                                                                                |                                 | (170,441                                            | )       |                    |          | (14,461 | )     
|                                                             | Proceeds from other long-term debt                                                                 |                                                                                                                                |                                 | 7,600                                               |         |                    |          | 30,526  |       
|                                                             |                                                                                                    |                                                                                                                                |                                 |                                                     |         |                    |          |         |       
|                                                             |                                                                                                    |                                                                                                                                |                                 | Net cash (used in) provided by financing activities |         |                    | (102,163 | )       |        |         | 18,789  |  
|                                                             |                                                                                                    |                                                                                                                                |                                 |                                                     |         |                    |          |         |       
|Net cash and cash equivalents from discontinued operations   |                                                                                                    |                                                                                                                                | 157                             |                                                     |         |                    | (3,945   | )      
|Effect of exchange rate changes on cash and cash equivalents |                                                                                                    |                                                                                                                                | 158                             |                                                     |         |                    | (3,739   | )      
|                                                             |                                                                                                    |                                                                                                                                |                                 |                                                     |         |                    |          |         |       
|                                                             |                                                                                                    |                                                                                                                                |                                 | Net decrease in cash and cash equivalents           |         |                    | 4,703    |         |        |         | (1,921  | )
|Cash and cash equivalents, beginning of period               |                                                                                                    |                                                                                                                                | 7,477                           |                                                     |         |                    | 10,644   |        
|                                                             |                                                                                                    |                                                                                                                                |                                 |                                                     |         |                    |          |         |       
|Cash and cash equivalents, end of period                     |                                                                                                    | $                                                                                                                              | 12,180                          |                                                     |         | $                  | 8,723    |        
|                                                             |                                                                                                    |                                                                                                                                |                                 |                                                     |         |                    |          |         |       
|Cash paid for interest                                       |                                                                                                    | $                                                                                                                              | 3,811                           |                                                     |         | $                  | 5,244    |        
|                                                             |                                                                                                    |                                                                                                                                |                                 |                                                     |         |                    |          |         |       
|Cash paid for income taxes                                   |                                                                                                    | $                                                                                                                              | 4,442                           |                                                     |         | $                  |         |        
|                                                             |                                                                                                    |                                                                                                                                |                                 |                                                     |         |                    |          |         |       

See accompanying notes to consolidated financial statements.

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MTS, INCORPORATED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
FOR THE THREE MONTHS ENDED OCTOBER 31, 2002 AND 2001
(DOLLARS IN THOUSANDS)
(UNAUDITED)

|                                               |                                                                              |                                   |        |                    |       |      |         |      |      |  
|---------------------------------------------- | ---------------------------------------------------------------------------- | --------------------------------- | ------ | ------------------ | ----- | ---- | ------- | ---- | ---- | -
|                                               |                                                                              |                                   |        | THREE MONTHS ENDED
|                                               |                                                                              |                                   |        | OCTOBER 31,       
|                                               |                                                                              |                                   |        | 2002               |       | 2001
|                                               |                                                                              |                                   |        |                    |       |     
|                                               |                                                                              |                                   |        | (AS RESTATED,      |       |      |         |     
|                                               |                                                                              |                                   |        | SEE NOTE 1)        |       |      |         |     
|Net loss                                       |                                                                              | $                                 | (1,124 | )                  |       | $    | (11,272 | )   
|                                               |                                                                              |                                   |        |                    |       |      |         |     
|Other comprehensive income (loss), net of tax: |                                                                              |                                   |        |                    |       |      |         |     
|                                               | Reclassification adjustment to net loss from
the sale of Japanese subsidiary |                                   |        | 9,029              |       |      |         |     |     
|                                               | Foreign currency translation                                                 |                                   |        | (71                | )     |      |         | (585 | )   
|                                               |                                                                              |                                   |        |                    |       |      |         |     
|                                               |                                                                              | Other comprehensive income (loss) |        |                    | 8,958 |      |         |      | (585 | )
|                                               |                                                                              |                                   |        |                    |       |      |         |     
|Comprehensive income (loss)                    |                                                                              | $                                 | 7,834  |                    |       | $    | (11,857 | )   
|                                               |                                                                              |                                   |        |                    |       |      |         |     

See accompanying notes to the consolidated financial statements.

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MTS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 1- RESTATEMENT

As part of the review and preparation of its Quarterly Report on Form 10-Q for
the three months ended January 31, 2003, MTS, Incorporated and its subsidiaries
(the Company) identified certain adjustments related to the prior quarter:



| |  |  | Gain on the disposal of our
Japanese subsidiary - The gain on the
sale of the Companys Japanese subsidiary was originally reported as
$36.0 million, net of tax. However, the Company has determined that the
gain should have been $15.8 million, net of tax, after reclassification
of the Japanese subsidiarys accumulated other comprehensive loss.                                                                                                                                                                                                                                                                                                                                                                                                        
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Employee severance costs - Restructuring charges and reserve for
restructuring costs of $4.0 million relating to senior management
employees terminated in October 2002 as a part of the Companys
continuing restructuring efforts were mistakenly not reflected in the
October 31, 2002 consolidated financial statements. The Company
intended to include such charges in the quarter ended January 31, 2003,
as the contracts setting forth such severance costs were executed after
October 31, 2002. However, as the contracts were executed prior to the
filing date of the Quarterly Report on Form 10-Q for the three months
ended October 31, 2002, the Company has now determined that such
severance costs should have been reflected in that report.

The effects of the restatements on the unaudited consolidated balance sheet and
statements of operations and other comprehensive income for the three months
ended October 31, 2002 are presented below (dollars in thousands):

|                                   |                                                                           |  |                                     |         |            |  |             |         |          |  |   |        |   |  |   |         |  
|---------------------------------- | ------------------------------------------------------------------------- |  | ----------------------------------- | ------- | ---------- |  | ----------- | ------- | -------- |  | - | ------ | - |  | - | ------- | -
|                                   |                                                                           |  | Three Months Ended October 31, 2002
|                                   |                                                                           |  |                                    
|                                   |                                                                           |  |                                     |         |            |  | Adjustments |         |          |  |  
|                                   |                                                                           |  |                                     |         |            |  |             |         |          |  |  
|                                   |                                                                           |  |                                     |         |            |  | Gain on     |         |          |  |   |        |   |  |  
|                                   |                                                                           |  | As                                  |         | sale of    |  | Accrual of  |         |          |  |  
|                                   |                                                                           |  | Previously                          |         | Japanese   |  | employee    |         | As      
|                                   |                                                                           |  | Reported*                           |         | subsidiary |  | severance   |         | Restated
|                                   |                                                                           |  |                                     |         |            |  |             |         |         
|Balance Sheet:                     |                                                                           |  |                                     |         |            |  |             |         |          |  |   |        |   |  |   |        
|                                   | Reserve for restructuring costs                                           |  | $                                   | 6,543   |            |  | $           |        |          |  | $ | 3,965  |   |  | $ | 10,508  |  
|                                   | Retained deficit                                                          |  |                                     | 18,514  |            |  |             |        |          |  |   | 3,965  |   |  |   | 22,479  |  
|Statement of Operations:           |                                                                           |  |                                     |         |            |  |             |         |          |  |   |        |   |  |   |        
|                                   | Restructuring and asset impairment
costs, net                             |  |                                     | (55     | )          |  |             |        |          |  |   | 3,965  |   |  |   | 3,910   |  
|                                   | Loss from operations                                                      |  |                                     | (8,192  | )          |  |             |        |          |  |   | (3,965 | ) |  |   | (12,157 | )
|                                   | Loss from continuing operations
before taxes                              |  |                                     | (14,340 | )          |  |             |        |          |  |   | (3,965 | ) |  |   | (18,305 | )
|                                   | Loss from continuing operations                                           |  |                                     | (14,387 | )          |  |             |        |          |  |   | (3,965 | ) |  |   | (18,352 | )
|                                   | Income from operations of discontinued
Japanese subsidiary                |  |                                     | 37,400  |            |  |             | (20,172 | )        |  |   |       |   |  |   | 17,228  |  
|                                   | Net income (loss)                                                         |  |                                     | 23,013  |            |  |             | (20,172 | )        |  |   | (3,965 | ) |  |   | (1,124  | )
|Statement of Comprehensive Income: |                                                                           |  |                                     |         |            |  |             |         |          |  |   |        |   |  |   |        
|                                   | Net income (loss)                                                         |  |                                     | 23,013  |            |  |             | (20,172 | )        |  |   | (3,965 | ) |  |   | (1,124  | )
|                                   | Reclassification adjustment for gain
from the
sale of Japanese subsidiary |  |                                     | (11,143 | )          |  |             | 20,172  |          |  |   |       |   |  |   | 9,029   |  
|                                   | Comprehensive income                                                      |  |                                     | 11,799  |            |  |             |        |          |  |   | (3,965 | ) |  |   | 7,834   |  

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*As previously reported in the Companys Quarterly Report on Form 10-Q for the
three months ended October 31, 2002, filed on December 16, 2002.

NOTE 2- BASIS OF PRESENTATION

The unaudited consolidated financial statements include the accounts of the
Company. In the opinion of the Companys management, the accompanying
unaudited consolidated financial statements contain all adjustments (consisting
of only normal recurring adjustments) necessary to present fairly its
consolidated financial position, the consolidated results of its operations and
the consolidated cash flows for each of the periods presented. The
consolidated results of operations for the interim periods are not necessarily
indicative of the results of operations to be expected for the full year or any
future period.

The significant accounting policies and certain financial information which are
normally included in financial statements prepared in accordance with
accounting principles generally accepted in the United States of America, but
which are not required for interim reporting purposes, have been condensed or
omitted. The accompanying unaudited consolidated financial statements should be
read in conjunction with the Companys Annual Report on Form 10-K for the
fiscal year ended July 31, 2002.

Certain reclassifications have been made to conform prior period financial
statements to the current period presentation.

NOTE 3  DISCONTINUED OPERATIONS

On October 11, 2002, the Company completed the sale of its Japanese subsidiary,
Tower Records Kabushiki Kaisha (TRKK), to Nikko Principal Investments Japan
Ltd. The Company sold all authorized and issued capital stock of TRKK for an
aggregate purchase price of 16 billion Japanese Yen, which was approximately
$129 million at then-current exchange rates. As discussed in Note 7, net
proceeds were used to pay down the Credit Facility (as defined in Note 7). The
Company recorded a $15.8 million gain, net of $6.5 million in U.S. income and
foreign taxes, from the sale of TRKK, which is included in income from
discontinued operations on the accompanying statement of operations for the
three months ended October 31, 2002. In accordance with the Statement of
Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets, TRKKs current year operating results have
been presented as discontinued operations. Additionally, all prior period
consolidated financial statements presented have been reclassified to present
TRKK as discontinued operations.

Net income from discontinued operations, excluding the gain on sale, is as
follows (dollars in thousands):

|              |            |   |                    |       |                    |   |        |       | 
|------------- | ---------- | - | ------------------ | ----- | ------------------ | - | ------ | ----- | 
|              |            |   | Three Months Ended |       | Three Months Ended
|              |            |   | October 31, 2002   |       | October 31, 2001  
|              |            |   |                    |       |                   
|Total revenue |            | $ | 66,313             |       |                    | $ | 86,573 |      
|Total expense |            |   | 64,932             |       |                    |   | 84,937 |      
|              |            |   |                    |       |                    |   |        |      
|              | Net income |   | $                  | 1,381 |                    |   | $      | 1,636 | 
|              |            |   |                    |       |                    |   |        |      

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Assets and liabilities of discontinued operations primarily consist of the
following (dollars in thousands):

|             |                                          |                                        |   |                  |         |               |   |         |         | 
|------------ | ---------------------------------------- | -------------------------------------- | - | ---------------- | ------- | ------------- | - | ------- | ------- | 
|             |                                          |                                        |   | October 31, 2001 |         | July 31, 2002
|             |                                          |                                        |   |                  |         |              
|Assets:      |                                          |                                        |   |                  |         |               |   |        
|             | Cash and cash equivalents                |                                        | $ | 20,763           |         |               | $ | 29,876  |        
|             | Merchandising inventories                |                                        |   | 70,421           |         |               |   | 68,763  |        
|             | Fixed assets, net                        |                                        |   | 32,703           |         |               |   | 31,873  |        
|             | Other                                    |                                        |   | 15,996           |         |               |   | 14,537  |        
|             |                                          |                                        |   |                  |         |               |   |         |        
|             |                                          | Assets of discontinued operations      |   | $                | 139,883 |               |   | $       | 145,049 | 
|             |                                          |                                        |   |                  |         |               |   |         |        
|Liabilities: |                                          |                                        |   |                  |         |               |   |        
|             | Current maturities of long-term debt     |                                        | $ | 113,643          |         |               | $ | 113,007 |        
|             | Accounts payable and accrued liabilities |                                        |   | 41,388           |         |               |   | 39,918  |        
|             | Other                                    |                                        |   | 10,951           |         |               |   | 16,508  |        
|             |                                          |                                        |   |                  |         |               |   |         |        
|             |                                          | Liabilities of discontinued operations |   | $                | 165,982 |               |   | $       | 169,433 | 
|             |                                          |                                        |   |                  |         |               |   |         |        

NOTE 4 - TRANSLATION OF FOREIGN CURRENCY

The value of the U.S. dollar rises and falls day-to-day on foreign currency
exchanges. Since the Company does business in foreign countries, these
fluctuations affect the Companys financial position and results of operations.
In accordance with SFAS No. 52, Foreign Currency Translation, all foreign
assets and liabilities have been translated at the exchange rates prevailing at
the respective balance sheets dates, and all statement of operations items have
been translated using the weighted average exchange rates during the respective
periods. The net gain or loss resulting from translation upon consolidation
into the financial statements is included in accumulated other comprehensive
loss, which is reported as a separate component of shareholders equity. Some
transactions of the Company and its foreign subsidiaries are made in currencies
different from their functional currency. Translation gains and losses from
these transactions are included in the consolidated statement of operations as
they occur. The Company recorded a net translation gain of approximately $0.1
million for the three months ended October 31, 2002 and a net translation loss
of approximately $0.3 million for the three months ended October 31, 2001.
These amounts primarily represent the volatility of currencies in international
countries in which the Company does business.

NOTE 5 - INCOME TAXES

The effective income tax rates for the three months ended October 31, 2002 and
2001 are based on the federal statutory income tax rate, increased for the
effect of state income taxes, net of federal benefit, and foreign taxes
resulting from the sale of TRKK. The Company has reserved all of its net
deferred tax assets at October 31, 2002 and 2001 and July 31, 2002 due to the
uncertainty of future utilization.

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NOTE 6 - RESTRUCTURING AND ASSET IMPAIRMENT CHARGES

RESTRUCTURING PLAN

During the third quarter of fiscal 2001, the Company commenced a business plan
and restructuring process and retained a consulting firm to assist the Company
in its efforts to improve its operations and financial performance. These
efforts produced a three-phase restructuring plan that was adopted by the
Company in February 2001 (the Restructuring Plan).

The Restructuring Plan contains several store-related initiatives designed to
improve the Companys profitability, including closing and liquidating most
stand-alone and combination bookstores; disposing of most of the Companys
foreign operations by direct sale, franchise or closure; closing
under-performing domestic record, outlet and frame/gallery stores; and
monitoring the performance of additional stores. The Restructuring Plan also
contains several operational initiatives designed to improve the Companys cash
flow position, including reducing corporate work force and overhead expenses,
reducing working capital requirements and reducing capital expenditures until
internally generated cash flow will support future needs.

FISCAL 2001 AND 2002 ACTIVITY

In fiscal 2001, the Company began efforts to dispose of its Argentina, Hong
Kong, Taiwan, Singapore and Canadian operations, close under-performing
domestic stores and make certain reductions in work force. As a result, the
Company recorded pre-tax restructuring and asset impairment charges of $23.3
million, which included $1.6 million of severance costs, $1.9 million of lease
termination costs, $14.2 million of non-cash asset impairment charges and $5.6
million of other closure costs. In fiscal 2001, the Company also recorded $2.7
million of professional fees incurred in connection with the Restructuring Plan
in selling, general and administrative expenses, and $20.7 million of inventory
write-downs in cost of sales. At July 31, 2001, the reserve for restructuring
costs was $2.2 million, which was comprised mainly of accruals for store
closures and severance.

In the fourth quarter of fiscal 2002, the Company began efforts to dispose of
its United Kingdom and Ireland operations, close additional under-performing
domestic stores and conduct a further domestic corporate reduction in work
force. As a result, the Company recorded pre-tax restructuring and asset
impairment charges of $21.8 million, which included $2.9 million of severance
costs, $4.7 million of lease termination costs, $13.6 million of non-cash asset
impairment charges and $0.6 million of other closure costs. In fiscal 2002,
the Company also recorded $5.9 million of professional fees incurred in
connection with the Restructuring Plan in selling, general and administrative
expenses, and $14.2 million of inventory write-downs in cost of sales. At July
31, 2002, the reserve for restructuring costs was $6.8 million, which was
comprised mainly of accruals for the closing of the United Kingdom and Ireland
operations and two domestic store closures.

FIRST QUARTER FISCAL 2002 AND 2003 ACTIVITY

In the first quarter of fiscal 2003, the Company terminated several senior
management employees in the United States as a part of its ongoing
restructuring efforts. The Company reached agreement with these terminated
employees in November and December 2002 to pay $4.0 million of severance
payments over terms ranging from 12 to 35 months. In addition, the Company
recorded $0.8 million of professional fees related to the Restructuring Plan in
selling,

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general and administrative expenses. At October 31, 2002, the reserve
for restructuring costs was $10.5 million, which comprised mainly of accruals for the closing of the United
Kingdom and Ireland operations and senior management severance obligations.

In the first quarter of fiscal 2002, the Company recorded pre-tax restructuring
and asset impairment charges of $0.1 million for employee severance and other
store closure costs. In addition, the Company recorded $1.5 million of
inventory write-downs in cost of sales, and $1.4 million of professional fees
related to the Restructuring Plan in selling, general and administrative
expenses. At October 31, 2001, the reserve for restructuring costs was $0.5
million.

A summary of the restructuring reserve activities recorded in fiscal 2002 and
for the three months ended October 31, 2002 is approximately as follows (in
millions):

|                        |       |   |               |     |               |   |             |     |               |   |               |      |             |   |                  |     |  |   |               |     |               |   |      |      |   |   |     |      | 
|----------------------- | ----- | - | ------------- | --- | ------------- | - | ----------- | --- | ------------- | - | ------------- | ---- | ----------- | - | ---------------- | --- |  | - | ------------- | --- | ------------- | - | ---- | ---- | - | - | --- | ---- | 
|                        |       |   |               |     |               |   |             |     |               |   |               |      |             |   |                  |     |  |   | First Quarter |     | First Quarter |   |      |      |  
|                        |       |   | Restructuring |     | Fiscal 2002   |   | Fiscal 2002 |     | Restructuring |   | Fiscal 2003   |      | Fiscal 2003 |   | Restructuring   
|                        |       |   | Reserve at    |     | Restructuring |   | Cash        |     | Reserve at    |   | Restructuring |      | Cash        |   | Reserve at      
|                        |       |   | July 31, 2001 |     | Charges       |   | Payments    |     | July 31, 2002 |   | Charges       |      | Payments    |   | October
31, 2002
|                        |       |   |               |     |               |   |             |     |               |   |               |      |             |   |                 
|Severance costs         |       | $ | 0.2           |     |               | $ | 2.9         |     |               | $ | (1.2          | )    |             | $ | 1.9              |     |  | $ | 4.0           |     |               | $ | (0.3 | )    |   | $ | 5.6 |     
|Lease termination costs |       |   | 0.8           |     |               |   | 4.7         |     |               |   | (0.7          | )    |             |   | 4.8              |     |  |   |              |     |               |   |     |      |   |   | 4.8 |     
|Other                   |       |   | 1.2           |     |               |   | 0.6         |     |               |   | (1.7          | )    |             |   | 0.1              |     |  |   |              |     |               |   |     |      |   |   | 0.1 |     
|                        |       |   |               |     |               |   |             |     |               |   |               |      |             |   |                  |     |  |   |               |     |               |   |      |      |   |   |     |     
|                        | Total |   | $             | 2.2 |               |   | $           | 8.2 |               |   | $             | (3.6 | )           |   | $                | 6.8 |  |   | $             | 4.0 |               |   | $    | (0.3 | ) |   | $   | 10.5 | 
|                        |       |   |               |     |               |   |             |     |               |   |               |      |             |   |                  |     |  |   |               |     |               |   |      |      |   |   |     |     

NOTE 7 - LONG-TERM DEBT

In April 1998, the Company refinanced on a long-term basis certain obligations
outstanding under its revolving credit lines, senior notes and term notes by
consummating an offering of $110.0 million of 9.375% senior subordinated notes
(the Notes) and entering into a senior revolving credit facility, which was
collateralized by a majority of the Companys inventory, accounts receivable
and a pledge of 65% of the capital stock of its Japanese subsidiary (the
Credit Facility). The Notes have options to redeem in part at various
premiums throughout the duration of the indenture, which mature in May 2005.

In April 2001, the Company extended and restated on a short-term basis its
outstanding obligations under the Credit Facility. The Credit Facility was
further amended in October 2001, April 2002, June 2002, September 2002 and
October 2002. The extended Credit Facility provided for initial maximum
borrowings of up to $225.0 million, consisting of two sub-facilities (one for
an initial maximum of $98.4 million and one for an initial maximum 15.6 billion
Japanese Yen which was equivalent to $126.6 million at inception), with a
maturity date, as amended, of October 11, 2002. Maximum borrowings under the
Credit Facility, as amended, were scheduled to decline during its one-year term
by $15 million in July 2001, $5 million in October 2001 and $10 million in
December 2001. The Company met all scheduled reductions under the Credit
Facility, as amended.

On October 11, 2002, the Company completed the sale of TRKK to Nikko Principal
Investments Japan, Ltd. for an aggregate purchase price of 16 billion Japanese
Yen (approximately $129 million at then-current exchange rates). Net proceeds
from the sale of $108.8 million were used to pay down the Credit Facility. The
balance of the Credit Facility was refinanced on October 11, 2002, with an
asset-based line of credit and a term loan, each of which matures on April 1,
2005. For its asset-based borrowings, the Company entered into a Loan and
Security Agreement with The CIT Group/Business Credit, Inc. and other lenders
providing for a line of credit of up to

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$110 million, subject to achieving
certain syndication requirements for the final $35 million of the line of
credit, which had not been achieved at October 31, 2002. Interest is based on
a formula of prime plus certain percentage increases based upon excess
availability levels achieved each month. On October 31, 2002, the line of
credit had an outstanding balance of $64.8 million, with an additional $10.2
million available. The Company also received a $26 million term loan pursuant
to an Amended and Restated Term Loan Agreement with JPMorgan Chase Bank and
other lenders, with an outstanding balance of $25 million at October 31, 2002.

Maximum borrowings under both the Amended and Restated Term Loan Agreement and
the Loan and Security Agreement are subject to a borrowing base formula,
certain financial ratio tests and maintaining a minimum rolling quarterly
EBITDA. Also, the new line of credit requires that the Company maintain a
minimum collateral reserve level of $15 million. Prior to its refinancing, the
Credit Facility bore interest at various variable rates, including (as defined
in the agreements) a Money Market Rate, ABR Rate, Yen Base Rate and Euro Rate,
plus an annual facility fee payable by the Company. Under the Companys
long-term financing agreements, there were various restrictive terms and
covenants relating to the occurrence of material adverse financial operating
conditions, balance sheet coverage ratio, certain debt and certain limitations
on additional indebtedness, sale-leaseback transactions, liens or encumbrances
on substantially all of the Companys assets, cash management arrangements,
long-term transactions, capital expenditures, investments, acquisitions and new
retail locations, mandatory commitment reductions and issuance of capital
stock. The Company obtained a waiver from its lenders approving the sale of
TRKK in October 2002.

NOTE 8 - RECENT ACCOUNTING PRONOUNCEMENTS

In June 2001, the Financial Accounting Standards Board (the FASB) issued SFAS
No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143 addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. The Companys adoption of SFAS 143 on August 1, 2002 did not materially
impact its financial position or results of operations.

In August 2001, the FASB finalized SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets. SFAS No. 144 addresses financial accounting
and reporting for the impairment or disposal of long-lived assets. The
Company adopted SFAS No. 144 on August 1, 2002, on a prospective basis, and has
recorded the sale of TRKK in accordance with this statement.

In May 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections,
which rescinded SFAS No. 4, Reporting Gains and Losses from Extinguishment of
Debt, and SFAS No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements. As a result, gains and losses from extinguishment of debt will
no longer be aggregated and classified as an extraordinary item, net of related
income tax effect, in the statement of operations. Instead, such gains and
losses will be classified as extraordinary items only if they meet the criteria
of unusual or infrequently occurring items. SFAS No. 145 also requires that
gains and losses from debt extinguishments, which were classified as
extraordinary items in prior periods, be reclassified to continuing operations
if they do not meet the revised criteria for extraordinary items. The adoption
of SFAS No. 145 on August 1, 2002 did not have a material impact on the
Companys financial position or results of operations.

In June 2002, the FASB issued SFAS No. 146, Accounting for Exit or Disposal
Activities.

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SFAS No. 146 addresses significant issues regarding the
recognition, measurement and reporting of costs associated with exit and
disposal activities, including restructuring activities that are
currently accounted for pursuant to the guidance that the Emerging Issues Task
Force (the EITF) set forth in EITF Issue 94-3, Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring) (EITF 94-3). The
scope of SFAS No. 146 also includes (i) costs related to terminating a contract
that is not a capital lease and (ii) termination benefits that employees who
are involuntarily terminated receive under the terms of a one-time benefit
arrangement that is not an ongoing benefit arrangement, or an individual
deferred compensation contract. SFAS No. 146 will be effective for exit or
disposal activities initiated after December 31, 2002. Accordingly, with the
Companys continued restructuring efforts, the Company can only determine
prospectively the impact that SFAS No. 146 may have on the Companys financial
position and results of operations.

NOTE 9 - SEGMENT AND GEOGRAPHIC INFORMATION

The Company reports financial and descriptive information about its reportable
operating segments using the management approach model. Under the management
approach model, segments are defined based on the way the Companys management
internally evaluates segment performance and decides how to allocate resources
to segments. The Company has defined its only reportable segment as retail
sales of pre-recorded music and evaluates this based on geographic area.

The Company is a worldwide specialty retailer and distributor of pre-recorded
music, video, books and other related products. Certain of the Companys stores
offer video and other products for rental. The Company is supported by
centralized corporate services and the stores have similar economic
characteristics, products, customers, and retail distribution methods, and as
such are reported as a single segment.

Financial information relating to the Companys principal geographic areas of
continuing operations is as follows (dollars in thousands):

|                      |                           |       |         |                            |         |             |        |         |         | 
|--------------------- | ------------------------- | ----- | ------- | -------------------------- | ------- | ----------- | ------ | ------- | ------- | 
|                      |                           |       |         | For the Three Months Ended
|                      |                           |       |         | October 31,                |         | October 31,
|                      |                           |       |         | 2002                       |         | 2001       
|                      |                           |       |         |                            |         |            
|                      |                           |       |         | (As Restated, See Note 1)  |         |             |        |        
|Net revenue:          |                           |       |         |                            |         |             |        |        
|                      | United States             |       | $       | 119,634                    |         |             | $      | 126,424 |        
|                      | Great Britain and Ireland |       |         | 9,713                      |         |             |        | 11,536  |        
|                      | Other foreign operations  |       |         | 775                        |         |             |        | 2,160   |        
|                      |                           |       |         |                            |         |             |        |         |        
|                      |                           | TOTAL |         | $                          | 130,122 |             |        | $       | 140,120 | 
|                      |                           |       |         |                            |         |             |        |         |        
|Loss from operations: |                           |       |         |                            |         |             |        |        
|                      | United States             |       | $       | (9,954                     | )       |             | $      | (1,490  | )      
|                      | Great Britain and Ireland |       |         | (2,182                     | )       |             |        | (1,954  | )      
|                      | Other foreign operations  |       |         | (21                        | )       |             |        | (2,859  | )      
|                      |                           |       |         |                            |         |             |        |         |        
|                      |                           | $     | (12,157 | )                          |         | $           | (6,303 | )      
|                      |                           |       |         |                            |         |             |        |         |        

|                     |                           |   |             |         |      |   |         |         | 
|-------------------- | ------------------------- | - | ----------- | ------- | ---- | - | ------- | ------- | 
|                     |                           |   | October 31,
|                     |                           |   | 2002        |         | 2001
|                     |                           |   |             |         |     
|Identifiable assets: |                           |   |             |         |      |   |         |        
|                     | United States             |   | $           | 342,782 |      |   | $       | 364,455 | 
|                     | Great Britain and Ireland |   |             | 7,614   |      |   |         | 30,024  | 
|                     | Other foreign operations  |   |             | (293    | )    |   |         | 138,282 | 
|                     |                           |   |             |         |      |   |         |         | 
|                     |                           | $ | 350,103     |         |      | $ | 532,761 |        
|                     |                           |   |             |         |      |   |         |         | 

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NOTE 10 - SUBSEQUENT EVENT

In November 2002, the Company terminated 49 employees in the United States as a
part of its
ongoing restructuring efforts. Such restructuring efforts include additional
closures of under-performing U.S. stores, closure of the Companys Pulse!
Magazine office and the suspension of the Pulse! publication. The Company
estimates that these employee terminations will result in severance costs of
approximately $3.0 million, which will be recorded in the second quarter of
fiscal 2003.

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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations

The following information should be read in conjunction with the unaudited
interim consolidated financial statements and the notes thereto included in
Item 1 of this Quarterly Report on Form 10-Q in addition to the consolidated
financial statements and notes thereto for the fiscal year ended July 31, 2002
included in the Companys Annual Report on Form 10-K filed with the Securities
and Exchange Commission.

FORWARD-LOOKING STATEMENTS

The following discussion should be read in conjunction with historical
consolidated financial information and the consolidated financial statements of
the Company and the notes thereto included elsewhere in this Form 10-Q. The
results shown herein are not necessarily indicative of the results to be
expected in any future period. The following discussion contains
forward-looking statements that involve known and unknown risks and
uncertainties. Use of the words anticipates, believes, estimates,
expects, intends, plans, potential and similar expressions are intended
to identify forward-looking statements. A variety of factors could cause the
Companys actual results to differ materially from the anticipated results
expressed in such forward-looking statements, including among other things: (i)
consumer demand for the Companys products, which is believed to be related to
a number of factors, including overall consumer spending patterns, weather
conditions and new releases available from suppliers; (ii) an increase in
competition, including Internet competition and competition resulting from
electronic or other alternative methods of delivery of music and other products
to consumers, or unanticipated margin or other disadvantages relative to
competitors; (iii) the continued availability and cost of adequate capital to
fund the Companys operations; (iv) higher than anticipated interest,
occupancy, labor, distribution and inventory shrinkage costs; (v) unanticipated
adverse litigation expenses or results; (vi) higher than anticipated costs
associated with the implementation of the Companys Restructuring Plan and/or
lower than anticipated resulting operations and cash flow benefits; (vii)
unanticipated increases in the cost of merchandise sold by the Company; (viii)
changes in foreign currency exchange rates and economic and political risks;
(ix) the adverse effects of acts or threats of war, terrorism or other armed
conflict on the United States and international economies; (x) the ability of
the Company to comply with the ongoing monthly affirmative and negative
covenants as prescribed by the Companys Amended and Restated Term Loan
Agreement with JPMorgan Chase and other lenders and by the Companys Loan and
Security Agreement with The CIT Group/Business Credit Inc., and other lenders;
(xi) the ability of the Company to continue to service its senior subordinated
notes; and (xii) the ability of the Company to successfully defend itself in
ongoing and future litigation. All forward-looking statements included in this
Form 10-Q are based on information available to the Company on the date hereof,
and the Company assumes no obligation to update any such forward-looking
statements. Please refer to the Risk Factors section of the Companys Annual
Report Form 10-K for further information on other factors, which could affect
the financial results of the Company and such forward-looking statements.

RESTATEMENT

The Company restated its consolidated financial statements for the three months
ended October 31, 2002 for (i) an overstatement of the gain from the disposal
of the Companys Japanese subsidiary and (ii) an understatement of employee
severance costs (see Note 1 to Notes to Consolidated Financial Statements).
The following discussion of the financial condition and results of operations
of the Company has been amended in its entirety to reflect changes resulting

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from these restatements.

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and revenues and expenses during the
period. The Companys management bases its estimates on historical experience
and other assumptions that it believes to be reasonable under the
circumstances, the results of which form the basis for making judgments about
carrying values of assets and liabilities that are not readily apparent from
other sources. The Company continually evaluates the information used to make
these estimates as its business and the economic environment change. The use of
estimates is pervasive throughout the Companys financial statements, but the
accounting policies and estimates it considers most critical are as follows:

INVENTORY VALUATION

Inventories are valued at the lower of cost or market value. Inventory
valuation requires significant judgments and estimates, including merchandise
markdowns and provisions for shrinkage. The Company evaluates all of its
inventory units to determine excess or slow-moving units based on current
quantities, anticipated store closures and projections of future demand and
market conditions. Due to industry return policies, which generally provide for
full recovery of cost upon return, the Company does not provide an allowance
for inventory returns.

RESTRUCTURING CHARGES

Since the Restructuring Plan was adopted in fiscal 2001, the Company has closed
seven out of ten of its stand-alone bookstores and has liquidated most of its
book inventories. The Company has also closed six domestic under-performing
record and outlet stores and has sold two of its frame/gallery stores. It has
successfully converted the Argentina, Hong Kong and Taiwan operations to
franchises and closed its Canadian operations. Additionally, four out of eight
stores in the United Kingdom were closed during the first quarter of fiscal
2003. The Company believes it is being more selective in the number of new
store openings and remodels. Management has implemented several rounds of
reductions in workforce related to store closures and to reduce operating
costs. Since the adoption of the Restructuring Plan, the Company has terminated
approximately 680 employees at both the retail and corporate level, from clerks
to management. Capital expenditures and working capital have also been closely
managed to the Restructuring Plan. In accordance with the Restructuring Plan,
the Company continues to monitor additional stores for possible future closure.

Management expects to substantially complete the final phase of the
Restructuring Plan by mid-fiscal 2003. Upon completion of the Restructuring
Plan and in conjunction with the hiring of a retail operations turnaround
specialist, the Company plans to adopt a new business plan targeted at
improving operations, monitoring and closing, if necessary, under-performing
stores and assets, and evaluating its ongoing working capital investments. The
new business plan will likely require the Company to implement various
restructuring initiatives, which could result in additional restructuring
costs, asset impairment charges and inventory write-downs in future periods.

In connection with the Restructuring Plan, the Company has estimated and
recorded restructuring costs, asset impairment charges and inventory
write-downs in fiscal 2003 and 2002 related to the restructuring efforts
described above. These costs and charges required significant

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judgments
about, among other things, employee severance costs, contract and lease
terminations, long-lived assets and inventory valuation, and other contingent
liabilities. The ability to obtain
agreements with lessors to terminate leases or with other parties to assign
leases can also affect the accuracy of these estimates.

IMPAIRMENT OF LONG-LIVED ASSETS

It is the Companys policy to review its long-lived assets for possible
impairment whenever events or circumstances indicate that the carrying amount
of an asset may not be recoverable. The Company recognizes impairment losses if
the carrying value of the long-lived asset (asset group) is not recoverable and
exceeds its fair value. The carrying amount of a long-lived asset (asset
group) is not recoverable if it exceeds the sum of the future undiscounted cash
flows expected to result from the use and eventual disposition of asset (asset
group). An impairment loss is measured as the amount by which the carrying
amount of a long-lived asset (asset group) exceeds its fair value. Assumptions
and estimates used in the evaluation of impairment, including current and
future economic trends in the many geographic regions that the Companys stores
are located, are subject to a high degree of judgment and complexity and
changes in the assumptions and estimates may affect the carrying value of
long-lived assets, and could result in additional impairment charges in future
periods.

For a detailed discussion of the Companys accounting policies and related
estimates and judgments, see the Notes to the Consolidated Financial Statements
for the fiscal year ended July 31, 2002 filed on Form 10-K with the Securities
and Exchange Commission. While the Company believes that the historical
experience and other factors considered provide a meaningful basis for the
accounting policies applied in the preparation of the consolidated financial
statements, there can be no assurance that its estimates and assumptions will
be accurate, which could require the Company to make adjustments to these
estimates in future periods.

LIQUIDITY AND CAPITAL RESOURCES

The Companys principal capital requirements are to fund working capital needs,
to refurbish and expand or move existing stores, and to continue development of
the Companys technological infrastructure.

Net cash used in operating activities was $1.8 million and $11.3 million for
the three months ended October 31, 2002, and October 31, 2001, respectively.
For the three months ended October 31, 2002, the net increase in inventory was
$22.1 million. For the three months ended October 31, 2001, the net increase
in inventory was $16.4 million, which excluded $1.5 million in write-down of
inventory related to the Companys Restructuring Plan.

Net cash provided by investing activities was $108.4 for the three months ended
October 31, 2002 and net cash used in investing activities was $1.7 million for
the three months ended October 31, 2001. Net cash provided by investing
activities for the three months ended October 31, 2002 was primarily from
proceeds received from the sale of the Companys Japanese subsidiary, TRKK, and
was offset by store leasehold improvements and capital expenditure
requirements, including refurbishment and technology investments of
approximately $0.8 million and $0.3 million for video rental acquisition. Net
cash used for the three months ended October 31, 2001 was primarily due to
store leasehold improvements and capital expenditure requirements, including
store relocations, refurbishment and technology investments totaling
approximately $1.1 million and $0.3 million for video rental acquisition.

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Net cash used in financing activities for the three months ended October 31,
2002 was $102.2
million, resulting principally from pay-down of long-term financing agreements
from proceeds received from the sale of TRKK offset by borrowings under the
Companys line of credit and changes in debt issuance costs. Net borrowings
under the Companys line of credit were $11.3 million for the three months
ended October 31, 2002. Net cash provided by financing for the three months
ended October 31, 2001 was $18.8 million, which resulted primarily from
proceeds received from life insurance loans and net borrowings under the
Companys Credit Facility (as defined in Note 7 to the Consolidated Financial
Statements). Net borrowings under the Companys Credit Facility for the three
months ended October 31, 2001 were $16.5 million.

Total debt decreased to $209.4 million as of October 31, 2002 from $307.3
million at October 31, 2001, which included funded debt of TRKK of $114.1
million at October 31, 2001. On October 31, 2002, outstanding debt consisted
primarily of $110.0 million of 9.375% senior subordinated notes, $64.8 million
under the asset-based line of credit with The CIT Group/Business Credit, Inc.
and $25.0 million under a term loan with JPMorgan Chase Bank. On October 31,
2001, outstanding debt consisted primarily of $110.0 million of 9.375% senior
subordinated notes and $187.2 million under the Credit Facility.

Interest payments on the Companys senior subordinated notes and under the term
loan and asset-based line of credit will continue to impose significant
liquidity demands upon the Company. In fiscal 2003, the Company has made an
interest payment on November 1, 2002, and is obligated to make another interest
payment on its subordinated notes on May 1, 2003, each in the amount of $5.2
million. The Company must continue the semi-annual interest payments through
the maturity date of the senior subordinated notes in May 2005. Based on actual
advances made against the Credit Facility through October 31, 2002, and if the
Company makes maximum borrowings under its asset-based line of credit, the
Companys aggregate secured debt service obligations in fiscal 2003 would be
approximately $8.2 million. In addition to its debt service obligations, the
Company will require liquidity for capital expenditures, lease obligations and
general working capital needs.

In October 2002, the Company terminated certain senior management employees in
the United States as a part of its cost reduction efforts. Such efforts
include closure of the Companys Pulse! Magazine office and the suspension of
the Pulse! publication as well as reductions in workforce at the corporate
office. The Company reached agreement with these senior management employees
prior to the December 16, 2002 filing date of this Form 10-Q to pay $4.0
million of severance payments over terms ranging from 12 to 35 months. This
severance obligation has been accrued in reserve for restructuring costs on the
accompanying consolidated balance sheet at October 31, 2002. In November 2002,
the Company terminated an additional 49 employees in the United States as a
part of its continuing restructuring efforts. The Company estimates that the
November 2002 reductions in workforce will result in severance costs of
approximately $3.0 million, which will be recorded in the second quarter of
fiscal 2003.

On October 11, 2002, the Company completed the sale of its Japanese subsidiary
to Nikko Principal Investments Japan, Ltd. for an aggregate purchase price of
16 billion Japanese Yen (approximately $129 million at then-current exchange
rates). Net proceeds from the sale of approximately $108.8 million were used to
pay down the Credit Facility. The balance of the Credit Facility was
refinanced on October 11, 2002, with an asset-based line of credit and a term
loan, each of which matures on April 1, 2005. For its asset-based borrowings,
the Company entered into a Loan and Security Agreement with The CIT
Group/Business Credit, Inc. and other lenders providing for an asset-based line
of credit of up to $110 million, subject to achieving

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certain syndication
requirements for the final $35 million of the line of credit, which have not
been achieved at October 31, 2002. As of October 31, 2002, the asset-based
line of credit had an
outstanding balance of $64.8 million, with an additional $10.2 million
available to the Company. The Company also received a $26 million term loan
pursuant to an Amended and Restated Term Loan Agreement with JPMorgan Chase
Bank and other lenders, which had an outstanding balance of $25 million at
October 31, 2002.

The Company believes that the cash flow generated from its operations, together
with amounts available from existing financing sources, will be sufficient to
fund its debt service requirements, lease obligations, working capital needs,
its currently anticipated expenditures and other operating expenses for at
least the next 12 months. However, the Companys ability to service its senior
subordinated notes which mature in 2005, the CIT Group/Business line of credit
and the JPMorgan Chase Bank term loan is subject to future economic conditions
and financial, business and other factors.

The Companys CIT Group/Business line of credit, JPMorgan Chase Bank term loan
and senior subordinated notes impose certain restrictions on the Companys
ability to make capital expenditures and limit the Companys ability to incur
additional indebtedness. Such restrictions could limit the Companys ability to
respond to market conditions, to provide for unanticipated capital investments
or to take advantage of business or acquisition opportunities. The debt
covenants also, among other things, limit the ability of the Company to dispose
of assets, repay indebtedness or amend other debt instruments, pay
distributions, create liens on assets, enter into sale and leaseback
transactions, make investments, loans or advances and make acquisitions.

The Company leases substantially all of its retail stores, warehouses and
administrative facilities pursuant to operating leases that expire on dates
through 2024 and generally have renewal options of one to 20 years. The terms
of the leases provide for fixed or minimum payments plus, in some cases,
contingent rents based on the consumer price index, or percentages of sales in
excess of specified minimum amounts or other specified increases. The Company
is generally responsible for maintenance, insurance and property taxes. The
Companys minimum obligations in fiscal 2003 on non-cancelable operating leases
are expected to be $36.4 million. Total rental expense (including taxes and
maintenance, when included in rent, contingent rents and accruals to recognize
minimum rents on the straight-line basis over the term of the lease) relating
to all operating leases for fiscal 2003 is expected to be $45.3 million.

SEASONALITY

Retail music sales in the United States are typically higher during the
calendar fourth quarter as a result of consumer purchasing patterns due to
increased store traffic and impulse buying by holiday shoppers. As a result,
the majority of U.S. music retailers and, more specifically, the mall-based
retailers rely heavily on the calendar fourth quarter to achieve annual sales
and profitability results. The Companys deep-catalog approach to prerecorded
music appeals to customers who purchase music on a year-round basis.
Consequently, the Company has historically experienced less seasonal reliance
than other U.S. music retailers. In fiscal 2002 and 2001, the second fiscal
quarter (November 1 through January 31), excluding the sales of the Japanese
subsidiary, accounted for approximately 32% and 31%, respectively, of the
Companys annual sales. Management expects to maintain this same seasonal
trend as the Company continues to emphasize its year-round specialized
entertainment shopping experience.

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RESULTS OF OPERATIONS

Three months ended October 31, 2002 compared to three months ended October 31,
2001

REVENUES

For the three months ended October 31, 2002, the Companys consolidated net
revenues decreased 7.1% to $130.1 million versus $140.1 million for the three
months ended October 31, 2001, a decrease of $10.0 million. The Companys net
revenues were derived from U.S. revenues of $119.6 million and international
revenues of $10.5 million for the three months ended October 31, 2002, compared
to $126.4 million in the U.S. and $13.7 million internationally for the three
months ended October 31, 2001. The overall decrease in total Company revenues
for the three months ended October 31, 2002 was driven primarily by the closing
of under-performing stores associated with the Companys Restructuring Plan, as
well as an industry-wide reduction in music sales in the United States. The
decrease in the Companys revenues during the three months ended October 31,
2002 was offset by revenue increases from Internet sales in the amount of $0.9
million and revenue increases from wholesale revenues in the amount of $1.2
million as compared to the three months ended October 31, 2001. Same store
sales for the three months ended October 31, 2002 decreased by 7.6% when
compared to the three months ended October 31, 2001.

GROSS PROFIT

For the three months ended October 31, 2002, gross profit decreased $3.4
million to $40.3 million from $43.7 million for the three months ended October
31, 2001. The decrease in the gross profit is principally due to the decrease
in revenues as described above. Gross profit as a percentage of net revenues
was 31.0% for the three months ended October 31, 2002. Gross profit as a
percentage of net revenues was 32.3% at October 31, 2001, excluding the effects
of the restructuring charge. The 1.3% decrease in gross profit as a percentage
of net revenues was primarily due to a decrease in wholesale distribution
margin. The decrease in gross profit as a percentage of net revenues was
offset by a 1.9% on Internet sales margin improvement.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSE

Selling, general and administrative expenses decreased by $0.9 million to $43.3
million for the three months ended October 31, 2002 from $44.2 million for the
three months ended October 31, 2001. Excluding the effects of the $0.8 million
and $1.4 million in professional fees related to the Restructuring Plan for the
three months ended October 31, 2002 and 2001, respectively, selling, general
and administrative expenses decreased by $0.3 million to $42.5 million during
the three months ended October 31, 2002 from $42.8 million for the three months
ended October 31, 2001. Excluding the effect of professional fees related to
the restructuring charge, decreases in personnel, occupancy and other
administrative expenses are due to cost savings initiatives resulting from the
Companys Restructuring Plan. As a percentage of net revenues, selling, general
and administrative expenses, excluding the effects of the professional fees
related to the restructuring charge, increased to 32.7% for the three months
ended October 31, 2002 as compared to 30.5% for the three months ended October
31, 2001. Management attributes this percentage increase primarily to the
overall reduction in revenues during the period.

RESTRUCTURING AND ASSET IMPAIRMENT COSTS

The Company recorded pre-tax restructuring and asset impairment charges of $3.9
million for

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the three months ended October 31, 2002 compared to $0.1 million
for the three months ended October 31, 2001. The $3.9 million recorded for the
three months ended October 31, 2002 was
for the senior management severance. For the three months ended October 31,
2002 and 2001, $0 and $1.5 million, respectively, were related to inventory
write-downs recorded in cost of sales, and $0.8 million and $1.4 million,
respectively, were related to professional fees incurred in connection with the
Restructuring Plan recorded in selling, general and administrative expenses on
the accompanying consolidated statements of operations.

DEPRECIATION AND AMORTIZATION

Depreciation and amortization expense was $5.3 million for the three months
ended October 31, 2002 as compared to $5.7 million for the three months ended
October 31, 2001. The decrease of $0.4 million was primarily due to the closing
of under-performing stores identified in the Companys Restructuring Plan.

LOSS FROM CONTINUING OPERATIONS

The Companys consolidated loss from continuing operations during the three
months ended October 31, 2002 was $12.2 million compared with consolidated
operating loss of $6.3 million during the three-months ended October 31, 2001.
The increase of $5.9 million was primarily attributable to the decrease in
revenues as described above.

INTEREST EXPENSE

Net interest expense decreased to $5.8 million during the three months ended
October 31, 2002 from $6.1 million during the three months ended October 31,
2001. The decrease of $0.3 million was due primarily to the reduction of the
variable interest rate components as specified in the Companys financing
agreements from October 31, 2001 to October 31, 2002.

FOREIGN CURRENCY TRANSLATION GAIN (LOSS)

A non-cash foreign currency translation gain of $0.1 million was recognized for
the three months ended October 31, 2002, compared to a non-cash foreign
currency translation loss of $0.3 million for the three months ended October
31, 2001. The gain (loss) primarily represents the volatility of foreign
currency fluctuations against the U.S. dollar in foreign countries in which the
Company does business.

INCOME TAXES

Pre-tax losses resulted in an income tax provision in the amount of $0.1
million for the three months ended October 31, 2002 and $0.1 million for the
three months ended October 1, 2001. Tax provisions and benefits are based upon
managements estimate of the Companys annualized effective tax rates.

DISCONTINUED OPERATIONS

On October 11, 2002, the Company completed the sale of its Japanese subsidiary,
TRKK, to Nikko Principal Investments Japan Ltd. The Company sold all authorized
and issued capital stock of TRKK for an aggregate purchase price of 16 billion
Japanese Yen, which was approximately $129 million at then-current exchange
rates. As discussed in Notes 3 and 7 to the Consolidated Financial Statements,
net proceeds were primarily used to pay down the Credit

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Facility. The Company
recorded a $15.8 million gain, net of $6.5 million in U.S. income and foreign
taxes, from the sale of TRKK, which is included in income from discontinued
operations
on the accompanying statement of operations for the three months ended October
31, 2002. In accordance with the SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets, TRKKs current year operating results have
been presented as discontinued operations. Additionally, all prior period
consolidated financial statements presented have been reclassified to present
TRKK as discontinued operations.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Company is exposed to the impact of interest-rate changes and foreign
exchange rate fluctuations. The Company does not enter into market risk
sensitive instruments for trading purposes. In the ordinary course of its
business, the Company enters into debt instruments, including instruments with
short-term maturities. The Company could be exposed to a higher interest rate
at the time such debt instruments are renewed or refinanced. Certain of the
Companys debt instruments contain terms that permit the Company to cap the
interest rate at a maximum rate. In the past, the Company has purchased
interest rate hedges to manage the risk associated with interest rate
variations.

The Company is subject to risks resulting from interest rate fluctuations
because interest on the Companys borrowings under its CIT Group/Business
Credit, Inc. Credit Facility and is based on variable rates. If the base
borrowing rates (primarily LIBOR) were to increase 1% in fiscal 2003 the
Companys interest expense related to this facility for fiscal 2003 would
increase approximately $750,000.

A majority of the Companys revenues, expenses and capital purchasing
activities are transacted in U.S. Dollars. However, before the sale of TRKK,
the Company did enter into these transactions in other foreign currencies,
primarily in Japanese Yen. The Company has used forward exchange contracts to
hedge intercompany transactions with foreign subsidiaries and affiliates, and
in connection with certain of its former Japanese subsidiarys purchases of
product from third parties. Such instruments are short-term instruments entered
into in the ordinary course of the Companys business, in order to reduce the
impact of exchange rate fluctuation on net income and shareholders equity. At
October 31, 2002, the Company did not have any outstanding forward exchange
contracts.

To finance expansion and operations in Japanese markets, the Company entered
into Japanese Yen-denominated borrowing arrangements. Unrealized gains and
losses resulting from the impact of foreign exchange rate movements on these
debt instruments are recognized as other income or expense in the period in
which the exchange rates change. These borrowing arrangements were settled with
the sale of TRKK. Historically, the Company has not entered into foreign
exchange contracts to manage the risk associated with such currency
fluctuations.

The Company has not entered into any Euro hedging contracts because the Company
believes that the Companys volume of transaction activity in the Euro does not
necessitate the type of hedging activity that the Company has engaged in with
respect to the Japanese Yen.

24



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##### Table of Contents






Item 4. Controls and Procedures

(a)     Under the supervision and with the participation of the Companys
management, including the Companys principal executive officer and principal
financial officer, the Company conducted an evaluation of its disclosure
controls and procedures, as such term is defined under Rule 13a-14(c)
promulgated under the Securities Exchange Act of 1934, as amended, within 90
days of the filing date of this report. Based on their evaluation, the
Companys principal executive officer and principal financial officer concluded
that the Companys disclosure controls and procedures are effective.

(b)     There have been no significant changes (including corrective actions with
regard to significant deficiencies or material weaknesses) in the Companys
internal controls or in other factors that could significantly affect these
controls subsequent to the date of the evaluation referenced in paragraph (a)
above.

25



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##### Table of Contents






PART II  OTHER INFORMATION




ITEM 1. LEGAL PROCEEDINGS

The Company entered into a consulting contract with Chilmark Partners, LLC
(Chilmark) on May 18, 2001. By letter to Chilmark dated June 12, 2002, the
Company terminated the contract. On July 29, 2002, Chilmark filed suit against
the Company in the U.S. District Court for the Northern District of Illinois,
alleging breach of contract and seeking other remedies under the contract and
attachment of proceeds of the Companys sale of its Japanese subsidiary. In
August 2002, Chilmarks request for such an attachment was denied. The
litigation continues with respect to Chilmarks breach of contract claim and
its request for damages under the terms of the contract. As of October 31,
2002, Chilmarks total damage request was approximately $2.6 million. The
Company believes it has meritorious defenses with respect to each of Chilmarks
claims and intends to defend against the claims vigorously; however, the
litigation is in the preliminary stage and there can be no assurance that the
Company will prevail in this action. If Chilmark receives a favorable judgment
for all or a substantial portion of the total $2.6 million in damages Chilmark
is seeking, such an outcome could have a material adverse effect on the
Companys financial condition, results of operations and cash flows.




ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

|                   |  |                                                                                                                                                                                                                                       
|------------------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a)                |  | Exhibits                                                                                                                                                                                                                              
|                   |  |                                                                                                                                                                                                                                       
|10.23*             |  | Stanley Goman Severance Agreement                                                                                                                                                                                                     
|                   |  |                                                                                                                                                                                                                                       
|10.24*             |  | Ron Nugent Severance Agreement                                                                                                                                                                                                        
|                   |  |                                                                                                                                                                                                                                       
|10.25*             |  | Mark Viducich Severance Agreement                                                                                                                                                                                                     
|                   |  |                                                                                                                                                                                                                                       
|                   | 
|* Previously filed | 
|                   |  |                                                                                                                                                                                                                                       
|(b)                |  | Reports on Form 8-K.                                                                                                                                                                                                                  
|                   |  |                                                                                                                                                                                                                                       
|                   |  | On August 6, 2002, the Company filed a Form 8-K relating to the
dismissal of Arthur Andersen LLP as the Companys independent
auditors as of July 31, 2002, and the hiring of KPMG LLP to
serve as the Companys independent auditors.
|                   |  |                                                                                                                                                                                                                                       
|                   |  | On August 16, 2002, the Company filed a Form 8-K relating to an
agreement dated August 14, 2002 to extend the closing date of
the sale of its Japanese subsidiary.                                                                    
|                   |  |                                                                                                                                                                                                                                       
|                   |  | On September 3, 2002, the Company filed a Form 8-K relating to
an agreement dated August 30, 2002 to extend the closing date of
the sale of its Japanese subsidiary.                                                                  
|                   |  |                                                                                                                                                                                                                                       
|                   |  | On September 13, 2002, the Company filed a Form 8-K relating to
an agreement dated September 13, 2002 to extend the closing date
of the sale of its Japanese subsidiary.                                                              
|                   |  |                                                                                                                                                                                                                                       
|                   |  | On September 20, 2002, the Company filed a Form 8-K relating to
the completion of the Fifth Amendment dated as of September 12,
2002, to the                                                                                          

26



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##### Table of Contents



| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Amended and Restated Credit Agreement dated as of April 27,
2001, as amended, among the Company, TRKK, the lenders party
thereto and JPMorgan Chase Bank as administrative agent.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | On October 3, 2002, the Company filed a Form 8-K relating to (i)
the completion of the Sixth Amendment dated as of September 30,
2002, to the Amended and Restated Credit Agreement dated as of
April 27, 2001, as amended, among the Company, TRKK, the lenders
party thereto and JPMorgan Chase Bank as administrative agent
and (ii) an agreement dated September 27, 2002 to extend the
closing date of the sale of its Japanese subsidiary.                                                                                                                                                                                                                  
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | On October 9, 2002, the Company filed a Form 8-K relating to the
completion of the Seventh Amendment dated as of October 4, 2002,
to the Amended and Restated Credit Agreement dated as of April
27, 2001, as amended, among the Company, TRKK, the lenders party
thereto and JPMorgan Chase Bank as administrative agent.                                                                                                                                                                                                                                                                                                                                        
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | On October 21, 2002, the Company filed a Form 8-K relating to
(i) the completion of the sale of its Japanese subsidiary to
Nikko Principal Investments Japan Ltd., and (ii) the
simultaneous refinancing of the Companys bank credit facility
pursuant to (A) a Loan and Security Agreement dated October 9,
2002 by and among the Company, Three As Holdings, L.L.C., the
lenders party thereto and The CIT Group/Business Credit, Inc.,
as administrative and collateral agent and (B) an Amended and
Restated Term Loan Agreement dated as of October 9, 2002, among
the Company, the lenders party thereto and JPMorgan Chase Bank,
as administrative agent.

27



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##### Table of Contents






SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

June 16, 2003
MTS, INCORPORATED
(Registrant)

|    |  |                                                                                                                     
|--- |  | --------------------------------------------------------------------------------------------------------------------
|By: |  | /s/ DeVaughn D. Searson                                                                                             
|    |  |                                                                                                                     
|    |  | DeVaughn D. Searson
Executive Vice President and Chief Financial Officer(Principal Financial and Accounting Officer)

28



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##### Table of Contents






CERTIFICATION OF CHIEF EXECUTIVE OFFICER



|   |  | I, E.Allen Rodriguez, Chief Executive Officer of MTS, Incorporated,
certify that:                                                                                                                                                                                                                                             
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|1. |  | I have reviewed this quarterly report on Form 10-Q of MTS, Incorporated.                                                                                                                                                                                                                                                      
|  
|2. |  | Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
|  
|3. |  | Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;                   
|  
|4. |  | The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:                                                                                                     



| | a) |  | designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | evaluated the effectiveness of the registrants disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the Evaluation Date); and                                                                                                  
|
| | c) |  | presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        



|5. |  | The registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrants
ability to record, process, summarize and report financial data and
have identified for the registrants auditors any material
weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrants
internal controls; and                                                                                                                                        



|6. |  | The registrants other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                     |  |                        
|-------------------- |  | -----------------------
|Dated: June 16, 2003 |  | /s/ E. Allen Rodriguez 
|                     |  |                        
|                     |  | E. Allen Rodriguez     
|                     |  | Chief Executive Officer

29



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##### Table of Contents






CERTIFICATION OF CHIEF FINANCIAL OFFICER



|   |  | I, DeVaughn D. Searson, Chief Financial Officer of MTS, Incorporated,
certify that:                                                                                                                                                                                                                                           
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|1. |  | I have reviewed this quarterly report on Form 10-Q of MTS, Incorporated.                                                                                                                                                                                                                                                      
|  
|2. |  | Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
|  
|3. |  | Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;                   
|  
|4. |  | The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:                                                                                                     



| | a) |  | designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | evaluated the effectiveness of the registrants disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the Evaluation Date); and                                                                                                  
|
| | c) |  | presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        



|5. |  | The registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrants
ability to record, process, summarize and report financial data and
have identified for the registrants auditors any material
weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrants
internal controls; and                                                                                                                                        



|6. |  | The registrants other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                     |  |                        
|-------------------- |  | -----------------------
|Dated: June 16, 2003 |  | /s/ DeVaughn D. Searson
|                     |  |                        
|                     |  | DeVaughn D. Searson    
|                     |  | Chief Financial Officer

30



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##### Table of Contents






INDEX OF EXHIBITS

|        |  |                                  
|------- |  | ---------------------------------
|Exhibit |  | Description                      
|        |  |                                  
|10.23*  |  | Stanley Goman Severance Agreement
|        |  |                                  
|10.24*  |  | Ron Nugent Severance Agreement   
|        |  |                                  
|10.25*  |  | Mark Viducich Severance Agreement



---

|* |  | Previously filed
|- |  | ----------------

31