##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q

|                                                |  |                                                                                         
|----------------------------------------------- |  | ----------------------------------------------------------------------------------------
|(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                                                                                      
|                                                |  |                                                                                         
|o                                               |  | Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934

For the Transition Period
from ________ to ________

Commission File Number
333-54035



MTS, INCORPORATED


(Exact name of registrant as specified in its charter)


|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|California                                                     |  | 94-1500342                          
|(State or other jurisdiction of
incorporation or organization) |  | (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                              |  | Outstanding at October 31, 2002
|Class B Common Stock, no par value |  | 1,000 shares                   





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TABLE OF CONTENTS



|                                         |                                                                                               |                                                                                                      |  |  |  |  |  | 
|---------------------------------------- | --------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------- |  |  |  |  |  | 
|PART IFINANCIAL INFORMATION            
|                                         | Item 1. Financial Statements                                                                 
|                                         |                                                                                               | CONSOLIDATED BALANCE SHEETS AS OF OCTOBER 31, 2002, 2001 AND JULY 31, 2002                          
|                                         |                                                                                               | CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE MONTHS ENDED OCTOBER 31, 2002 AND 2001              
|                                         |                                                                                               | CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED OCTOBER 31, 2002 AND 2001          
|                                         |                                                                                               | CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE THREE MONTHS ENDED OCTOBER 31, 2002 AND 2001
|                                         |                                                                                               | 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                       
|EXHIBIT 99.1                            
|EXHIBIT 99.2                            



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##### Table of Contents



MTS, INCORPORATED
TABLE OF CONTENTS

|                                             |                                                                                               |                                                                                                      |       |      |  | 
|-------------------------------------------- | --------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------- | ----- | ---- |  | 
|                                             |                                                                                               |                                                                                                      |       | Page
|                                             |                                                                                               |                                                                                                      |       |     
|Part
I. Financial Information               
|                                             | Item 1. Consolidated Financial Statements                                                     |                                                                                                      |      
|                                             |                                                                                               | Consolidated Balance Sheets as of October 31, 2002, 2001 and July 31, 2002                           |       | 3   
|                                             |                                                                                               | Consolidated Statements of Income for the three months ended October 31, 2002 and 2001               |       | 4   
|                                             |                                                                                               | Consolidated Statements of Cash Flows for the three months ended October 31, 2002 and 2001           |       | 5   
|                                             |                                                                                               | Consolidated Statements of Comprehensive Income for the three months ended October 31,
2002 and 2001 |       | 6   
|                                             |                                                                                               | Notes to Consolidated Financial Statements                                                           |       | 7-13
|                                             | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations |                                                                                                      | 14-20
|                                             | Item 3. Quantitative and Qualitative Disclosures about Market Risk                            |                                                                                                      | 21   
|                                             | Item 4. Controls and Procedures                                                               |                                                                                                      | 22   
|Part
II. Other
Information                  
|                                             | Item 1. Legal Proceedings                                                                     |                                                                                                      | 23   
|                                             | Item 6. Exhibits and Reports on Form 8-K                                                      |                                                                                                      | 23-24
|Signatures                                   |                                                                                               | 25                                                                                                  
|Certification of the Chief Executive Officer |                                                                                               | 26-27                                                                                               
|Certification of the Chief Financial Officer |                                                                                               | 28-29                                                                                               
|Index of Exhibits                            |                                                                                               | 30                                                                                                  
|                                             | Exhibit 99.1                                                                                  |                                                                                                      | 31   
|                                             | Exhibit 99.2                                                                                  |                                                                                                      | 32   

2



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##### Table of Contents






PART IFINANCIAL INFORMATION




Item 1. Financial Statements




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

|                                               |                                                                                                                                                  |                                         |                                      |                                                      |         |             |         |             |         |          |         |         |         |         |         | 
|---------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------ | --------------------------------------- | ------------------------------------ | ---------------------------------------------------- | ------- | ----------- | ------- | ----------- | ------- | -------- | ------- | ------- | ------- | ------- | ------- | 
|                                               |                                                                                                                                                  |                                         |                                      |                                                      |         | 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         |                                      |                                                      | 6,543   |             |         |             | 481     |          |         |         | 6,839   |        
|                                               |                                                                                                                                                  | Accrued liabilities                     |                                      |                                                      | 32,315  |             |         |             | 31,058  |          |         |         | 28,664  |        
|                                               |                                                                                                                                                  | Deferred revenue, current portion       |                                      |                                                      | 1,990   |             |         |             | 2,233   |          |         |         | 2,286   |        
|                                               |                                                                                                                                                  |                                         |                                      |                                                      |         |             |         |             |         |          |         |        
|                                               |                                                                                                                                                  |                                         |                                      | Total current liabilities                            |         |             | 174,237 |             |         |          | 239,713 |         |         |         | 233,469 | 
|Long-term Liabilities:                         |                                                                                                                                                  |                                         |                                      |                                                      |         |             |         |             |         |          |         |        
|                                               |                                                                                                                                                  | 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                                    |         |             | 379,091 |             |         |          | 523,229 |         |         |         | 518,791 | 
|                                               |                                                                                                                                                  |                                         |                                      |                                                      |         |             |         |             |         |          |         |        
|Shareholders (Deficit) Equity:                |                                                                                                                                                  |                                         |                                      |                                                      |         |             |         |             |         |          |         |        
|                                               | Common stock:                                                                                                                                    |                                         |                                      |                                                      |         |             |         |             |         |          |         |         |        
|                                               | Class B, no par value; 10,000,000 shares authorized;
1,000 shares issues and outstanding at October 31,
2002,
October 31, 2001 and July 31, 2002 |                                         |                                      | 6                                                    |         |             |         | 6           |         |          |         | 6       |        
|                                               | Retained (deficit) earnings                                                                                                                      |                                         |                                      | (18,514                                              | )       |             |         | 24,576      |         |          |         | (21,355 | )      
|                                               | Accumulated other comprehensive income                                                                                                           |                                         |                                      | (10,480                                              | )       |             |         | (15,050     | )       |          |         | (19,438 | )      
|                                               |                                                                                                                                                  |                                         |                                      |                                                      |         |             |         |             |         |          |         |        
|                                               |                                                                                                                                                  |                                         | Total shareholders (deficit) equity |                                                      |         | (28,988     | )       |             |         | 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 INCOME
FOR THE THREE MONTHS ENDED OCTOBER 31, 2002 AND 2001
(DOLLARS IN THOUSANDS)
(UNAUDITED)

|                                                 |                                          |                                                                                                                |         |                    |         |      |         |        |         |  
|------------------------------------------------ | ---------------------------------------- | -------------------------------------------------------------------------------------------------------------- | ------- | ------------------ | ------- | ---- | ------- | ------ | ------- | -
|                                                 |                                          |                                                                                                                |         | THREE MONTHS ENDED
|                                                 |                                          |                                                                                                                |         | OCTOBER 31,       
|                                                 |                                          |                                                                                                                |         | 2002               |         | 2001
|                                                 |                                          |                                                                                                                |         |                    |         |     
|Net revenue                                      |                                          | $                                                                                                              | 130,122 |                    |         | $    | 140,120 |       
|Cost of sales (a)                                |                                          |                                                                                                                | 89,786  |                    |         |      | 96,435  |       
|                                                 |                                          |                                                                                                                |         |                    |         |      |         |       
|                                                 |                                          | Gross Profit                                                                                                   |         |                    | 40,336  |      |         |        | 43,685  |  
|Selling, general and administrative expenses (b) |                                          |                                                                                                                | 43,255  |                    |         |      | 44,172  |       
|Restructuring and asset impairment (gain) costs  |                                          |                                                                                                                | (55     | )                  |         |      | 83      |       
|Depreciation and amortization                    |                                          |                                                                                                                | 5,328   |                    |         |      | 5,733   |       
|                                                 |                                          |                                                                                                                |         |                    |         |      |         |       
|                                                 |                                          | Loss from operations                                                                                           |         |                    | (8,192  | )    |         |        | (6,303  | )
|Other income and (expenses):                     |                                          |                                                                                                                |         |                    |         |      |         |       
|                                                 | Interest Expense                         |                                                                                                                |         | (5,848             | )       |      |         | (6,143 | )      
|                                                 | Foreign currency translation gain (loss) |                                                                                                                |         | 28                 |         |      |         | (301   | )      
|                                                 | Other expenses                           |                                                                                                                |         | (328               | )       |      |         | (30    | )      
|                                                 |                                          |                                                                                                                |         |                    |         |      |         |       
|                                                 |                                          | Loss from continuing operations before taxes                                                                   |         |                    | (14,340 | )    |         |        | (12,777 | )
|Provision for income taxes                       |                                          |                                                                                                                | 47      |                    |         |      | 131     |       
|                                                 |                                          |                                                                                                                |         |                    |         |      |         |       
|                                                 |                                          | Loss
from continuing operations                                                                                |         |                    | (14,387 | )    |         |        | (12,908 | )
|Discontinued
operations (Note 2)                
|                                                 |                                          | Income from operations of discontinued Japanese operations
(Including gain on disposal of $36,019, net of tax) |         |                    | 37,400  |      |         |        | 1,636   |  
|                                                 |                                          |                                                                                                                |         |                    |         |      |         |       
|                                                 |                                          | Net income (loss)                                                                                              |         | $                  | 23,013  |      |         | $      | (11,272 | )
|                                                 |                                          |                                                                                                                |         |                    |         |      |         |       



---

|(a) |  | Includes $0 and $1.5 million of inventory write-downs
related to the Restructuring Plan for the three months ended
October 31, 2002 and 2001, respectively.  
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(b) |  | Includes $800,000 and $1.4 million in professional fees
related to the Restructuring Plan 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)

|                                               |                                                                                      |                                                        |                     |                                                      |         |             |          |         |        |         |         |  
|---------------------------------------------- | ------------------------------------------------------------------------------------ | ------------------------------------------------------ | ------------------- | ---------------------------------------------------- | ------- | ----------- | -------- | ------- | ------ | ------- | ------- | -
|                                               |                                                                                      |                                                        |                     |                                                      |         | OCTOBER 31,
|                                               |                                                                                      |                                                        |                     |                                                      |         | 2002        |          | 2001   
|                                               |                                                                                      |                                                        |                     |                                                      |         |             |          |        
|Cash flows from operating activities:          |                                                                                      |                                                        |                     |                                                      |         |             |          |        
|                                               | Net income (loss)                                                                    |                                                        | $                   | 23,013                                               |         |             | $        | (11,272 | )     
|                                               | Adjustments
to reconcile net income (loss) to net cash used in operating activities: |                                                        |                     |                                                      |         |             |          |         |       
|                                               |                                                                                      | Discontinued operations                                |                     |                                                      | (37,400 | )           |          |         | (1,636 | )      
|                                               |                                                                                      | Depreciation and amortization                          |                     |                                                      | 6,697   |             |          |         | 7,665  |        
|                                               |                                                                                      | Restructuring and asset impairment costs               |                     |                                                      | 510     |             |          |         | (381   | )      
|                                               |                                                                                      | Recovery for losses on accounts receivable             |                     |                                                      | (10     | )           |          |         | (79    | )      
|                                               |                                                                                      | Loss on disposal of depreciable assets                 |                     |                                                      | 99      |             |          |         | 301    |        
|                                               |                                                                                      | Exchange loss/(gain)                                   |                     |                                                      | 266     |             |          |         | (603   | )      
|                                               |                                                                                      | Other non-cash expense                                 |                     |                                                      | 220     |             |          |         | 228    |        
|                                               |                                                                                      | Increase/(decrease) in cash resulting from changes in: |                     |                                                      |         |             |          |         |        |        
|                                               |                                                                                      |                                                        | Accounts receivable |                                                      |         | 7,817       |          |         |        | 2,246   |        
|                                               |                                                                                      |                                                        | Inventories         |                                                      |         | (22,105     | )        |         |        | (16,436 | )      
|                                               |                                                                                      |                                                        | Prepaid expenses    |                                                      |         | 696         |          |         |        | (1,311  | )      
|                                               |                                                                                      |                                                        | Accounts payable    |                                                      |         | 15,818      |          |         |        | 9,270   |        
|                                               |                                                                                      |                                                        | Accrued liabilities |                                                      |         | 3,651       |          |         |        | 1,169   |        
|                                               |                                                                                      |                                                        | Deferred revenue    |                                                      |         | (299        | )        |         |        | (459    | )      
|                                               |                                                                                      |                                                        |                     |                                                      |         |             |          |        
|                                               |                                                                                      |                                                        |                     | Net cash used in operating activities                |         |             | (1,027   | )       |        |         | (11,298 | )
|                                               |                                                                                      |                                                        |                     |                                                      |         |             |          |        
|Cash flows from investing activities:          |                                                                                      |                                                        |                     |                                                      |         |             |          |        
|                                               | Net
proceeds from sale of discontinued operations                                    |                                                        |                     | 109,532                                              |         |             |          |        |       
|                                               | Acquisition of fixed assets                                                          |                                                        |                     | (1,094                                               | )       |             |          | (1,448  | )     
|                                               | Acquisition of investments                                                           |                                                        |                     |                                                     |         |             |          | (140    | )     
|                                               | Increase in deposits                                                                 |                                                        |                     | (2                                                   | )       |             |          | (84     | )     
|                                               | Increase in intangibles                                                              |                                                        |                     | (52                                                  | )       |             |          | (56     | )     
|                                               |                                                                                      |                                                        |                     |                                                      |         |             |          |        
|                                               |                                                                                      |                                                        |                     | Net
cash provided by (used in) investing activities  |         |             | 108,384  |         |        |         | (1,728  | )
|                                               |                                                                                      |                                                        |                     |                                                      |         |             |          |        
|Cash flows from financing activities:          |                                                                                      |                                                        |                     |                                                      |         |             |          |        
|                                               | Payment
on long-term financing agreements from sale of discontinued operations       |                                                        |                     | (108,859                                             | )       |             |          |        |       
|                                               | Proceeds from life insurance loans                                                   |                                                        |                     |                                                     |         |             |          | 3,526   |       
|                                               | Proceeds from employee loan payments                                                 |                                                        |                     |                                                     |         |             |          | 105     |       
|                                               | Debt issuance costs                                                                  |                                                        |                     | (4,163                                               | )       |             |          | (907    | )     
|                                               | Principal payments under long-term financing agreements                              |                                                        |                     | (114,328                                             | )       |             |          | (14,461 | )     
|                                               | Proceeds from issuance of long-term financing agreements                             |                                                        |                     | 125,187                                              |         |             |          | 30,526  |       
|                                               |                                                                                      |                                                        |                     |                                                      |         |             |          |        
|                                               |                                                                                      |                                                        |                     | Net
cash (used in) provided by financing activities  |         |             | (102,163 | )       |        |         | 18,789  |  
|                                               |                                                                                      |                                                        |                     |                                                      |         |             |          |        
|Net
cash from sale of discontinued operations  |                                                                                      |                                                        | 157                 |                                                      |         |             | (3,945   | )      
|Effect of exchange rate changes on cash        |                                                                                      |                                                        | (648                | )                                                    |         |             | (3,739   | )      
|                                               |                                                                                      |                                                        |                     |                                                      |         |             |          |        
|                                               |                                                                                      |                                                        |                     | Net increase (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                     |                                                                                      | $                                                      |                    |                                                      |         | $           |         |        
|                                               |                                                                                      |                                                        |                     |                                                      |         |             |          |        

See accompanying notes to consolidated financial statements.

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

|                                        |                                                                                               |   |             |         |      |   |         |      |  
|--------------------------------------- | --------------------------------------------------------------------------------------------- | - | ----------- | ------- | ---- | - | ------- | ---- | -
|                                        |                                                                                               |   | OCTOBER 31,
|                                        |                                                                                               |   | 2002        |         | 2001
|                                        |                                                                                               |   |             |         |     
|Net income (loss)                       |                                                                                               | $ | 23,013      |         |      | $ | (11,272 | )   
|Other comprehensive income, net of tax: |                                                                                               |   |             |         |      |   |         |     
|                                        | Reversal of other comprehensive income related to
the sale of Japanese subsidiary, net of tax |   |             | (11,143 | )    |   |         |     |  
|                                        | Foreign currency translation                                                                  |   |             | (71     | )    |   |         | (585 | )
|                                        |                                                                                               |   |             |         |      |   |         |     
|Comprehensive income (loss)             |                                                                                               | $ | 11,799      |         |      | $ | (11,857 | )   
|                                        |                                                                                               |   |             |         |      |   |         |     

See accompanying notes to the consolidated financial statements.

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MTS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 1  BASIS OF PRESENTATION

The unaudited consolidated financial statements include the accounts of MTS,
Incorporated and its majority and wholly owned subsidiaries (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 and restructuring and asset impairment charges)
necessary to present fairly its consolidated financial position as of October
31, 2002 and the results of its operations and cash flows for the three months
ended 2002 and 2001. The significant accounting policies and certain financial
information which are normally included in financial statements prepared in
accordance with generally accepted accounting principles, 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.

NOTE 2  DISCONTINUED OPERATIONS

On October 11, 2002, the Company completed the sale of its Japanese operations,
Tower Records Kabushiki Kaisha (TRKK), to Nikko Principal Investments Japan
Ltd. The Company sold all authorized and issued capital stock for an aggregate
purchase price of 16 billion Japanese Yen, which was approximately $129 million
at then-current exchange rates. As discussed in Note 6, net proceeds were used
to pay down the Credit Facility (defined in Note 6). The recording of the sale
resulted in a $36.0 million gain, net of $4.4 million in taxes. In accordance
with the Statement of Financial Accounting Standards No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets (FAS 144), the current year
results of operations have been classified as discontinued. Additionally, all
prior period consolidated financial statements presented have been reclassified
for the discontinued operations.

Net income from discontinued operations, excluding the sale, is as follows:

|              |            |   |                    |       |                    |   |        |       | 
|------------- | ---------- | - | ------------------ | ----- | ------------------ | - | ------ | ----- | 
|              |            |   | 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:

|             |                                          |                                        |   |                  |         |               |   |         |         | 
|------------ | ---------------------------------------- | -------------------------------------- | - | ---------------- | ------- | ------------- | - | ------- | ------- | 
|             |                                          |                                        |   | As of            |         | As of        
|             |                                          |                                        |   | October 31, 2001 |         | July 31, 2002
|             |                                          |                                        |   |                  |         |              
|Assets:      |                                          |                                        |   |                  |         |               |   |        
|             | Cash                                     |                                        | $ | 20,763           |         |               | $ | 29,876  |        
|             | Inventory                                |                                        |   | 70,421           |         |               |   | 68,763  |        
|             | Fixed Assets                             |                                        |   | 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 3  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 income statement items have been
translated using the weighted average exchange rates during the respective
years. The net gain or loss resulting from translation upon consolidation into
the financial statements 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 income as they occur. The
Company recorded a net translation gain of approximately $28,000 for the three
months ended October 31, 2002 and a net translation loss of approximately
$301,000 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 4  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. The
Company has reserved all remaining deferred tax assets at October 31, 2002 and
2001 due to the uncertainty of future utilization.

NOTE 5  RESTRUCTURING AND ASSET IMPAIRMENT CHARGES

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

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The implemented Restructuring Plan contains several initiatives designed to
improve the Companys operations, including closing and liquidating most
stand-alone and combination bookstores, selling the Companys Argentina, Hong
Kong, Taiwan and Singapore operations and converting them to franchises,
closing the Companys Canadian operations, closing under-performing domestic
record, outlet and frame/gallery stores, and monitoring the performance of
additional stores. The Restructuring Plan also contains several initiatives
intended to improve cash flow by reducing overhead expenses, reducing working
capital and reducing capital expenditures until internally generated cash flow
will support future needs, and an effort to reduce the Companys long-term debt
by selling the Companys Japanese operations. In fiscal 2002, the Company
began implementation of the possible franchising and closure of its United
Kingdom and Ireland operations. As a result, the Company established and
recorded a restructuring accrual for the United Kingdom and Ireland operations
in fiscal 2002. In the first quarter of fiscal 2003, four out of eight stores
in the United Kingdom were closed.

The Company began implementing its Restructuring Plan shortly after its
adoption. Since the plan was implemented, 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 several of its under-performing record
and outlet stores and has arranged for the sale of two of its frame/gallery
stores. It has successfully converted the Argentina, Hong Kong and Taiwan
operations to franchises through the sale of the operating entities and closed
its Canadian operations. The Company has successfully reduced the number of
new store openings and remodels, while maintaining its trademark
local shopping experience and deep selection at its existing stores
overhead expenses. 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.

During the three months ended October 31, 2002, the Company recorded pre-tax
restructuring charges of $800,000 for professional fees
related to the Companys restructuring efforts, which are recorded in selling,
general and administrative expenses. The $(55,000) of restructuring
asset gains are a result of
premiums received for two of the United Kingdom leases.

During the three months ended October 31, 2001, the Company recorded pre-tax
restructuring and asset impairment charges of $3.0 million. Of the $3.0 million
in total pre-tax restructuring and asset impairment charges, $1.5 million
related to inventory write-downs was recorded in cost of sales and $1.4 million
in professional fees was recorded in selling, general and administrative
expenses. The $83,000 of restructuring and asset impairment
charges are a result of involuntary termination and
benefits and other store closing costs.

At July 31, 2002, a restructuring accrual of $6.8 million remained on the
balance sheet, which was comprised mainly of accruals for the closing of the
United Kingdom and Ireland operations and two store closures in the United
States. Payments and charges against the accrual during the three months ended
October 31, 2002 were approximately $300,000 relating mainly to the closure
costs of four stores in the United Kingdom. At October 31, 2002, the remaining
restructuring liability was $6.5 million and was mainly comprised of accruals
for remaining store closures in the United Kingdom and in Ireland as well as
one store closure in the United States.

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 implement a new business plan targeted at
improving operations, continue monitoring under-performing stores and assets,
and

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evaluate its ongoing working capital investments. The new business plan will
require the Company to implement additional restructuring efforts and continue
to record charges to operations for restructuring costs, and possible asset impairments and
inventory reserves in future periods.

NOTE 6  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 its senior revolving 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
Japanese Yen of 15,596,828,718, 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 its Japanese operations
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. 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 $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 upon 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 asset-based line of credit 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 refinance, 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. 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,

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mandatory commitment reductions and issuance of capital stock. At October 31,
2002 the Company was in compliance with affirmative and negative covenants.

NOTE 7  RECENT ACCOUNTING
PRONOUNCEMENTS

In June 2001, the Financial Accounting Standards Board (FASB) finalized
Statement No. 143, Accounting for Asset Retirement Obligations (SFAS 143).
SFAS 143 addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. This statement is effective for financial statements
issued for fiscal years beginning after June 15, 2002. The Companys
adoption of SFAS 143 did not materially impact its financial position or
results of operations.

In August 2001, the FASB finalized Statement No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets (SFAS 144). SFAS 144 addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets. This statement is effective for financial statements issued for fiscal
years beginning after December 15, 2001. The Company adopted this SFAS on
August 1, 2002 on a prospective basis which is in accordance with the newly
issued guidance and has recorded the sale of TRKK in accordance with this
statement.

The Company is currently reviewing SFAS No. 145, Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections, which was issued in May 2002. The statement rescinds FASB No. 4,
Reporting Gains and Losses from Extinguishment of Debt, and an amendment of
that statement, FASB 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 from operations if they do not meet the criteria for extraordinary
items. The provisions related to this portion of the statement are required to
be applied in fiscal years beginning after May 15, 2002, with earlier
application encouraged. The Company does not expect the adoption of SFAS No.
145 to impact its financial position or results of operations.

In June 2002, the FASB issued SFAS No. 146, Accounting for Exit or Disposal
Activities. 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
(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 (1) costs related to terminating a contract that is not a
capital lease and (2) 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 that
are initiated after December 31, 2002. With the Companys continued
restructuring efforts, SFAS No. 146 could impact the Companys operations;
however the Company is currently quantifying the impact of the adoption of the
new guidance.

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NOTE 8  SUBSEQUENT EVENTS

In October and November 2002, the Company terminated a total of 53 employees in
the United States in accordance with turnaround efforts, including four members
of its senior management. New restructuring efforts include closure of
non-profitable U.S. stores, closure of the Companys Pulse! Magazine office and
suspension of the Pulse! publication. The Company is currently negotiating
severance arrangements with the four members of senior management. Although
the exact amount of severance the Company may pay to such individuals has not
yet been determined, the Company believes that the amount will be material.
The Company also expects that payment of all or a substantial amount of the
severance amounts will be made over time and not in a lump sum. The Company
does not believe that severance amounts to be paid in connection with the
termination of non-senior management employees are material.

NOTE 9  RECLASSIFICATIONS

Certain reclassifications have been made to conform prior years financial
statements to the current years presentation.

NOTE 10  SEGMENT AND GEOGRAPHIC INFORMATION

SFAS No. 131 requires that the Company report 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 segment as retail sales of pre-recorded music and
evaluates this based on geographic area.

The Company is a worldwide specialty retailer 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.

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Financial information relating to the Companys principal foreign operations is
as follows (in thousands):

|                         |                            |                             |         |        |                             |         |             |        |         |         | 
|------------------------ | -------------------------- | --------------------------- | ------- | ------ | --------------------------- | ------- | ----------- | ------ | ------- | ------- | 
|                         |                            |                             |         |        | FOR THE THREE MONTHS ENDING
|                         |                            |                             |         |        | OCTOBER 31,                 |         | OCTOBER 31,
|                         |                            |                             |         |        | 2002                        |         | 2001       
|                         |                            |                             |         |        |                             |         |            
|Net Revenue              |                            |                             |         |        |                             |         |             |       
|                         | United States:             |                             |         |        |                             |         |             |        |        
|                         |                            | Unaffiliated customer sales |         | $      | 114,598                     |         |             | $      | 119,771 |        
|                         |                            | Interarea transfers         |         |        | 5,036                       |         |             |        | 6,653   |        
|                         |                            |                             |         |        |                             |         |             |       
|                         |                            |                             | 119,634 |        |                             |         | 126,424     |       
|                         |                            |                             |         |        |                             |         |             |       
|                         | Great Britain and Ireland: |                             |         |        |                             |         |             |        |        
|                         |                            | Unaffiliated customer sales |         |        | 9,713                       |         |             |        | 11,536  |        
|                         |                            | Interarea transfers         |         |        |                            |         |             |        |        |        
|                         |                            |                             |         |        |                             |         |             |       
|                         |                            |                             | 9,713   |        |                             |         | 11,536      |       
|                         |                            |                             |         |        |                             |         |             |       
|                         | Other:                     |                             |         |        |                             |         |             |        |        
|                         |                            | Unaffiliated customer sales |         |        | 775                         |         |             |        | 2,160   |        
|                         |                            | Interarea transfers         |         |        |                            |         |             |        |        |        
|                         |                            |                             |         |        |                             |         |             |       
|                         |                            |                             | 775     |        |                             |         | 2,160       |       
|                         |                            |                             |         |        |                             |         |             |       
|                         |                            |                             | TOTAL   |        | $                           | 130,122 |             |        | $       | 140,120 | 
|                         |                            |                             |         |        |                             |         |             |       
|Operating income (loss): |                            |                             |         |        |                             |         |             |       
|                         | United States              |                             | $       | (5,989 | )                           |         | $           | (4,107 | )      
|                         | Great Britain and Ireland  |                             |         | (2,182 | )                           |         |             | (1,954 | )      
|                         | Other                      |                             |         | (21    | )                           |         |             | (242   | )      
|                         |                            |                             |         |        |                             |         |             |       
|                         |                            | $                           | (8,192  | )      |                             | $       | (6,303      | )     
|                         |                            |                             |         |        |                             |         |             |       

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

United States net revenue includes export sales to non-affiliated customers of
$6,835 and $17,211 for the three months ended October 31, 2002 and 2001,
respectively.

Interarea transfers relate to the Companys distribution operations.

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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.

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

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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 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

The Company has recorded restructuring charges in fiscal 2003 and 2002 related
to the restructuring efforts to close stores, liquidate inventory and to sell
some international operations, some of which were converted to franchises.
These charges required judgments about exit costs to be incurred for employee
severance, contract and lease terminations, the future net realizable value of
long-lived assets, inventory to be disposed of and other liabilities. The
ability to obtain agreements with lessors to terminate leases or with other
parties to assign leases can also affect the accuracy of current 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 losses relating to
the impairment of long-lived assets when future undiscounted cash flows are
less than an assets carrying value. Assumptions and estimates used in the
evaluation of impairment, including current and future economic trends for
stores in many geographic regions, 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 our accounting policies and related estimates and
judgments, see Note 1 of the Notes to the audited July 31, 2002 Consolidated
Financial Statements 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, it cannot
guarantee 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 $1.0 million and $11.3 million for the
three months ended

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October 31, 2002, and October 31, 2001, respectively. For the three months
ended October 31, 2002, net increase in inventory was $22.1 million. For the
three months ended October 31, 2001, net increase in inventory was $16.4
million, which included $1.5 million in write-down of inventory related to the
Companys Restructuring Plan.

Net cash provided (used in) by investing
activities was $108.3 and $1.7 million for the three
months ended October 31, 2002, and October 31, 2001, respectively. Net cash
used in investing activities for the three months ended October 31, 2002 was
due to proceeds received from sale of discontinued operations and was
offset by store leasehold improvements and capital expenditure
requirements, including refurbishment and technology investments totaling
approximately $793,000, with an additional $287,000 used for video rental
acquisition. Net cash used for the three months ended October 31, 2001 was
focused primarily on store leasehold improvements and capital expenditure
requirements including store relocations, refurbishment and technology
investments totaling approximately $1.2 million with an additional $293,000
used for video rental acquisition.

Net cash (used in) provided by financing activities for the three months ended October
31, 2002 was $102.2 million, resulting principally from paydown of long-term financing related to discontinued operations and was
offset by borrowings under the
Companys line of credit, net of debt repayments and 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 from life insurance loans and net borrowings under the Companys
credit facility. Net borrowings under the Companys credit facility for the
three months ended October 31, 2001 were $16.5 million.

Total funded debt decreased to $209.4 million as of October 31, 2002 from
$307.3 million, which included funded debt of the Japanese operation in the
amount of $114.1 million at October 31, 2001 which is included in liabilities of
discontinued operations. On October 31, 2002 outstanding debt consisted
primarily of $110.0 million of 9.375% senior subordinated notes, $64.8 million
under the loan agreement 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
Companys Credit Facility and term loan 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
$5,156,250, and must continue the semi-annual payments until the maturity 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 existing 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 and November 2002, the Company terminated a total of 53 employees in
the United States in accordance with turnaround efforts, including four members
of its senior management. New restructuring efforts include closure of
non-profitable U.S. stores, closure of the Companys Pulse! Magazine office and
suspension of the Pulse! publication. The Company is currently negotiating
severance arrangements with the four members of senior management. Although
the

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exact amount of severance the Company may pay to such individuals has not yet
been determined, the Company believes that the amount will be material. The
Company also expects that payment of all or a substantial amount of the
severance amounts will be made over time and not in a lump sum. The Company
does not believe that severance amounts to be paid in connection with the
termination of non-senior management employees are material.

On October 11, 2002, the Company completed the sale of its Japanese operations
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 Companys credit facility. The balance of the Companys 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. The Company entered
into this Loan and Security Agreement with The CIT Group/Business Credit, Inc.
and other lenders providing for a line of credit of up to $110 million, subject
to achieving certain syndication requirements for the final $35 million of the
line of credit, which have not been achieved at October 31, 2002. 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, 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 Credit Facility
and the JPMorgan Chase Bank term loan is subject to future economic conditions
and financial, business and other factors, many of which are beyond the
Companys control.

The Companys CIT Group/Business Credit Facility, 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

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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 each of 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 annual sales.
Management expects to maintain this same seasonal trend as the Company
continues to emphasize its year-round specialized entertainment shopping
experience.

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 closing of unprofitable stores associated with
the Companys Restructuring Plan, as well as an industry-wide
reduction in music sales in the U.S. The decrease in Company revenues was
primarily offset by revenue increases from Internet sales in the amount of
$900,000 and from wholesale revenues in the amount of $1.2 million for the three
months ended October 31, 2002 as compared to the three months ended October 31,
2001. Same store sales for the three months ended October 31, 2002 decreased
by 7.64% 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 was net revenues
was 31.0% for the three months ended October 31, 2002. Gross profit as a
percentage of net revenues was 32.2% at October 31, 2001, excluding the effects
of the restructuring charge. The 1.1% gross profit as a percentage of net
revenues decrease was primarily due to a decrease in wholesale distribution.
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 $900,000 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 $800,000 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 $300,000 to $42.5 million during the
three months ended October 31, 2002 from $42.8 million for the three months
ended October 31,

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2001. Excluding the effect of professional fees related to the restructuring
charge, decreases in personnel, occupancy and other cost savings initiatives
resulting from the Companys Restructuring Plan contributed primarily to the
reduction in overall operating costs. 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 32.6% 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
$800,000 for the three months ended October 31, 2002, compared to $3.0 million
for the three months ended October 31, 2001, a decrease of $2.2 million,
related to the implementation of the Restructuring Plan. Of the $800,000 and
$3.0 million in total pre-tax restructuring and asset impairment charges for
the three months ended October 31, 2002 and 2001, respectively, $0 and $1.5
million, respectively, were related to inventory write-downs and were recorded
in cost of sales and $800,000 and $1.4 million, respectively, related to
professional fees were recorded in selling, general and administrative
expenses. The remaining gain of $(55,000) and charge of $83,000 for the three
months ended October 31, 2002 and 2001, respectively, of total pre-tax
restructuring and asset impairment charges were reported separately.

DEPRECIATION AND AMORTIZATION

Depreciation and amortization expense was $5.3 million for the three months
ended October 31, 2002, compared to $5.7 million for the three months ended
October 31, 2001, a decrease of $400,000. The decrease was primarily due to the
closing of unprofitable stores associated with the Companys Restructuring
Plan.

LOSS FROM OPERATIONS

The Companys consolidated loss from operations during the three months ended
October 31, 2002 was $8.2 million compared with consolidated operating loss of
$6.3 million during the three-months ended October 31, 2001, an increased loss
of $1.9 million. The increase was primarily attributable to the decrease in
revenues as described above.

DISCONTINUED OPERATIONS

On October 11, 2002, the Company completed the sale of its Japanese operations
to Nikko Principal Investments Japan Ltd. The Company sold all authorized and
issued capital stock for an aggregate purchase price of 16 billion Japanese
Yen, which was approximately $129 million at then-current exchange rates. As
discussed in Notes 2 and 6 to the Consolidated Financial Statements, net
proceeds were primarily used to pay down the Credit Facility. The recording of
the sale resulted in a $36.0 million gain, net of $4.4 million in taxes. In
accordance with the Statement of Financial Accounting Standards No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets (FAS 144), the
current year results of operations have been classified as discontinued.
Additionally, all prior period consolidated financial statements presented have
been reclassified for the discontinued operations.

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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 was due primarily to the reduction of the variable interest
rate components from October 31, 2001 to October 31, 2002.

FOREIGN CURRENCY TRANSLATION GAIN

A non-cash foreign currency translation benefit of $28,000 was recognized for
the three months ended October 31, 2002, compared to a non-cash foreign
currency translation loss of $301,000 for the three months ended October 31,
2001. The account 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 $47,000 for
the three months ended October 31, 2002 and $131,000 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.

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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.

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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.

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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 Japan operations. 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
| | --- |  | --------

|        |  |                                         
|------- |  | ----------------------------------------
|Exhibit |  | Description                             
|        |  |                                         
|99.1    |  | Certification of Chief Executive Officer
|        |  |                                         
|99.2    |  | Certification of Chief Financial Officer



| | (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 operations.                                                                    
|
| |     |  | 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 operations.                                                                  
|
| |     |  | 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 operations.                                                              
|
| |     |  | 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                                                                                          

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| |  |  | 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 operations.                                                                                                                                                                                                                  
|
| |  |  | 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 operations 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.

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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.

|                  |  |                               |  |     |  |                               
|----------------- |  | ----------------------------- |  | --- |  | ------------------------------
|MTS,
INCORPORATED |  |                               |  |    
|(Registrant)      |  |                               |  |    
|                  |  |                               |  |     |  |                               
|By:               |  | /s/ James S. Bain             |  | By: |  | /s/ Karen M. Wilhelmi         
|                  |  |                               |  |     |  |                               
|                  |  | James S. Bain                 |  |     |  | Karen M. Wilhelmi             
|                  |  | Executive Vice President and  |  |     |  | Vice President and Controller 
|                  |  | Chief Financial Officer       |  |     |  |                               
|                  |  | (Principal Financial Officer) |  |     |  | (Principal Accounting Officer)

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CERTIFICATION OF CHIEF EXECUTIVE OFFICER



|   |  | I, Michael T. Solomon, 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.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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|                         |  |                        
|------------------------ |  | -----------------------
|Dated: December 16, 2002 |  | /s/ Michael T. Solomon 
|                         |  |                        
|                         |  | Michael T. Solomon     
|                         |  | Chief Executive Officer

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CERTIFICATION OF CHIEF FINANCIAL OFFICER



|   |  | I, James S. Bain, 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.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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|                         |  |                        
|------------------------ |  | -----------------------
|Dated: December 16, 2002 |  | /s/ James S. Bain      
|                         |  |                        
|                         |  | James S. Bain          
|                         |  | Chief Financial Officer

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INDEX OF EXHIBITS

|        |  |                                         
|------- |  | ----------------------------------------
|Exhibit |  | Description                             
|        |  |                                         
|99.1    |  | Certification of Chief Executive Officer
|        |  |                                         
|99.2    |  | Certification of Chief Financial Officer

30