##### 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 April 30, 2003

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 xNo

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 April 30, 2003
|Class B Common Stock, no par value |  | 1,000 shares                 





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TABLE OF CONTENTS



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



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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 (unaudited) as of April 30, 2003, 2002 and July 31, 2002 )                                                                 |    |       | 3    | 
|                                             |                                                                                               | Consolidated Statements of Operations (unaudited) for the three months ended April 30, 2003 and 2002 and
the nine months ended April 30, 2003 and 2002 |    |       | 4    | 
|                                             |                                                                                               | Consolidated Statements of Cash Flows (unaudited) for the nine months ended April 30, 2003 and 2002                                                    |    |       | 5    | 
|                                             |                                                                                               | Consolidated Statements of Comprehensive Loss (unaudited) for the nine months ended April 30, 2003 and
2002                                            |    |       | 6    | 
|                                             |                                                                                               | Notes to Consolidated Financial Statements (unaudited)                                                                                                 |    |       | 7-15 | 
|                                             | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations |                                                                                                                                                        |    | 16-27 |     
|                                             | Item 3. Quantitative and Qualitative Disclosures about Market Risk                            |                                                                                                                                                        |    | 28    |     
|                                             | Item 4. Controls and Procedures                                                               |                                                                                                                                                        |    | 29    |     
|Part II. Other Information                   |                                                                                               |                                                                                                                                                        |    |      
|                                             | Item 1. Legal Proceedings                                                                     |                                                                                                                                                        |    | 30    |     
|                                             | Item 6. Exhibits and Reports on Form 8-K                                                      |                                                                                                                                                        |    | 30    |     
|Signatures                                   |                                                                                               |                                                                                                                                                        | 31 |      
|Certification of the Chief Executive Officer |                                                                                               |                                                                                                                                                        | 32 |      
|Certification of the Chief Financial Officer |                                                                                               |                                                                                                                                                        | 33 |      

2



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##### Table of Contents






PART I  FINANCIAL INFORMATION




Item 1. Consolidated Financial Statements




MTS, INCORPORATED

CONSOLIDATED BALANCE SHEETS


AS OF APRIL 30, 2003, 2002 AND JULY 31, 2002


(DOLLARS IN THOUSANDS)


(UNAUDITED)


|                                  |                                         |                                                                                                                                                |                                      |                                                      |         |           |         |           |         |          |         |         |         |         |         |  
|--------------------------------- | --------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------ | ---------------------------------------------------- | ------- | --------- | ------- | --------- | ------- | -------- | ------- | ------- | ------- | ------- | ------- | -
|                                  |                                         |                                                                                                                                                |                                      |                                                      |         | APRIL 30, |         | APRIL 30, |         | JULY 31,
|                                  |                                         |                                                                                                                                                |                                      |                                                      |         | 2003      |         | 2002      |         | 2002    
|                                  |                                         |                                                                                                                                                |                                      |                                                      |         |           |         |           |         |         
|                                  |                                         |                                                                                                                                                |                                      | Assets                                               |         |           |         |           |         |          |         |         |         |         |         |  
|Current assets:                   |                                         |                                                                                                                                                |                                      |                                                      |         |           |         |           |         |          |         |        
|                                  |                                         |                                                                                                                                                | Cash and cash equivalents            |                                                      | $       | 6,973     |         |           | $       | 10,101   |         |         | $       | 7,477   |        
|                                  |                                         |                                                                                                                                                | Receivables, net                     |                                                      |         | 5,291     |         |           |         | 20,888   |         |         |         | 21,710  |        
|                                  |                                         |                                                                                                                                                | Merchandising inventories            |                                                      |         | 149,972   |         |           |         | 167,360  |         |         |         | 167,609 |        
|                                  |                                         |                                                                                                                                                | Prepaid expenses                     |                                                      |         | 6,120     |         |           |         | 5,324    |         |         |         | 8,055   |        
|                                  |                                         |                                                                                                                                                |                                      |                                                      |         |           |         |           |         |          |         |         |         |         |        
|                                  |                                         |                                                                                                                                                |                                      | Total current assets                                 |         |           | 168,356 |           |         |          | 203,673 |         |         |         | 204,851 |  
|Fixed assets, net                 |                                         |                                                                                                                                                | 98,156                               |                                                      |         |           | 132,363 |           |         |          | 114,894 |        
|Other assets                      |                                         |                                                                                                                                                | 11,609                               |                                                      |         |           | 13,853  |           |         |          | 13,210  |        
|Assets of discontinued operations |                                         |                                                                                                                                                |                                     |                                                      |         |           | 131,552 |           |         |          | 145,049 |        
|                                  |                                         |                                                                                                                                                |                                      |                                                      |         |           |         |           |         |          |         |         |         |         |        
|                                  |                                         |                                                                                                                                                |                                      | Total assets                                         |         | $         | 278,121 |           |         | $        | 481,441 |         |         | $       | 478,004 |  
|                                  |                                         |                                                                                                                                                |                                      |                                                      |         |           |         |           |         |          |         |         |         |         |        
|                                  |                                         |                                                                                                                                                |                                      | Liabilities and Shareholders Deficit                |         |           |         |           |         |          |         |         |         |         |         |  
|Current liabilities:              |                                         |                                                                                                                                                |                                      |                                                      |         |           |         |           |         |          |         |        
|                                  |                                         |                                                                                                                                                | Current maturities of long-term debt |                                                      | $       | 2,814     |         |           | $       | 76,823   |         |         | $       | 82,776  |        
|                                  |                                         |                                                                                                                                                | Accounts payable                     |                                                      |         | 101,910   |         |           |         | 109,668  |         |         |         | 112,904 |        
|                                  |                                         |                                                                                                                                                | Reserve for restructuring costs      |                                                      |         | 14,367    |         |           |         | 68       |         |         |         | 6,839   |        
|                                  |                                         |                                                                                                                                                | Accrued liabilities                  |                                                      |         | 32,297    |         |           |         | 32,320   |         |         |         | 28,664  |        
|                                  |                                         |                                                                                                                                                | Deferred revenue, current portion    |                                                      |         | 3,837     |         |           |         | 3,172    |         |         |         | 2,286   |        
|                                  |                                         |                                                                                                                                                |                                      |                                                      |         |           |         |           |         |          |         |         |         |         |        
|                                  |                                         |                                                                                                                                                |                                      | Total current liabilities                            |         |           | 155,225 |           |         |          | 222,051 |         |         |         | 233,469 |  
|                                  | Long-term debt, less current maturities |                                                                                                                                                |                                      | 191,721                                              |         |           |         | 116,199   |         |          |         | 115,771 |        
|                                  | Deferred revenue, less current portion  |                                                                                                                                                |                                      | 108                                                  |         |           |         | 121       |         |          |         | 118     |        
|                                  | Liabilities of discontinued operations  |                                                                                                                                                |                                      |                                                     |         |           |         | 151,143   |         |          |         | 169,433 |        
|                                  |                                         |                                                                                                                                                |                                      |                                                      |         |           |         |           |         |          |         |         |         |         |        
|                                  |                                         |                                                                                                                                                |                                      | Total liabilities                                    |         |           | 347,054 |           |         |          | 489,514 |         |         |         | 518,791 |  
|                                  |                                         |                                                                                                                                                |                                      |                                                      |         |           |         |           |         |          |         |         |         |         |        
|Shareholders deficit:            |                                         |                                                                                                                                                |                                      |                                                      |         |           |         |           |         |          |         |        
|                                  |                                         | Class B common stock, no par value; 10,000,000 shares
authorized;1,000 shares issued and outstanding at
April 30, 2003, 2002 and July 31, 2002 |                                      |                                                      | 6       |           |         |           | 6       |          |         |         | 6       |        
|                                  |                                         | Retained (deficit) earnings                                                                                                                    |                                      |                                                      | (61,126 | )         |         |           | 6,580   |          |         |         | (21,355 | )      
|                                  |                                         | Accumulated other comprehensive loss                                                                                                           |                                      |                                                      | (7,813  | )         |         |           | (14,659 | )        |         |         | (19,438 | )      
|                                  |                                         |                                                                                                                                                |                                      |                                                      |         |           |         |           |         |          |         |         |         |         |        
|                                  |                                         |                                                                                                                                                |                                      | Total shareholders deficit                          |         |           | (68,933 | )         |         |          | (8,073  | )       |         |         | (40,787 | )
|                                  |                                         |                                                                                                                                                |                                      |                                                      |         |           |         |           |         |          |         |         |         |         |        
|                                  |                                         |                                                                                                                                                |                                      | Total liabilities and shareholders (deficit) equity |         | $         | 278,121 |           |         | $        | 481,441 |         |         | $       | 478,004 |  
|                                  |                                         |                                                                                                                                                |                                      |                                                      |         |           |         |           |         |          |         |         |         |         |        

See accompanying notes to consolidated financial statements

3



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MTS, INCORPORATED

CONSOLIDATED STATEMENTS OF OPERATIONS


FOR THE THREE MONTHS ENDED APRIL 30, 2003 AND 2002


AND THE NINE MONTHS ENDED APRIL 30, 2003 AND 2002


(DOLLARS IN THOUSANDS)


(UNAUDITED)


|                                                 |                                          |                                                                                                                                                                                             |                                              |        |                    |         |                   |        |         |         |         |         |         |         |         |         |         |         |  
|------------------------------------------------ | ---------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------- | ------ | ------------------ | ------- | ----------------- | ------ | ------- | ------- | ------- | ------- | ------- | ------- | ------- | ------- | ------- | ------- | -
|                                                 |                                          |                                                                                                                                                                                             |                                              |        | THREE MONTHS ENDED |         | NINE MONTHS ENDED
|                                                 |                                          |                                                                                                                                                                                             |                                              |        | APRIL 30,          |         | APRIL 30,        
|                                                 |                                          |                                                                                                                                                                                             |                                              |        |                    |         |                  
|                                                 |                                          |                                                                                                                                                                                             |                                              |        | 2003               |         | 2002              |        | 2003    |         | 2002   
|                                                 |                                          |                                                                                                                                                                                             |                                              |        |                    |         |                   |        |         |         |        
|Net revenue                                      |                                          | $                                                                                                                                                                                           | 121,951                                      |        |                    | $       | 137,463           |        |         | $       | 428,862 |         |         | $       | 471,893 |        
|Cost of sales (a) (b)                            |                                          |                                                                                                                                                                                             | 76,204                                       |        |                    |         | 87,229            |        |         |         | 271,754 |         |         |         | 304,328 |        
|                                                 |                                          |                                                                                                                                                                                             |                                              |        |                    |         |                   |        |         |         |         |         |         |         |         |        
|                                                 |                                          |                                                                                                                                                                                             | Gross profit                                 |        |                    | 45,747  |                   |        |         | 50,234  |         |         |         | 157,108 |         |         |         | 167,565 |  
|Operating expenses:                              |                                          |                                                                                                                                                                                             |                                              |        |                    |         |                   |        |         |         |         |         |         |         |         |        
|Selling, general and administrative expenses (c) |                                          |                                                                                                                                                                                             | 42,442                                       |        |                    |         | 49,658            |        |         |         | 152,099 |         |         |         | 165,416 |        
|Restructuring and asset impairment costs, net    |                                          |                                                                                                                                                                                             | 2,036                                        |        |                    |         | 1,661             |        |         |         | 26,017  |         |         |         | 2,463   |        
|Depreciation and amortization                    |                                          |                                                                                                                                                                                             | 4,752                                        |        |                    |         | 5,309             |        |         |         | 15,336  |         |         |         | 16,751  |        
|                                                 |                                          |                                                                                                                                                                                             |                                              |        |                    |         |                   |        |         |         |         |         |         |         |         |        
|                                                 |                                          |                                                                                                                                                                                             | Loss from operations                         |        |                    | (3,483  | )                 |        |         | (6,394  | )       |         |         | (36,344 | )       |         |         | (17,065 | )
|Other income and (expense):                      |                                          |                                                                                                                                                                                             |                                              |        |                    |         |                   |        |         |         |         |         |         |         |         |        
|                                                 | Interest expense                         |                                                                                                                                                                                             |                                              | (5,396 | )                  |         |                   | (6,387 | )       |         |         | (16,553 | )       |         |         | (18,744 | )      
|                                                 | Foreign currency translation (loss) gain |                                                                                                                                                                                             |                                              | (3,520 | )                  |         |                   | 1,126  |         |         |         | (1,461  | )       |         |         | 40      |        
|                                                 | Other                                    |                                                                                                                                                                                             |                                              | (1,303 | )                  |         |                   | (935   | )       |         |         | (2,476  | )       |         |         | (1,783  | )      
|                                                 |                                          |                                                                                                                                                                                             |                                              |        |                    |         |                   |        |         |         |         |         |         |         |         |        
|                                                 |                                          |                                                                                                                                                                                             | Loss from continuing operations before taxes |        |                    | (13,702 | )                 |        |         | (12,590 | )       |         |         | (56,834 | )       |         |         | (37,552 | )
|Provision for income taxes                       |                                          |                                                                                                                                                                                             | 89                                           |        |                    |         | 55                |        |         |         | 165     |         |         |         | 309     |        
|                                                 |                                          |                                                                                                                                                                                             |                                              |        |                    |         |                   |        |         |         |         |         |         |         |         |        
|                                                 |                                          | Loss from continuing operations                                                                                                                                                             |                                              |        | (13,791            | )       |                   |        | (12,645 | )       |         |         | (56,999 | )       |         |         | (37,861 | )      
|Discontinued operations (Note 3):                |                                          |                                                                                                                                                                                             |                                              |        |                    |         |                   |        |         |         |         |         |         |         |         |        
|                                                 |                                          | Income from operations of discontinued Japanese
subsidiary (including gain on disposal of
$15,847, net of U.S. income and foreign
taxes of $6,512, for the nine months ended
April 30, 2003 |                                              |        |                   |         |                   |        | 4,022   |         |         |         | 17,228  |         |         |         | 8,593   |        
|                                                 |                                          |                                                                                                                                                                                             |                                              |        |                    |         |                   |        |         |         |         |         |         |         |         |        
|                                                 |                                          |                                                                                                                                                                                             | Net loss                                     |        | $                  | (13,791 | )                 |        | $       | (8,623  | )       |         | $       | (39,771 | )       |         | $       | (29,268 | )
|                                                 |                                          |                                                                                                                                                                                             |                                              |        |                    |         |                   |        |         |         |         |         |         |         |         |        



|(a) |  | Includes $0 million and $0 million of inventory write-downs related
to restructuring efforts for the three months ended April 30, 2003 and
2002, respectively; and $2.0 million and $11.2 million for the nine
months ended April 30, 2003 and 2002, respectively.                                                           
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(b) |  | Excludes depreciation and amortization related to retail and
distribution assets of $2.8 and $3.5 million for the three months ended
April 30, 2003 and 2002, respectively, and $9.6 and $11.1 million for
the nine months ended April 30, 2003 and 2002, respectively, which have
been included below in operating expenses.
|   
|(c) |  | Includes $0.6 million and $1.5 million in professional fees related
to restructuring efforts for the three months ended April 30, 2003 and
2002, respectively; and $2.1 million and $4.2 million for the nine
months ended April 30, 2003 and 2002, respectively.                                                            

See accompanying notes to consolidated financial statements.

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##### Table of Contents






MTS, INCORPORATED

CONSOLIDATED STATEMENTS OF CASH FLOWS


FOR THE NINE MONTHS ENDED APRIL 30, 2003 AND 2002


(DOLLARS IN THOUSANDS)


(UNAUDITED)


|                                                             |                                                                                           |                                                                                                                                |                                 |                                                     |         |                   |          |         |        |         |        |  
|------------------------------------------------------------ | ----------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------ | ------------------------------- | --------------------------------------------------- | ------- | ----------------- | -------- | ------- | ------ | ------- | ------ | -
|                                                             |                                                                                           |                                                                                                                                |                                 |                                                     |         | NINE MONTHS ENDED
|                                                             |                                                                                           |                                                                                                                                |                                 |                                                     |         | APRIL 30,        
|                                                             |                                                                                           |                                                                                                                                |                                 |                                                     |         |                  
|                                                             |                                                                                           |                                                                                                                                |                                 |                                                     |         | 2003              |          | 2002   
|                                                             |                                                                                           |                                                                                                                                |                                 |                                                     |         |                   |          |        
|Cash flows from operating activities:                        |                                                                                           |                                                                                                                                |                                 |                                                     |         |                   |          |        
|                                                             | Net loss                                                                                  |                                                                                                                                | $                               | (39,771                                             | )       |                   | $        | (29,268 | )     
|                                                             | Adjustments to reconcile net loss to net cash provided by (used
in) operating activities: |                                                                                                                                |                                 |                                                     |         |                   |          |         |       
|                                                             |                                                                                           | Income from discontinued operations, net of tax                                                                                |                                 |                                                     | (17,228 | )                 |          |         | (8,593 | )      
|                                                             |                                                                                           | Depreciation and amortization                                                                                                  |                                 |                                                     | 18,097  |                   |          |         | 17,649 |        
|                                                             |                                                                                           | Restructuring and asset impairment costs, net                                                                                  |                                 |                                                     | 26,017  |                   |          |         | 2,463  |        
|                                                             |                                                                                           | Allowance for doubtful accounts                                                                                                |                                 |                                                     | (197    | )                 |          |         | 104    |        
|                                                             |                                                                                           | Inventory write-downs due to restructuring                                                                                     |                                 |                                                     | 1,965   |                   |          |         | 11,156 |        
|                                                             |                                                                                           | Loss on disposal of depreciable assets                                                                                         |                                 |                                                     | 402     |                   |          |         | 282    |        
|                                                             |                                                                                           | Foreign exchange (gain) loss                                                                                                   |                                 |                                                     | (1,341  | )                 |          |         | 180    |        
|                                                             |                                                                                           | Other non-cash expense                                                                                                         |                                 |                                                     | 1,341   |                   |          |         | 350    |        
|                                                             |                                                                                           | Increase (decrease) in cash resulting from changes in operating
assets and liabilities, net of effect from
sale of subsidiary: |                                 |                                                     |         |                   |          |         |        |        
|                                                             |                                                                                           |                                                                                                                                | Receivables                     |                                                     |         | 10,535            |          |         |        | 5,059   |       
|                                                             |                                                                                           |                                                                                                                                | Merchandising inventories       |                                                     |         | 15,672            |          |         |        | 4,177   |       
|                                                             |                                                                                           |                                                                                                                                | Prepaid expenses                |                                                     |         | 1,935             |          |         |        | 1,492   |       
|                                                             |                                                                                           |                                                                                                                                | Accounts payable                |                                                     |         | (10,994           | )        |         |        | (11,339 | )     
|                                                             |                                                                                           |                                                                                                                                | Reserve for restructuring costs |                                                     |         | (7,258            | )        |         |        | (4,179  | )     
|                                                             |                                                                                           |                                                                                                                                | Accrued liabilities             |                                                     |         | 3,633             |          |         |        | 2,431   |       
|                                                             |                                                                                           |                                                                                                                                | Deferred revenue                |                                                     |         | 1,541             |          |         |        | 473     |       
|                                                             |                                                                                           |                                                                                                                                |                                 |                                                     |         |                   |          |         |       
|                                                             |                                                                                           |                                                                                                                                |                                 | Net cash provided by (used in) operating activities |         |                   | 4,349    |         |        |         | (7,563 | )
|                                                             |                                                                                           |                                                                                                                                |                                 |                                                     |         |                   |          |         |       
|Cash flows from investing activities:                        |                                                                                           |                                                                                                                                |                                 |                                                     |         |                   |          |        
|                                                             | Net proceeds from sale of Japanese subsidiary                                             |                                                                                                                                |                                 | 109,532                                             |         |                   |          |        |       
|                                                             | Acquisition of fixed assets                                                               |                                                                                                                                |                                 | (3,017                                              | )       |                   |          | (5,458  | )     
|                                                             | Acquisition of investments                                                                |                                                                                                                                |                                 | (175                                                | )       |                   |          | (1,826  | )     
|                                                             | Change in deposits, net                                                                   |                                                                                                                                |                                 | (437                                                | )       |                   |          | (483    | )     
|                                                             | Change in intangibles, net                                                                |                                                                                                                                |                                 | (462                                                | )       |                   |          | (308    | )     
|                                                             |                                                                                           |                                                                                                                                |                                 |                                                     |         |                   |          |         |       
|                                                             |                                                                                           |                                                                                                                                |                                 | Net cash provided by (used in) investing activities |         |                   | 105,441  |         |        |         | (8,075 | )
|                                                             |                                                                                           |                                                                                                                                |                                 |                                                     |         |                   |          |         |       
|Cash flows from financing activities:                        |                                                                                           |                                                                                                                                |                                 |                                                     |         |                   |          |        
|                                                             | Proceeds from life insurance loans                                                        |                                                                                                                                |                                 |                                                    |         |                   |          | 3,526   |       
|                                                             | Proceeds from employee loan payments                                                      |                                                                                                                                |                                 | 4                                                   |         |                   |          | 143     |       
|                                                             | Change in debt issuance costs, net                                                        |                                                                                                                                |                                 | (5,163                                              | )       |                   |          | (1,262  | )     
|                                                             | Net proceeds from long-term line of credit                                                |                                                                                                                                |                                 | 53,307                                              |         |                   |          |        |       
|                                                             | Repayments on other long-term debt                                                        |                                                                                                                                |                                 | (199,888                                            | )       |                   |          | (52,390 | )     
|                                                             | Proceeds from other long-term debt                                                        |                                                                                                                                |                                 | 33,711                                              |         |                   |          | 70,526  |       
|                                                             |                                                                                           |                                                                                                                                |                                 |                                                     |         |                   |          |         |       
|                                                             |                                                                                           |                                                                                                                                |                                 | Net cash (used in) provided by financing activities |         |                   | (118,029 | )       |        |         | 20,543 |  
|                                                             |                                                                                           |                                                                                                                                |                                 |                                                     |         |                   |          |         |       
|Net cash and cash equivalents from discontinued operations   |                                                                                           |                                                                                                                                | 157                             |                                                     |         |                   | (3,496   | )      
|Effect of exchange rate changes on cash and cash equivalents |                                                                                           |                                                                                                                                | 7,578                           |                                                     |         |                   | (1,952   | )      
|                                                             |                                                                                           |                                                                                                                                |                                 |                                                     |         |                   |          |         |       
|                                                             |                                                                                           |                                                                                                                                |                                 | Net decrease in cash and cash equivalents           |         |                   | (504     | )       |        |         | (543   | )
|Cash and cash equivalents, beginning of period               |                                                                                           |                                                                                                                                | 7,477                           |                                                     |         |                   | 10,644   |        
|                                                             |                                                                                           |                                                                                                                                |                                 |                                                     |         |                   |          |         |       
|Cash and cash equivalents, end of period                     |                                                                                           | $                                                                                                                              | 6,973                           |                                                     |         | $                 | 10,101   |        
|                                                             |                                                                                           |                                                                                                                                |                                 |                                                     |         |                   |          |         |       
|Cash paid for interest                                       |                                                                                           | $                                                                                                                              | 14,447                          |                                                     |         | $                 | 16,274   |        
|                                                             |                                                                                           |                                                                                                                                |                                 |                                                     |         |                   |          |         |       
|Cash paid for income taxes                                   |                                                                                           | $                                                                                                                              | 4,597                           |                                                     |         | $                 | 60       |        
|                                                             |                                                                                           |                                                                                                                                |                                 |                                                     |         |                   |          |         |       

See accompanying notes to consolidated financial statements.

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MTS, INCORPORATED

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS


FOR THE NINE MONTHS ENDED APRIL 30, 2003 AND 2002


(DOLLARS IN THOUSANDS)


(UNAUDITED)


|                                               |                                                                              |                                   |         |                   |        |      |         |      |      |  
|---------------------------------------------- | ---------------------------------------------------------------------------- | --------------------------------- | ------- | ----------------- | ------ | ---- | ------- | ---- | ---- | -
|                                               |                                                                              |                                   |         | NINE MONTHS ENDED
|                                               |                                                                              |                                   |         | APRIL 30,        
|                                               |                                                                              |                                   |         |                  
|                                               |                                                                              |                                   |         | 2003              |        | 2002
|                                               |                                                                              |                                   |         |                   |        |     
|Net loss                                       |                                                                              | $                                 | (39,771 | )                 |        | $    | (29,268 | )   
|                                               |                                                                              |                                   |         |                   |        |      |         |     
|Other comprehensive income (loss), net of tax: |                                                                              |                                   |         |                   |        |      |         |     
|                                               | Reclassification adjustment to net loss from
the sale of Japanese subsidiary |                                   |         | 9,029             |        |      |         |     |     
|                                               | Foreign currency translation                                                 |                                   |         | 2,596             |        |      |         | (194 | )   
|                                               |                                                                              |                                   |         |                   |        |      |         |     
|                                               |                                                                              | Other comprehensive income (loss) |         |                   | 11,625 |      |         |      | (194 | )
|                                               |                                                                              |                                   |         |                   |        |      |         |     
|Comprehensive loss                             |                                                                              | $                                 | (28,146 | )                 |        | $    | (29,462 | )   
|                                               |                                                                              |                                   |         |                   |        |      |         |     

See accompanying notes to 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) necessary to present fairly its consolidated
financial position, the consolidated results of its operations and the
consolidated cash flows for each of the periods presented. The consolidated
results of operations for the interim periods are not necessarily indicative of
the results of operations to be expected for the full year or any future
period.

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

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

NOTE 2  LIQUIDITY

The Companys principal capital requirements are to fund working capital needs,
maintenance of existing stores, real estate leases, inventory, payroll, cash
outlays for restructuring efforts and continued support of the Companys
technological infrastructure. In addition, interest payments required under
the Companys current long-term financing agreements would also continue to
impose significant liquidity demands upon the Company.

During fiscal 2003 and for the nine months ended April 30, 2003, the Company
has incurred retained deficits and losses from continuing operations. In
response to declining sales and recurring losses, the Company has implemented
several rounds of restructuring efforts (Note 6) during fiscal 2002 and the
nine months ended April 30, 2003 designed to close under-performing stores,
reduce cost and improve operating results. The Company used the proceeds from
the sale of the Companys Japanese subsidiary in October 2002 (Note 3) to pay
down long-term debt and to refinance its remaining long-term debt with several
lenders (Note 7).

On June 2, 2003, the Company announced that it had determined it would not make
the $5.2 million payment of interest on the Companys $110 million 9.375%
senior subordinated notes (the Notes) that was due on May 1, 2003 (Note 7).
The Companys decision to not make the interest payment constituted an event of
default under the Indenture for the Notes (the Indenture). As a result of the
event of default, the trustee under the Indenture (the Trustee) or the
holders of at least 25% in aggregate principal amount of the Notes can take
certain actions to cause the Notes to become immediately due and payable.
Although, as of the date of this Quarterly Report on Form 10-Q, neither the
Trustee nor such holders have taken such actions, the Company can make no
assurance that they will not do so in the future.

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The Company has retained financial advisors Jefferies and Company, Inc.
(Jefferies) and Greif & Co. (Greif) to assist the Company in evaluating
strategic and financing alternatives. With the assistance of Jefferies, the
Company has made a proposal to an ad hoc committee of the holders of the Notes
relating to a restructuring of the outstanding debt represented by the Notes
and is in discussions with representatives of that committee concerning such a
restructuring. No understanding or agreement has been reached with this
committee as of the date of this Quarterly Report on Form 10-Q, and the Company
can make no assurance that any understanding or agreement will be reached.
With the assistance of Greif, the Company is exploring the possibility of
selling the Company or all or substantially all of the Companys assets. The
Company can make no assurance that any such sale efforts will be successful.

The occurrence of an event of default with respect to the Notes under the
Indenture triggered the cross-default provisions of the Companys agreements
for its asset-based credit facility agented by The CIT Group/Business Credit,
Inc. (the Credit Facility) and term loan agented by JPMorgan Chase Bank (the
Term Loan), and resulted in an event of default under such agreements (See
Note 7). On June 10, 2003, the Company received an extended forbearance
agreement (the Forbearance Agreement) from the senior lenders under the
Credit Facility, whereby such senior lenders agreed not to exercise
their default rights relating to the above-reference default. In connection
with the Forbearance Agreement, the Company and such senior lenders amended the
Credit Facility to provide for additional covenants relating to the Companys
operations and capital structure. The forbearance period will terminate on
September 30, 2003 (or earlier, upon any new event of default under the Credit
Facility), unless it is extended by agreement of such lenders or by that date
there has occurred a restructuring of the Notes or a sale or merger of the
Company that provides for the payment of all obligations under the Credit
Facility, in either case on terms reasonably acceptable to the agent for the
Credit Facility.

The Companys ability to continue its operations without seeking protection
from its creditors depends on several factors, including but not limited to the
following: (i) the Companys ability to reach an agreement with the holders of
the Notes relating to a restructuring of the outstanding debt represented by
the Notes; (ii) the availability of funds under the Credit Facility sufficient
to fund the Companys operating requirements; and (iii) the Companys ability
to satisfy the financial and other covenants set forth in the Companys Credit
Facility, as amended in connection with the execution of the Forbearance
Agreement on June 10, 2003 and its Term Loan agreements.

The Companys liquidity, future operating performance and ability to service
its long-term financing agreements will be subject to the success of the
Companys restructuring efforts, its plan to restructure the Notes, its plan to
sell the Company or the Companys assets, its relationship with key vendors,
compliance with amended debt covenants, future economic conditions and other
factors, many of which are beyond the Companys control. There can be no
assurance or guaranty that the Company will be successful in meeting its
operational and strategic objectives. In the event that the Company is unable
to successfully implement its restructuring plans, the Companys business,
financial position and results from operations may be materially and adversely
affected.

NOTE 3  DISCONTINUED OPERATIONS

On October 11, 2002, the Company completed the sale of its Japanese subsidiary,
Tower Records Kabushiki Kaisha (TRKK), to Nikko Principal Investments Japan,
Ltd. The Company sold all authorized and issued capital stock of TRKK for an
aggregate purchase price of 16

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billion Japanese Yen, which was approximately $129 million at then-current
exchange rates. As discussed in Note 7, net proceeds were used to pay down the
Prior Credit Facility (as defined in Note 7). The Company recorded a $15.8
million gain, net of $6.5 million in U.S. income and foreign taxes, from the
sale of TRKK, which is included in income from discontinued operations on the
accompanying statement of operations for the nine months ended April 30, 2003.
In accordance with the Statement of Financial Accounting Standards (SFAS) No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets, TRKKs
current year operating results have been presented as discontinued operations.
Additionally, all prior period consolidated financial statements presented have
been reclassified to present TRKK as discontinued operations.

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

|              |            |   |                   |       |                   |   |         |       | 
|------------- | ---------- | - | ----------------- | ----- | ----------------- | - | ------- | ----- | 
|              |            |   | Nine Months Ended |       | Nine Months Ended
|              |            |   | April 30, 2003    |       | April 30, 2002   
|              |            |   |                   |       |                  
|Total revenue |            | $ | 66,313            |       |                   | $ | 273,683 |      
|Total expense |            |   | 64,932            |       |                   |   | 265,090 |      
|              |            |   |                   |       |                   |   |         |      
|              | Net income |   | $                 | 1,381 |                   |   | $       | 8,593 | 
|              |            |   |                   |       |                   |   |         |      

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

|             |                                          |                                        |   |                |         |               |   |         |         | 
|------------ | ---------------------------------------- | -------------------------------------- | - | -------------- | ------- | ------------- | - | ------- | ------- | 
|             |                                          |                                        |   | April 30, 2002 |         | July 31, 2002
|             |                                          |                                        |   |                |         |              
|Assets:      |                                          |                                        |   |                |         |               |   |        
|             | Cash and cash equivalents                |                                        | $ | 21,539         |         |               | $ | 29,876  |        
|             | Merchandising inventories                |                                        |   | 66,587         |         |               |   | 68,763  |        
|             | Fixed assets, net                        |                                        |   | 30,144         |         |               |   | 31,873  |        
|             | Other                                    |                                        |   | 13,282         |         |               |   | 14,537  |        
|             |                                          |                                        |   |                |         |               |   |         |        
|             |                                          | Assets of discontinued operations      |   | $              | 131,552 |               |   | $       | 145,049 | 
|             |                                          |                                        |   |                |         |               |   |         |        
|Liabilities: |                                          |                                        |   |                |         |               |   |        
|             | Current maturities of long-term debt     |                                        | $ | 105,441        |         |               | $ | 113,007 |        
|             | Accounts payable and accrued liabilities |                                        |   | 34,080         |         |               |   | 39,918  |        
|             | Other                                    |                                        |   | 11,622         |         |               |   | 16,508  |        
|             |                                          |                                        |   |                |         |               |   |         |        
|             |                                          | Liabilities of discontinued operations |   | $              | 151,143 |               |   | $       | 169,433 | 
|             |                                          |                                        |   |                |         |               |   |         |        

NOTE 4  TRANSLATION OF FOREIGN CURRENCY

The value of the U.S. dollar rises and falls day-to-day on foreign currency
exchanges. These fluctuations affect the Companys financial position and
results of operations due to business in other countries. In accordance with
SFAS No. 52, Foreign Currency Translation, all foreign assets and liabilities
have been translated at the exchange rates prevailing at the respective balance
sheets dates, and all statement of operations items have been translated using
the weighted average exchange rates during the respective periods. The net
gain or loss resulting from translation upon consolidation into the financial
statements is included in accumulated other comprehensive loss, which is
reported as a separate component of shareholders deficit. Some transactions
of the Company and its foreign subsidiaries are made in currencies different

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from their functional currency. Translation gains and losses from these
transactions are included
in the consolidated statement of operations as they occur. The Company
recorded a net translation loss of $1.5 million for the nine months ended April
30, 2003 and a net translation gain of less than $0.1 million for the nine
months ended April 30, 2002. These amounts primarily represent the volatility
of currencies in foreign countries in which the Company does business.

NOTE 5  INCOME TAXES

The effective income tax rates for the nine months ended April 30, 2003 and
2002 are based on the federal statutory income tax rate, increased for the
effect of state income taxes, net of federal benefit, and foreign taxes
resulting from the sale of TRKK. The Company has reserved its net deferred tax
assets at April 30, 2003, 2002 and July 31, 2002 due to the uncertainty of
future utilization.

NOTE 6  RESTRUCTURING PLANS

2001 RESTRUCTURING PLAN

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

The Company has substantially completed implementation of the 2001
Restructuring Plan as of April 30, 2003. The 2001 Restructuring Plan contained
several store-related initiatives designed to improve the Companys
profitability, including closing and liquidating most stand-alone and
combination bookstores; disposing of most of the Companys foreign operations
by direct sale, franchise or closure; closing under-performing domestic record,
outlet and frame/gallery stores; and monitoring the performance of additional
stores. The 2001 Restructuring Plan also contained several operational
initiatives designed to improve the Companys cash flow position, including
reducing corporate work force and overhead expenses, reducing working capital
requirements and reducing capital expenditures until internally generated cash
flow will support future needs.

2003 RESTRUCTURING PLAN

During the second quarter of the Companys 2003 fiscal year, the Company
commenced another restructure and turnaround plan and retained a consulting
firm to assist the Company in its efforts. These efforts produced a
restructuring plan that was adopted by the Company in December 2002 (the 2003
Restructuring Plan).

The 2003 Restructuring Plan contains several additional initiatives designed to
improve the Companys operations, including closing and liquidating 13
under-performing stores, selling its Mexico investment, making cost cutting
efforts focused on overhead reduction, right-sizing inventory with centralized
purchasing and automatic replenishment, and suspending the Pulse! Magazine
publication. The Company began implementing its restructuring plan shortly
after its adoption and has since closed five of the 13 under-performing stores
through April 30, 2003. The Company expects to substantially complete
implementation of the 2003 Restructuring Plan by the end of the second quarter
of fiscal 2004.

SUMMARY OF RESTRUCTURING ACTIVITIES

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FISCAL 2001 AND 2002 ACTIVITY

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

In the fourth quarter of fiscal 2002, the Company began efforts to dispose of
its United Kingdom and Ireland operations, close additional under-performing
domestic stores and further reduce the domestic corporate work force. As a
result, the Company recorded pre-tax restructuring and asset impairment charges
of $21.8 million during fiscal 2002, which included $2.9 million of severance
costs, $4.7 million of lease termination costs, $13.6 million of non-cash asset
impairment charges and $0.6 million of other closure costs. In fiscal 2002,
the Company also recorded $5.9 million of professional fees incurred in
connection with the 2001 Restructuring Plan in selling, general and
administrative expenses, and $14.2 million of inventory write-downs in cost of
sales. At July 31, 2002, the reserve for restructuring costs was $6.8 million,
which was comprised mainly of accruals for the closing of the United Kingdom
and Ireland operations and two domestic store closures.

THIRD QUARTER FISCAL 2002 AND 2003 ACTIVITY

In the third quarter of fiscal 2003, the Company recorded restructuring and
asset impairment charges of $2.0 million under the 2003 Restructuring Plan. In
connection with the 2003 Restructuring Plan, the Company also recorded $0.6
million of professional fees incurred as a result of the Companys
restructuring efforts in selling, general and administrative expenses.

In April 2003, the Company completed a transaction with Virgin Retail Group
Limited and Piccadilly Entertainment Store Limited (collectively, Virgin)
pursuant to a Leasing and Employee Transfer Agreement. Under this agreement,
the Company assigned leases, sold store fixtures and transferred certain
employees for two of the Companys stores in the United Kingdom to Virgin in
exchange for 1.5 million British Sterling (approximately $2.5 million U.S.
Dollars at the then-current exchange rates). In addition, Virgin obtained the
non-exclusive right to use the business name of Tower Records for the
operation of these two stores for a period not to exceed one year from date of
closing. As a result of the Leasing and Employee Transfer Agreement with
Virgin, the Company had revised its 2001 Restructuring plan estimates and
decreased its reserve for restructuring costs as of and
for the three months ended January 31, 2003 by $1.3 million, which was
comprised of $0.9 million of accrued lease termination costs and $0.4 million
of accrued severance costs. The Company recorded a gain of approximately $1.5
million on the sale of related store fixtures for the three months ended April
30, 2003.

In connection with the 2001 Restructuring Plan, the Company has closed or sold
all of its United Kingdom stores as of April 30, 2003. However, the reserve
for restructuring costs at April 30, 2003, included $3.0 million of accrued
lease termination costs in the United Kingdom. Upon

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complete liquidation of the
Companys United Kingdom operations which is anticipated to be
completed by the end of fiscal year 2004, the accumulated other
comprehensive income related to its United Kingdom operations will be
reclassified and included in the statement of operations. At April 30, 2003,
the portion of the Companys accumulated other comprehensive loss related to
its United Kingdom operations was $9.2 million.

In the third quarter of fiscal 2002, the Company recorded pre-tax restructuring
and asset impairment charges of $1.7 million, which was comprised of $0.3
million for lease termination cost, $0.7 million in involuntary termination
benefits and $0.7 million in other costs. In connection with the 2001
Restructuring Plan, the Company also recorded $1.5 million of professional fees
in selling, general and administrative expenses.

A summary of the restructuring reserve activities in fiscal 2002 and for the
nine months ended April 30, 2003 is approximately as follows (dollars in
millions):

|                        |       |   |               |     |               |   |                  |     |               |   |                     |      |                     |   |                |     |  |   |               |      |  |   |      |      |   |   |     |      | 
|----------------------- | ----- | - | ------------- | --- | ------------- | - | ---------------- | --- | ------------- | - | ------------------- | ---- | ------------------- | - | -------------- | --- |  | - | ------------- | ---- |  | - | ---- | ---- | - | - | --- | ---- | 
|                        |       |   | Restructuring |     | Fiscal 2002   |   |                  |     |               |   | Restructuring       |      | Fiscal 2003 Nine    |   |                |     |  |   | Restructuring
|                        |       |   | Reserve at    |     | Restructuring |   | Fiscal 2002 Cash |     | Reserve at    |   | Month Restructuring |      | Fiscal 2003 Nine    |   | Reserve at    
|                        |       |   | July 31, 2001 |     | Charges       |   | Payments         |     | July 31, 2002 |   | Charges             |      | Month Cash Payments |   | April 30, 2003
|                        |       |   |               |     |               |   |                  |     |               |   |                     |      |                     |   |               
|Severance costs         |       | $ | 0.2           |     |               | $ | 2.9              |     |               | $ | (1.2                | )    |                     | $ | 1.9            |     |  | $ | 10.9          |      |  | $ | (6.8 | )    |   | $ | 6.0 |     
|Lease termination costs |       |   | 0.8           |     |               |   | 4.7              |     |               |   | (0.7                | )    |                     |   | 4.8            |     |  |   | 3.3           |      |  |   | (0.3 | )    |   |   | 7.8 |     
|Other                   |       |   | 1.2           |     |               |   | 0.6              |     |               |   | (1.7                | )    |                     |   | 0.1            |     |  |   | 0.6           |      |  |   | (0.1 | )    |   |   | 0.6 |     
|                        |       |   |               |     |               |   |                  |     |               |   |                     |      |                     |   |                |     |  |   |               |      |  |   |      |      |   |   |     |     
|                        | Total |   | $             | 2.2 |               |   | $                | 8.2 |               |   | $                   | (3.6 | )                   |   | $              | 6.8 |  |   | $             | 14.8 |  |   | $    | (7.2 | ) |   | $   | 14.4 | 
|                        |       |   |               |     |               |   |                  |     |               |   |                     |      |                     |   |                |     |  |   |               |      |  |   |      |      |   |   |     |     

NOTE 7  LONG-TERM DEBT

In April 1998, the Company refinanced on a long-term basis certain obligations
outstanding under its revolving credit lines, senior notes and term notes by
consummating a $110 million offering of the Notes. The Notes have options to
redeem in part at various premiums throughout the duration of the Indenture and
mature in May 2005. The Company also entered 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 Prior Credit Facility).

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

On October 11, 2002, the Company completed the sale of TRKK to Nikko Principal
Investments Japan, Ltd. for an aggregate purchase price of 16 billion Japanese
Yen (approximately $129 million at then-current exchange rates). The Company
obtained a waiver from its lenders approving the sale of TRKK in October 2002.
Of the proceeds from the sale of TRKK, $108.8 million were used to pay down the
Prior Credit Facility. The balance of the Prior Credit Facility was refinanced
on October 11, 2002, with the Credit Facility and the Term Loan, each of which
matures on April 1, 2005. The Loan and Security Agreement governing the Credit
Facility

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provides for a line of credit of up to
$110 million. Through April 30,
2003, the Company has
successfully syndicated $100 million of the line of credit. Interest under the
revolving portion of the Credit Facility is based on a formula of the Prime
Rate plus an interest percentage premium based upon excess availability levels
achieved each month. For the year ending July 31, 2003 the interest
premium shall be 1.25% based upon the average net outstanding
balances. Borrowings under the real estate loan portion of the Credit Facility bear
interest at the greater of 11% or Prime Rate plus 5%. In addition, the Company
also pays a monthly credit facility fee of 0.50% based on outstanding daily
balances under the Credit Facility, as defined. The interest and the credit
facility fee on the Credit Facility is due monthly. As of April 30, 2003, the
Credit Facility had an outstanding balance of $53.3 million, with an additional
$24.2 million available based upon the collateral calculation of availability
and other borrowing based restrictions which includes a required collateral
reserve of $15 million, as defined. The Amended and Restated Term Loan
Agreement governing the Term Loan provided for a loan of $26 million. At April
30, 2003, the Term Loan had an outstanding balance of $25 million. The Term
Loan bears interest at the greater of 11% or Prime Rate plus 5%. Interest on
the Term Loan is due monthly. The Company is also required to make mandatory
Prepayments of $0.5 million on the Term Loan on the first day of each fiscal
quarter, beginning August 1, 2003.

Maximum borrowings under the Credit Facility are subject to a borrowing base
formula, certain financial ratio tests and maintaining a minimum rolling
quarterly EBITDA. Also, the Credit Facility requires that the Company maintain
a minimum collateral reserve level of $15 million. Under the Credit Facility,
Term Loan and Notes agreements, there are various restrictive terms and
covenants relating to the occurrence of material adverse financial operating
conditions, balance sheet coverage ratio, certain debt and certain limitations
on additional indebtedness, sale-leaseback transactions, liens or encumbrances
on substantially all of the Companys assets, cash management arrangements,
long-term transactions, capital expenditures, investments, acquisitions and new
retail locations, mandatory commitment reductions and issuance of capital
stock.

SUBSEQUENT EVENT

On June 2, 2003, the Company announced that it had determined it would not make
the $5.2 million payment of interest on the Notes that was due on May 1, 2003.
The Companys decision not to make the interest payment before the end of the grace
period constitutes an event of default under the Indenture. As a result of the
event of default, the Trustee or the holders of at least 25% in aggregate
principal amount of the Notes could take certain actions to cause the Notes to
become immediately due and payable. Although, as of the date of this Quarterly
Report of Form 10-Q, neither the Trustee nor such holders have taken such
actions, the Company can make no assurance that they will not do so in the
future.

The occurrence of an event of default under the Indenture triggered the
cross-default provisions of the Credit Facility and Term Loan agreements and
resulted in an event of default under such agreements. On June 10, 2003, the
Company received an extended Forbearance Agreement from the senior lenders
under the Credit Facility, pursuant to which such senior lenders have agreed
not to exercise their default rights relating to the above-referenced default.
In connection with the Forbearance Agreement, the Company and such senior
lenders amended the Credit Facility agreement to provide for additional
covenants relating to the Companys operations and capital structure. The
forbearance period will terminate on September 30, 2003 (or earlier, upon any
new event of default under the Credit Facility), unless it is extended by
agreement of such lenders or by that date there has occurred a restructuring of
the Notes or a sale or merger of the Company that provides for the payment of
all obligations under the Credit Facility, in either case

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on terms reasonably
acceptable to the agent for the Credit Facility.

NOTE 8  RECENT ACCOUNTING PRONOUNCEMENTS

In November 2002, and as amended in March 2003, the Financial Accounting
Standards Board (the FASB) issued Emerging Issues Task Force Issue No. 02-16
(EITF No. 02-16), Accounting by a Customer (Including a Reseller) for
Certain Consideration Received from a Vendor. EITF No. 02-16 provides
guidance on how a reseller of a vendors products should account for cash
consideration received from that vendor. The Task Force reached a consensus
that cash consideration received from a vendor is presumed to be a reduction of
the prices of the vendors products or services and should, therefore, be
characterized as a reduction of cost of sales unless certain restrictive
criteria are met. EITF No. 02-16 is effective for vendor reimbursement
arrangements entered into after December 31, 2002. Accordingly, the Company
now records amounts received from vendors for cooperative advertising and
slotting arrangements as reductions to cost of sales. Vendor reimbursements
from arrangements entered into prior to December 31, 2002 were recorded as
reductions to selling, general and administrative expense. The Companys
accounting for promotional and volume related allowances was already consistent
with the new EITF No. 02-16 requirements, and therefore did not require a
change in policy. Prior periods have been reclassified for comparable
presentation. For the three months ended April 30, 2003 and 2002, and the nine
months ended April 30, 2003 and 2002, $5.8 million, $5.9 million, $28.0 million
and $27.6 million, respectively, of vendor payments were reclassified from
selling, general and administrative expenses to cost of sales. These
reclassification adjustments did not have an impact on net loss or
shareholders deficit.

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

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

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

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

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

NOTE 9  SEGMENT AND GEOGRAPHIC INFORMATION

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

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

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

|                      |                           |       |         |                           |         |           |         |         |         | 
|--------------------- | ------------------------- | ----- | ------- | ------------------------- | ------- | --------- | ------- | ------- | ------- | 
|                      |                           |       |         | For the Nine Months Ended
|                      |                           |       |         |                          
|                      |                           |       |         | April 30,                 |         | April 30,
|                      |                           |       |         | 2003                      |         | 2002     
|                      |                           |       |         |                           |         |          
|Net Revenue           |                           |       |         |                           |         |           |         |        
|                      | United States             |       | $       | 402,494                   |         |           | $       | 427,595 |        
|                      | Great Britain and Ireland |       |         | 24,301                    |         |           |         | 40,045  |        
|                      | Other foreign operations  |       |         | 2,067                     |         |           |         | 4,253   |        
|                      |                           |       |         |                           |         |           |         |         |        
|                      |                           | TOTAL |         | $                         | 428,862 |           |         | $       | 471,893 | 
|                      |                           |       |         |                           |         |           |         |         |        
|Loss from operations: |                           |       |         |                           |         |           |         |        
|                      | United States             |       | $       | (31,712                   | )       |           | $       | (16,239 | )      
|                      | Great Britain and Ireland |       |         | (4,492                    | )       |           |         | (5,634  | )      
|                      | Other foreign operations  |       |         | (140                      | )       |           |         | 4,808   |        
|                      |                           |       |         |                           |         |           |         |         |        
|                      |                           | $     | (36,344 | )                         |         | $         | (17,065 | )      
|                      |                           |       |         |                           |         |           |         |         |        

|                     |                           |   |           |         |      |   |         |         | 
|-------------------- | ------------------------- | - | --------- | ------- | ---- | - | ------- | ------- | 
|                     |                           |   | April 30,
|                     |                           |   |          
|                     |                           |   | 2003      |         | 2002
|                     |                           |   |           |         |     
|Identifiable assets: |                           |   |           |         |      |   |         |        
|                     | United States             |   | $         | 276,656 |      |   | $       | 324,140 | 
|                     | Great Britain and Ireland |   |           | 1,973   |      |   |         | 27,496  | 
|                     | Other foreign operations  |   |           | (508    | )    |   |         | 129,805 | 
|                     |                           |   |           |         |      |   |         |         | 
|                     |                           | $ | 278,121   |         |      | $ | 481,441 |        
|                     |                           |   |           |         |      |   |         |         | 

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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, and in conjunction with the
consolidated financial statements and notes thereto for the fiscal year ended
July 31, 2002 included in the Annual Report on Form 10-K of MTS, Incorporated
and subsidiaries (the Company) 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 Quarterly Report
on 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)
the outcome of discussions with the Companys lenders under its credit facility
and term loan agreements regarding the Companys strategic alternatives; (ii)
the outcome of discussions with holders of the Notes and other significant
creditors regarding the Companys strategic alternatives; (iii) the risks
associated with negotiating a restructuring of the Companys debt, including
the risks associated with commencement of a bankruptcy proceeding under Chapter
11 of the Bankruptcy Code; (iv) the ability of the Company to comply with its
obligations, including the ongoing monthly affirmative and negative covenants,
as prescribed by the Companys agreements governing its credit facility agented
by The CIT Group/Business Credit, Inc. (the Credit Facility) and term loan
agented by JPMorgan Chase Bank (the Term Loan), as amended in connection with
the execution of a forbearance agreement by the senior lenders under the Credit
Facility; (v) the ability of the Company to continue to service its senior
subordinated notes; (vi) 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; (vii) 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; (viii) the continued availability and
cost of adequate capital to fund the Companys operations; (ix) higher than
anticipated interest, occupancy, labor, distribution and inventory shrinkage
costs; (x) the ability of the Company to successfully defend itself in ongoing
and future litigation and the expenses associated with such litigation; (xi)
higher than anticipated costs associated with the implementation of the
Companys restructuring plans and/or lower than anticipated resulting
operations and cash flow benefits; (xii) unanticipated increases in the cost of
merchandise sold by the Company; (xiii) changes in foreign currency exchange
rates and economic and political risks; (xiv) the adverse effects of acts or
threats of war, terrorism or other armed conflict on the United States and
international economies; and (xv) the other risk factors disclosed in the
Companys filings with the Securities and Exchange Commission, including its
Annual Report on Form 10-K. All forward-looking statements included in this
Quarterly Report on 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. Actual results could differ from those
contemplated by such forward-looking statements.

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OVERVIEW

Founded in 1960, the Company is one of the largest specialty retailers of
recorded music headquartered in the United States in terms of revenues and is
one of the largest and most widely recognized music retailers in the world. As
of April 30, 2003, the Company operated a total of 99 stores, consisting of 96
U.S. stores in 21 states and three stores in two foreign countries.

The Company offers a diversified line of music and video products including
compact discs, recorded audio cassettes, recorded video cassettes, DVD and
other complementary products, including books, magazines, blank tapes, video
games, personal electronics and accessories.

On October 11, 2002, the Company sold its Japanese subsidiary, Tower Records,
Kabushiki Kaisha (TRKK). Prior to its sale, TRKK represented a significant
portion of the Companys revenues, and the revenues accounted for by TRKK
increased annually in each of the most recent two fiscal years. In addition,
Japan was the only geographic region in which the Company generated net
operating income in each of fiscal 2002 and fiscal 2001. For the fiscal year
ended July 31, 2002, TRKK accounted for 38% of the Companys revenues and
provided $15.6 million of operating income, which was included in the Companys
net operating loss of $31.2 million.

On June 2, 2003, the Company announced that it had determined it would not make
the $5.2 million payment of interest on the Companys $110 million 9.375%
senior subordinated notes (the Notes) that was due on May 1, 2003. The
Companys decision not to make the interest payment constituted an event of default
under the indenture for the Notes. Although, as of the date of this Quarterly
Report on Form 10-Q, neither the holders of the Notes nor the Trustee under the
Indenture for the Notes has taken action to cause the Notes to be immediately
due and payable, the Company can make no assurance that they will not do so in
the future.

The occurrence of an event of default under the indenture for the Notes
triggered an event of default with respect to the Credit Facility and the Term
Loan pursuant to the cross-default provisions of the Credit Facility and Term
Loan agreements. On June 10, 2003, the Company received an extended
Forbearance Agreement from the senior lenders under the Credit Facility,
pursuant to which such senior lenders have agreed not to exercise their default
rights related to the above-referenced default. In connection with the
Forbearance Agreement, the Company and such senior lenders amended the Credit
Facility to provide for additional covenants relating to the Companys
operations and capital structure. The forbearance period will terminate on
September 30, 2003 (or earlier, upon any new event of default under the Credit
Facility), unless it is extended by agreement of such lenders or by that date
there has occurred a restructuring of the Notes or a sale or merger of the
Company that provides for the payment of all obligations under the Credit
Facility, in either case on terms reasonably acceptable to the agent for the
Credit Facility.

The Company has retained financial advisors Jefferies and Company, Inc.
(Jefferies) and Greif & Co. (Greif) to assist the Company in evaluating
strategic and financing alternatives. With the assistance of Jefferies, the
Company has made a proposal to an ad hoc committee of the holders of the Notes
relating to a restructuring of the outstanding debt represented by the Notes
and is in discussions with representatives of that committee concerning such a
restructuring. With the assistance of Greif, the Company is exploring the
possibility of selling the Company or all or substantially all of the Companys
assets. The Company can make no assurance that any such restructuring or sale
efforts will be successful.

The Company faces declining sales with the emerging digital download of music
by consumers

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and mass-market competition. According to Billboard, the
International Newsweekly of music, video and home entertainment, as of the week
ended April 20, 2003, year-to-date national music
unit sales have declined. At April 30, 2003, the Companys
year-to-date overall sales decline on a comparable basis was 4.6%. The Company
attributes its lower-than-industry sales decline to its deep catalog
competitive advantage as well as efforts to market products other than
pre-recorded music such as DVDs, accessories, and other complementary products.
Management continues to explore ways of maintaining the Companys competitive
position through optimizing product mix and marketing products other than
pre-recorded music.

The Companys management attempts to manage business risks on a daily basis by
analyzing sales trends, industry trends and monitoring costs in order to
maintain sales and gross profits for the domestic operations. In September
2002, the Company hired a turn-around specialist to focus efforts in the
domestic market and improve financial results. In April 2003, the turn-around
specialist left the Company and the Company hired a new chief executive officer
in order to further these and other turn-around efforts.

CRITICAL ACCOUNTING POLICIES

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

REVENUE RECOGNITION

The Company generates revenue primarily from retail sales comprised of
pre-recorded music (including compact discs and audio cassettes), video sales
(including recorded video cassettes and DVD) and other complementary products
(including books, magazines, video games, personal electronics and accessories)
through the Companys stores and is recognized at the point of the retail
transaction. Reductions of revenue for returns by retail customers are provided
at the point of the return. Additionally, the Company generates revenue from
distribution to outside customers and recognizes revenue based upon the
shipment of merchandise to those distribution customers. The Companys
distribution arrangements with these customers generally give them the right to
return titles. The Company reduces gross sales and direct product costs for
returns at the time of the returns. The Company continuously monitors
collections and payments from its wholesale distribution customers and
maintains a provision for estimated credit losses based upon its historical
experience and any specific distribution customer collection issues that the
Company has identified.

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 inventory shrink caused by customer theft. The
Company evaluates all of its inventory units to determine excess or slow-moving
units based on current quantities, anticipated store closures and

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projections
of future demand and market conditions. Due to industry return policies, which
generally provide for full recovery of cost upon return, the Company does not
provide an allowance for inventory returns.

RESTRUCTURING CHARGES

Since the adoption of the 2001 Restructuring Plan and the 2003 Restructuring
Plan (the Restructuring Plans), the Company has closed seven out of ten of
its stand-alone bookstores and has liquidated most of its stand-alone book
inventories. The Company has also closed nine domestic under-performing record
and outlet stores and sold two of its frame/gallery stores. It has
successfully converted the Argentina, Hong Kong and Taiwan operations to
franchises and closed its Canadian operations. Additionally, during the nine
months ended April 30, 2003, the United Kingdom operations were either closed
or transferred to Virgin Retail Group Limited and Piccadilly Entertainment
Store Limited. Management has implemented several rounds of reductions in
workforce related to store closures and to reduce operating costs. Since the
adoption of the 2001 Restructuring Plan, the Company has terminated
approximately 650 employees at both the retail and corporate level, from clerks
to executives. Capital expenditures and working capital have also been closely
managed under the Restructuring Plans. In accordance with the Restructuring
Plans, the Company continues to monitor additional stores for possible future
closure.

The Company has substantially completed the final phase of the 2001
Restructuring Plan. The Company adopted the 2003 Restructuring Plan in
December 2002 aimed at further improving operations, monitoring and closing
additional under-performing stores and assets, and evaluating its ongoing
working capital investments. The 2003 Restructuring Plan will implement various
restructuring initiatives, which could result in additional restructuring
costs, asset impairment charges and inventory write-downs in future periods.
The Company expects to complete the 2003 Restructuring Plan by the end of the
second quarter of fiscal 2004.

The Company has estimated and recorded restructuring and asset impairment
charges and inventory write-downs in fiscal 2003 and 2002 related to the
Restructuring Plans. These costs and charges required judgments about, among
other things, employee severance costs, contract and lease terminations,
related consulting and litigation fees, long-lived assets and inventory
realization and other contingent liabilities. The ability to obtain agreements
with lessors to terminate leases or with other parties to assign leases can
also affect the accuracy of 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 impairment losses
when the carrying value of the long-lived asset (asset group) is not
recoverable and exceeds its fair value. The carrying amount of a long-lived
asset (asset group) is not recoverable if it exceeds the sum of the future
undiscounted cash flows expected to result from the use and eventual
disposition of the asset (asset group). An impairment loss is measured as the
amount by which the carrying amount of a long-lived asset (asset group) exceeds
its fair value. Assumptions and estimates used in the evaluation of impairment,
including current and future economic trends in the many geographic regions
that the Companys stores are located, are subject to a high degree of judgment
and complexity and changes in the assumptions and estimates may affect the
carrying value of long-lived assets, and could result in additional impairment
charges in future periods.

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

RESULTS OF OPERATIONS

Three months ended April 30, 2003 compared to three months ended April 30, 2002

REVENUES

For the three months ended April 30, 2003, the Companys consolidated net
revenues decreased 11.3% to $122.0 million from $137.5 million for the three
months ended April 30, 2002, a decrease of $15.5 million. The Companys net
revenues were comprised of domestic revenues of $118.4 million and
international revenues of $3.6 million for the three months ended April 30,
2003, compared to domestic revenues of $125.2 million and international
revenues of $12.3 million for the three months ended April 30, 2002. The
decrease in total Company revenues for the three months ended April 30, 2003
was driven by the closing of six stores in connection with the Restructuring
Plans, the closure of the UK operations, a decrease in the Companys same store
sales attributed to an industry-wide reduction in pre-recorded music sales
in the United States, which the Company believes is primarily due to the
increased digital downloading of music, online and physical music piracy, and
the effects of other mass market competition. Same store sales for the three
months ended April 30, 2003 decreased by 3.3% when compared to the three months
ended April 30, 2002.

GROSS PROFIT

For the three months ended April 30, 2003, the Companys gross profit decreased
$4.5 million to $45.7 million from $50.2 million. The decline in gross profit
is primarily due to the decrease in revenues as described above. Gross profit
as a percentage of net revenues was 37.5% for the three months ended April 30,
2003, or 32.7% excluding the effects of the EITF No. 02-16 reclassification
adjustment. Gross profit as a percentage of net revenues was 36.5% for the
three months ended April 30, 2002, or 32.3% excluding the effects of the EITF
No. 02-16 reclassification adjustment.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSE

Selling, general and administrative expenses decreased by $7.3 million to $42.4
million for the three months ended April 30, 2003 from $49.7 million for the
three months ended April 30, 2002. Excluding the effects of the $0.6 million
and $1.5 million in professional fees related to the Restructuring Plans for
the three months ended April 30, 2003 and 2002, respectively, selling, general
and administrative expenses decreased by $6.4 million to $41.8 million for the
three months ended April 30, 2003 from $48.2 million for the three months ended
April 30, 2002. Excluding the effect of professional fees related to the
Restructuring Plans, decreases in personnel, occupancy and other administrative
expenses are due to cost savings from initiatives resulting from the Companys
Restructuring Plans. As a percentage of net revenues, selling,

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general and
administrative expenses, excluding the effects of the professional fees related
to the Restructuring Plans, decreased to 34.3% for the three months ended April
30, 2003 as compared to 35.0% for the three months ended April 30, 2002.

RESTRUCTURING AND IMPAIRMENT COSTS

Pre-tax restructuring and asset impairment charges increased by $0.3 million to
$2.0 million for the three months ended April 30, 2003, from $1.7 million for
the three months ended April 30, 2002. The increase was attributable to higher
severance costs associated with the reductions in the work force. In
connection with the Restructuring Plans and for the three months ended April
30, 2003 and 2002, the Company also recorded $0.6 million and $1.5 million,
respectively, of professional fees incurred in connection with the
Restructuring Plans in selling, general and administrative expenses on the
accompanying consolidated statements of operations.

DEPRECIATION AND AMORTIZATION

Depreciation and amortization expense was $4.8 million for the three months
ended April 30, 2003, compared to $5.3 million for the three months ended April
30, 2002. The decrease of $0.5 million was primarily due to the closing of
under-performing stores identified in the Restructuring Plans.

LOSS FROM CONTINUING OPERATIONS

The Companys consolidated operating loss for the three months ended April 30,
2003 decreased $2.9 million to $3.5 million from $6.4 million for the three
months ended April 30, 2002. The decrease was primarily due to the decrease in
selling, general and administrative expenses described above. Excluding the
effects of the Restructuring Plans, operating losses decreased $2.3 million to
$0.9 million for the three months ended April 30, 2003 from $3.2 million for
the three months ended April 30, 2002, which was primarily attributable to the
decrease selling, general and administrative expenses described above, offset
by decrease in revenues and gross profit for the three-month period.

INTEREST EXPENSE

Net interest expense decreased to $5.4 million for the three months ended April
30, 2003 from $6.4 million for the three months ended April 30, 2002. The
decrease of $1.0 million was due primarily to the reduction of the variable
interest rate components and lower comparative debt levels.

FOREIGN CURRENCY TRANSLATION (LOSS) GAIN

A non-cash foreign currency translation loss of $3.5 million was recognized for
the three months ended April 30, 2003, compared to a non-cash foreign currency
translation gain of $1.1 million for the three months ended April 30, 2002.
The loss for the three months ended April 30, 2003 primarily represents the
foreign exchange fluctuations against the U.S. dollar in the foreign countries
in which the Company does business.

INCOME TAXES

Pre-tax losses resulted in an income tax provision in the amount of $0.1
million for the three months ended April 30, 2003 and for the three months
ended April 30, 2002. Tax provisions and

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benefits are based upon managements
estimate of the Companys annualized effective tax rates.

Nine months ended April 30, 2003 compared to nine months ended April 30, 2002

REVENUES

For the nine months ended April 30, 2003, the Companys consolidated net
revenues decreased 9.1% to $428.9 million from $471.9 million for the nine
months ended April 30, 2002, a decrease of $43.0 million. The Companys net
revenues were comprised of domestic revenues of $402.5 million and
international revenues of $26.4 million for the nine months ended April 30,
2003, compared to domestic revenues of $427.6 million and international
revenues of $44.3 million for the nine months ended April 30, 2002. The
decrease in total Company revenues for the nine months ended April 30, 2003 was
driven by the closing of seven domestic stores and eight stores in the United
Kingdom associated with the Restructuring Plans, a decrease in the Companys
same store sales attributable to an industry-wide reduction in
pre-recorded music sales in the United States, which the Company believes is
primarily due to the increased digital downloading of music, online and
physical music piracy, and the effects of other mass market competition. Same
store sales for the nine months ended April 30, 2003 decreased by 4.6% when
compared to the nine months ended April 30, 2002.

GROSS PROFIT

For the nine months ended April 30, 2003, gross profit decreased $10.5 million
to $157.1 million from $167.6 million for the nine months ended April 30, 2002.
The decrease in the gross profit is principally due to the decrease in revenues
described above. Gross profit as a percentage of net revenues was 36.6% for
the nine months ended April 30, 2003, or 30.6% excluding the effects of the
Restructuring Plans and EITF 02-16 reclassification adjustments. Gross profit
as a percentage of net revenues was 35.5% for the nine months ended April 30,
2002, or 32.0% excluding the effects of the Restructuring Plans and EITF 02-16
reclassification adjustments and
EITF 02-16 reclassification adjustments. Management attributes the percentage decrease,
excluding the effects of the Restructuring Plans, primarily to weaker margins
associated with the competitive pricing pressures in the United States as well
as certain advertising promotions to increase sales.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSE

Selling, general and administrative expenses decreased by $13.3 million to
$152.1 million for the nine months ended April 30, 2003 from $165.4 million for
the nine months ended April 30, 2002. Excluding the effects of the $2.1 million
and $4.2 million in professional fees related to the Restructuring Plans for
the nine months ended April 30, 2003 and 2002, respectively, selling, general
and administrative expenses decreased by $11.2 million to $150.0 million during
the nine months ending April 30, 2003 from $161.2 million during the nine
months ending April 30, 2002. Excluding the effect of professional fees related
to the Restructuring Plans, decreases in personnel, occupancy and other
administrative expenses are due to cost savings from initiatives resulting from
the Restructuring Plans. As a percentage of net revenues, selling, general and
administrative expenses, excluding the effects of the professional fees related
to the Restructuring Plans, was 35.0% for the nine months ended April 30, 2003
as compared to 34.2% for the nine months ended April 30, 2002. This increase of
0.8% as a percentage of net revenues is attributable to the decrease in net
revenues as described above.

RESTRUCTURING AND IMPAIRMENT COSTS

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The Company recorded pre-tax restructuring and asset impairment charges of
$26.0 million for the nine months ended April 30, 2003 and $2.5 million for the
nine months ended April 30, 2002. The increase was comprised of severance costs
for terminated employees, asset disposal
costs and costs associated with the closing of the Mexico operations. In
connection with the Restructuring Plans and for the nine months ended April 30,
2003 and 2002, the Company also recorded $2.0 million and $11.2 million,
respectively, of inventory write-downs in cost of sales, and $2.1 million and
$4.2 million, respectively, of professional fees in selling, general and
administrative expenses.

DEPRECIATION AND AMORTIZATION

Depreciation and amortization expense was $15.3 million for the nine months
ended April 30, 2003, compared to $16.8 million for the nine months ended April
30, 2002. The decrease of $1.5 million was primarily due to the closing of
under-performing stores identified in the Restructuring Plans.

LOSS FROM CONTINUING OPERATIONS

The Companys consolidated operating loss for the nine months ended April 30,
2003 was $36.3 million compared to $17.1 million for the nine months April 30,
2002. The increase of $19.2 million was primarily attributable to costs
associated with the Restructuring Plans described above. Excluding the effects
of the Restructuring Plans, operating losses increased $7.1 million to $6.3
million for the nine months ended April 30, 2003 from an operating gain of $0.8
million for the nine months ended April 30, 2002, which was primarily
attributable to the decrease in revenues and gross profit described above
partially offset by the decrease in selling, general and administrative
expenses.

DISCONTINUED OPERATIONS

On October 11, 2002, the Company completed the sale of its Japanese subsidiary,
TRKK, to Nikko Principal Investments Japan, Ltd. The Company sold all
authorized and issued capital stock of TRKK for an aggregate purchase price of
16 billion Japanese Yen, which was approximately $129 million at then-current
exchange rates. As discussed in Notes 3 and 7 to the Consolidated Financial
Statements, net proceeds were primarily used to pay down the Prior Credit
Facility. The Company recorded a $15.8 million gain, net of $6.5 million in
U.S. income and foreign taxes, from the sale of TRKK, which is included in
income from discontinued operations on the accompanying statement of operations
for the nine months ended April 30, 2003. In accordance with SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets, TRKKs
current year operating results have been presented as discontinued operations.
Additionally, all prior period consolidated financial statements presented have
been reclassified to present TRKK as discontinued operations.

INTEREST EXPENSE

Net interest expense decreased to $16.6 million for the nine months ended April
30, 2003 from $18.7 million for the nine months ended April 30, 2002. The
decrease of $2.1 million was due primarily to the reduction of the variable
interest rate components as specified in the Companys financing agreements.

FOREIGN CURRENCY TRANSLATION (LOSS) GAIN

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A non-cash foreign currency translation loss of $1.5 million was recognized for
the nine months ended April 30, 2003, compared to a non-cash foreign currency
gain of $0.1 million for the nine months ended April 30, 2002. The loss
primarily represents the volatility of foreign currency
fluctuations against the U.S. Dollar in foreign countries in which the Company
does business.

INCOME TAXES

Pre-tax losses resulted in an income tax provision in the amount of $0.2
million for the nine months ended April 30, 2003 and $0.3 million for the nine
months ended April 30, 2002. Tax provisions and benefits are based upon
managements estimate of the Companys annualized effective tax rates.

LIQUIDITY AND CAPITAL RESOURCES

The Companys principal capital requirements are to fund working capital needs,
maintenance of existing stores, real estate leases, inventory, payroll, cash
outlays for restructuring efforts and continued support of the Companys
technological infrastructure. In addition, interest payments required under
the Companys current long-term financing agreements would also continue to
impose significant liquidity demands upon the Company.

The Companys total funded debt as of April 30, 2003 was $194.5 million,
consisting primarily of the Notes, $53.3 million under the Credit Facility and
$25.0 million under the Term Loan. On April 30, 2002 outstanding debt consisted
primarily of the Notes and $180.0 million under the Prior
Credit Facility.

On June 2, 2003, the Company announced that it had determined it would not make
the $5.2 million payment of interest on the Notes that was due on May 1, 2003.
The Companys decision not to make the interest payment constituted an event of
default under the indenture for the Notes (the Indenture). As a result of the
event of default, the Trustee or the holders of at least 25% in aggregate
principal amount of the Notes can take certain actions to cause the Notes to
become immediately due and payable. Although, as of the date of this report,
neither the Trustee nor such holders have taken such actions, the Company can
make no assurance that they will not do so in the future.

The Company has retained financial advisors Jefferies and Greif to assist the
Company in evaluating strategic and financing alternatives. With the
assistance of Jefferies, the Company has made a proposal to an ad hoc committee
of the holders of the Notes relating to a restructuring of the outstanding debt
represented by the Notes and is in discussions with representatives of that
committee concerning such a restructuring. No understanding or agreement has
been reached with this committee as of the date of this Quarterly Report on
Form 10-Q, and the Company can make no assurance that any understanding or
agreement will be reached. With the assistance of Greif, the Company is
exploring the possibility of selling the Company or all or substantially all of
the Companys assets. The Company can make no assurance that any such sale
efforts will be successful.

The occurrence of an event of default with respect to the Notes under the
Indenture triggered the cross-default provisions of the Companys Credit
Facility and Term Loan agreements and resulted in an event of default under
such agreements. On June 10, 2003, the Company received an extended
Forbearance Agreement from the senior lenders under the Credit Facility,
whereby senior lenders agreed not to exercise their default rights related to
the above-referenced default. In connection with the Forbearance Agreement,
the Company and such senior lenders amended

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the Credit Facility to provide for
additional covenants relating to the Companys operations and capital
structure. The forbearance period will terminate on September 30, 2003 (or
earlier, upon any new event of default under the Credit Facility), unless it is
extended by agreement of such
lenders or by that date there has occurred a restructuring of the Notes or a
sale or merger of the Company that provides for the payment of all obligations
under the Credit Facility, in either case on terms reasonably acceptable to the
agent for the Credit Facility.

The Companys ability to continue its operations without seeking protection
from its creditors depends on several factors, including but not limited to the
following: (i) the Companys ability to reach an agreement with the holders of
the Notes relating to a restructuring of the outstanding debt represented by
the Notes; (ii) the availability of funds under the Credit Facility sufficient
to fund the Companys operating requirements; and (iii) the Companys ability
to satisfy the financial and other covenants set forth in the Companys Credit
Facility, as amended in connection with the execution of the Forbearance
Agreement on June 10, 2003 and its Term Loan agreements.

The Companys liquidity, future operating performance and ability to service
its long-term financing agreements will be subject to the success of the
Companys restructuring efforts, its plan to restructure the Notes, its plan to
sell the Company or the Companys assets, relationship with key vendors,
compliance with amended debt covenants, future economic conditions and other
factors, many of which are beyond the Companys control. There can be no
assurance or guaranty that the Company will be successful in meeting its
operational and strategic objectives. In the event that the Company is unable
to successfully implement its restructuring plans, the Companys business,
financial position and results from operations may be materially and adversely
affected.

In fiscal 2003, the Company made an interest payment on the Notes on November
1, 2002, and decided not to make the interest payment on the Notes due May 1,
2003, each in the amount of $5.2 million. Under the Indenture, the Company must
continue to make semi-annual payments through the maturity date of the Notes in
May 2005. In fiscal 2003, the Company has made interest payments with respect
to the Credit Facility and Term Loan in the aggregate amount of $3.2 million,
and anticipates that it will make approximately $1.7 million of additional
interest payments for the remainder of fiscal 2003. Interest under the Credit
Facility is based on a formula of prime plus a premium based upon excess
availability levels achieved each month. Interest under the Term Loan is the
greater of 11% or prime plus 5%.

The Credit Facility agreement provides for a line of credit up to $110 million.
The Company has
successfully achieved the syndication requirements for a line of credit up to
$100 million. As of April 30, 2003, the Companys borrowing base allowed for a
gross borrowing amount under the Credit Facility of $77.5 million. As of April
30, 2003, the Credit Facility had an outstanding balance of $45.8 million
related to the line of credit and a $7.5 million outstanding loan
collateralized by certain real estate. Based on the outstanding balance,
borrowing base restrictions and other covenants under the Credit Facility
agreement, the net excess availability of funds to the Company under the Credit
Facility as of April 30, 2003 was $24.2 million, which includes a required
collateral reserve of $15 million.

The Term Loan agreement provides for a loan of $26 million. The outstanding
balance of the Term Loan as of April 30, 2003 was $25 million.

The Credit Facility and Term Loan agreements and the Indenture covering the
Notes impose certain restrictions on the Companys ability to make capital
expenditures and limit the

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Companys ability to incur additional indebtedness.
In addition, pursuant to the Credit Facility agreement, the Companys cash
balances are transferred nightly to pay down its outstanding debt and the daily
management of cash needs and availability determine the next days draw on the
line of credit. Such restrictions and cash balance transfers 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 to its shareholders, create liens on assets,
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. 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 the
twelve months ending April 30, 2004 is expected to be approximately $38.7
million.

During the nine months ended April 30, 2003, the Company terminated a total of
125 employees in the United States, including certain senior executives, in
accordance with its Restructuring Plans. As a result, the Company has
estimated and accrued for $6.0 million of severance obligations in reserve for
restructuring costs on the accompanying April 30, 2003 consolidated balance
sheet and $2.5 million of which will be payable to former senior executives
over the terms ranging from 12 to 35 months. New restructuring efforts that
have resulted in cost reductions include closure of under-performing domestic
stores, closure of the Companys Pulse! Magazine office and suspension of the
Pulse! publication.

The Companys contractual obligations as of April 30, 2003 are as follows:
(dollars in thousands):

|                        |       |       |                        |         |  |       |        |        |     |       |         |         |        |   |        |        |      |   |         |         | 
|----------------------- | ----- | ----- | ---------------------- | ------- |  | ----- | ------ | ------ | --- | ----- | ------- | ------- | ------ | - | ------ | ------ | ---- | - | ------- | ------- | 
|                        |       |       | Payments due by period
|                        |       |       |                       
|                        |       |       |                        |         |  |       | Less   |        |     |       |         |         |        |   |        |        | More
|                        |       |       |                        |         |  |       | than 1 |        | 1-3 |       | 3-5     |         | than 5
|Contractual Obligations |       | Total |                        | year    |  | years |        | years  |     | years
|                        |       |       |                        |         |  |       |        |        |     |      
|Long-term debt          |       | $     | 194,535                |         |  | $     | 2,814  |        |     | $     | 170,835 |         |        | $ | 2,347  |        |      | $ | 18,539  |        
|Operating leases        |       |       | 247,432                |         |  |       | 32,958 |        |     |       | 63,316  |         |        |   | 47,913 |        |      |   | 103,245 |        
|                        |       |       |                        |         |  |       |        |        |     |       |         |         |        |   |        |        |      |   |         |        
|                        | Total |       | $                      | 441,967 |  |       | $      | 35,772 |     |       | $       | 234,151 |        |   | $      | 50,260 |      |   | $       | 121,784 | 
|                        |       |       |                        |         |  |       |        |        |     |       |         |         |        |   |        |        |      |   |         |        

Net cash provided by operating
activities was $4.3 million for the nine months
ended April 30, 2003, and net cash used in operating activities was $7.6
million for the nine months ended April 30, 2002. For the nine months ended
April 30, 2003 and April 30, 2002, net decrease in inventory was $15.7 million
and $4.2 million, respectively.

Net cash provided by investing activities was $105.4 million for the nine
months ended April 30, 2003 and net cash used in investing activities was $8.1
million for the nine months ended April 30, 2002. Net cash provided by
investing activities for the nine months ended April 30, 2003 was primarily
from proceeds received from sale of the Companys Japanese subsidiary, TRKK,
and was offset by store leasehold improvements and capital expenditure needs,
including

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refurbishment and technology investments totaling approximately $2.1
million and $0.9 million used for video rental acquisition. Net cash used in
investing activities for the nine months ended April 30, 2002 was primarily due
to store leasehold improvements and capital expenditure needs,
including store relocations, refurbishment and technology investments totaling
approximately $4.6 million and $0.9 million used for video rental acquisition.

Net cash used in financing activities for the nine months ended April 30, 2003
was $118.0 million, resulting principally from pay-down of long-term financing
agreements from proceeds received from the sale of TRKK, offset by borrowings
under the Companys line of credit, net of debt issuance costs. Net borrowings
under the Companys line of credit were $53.3 million as of April 30, 2003. Net
cash provided by financing activities for the nine months ended April 30, 2002
was $20.5 million, which resulted primarily from net borrowings under the Prior
Credit Facility (as defined in the Notes to the Consolidated Financial
Statements).

SEASONALITY

Retail music sales in the United States are typically higher during the
calendar fourth quarter as a result of consumer purchasing patterns due to
increased store traffic and impulse buying by holiday shoppers. As a result,
the majority of domestic 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 pre-recorded
music appeals to customers who purchase music on a year-round basis.
Consequently, the Company has historically experienced less seasonal reliance
than other domestic 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 the Companys annual sales. Management expects to maintain this same
seasonal trend as the Company continues to emphasize its year-round specialized
entertainment shopping experience.

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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.

The Company is subject to risks resulting from interest rate fluctuations
because interest on the Companys asset-based line of credit borrowings is
based on variable rates. If the base borrowing rates (primarily Prime) were to
increase 1% above current rates as of April 30, 2003, the Companys interest
expense under the line of credit in fiscal 2003 would increase approximately
$0.5 million.

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 had significant transactions in foreign currencies, primarily in
Japanese Yen. The Company had used forward exchange contracts to hedge
intercompany transactions with foreign subsidiaries and affiliates, and their
vendors. Such instruments were short-term in nature and 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 April 30,
2003, the Company did not have any outstanding forward exchange contracts. The
Company has not entered into any Euro hedging contracts because the Company
believes that the Companys volume of transactions denominated in the Euro is
not significant.

To finance expansion and operations in Japanese markets prior to the sale of
TRKK, 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 were recognized as other income or expense
in the period in which the exchange rates change. These borrowing arrangements
were ultimately repaid with the proceeds received from the sale of TRKK.

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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 Japanese subsidiary. In
August 2002, Chilmarks request for such an attachment was denied. The
litigation continues with respect to Chilmarks breach of contract claim and
its request for damages under the terms of the contract. As of April 30, 2003,
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
|None   



| | (b) |  | Reports on Form 8-K.                                                                                                                                                                                                                                                                                                                                        
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | On February 3, 2003, the Company filed a Form 8-K relating to
the dismissal of KPMG LLP as the Companys independent auditors
as of January 28, 2003 and the appointment of
PricewaterhouseCoopers LLP to serve as the Companys
independent auditors.                                                                                                      
|
| |     |  | On April 29, 2003, the Company filed a Form 8-K relating to the
Companys election to take advantage of the 30-day grace
period provided for in the indenture with respect to the
payment of interest on its 9 3/8% Senior Subordinated Notes due
2005. The Company also appointed E. Allen Rodriguez as Chief
Executive Officer effective April 26, 2003.

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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.

June 16, 2003
MTS, INCORPORATED
(Registrant)

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

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CERTIFICATION OF CHIEF EXECUTIVE OFFICER



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



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



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



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



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

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

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CERTIFICATION OF CHIEF FINANCIAL OFFICER



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



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



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



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



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

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

33