<PAGE>

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-Q

(Mark One)
[X]               QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934
                       For the period ended March 31, 2002

[ ]              TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934

     For the transition period from ________________ to __________________.


                        Commission File Number 000-21887

                               CD WAREHOUSE, INC.
             (Exact name of registrant as specified in its charter)

           DELAWARE                                                   73-1504999
           --------                                                   ----------
(State or other jurisdiction of             (I.R.S. Employer Identification No.)
incorporation or organization)

900 N. Broadway, Oklahoma City, Oklahoma                                   73102
----------------------------------------                                   -----
  (Address of principal executive offices)                            (Zip Code)

       Registrant's telephone number, including area code: (405) 236-8742

Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.

                                Yes  X   No
                                    ---     ---

The number of shares outstanding of the Issuer's Common Stock, $.01 par value,
as of May 10, 2002 was 3,660,295.

<PAGE>

                                    FORM 10-Q

                                TABLE OF CONTENTS
<TABLE>
<CAPTION>
                                                                                            Page
PART I.         FINANCIAL INFORMATION
<S>                                                                                         <C>
        Item 1. Financial Statements

                Condensed Consolidated Balance Sheets - December 31, 2001 and
                March 31, 2002 (unaudited)                                                     3

                Condensed Consolidated Statements of Operations - Three months
                ended March 31, 2001 and 2002 (unaudited)                                      4

                Condensed Consolidated Statements of Cash Flows - Three months ended
                March 31, 2001 and 2002 (unaudited)                                            5

                Notes to Condensed Consolidated Financial Statements (unaudited)               6

        Item 2. Management's Discussion and Analysis of Financial Condition and
                Results of Operations                                                          8

        Item 3. Quantitative and Qualitative Disclosures About Market Risk                    13

PART II.        OTHER INFORMATION

        Item 1. Legal Proceedings                                                             13

        Item 6. Exhibits and Reports on Form 8-K                                              13

        Signatures                                                                            14
</TABLE>

                                        2

<PAGE>

                          PART I. FINANCIAL INFORMATION

                               CD WAREHOUSE, INC.
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                  (Information at March 31, 2002 is unaudited)

<TABLE>
<CAPTION>
                                     ASSETS
                                                                      December 31,        March 31,
                                                                         2001               2002
                                                                    ---------------     -------------
<S>                                                                 <C>                 <C>
Current assets:
     Cash and cash equivalents                                      $       548,950     $     531,014
     Accounts receivable, net                                               747,422           519,282
     Merchandise inventory                                                7,652,294         7,613,460
     Prepaid expenses and other                                             250,106           424,200
                                                                    ---------------     -------------
                   Total current assets                                   9,198,772         9,087,956

Furniture, fixtures and equipment, net                                    1,755,555         1,641,017

Intangible and other assets, net                                            199,735           197,235
                                                                    ---------------     -------------
                   Total assets                                     $    11,154,062     $  10,926,208
                                                                    ===============     =============

                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
     Accounts payable                                               $       764,452     $     685,090
     Accrued liabilities                                                  1,007,412           987,769
     Advances and deposits                                                   79,000            31,500
                                                                    ---------------     -------------
                   Total current liabilities                              1,850,864         1,704,359

Long-term debt                                                            4,409,043         4,373,397
Other noncurrent liabilities                                                360,000           289,017

Stockholders' equity:
     Preferred stock, $.01 par value; 5,000,000 shares
       authorized, none issued                                                   --                --
     Common stock, $.01 par value; 10,000,000 shares
       authorized, 3,660,295 issued and outstanding
       at December 31, 2001 and March 31, 2002                               36,603            36,603
     Additional paid-in-capital                                          21,828,756        21,828,756
     Accumulated deficit                                                (17,331,204)      (17,305,924)
                                                                    ---------------     -------------
                   Total stockholders' equity                             4,534,155         4,559,435
                                                                    ---------------     -------------
                   Total liabilities and stockholders' equity       $    11,154,062     $  10,926,208
                                                                    ===============     =============
</TABLE>
                            (See accompanying notes)

                                        3

<PAGE>

                               CD WAREHOUSE, INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (unaudited)
<TABLE>
<CAPTION>
                                                                        Three Months Ended
                                                                   -----------------------------
                                                                     March 31,        March 31,
                                                                       2001             2002
                                                                   ------------     ------------
<S>                                                                <C>              <C>
Revenues:
      Company operations:
             Retail store sales                                    $  5,662,961     $  5,404,854
             Wholesale merchandise sales                                 96,040           90,516
             Software income, net                                         6,000            3,000
      Franchise operations:
             Royalty income                                             771,130          779,489
             Franchise and development fees                              25,000           47,500
                                                                   ------------     ------------
                         Total revenues                               6,561,131        6,325,359

Operating costs and expenses:
             Cost of sales - retail stores sales                      3,437,226        3,329,099
             Cost of sales - wholesale merchandise sales                 65,062           72,868
             Retail store operating expenses                          1,913,393        1,940,643
             General and administrative                                 894,273          725,409
             Depreciation and amortization                              303,780          153,254
                                                                   ------------     ------------
                         Total operating costs and expenses           6,613,734        6,221,273
                                                                   ------------     ------------

Operating income (loss)                                                 (52,603)         104,086

Other income (expense):
             Interest expense                                          (108,744)         (63,295)
             Other, net                                                  48,819          (15,511)
                                                                   ------------     ------------
                                                                        (59,925)         (78,806)
                                                                   ------------     ------------

Income (loss) before income taxes                                      (112,528)          25,280

Provision for income taxes                                                    -                -
                                                                   ------------     ------------

Net income (loss)                                                  $   (112,528)    $     25,280
                                                                   ============     ============

Net income (loss) per share-basic and diluted:
      Basic                                                        $       (.03)    $        .01
                                                                   ============     ============
      Diluted                                                      $       (.03)    $        .01
                                                                   ============     ============
Shares used in computations:
      Basic                                                           3,660,295        3,660,295
                                                                   ============     ============
      Diluted                                                         3,660,295        3,684,700
                                                                   ============     ============
</TABLE>

                            (See accompanying notes)


                                       4

<PAGE>

                               CD WAREHOUSE, INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (unaudited)
<TABLE>
<CAPTION>
                                                                        Three Months Ended
                                                                    ---------------------------
                                                                      March 31,      March 31,
                                                                        2001           2002
                                                                    ------------   ------------
<S>                                                                 <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITES:
      Net income (loss)                                             $   (112,528)  $     25,280
      Adjustments to reconcile net income (loss) to net cash
        provided by (used for) operating activities:
             Depreciation and amortization                               303,780        153,254
             Accrual for store closures                                 (109,308)       (50,530)
             Accrual for severance                                             -        (35,000)
             Changes in operating assets and liabilities,
               exclusive of business acquisitions:
                        Accounts receivable, net                          96,233        228,140
                        Inventories                                       33,964         38,834
                        Prepaid expenses and other                      (144,928)      (205,560)
                        Other assets                                      19,417          2,500
                        Accounts payable                                (122,503)       (79,362)
                        Accrued liabilities                             (116,608)        (5,096)
                        Advances and deposits                            (69,000)       (47,500)
                                                                    ------------   ------------
      Total adjustments                                                 (108,953)          (320)
                                                                    ------------   ------------
      Net cash provided by (used for) operating activities              (221,481)        24,960

CASH FLOW FROM INVESTING ACTIVITIES:
      Note receivable - collections                                        6,001          6,020
      Purchase of furniture, fixtures and equipment                      (58,081)       (13,270)
                                                                    ------------   ------------
      Net cash used for investing activities                             (52,080)        (7,250)

CASH FLOW FROM FINANCING ACTIVITIES:
      Notes payable:
             Advances                                                  4,038,785      3,416,940
             Repayments                                               (3,611,247)    (3,452,586)
                                                                    ------------   ------------
      Net cash provided by (used for) financing activities               427,538        (35,646)
                                                                    ------------   ------------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                     153,977        (17,936)

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                         637,035        548,950
                                                                    ------------   ------------

CASH AND CASH EQUIVALENTS AT END OF PERIOD                          $    791,012   $    531,014
                                                                    ============   ============
</TABLE>
                            (See accompanying notes)

                                        5

<PAGE>

                               CD WAREHOUSE, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (unaudited)

NOTE 1. BASIS OF PRESENTATION

     The condensed consolidated financial statements as of December 31, 2001 and
March 31, 2002 and for the three months ended March 31, 2001 and 2002, include
the accounts of CD Warehouse, Inc. (the "Company") and its wholly owned
subsidiaries, Compact Discs Management, Inc. and CD Warehouse Finance Company.
All material intercompany accounts and transactions have been eliminated in
consolidation.

     The accompanying interim condensed consolidated financial statements of the
Company are unaudited; however, in the opinion of management, all adjustments
necessary for a fair presentation of such condensed consolidated financial
statements have been reflected in the interim periods presented. Such
adjustments consisted only of normal recurring items. The results of operations
for the three months ended March 31, 2002 are not necessarily indicative of the
results to be expected for the full year ending December 31, 2002. The
significant accounting policies and certain financial information, which are
normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States, but which are not required
for interim reporting purposes, have been condensed or omitted. The accompanying
condensed consolidated financial statements of the Company should be read in
conjunction with the consolidated financial statements and related notes
included in the Company's December 31, 2001 Form 10-K.

NOTE 2. CONTINGENT MATTERS

     The Company is involved in legal proceedings and litigation arising in the
ordinary course of business, including a legal proceeding where the alleged
damages are in excess of $6.9 million. The Company believes this proceeding is
without merit and the resolution of this and other contingencies will not have a
material adverse effect on the Company's consolidated financial statements. The
Company's beliefs are subject to change in the near term.

NOTE 3. LONG-TERM DEBT

     The Company has a $15,000,000 revolving credit facility (the "Credit
Facility") with an asset-based lender (the "Lender"). As of March 31, 2002, the
outstanding balance of the Credit Facility was $4,373,397. The outstanding
principal and interest under the Credit Facility will become due and payable on
July 1, 2003. As a result of the March 2002 amendment, amounts borrowed under
the Credit Facility bear a variable rate of interest equal to an index rate
(30-day commercial paper) plus 4.75% (an aggregate of 6.50% at March 31, 2002).
The borrowings under the Credit Facility are limited to a borrowing base
calculation based upon stated percentages of the Company's compact disc
inventory. In March 2002, the Lender notified the Company of a reduction in the
stated percentages utilized to calculate the available borrowing base. The
reduction was based on a recent assessment of the estimated liquidating market
value of the compact disc inventory by a third party and resulted in a reduction
of the amount available under the Credit Facility. This reduction created a
temporary over advancement of $200,000 that was resolved by the end of April
2002. All assets of the Company are pledged as collateral under the Credit
Facility. In March 2002, certain financial covenants required to be maintained
by the Company were amended to amounts the Company expected to achieve in future
accounting periods. For 2002, the Company must maintain a fixed charge coverage
ratio in the first, second, third and fourth quarters equal to 1.15 to 1, 2.0 to
1, 2.5 to 1, and 3.0 to 1, respectively. The Company is also required to have a
tangible net worth of at least $4,675,000 at December 31, 2002, and the
Company's capital expenditures during 2002 cannot exceed $375,000. As of March
31, 2002, the Company was in compliance with the Credit Facility covenants for
the first quarter of 2002.

                                       6

<PAGE>

NOTE 4. EARNINGS PER SHARE

     Shares used in the computation of diluted earnings per share include
dilutive outstanding stock options and warrants after giving effect to the
treasury stock method for assumed exercise.

NOTE 5. LIQUIDITY AND MANAGEMENT'S PLANS

     At March 31, 2002, the Company had working capital of $7,384,000 and cash
and cash equivalents of $531,000 substantially all of which were committed to
servicing the Company's advancements under the Credit Facility. Due to the
recent reductions in the calculation of the available borrowing base of the
Credit Facility, at March 31, 2002 the Company did not have any remaining
available borrowing base. All assets of the Company are pledged as collateral
under the Credit Facility. The Credit Facility requires the Company to maintain
certain financial covenants including fixed charge coverage, minimum tangible
net worth, and limits on capital expenditures. The impairment of long-lived
assets and provision for store closures recorded in 2000 and 2001 resulted in
the Company being out of compliance with the fixed charge coverage ratios and
minimum tangible net worth covenants. The Lender waived the covenant violations
for 2000 and 2001 and reset the covenants for 2002. The Company anticipates that
the 2002 results of operations will not significantly exceed the Credit Facility
covenants for 2002. In the event the Company fails to comply with the Credit
Facility covenants, the Lender has the right to declare the outstanding
borrowings immediately due and payable. In such case, the Company will be
required to obtain alternative funding for repayment of the Credit Facility. The
alternative funding sources include the offering of additional equity securities
that may be substantially dilutive of the Company's shareholders interests in
the Company or the obtaining of borrowings under a replacement credit facility.
The Company does not currently have any commitments to fund repayment of the
Credit Facility, and there is no assurance funding will become available on a
timely basis or on terms acceptable to the Company.

     For the year ended December 31, 2001, the Company experienced a decline in
comparable retail store sales from the same period in 2000. This decline
continued for the three months ended March 31, 2002 compared to the same period
in 2001. The Company believes that the decline is temporary and largely due to
the lack of new releases of music and the downturn of the economy. The Company
anticipates that it will achieve an overall 2% growth in company retail sales
for 2002 and at least maintain the 2001 level of franchise royalties. Although
the Company will continue to focus on reducing retail store operating costs and
corporate headquarter expenses, it is possible that the decline in retail store
sales could continue during 2002. Furthermore, the Company believes its decline
in comparable retail store sales are consistent with that currently experienced
by others in the retail music industry. Because the Company believes these
situations are not reflective of the Company's brand and still believes the
introduction of digital versatile discs (DVDs) represents potential profitable
sales growth opportunities for the Company and its franchise community, the
Company does not currently plan to close additional retail stores in the near
term. Thus, no provision for additional store closures was made for the three
months ended March 31, 2002; however, in the event the decline in comparable
retail store sales continues or the Company does not experience favorable 2002
operating results from the introduction of DVDs into its operations, this
evaluation could change in the near term, which could result in the need for
future provisions for store closures or further impairment of long-lived assets.

     The Company plans to continue improving the operating results of its retail
stores through increased emphasis on DVD sales, development of relationships to
acquire inventory at lower cost and reduction of operating expenses. The Company
will also continue to focus its efforts on market expansion through increased
franchised domestic and international store development, rather than through
opening of additional Company-owned stores. The Company expects to open 15 to 20
new franchised stores during 2002.

                                        7

<PAGE>

     The continuation of the Company's profitability obtained in the first
quarter of 2002 and the generation of sufficient working capital to sustain
operations are dependent on the successful implementation of its business plans,
the success of which cannot be assured.

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

     Certain statements contained with this report, including the financial
statements, may be deemed "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended (collectively, the "Private
Securities Litigation Reform Act of 1995"). All statements in this report other
than a statement of historical fact are forward-looking statements that are
subject to known and unknown risks, uncertainties and other factors which could
cause actual results and performance of the Company to differ materially from
such statements. The words "believe," "expect," "anticipate," "intend," "will,"
and similar expressions identify forward-looking statements. While the Company
believes the expectations reflected in such forward-looking statements are
reasonable, it can give no assurance such expectations will prove to have been
correct. Forward-looking statements contained herein relate to, among other
things:

     o    ability or inability to continue and improve operations and remain
          profitable on an annualized basis;
     o    anticipated financial performance;
     o    ability to comply with the Company's general working capital
          requirements;
     o    ability to generate sufficient cash flow from operations to fund all
          costs of operations;
     o    achieve an overall 2% growth in company retail sales for 2002;
     o    opening 15 to 20 new franchised stores during 2002; and
     o    all other statements which are not statements of historical fact.

     While the Company believes the expectations reflected in such
forward-looking statements are reasonable, it can give no assurance such
expectations will prove to have been correct. There are a variety of factors
which could cause future outcomes to differ materially from those described in
this report, including, but not limited to:

     o    general economic conditions;
     o    inability to collect in a timely manner a material amount of
          receivables;
     o    material reduction in revenues;
     o    increased competitive pressures;
     o    management retention and development;
     o    the requirement to use internally generated funds for purposes not
          presently anticipated;
     o    the inability to remain profitable or if not profitable, the inability
          to secure additional liquidity in the form of additional equity or
          debt;
     o    the unfavorable outcome of legal proceedings now in progress; and
     o    inability to maintain compliance with debt covenants.

     The Company undertakes no obligations to update any forward-looking
statement, whether as a result of new information, future events or otherwise

Results of Operations

     The Company derives its revenues primarily from retail sales of its
company-owned stores, wholesale merchandise sales to franchisees of the Company
and royalty fees from franchisees. The Company also receives revenues from
initial franchise fees, area development fees and software income. Retail store
cost of sales and operating expenses relate directly to company-owned retail
store sales. Wholesale merchandise sales and associated cost of sales relate to
the Company's franchising operations. Other expenses, such as depreciation,
amortization, and general and administrative expenses, relate to

                                       8

<PAGE>

company-owned store operations, as well as the Company's franchising operations.
The number and sales volumes of company-owned retail stores directly affect the
Company's revenues and expenses. The Company's revenues and, to a lesser extent,
expenses, also are affected by the number and sales volumes of franchised
stores. Initial franchise fees are directly related to the number of franchised
store openings.

     The following table sets forth the percentage relationship to total
revenues, unless otherwise indicated, of certain items included in the Company's
statement of income:

<TABLE>
<CAPTION>
                                                                Three months ended March 31,
                                                                ----------------------------
                                                                   2001            2002
                                                                   ----            ----
<S>                                                             <C>                <C>
      Revenues:
         Retail store sales ..................................      86.3%           85.4%
         Wholesale merchandise sales .........................       1.5%            1.4%
         Software income, net ................................        .1%             .1%
         Royalty income ......................................      11.7%           12.3%
         Franchise and development fees ......................        .4%             .8%
                                                                   -----           -----
             Total revenues ..................................     100.0%          100.0%

      Cost and expenses:
         Cost of sales - retail store sales (1) ..............      60.7%           61.6%
         Cost of sales - wholesale merchandise sales (2) .....      67.7%           80.5%
         Retail store operating expenses (1) .................      33.8%           35.9%
         General and administrative ..........................      13.6%           11.5%
         Depreciation and amortization .......................       4.6%            2.4%
      Operating income (loss) ................................       (.8)%           1.6%
      Net income (loss) ......................................      (1.7)%            .4%
</TABLE>
      (1)  As a percentage of retail store sales.
      (2)  As a percentage of wholesale merchandise sales.

<TABLE>
<CAPTION>
                                                                Three months ended March 31,
                                                                ----------------------------
  Sales Data:                                                      2001            2002
                                                                   ----            ----
<S>                                                          <C>                  <C>
  System wide sales: (A)
     CD Warehouse                                            $  21,216,308        $ 21,278,827
     Disc Go Round                                               1,904,601           1,361,706
                                                             -------------        ------------
                                                             $  23,120,909        $ 22,640,533
                                                             =============        ============
  Percentage increase (decrease): (A)
      CD Warehouse                                                      (6)%                 - %
      Disc Go Round                                                    (52)%               (29)%

  Average monthly sales per store: (A)
      CD Warehouse                                           $      27,625        $     28,372
      Disc Go Round                                          $      22,947        $     25,217

  Change in comparable retail store sales (B)
      CD Warehouse                                                      (8)%                (4)%
      Disc Go Round                                                     (3)%                 8 %
</TABLE>

  (A)  Represents the aggregate amounts for both Company owned stores and
       franchise stores.
  (B)  Represents percentage increase (decrease) only for stores open in both
       periods reported.



                                       9

<PAGE>

     The following table sets forth the number of stores opened and closed
throughout the CD Warehouse System for the three months ended March 31, 2002:

<TABLE>
<CAPTION>
                                   December 31,                                                March 31,
                                       2001          Opened         Closed       Transfers       2002
                                  --------------   -----------   ------------   -----------   -----------
<S>                               <C>              <C>           <C>            <C>           <C>
Franchised Stores
  Domestic-CD Warehouse                184                1            (7)           --           178
  Domestic-Disc Go Round                21               --            (2)           --            19
                                     -----           ------         -----         -----         -----
                                       205                1            (9)           --           197

  International-CD Warehouse            18               --            --            --            18
  International-Disc Go Round           --               --            --            --            --
                                     -----           ------         -----         -----         -----
                                        18               --            --            --            18
Company-owned Stores
  Domestic-CD Warehouse                 64               --            --            --            64
  Domestic-Disc Go Round                --               --            --            --            --
                                     -----           ------         -----         -----         -----
                                        64               --            --            --            64
                                     -----           ------         -----         -----         -----
         Total                         287                1            (9)           --           279
                                     =====           ======         =====         =====         =====
</TABLE>

     Revenues

     Retail store sales decreased $258,000 to $5,405,000 for the three months
ended March 31, 2002, from $5,663,000 for the three months ended March 31, 2001.
The decrease in retail store sales was the result of the downturn of the economy
that started in the fourth quarter of 2001 and has continued through the first
quarter of 2002, and the lack of new music releases. The Company also had to
reduce its normal markup on inventory sales to generate enough sales to fund the
$200,000 over-advancement of the Company's revolving credit facility (the
"Credit Facility") resulting from the lender modification of the borrowing base
calculation. The forced sale of the Company's inventory at reduced markup
affected operating results by (i) increasing the cost of sales as a percent of
revenues and (ii) depletion of inventory available for resale through
Company-owned stores and to the franchised stores on a wholesale basis.

     Wholesale merchandise sales decreased $5,000 to $91,000 for the three
months ended March 31, 2002, from $96,000 for the same period in 2001. The
decrease was due to the net reduction of 17 CD Warehouse franchise-operated
stores during the three months ended March 31, 2002 compared to the same period
in 2001.

     Royalty income increased $8,000 to $779,000 for the three months ended
March 31, 2002 from $771,000 for the three months ended March 31, 2001. Although
the Company had a net reduction of 17 franchise-operated stores as of March 31,
2002 and experienced an average 3% decline in comparable retail store sales,
average monthly sales per store increased from $27,170 for the three month
period ended March 31, 2001 to $28,160 for the three months ended March 31,
2002.

     Costs and Expenses

     Cost of sales for retail store sales decreased $108,000 for the three
months ended March 31, 2002 compared to the same period in 2001. This 3%
decrease is consistent with the decline in retail store sales discussed above.
However, cost of sales as a percentage of sales was 62% of sales for the three
months ended March 31, 2002 compared to 61% for the three months ended March 31,
2001. The increase in cost of sales as a percentage of sales was due to the
reduction of markup on inventory sales as discussed above.

     Cost of sales for wholesale merchandise increased $8,000 to $73,000 for
the three months ended March 31, 2002, from $65,000 for the three months ended
March 31, 2001. Cost of sales for merchandise as a percentage of merchandise
sales increased from 68% for the three months ended March 31, 2001 to 81%

                                       10

<PAGE>

for the three months ended March 31, 2002. As can be seen by the reduction in
merchandise sales discussed above, the Company has decreased the amount of
merchandise available for resale to the franchise system along with a reduction
in its related margin.

     Retail store operating expenses increased $28,000 to $1,941,000 for the
three months ended March 31, 2002, from $1,913,000 for the three months ended
March 31, 2001. The increase in retail store operating expenses combined with
the decline in retail store sales discussed above caused retail store expenses
to increase to 36% of retail store sales for the three months ended March 31,
2002 compared to 34% for the same period in 2001. The lack of any decrease in
retail store operating expenses corresponding to the decline in retail store
sales indicates most of these expenses are fixed or semi-fixed in nature and do
not vary with fluctuations in sale volumes. The major increases in retail
operating expenses related to advertising and property taxes.

     General and administrative expenses decreased by $169,000 to $725,000 for
the three months ended March 31, 2002, from $894,000 for the three months ended
March 31, 2001. This 19% decrease was associated with the reduction in salaries,
travel and legal expense.

     Depreciation and Amortization

     Depreciation and amortization decreased $151,000 to $153,000 for the three
months ended March 31, 2002, from $304,000 for the same period in 2001. The
decrease was attributed to the charge-offs and impairment of certain assets of
$7,137,000 during the last two quarters of 2001.

     Net Income (Loss)

     The Company realized net income of $25,000 for the three months ended March
31, 2002, compared to having sustained a net loss of $113,000 during the same
period in 2001. This increase in net income and elimination of loss was
attributed to decreases in general and administrative expenses of $169,000 and
depreciation and amortization of $151,000, offset by a decrease in contribution
from retail store operations of $176,000.

Liquidity and Capital Resources

     At March 31, 2002, the Company had working capital of $7,384,000 and cash
and cash equivalents aggregating $531,000, compared to working capital of
$7,348,000 and cash and cash equivalents of $549,000 at December 31, 2001. Net
cash provided by operating activities was $25,000 for the three months ended
March 31, 2002, compared to net cash used for operating activities of $221,000
for the three months ended March 31, 2001. The net cash provided by operating
activities for the three months ended March 31, 2002 related to a reduction in
accounts receivables, which usually has larger balances as of December 31
because of the holiday season, and offset by the increase in prepaid expense
that was primarily associated with insurance. The net cash used for operating
activities for the three months ended March 31, 2001 related to a decrease in
all current liabilities in addition to an increase in prepaid expenses.

     Net cash used for investing activities was $7,000 for the three months
ended March 31, 2002, compared to $52,000 for the same period in 2001. The net
cash used for investing activities for the three months ended March 31, 2002 and
March 31, 2001 related to the Company's purchase of fixed assets.

     Net cash used for financing activities was $36,000 for the three months
ended March 31, 2002, compared to net cash provided by financing activities of
$428,000 for the same period in 2001. The net cash used for or provided by
financing activities for 2002 and 2001, respectively, relates to the net change
in borrowings under the Company's Credit Facility with the Lender.

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<PAGE>

     The Company has a $15,000,000 revolving credit facility (the "Credit
Facility") with an asset-based lender (the "Lender"). As of March 31, 2002, the
outstanding balance of the Credit Facility was $4,373,397. The outstanding
principal and interest under the Credit Facility will become due and payable on
July 1, 2003. As a result of the March 2002 amendment, amounts borrowed under
the Credit Facility bear a variable rate of interest equal to an index rate
(30-day commercial paper) plus 4.75% (an aggregate of 6.50% at March 31, 2002).
The Credit Facility requires the Company to maintain certain financial covenants
including fixed charge coverage, minimum tangible net worth, and limits on
capital expenditures. The impairment of long-lived assets and provision for
store closures recorded in 2000 and 2001 resulted in non-compliance with the
fixed charged coverage ratios and minimum tangible net worth covenant
requirements. The Lender waived all covenant violations for both years and
amended the covenants in March 2002 to reflect more accurately the anticipated
results of operations for 2002 and financial condition at December 31, 2002.

     The borrowings under the Credit Facility are limited to a borrowing base
calculation based upon stated percentages of the Company's compact disc
inventory. In March 2002, the Lender notified the Company of a reduction in the
stated percentages utilized to calculate the available borrowing base. The
reduction was based on a reassessment of the estimated liquidating market value
of the Company's compact disc inventory by a third party and resulted in a
reduction of the amount available under the Credit Facility. This reduction
created a temporary over advancement of $200,000 that was resolved in April
2002. All assets of the Company are pledged as collateral under the Credit
Facility.

     For 2002, the Company must maintain a fixed charge coverage ratio in the
first, second, third and fourth quarters equal to 1.15 to 1, 2.0 to 1, 2.5 to 1,
and 3.0 to 1, respectively. The Company is also required to have a tangible net
worth of at least $4,675,000 at December 31, 2002, and capital expenditures
during 2002 cannot exceed $375,000. As of March 31, 2002, the Company was in
compliance with the Credit Facility covenants for the first quarter of 2002.

     The Company anticipates that the 2002 results of operations will not
significantly exceed the Credit Facility covenants for 2002. In the event the
Company fails to comply with the Credit Facility covenants, the Lender will have
the right to declare the outstanding borrowings immediately due and payable. In
such case, the Company will be required to obtain alternative funding for
repayment of the Credit Facility. In March 2002, the Company retained an
investment banker to assist the Company in arranging funding for replacement of
the Credit Facility. The alternative funding sources include the offering of
additional equity securities that may be substantially dilutive of the Company's
shareholders' interests in the Company or the obtaining of borrowings under a
replacement credit facility on more favorable terms. The Company does not
currently have any commitments to fund repayment of the Credit Facility and
there is no assurance funding will become available on a timely basis or on
terms acceptable to the Company.

     For the year ended December 31, 2001, the Company experienced a decline in
comparable retail store sales from the same period in 2000. This decline
continued for the three months ended March 31, 2002 compared to the same period
in 2001. The Company currently believes that the decline is temporary and
largely due to the lack of new releases of music and the downturn of the
economy. The Company anticipates that it will be successful in achieving an
overall 2% growth in retail sales for 2002 and at least maintain the 2001 level
of franchise royalties. Although the Company will continue to focus on reducing
retail store operating costs and corporate headquarter expenses, it is possible
that the decline in retail store sales may continue during 2002. Furthermore,
the Company believes its decline in comparable retail store sales are consistent
with that currently experienced by others in the retail music industry. Because
the Company believes these situations are not reflective of the Company's brand
and still believes the introduction of digital versatile discs (DVDs) represents
potential profitable sales growth opportunities for the Company and its
franchise community, the Company does not currently plan to close additional
retail stores in the near term. Thus, no provision for additional store closures
was made for the three months ended March 31, 2002; however, in the event the
decline in comparable retail store sales continues or the Company does not
experience favorable 2002 operating results from the introduction of DVDs into
its operations, this

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<PAGE>

evaluation could change in the near term, which could result in the need for
future provisions for store closures or further impairment of long-lived assets.

     The Company plans to continue improving the operating results of its retail
stores through increased emphasis on DVD sales, development of relationships to
acquire product at lower cost and reduction of operating expenses. The Company
will also continue to focus its efforts on market expansion through increased
franchised domestic and international store development, rather than through
opening of additional Company-owned stores. The Company expects to open 15 to 20
new franchised stores during 2002.

     The continuation of the profitability obtained in the first quarter of 2002
and the generation of sufficient working capital to sustain operations are
dependent on the successful implementation of the Company's business plans, the
success of which cannot be assured.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk.

     The Company is exposed to certain market risks arising from adverse changes
in interest rates, primarily due to the potential effect of such changes on the
Company's variable rate loan arrangements with its Lender as described in Part
I, Item 2 above under the caption "Liquidity and Capital Resources." The Company
does not use interest rate derivative instruments to manage exposure to interest
rate changes.

                           Part II - Other Information

Item 1.  Legal Proceedings.

     There are no additional material legal proceedings pending against the
Company not previously reported by the Company in Item 3 of its Form 10-K for
the year ended December 31, 2001. Subsequent to filing of the Form 10-K for
2001, Christopher M. Salyer, President and Chief Executive Officer of the
Company, was removed as defendant in all five of the arbitration demands in
which he was named. There have been no other material developments in the legal
proceedings. The Company believes all of the pending legal proceedings are
without merit and intends to vigorously defend its position.

Item 6.  Exhibits and Reports on Form 8-K.

         (a)  Exhibits

              None

         (b)  Reports on Form 8-K

              On March 11, 2002, the Company filed Form 8-K reporting under Item
              5. Other Events the resignation of Stephen B. Browne on February
              25, 2002 as a Director.

              On May 14, 2002, the Company filed Form 8-K reporting under Item
              5. Other Events the resignations of Norman R. Proulx and K.
              Douglas Martin on April 2, 2002 and April 5, 2002, respectively,
              as Directors and the subsequent appointments of David S. Boyd and
              Kenneth Sarachan as Directors on May 7, 2002. In addition,
              reporting under Item 4. Changes in Registrant's Certifying
              Accountant the dismissal of Ernst & Young, LLP as the Company's
              independent accountants and the appointment of Steakley, Gilbert &
              Morgan, P.C. as the Company's independent accountants, effective
              May 8, 2002.

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<PAGE>

                                   SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.


                                           CD WAREHOUSE, INC.,
                                           a Delaware corporation


Date: May 15, 2002                         /s/ Christopher M. Salyer
                                           -------------------------------------
                                           Christopher M. Salyer
                                           Chairman of the Board of Directors;
                                           President and Chief Executive Officer


Date: May 15, 2002                         /s/ Doyle E. Motley
                                           -------------------------------------
                                           Doyle E. Motley
                                           Senior Vice-President and Chief
                                           Financial Officer


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