Overview
Management's Discussion and Analysis of Financial Condition and Results of Operations provides information that the Company's management believes necessary to achieve an understanding of its financial statements and results of operations. To the extent that such analysis contains statements which are not of a historical nature, such statements are forward-looking statements, which involve risks and uncertainties. These risks include, but are not limited to, changes in the competitive environment for the Company's merchandise, including the entry or exit of non-traditional retailers of the Company's merchandise to or from its markets; releases by the music, home video and video games industries of an increased or decreased number of "hit releases"; general economic factors in markets where the Company's merchandise is sold; and other factors discussed in the Company's filings with the Securities and Exchange Commission. The following discussion and analysis of the Company's financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and related notes included elsewhere in this report and the audited financial statements included in the Company's Annual Report on Form 10-K for the fiscal year ended February 2, 2008.

As of November 1, 2008, the Company operated 786 stores totaling approximately 4.9 million square feet in the United States, the District of Columbia, the Commonwealth of Puerto Rico and the U.S. Virgin Islands. The Company's stores offer predominantly entertainment software, including music, home video and video games. In total, these categories represented 86% of the Company's sales in the thirty-nine weeks ended November 1, 2008. The balance of categories, including software accessories, trend and electronic products represented 14% of the Company's sales in the thirty-nine weeks ended November 1, 2008.

The Company's success has been, and will continue to be, contingent upon management's ability to understand general economic and business trends and to manage the business in response to those trends. Management monitors a number of key performance indicators to evaluate its performance, including:

Sales: The Company measures the rate of comparable store sales change. A store is included in comparable store sales calculations at the beginning of its thirteenth full month of operation. Mall stores relocated in the same shopping center after being open for at least thirteen months are considered comparable stores. Closed stores that were open for at least thirteen months are included in comparable store sales through the month immediately preceding the month of closing. The Company further analyzes sales by store format and by product category. In evaluating sales within a category, the Company analyzes Top 50 (sales from the top 50 selling new releases from a specified period) and catalog (older releases) sales.

Cost of Sales and Gross Profit: Gross profit is impacted primarily by the mix of products sold, by discounts negotiated with vendors and discounts offered to customers. The Company records its distribution and product shrink expenses in cost of sales. Distribution expenses include those costs associated with receiving, shipping, inspecting and warehousing product and costs associated with product returns to vendors. Cost of sales further includes obsolescence costs and is reduced by the benefit of vendor allowances, net of direct reimbursements of expense.

Balance Sheet and Ratios: The Company views cash, net inventory investment (merchandise inventory less accounts payable) and working capital (current assets less current liabilities) as indicators of its financial position. See Liquidity and Capital Resources for further discussion of these items.

                             RESULTS OF OPERATIONS
             Thirteen and Thirty-nine Weeks Ended November 1, 2008
     Compared to the Thirteen and Thirty-nine Weeks Ended November 3, 2007

The following table sets forth a period over period comparison of the Company's
sales for the thirteen weeks and thirty-nine weeks ended November 1, 2008 and
November 3, 2007, by category:

                                       Thirteen weeks ended                                             Thirty-nine weeks ended
                  November        November          Change         %       Comp      November        November          Change         %       Comp
                  1, 2008         3, 2007                                  Store     1, 2008         3, 2007                                  Store
                                                                           Sales                                                              Sales
                               (in thousands)                                                     (in thousands)

Sales             $195,193        $260,570        $ (65,377)     (25)%     (14)%     $642,971        $814,182        $(171,211)     (21)%     (9%)
As a % of sales
 Music              37%             40%                                    (22)%       38%             42%                                    (21)%
 Home Video         41%             38%                                    (5)%        40%             38%                                     1%
 Video Games         8%              9%                                    (32)%        8%              8%                                    (13)%
 Other              14%             13%                                    (1)%        14%             12%                                     7%

Store Count:                                                                           786             962             (176)        (18)%

Sales. Sales decreased 25% and 21% in the thirteen and thirty-nine week periods ending November 1, 2008, respectively. The decrease in total sales is due to comparable store sales decline of 14% and 9% for the thirteen and thirty-nine week periods ended November 1, 2008 and a decline of 18% in the number of stores in operation as compared to the same period last year.

Music:
The Company offers a wide range of compact discs ("CDs") and music DVDs across most music genres, including new releases from current artists as well as an extensive catalog of music from past periods and artists.

During the thirteen and thirty-nine weeks ended November 1, 2008, CD sales in comparable stores decreased 22% and 21%, respectively, versus the thirteen and thirty-nine weeks ended November 3, 2007. The decrease is related to continued industry declines.

Home Video:
The Company offers DVDs and high definition DVDs in all of its stores. Comparable store sales in the video category decreased 5% and increased 1% during the thirteen and thirty-nine week periods ending November 1, 2008, respectively. The decline in sales in the thirteen week period was in line with the

Video Games:
The Company offers video game hardware and software in many of its stores. Comparable store sales decreased 32% during the thirteen weeks ended November 1, 2008 while decreasing 13% during the thirty-nine week period ended November 1, 2008. During September 2007, we reduced the number of stores carrying video games from 600 to 400 with the strategy to build this business on the allocations of product to fewer stores, as well as strengthening our game selling culture. While we made the transition last year, we also aggressively cleared out product. Strong clearance sales, coupled with strong new releases last year resulted in difficult sales comparisons.

Other:
The Company offers accessory items for the use, care and storage of entertainment software, along with trend and electronic products. Comparable store sales, on a combined basis, decreased 1% and increased 7% during the thirteen and thirty-nine week periods ended November 1, 2008, respectively. In addition, on a combined basis, these categories represented 14% of total sales during the thirteen and thirty-nine weeks ended November 1, 2008.

Gross Profit. The following table sets forth a period over period comparison of the Company's gross profit:

                   Thirteen weeks ended                               Thirty-nine weeks ended
                      (in thousands)               Change                  (in thousands)                 Change
                  November      November                              November        November
                   1, 2008      3, 2007          $           %        1, 2008         3, 2007           $           %
Gross Profit       $65,411      $91,332      $(25,921)     (28)%      $224,269        $293,675      $(69,406)     (24)%


As a % of sales     33.5%        35.1%                                 34.9%           36.1%

The decrease in gross profit as a percentage of sales for the thirteen and thirty-nine week periods ended November 1, 2008 reflects lower vendor allowances this year versus last year and an increase in distribution and freight costs as a percentage of sales.

Selling, General & Administrative Expenses ("SG&A"). The following table sets forth a period over period comparison of the Company's SG&A:

                       Thirteen weeks ended                                 Thirty-nine weeks ended
                         (in thousands)                  Change                  (in thousands)                 Change
                   November         November                                November        November
                    1, 2008          3, 2007           $           %        1, 2008         3, 2007           $           %
SG&A                $92,829         $115,196       $(22,367)     (19)%      $281,160        $348,818      $(67,658)     (19)%


As a % of sales      47.6%            44.2%                                  43.7%           42.8%

The $22 million decrease in SG&A expenses for the thirteen weeks ended November 1, 2008 compared to prior year is largely due to the Company operating an average of 18% fewer stores. Despite the decrease, SG&A as a percentage of sales increased to 47.6% from 44.2% due to the sales decline of 25% in the quarter. The increase in SG&A expenses as a percentage of sales from 42.8% for the thirty-nine

Included in SG&A for the thirty-nine weeks ended November 1, 2008, is a gain of approximately $3.1 million from the sale of the Canton, Ohio distribution facility.

Interest Expense, net. Interest expense, net was $1.1 million and $3.0 million during the thirteen and thirty-nine week periods ended November 1, 2008 compared to $1.9 million and $5.0 million for the thirteen and thirty-nine week periods ended November 3, 2007, respectively. The decrease is due to lower average borrowings and lower average interest rates under the Company's revolving credit facility.

Income Tax Benefit. The following table sets forth a period over period comparison of the Company's income tax benefit:

                                                      Thirteen weeks ended                       Thirty-nine weeks ended
                                                         (in thousands)                               (in thousands)
                                               November 1,           November 3,           November 1,            November 3,
                                                  2008                  2007                   2008                  2007
Income tax benefit before impact of
period-specific items                                $   0               $ (11,535 )             $    0               $ (27,111 )

Effective tax rate before impact of period
specific items                                           0 %                  44.8 %                  0 %                  45.0 %

Tax expense (benefit) of period-specific
items                                                  (86 )                    36                 (383 )                   334

Income tax benefit                                   $ (86 )             $ (11,499 )             $ (383 )             $ (26,777 )

As of February 2, 2008, the Company had incurred a cumulative three-year loss. Based on the cumulative three-year loss and other available objective evidence, management concluded that a full valuation allowance should be recorded against the Company's deferred tax assets. In light of the recognition of a full valuation allowance as of February 2, 2008, the net loss incurred for the thirteen and thirty-nine weeks ended November 1, 2008 and the projected net loss for the year ending January 31, 2009, the Company did not provide a current tax benefit for the net loss incurred for the thirteen and thirty-nine weeks ended November 1, 2008.

For the thirteen and thirty-nine weeks ended November 1, 2008, the tax benefit associated with period-specific items is primarily due to FIN 48 statute of limitation expirations offset by tax expense due to FIN 48 interest and state taxes based on modified gross receipts recorded during the period. For the thirteen and thirty-nine weeks ended November 3, 2007, the tax expense associated with period-specific items is primarily due to changes in state tax laws enacted during the period.

                                   Thirteen weeks ended                          Thirty-nine weeks ended
                            November 1,            November 3,             November 1,             November 3,
(in thousands)                 2008                   2007                    2008                    2007
Loss before income tax
benefit                        $ (28,528 )             $ (25,762 )             $ (59,880 )             $ (60,183 )
Income tax benefit                   (86 )               (11,499 )                  (383 )               (26,777 )

Net loss                       $ (28,442 )             $ (14,263 )             $ (59,497 )             $ (33,406 )

Loss before income tax benefit increased $2.8 million to $28.5 million for the third quarter of 2008, from $25.8 million last year. For the thirteen weeks ended November 1, 2008, the Company's net loss increased $14.2 million, to $28.4 million from $14.3 million for the thirteen weeks ended November 3, 2007, largely due to the reduced tax benefit recorded in the current interim period.

For the thirty-nine weeks ended November 1, 2008, loss before income taxes improved $0.3 million to $59.9 million from $60.2 million last year. This improvement was primarily driven by the gain on the sale of the Canton, Ohio distribution facility. The Company's net loss increased $26.1 million to $59.5 million from $33.4 million for the thirty-nine weeks ended November 3, 2007, largely due to the reduced tax benefit recorded in the current interim period.

Liquidity and Cash Flows. The Company's primary sources of working capital are cash provided by operations and borrowings under its revolving credit facility. The Company's cash flows fluctuate from quarter to quarter due to various items, including the seasonality of sales and results from operations, merchandise inventory purchases and the related terms on the purchases, tax payments, capital expenditures, and store acquisitions. Management believes it will have adequate resources to fund its cash needs for the foreseeable future.

The following table sets forth a summary of key components of cash flow and working capital for each of the thirty-nine weeks ended November 1, 2008 and November 3, 2007:

                                         Thirty-nine weeks ended                 Change
       (in thousands)               November 1,          November 3,
                                        2008                 2007                  $
         Operating Cash Flows         $ (123,249 )         $ (169,392 )         $   46,143
         Financing Cash Flows             59,504               79,781              (20,277 )
Sale of distribution facility              6,193                  ---                6,193
         Capital Expenditures             (8,000 )            (13,480 )              5,480

                Cash and Cash
                  Equivalents              9,103               15,539               (6,436 )
        Merchandise Inventory            468,832              569,087             (100,255 )
              Working Capital            202,772              247,361              (44,589 )

The Company had cash and cash equivalents of $9.1 million at November 1, 2008, compared to $74.7 million at February 2, 2008 and $15.5 million at November 3, 2007. Merchandise inventory was $95 per square foot at November 1, 2008, compared to $98 per square foot at November 3, 2007.

Cash used by operating activities was $123.2 million for the thirty-nine weeks ended November 1, 2008. The primary use of cash was a seasonal reduction of accounts payable, resulting in a $73.1 million increase in net inventory (inventory less accounts payable). The Company's merchandise inventory and accounts payable are heavily influenced by the seasonality of its business. A significant reduction of accounts payable occurs annually in the fiscal first quarter, reflecting payments for merchandise inventory sold during the prior year's holiday season.

During the thirty-nine weeks ended November 1, 2008, the Company sold its Canton, Ohio distribution facility, receiving net proceeds of $6.2 million.

Cash provided by financing activities was $59.5 million for the thirty-nine weeks ended November 1, 2008. The primary source of cash of $62.1 million was from borrowings under the Company's revolving credit facility.

The Company has a five-year, $150 million secured revolving credit facility with Bank of America, N.A. that expires in January 2011. The revolving credit facility contains provisions governing additional indebtedness and acquisitions and is secured by the Company's eligible inventory, proceeds from the sale of inventory and by the stock of the Company's subsidiaries. The Company anticipates the amount of the revolving credit facility being fully available to the Company through its term, and does not anticipate any difficulty in obtaining a replacement facility upon its expiration. As of November 1, 2008,

Capital Expenditures. During the thirty-nine weeks ended November 1, 2008, the Company made capital expenditures of $8.0 million. The Company plans to spend a total of $12 million for capital expenditures in 2008.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires that management apply accounting policies and make estimates and assumptions that affect results of operations and the reported amounts of assets and liabilities in the financial statements. Management continually evaluates its estimates and judgments including those related to merchandise inventory and return costs, valuation of long-lived assets, income taxes, stock-based compensation and accounting for gift card liability. Management bases its estimates and judgments on historical experience and other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.

Note 1 of Notes to the Consolidated Financial Statements on Form 10-K for the
year ended February 2, 2008 includes a summary of the significant accounting policies and methods used by the Company in the preparation of its condensed consolidated financial statements. There have been no material changes or modifications to the policies since February 2, 2008.

Recently Issued Accounting Pronouncements:

In December 2007, the Financial Accounting Standards Board ("FASB") issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements-an amendment of Accounting Research Bulletin No. 51" ("SFAS 160"). This new standard establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent's ownership interest and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. The statement also establishes reporting requirements that provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. This standard is effective for fiscal years beginning after December 15, 2008. The Company plans to adopt SFAS 160 on February 1, 2009 and will apply the provisions to prospective transactions.

In December 2007, the FASB issued SFAS No. 141 (Revised 2007), "Business Combinations," ("SFAS 141R"). This new standard applies to all transactions or other events in which an entity obtains control of one or more businesses, including those sometimes referred to as "true mergers" or "mergers of equals" and combinations achieved without the transfer of consideration. This standard replaces FASB Statement No. 141 and applies to all business entities, including mutual entities that previously used the pooling-of-interests method of accounting for some business combinations. The Company plans to adopt SFAS 141R on February 1, 2009 and will apply the provisions to prospective transactions.

In May 2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted Accounting Principles." SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles in the United States. SFAS No. 162 is effective 60 days following the SEC's approval of the Public Company Accounting Oversight Board amendments to Statement of Auditing Standards Section 411, "The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles." We do not expect this statement to have a material impact on our financial condition or operating results.