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 January 31, 2009.

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 January 31, 2009 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 January 31, 2009.

At August 1, 2009, the Company operated 697 stores totaling approximately 4.5 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, video and video games and related products. In total, these categories represented 87% of the Company's sales in the twenty-six weeks ended August 1, 2009. The balance of categories, including software accessories, electronics and trend products represented 13% of the Company's sales in the twenty-six weeks ended August 1, 2009.

The Company's results have been, and will continue to be, dependent 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

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 purchasing, 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.

Selling, General and Administrative ("SG&A") Expenses: Included in SG&A expenses are payroll and related costs, occupancy charges, general operating and overhead expenses and depreciation charges (excluding those related to distribution operations, as disclosed in Note 8 to the condensed consolidated financial statements). SG&A expenses also include asset impairment charges and write-offs, if any, and miscellaneous items, other than interest.

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 Twenty-six Weeks Ended August 1, 2009
       Compared to the Thirteen and Twenty-six Weeks Ended August 2, 2008

The following table sets forth a period over period comparison of the Company's
sales for the thirteen weeks and twenty-six weeks ended August 1, 2009 and
August 2, 2008, by category:


                                         Thirteen weeks ended                                              Twenty-six weeks ended
                   -----------------------------------------------------------------   --------------------------------------------------------------
                                                                               Comp                                                             Comp
                   August 1,        August 2,                                 Store    August 1,        August 2,                              Store
                      2009             2008            Change         %       Sales       2009            2008            Change        %      Sales
                   ----------    ----------------    -------------------------------   -----------------------------    -----------------------------
                                  (in thousands)                                                     (in thousands)

Net sales          $165,746           $215,226        $(49,480 )    (23 )%    (15 )%   $357,179           $447,778      $(90,599 )    (20 )%   (12 )%
As a % of sales
Music                    38 %               39 %                              (18 )%         37 %               38 %                           (15 )%
Home Video               41 %               39 %                              (11 )%         42 %               40 %                            (7 )%
Video Games               8 %                8 %                              (23 )%          8 %                8 %                           (18 )%
Other                    13 %               14 %                              (17 )%         13 %               14 %                           (13 )%

Store Count:                                                                                697                789           (92 )    (12 )%

Sales. Sales decreased 23% and 20% in the thirteen and twenty-six week periods ending August 1, 2009, respectively. The decrease in total sales is due to comparable store sales decline of 15% and 12% for the thirteen and twenty-six week periods ended August 1, 2009, respectively and a decline of 12% in the number of stores in operation as compared to the same periods last year.

The Company's stores and Internet websites offer 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. The music category represented 38% and 37% of total net sales for the thirteen and twenty-six weeks ended August 1, 2009, respectively.

During the thirteen and twenty-six weeks ended August 1, 2009, music sales in comparable stores decreased 18% and 15%, respectively, versus the thirteen and twenty-six weeks ended August 2, 2008. The decrease is related to continued industry declines. Total CD unit sales industry-wide were down 23% during the corresponding period to the Company's second fiscal quarter.

Home Video:

The Company offers DVDs and high definition DVDs ("Bluray") in all of its stores. Comparable store sales in the video category decreased 11% and 7% during the thirteen and twenty-six week periods ending August 1, 2009, respectively. For the quarter, the industry was down 19%.

Video Games:

The Company offers video game hardware and software in approximately half of its stores. Comparable store net sales decreased 23% and 18% and for the thirteen and twenty-six weeks ended August 1, 2009, respectively. Video games represented 8% of our business for the thirteen and twenty-six weeks ended August 1, 2009. For the quarter, the industry was down 28%.

Other:

The Company offers accessory items for the use, care and storage of entertainment software, along with electronics and trend products. For the thirteen and twenty-six weeks ended August 1, 2009, comparable store net sales decreased 17% and 13% for these categories, respectively.

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

                    Thirteen weeks ended                                  Twenty-six weeks ended
                       (in thousands)                Change                   (in thousands)                 Change
                  ------------------------   -----------------------    --------------------------   ---------------------- -
                   August 1,    August 2,                                August 1,      August 2,
                     2009          2008           $            %            2009          2008            $           %
                  -----------   ----------   ------------ - -------- -- ------------ - ----------- - ----------- - -------- -
Gross Profit       $ 58,770     $ 75,870       $ (17,100)     (23)%      $ 124,521     $ 158,858       $(34,337)     (22)%

As a % of sales        35.5 %       35.3 %                                    34.9 %        35.5 %

The decrease in gross profit dollars of 23% and 22% in the thirteen and twenty-six weeks ended August 1, 2009 as compared to the same period last year is due to the decline in total sales.

The decrease in gross profit as a percentage of sales for the twenty-six week periods ended August 1, 2009 reflects lower vendor allowances this year versus last year.

                    Thirteen weeks ended                                  Twenty-six weeks ended
                       (in thousands)                Change                   (in thousands)                 Change
                  ------------------------   -----------------------    --------------------------   ----------------------- -
                   August 1,    August 2,                                August 1,      August 2,
                     2009          2008           $            %            2009          2008            $            %
                  -----------   ----------   ------------   -------- -- ------------ - ----------- - ------------ - -------- -
SG&A               $ 75,767     $ 94,533       $ (18,766)     (20)%      $ 155,126     $ 188,331       $ (33,205)     (18)%

As a % of sales        45.7 %       43.9 %                                    43.4 %        42.1 %

The $19 million, or 20%, decrease in SG&A expenses for the thirteen weeks ended August 1, 2009 compared to prior year is due to the Company operating an average of 12% fewer stores. Despite the decrease, SG&A as a percentage of sales increased to 45.7% from 43.9% due to the sales decline of 23% in the quarter. The increase in SG&A expenses as a percentage of sales from 42.1% for the twenty-six week period ended August 2, 2008 to 43.4% for the twenty-six week period ended August 1, 2009 is due primarily to the overall sales decline of 20%.

Included in SG&A for the twenty-six weeks ended August 2, 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 $0.7 million and $1.4 million during the thirteen and twenty-six week periods ended August 1, 2009 compared to $1.0 million and $1.9 million for the thirteen and twenty-six week periods ended August 2, 2008, respectively. The decrease is due to lower average borrowings and average interest rates under the Company's Credit Facility.

Income Tax Expense (Benefit). As of January 31, 2009 and February 2, 2008, the Company had incurred cumulative three-year losses. Based on the cumulative three-year losses and other available objective evidence, management concluded that a full valuation allowance should be recorded against the Company's deferred tax assets. Due to the recognition of a full valuation allowance as of January 31, 2009, the projected net loss for the year ending January 30, 2010 and the net loss incurred for the twenty-six weeks ended August 1, 2009, the Company did not provide a current tax benefit for the net loss incurred for the thirteen week period.

For the thirteen weeks ended August 1, 2009, the tax expense is attributed to the net impact of the FIN 48 interest accrual and state taxes based on modified gross receipts incurred during this period.

For all other periods presented, the tax benefit is primarily attributed to the net impact of the FIN 48 interest accrual and the reduction of tax reserves due to a tax examination settlement and state taxes based on modified gross receipts incurred during this period.

                                 Thirteen weeks ended        Twenty-six weeks ended
                               ------------------------- - --------------------------- -
                                August 1,     August 2,      August 1,      August 2,
(in thousands)                     2009          2008          2009            2008
                               ------------   ----------   -------------    ---------- -
Loss before income tax         $    (17,681 ) $  (19,649 ) $     (31,991 )  $  (31,352 )
Income tax expense (benefit)             74         (419 )          (499 )        (296 )
                               -- ---------   -- -------   -- ----------    -- ------- -
Net loss                       $    (17,755 ) $  (19,230 ) $     (31,492 )  $  (31,056 )
                               -- ---------   -- -------   -- ----------    -- ------- -

Loss before income tax benefit decreased $2.0 million to $17.7 million for the second quarter of 2009, from $19.6 million last year. For the thirteen weeks ended August 1, 2009, the Company's net loss decreased $1.5 million, to $17.8 million from $19.2 million for the thirteen weeks ended August 2, 2008.

For the twenty-six weeks ended August 1, 2009, the loss before income taxes increased $0.6 million to $32.0 million from $31.4 million last year. The Company's net loss increased $0.4 million to $31.5 million from $31.1 million for the twenty-six weeks ended August 2, 2008.

Liquidity and Cash Flows: The Company's primary sources of working capital are cash provided by sales of merchandise inventory and borrowing capacity under its Credit Facility. The Company's cash flows fluctuate from quarter to quarter due to various items, including seasonality of sales and earnings, merchandise inventory purchases and returns and the related terms on the purchases and capital expenditures. We believe the cash generated from sales of merchandise inventory and borrowing capacity under our Credit Facility will be sufficient to finance our working capital and capital expenditure requirements for at least the next 12 months. The Company expects to replace its current Credit Facility prior to the expiration of the Credit Facility on January 6, 2011. Management has considered many initiatives as part of the development of its operating plan for 2009 and beyond that focus on the operation of a core base of stores, improved product selection based on customer preferences and industry changes, as well as further streamlining of its operations. During Fiscal 2008, management carried out certain strategic initiatives in its efforts to reduce operating costs such as the closure of the Canton, OH distribution center, reduction of headcount at the home office and its distribution centers, the closing of 101 stores, as well as the elimination or curtailment of certain other general and administrative expenses. Also, during the first half of Fiscal 2009, management closed 15 stores and plans to continue its evaluation of store profitability of its remaining 697 stores in consideration of lease terms, conditions and expirations. As a result of these actions, the liquidation of the merchandise inventory from closed stores and management of overall merchandise inventory levels, management expects improvement in its operating cash flow during Fiscal 2009.

The following table sets forth a summary of key components of cash flow and working capital for each of the twenty-six weeks ended August 1, 2009 and August 2, 2008:

                                                 Twenty-six weeks ended       Change
                                               ---------------------------   ---------
                                                 August 1,      August 2,
               (in thousands)                      2009            2008          $
 -------------------------------------------   -------------    ----------   ---------
                        Operating Cash Flows   $     (47,039 )  $  (99,027 ) $  51,988
                        Financing Cash Flows          26,488        33,748      (7,260 )

 Proceeds from sale of distribution facility               -         6,193      (6,193 )
                        Capital Expenditures          (2,366 )      (5,169 )     2,803

                   Cash and Cash Equivalents           7,138        10,400      (3,262 )
                       Merchandise Inventory         320,413       399,193     (78,780 )
                             Working Capital         185,852       228,815     (42,963 )

The Company had cash and cash equivalents of $7.1 million at August 1, 2009, compared to $30.1 million at January 31, 2009 and $10.4 million at August 2, 2008. Merchandise inventory was $72 per square foot at August 1, 2009, compared to $81 per square foot at August 2, 2008.

Cash used by operating activities was $47.0 million for the twenty-six weeks ended August 1, 2009. The primary uses of cash during the twenty-six weeks ended August 1, 2009 were a seasonal reduction of accounts payable, resulting in a $17.9 million increase in net inventory (inventory less accounts payable) and losses from operation. The Company's merchandise inventory and accounts payable are heavily

During the twenty-six weeks ended August 2, 2008, the Company sold its Canton, Ohio distribution facility, receiving net proceeds of $6.2 million.

Cash provided by financing activities was $26.5 million for the twenty-six weeks ended August 1, 2009. The primary source of cash of $28.3 million was from borrowings under the Company's Credit Facility.

The Company has a five-year, $150 million secured Credit Facility with Bank of America, N.A. that expires in January 2011. The 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 availability under the Credit Facility is subject to limitations based on sufficient inventory levels. Based on inventory levels at the end of the quarter, the availability under the Credit Facility was $133 million as of August 1, 2009. As of August 1, 2009, the Company had borrowed $28.3 million under the Credit Facility, had $0.7 million in outstanding letter of credit obligations under the Credit Facility and $104 million was available for borrowing. The weighted average interest rate on outstanding borrowings for the thirteen weeks ended August 1, 2009 was 1.34%.

Capital Expenditures. During the twenty-six weeks ended August 1, 2009, the Company made capital expenditures of $2.4 million. The Company plans to spend a total of $10 million for capital expenditures in 2009.

Recently Issued Accounting Pronouncements:

In June 2009, the FASB issued SFAS No. 168, " The FASB Accounting Standards Codification TM and the Hierarchy of Generally Accepted Accounting Principles - a replacement of FASB Statement No. 162 " ("SFAS 168"). SFAS 168 provides for the FASB Accounting Standards Codification TM (the "Codification") to become the single official source of authoritative, nongovernmental U.S. GAAP. Rules and interpretative releases of the SEC under authority of Federal Securities laws are also sources of U.S. GAAP for SEC registrants. The Codification is not intended to change existing U.S. GAAP and as such will not have a significant impact on the Company's financial statements, but reorganizes the literature. SFAS 168 is effective for interim and annual periods ending after September 15, 2009.

In June 2009, the FASB issued FAS 166, "Accounting for Transfers of Financial Assets" an amendment of FAS 140. FAS 140 is intended to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets: the effects of a transfer on its financial position, financial performance, and cash flows: and a transferor's continuing involvement, if any, in transferred financial assets. This statement must be applied as of the beginning of each reporting entity's first annual reporting period that begins after November 15, 2009. The Company does not expect the adoption of FAS 166 to have an impact on the Company's results of operations, financial condition or cash flows.

In June 2009, the FASB issued FAS 167, "Amendments to FASB Interpretation No.
46(R)". FAS 167 is intended to (1) address the effects on certain provisions of FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities, as a result of the elimination of the qualifying special-purpose entity concept in FAS 166, and (2) constituent concerns about the application

In April 2009, the Financial Accounting Standards Board ("FASB") issued FASB Staff Position ("FSP") No. 107-1("FSP FAS 107-1") and APB 28-1 ("APB 28-1"), which amends FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments, and APB Opinion No. 28, Interim Financial Reporting, to require disclosures about the fair value of financial instruments for interim reporting periods. FSP FAS 107-1 and APB 28-1 will be effective for interim reporting periods ending after June 15, 2009. The adoption of this staff position is not expected to have a material impact on the Company's financial position or results of operations.

In April 2009, the FASB issued FASB Staff Position No. 157-4 ("FSP FAS 157-4"), which provides additional guidance in accordance with FASB No. 157, Fair Value Measurements, when the volume and level of activity for the asset or liability has significantly decreased. This FSP does not change the requirements in paragraphs 24-27 of Statement 157, which provide guidance on the use of Level 1 inputs. FSP FAS 157-4 shall be effective for interim and annual reporting periods ending after June 15, 2009. The adoption of this staff position is not expected to have a material impact on the Company's financial position or results of operations.

In April 2009, the FASB issued FASB Staff Position No. 115-2 ("FSP FAS 115-2") and FASB Staff Position No. 124-2 ("FSP FAS 124-2"), which amends the other-than-temporary impairment guidance for debt and equity securities. FSP FAS 115-2 and FSP FAS 124-2 shall be effective for interim and annual reporting periods ending after June 15, 2009. The adoption of this staff position is not expected to have a material impact on the Company's financial position or results of operations.

In April 2009, the FASB issued FSP FAS 141R-1, Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies, which amends and clarifies SFAS No. 141 (Revised) to address application issues on initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. This FSP shall be effective for assets or liabilities arising from contingencies in business combinations for which the acquisition date is during or after fiscal 2010. After the effective date, the Company will apply the requirements of SFAS No. 141R-1 to any future business combinations.

In December 2008, the Financial Accounting Standards Board ("FASB") issued FASB Staff Position ("FSP") FAS No. 132(R)-1, "Employers' Disclosures about Postretirement Benefit Plan Assets" ("FSP FAS No. 132(R)-1") which amends SFAS No. 132(revised 2003) "Employers' Disclosures about Pensions and Other Postretirement Benefits" - an Amendment of FASB Statements No. 87, 88, and 106 ("SFAS No. 132(R)"). FSP FAS No. 132(R)-1 requires more detailed disclosures about the assets of a defined benefit pension or other postretirement plan and is effective for fiscal years ending after December 15, 2009. We are in the process of evaluating FSP FAS No. 132(R)-1 and do not expect it will have a significant impact on our Consolidated Financial Statements.

. . .