Management Discussion & Analysis pg 1 2 3 4 5 6 7 8 9 10 11 12 13 14

Independent physical inventory counts are taken on a regular basis at all locations that hold inventory to ensure the amounts reflected in our consolidated financial statements are properly stated. During the interim period between physical inventory counts, we accrue for anticipated physical inventory losses on a location-by-location basis, based on historical results and current trends. If our estimates regarding physical losses are inaccurate, we could be exposed to losses in excess of our established reserves.

Long-Lived Assets
Long-lived assets such as property, plant and equipment; goodwill; software; and investments are reviewed for impairment when events or changes in circumstances indicate the carrying value of the assets may not be recoverable. We would recognize an impairment loss when estimated future undiscounted cash flows expected to result from the use of the asset and its value upon disposal are less than its carrying amount. If our estimates regarding future undiscounted cash flows or useful lives were to change, we could be exposed to losses that are material in nature.

Tax Contingencies
Domestic and foreign tax authorities frequently audit us. These audits include questions regarding the timing and amount of deductions and the allocation of income among various tax jurisdictions. In evaluating the exposure associated with our various filing positions, we record reserves for probable exposures. To the extent we prevail in matters for which accruals have been established or are required to pay amounts in excess of our reserves, our effective tax rate in a given financial statement period may be materially impacted. As of the end of fiscal 2002, three and two of our open tax years were undergoing examination by the United States Internal Revenue Service and Revenue Canada, respectively.

New Accounting Pronouncements
A discussion of recently issued accounting pronouncements is described in note 1 of the Notes to Consolidated Financial Statements.

Outlook for Fiscal 2003
Looking forward to fiscal 2003, we are projecting earnings growth of approximately 18% to 21% from $1.77 per share in fiscal 2002 to approximately $2.10 to $2.17 per share in fiscal 2003. We expect the earnings growth to be driven by a 17% to 20% increase in revenues, 
maintaining the gross profit rate we delivered in fiscal 2002 and modestly reducing our SG&A rate. The projected earnings increase reflects a reduction in Musicland’s operating income from $29 million in fiscal 2002 to approximately break-even in fiscal 2003 due to continued transformation initiatives. The reduction in Musicland’s operating income is net of the $16 million decrease in Musicland’s goodwill amortization expense as a result of adopting SFAS No. 142, Goodwill and Other Intangible Assets, at the beginning of fiscal 2003. In addition, our projections assume that the U.S. economy will continue to gradually improve in fiscal 2003.