CD WAREHOUSE INC, SB-2, 1996-10-30

CD WAREHOUSE INC
SB-2, 1996-10-30

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<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 30, 1996
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------

FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------------------

CD WAREHOUSE, INC.

(Name of Small Business Issuer in its Charter)

<TABLE>
<S> <C> <C>
DELAWARE 5735 73-1504999
(State or Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification
Number)
</TABLE>

722 N. BROADWAY
OKLAHOMA CITY, OKLAHOMA 73102
(405) 232-2797
(Address and Telephone Number of Principal Executive Offices)

JERRY W. GRIZZLE, PRESIDENT
CD WAREHOUSE, INC.
722 N. BROADWAY
OKLAHOMA CITY, OKLAHOMA 73102
(405) 232-2797
(Name, Address and Telephone Number of Agent for Service)
------------------------

COPIES TO:

JEANETTE C. TIMMONS, ESQ. DOUGLAS A. BRANCH, ESQ.
Day Edwards Federman Propester & Phillips McFall McCaffrey McVay &
Christensen, P.C. Murrah, P.C.
210 Park Avenue, Suite 2900 211 North Robinson
Oklahoma City, Oklahoma 73102 Oklahoma City, Oklahoma 73102
(405) 239-2121 (405) 235-4100

------------------------

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
------------------------

CALCULATION OF REGISTRATION FEE

<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED PER SHARE(1) OFFERING PRICE(1) REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, $.01 par value........ 1,150,000(2) $7.00 $8,050,000 $2,775.86
Representative's Warrants (3)....... 115,000 $.001 $115 (4)
Common Stock Issuable on Exercise of
Representative's Warrants (5)..... 115,000 $8.40 $966,000 $333.08
TOTAL............................... $9,016,115 $3,108.94
</TABLE>

(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457.

(2) Includes 150,000 shares of Common Stock subject to the Underwriters'
over-allotment option.

(3) The Representative's Warrants entitle the Representative to purchase shares
of Common Stock equal to 10% of the total number of shares sold pursuant to
this Registration Statement.

(4) Pursuant to Rule 457(g), no registration fee is payable.

(5) Pursuant to Rule 416, this Registration Statement also covers an
indeterminate number of additional securities issuable upon future
anti-dilution adjustments in accordance with the terms of the
Representative's Warrants.
------------------------

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.

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<PAGE>
SUBJECT TO COMPLETION, DATED OCTOBER 30, 1996
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
PROSPECTUS

1,000,000 SHARES

CD WAREHOUSE, INC.

COMMON STOCK

All of the 1,000,000 shares of common stock, $.01 par value per share (the
"Common Stock"), offered hereby (the "Offering") are being sold by CD Warehouse,
Inc. (the "Company"). Prior to this Offering, there has been no public market
for the Common Stock of the Company. It is currently anticipated that the
initial public offering price will be between $5.00 and $7.00 per share. See
"Underwriting" for information relating to the method of determining the initial
public offering price. The Company has applied for inclusion of the Common Stock
on the Nasdaq Small Cap Market under the trading symbol "CDWI."

THESE SECURITIES ARE SPECULATIVE IN NATURE, INVOLVE A HIGH DEGREE OF RISK
AND SUBSTANTIAL DILUTION AND SHOULD BE CONSIDERED ONLY BY PERSONS WHO CAN AFFORD
THE LOSS OF THEIR ENTIRE INVESTMENT. SEE "RISK FACTORS" ON PAGE 7.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

<TABLE>
<CAPTION>
UNDERWRITING DISCOUNTS PROCEEDS TO
PRICE TO PUBLIC AND COMMISSIONS (1) COMPANY (2)(3)
<S> <C> <C> <C>
Per Share.............................. $ $ $
Total (3).............................. $ $ $
</TABLE>

(1) Does not include a 3% nonaccountable expense allowance which the Company has
agreed to pay to Capital West Securities, Inc. ("Capital West"), as
representative (the "Representative") of the several Underwriters. The
Company has also agreed to sell to the Representative five-year warrants
(the "Representative's Warrants") to purchase shares of Common Stock equal
to 10% of the total number of shares sold pursuant to this Offering and to
indemnify the Underwriters against certain liabilities, including
liabilities under the Securities Act of 1933, as amended (the "Securities
Act"). See "Underwriting."

(2) Before deducting expenses in connection with this Offering payable by the
Company, including the Representative's nonaccountable expense allowance in
the amount of $ ($ if the Underwriters' over-allotment option is
exercised in full), estimated at $ . See "Use of Proceeds" and
"Underwriting."

(3) The Company has granted the Underwriters an option, exercisable within 30
business days from the date of this Prospectus, to purchase up to 150,000
additional shares of Common Stock upon the same terms and conditions as set
forth above, solely to cover over-allotments, if any. If such over-allotment
option is exercised in full, the total Price to Public, Underwriting
Discounts and Commissions and Proceeds to Company will be $ , $
and $ , respectively. See "Underwriting."

The Common Stock is being offered by the Underwriters, subject to prior
sale, when, as and if delivered to and accepted by the Underwriters and subject
to the approval of certain legal matters by counsel and to certain other
conditions. It is expected that delivery of certificates representing the shares
of Common Stock will be made against payment therefor at the offices of Capital
West Securities, Inc., Oklahoma City, Oklahoma, on or about , 1996.

CAPITAL WEST SECURITIES, INC.

THE DATE OF THIS PROSPECTUS IS , 1996.
<PAGE>
The picture on the inside front cover of the Prospectus depicts a CD Warehouse,
Inc., storefront. On the top half of the inside back cover is a map with
pinpoint markings which represent CD Warehouse, Inc., store locations
nationwide, and on the bottom half of the inside back cover is depicted the
interior of a CD Warehouse Store.
------------------------

The Company intends to furnish its stockholders with annual reports
containing audited financial statements certified by an independent public
accounting firm and with quarterly reports for the first three quarters of each
fiscal year containing unaudited financial information.

------------------------

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICES OF THE COMMON STOCK
AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

2
<PAGE>
PROSPECTUS SUMMARY

THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION, INCLUDING "RISK FACTORS" AND FINANCIAL STATEMENTS, INCLUDING THE
NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE
INDICATED, ALL INFORMATION CONTAINED IN THIS PROSPECTUS (I) ASSUMES AN INITIAL
OFFERING PRICE OF $5.00 PER SHARE (THE MINIMUM OF THE RANGE APPEARING ON THE
COVER OF THIS PROSPECTUS); (II) ASSUMES THAT THE UNDERWRITERS' OVER-ALLOTMENT
OPTION IS NOT EXERCISED; AND (III) GIVES EFFECT TO THE CDIL ACQUISITION AND THE
MACDONALD ACQUISITION (AS DESCRIBED ELSEWHERE IN THIS PROSPECTUS). EXCEPT FOR
THE HISTORICAL INFORMATION CONTAINED HEREIN, THIS PROSPECTUS CONTAINS CERTAIN
FORWARD-LOOKING STATEMENTS REGARDING THE COMPANY'S BUSINESS AND PROSPECTS THAT
ARE BASED UPON NUMEROUS ASSUMPTIONS ABOUT FUTURE CONDITIONS WHICH MAY ULTIMATELY
PROVE TO BE INACCURATE AND ACTUAL EVENTS AND RESULTS MAY MATERIALLY DIFFER FROM
ANTICIPATED RESULTS DESCRIBED IN SUCH STATEMENTS. THE COMPANY'S ABILITY TO
ACHIEVE SUCH RESULTS IS SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES, SUCH AS
THOSE INHERENT GENERALLY IN THE RETAIL AND FRANCHISING INDUSTRIES, THE IMPACT OF
COMPETITION AND PRICING, CHANGING MARKET CONDITIONS, THE RISKS DETAILED IN THE
SECTIONS ENTITLED "RISK FACTORS" AND "LEGAL PROCEEDINGS," AND OTHER RISKS
DETAILED THROUGHOUT THIS PROSPECTUS. THESE FORWARD-LOOKING STATEMENTS REPRESENT
THE COMPANY'S JUDGMENT AS OF THE DATE OF THE FILING OF THIS PROSPECTUS. THE
COMPANY DISCLAIMS, HOWEVER, ANY INTENT OR OBLIGATION TO UPDATE THESE
FORWARD-LOOKING STATEMENTS. AS A RESULT, THE READER IS CAUTIONED NOT TO PLACE
RELIANCE ON THESE FORWARD-LOOKING STATEMENTS. AS USED IN THIS PROSPECTUS, THE
WORD "COMPANY" MEANS CD WAREHOUSE, INC. AND ITS WHOLLY OWNED SUBSIDIARY, CD
MANAGEMENT, INC., UNLESS THE CONTEXT INDICATES OTHERWISE.

THE COMPANY

The Company was formed in September 1996 to acquire the assets of Compact
Discs International, Ltd. ("CDIL"), a Texas limited partnership which franchises
and operates stores throughout the United States and England under the name "CD
Warehouse." CD Warehouse stores sell, trade and buy new and preowned compact
discs ("CD's") and related products. According to the January 1996 issue of
Entrepreneur Magazine, CDIL was ranked among the top 30 new franchises in the
United States. At August 31, 1996, there were 108 franchised CD Warehouse stores
in 25 states and England.

CD Warehouse stores sell CD's, take customers' CD's in trade or buy
customers' CD's for cash. The CD Warehouse concept capitalizes on the emergence
of CD's as the prevailing form of prerecorded music. Because the CD is encased
in plastic and read by a laser, the playing of CD's, and even the occasional
careless handling of CDs, rarely cause damage that will impair performance or
result in any degradation of sound quality. In the absence of pronounced abuse,
CD's may reasonably be expected to last for decades. The CD Warehouse
remarketing concept emphasizes consumer value by offering quality preowned CD's
at substantial savings and responding to consumers' desire to recycle
merchandise they no longer want or use but which has intrinsic value. The CD
Warehouse marketing slogan, "selling compact discs at compact prices," embodies
this concept.

A typical CD Warehouse store, located in a high traffic strip shopping
center, will occupy between 1,000 and 2,000 square feet and offer between 8,000
and 12,000 selections, with approximately 80% of the dollar sales volume being
preowned selections and the balance being new releases from the major music
categories. At each CD Warehouse store, a customer selects from a number of new
and preowned CD's and may listen to preowned CD's before purchase. Typically,
each CD Warehouse store carries the majority of the Billboard Top 100 selections
as "new" inventory, filling out its inventory selection with preowned CD's which
are purchased for $1 to $4 and remarketed for $6 to $9.

The Company believes that a growing consumer willingness to purchase
preowned CD's provides an expanding market niche in the retail music industry
for CD remarketers. The Company's business strategy is to establish itself as
the recognized industry leader in the domestic buy-sell-trade retail CD
marketplace by pursuing a three-fold approach: (1) offering quality, preowned
CD's at exceptional value; (2) selling new releases at competitive prices; and
(3) offering to accept as a trade, or buy for cash, selected CD's from
customers.

3
<PAGE>
The Company's expansion strategy for 1997 is to open 9 to 12 Company-owned
stores and 18 to 24 franchised stores. Management believes that, in addition to
the Company, Disc Go Round and The Wherehouse are the only national chains
engaged in the sale of preowned CD's. Based on publicly available information
regarding such companies, the Company believes that CD Warehouse stores
currently account for approximately 23% of the estimated 480 chain-based CD
reseller stores that operate throughout the United States. Management believes
that the market for CD remarketers is fragmented and underserved, and that the
Company can capitalize on the demand by expanding the CD Warehouse concept in
targeted markets.

Simultaneously with the closing of the Offering, the Company will acquire
substantially all of the assets of CDIL (the "CDIL Assets") for a purchase price
of $3.2 million (the "CDIL Acquisition"). See "Certain Transactions--CDIL
Acquisition." In a related transaction (the "MacDonald Acquisition"), which also
will occur simultaneously with the closing of the Offering, the Company's wholly
owned subsidiary, CD Management, Inc. ("CD Management") will acquire the equity
interests of Bruce D. MacDonald (together with his affiliates, "MacDonald") with
respect to 36 franchised CD Warehouse stores. Pursuant to the MacDonald
Acquisition, the Company will acquire 100% ownership of an existing store in
Dallas, Texas (the "Montfort Street Store") and minority equity interests
(including MacDonald's interest as a managing general partner or limited
liability company manager) in 35 other existing stores (the "MacDonald Equity
Interests"). The Company has formed CD Management to act as the successor
general partner or manager of, respectively, 12 partnerships and one limited
liability company originally organized by MacDonald to fund, own and operate the
35 franchised stores in which MacDonald holds a minority equity interest. Upon
acquisition of the Montfort Street Store and the MacDonald Equity Interests
(collectively, the "MacDonald Assets"), the Company will manage and have an
interest in 36 of the 108 stores in the CD Warehouse system. Pursuant to the
MacDonald Acquisition, the Company will issue to MacDonald 80,000 shares of the
Company's Common Stock. See "Certain Transactions-- MacDonald Acquisition." The
Offering will not be closed unless there is a simultaneous closing of the CDIL
Acquisition and the MacDonald Acquisition. Upon consummation of the CDIL
Acquisition and the MacDonald Acquisition, the Company will acquire the rights
to the CD Warehouse name, assume CDIL's role as franchisor under the 108
franchise agreements to which CDIL was a party and manage and have an interest
in the 36 CD Warehouse Stores in which MacDonald had an interest.

During the year ended December 31, 1995, and the eight months ended August
31, 1996, on a pro forma basis taking into account the CDIL Acquisition and the
MacDonald Acquisition, the Company had pro forma total revenues of approximately
$4,153,000 and $3,171,000, respectively, and pro forma net income, as adjusted,
of approximately $168,000 and $138,000, respectively. There can be no assurance
that the historical level of the Company's revenues and net income will continue
to be achieved in the future. See "Risk Factors," "Business" and "Certain
Transactions."

The Company was incorporated under the laws of the State of Delaware in
September 1996. The Company's principal office is located at 722 N. Broadway,
Oklahoma City, Oklahoma 73102, and its telephone number is (405) 232-2797.

4
<PAGE>
THE OFFERING

<TABLE>
<S> <C>
Common Stock offered by the
Company..................... 1,000,000 shares

Shares of Common Stock to be
outstanding after the
Offering.................... 1,780,000 shares (1)

Use of Proceeds............... To purchase the CDIL Assets, open new Company
stores and remodel existing stores in which the
Company owns an interest and manages and for
working capital and general corporate purposes

Nasdaq Small Cap Market
Symbol...................... CDWI (proposed)
</TABLE>

- ------------------------

(1) Includes 350,000 shares of Common Stock for which Mark E. Kane, the founder
of CDIL, previously has subscribed, but the payment for which is conditioned
upon the consummation of the Offering, and 80,000 shares of Common Stock to
be issued to Bruce D. MacDonald in connection with the MacDonald
Acquisition.

RISK FACTORS

Investment in the Common Stock offered hereby involves a high degree of risk
and immediate substantial dilution. See "Risk Factors" and "Dilution."

5
<PAGE>
SUMMARY--FINANCIAL AND OPERATING DATA

The following table sets forth historical financial information, on a
combined basis, of the operations of CDIL, as well as historical financial
information attributable to the MacDonald Assets to be acquired by the Company
upon successful completion of this Offering. The information is derived from the
audited financial statements of CDIL and CD Acquisitions (a joint venture which
was acquired by CDIL effective January 1, 1996), for each of the two years in
the period ended December 31, 1995 and from the internally-prepared financial
statements of such entities for the year ended December 31, 1993 and the eight
months ended August 31, 1995 and 1996 appearing elsewhere in this Prospectus,
and should be read in conjunction with such Financial Statements including the
Notes thereto. See "Combined Statements of Operations," "Pro Forma Combined
Condensed Financial Statements" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations." The historical information and
pro forma disclosures are further explained in the accompanying notes.

<TABLE>
<CAPTION>
EIGHT MONTHS ENDED
AUGUST 31,
YEARS ENDED DECEMBER 31, ------------------------
--------------------------------------------
AS AS AS
HISTORICAL COMBINED(1) ADJUSTED(2) ADJUSTED(2) ADJUSTED(2)
------------------------------- ----------- ----------- -----------
1993 1994 1995 1995 1995 1996
--------- --------- --------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Total revenues................................. $ 719 $ 2,627 $ 4,153 $ 4,153 $ 2,400 $ 3,171
Operating income (1)........................... 85 126 370 206 61 166
Pro forma net income (1)(2).................... 67 110 277 168 64 138
Pro forma net income per share (2)............. .09 .04 .08
Shares used in computation..................... 1,780,000 1,780,000 1,780,000
</TABLE>

- --------------------------

(1) The operations to be acquired were organized as partnerships. Salaries for
the partners were not reflected as salary expense but rather as a reduction
of partnership equity. In addition, no provisions were included for income
taxes since the earnings were distributed directly to the partners.
Historical results have been adjusted to reflect the cash distributions to
partners as compensation expense in the determination of operating and net
income and to provide for income taxes in each of the periods.

(2) The amounts presented "as adjusted" are calculated as if the CDIL
Acquisition, the MacDonald Acquisition and the Offering were completed as of
January 1, 1995.

<TABLE>
<CAPTION>
EIGHT MONTHS ENDED
YEARS ENDED DECEMBER 31, AUGUST 31,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
($ IN THOUSANDS)
STORE DATA:
System-wide sales............................................. $ 2,778 $ 11,550 $ 20,868 $ 13,177 $ 16,867
Store Count:
Beginning................................................... 2 19 67 67 96
Open........................................................ 17 51 36 23 15
Close....................................................... -- 3 7 4 3
Ending...................................................... 19 67 96 86 108
</TABLE>

6
<PAGE>
RISK FACTORS

An investment in the securities being offered hereby involves substantial
risk. Prospective investors should carefully consider the following factors, in
addition to the other information set forth in this Prospectus.

NO OPERATING HISTORY. Although CD Warehouse stores have operated since late
1992, the Company is only recently formed and will commence its operations upon
the acquisition of CDIL's franchise operations and the concurrent MacDonald
Acquisition. Although members of the Company's management have extensive
experience in the franchise industry, only Mr. MacDonald has any experience in
the retail music industry or in CD Warehouse franchises, and the Company itself
has no operating history upon which investors may base their evaluation of the
Company's performance. As a result of the Company's lack of operating history,
period-to-period comparisons of operating results may not be meaningful and
results of operations from prior periods may not be indicative of future
results. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."

EXPANSION. The Company's growth will depend in part on its ability to open
and operate new stores on a profitable basis. Upon consummation of the CDIL
Acquisition and the MacDonald Acquisition, the Company will have an interest in
108 stores, 36 of which will be managed by its subsidiary, CD Management. By the
end of 1997, the Company contemplates having approximately 45 to 48 Company-
owned or managed stores and 90 to 96 franchised stores in operation. There can
be no assurance that the Company will achieve these goals for 1997. The opening
and success of new stores will depend on various factors, including customer
acceptance of the Company's buy-sell-trade concept in new markets, the
availability of suitable store sites, the negotiation of acceptable lease or
purchase terms for new locations, the financial and other capabilities of the
Company and its franchisees, the ability of the Company to manage the
anticipated expansion and hire and train personnel and general economic and
business conditions. Some of the foregoing factors are not within the control of
the Company or its franchisees. See "Business--Expansion Strategy" and
"--Government Regulation."

The Company's expansion will also require the implementation and integration
of enhanced operational and financial systems and additional management,
operational and financial resources. Failure to implement and integrate these
systems and add these resources could have a material adverse effect on the
Company's results of operations and financial condition. There can be no
assurance that the Company will be able to manage its expanding operations
effectively or that it will be able to maintain or accelerate the growth of its
predecessor, CDIL. On a pro forma basis, the Company experienced growth in
revenues and net income in 1995 and for the eight months ended August 31, 1996.
There can be no assurance that the Company will continue to experience growth
in, or maintain the present level of, revenues or net earnings.

DEPENDENCE ON FRANCHISEES. Prior to the implementation of the Company's
plan to own and open new stores, the Company will be primarily reliant upon its
revenues from initial franchise fees, continuing royalty payments from its
franchisees and wholesale CD sales throughout the current store system. If the
Company's franchisees encounter business or operational difficulties, the
Company's revenues from royalties will be adversely affected. Such difficulties
may also negatively impact the Company's ability to sell new franchises.
Consequently, the Company's financial prospects are significantly related to the
success of its franchised stores, over which the Company has limited operational
control. There can be no assurance that the Company will be able to successfully
attract new franchises or that the Company's franchisees will be able to
successfully operate existing or develop and operate additional CD Warehouse
stores. See "Business--Expansion Strategy" and "Business--Franchise Program."

GOVERNMENT REGULATION. The Company is subject to federal regulation and
certain state laws which govern the offer and sale of franchises. Many state
franchise laws impose substantive requirements on franchise agreements,
including limitations on non-competition provisions and termination or
non-renewal of a franchise. Some states require that certain franchise offering
materials be registered before franchises

7
<PAGE>
can be offered or sold in that state. The failure to obtain or retain any
requisite licenses or approvals to sell franchises could adversely affect the
Company's results of operations. CDIL is subject to a currently effective cease
and desist order as a result of CDIL's failure to register its franchise in the
State of South Dakota. See "Legal Proceedings." The future enactment, adoption
or amendment of laws or regulations, such as establishing basic franchisee
rights, could adversely affect the Company's results of operations. See
"Business--Franchise Program" and "Business--Government Regulation."

COMPETITION. The prerecorded music market is highly competitive. The
Company competes with other chain retailers who specialize in prerecorded music,
discounters and other mass merchandisers, direct mail programs such as record
clubs, and local operators. In the Company's judgment, small operators may be
well located, but usually have significant disadvantages in inventory selection
and cost relative to chain retailers. The Company is aware of, and competes
with, one franchisor of stores which sell preowned and new CD's, Disc Go Round,
and one national music and video retail chain, The Wherehouse, which in recent
years has begun selling preowned CD's. An increase in the number of competitors,
particularly the large chains, selling preowned CD's in the Company's
territories could have an adverse impact on the Company's results of operations
and expansion plans. See "Business--Competition."

TECHNOLOGICAL ADVANCEMENT. The advent of the CD as the prevailing form of
prerecorded music is less than 15 years old. The CD has during this period
surpassed vinyl records and subsequently audio cassette tapes as the dominant
form of music reproduction. Subsequent technological advancements in music
reproduction media may occur which may adversely affect the CD marketplace as it
exists today. Further refinement in size and capacity of CD's is currently
anticipated. The Company's strategy is to adapt the CD Warehouse concept to
compete effectively as the industry changes. However, the evolution of music
reproduction media could occur in such a manner, or at a pace, that would
adversely affect the Company's results of operations and profitability.

POSSIBLE ACQUISITIONS. The Company's growth strategy includes possible
acquisitions of CD music retailers specializing in preowned CD titles. However,
no assurance can be given that the Company will be able to find attractive
acquisition candidates, consummate additional acquisitions or that it will
successfully integrate, convert or operate any acquired business. In the event
that the Company makes acquisitions, there can be no assurance that any such
acquisition and resulting conversion expenses, including loss of unit sales
during the remodel period, will not have a material adverse effect upon the
Company's operating results, particularly during the period in which such
operations are being integrated into the Company. Furthermore, the Company's
ability to make acquisitions may depend upon its ability to obtain financing.
There can be no assurance that the Company will be able to obtain financing or,
if available, that such financing will be on acceptable terms. See
"Business--Expansion" and "--Possible Need for Additional Funds."

DEPENDENCE ON KEY PERSONNEL. The Company's future success will be highly
dependent on the continued efforts of Jerry W. Grizzle, President and Chief
Executive Officer; Gary D. Johnson, Chief Operating Officer and Executive Vice
President; Bruce D. MacDonald, Vice President--Company Store Operations; and
Doyle E. Motley, Senior Vice President and Chief Financial Officer. Although the
Company has employment agreements with all of its senior management, the loss of
the services of one or more of such key personnel could have a material adverse
effect upon the Company's results of operations. The Company's success is also
dependent upon its ability to attract and retain skilled retail managers and
employees who are also knowledgeable in music and the ability of its key
personnel to manage the Company's growth and integrate its operations. There can
be no assurance that the Company will be successful in attracting and retaining
such personnel. See "Management."

POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS; SEASONALITY. The Company
expects to experience fluctuations in future quarterly operating results that
may be caused by many factors, including variations in the number and timing of
store openings, the quality of release titles available for sale, additional and
existing competition, marketing programs, weather, special or unusual events and
national, regional and local

8
<PAGE>
economic conditions that may affect retailers in general. Any concentration of
new store openings and the related new store pre-opening costs near the end of a
fiscal quarter could have an adverse effect on the financial results for that
quarter and could, in certain circumstances, lead to fluctuations in quarterly
financial results. The retail music business is somewhat seasonal, with revenues
in September and October generally being lower compared to other months of the
year. The Company anticipates that its revenues will track traditional consumer
music-buying habits. Therefore, revenues are expected to decline during the fall
months of the third fiscal quarter and increase during the late fourth-quarter
peak holiday season. As a result, the Company believes that period-to-period
comparisons of its results of operations are not and will not necessarily be
meaningful, and should not be relied upon, as an indication of future
performance. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."

CONTROL BY MANAGEMENT. The Company's executive officers and directors and
their respective affiliates will beneficially own an aggregate of approximately
24.1% of the Company's outstanding shares of Common Stock after the Offering
(approximately 22.3% if the Underwriters' over-allotment option is exercised in
full). Additionally, Mark E. Kane, the founder of CDIL, will own approximately
19.7% of the Company's outstanding shares of Common Stock after the Offering
(approximately 18.1% if the Underwriters' over-allotment option is exercised in
full). Such stockholders, if voting together, may, as a practical matter, have
sufficient voting power to elect the board of directors of the Company (the
"Board of Directors"), exercise significant control over the business, policies
and affairs of the Company and, in general, determine the outcome of any
corporate transaction or other matters submitted to the stockholders for
approval, such as any amendment to the certificate of incorporation of the
Company (the "Certificate of Incorporation"), any merger, consolidation, sale of
all or substantially all of the Company's assets or "going private" transactions
and prevent or cause a change in control of the Company, all of which may
adversely affect the market price of the Common Stock. See "Principal
Stockholders."

ANTI-TAKEOVER PROVISIONS. Certain provisions of the Delaware General
Corporation Law (the "DGCL") may delay, discourage or prevent a change in
control of the Company. Such provisions may discourage bids for the Common Stock
at a premium over the market price of the Common Stock and may adversely affect
the market price and the voting and other rights of the holders of Common Stock.
In addition, the Board of Directors has the authority without action by the
Company's stockholders to fix the rights, privileges and preferences of and to
issue shares of the Company's preferred stock, par value $.01 per share (the
"Preferred Stock"), which may have the effect of delaying, deterring or
preventing a change in control of the Company. See "Description of Capital
Stock--Preferred Stock" and "--Anti-Takeover Effects of Delaware Law."

In addition to the authorization of Preferred Stock, the Company's
Certificate of Incorporation and Bylaws include several other provisions which
may have the effect of inhibiting a change of control of the Company. These
include a classified Board of Directors, no stockholder action by written
consent and advance notice requirements for stockholder proposals and director
nominations. The provisions may discourage a party from making a tender offer
for or otherwise attempting to obtain control of the Company.

SUBSTANTIAL DILUTION. On the basis of an assumed offering price of $5.00
per share (the minimum of the range set forth on the cover of this Prospectus),
and assuming the consummation of the CDIL Acquisition and the MacDonald
Acquisition, this Offering involves an immediate dilution of approximately $4.05
per share of Common Stock (approximately 81% of the offering price per share)
between the offering price per share and the pro forma net tangible book value
per share of the Common Stock immediately after the completion of this Offering.
See "Dilution."

ABSENCE OF PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE. Prior
to the Offering, there has been no public market for the Common Stock. The
Company has applied for listing of the Common Stock on the Nasdaq Small Cap
Market under the trading symbol "CDWI." There can be no assurance, however,

9
<PAGE>
that an active public market will develop for the Common Stock. The initial
public offering price will be determined through negotiations between the
Company and the Representative of the Underwriters, and may not be indicative of
the market price for the Common Stock after the completion of the Offering.
Among the factors to be considered in such negotiations are prevailing market
conditions, the pro forma results of operations of the Company in recent
periods, the market capitalizations and stages of development of other companies
which the Company and the Representative of the Underwriters believe to be
comparable to the Company, estimates of the business potential of the Company,
the present state of the Company's development and other factors, if any, deemed
relevant. See "Underwriting."

Moreover, the trading price of the Company's Common Stock could be subject
to fluctuations in response to quarterly variations in results of operations,
announcements of technological innovations or new services or products by the
Company or its competitors, changes in financial estimates by securities
analysts and other events or factors. See "Business and Properties." Recent
history relating to the market prices of other newly public companies indicates
that the market price of the Company's Common Stock following the Offering may
be highly volatile. At various times, the stock market has experienced
volatility that has particularly affected the market prices for stock of
particular industry groups, such as retail-oriented companies, often without
regard to a particular company's operating results.

SHARES ELIGIBLE FOR FUTURE SALE. After the completion of the Offering and
the MacDonald Acquisition, 1,780,000 shares of Common Stock will be outstanding.
See "Certain Transactions." Of such shares, the 1,000,000 shares sold pursuant
to the Offering will be tradeable without restriction by persons other than
"affiliates" of the Company. The remaining 780,000 shares of Common Stock to be
outstanding after the Offering are "restricted securities" within the meaning of
Rule 144 under the Securities Act and may not be publicly resold, except in
compliance with the registration requirements of the Securities Act or pursuant
to an exemption from registration, including that provided by Rule 144
promulgated under the Securities Act.

The directors and executive officers of the Company (including Bruce D.
MacDonald), as well as Mark E. Kane, collectively will hold 780,000 shares, or
approximately 43.8%, of the outstanding shares of Common Stock after the
Offering. Such individuals have agreed not to, directly or indirectly, offer,
sell, assign, transfer, encumber, pledge, contract to sell, grant an option to
purchase or otherwise dispose of any Common Stock for a period of 24 months
after the date of this Prospectus without the prior written consent of Capital
West. Upon expiration of the 24 month period, 780,000 shares of Common Stock
will be eligible for immediate resale without restriction under the Securities
Act, subject, in certain cases, to certain volume, timing and other requirements
of Rule 144 promulgated under the Securities Act. Sales of substantial amounts
of Common Stock, or the perception that such sales could occur, could adversely
affect the prevailing market price of the Common Stock. See "Shares Eligible for
Future Sale" and "Underwriting."

ABSENCE OF DIVIDENDS. The Company has never declared or paid any dividends
on the Common Stock and does not anticipate paying any cash dividends on the
Common Stock in the foreseeable future. See "Dividend Policy."

POSSIBLE NEED FOR ADDITIONAL FUNDS. The Company has arranged for a
$2,000,000 credit facility with the Bank of Oklahoma, N.A., Oklahoma City,
Oklahoma (the "Credit Facility"). See "Management's Discussion and Analysis of
Financial Condition and Results of Operations." Based on current pro forma
levels of operations and the Company's current plans for expansion, the Company
anticipates that its existing capital resources, including the Credit Facility,
together with the proceeds of the Offering, will enable it to maintain its
operations for the foreseeable future. However, the Company may require
additional funds to sustain and expand its sales and marketing activities,
particularly if a well-financed competitor emerges. Adequate funds for these and
other purposes on terms acceptable to the Company, whether through additional
equity financing, debt financing or other sources, may not be available when
needed or may result in significant dilution to existing stockholders. The
inability to obtain sufficient funds

10
<PAGE>
from operations or external sources would have a material adverse effect on the
Company's business, results of operations and financial condition. See "Use of
Proceeds" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."

USE OF PROCEEDS

The net proceeds to the Company from the sale of the 1,000,000 shares of
Common Stock being offered hereby are estimated to be approximately $4,250,000
(approximately $4,887,500 if the Underwriters' over-allotment option is
exercised in full), assuming an initial offering price of $5.00 per share (the
minimum of the range appearing on the cover of this Prospectus).

Approximately $3,200,000 of the net proceeds will be used to purchase the
CDIL Assets. See "Business and Properties--General" and "Certain Transactions."
The balance of the estimated net proceeds, together with the equity contributed
by the original stockholders of the Company and the equity to be contributed by
Mark E. Kane, the founder of CDIL, will provide approximately $1,500,000 of
additional working capital to the Company. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."

The CDIL Acquisition will be completed immediately upon consummation of the
Offering. Pending any other use of the proceeds, the Company intends to invest
the remaining proceeds from the Offering in investment grade short-term,
interest-bearing securities.

DIVIDEND POLICY

To date, the Company has not paid any dividends on its Common Stock. The
payment of dividends, if any, in the future is within the discretion of the
Board of Directors and will depend on the Company's earnings, its capital
requirements and financial condition and other relevant factors. The Company
does not expect to declare or pay any dividends on Common Stock in the
foreseeable future.

11
<PAGE>
DILUTION

At October 15, 1996, the pro forma, as adjusted, net tangible book value of
the Company's Common Stock was approximately $1,687,000, or $.95 per share. Net
tangible book value per share of Common Stock is defined as total tangible
assets of the Company less total liabilities, divided by the total number of
shares of Common Stock outstanding. The combination of this Offering and the
consummation of both the CDIL Acquisition and the MacDonald Acquisition
represent an immediate dilution of $4.05 per share to new investors purchasing
shares of Common Stock in this Offering, assuming an initial public offering
price of $5.00 per share (the minimum of the range set forth on the cover of
this Prospectus).

The following table summarizes the number of shares of Common Stock
purchased from the Company, the total consideration paid to the Company and the
average price paid per share by existing or subscribed stockholders and new
investors purchasing shares in this Offering:

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------------- ------------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
------------- ------- ------------- ------- -----------
<S> <C> <C> <C> <C> <C>
Existing or subscribed stockholders (cash)............... 700,000(1) 39.3% $ 700,000 11.5% $ 1.00
MacDonald stock subscription............................. 80,000 4.5% 400,000(2) 6.6% $ 5.00
New investors............................................ 1,000,000 56.2% 5,000,000 81.9% $ 5.00
------------- ------- ------------- -------
Total.................................................. 1,780,000 100.0% $ 6,100,000 100.0%
------------- ------- ------------- -------
------------- ------- ------------- -------
</TABLE>

- ------------------------

(2) Represents the purchase price paid for the MacDonald Assets. See "Certain
Transactions--MacDonald Acquisition."

12
<PAGE>
CAPITALIZATION

The following table sets forth the capitalization of the Company at October
15, 1996 and as adjusted to give effect to the sale of the 1,000,000 shares of
Common Stock offered hereby at an assumed per-share price of $5.00 (the minimum
of the range appearing on the cover of this Prospectus) and the application of
the estimated net proceeds as described under "Use of Proceeds." This table
should be read in conjunction with "Use of Proceeds," "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
Consolidated Financial Statements and Notes appearing elsewhere in this
Prospectus.

<TABLE>
<CAPTION>
OCTOBER 15, 1996
------------------------
ACTUAL AS ADJUSTED
---------- ------------
<S> <C> <C>
Stockholders' Equity:
Common Stock; $.01 par value, 10,000,000 shares authorized; 350,000 shares issued and
outstanding; 1,780,000 shares as adjusted (1)....................................... $ 3,500 $ 17,800
Preferred Stock; $.01 par value, 5,000,000 shares authorized, no shares issued and
outstanding, actual or adjusted..................................................... -- --
Additional paid-in capital............................................................ 346,500 5,332,200
Retained earnings..................................................................... -- --
---------- ------------
Total capitalization................................................................ $ 350,000 $ 5,350,000
---------- ------------
---------- ------------
</TABLE>

- ------------------------

13
<PAGE>
COMBINED STATEMENTS OF OPERATIONS

The following table (unaudited) sets forth the combined historical results
of operations of CDIL, CD Acquisitions and the MacDonald Assets to be acquired
by the Company. The historical information has been adjusted to eliminate
operations to be retained by CDIL and to provide charges for executive
compensation and income taxes as explained below. The information should be read
in conjunction with the historical Financial Statements and the Pro Forma
Combined Condensed Financial Statements included elsewhere in this Prospectus.

<TABLE>
<CAPTION>
EIGHT MONTHS ENDED
YEARS ENDED DECEMBER 31, AUGUST 31,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Revenues:
Retail store sales............................................... $ 372 $ 316 $ 281 $ 193 $ 161
Wholesale merchandise sales...................................... 139 1,568 2,717 1,541 2,150
Software income, net............................................. 10 62 24 3 25
Royalty income................................................... 112 527 947 587 774
Franchise and development fees................................... 86 154 184 76 61
--------- --------- --------- --------- ---------
Total revenues................................................. 719 2,627 4,153 2,400 3,171

Costs and expenses:
Cost of sales--retail store sales................................ 272 196 180 121 98
Cost of sales--wholesale merchandise sales....................... 139 1,539 2,511 1,407 2,037
Retail store operating expenses.................................. 88 79 68 46 45
General and administrative (2)................................... 135 681 1,015 658 818
Depreciation and amortization.................................... -- 6 9 8 8
--------- --------- --------- --------- ---------
Total costs and expenses....................................... 634 2,501 3,783 2,240 3,006
--------- --------- --------- --------- ---------

Operating income................................................... 85 126 370 160 165
Other income....................................................... 16 40 49 36 42
--------- --------- --------- --------- ---------

Income before pro forma provision for income taxes................. 101 166 419 196 207
Pro forma provision for income taxes (2)........................... 34 56 142 67 70
--------- --------- --------- --------- ---------
Pro forma net income (2)........................................... $ 67 $ 110 $ 277 $ 129 $ 137
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>

- ------------------------

(1) Operations to be retained by CDIL have been eliminated from the combined
information presented above.

(2) The operations to be acquired were organized as partnerships and did not
historically include charges for executive compensation or income taxes. The
information presented above includes charges for executive compensation
based on the cash distribution to partners in each of the periods presented.
Such amounts, which are included in general and administrative expenses are:

<TABLE>
<S> <C>
Years ended December 31, Eight months ended August 31,
1993--$ 82,000 1995--$208,000
1994--$227,000 1996--$307,000
1995--$296,000
</TABLE>

The pro forma provisions for income taxes are based on a rate of 34% applied
to pro forma income before income tax in each of the periods presented.

14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

OVERVIEW

The Company was formed in September 1996 to acquire the assets of CDIL, a
Texas limited partnership which franchises and operates stores throughout the
United States and England under the name "CD Warehouse." The first CD Warehouse
store was opened in 1992. Under the CD Warehouse name, there are currently 105
domestic units operating in 25 states and 3 international units operating in
England.

Simultaneously with the closing of the Offering, the Company will acquire
the CDIL Assets for a purchase price of $3.2 million. See "Certain
Transactions--CDIL Acquisition." In a related transaction, which also will occur
simultaneously with the closing of the Offering, the Company will acquire the
equity interests of MacDonald in 36 franchised CD Warehouse stores. Pursuant to
the MacDonald Acquisition, the Company will acquire 100% ownership of
MacDonald's Montfort Street Store and minority equity interests (including
MacDonald's interest as a managing general partner or limited liability company
manager) in the other 35 existing stores in which MacDonald has an interest.
Upon acquisition of the Montfort Street Store and the MacDonald Equity
Interests, the Company will manage and have an interest in 36 of the 108 stores
in the CD Warehouse system. The Offering will not be closed unless there is a
simultaneous closing of the CDIL Acquisition and the MacDonald Acquisition. Upon
consummation of the CDIL Acquisition and the MacDonald Acquisition, the Company
will acquire the rights to the CD Warehouse name, assume CDIL's role as
franchisor under the 108 franchise agreements to which CDIL was a party and
manage and have an interest in the 36 CD Warehouse stores in which MacDonald had
an interest.

The following discussion and analysis reviews the operations to be acquired
by the Company in connection with the CDIL Acquisition and the MacDonald
Acquisition for the years ended December 31, 1993, 1994 and 1995 and for the
eight months ended August 31, 1996. All of such periods reflect the historical
operations of CDIL and financial information attributable to the MacDonald
Assets. The following discussion and analysis should be read in conjunction with
the discussion about risk factors and the financial statements of the Company,
CDIL and CD Acquisitions and notes related thereto and "Combined Statements of
Operations" included elsewhere in this Prospectus.

CDIL previously conducted its business through two separate entities, CDIL
and CD Acquisitions. CD Acquisitions was formed to support the inventory needs
of the CD Warehouse franchise system and engaged in the wholesale supply of new
and preowned CD's to the franchise system, as well as sales of computer hardware
and proprietary software to franchisees. CDIL and CD Acquisitions were merged
effective January 1, 1996 as a Texas limited partnership.

Historically, CDIL has had only a limited involvement in direct retail
operations. The assets acquired from CDIL include minority interests in three
partnerships which operate stores in Memphis, Tennessee, Edmond, Oklahoma and
Tulsa, Oklahoma. The earnings from such partnerships are reflected as other
income and the investment in those partnerships is reflected as an asset on
CDIL's balance sheet. The retail store sales relate to the earnings attributable
to the Montfort Street Store being acquired from MacDonald.

On a pro forma basis, the Company's revenues are derived from three
principal sources: (1) franchise fees and royalties from franchised stores; (2)
sales of CD's and proprietary software to stores in the franchise system; and
(3) revenues attributable to the Montfort Street Store. Franchise and
development fees are initially recorded as deferred revenue until each
franchised store opens, at which time such fees are recorded as revenue.

Cost of sales include the cost for CD's sold at retail and those sold at
wholesale to franchised stores. Operating expenses consist primarily of labor
costs, rent and advertising. General and administrative

15
<PAGE>
expenses include corporate and administrative salaries, accounting, legal and
direct costs associated with franchise operations.

RESULTS OF OPERATIONS

The following table sets forth the percentage relationship of certain
operating statement data to total revenues, except as otherwise indicated:

<TABLE>
<CAPTION>
EIGHT MONTHS ENDED
YEARS ENDED DECEMBER 31, AUGUST 31,
------------------------------------- ------------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
REVENUES:
Retail store sales.............................. 51.8% 12.0% 6.8% 8.0% 5.1%
Wholesale merchandise sales..................... 19.3% 59.7% 65.4% 64.2% 67.8%
Software income, net............................ 1.4% 2.4% .6% .1% .8%
Royalty income.................................. 15.7% 20.1% 22.8% 24.5% 24.4%
Franchise and development fees.................. 11.8% 5.8% 4.4% 3.2% 1.9%
----- ----- ----- ----- -----
Total revenues................................ 100.0% 100.0% 100.0% 100.0% 100.0%

COST AND EXPENSES:
Cost of sales--retail store sales (1)........... 73.1% 62.0% 64.1% 62.7% 60.9%
Cost of sales--wholesale merchandise sales
(2)........................................... 100.0% 98.2% 92.4% 91.3% 94.7%
Retail store operating expenses (1)............. 23.7% 25.0% 24.2% 23.8% 28.0%
General and administrative...................... 18.8% 26.0% 24.4% 27.4% 25.8%
Depreciation and amortization................... -- % .2% .2% .3% .3%

OPERATING INCOME.................................. 11.8% 4.8% 8.9% 6.7% 5.2%
PRO FORMA NET INCOME.............................. 9.3% 4.2% 6.7% 5.4% 4.3%
</TABLE>

- ------------------------

(1) As a percentage of sales from the majority owned retail store.

(2) As a percentage of wholesale merchandise sales.

EIGHT MONTHS ENDED AUGUST 31, 1995 COMPARED WITH THE EIGHT MONTHS ENDED AUGUST
31, 1996

REVENUES

Total revenues increased by $771,000, or 32%, to $3,171,000 for the eight
months ended August 31, 1996 compared to $2,400,000 for the eight months ended
August 31, 1995. This increase resulted primarily from the 15 franchised stores
opened during the eight months ended August 31, 1996, as well as from the 36
stores opened periodically throughout 1995 (which contributed revenues for the
entire period in 1996), and the resulting increases in merchandise sales to more
stores and increased royalties.

Wholesale sales to franchised stores increased $609,000, or 40%, to
$2,150,000 for the eight months ended August 31, 1996 compared to $1,541,000 for
the eight months ended August 31, 1995. This increase resulted primarily from
the opening inventory packages purchased by the 15 new franchised stores opened
during the eight months ended August 31, 1996.

Royalties from franchised stores increased $187,000, or 32%, to $774,000 for
the eight months ended August 31, 1996 compared to $587,000 for the eight months
ended August 31, 1995. This increase resulted primarily from the 15 new
franchised stores opened during the eight months ended August 31, 1996, as well
as from the 36 stores opened periodically throughout 1995 (which contributed
revenues for the entire period in 1996).

16
<PAGE>
COSTS AND EXPENSES

Cost of sales for wholesale sales to franchised stores increased $630,000,
or 45%, to $2,037,000 for the eight months ended August 31, 1996 compared to
$1,407,000 for the eight months period August 31, 1995. This increase is
primarily the result of greater volume due to the increased number of stores
opened during the period, as well as higher product cost from suppliers.

General and administrative expenses increased by $160,000, or 24%, to
$818,000 for the eight months ended August 31, 1996 compared to $658,000 for the
eight months ended August 31, 1995. This increase resulted from the 15 new
franchised stores opened during the eight months ended August 31, 1996 and the
increase of executive salaries taken by the previous officers of $307,145 for
the eight months ended August 31, 1996 compared to $208,296 for the same period
of 1995.

NET INCOME

Net income increased $8,000, or 6%, to $137,000 for the eight months ended
August 31, 1996 compared to $129,000 for the same period ended August 31, 1995.
This increase was primarily due to the increased stores discussed above, offset
by an additional $98,899 in salary taken by CDIL's owners compared to the prior
period.

YEAR ENDED DECEMBER 31, 1994 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1995

REVENUE

Total revenues increased by $1,526,000, or 58%, to $4,153,000 for the year
ended December 31, 1995 compared to $2,627,000 for the year ended December 31,
1994. This increase was attributable primarily to the effect of 36 new
franchised stores opened during 1995, as well as from the 51 stores opened
periodically throughout 1994 (which contributed revenues for the entire period
in 1995), which resulted in increased merchandise sales and increased royalties.

Wholesale sales to franchised stores increased by $1,149,000, or 73%, to
$2,717,000 for the year ended December 31, 1995 compared to $1,568,000 for the
year ended December 31, 1994. This increase was primarily the result of the 50%
increase in the number of stores as well as increasing sales to all stores.

Royalties from franchised stores increased $420,000, or 80%, to $947,000 for
the year ended December 31, 1995 compared to $527,000 for the year ended
December 31, 1994. This increase resulted primarily from the 36 new franchised
stores opened during 1995, as well as from the 51 stores opened periodically
throughout 1994 (which contributed revenues for the entire period in 1995).

COSTS AND EXPENSES

Cost of sales for wholesale sales to franchised stores increased by
$972,000, or 63%, to $2,511,000 for the year ended December 31, 1995 compared to
$1,539,000 for the year ended December 31, 1994. This increase is primarily the
result of greater volume due to the increased number of stores opened during the
period, as well as higher product cost from suppliers.

General and administrative expenses increased by $334,000, or 49%, to
$1,015,000, for the year ended December 31, 1995 compared to $681,000 for the
year ended December 31, 1994. This increase was due primarily to greater
franchise activity and support for the 36 new franchised store openings in 1995,
as well as from the 51 stores opened periodically throughout 1994 (the full
effects of which were recognized for the entire period in 1995).

NET INCOME

Net income increased $167,000, or 152%, to $277,000 for the year ended
December 31, 1995 compared to $110,000 for the same period ended December 31,
1994. This increase was attributable

17
<PAGE>
primarily to the higher royalty income from the 36 new franchised stores opened
during 1995, as well as from the 51 stores opened periodically throughout 1994
(which contributed revenues for the entire period in 1995)

YEAR ENDED DECEMBER 31, 1993 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1994

CDIL began franchising stores in 1993, and had 19 stores open at year end
1993. During 1994, 51 stores opened. All items of revenue, costs and expenses
and net income increased significantly in 1994 as compared to 1993, due almost
entirely to the 168% increase in franchised stores open.

REVENUES

Total revenues increased by $1,908,000 to $2,627,000 for the year ended
December 31, 1994 compared to $719,000 for the year ended December 31, 1993.

Wholesale sales to franchised stores increased by $1,429,000 to $1,568,000
for the year ended December 31, 1994 compared to $139,000 for the year ended
December 31, 1993.

Royalties from franchised stores increased $415,000 to $527,000 for the year
ended December 31, 1994 compared to $112,000 for the year ended December 31,
1993.

COSTS AND EXPENSES

Cost of goods sold for wholesale sales to franchised stores increased by
$1,400,000 to $1,539,000 for the year ended December 31, 1994 compared to
$139,000 for the year ended December 31, 1993.

General and administrative expenses increased by $546,000 to $681,000
compared to $135,000 for the year ended December 31, 1993. This increase was due
primarily to the increased franchise activity and administrative support
necessary for the 51 new franchised store openings as well as the increased
wholesale merchandise operations.

NET INCOME

Net income increased by $43,000, or 64%, to $110,000 for the year ended
December 31, 1994 compared to $67,000 for the year ended December 31, 1993 as a
result of the growth in the number of stores discussed above.

LIQUIDITY AND CAPITAL RESOURCES

Historically, CDIL has required capital primarily for the development of the
franchise system and to fund inventory purchases for CD Acquisitions. CDIL has
historically funded such expenditures with cash provided by operations. Net cash
provided by operating activities of CDIL was $278,700 and $311,400 for the years
ended December 31, 1994 and December 31, 1995, respectively, and $447,900 for
the eight months ended August 31, 1996.

The Company will have available approximately $1,500,000 in working capital
from the proceeds of the Offering and after completion of the CDIL Acquisition.
This available capital will be used to support an aggressive Company store
development program. In addition, the Company will be developing a standard
decor package to establish the identity of the system through its appearance.
Once the decor package is developed, the Company will evaluate the need to
remodel the 36 stores in which the Company will have an equity interest as a
result of the MacDonald Acquisition.

The Company will also use its capital resources to take advantage of any
suitable acquisition opportunities. The preowned CD market consists of numerous
single store operators that the Company believes may be candidates for
acquisition and conversion to the CD Warehouse concept.

18
<PAGE>
The Company and Mr. Grizzle are parties to a Finders and Release Agreement
(the "Finders' Agreement"), pursuant to which the Company has agreed to pay
certain unaffiliated parties a finder's fee of $100,000 for their assistance in
identifying CDIL for potential acquisition or investment. The Company has made a
nonrefundable payment of $20,000 in partial satisfaction of this obligation and
is required to pay the balance of $80,000 at the closing of this Offering. None
of the proceeds of the Offering will be used to pay the remaining obligation
under the Finders' Agreement.

In addition to the working capital expected to be available from the
proceeds of the Offering after completion of the CDIL Acquisition, the Company
has arranged for a $2,000,000 credit facility with the Bank of Oklahoma, N.A.,
Oklahoma City, Oklahoma. The Credit Facility will bear an interest rate equal to
.75% over Chase Manhattan's prime rate, adjusted semi-annually. No funds have
been borrowed under this Credit Facility. It is the Company's opinion that the
excess proceeds generated from the Offering, combined with the Credit Facility,
will be sufficient to support the ongoing activities of the business for the
foreseeable future.

19
<PAGE>
PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS

The accompanying Pro Forma Combined Condensed Financial Statements reflect
the historical financial position and results of operations of the Company
adjusted for the acquisitions, using the purchase method of accounting, to be
completed upon the successful completion of this Offering.

The Pro Forma Combined Condensed Balance Sheet as of August 31, 1996 assumes
formation of the Company by such date and the completion of this Offering and
resulting acquisition of the CDIL Assets and the MacDonald Assets. The Pro Forma
Combined Condensed Statements of Operations for the year ended December 31, 1995
and for the eight months ended August 31, 1995 and August 31, 1996 have been
prepared assuming the Offering and resulting acquisition of the CDIL Assets and
the MacDonald Assets were completed on January 1, 1995.

The pro forma adjustments are based upon available information and
assumptions that management of the Company believes are reasonable. The Pro
Forma Combined Condensed Financial Statements do not purport to represent the
financial position or results of operations which would have occurred had such
transactions been consummated on the dates indicated or the Company's financial
position or results of operations for any future date or period. These Pro Forma
Combined Condensed Financial Statements and notes thereto should be read in
conjunction with the historical financial statements and notes included
elsewhere herein.

20
<PAGE>
CD WAREHOUSE, INC.

PRO FORMA COMBINED CONDENSED BALANCE SHEET (NOTE)

AUGUST 31, 1996

(UNAUDITED)

ASSETS

<TABLE>
<CAPTION>
HISTORICAL
----------------------------------------------- PRO FORMA
COMPACT ADJUSTMENTS
CD DISCS FOR
WAREHOUSE, INTERNATIONAL, MACDONALD OFFERING AND AS
INC. LTD. ASSETS ACQUISITIONS ADJUSTED
----------- ------------- ------------- ------------- -------------

<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents............. $ 250,000 $ 326,091 $ 1,653 $ 4,294,364(1)
(326,091)(2)
(3,100,000)(2)
(80,000)(3)
350,000(5) $ 1,716,017
Accounts receivable, net.............. -- 290,828 -- (181,428)(2) 109,400
Merchandise inventory................. -- 498,432 47,127 (47,236)(2) 498,323
Prepaid expenses and other............ -- 11,919 2,345 (11,919)(2) 2,345
----------- ------------- ------------- ------------- -------------
Total current assets.................... 250,000 1,127,270 51,125 897,690 2,326,085
Furniture, fixtures and equipment,
net................................... -- 39,924 824 (4,859)(2) 35,889
Investment in partnerships.............. -- 63,306 -- (15,283)(2) 48,023
Intangible and other assets, net........ 206,394 4,984 -- (44,364)(1)
(1,474)(2)
3,065,521(2)
80,000(3)
352,104(4) 3,663,165
----------- ------------- ------------- ------------- -------------
Total assets............................ $ 456,394 $ 1,235,484 $ 51,949 $ 4,329,335 $ 6,073,162
----------- ------------- ------------- ------------- -------------
----------- ------------- ------------- ------------- -------------

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable...................... $ 55,394 $ 534,270 $ 862 $ (26,155)(2) $ 564,371
Accrued liabilities................... -- 991 3,191 (991)(2) 3,191
Advances and deposits................. 51,000 104,600 -- 155,600
----------- ------------- ------------- ------------- -------------
Total current liabilities............... 106,394 639,861 4,053 (27,146) 723,162
Minority interest....................... -- 1,358 -- (1,358)(2) --
Stockholders' equity:
Common stock.......................... 3,500 -- -- 10,000(1)
800(4)
3,500(5) 17,800
Additional paid-in capital............ 346,500 -- -- 4,240,000(1)
399,200(4)
346,500(5) 5,332,200
Partners' capital..................... -- 594,265 47,896 (594,265)(2)
(47,896)(4) --
----------- ------------- ------------- ------------- -------------
350,000 594,265 47,896 4,357,839 5,350,000
----------- ------------- ------------- ------------- -------------
Total liabilities and stockholders'
equity................................ $ 456,394 $ 1,235,484 $ 51,949 $ 4,329,335 $ 6,073,162
----------- ------------- ------------- ------------- -------------
----------- ------------- ------------- ------------- -------------
</TABLE>

21
<PAGE>
CD WAREHOUSE, INC.
PRO FORMA COMBINED CONDENSED BALANCE SHEET (NOTE)
AUGUST 31, 1996
(UNAUDITED)

NOTE: The Company was formed in September 1996. For purposes of this Pro Forma
Combining Balance Sheet, it is assumed such capitalization occurred at
August 31, 1996. The Company has not had any operations to date.

Combining and Pro Forma Adjustments:

<TABLE>
<C> <S> <C>
(1) To record the issuance of 1,000,000 shares of Common Stock of the Company in
connection with this Offering:
Estimated Offering proceeds..................................................... $ 5,000,000
Estimated expenses of Offering (including $44,364 incurred to date)............. 750,000
------------
Estimated net proceeds of Offering.............................................. 4,250,000
Offering expenses previously incurred........................................... 44,364
------------
Estimated net cash proceeds..................................................... $ 4,294,364
------------
------------
(2) Acquisition of specified assets of CDIL and assumption of specified liabilities:
Net assets at August 31, 1996................................................... $ 594,265
Less net assets retained by CDIL:...............................................
Retail store.................................................................... (57,387)
Investment in partnership....................................................... (15,283)
Cash and accounts receivable, net of accounts payable and accrued liabilities... (487,116)
------------
Net assets acquired............................................................. 34,479
Acquisition price............................................................... 3,200,000
------------
Excess of purchase price over assets acquired................................... 3,165,521
Escrow deposit--to be paid to CDIL.............................................. (100,000)
------------
$ 3,065,521
------------
------------
(3) Payment of balance of finder's fee.............................................. $ 80,000
------------
------------
(4) Acquisition of MacDonald Assets for 80,000 shares of Common Stock:
Purchase price.................................................................. $ 400,000
Less net assets at August 31, 1996.............................................. 47,896
------------
Excess of purchase price over assets acquired................................... $ 352,104
------------
------------
(5) Payment of Common Stock subscription by initial stockholders.................... $ 350,000
------------
------------
</TABLE>

22
<PAGE>
CD WAREHOUSE, INC.

PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS

YEAR ENDED DECEMBER 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL--ACQUIRED OPERATIONS
-------------------------------------------------
COMPACT DISCS
INTERNATIONAL, CD MACDONALD
LTD. ACQUISITIONS ASSETS
------------- ------------- -------------
<S> <C> <C> <C>
Revenues:
Company operations:
Retail store sales.................. $ 291,948 $ -- $ 281,144
Wholesale merchandise sales......... -- 2,717,043 --
Software income, net................ 23,683 -- --
Franchise operations:
Royalty income...................... 946,640 -- --
Franchise and development fees...... 184,250 -- --
------------- ------------- -------------
Total revenues........................ 1,446,521 2,717,043 281,144
Operating costs and expenses:
Cost of sales-retail store sales.... 181,312 -- 179,568
Cost of sales-wholesale merchandise
sales............................. -- 2,511,032 --
Retail store operating expenses..... 71,253 -- 67,800
General and administrative.......... 641,191 77,918 --
Depreciation and amortization....... 9,645 -- --
Minority interest................... 7,293 -- --
------------- ------------- -------------
910,694 2,588,950 247,368
------------- ------------- -------------
Operating income...................... 535,827 128,093 33,776
Other income.......................... 2,987 -- 45,707
------------- ------------- -------------
Income before income taxes............ 538,814 128,093 79,483
Pro forma provision for income
taxes............................... -- -- --
------------- ------------- -------------
Pro forma net income.................. $ 538,814 $ 128,093 $ 79,483
------------- ------------- -------------
------------- ------------- -------------
Pro forma net income per share........
Shares used in computation............

<CAPTION>
PRO FORMA
ADJUSTMENTS
PRO FORMA FOR THE
COMBINING PRO FORMA OFFERING AND
ADJUSTMENTS COMBINED ACQUISITIONS AS ADJUSTED
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Company operations:
Retail store sales.................. $ (291,948)(1) $ 281,144 $ 281,144
Wholesale merchandise sales......... 2,717,043 2,717,043
Software income, net................ 23,683 23,683
Franchise operations:
Royalty income...................... 946,640 946,640
Franchise and development fees...... 184,250 184,250
------------- ------------- -------------
Total revenues........................ (291,948) 4,152,760 4,152,760
Operating costs and expenses:
Cost of sales-retail store sales.... (181,312)(1) 179,568 179,568
Cost of sales-wholesale merchandise
sales............................. 2,511,032 2,511,032
Retail store operating expenses..... (71,253)(1) 67,800 67,800
General and administrative.......... 296,277(3) 1,015,386 $ (15,777)(5) 999,609
Depreciation and amortization....... (487)(1) 9,158 180,000(6) 189,158
Minority interest................... (7,293)(1) -- --
------------- ------------- ------------- -------------
35,932 3,782,944 164,223 3,947,167
------------- ------------- ------------- -------------
Operating income...................... (327,880) 369,816 (164,223) 205,593
Other income.......................... 48,694 48,694
------------- ------------- ------------- -------------
Income before income taxes............ (327,880) 418,510 (164,223) 254,287
Pro forma provision for income
taxes............................... 142,000(4) 142,000 (56,000)(7) 86,000
------------- ------------- ------------- -------------
Pro forma net income.................. $ (469,880) $ 276,510 $ (108,223) $ 168,287
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Pro forma net income per share........ $ .09
-------------
-------------
Shares used in computation............ 1,780,000
-------------
-------------
</TABLE>

23
<PAGE>
CD WAREHOUSE, INC.

PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS

EIGHT MONTHS ENDED AUGUST 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL--ACQUIRED OPERATIONS
-------------------------------
COMPACT DISCS
INTERNATIONAL, MACDONALD
LTD. (NOTE) OPERATIONS
------------- -------------
<S> <C> <C>
Revenues:
Company operations:
Retail store sales....................... $ 199,297 $ 192,562
Wholesale merchandise sales.............. 1,540,765 --
Software income, net..................... 2,844 --
Franchise operations:
Royalty income........................... 587,064 --
Franchise and development fees........... 75,750 --
------------- -------------
Total revenues............................. 2,405,720 192,562

Operating costs and expenses:
Cost of sales--retail store sales........ 124,633 120,608
Cost of sales--wholesale merchandise
sales.................................. 1,406,671 --
Retail store operating expenses.......... 47,045 45,622
General and administrative............... 449,838 --
Depreciation and amortization............ 8,354 --
Minority interest........................ 5,179 --
------------- -------------
2,041,720 166,230
------------- -------------
Operating income........................... 364,000 26,332
Other income............................... 66 35,745
------------- -------------
Income before income taxes................. 364,066 62,077
Pro forma provision for income taxes....... -- --
------------- -------------
Pro forma net income....................... $ 364,066 $ 62,077
------------- -------------
------------- -------------
Pro forma net income per share.............
Shares used in computation.................

PRO FORMA
ADJUSTMENTS
PRO FORMA FOR THE
COMBINING PRO FORMA OFFERING AND
ADJUSTMENTS COMBINED ACQUISITIONS AS ADJUSTED
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Company operations:
Retail store sales....................... $ (199,297)(1) $ 192,562 $ 192,562
Wholesale merchandise sales.............. 1,540,765 1,540,765
Software income, net..................... 2,844 2,844
Franchise operations:
Royalty income........................... 587,064 587,064
Franchise and development fees........... 75,750 75,750
------------- ------------- -------------
Total revenues............................. (199,297) 2,398,985 2,398,985
Operating costs and expenses:
Cost of sales--retail store sales........ (124,633)(1) 120,608 120,608
Cost of sales--wholesale merchandise
sales.................................. 1,406,671 1,406,671
Retail store operating expenses.......... (47,045)(1) 45,622 45,622
General and administrative............... 208,296(3) 658,134 $ (21,296)(5) 636,838
Depreciation and amortization............ 8,354 120,000(6) 128,354
Minority interest........................ (5,179)(1) -- --
------------- ------------- ------------- -------------
31,439 2,239,389 98,704 2,338,093
------------- ------------- ------------- -------------
Operating income........................... (230,736) 159,596 (98,704) 60,892
Other income............................... -- 35,811 35,811
------------- ------------- ------------- -------------
Income before income taxes................. (230,736) 195,407 (98,704) 96,703
Pro forma provision for income taxes....... 67,000(4) 67,000 (34,000)(7) 33,000
------------- ------------- ------------- -------------
Pro forma net income....................... $ (297,736) $ 128,407 $ (64,704) $ 63,703
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Pro forma net income per share............. $ .04
-------------
-------------
Shares used in computation................. 1,780,000
-------------
-------------
</TABLE>

Note: CD Acquisitions included with CDIL as though a combined entity. Such
entities were merged January 1, 1996.

24
<PAGE>
CD WAREHOUSE, INC.

PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS

EIGHT MONTHS ENDED AUGUST 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL--ACQUIRED OPERATIONS
-------------------------------
COMPACT DISCS
INTERNATIONAL, MACDONALD
LTD. (NOTE) ASSETS
------------- -------------
<S> <C> <C>
Revenues:
Company operations:
Retail store sales....................... $ 179,408 $ 161,330
Wholesale merchandise sales.............. 2,150,378 --
Software income, net..................... 24,885 --
Franchise operations:
Royalty income........................... 774,283 --
Franchise and development fees........... 60,500 --
------------- -------------
Total revenues............................. 3,189,454 161,330

Operating costs and expenses:
Cost of sales--retail store sales........ 112,580 98,248
Cost of sales--wholesale merchandise
sales.................................. 2,036,607 --
Retail store operating expenses.......... 51,859 45,076
General and administrative............... 510,136 --
Depreciation and amortization............ 8,602 --
Minority interest........................ 2,898 --
------------- -------------
2,722,682 143,324
------------- -------------
Operating income........................... 466,772 18,006
Other income............................... 21,132 28,008
------------- -------------
Income before income taxes................. 487,904 46,014
Pro forma provision for income taxes....... -- --
------------- -------------
Pro forma net income....................... $ 487,904 $ 46,014
------------- -------------
------------- -------------
Pro forma net income per share.............
Shares used in computation.................

PRO FORMA
ADJUSTMENTS
PRO FORMA FOR THE
COMBINING PRO FORMA OFFERING AND
ADJUSTMENTS COMBINED ACQUISITIONS AS ADJUSTED
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Company operations:
Retail store sales....................... $ (179,408)(1) $ 161,330 $ 161,330
Wholesale merchandise sales.............. 2,150,378 2,150,378
Software income, net..................... 24,885 24,885
Franchise operations:
Royalty income........................... 774,283 774,283
Franchise and development fees........... 60,500 60,500
------------- ------------- -------------
Total revenues............................. (179,408) 3,171,376 3,171,376
Operating costs and expenses:
Cost of sales--retail store sales........ (112,580)(1) 98,248 98,248
Cost of sales--wholesale merchandise
sales.................................. 2,036,607 2,036,607
Retail store operating expenses.......... (51,859)(1) 45,076 45,076
General and administrative............... 307,145(3) 817,281 $ (120,145)(5) 697,136
Depreciation and amortization............ 8,602 120,000(6) 128,602
Minority interest........................ (2,898)(1) -- --
------------- ------------- ------------- -------------
139,808 3,005,814 (145) 3,005,669
------------- ------------- ------------- -------------
Operating income........................... (319,216) 165,562 145 165,707
Other income............................... (7,283)(2) 41,857 41,857
------------- ------------- ------------- -------------
Income before income taxes................. (326,499) 207,419 145 207,564
Pro forma provision for income taxes....... 70,000(4) 70,000 -- (7) 70,000
------------- ------------- ------------- -------------
Pro forma net income....................... $ (396,499) $ 137,419 $ 145 $ 137,564
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Pro forma net income per share............. $ .08
-------------
-------------
Shares used in computation................. 1,780,000
-------------
-------------
</TABLE>

Note: Effective January 1, 1996, CD Acquisitions was merged into CDIL and is
included in consolidated CDIL amounts.

25
<PAGE>
CD WAREHOUSE, INC.

PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS

PRO FORMA ADJUSTMENTS
(UNAUDITED)

<TABLE>
<CAPTION>
YEAR ENDED EIGHT MONTHS EIGHT MONTHS
DECEMBER 31, ENDED AUGUST ENDED AUGUST
1995 31, 1995 31, 1996
------------- ------------- -------------
<C> <S> <C> <C> <C>
(1) Eliminate retail store operations of majority-owned store of
CDIL--to be retained by CDIL:
Retail store sales.......................................... $ 291,948 $ 199,297 $ 179,408

Cost of sales............................................... 181,312 124,633 112,580
Retail store operating expense.............................. 71,253 47,045 51,859
Depreciation and amortization............................... 487 -- --
Minority interest........................................... 7,293 5,179 2,898
------------- ------------- -------------
260,345 176,857 167,337
------------- ------------- -------------
Net......................................................... $ 31,603 $ 22,440 $ 12,071
------------- -------------
------------- ------------- -------------
-------------
(2) Eliminate equity in earnings of investment in partnership of
retail store located in Orange Park, Florida--to be
retained by CDIL.......................................... $ -- $ -- $ 7,283
------------- -------------
------------- ------------- -------------
-------------
(3) Allocate partner cash distributions as salaries of officers
of CDIL................................................... $ 296,277 $ 208,296 $ 307,145
------------- -------------
------------- ------------- -------------
-------------
(4) Provide for income taxes at statutory rate on income of
partnership entities after above adjustments:
Combined pre-tax combined income before pro forma
adjustment................................................ $ 746,390 $ 426,143 $ 533,918
Adjustments, net--above..................................... (327,880) (230,736) (326,499)
------------- ------------- -------------
$ 418,510 $ 195,407 $ 207,419
------------- -------------
------------- ------------- -------------
-------------
Pro forma income taxes...................................... $ 142,000 $ 67,000 $ 70,000
------------- -------------
------------- ------------- -------------
-------------
(5) Adjust executive compensation as a result of employment
arrangements with new officers of the Company:
New officers' compensation.................................. $ 280,500 $ 187,000 $ 187,000
Pro forma adjustment for partners' cash draws............... (296,277) (208,296) (307,145)
------------- ------------- -------------
Net......................................................... $ (15,777) $ (21,296) $ (120,145)
------------- -------------
------------- ------------- -------------
-------------
(6) Amortization of estimated goodwill on purchase transaction
over twenty-year period................................... $ 180,000 $ 120,000 $ 120,000
------------- -------------
------------- ------------- -------------
-------------
(7) Pro forma income tax effect of adjustments for the offering
and acquisition........................................... $ (56,000) $ (34,000) $ --
------------- -------------
------------- ------------- -------------
-------------
</TABLE>

26
<PAGE>
BUSINESS AND PROPERTIES

GENERAL

The Company was formed in September 1996 to acquire the assets of CDIL, a
Texas limited partnership which franchises stores throughout the United States
and England under the name "CD Warehouse." CD Warehouse stores sell, trade and
buy new and preowned CD's and related products. According to the January 1996
issue of Entrepreneur Magazine, CDIL was ranked among the top 30 new franchises
in the United States. At August 31, 1996, there were 108 franchised CD Warehouse
stores in 25 states and England.

The CD is a digital storage medium developed by Phillips Electronics of the
Netherlands and Sony Corporation of Japan and introduced commercially in the
U.S. in 1983. The pronounced freedom from surface noise, the absence of tape
hiss, and the large dynamic range of the CD (i.e., the ability to play very
quiet and very loud passages without excessive distortion) have made the
digitally-recorded CD a success in the music industry. Moreover, improved
mechanical isolation of CD players, information buffering and rapid random
access have made CD playing acceptable for automobile as well as home use.

According to the Recording Industry Association of America (the "RIAA"), CD
sales in the United States were over 700 million units in 1995, generating
annual sales exceeding $9 billion. The lack of any audible difference between
new and preowned CD's, durability of the medium, cost savings and the
accumulating stock of available CDs for resale, suggest the possibility for
rapid market growth in the preowned CD market.

CD Warehouse stores sell CD's, take customers' CD's in trade or buy
customers' CD's for cash. The CD Warehouse concept capitalizes on the emergence
of CD's as the prevailing form of prerecorded music. Because the CD is encased
in plastic and read by a laser, the playing of CD's, and even the occasional
careless handling of CDs, rarely cause damage that will impair performance or
result in any degradation of sound quality. In the absence of pronounced abuse,
CD's may reasonably be expected to last for decades; premium (gold-plated) CD's
may last significantly longer. Such extraordinary durability, coupled with the
standard error-correction circuitry in CD players, means that preowned CDs are
essentially indistinguishable from new CDs in terms of audible performance. By
offering quality preowned CD's at substantial savings and responding to
consumers' desire to recycle merchandise they no longer want or use but which
has intrinsic value, the CD Warehouse remarketing concept emphasizes consumer
value. The CD Warehouse marketing slogan, "selling compact discs at compact
prices," embodies this concept.

The Company's expansion strategy for 1997 is to open 9 to 12 Company-owned
stores and 18 to 24 franchised stores. Simultaneously with the closing of the
Offering, the Company will acquire the CDIL Assets for a purchase price of $3.2
million. See "Certain Transactions--CDIL Acquisition." In a related transaction,
which also will occur simultaneously with the closing of the Offering, the
Company will acquire the equity interests of MacDonald in 36 franchised CD
Warehouse stores. See "Certain Transactions-- MacDonald Acquisition." The
Offering will not be closed unless there is a simultaneous closing of the CDIL
Acquisition and the MacDonald Acquisition. Upon consummation of the CDIL
Acquisition and the MacDonald Acquisition, the Company will acquire the rights
to the CD Warehouse name, assume CDIL's role as franchisor under the 108
franchise agreements to which CDIL was a party and manage and have an interest
in the 36 CD Warehouse Stores in which MacDonald had an interest.

27
<PAGE>
During the year ended December 31, 1995 and the eight months ended August
31, 1996, on a pro forma basis taking into account the CDIL Acquisition and the
MacDonald Acquisition, the Company had pro forma total revenues of approximately
$4,153,000 and $3,171,000, respectively, and pro forma net income, as adjusted,
of approximately $168,000 and $138,000, respectively. There can be no assurance
that the historical level of the Company's revenues and net income will continue
to be achieved in the future. See "Risk Factors," "--Business Strategy" and
"Certain Transactions."

Certain statements contained herein relating to the Company's proposed
business strategy and expansion plans are not based on historical facts, but are
forward-looking statements that are based upon numerous assumptions about future
conditions which may ultimately prove to be inaccurate and actual events and
results may materially differ from anticipated results described in such
statements. The Company's ability to achieve such results is subject to certain
risks and uncertainties, such as those inherent generally in the retail and
franchising industries, the impact of competition and pricing, changing market
conditions, the risks detailed in the sections entitled "Risk Factors" and
"Legal Proceedings," and other risks detailed throughout this Prospectus. These
forward-looking statements represent the Company's judgment as of the date of
this Prospectus. The Company disclaims, however, any intent or obligation to
update these forward-looking statements. As a result, the reader is cautioned
not to place reliance on these forward-looking statements.

BUSINESS STRATEGY

The Company believes that a growing consumer willingness to purchase
preowned CD's, provides an expanding market niche in the retail music industry
for CD remarketers. The Company's business strategy is to establish itself as
the recognized industry leader in the domestic buy-sell-trade retail CD
marketplace by pursuing a three-fold approach: (1) offering quality, preowned
CD's at exceptional value; (2) selling new releases at competitive prices; and
(3) offering to accept as a trade, or buy for cash, selected CD's from
customers.

The Company's expansion strategy for 1997 is to open 9 to 12 Company-owned
stores and 18 to 24 franchised stores. Management believes that, in addition to
the Company, Disc Go Round and The Wherehouse are the only national chains
engaged in the sale of preowned CD's. Based on publicly available information
regarding such companies, the Company believes that CD Warehouse stores
currently account for approximately 23% of the estimated 480 chain-based CD
reseller stores that operate throughout the United States. Management believes
that the market for CD remarketers is fragmented and underserved, and that the
Company can increase its market share by expanding the CD Warehouse concept in
targeted markets. To accomplish this objective, the Company intends to employ a
business strategy that includes the following elements:

INVENTORY MANAGEMENT SYSTEM. The Company considers its inventory management
system, which is a proprietary software program, to be essential to the success
of its business strategy and the CD Warehouse concept. The program, which has a
database in excess of 60,000 titles and includes catalogs from all the major
record labels, assists each store in selectively procuring preowned CD's by
supplying buying guidelines for every CD offered. The ability to access this
data instantly gives store operators the capability to make an informed decision
on every CD presented by a customer for purchase or trade, by reviewing the
title's historic store sales data, as well as the recommended purchase price
that the CD has been assigned by the Company. By scanning each CD (utilizing bar
coding capability), the program also includes point-of-sale recording of all
transactions, including customer profiles with which mailing lists may be
created. Additionally, as each transaction is entered, the program prints
customer receipts and compiles inventory by title, including respective costs,
selling price and gross profit results. Accordingly, the program can generate
reports of comprehensive data for any selected period or any facet of store
operations, including sales by title, sales by dollar volume, inventory by
title, individual transaction summaries, acquisitions for any period, system
adjustments, cash register reconciliation and other pertinent financial
information.

28
<PAGE>
The Company believes that its inventory management system contributes to
more efficient system-wide management of inventory by reducing the need to
purchase new titles from music distributors for new store inventories and
affording existing stores the opportunity to sell excess inventory. See
"--Operations--Acquisition of Preowned CD's."

CUSTOMER SERVICE. The Company emphasizes excellent customer service and
seeks to employ, and to sell franchises to, motivated and energetic people.
Management has adopted an owner/operator principle in which the store manager
has a vested interest in increasing sales and profitability. It is management's
intent to encourage this same philosophy to its multi-unit franchises. The
Company also intends to foster enthusiasm for its customer service philosophy
and the CD Warehouse concept through annual franchise conventions, regional
meetings and other frequent contacts with its franchisees and store managers.

TARGETED EXPANSION. The Company believes that its existing core and
developing markets offer significant growth opportunity for both Company-owned
and franchised store development. During 1997, the Company intends to
concentrate its expansion of Company-owned stores in markets where it can
cluster stores, thereby expanding consumer awareness and creating significant
operating, distribution and advertising efficiencies. To increase its
penetration of core markets, the Company intends to co-develop markets with
franchisees, divide markets among franchisees or divide markets among the
Company and franchisees. The Company also intends to cluster its Company-owned
stores and franchised stores through the use of area development agreements and
its site selection approval process. The Company believes that this approach
will result in increased average store sales.

29
<PAGE>
STORE LOCATIONS

The table below illustrates the location by state of all CD Warehouse retail
stores in the United States and England as of August 31, 1996:

DOMESTIC

ALABAMA
Decatur
Huntsville

ARKANSAS
Little Rock*

CALIFORNIA
San Diego

COLORADO
Colorado Springs
Denver*
Ft. Collins*

FLORIDA
Ft. Myers
Jacksonville*
Lake Park
Naples
Neptune Beach*
Orange Park*
Tallahassee
Tampa*
Venice

GEORGIA
Atlanta
Martinez

ILLINOIS
Carol Stream
Lombard
Streamwood
Wheaton

IOWA
Des Moines

KANSAS
Overland Park*
Shawnee*
Wichita*

LOUISIANA
Baton Rouge*
Bossier City
Lafayette*
Metarie*
Shreveport
Slidell

MARYLAND
Laurel

MISSOURI
Ballwin
Branson*
Cape Girardeau
Gladstone*
Springfield*
St. Louis

MONTANA
Bozeman

NEBRASKA
Omaha*

NEW MEXICO
Albuquerque

OHIO
Cincinnati--Beechmont Ave
Cincinnati--Montgomery
Columbus
Mayfield Heights
Miamisburg
Parma Heights
Toledo

OKLAHOMA
Edmond*
Oklahoma City--N May*
Oklahoma City--NW Expressway*
Tulsa--S Sheridan*
Tulsa--S Peoria

OREGON
Portland--SW Washington St.
Portland--NE Broadway

SOUTH CAROLINA
Columbia
Greenville

SOUTH DAKOTA
Rapid City

TENNESSEE
Jackson
Memphis*

TEXAS
Abilene
Arlington--Cooper Street*
Arlington--N Collins
Austin--Research Blvd
Austin--Guadalupe
Beaumont*
Carrollton
College Station*
Dallas--Montfort**
Dallas--Oak Lawn
Dallas--Preston
Dallas--Skillman
Dallas--Walnut Hill
Denton*
El Paso
Ft. Worth--Berry Street
Ft. Worth--S. Hulen
Garland
Houston--FM 1960
Houston--Shepherd*
Irving*
Lewisville*
Lubbock
Mesquite*
Midland
N. Richland Hills
Plano
San Angelo
San Antonio--NW Military
San Antonio--Thousand Oaks
San Antonio--Evers
San Antonio--Broadway
Sherman
Temple
Waco*
Webster
Wichita Falls

UTAH
Provo
St. George
Taylorsville*

VIRGINIA
Alexandria*

WASHINGTON
Seattle

WISCONSIN
Appleton
Brookfield
Kenosha
INTERNATIONAL/UK
Ealing
Leeds
London

- ------------------------------
* Franchise store operations managed by CD Management, a wholly-owned
subsidiary of the Company, which also owns a minority equity interest in the
indicated store.

** To be acquired as a Company-owned store upon completion of the Offering.

EXPANSION STRATEGY

The first CD Warehouse store opened in Dallas, Texas in August 1992 and by
August 1996 there were a total of 108 CD Warehouse stores in 25 states and
England, all but one of which were franchised. In 1997,

30
<PAGE>
the Company expects to open between 12 and 24 new franchised stores and 9 to 12
new Company-owned stores. Key elements of the Company's expansion strategy
include:

AGGRESSIVE, BALANCED GROWTH. The Company's expansion strategy is to balance
the growth of its Company-owned and franchised stores by increasing its emphasis
on Company-owned store expansion. A Company-owned store provides a greater
potential economic return to the Company than does a franchised store. The
Company believes that, in many cases, the Company will be able to take advantage
of a promising new location by establishing a Company-owned store when a delay
in finding a qualified franchisee might jeopardize the Company's ability to
secure the site. Company-owned stores also provide a training ground for
Company-owned store and district managers and a controllable testing ground for
new products and promotions, operating and training methods and merchandising
techniques. The Company also plans to open additional franchised stores, which
will enable the Company to expand its system more quickly with no capital
investment. Proceeds from the Offering and the Credit Facility will be used to
support this growth.

NAME RECOGNITION AND NEW MARKET PENETRATION. The Company believes the
visibility of its stores at high traffic strip shopping centers has generated
good name recognition in the areas in which stores currently are located. CD
Warehouse stores historically have been concentrated in the Southwest United
States, but recent growth has generated a gradual shift outward into adjoining
states and scattered parts of the Midwestern and Southeastern United States. The
Company's expansion strategy involves initially the building-out of these
existing markets and subsequently the further penetration of developing markets
through the clustering of both Company-owned and franchised stores. This
expansion strategy is designed to take advantage of operational and advertising
efficiencies through store clustering within television and other advertising
markets, thereby increasing market penetration and consumer awareness. To
accelerate penetration of larger markets, the Company intends to co-develop
markets with franchisees or divide markets among franchisees, and intends to
utilize market co-development where appropriate. In determining which new
markets to develop, the Company considers many factors, including the size of
the market, demographics and population trends, competition and real estate
availability and pricing.

INTERNATIONAL FRANCHISE EXPANSION. There are three franchised stores
currently operating in England. In connection with the CDIL Acquisition, the
Company has entered into a master franchise agreement (the "Worldwide Area
Development Agreement") with the founder of CDIL, Mark E. Kane. The Worldwide
Area Development Agreement provides for a period of ten years for development of
franchise operations worldwide, excluding the United States, Canada and Mexico,
and includes a provision which allows the Company, at its option, to purchase
Mr. Kane's interest in any franchised operations developed pursuant to the
Worldwide Area Development Agreement. The development schedule under the
agreement requires that Mr. Kane open 100 stores over the ten year period. There
is no assurance that Mr. Kane will be successful in opening these stores. The
agreement provides that Mr. Kane will pay the Company an amount to be jointly
determined between the Company and Mr. Kane on a country-by-country basis,
provided that the Company will receive a franchise fee of not less than $3,000
per store, a minimum royalty of 1% of gross sales based on individual store
sales volume and 20% of the total fee received from each subfranchisee by Mr.
Kane. The Company's intent is to focus its own efforts on developing the CD
Warehouse franchise system domestically, and it considers the Worldwide Area
Development Agreement an attractive vehicle to utilize the expertise of Mr. Kane
to develop the international franchise system. See "Certain
Transactions--Worldwide Area Development Agreement."

CONSIDERATION OF ACQUISITIONS. Concurrently with the Offering, the Company
will acquire the interests of MacDonald, the largest CD Warehouse franchisee.
The Company intends to pursue the acquisition of other local and regional
preowned music retailers to implement its strategy of building out current
markets and establishing itself in new target markets that may be concurrently
developed by the Company as well as franchised stores.

31
<PAGE>
NEW STORE CONCEPT. The Company intends to examine the need for a new,
consistent appearance, both externally and internally, for all stores. A
prototype unit has opened in August 1996, in Plano Texas. This particular store
carries slightly more inventory (16,000 titles) and utilizes updated decor and
lighting schemes. The Company believes that by offering a larger variety in both
new and preowned titles, the Company will improve store sales. A component of
developing the new store concept is to devise a uniform, low cost remodel plan
for the system as a whole. The cost of remodeling non-Company-owned stores will
be borne by the respective franchisees.

OPERATIONS

ACQUISITION OF PREOWNED CD'S. A key component of the CD Warehouse concept
is to accept as a trade or buy for cash selected CD's from customers;
accordingly, the Company anticipates that it will obtain its preowned CD
inventory primarily from within the system itself. Additionally, utilizing its
inventory management system, which is a proprietary program, the Company affords
existing stores the opportunity to sell excess inventory. As new stores are
developed, opening packages of inventory are assembled by the Company and sold
to the franchisees. The demand for inventory by new stores allows existing
stores to sell excess inventory. The Company has a policy of buying available
inventory directly from the retail locations and, with modem and Internet
capability, the Company compiles real-time inventory information. If, for
example, it is determined that a store may be overstocked on a particular
selection, the Company may purchase the selection and resell it to another unit
or as part of the opening inventory of a new store. The Company believes that
this is a significant advantage in comparison to its competitors since the
Company can review all titles available and source its own system for inventory.
Management anticipates, based on CDIL's operational history, that as much as 75%
of the opening inventory for a new store can be purchased from the current
system of CD Warehouse stores. This constant inventory turnover allows existing
stores to make a reasonable profit and provide a source of capital while
providing an opportunity for the Company to acquire quality inventory to open
new stores or update an existing location's inventory.

PURCHASING OF NEW CD'S, OTHER POINT-OF-SALE ITEMS AND STORE FIXTURES. For
new music releases, the Company will contract with six major industry CD
suppliers (Sony Music; Warner/Electra/Atlantic Corp. (subsidiary of Time
Warner); BMG Music (subsidiary of Bertelsman); UNI (subsidiary of Seagrams);
PolyGram (subsidiary of Philips); and EMI (subsidiary of Thorn-EMI)) to provide
the necessary access to new titles. As these new releases become available, the
Company reviews all titles and determines what specific releases will be
acquired for sale to the system. The Company then provides a weekly sales
program to franchisees and Company-owned stores consisting of available
inventory. This program includes new releases, catalog titles (i.e., Elvis
Presley, Pink Floyd, movie soundtracks, etc.), preowned titles and various point
of sale and merchandising items. The Company negotiates on behalf of the system
for inventory display racks, lighting and related products which are then
shipped directly from the manufacturers to the individual stores.

As the system grows, the Company believes that additional quantity discounts
can be negotiated with the respective equipment and product suppliers. The
Company maintains its own distribution facility to provide its franchise and
Company-owned stores with available new and preowned CD's. Additionally, the
Company is researching the possibility of forward warehousing inventory in
specific regions to reduce the shipping time and related shipping costs.

MARKETING AND ADVERTISING

Historically, CDIL has had only a limited involvement in direct retail
operations, and therefore has not conducted significant advertising or marketing
programs. Although the Company provides new stores with certain pre-opening
items and point-of-sale materials (additional point-of-sales materials are
available to all stores at no cost from the record companies), CD Warehouse
franchisees currently conduct marketing and advertising activities independently
through newspapers and radio, the funds for which are

32
<PAGE>
reserved pursuant to the franchise agreement, which provides for each store to
reserve 1.5% of sales to spend specifically on advertising. It is the Company's
intent, as markets reach relative points of saturation, to develop an
advertising cooperative that the Company will manage to support enhanced
advertising (i.e., television, direct mail, etc.). Additionally, the Company is
considering making preowned CD's available for sale through Internet access.

FRANCHISING PROGRAM

GENERAL. The Company's predecessor, CDIL, commenced franchising the CD
Warehouse concept in 1993. Upon completion of the Offering and the concurrent
closings of the CDIL Acquisition and the MacDonald Acquisition, the Company will
have 36 Company-owned or controlled stores and 72 franchised stores in 25 states
and England. The Company expects that 18 to 24 franchised stores will open by
the end of 1997. However, there can be no assurance that all of these stores
will be opened or that the development schedule set forth in each area
development agreement will be achieved.

The Company's franchise agreement provides the franchisee the right to use
the Company's trade names, service marks and trademark; design plans, color
schemes, signs and fixtures for store premises; buying and selling guidelines;
computerized inventory management system; initial inventory, operations and
financial control guidelines; initial management training; and advertising
assistance.

The following table sets forth the number of CD Warehouse stores opened and
closed since the inception of the CD Warehouse franchise system:

<TABLE>
<CAPTION>
PERIOD ENDING
1992 1993 1994 1995 AUGUST 31, 1996 TOTAL
----- ----- ----- ----- ------------------- -----
<S> <C> <C> <C> <C> <C> <C>
Opened.................................... 2 17 51 36 15 121
Closed.................................... 0 0 3 7 3 13
---
108
</TABLE>

FRANCHISE SOURCING AND SELECTION. The majority of new franchises are
awarded to persons referred by existing franchisees, to interested consumers who
have visited CD Warehouse stores and to existing franchisees. The Company also
advertises for new franchisees in national business publications and regional
newspapers as suitable potential store locations come to the Company's
attention. See
"--Franchise Marketing Program." Franchisees are approved by the Company on the
basis of the applicant's net worth and liquidity, together with an assessment of
work ethic and personality compatibility with the Company's operating
philosophy. Currently, 19 franchisees own two or more CD Warehouse stores and 16
franchisees own a single store. The largest number of stores owned or managed by
a single franchisee is 36 which, upon completion of the Offering and the
MacDonald Acquisition, will become Company-owned or managed stores.

FRANCHISE MARKETING PROGRAM. The Company's franchise marketing program
seeks to attract prospective franchisees with management experience, a minimum
level of net worth and strong interest in the retail music business. The Company
markets its franchise opportunities by advertising in selected business
magazines and franchise-oriented publications. Each inquiry is responded to and
an initial determination is made as to the prospects' qualifications to become a
CD Warehouse franchisee. Once initially qualified, the prospect is mailed the
Company's brochure and marketing materials. The inquiry is then followed up on
within a period of two weeks. In June 1996, CDIL implemented an enhanced
advertising strategy utilizing Entrepreneur Magazine. The Company believes that
the new marketing program has resulted in heightened awareness of CD Warehouse
as a franchise opportunity.

The Company also intends to establish a home page via the Internet (World
Wide Web) that will provide detail on the franchise opportunities presented by
operating a CD Warehouse store.

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<PAGE>
TRAINING AND SUPPORT. The Company's philosophy is one of service and
commitment to its franchise system and it intends immediately upon commencement
of operations to implement a plan to improve its franchise support services.
Each franchise owner/operator and each franchised store manager is required to
complete a comprehensive training program in store operation and management.
Topics covered in the training course include the Company's philosophy of store
operation and management, customer service, merchandising, marketing, pricing,
inventory and cost control, record keeping, labor scheduling and personnel
management. Training is based on standard operating policies and procedures
contained in an operations manual provided to all franchisees, which the
franchisee is required to follow by terms of the franchise agreement.
Additionally, trainees are provided with a complete orientation to Company
operations by meeting with members of the senior management of the Company.
Training continues through the opening of the store, where Company field
personnel assist and guide the franchisee in all areas of operation.

THE FRANCHISE AGREEMENT; TERMS AND CONDITIONS. The domestic offer and sale
of CD Warehouse franchises is made by its Uniform Franchise Offering Circular
prepared in accordance with federal and state laws and regulations. States that
regulate the sale and operation of franchises require a franchisor to register
or file certain notices with the state authorities prior to offering and selling
franchises in those states.

Under the current form of domestic franchise agreement, franchisees pay the
Company (i) an initial franchise fee of $6,000, (ii) royalties equal to 5% of
monthly gross sales and (iii) a marketing fee equal to 1.5% of monthly gross
sales. It is expected that the initial fee will increase as the Company enhances
franchise services. Franchisees are generally granted exclusive territory with
respect to the operation of CD Warehouse stores only in the immediate vicinity
of their stores.

The franchise agreement requires franchisees to purchase from the Company
certain proprietary software and the store's initial inventory, and to comply
with the Company's procedures of operation, to permit inspections and audits by
the Company and to remodel stores to conform with standards in effect from time
to time for the CD Warehouse system. The Company may terminate the franchise
agreement upon the failure of the franchisee to comply with the conditions of
the agreement and upon the occurrence of certain events, such as insolvency or
bankruptcy of the franchisee or the commission by the franchisee of any unlawful
or deceptive practice, which in the judgment of the Company is likely to
adversely affect the CD Warehouse system. The Company's ability to terminate
franchise agreements pursuant to such provisions is subject to applicable
bankruptcy and state laws and regulations. See "--Regulation."

The agreement prohibits the transfer or assignment of any interest in a
franchise without the prior written consent of the Company. The agreement also
gives the Company a right of first refusal to purchase any interest in a
franchise if a proposed transfer would result in a change of control of that
franchise. The refusal right, if exercised, would allow the Company to purchase
the interest proposed to be transferred under the same terms and conditions and
for the same price as offered by the proposed transferee.

The term of each franchise agreement is ten years, and franchisees generally
have the right to renew for an additional ten-year term. All of the franchise
agreements to be assigned to the Company in connection with the CDIL Acquisition
will expire between 2002 and 2006.

34
<PAGE>
UNIT ECONOMICS. The Company believes that future CD Warehouse stores can be
opened for an initial investment of approximately $100,000. The estimated
initial investment is comprised of the following:

<TABLE>
<S> <C>
Franchise fee............................................. $ 6,000
Inventory................................................. 50,000
Leasehold improvements.................................... 11,500
Proprietary software and related hardware................. 4,500
Signage (exterior and interior)........................... 5,500
Fixtures and equipment.................................... 10,000
Lease and utility deposits................................ 2,500
Initial working capital................................... 10,000
---------
$ 100,000
---------
---------
</TABLE>

Management believes that a key indicator of the success of a franchise
location is the sales to capitalization ratio. That ratio is defined as the
annual sales revenue generated by the business divided by the capitalization
costs to open the business. For the year ended December 31, 1995, average unit
sales on a comparable basis were $276,338. Based on an initial estimated
capitalization of $100,000, the sales to capitalization ratio to open a new CD
Warehouse store is 2.76 to 1.

FRANCHISE FINANCING. The Company's predecessor did not provide prospective
franchisees with financing for its stores. Typically, franchisees have obtained
their own sources of such financing and have not required the Company's
assistance. The Company plans to develop relationships with sources of franchise
financing which will serve both franchised and Company-owned store development.

COMPANY STORE PROGRAM

As a result of the MacDonald Acquisition, the Company will have interests in
and will manage 36 CD Warehouse stores and intends to open 9 to 12 Company-owned
stores in 1997. Although Company-owned stores require an initial capital outlay
by the Company, they also provide a greater potential economic return to the
Company than franchised stores. The Company estimates that the cost of opening a
new Company-owned store is approximately $84,000, excluding franchise fee and
initial working capital applicable to franchisees.

Company-owned stores also permit market penetration, or seeding, in the
absence of an immediately-viable multi-location franchise operator. Company
stores provide an opportunity to continually refine the Company's standard store
model in order to respond to market dynamics. Variations in inventory mix,
ancillary product offerings, and marketing and sales techniques can be tested
and refined before implementation throughout the system.

The Company believes in the owner-operator concept. It is the intent that
each Company-owned store will be operated by an owner-manager. The Company
believes that this relationship provides operators with an incentive to perform
with a higher degree of commitment to the store's business. As a market is
developed, owner-managers will be given opportunities to progress into
multi-unit management. A typical multi-unit supervisor will own up to 20% of
each unit under his supervision. With the exception of the 35 franchised stores
in which the Company will acquire a minority ownership interest pursuant to the
MacDonald Acquisition, the Company will always retain a majority ownership in
the operating partnerships.

Managers of Company-owned stores are required to comply with all Company
operating standards and undergo training and receive support from the Company
similar to the training and support provided to franchisees. See "--Franchising
Program--Training and Support." The Company's Vice President--

35
<PAGE>
Company Store Operations and his staff intend to regularly visit Company-owned
stores to ensure compliance with Company standards and procedures and to provide
advice and support.

GOVERNMENTAL REGULATION

The Company is subject to various federal, state and local laws affecting
its business. Each of the Company's stores is subject to licensing and
regulation by a number of governmental authorities, which include taxing, zoning
and building agencies in the state or municipality in which the store is
located. Difficulties in obtaining or failures to obtain required licenses or
approvals could delay or prevent the opening a new store in a particular area.

The Company is subject to Federal Trade Commission ("FTC") regulation and
various state laws which regulate the offer and sale of franchises. The FTC has
adopted a rule that requires franchisors to make certain disclosures to
prospective franchise owners prior to the offer or sale of franchises. This rule
requires the disclosure of information necessary for a franchise owner to make
an informed decision as to whether to enter into a franchise relationship and
delineates the circumstances in which franchisors may make predictions on future
sales, income and profits. Failure to comply with this rule constitutes an
unfair or deceptive act or practice under the Federal Trade Commission Act.
Additionally, numerous states have in recent years adopted laws regulating
franchise operations and the franchisor-franchisee relationship, and similar
legislation is pending in Congress and several other states. Existing laws and
pending proposals vary from filing and disclosure requirements in the offer and
sale of franchises to the application of statutory standards regulating the
establishment and termination of franchise relationships. These laws generally
apply to both area and individual franchises. Although the foregoing matters may
result in some modification in the Company's franchising activities and some
delays or failures in enforcing certain of its rights and remedies under certain
area or individual franchise agreements, such modifications, delays or failures
have not had a material adverse effect on the Company's operations or business.
However, the law applicable to franchise operations and relationships is still
developing, and the Company is unable to predict the effect, if any, on its
operations of additional requirements or restrictions that may be enacted or
promulgated or of court decisions that may be adverse to the franchise industry.
While it is difficult to assess potential effects of federal and state
legislation in the U.S. or new international laws that may impact the industry,
the Company does not anticipate any material adverse effects from such
legislation or laws at this time.

The Company's operations are also subject to federal and state laws
governing such matters as wages, working conditions and overtime.

COMPETITION

The Company competes in the retail music industry, which is highly
competitive in price, selection, service and location and is often affected by
changes in consumer trends, economic conditions, demographics, traffic patterns
and technological innovations. The following profile provides an overview and
comparison of how the retail "new release" CD industry and the emerging retail
"remarketing" or "buy-sell-trade" CD industry are currently structured and
segmented.

According to the RIAA, CD sales in the United States were over 700 million
units in 1995, generating annual sales exceeding $9 billion. The Company has
various competitors in the industry who sell new recordings and music related
merchandise. These companies vary from those who are specialty music stores in
malls (such as Musicland, Camelot) and those who utilize free-standing buildings
(such as Blockbuster Music, Wherehouse Records). Empirical studies conducted by
the Company indicate that companies in mall locations typically charge $15.99 to
$17.99 for their front-line CD products. Those in free-standing buildings
generally have much larger facilities (between 12,000 to 20,000 square feet).
Their selling price for front-line items range between $13.99 and $15.99, with
the latest top 20 releases on sale for $11.99 to $13.99 per CD. None of these
"superstores" sell preowned music except for Wherehouse

36
<PAGE>
Records, which has generally offered an inventory of preowned CDs in less than
500 square feet of space with limited selections.

Other retailers offering music include major national discount stores,
including Wal-Mart, K-Mart and Target stores. These national discounters
maintain a very small number of new music titles while offering no preowned
music. Their pricing will typically vary from $11.99 to $13.99 per item in
approximately 1,000 square feet of space. In another category are the
multi-media electronic stores (such as Best Buy, Circuit City), which have
generally utilized approximately 1,000 square feet of space and discount their
new releases at prices which range generally from $9.99 to $12.99 per item.

The CD Warehouse system competes currently with one other national company
specializing in the sale of preowned CD's. Disc Go Round is a Minneapolis-based
company owned by GrowBiz International, a franchisor of several other concepts
including Play It Again Sports. Disc Go Round maintains smaller quantities of
preowned inventory than does CD Warehouse. Both CD Warehouse and Disc Go Round
sell preowned front-line product at $6.00 to $9.00 and new releases at $10.99 to
$12.99, as compared to Best Buy and Circuit City prices of new CD's, which range
generally $11.99 to $12.99 per selection. GrowBiz International's Form 10-Q for
the quarter ended June 1996 indicates that there are currently 107 units in the
Disc Go Round system, as compared to 108 units in the CD Warehouse system.

The Company also competes in the franchise industry for prospective
franchisees. With respect to the only other franchisor known to the Company to
engage in a business similar to that of the Company, the Company believes that
it competes favorably.

TRADEMARKS AND SERVICE MARKS

The Company has registered the name "CD Warehouse" with the United States
Patent and Trademark Office. The Company believes that its trademark has
significant value and is important to its marketing efforts.

PROPERTIES

The Company's principal executive offices currently are located at 722 N.
Broadway, Oklahoma City, Oklahoma 73012, where it leases from a director of the
Company approximately 800 square feet under a month-to-month lease with a
monthly lease payment of $600. See "Certain Transactions."

CDIL maintains its offices and warehouse operations at 1710 Firman, Suite
300, Richardson, Texas 75081. The total facility is approximately 4,500 square
feet and is held under a lease expiring in March 1997 with a monthly lease
payment of $2,087. Approximately 2,500 square feet is used for administrative
and the balance of the space is utilized as a warehouse. Upon completing the
CDIL Acquisition, the Company will share offices with CDIL during a transition
period anticipated to last approximately four months. The transition period will
allow the Company to evaluate the employees of CDIL and to plan an orderly move
of the CD Warehouse system operations to Oklahoma City.

Upon the expiration of the CDIL lease, the Company anticipates that it will
relocate its principal offices to a larger facility in Oklahoma City. The
Company has solicited the services of the largest commercial realtor in Oklahoma
City to assist in locating suitable facilities.

EMPLOYEES

Upon commencement of operations, the Company will employ 13 employees, 11 on
a full-time basis. None of the Company's employees are represented by a labor
union and the Company believes that its relations with its employees are good.

37
<PAGE>
LEGAL PROCEEDINGS

From time to time, the Company may be involved in litigation relating to
claims arising out of its normal business operation. The Company is not now
engaged in any legal proceedings.

CDIL is subject to a currently effective order from the State of South
Dakota, issued by the South Dakota Division of Securities, to cease and desist
and refrain from offering or selling franchises in the State of South Dakota
until CDIL has complied with the South Dakota franchise registration laws. This
cease and desist order was issued because CDIL sold a franchise to two South
Dakota residents and had not registered the franchise in South Dakota. The
Company intends to seek registration of its franchise in South Dakota as soon as
practicable after completion of the Offering and the CDIL Acquisition.

38
<PAGE>
MANAGEMENT

DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES

The following table sets forth certain information regarding the directors,
executive officers and key employees of the Company.

<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------ --- ----------------------------------------------------------------------
<S> <C> <C>
Jerry W. Grizzle.............. 44 Chairman of the Board of Directors, President and Chief Executive
Officer

Gary D. Johnson............... 37 Chief Operating Officer, Executive Vice President and Director

Bruce D. MacDonald............ 41 Vice President-Company Store Operations

Doyle E. Motley............... 42 Senior Vice President and Chief Financial Officer

Christopher M. Salyer......... 44 Director

Ronald V. Perry............... 47 Director
</TABLE>

JERRY W. GRIZZLE founded the Company in September 1996 and has served as
Chairman of the Board of Directors, President and Chief Executive Officer of the
Company since that time. From 1984 to 1991, Mr. Grizzle was Vice President and
Treasurer of Sonic Corporation, a publicly held fast food franchisor with over
1,500 units operating in 26 states, and from 1991 to 1994, he owned and operated
Orbit Finer Foods, a privately owned Mexican food product manufacturer. For a
four-month period in 1994, Mr. Grizzle served as President of Skolniks, Inc., a
publicly held bagel manufacturer ("Skolniks"). Mr. Grizzle resigned from
Skolniks in October 1994 as a result of significant disagreements with the Board
of Directors over Skolniks' corporate practices; subsequent to Mr. Grizzle's
resignation, Skolniks was the subject of an involuntary Chapter 11 proceeding.
Mr. Grizzle received his B.S. degree in Accounting from Southwestern Oklahoma
State University in 1976 and received an M.B.A. in 1983 from the University of
Central Oklahoma. He is currently completing his Ph.D. in Marketing at Oklahoma
State University, and holds the rank of Colonel in the Oklahoma Army National
Guard.

GARY D. JOHNSON has been Executive Vice President, Chief Operating Officer
of the Company and a director of the Company since the Company's inception in
September 1996. For the past nine years, from 1987 to 1996, Mr. Johnson served
as Vice President of Purchasing and Distribution for Sonic Corp. In such
capacity, Mr. Johnson was responsible for cooperative purchasing and management
of all procurement functions and distribution for the Sonic system. Mr. Johnson
received his B.S. degree in Business Management from Southwestern Oklahoma State
University in 1981.

BRUCE D. MACDONALD will be appointed to Vice President-Company Store
Operations upon completion of the offering. Prior to the Company's acquisition
of CDIL, Mr. MacDonald owned an interest in and managed 36 CD Warehouse retail
stores. Mr. MacDonald is a certified public accountant and began his career at
Arthur Andersen in 1977, after graduating with a B.B.A. degree from Southern
Methodist University in 1977. For at least the last five years, Mr. MacDonald
has been self-employed as a certified public accountant, in addition to his
activities as a CD Warehouse franchisee.

DOYLE E. MOTLEY will be appointed to Senior Vice President and Chief
Financial Officer of the Company upon completion of the Offering. For the past
two years, Mr. Motley has served as an internal auditor for Bob Moore Financial
Group, a multi-state auto dealership. Prior to that, from 1991 to 1994, Mr.
Motley served as Chief Financial Officer of Orbit Finer Foods. For a four-month
period in 1994, Mr. Motley served as Chief Financial Officer of Skolniks. Mr.
Motley resigned from Skolniks in October 1994 as a result of significant
disagreements with the Board of Directors over Skolniks' corporate practices;
subsequent to Mr. Motley's resignation, Skolniks was the subject of an
involuntary Chapter 11 proceeding.

CHRISTOPHER M. SALYER has been a member of the Board of Directors since
October 1996. Mr. Salyer is currently serving as the Chairman and Chief
Executive Officer of Accounting Principals, Inc., a company

39
<PAGE>
specializing in the placement of accounting personnel. From February 1984
through December 1994, Mr. Salyer served as the Chairman and Chief Executive
Officer of National Check Cashers Corporation, a retail financial services
company. He received his B.B.A. degree from Southern Methodist University in
1973 and received an M.B.A. in 1974 from Babson College in Boston,
Massachusetts. Mr. Salyer is a certified public accountant.

RONALD V. PERRY has been a member of the Board of Directors since October
1996. Mr. Perry has served as the President and Chief Operating Officer of Prime
Time Travel, Inc., a travel agency specializing in providing services to a
corporate client base since August 1986. During this same period of time Mr.
Perry has also served as the President and Chief Operating Officer of Prime Cut
Restaurants, Inc. which owns and operates four restaurants. Mr. Perry received
his B.B.A. degree from Oklahoma State University in 1971.

THE BOARD OF DIRECTORS

The Company's Bylaws authorize a maximum of nine directors and a minimum of
five directors. The Bylaws also provide that the directors shall be divided into
three classes, as nearly equal in number as possible, with each class serving
staggered three-year terms. Currently, the Board of Directors consists of four
directors. The Board of Directors is continuing to search for additional
qualified and available nominees to fill the remaining vacant Board of Directors
seats which, when filled, will have a term expiring in 1999.

The Company has agreed with the Representative that it will recommend and
use its best efforts to cause a designee of the Representative who is reasonably
satisfactory to the Company to be elected as a full voting member of its Board
of Directors. As of the date of this Prospectus, the Representative has not
named a nominee for election to board membership.

EXECUTIVE COMPENSATION

The Company was formed in September 1996 and has not paid any executive
compensation. The Company has entered into employment agreements with each of
the executive officers of the Company, the terms of which are set forth under
"--Employment Agreements."

DIRECTORS' COMPENSATION

Directors who are not officers of the Company are to be paid $1,000 for each
Board of Director's meeting attended.

STOCK OPTIONS GRANTED

Since the Company's inception, no options to purchase Common Stock have been
granted to any executive officer.

EMPLOYMENT AGREEMENTS

The Company has employment agreements with Jerry W. Grizzle, Gary D.
Johnson, Bruce D. MacDonald and Doyle E. Motley (each an "Employee" and
collectively, the "Employees"). Each of these agreements, other than that of Mr.
Grizzle, runs for a term of one year and automatically renews for additional
one-year terms unless terminated by either the Company or Employee. Mr.
Grizzle's agreement runs for a term of five years and automatically renews for
additional five-year terms unless terminated by either the Company or Mr.
Grizzle. Under the respective agreements, Mr. Grizzle will receive an annual
salary of $100,000, Mr. Johnson will receive an annual salary of $90,000, Mr.
MacDonald will receive an annual salary of $100,000 upon commencement of his
employment, and Mr. Motley will receive an annual salary of $65,000 upon
commencement of his employment. In addition, each Employee may be entitled to

40
<PAGE>
receive incentive compensation. Such incentive compensation consists of an
annual bonus if certain individual and Company objectives are achieved. "Cause"
for termination of an Employee includes: the conviction of a felony; the
perpetration of a fraud, misappropriation or embezzlement of property of the
Company; willful misconduct with respect to the duties or obligations of
Employee under his employment agreement; or intentional or continual neglect of
duties. For two years following the termination of an Employee, the Employee is
prohibited from engaging in or assisting in any business which is identical,
competitive with, or comparable to, the Company's business within 50 miles of
any area in which Employee rendered services to the Company. Each agreement
contains a provision prohibiting the Employees for two years subsequent to
termination of employment from disclosing to third parties proprietary
information relating to the Company.

OFFICER AND DIRECTOR LIABILITY

As permitted by the provisions of the DGCL, the Company's Certificate of
Incorporation eliminates, in certain circumstances, the monetary liability of
directors of the Company for a breach of their fiduciary duty as directors.
These provisions do not eliminate the liability of a director (i) for a breach
of a director's duty of loyalty to the Company or its stockholders; (ii) for
acts or omissions by a director not in good faith or which involve intentional
misconduct or a knowing violation of law; (iii) for liability arising under
Section 174 of the DGCL (relating to the declaration of dividends and purchase
or redemption of shares in violation of the DGCL); or (iv) for any transaction
from which the director derived an improper personal benefit. In addition, these
provisions do not eliminate the liability of a director for violations of
federal securities laws or limit the rights of the Company or its stockholders,
in appropriate circumstances, to seek equitable remedies such as injunctive or
other forms of non-monetary relief. Such remedies may not be effective in all
cases.

The Company's Certificate of Incorporation provides that the Company shall
indemnify all directors and officers of the Company to the full extent permitted
by the DGCL. Under such provisions, any director or officer, who in his capacity
as such, is made or threatened to be made, a party to any suit or proceeding,
may be indemnified if the Board of Directors determines such director or officer
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interest of the Company. The Certificate and the DGCL
further provide that such indemnification is not exclusive of any other rights
to which such individuals may be entitled under the Certificate of
Incorporation, the Bylaws, any agreement, vote of stockholders or disinterested
directors or otherwise.

Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions or otherwise, the Company has been advised
that in the opinion of the Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.

CERTAIN TRANSACTIONS

CDIL ACQUISITION

At the closing of the Offering, the Company will acquire for a purchase
price of $3,200,000 (of which $100,000 has previously been paid in the form of
an earnest money deposit) substantially all of the assets of CDIL pursuant to
the CDIL Acquisition. The assets being acquired consist of all of CDIL's: (a)
rights as the franchisor under 108 franchise agreements and existing area
development agreements; (b) inventory of new and used CD's, (c) accounts, notes
and warranty receivables; (d) trademarks and other intellectual property rights;
(e) business records, including but not limited to CDIL's customer lists, vendor
lists, prospective franchisee lists, franchise files, accounting and tax records
concerning the same, sales literature and promotional materials; (f) software
programs; (g) furniture, equipment, files and other assets located at CDIL's
corporate offices; and (h) the equity interests of CDIL in two CD Warehouse
Stores in Tulsa, Oklahoma and Memphis, Tennessee. The Company will be entitled
to all franchise fees and royalties

41
<PAGE>
accruing to CDIL after the closing date of the CDIL Acquisition. As part of the
CDIL Acquisition, the Company will assume CDIL's accounts payable for the
inventory being acquired as of the closing date, as well as CDIL's obligations
under the franchise agreements and franchise and area development agreements.

Pursuant to the CDIL Acquisition, Mark E. Kane, the founder and manager of
CDIL, will be granted a World Wide Area Development Agreement at the closing of
the CDIL acquisition. Under the terms of the Worldwide Area Development
Agreement, Kane will be granted the right to develop, as a franchisee of the
Company, on a worldwide basis (excluding the United States, Mexico and Canada)
CD Warehouse franchise operations for a ten year period. The development
schedule requires that Mr. Kane open 100 stores during the term of the Worldwide
Area Development Agreement. Additionally, the Worldwide Area Development
Agreement provides that the Company may, at its option for a period of seven
years beginning three years from the date of the grant thereof, purchase Mr.
Kane's interest in any franchised operations developed pursuant to the
agreement. The Worldwide Area Development Agreement provides that Mr. Kane will
pay the Company an amount to be jointly determined by the Company and Mr. Kane
on a country-by-country basis, provided that the Company will receive a
franchise fee of not less than $3,000 per store, a minimum royalty of 1% of
gross sales based on individual store sales volume and 20% of the total fee
received from each subfranchisee by Mr. Kane. Additionally, at the closing of
the CDIL Acquisition, the Company will grant Mr. Kane, with no initial franchise
fee payable by Mr. Kane, ten domestic CD Warehouse franchise license agreements,
pursuant to which Mr. Kane may develop and install, as a franchisee, up to ten
separate CD Warehouse franchise stores, subject to the Company's approval as to
the location of such stores. Mr. Kane will pay a royalty of 2% of net sales for
any CD Warehouse store opened by him pursuant to these franchise agreements. Mr.
Kane will also be granted two franchise agreements by the Company for CD
Warehouse Stores currently owned and operated by Mr. Kane in Ft. Worth, Texas
and Plano, Texas pursuant to which Mr. Kane will not be required to pay to the
Company any royalties or franchise fee.

In connection with the CDIL Acquisition, Mr. Kane has subscribed for 350,000
shares of Common Stock, at a subscription price of $1.00 per share. Payment of
the subscription is conditioned upon the successful completion of the Offering
and the CDIL Acquisition.

MACDONALD ACQUISITION

Simultaneously with the closing of the Offering, the Company will acquire
the CD Warehouse franchise interests of Bruce D. MacDonald, Vice
President-Company Store Operations. Mr. MacDonald acts as franchisee, either on
his own account or as general partner or manager of entities which themselves
act as franchisees, of 36 CD Warehouse stores. Pursuant to the MacDonald
Acquisition the Company will acquire 100% ownership of the Montfort Street Store
and minority equity interests (including MacDonald's interest as a managing
general partner or limited liability company manager), in the 35 other
franchised stores. The Company has formed CD Management as a wholly owned
subsidiary to act as the successor general partner or manager of the 12
partnerships and one limited liability company originally organized by MacDonald
to fund, own and operate the 35 franchised stores in which MacDonald holds an
equity interest. Upon acquisition of the Montfort Street Store and the MacDonald
Equity Interests, the Company upon consummation of the MacDonald Acquisition
will manage and own an interest in 36 of the 108 stores in the CD Warehouse
system. The MacDonald Equity Interests to be acquired by the Company range from
8% to 40%, although certain percentages of ownership are earned only after
partnership payout, as defined in the respective partnership agreement. Upon
consummation of the MacDonald Acquisition, the Company will be vested with
equity interests ranging from 8% to 40%. Pursuant to the MacDonald Acquisition,
the Company will issue to MacDonald 80,000 shares of the Company's Common Stock.

42
<PAGE>
ACCOUNTING SERVICES

Bruce D. MacDonald has ownership in an accounting firm with which the
Company has contracted to provide services for the Company's stores. This
agreement provides that each store will be charged $150 per store, per month for
certain accounting and bookkeeping services rendered.

OFFICE LEASE

The Company has entered into a lease agreement with an affiliate of
Christopher M. Salyer, a director of the Company, for its temporary executive
offices at 722 North Broadway, Oklahoma City, Oklahoma 73102. The total office
space is approximately 800 square feet and is held under the lease on a month to
month basis with monthly lease payment of $600. Additionally, upon completing
the CDIL Acquisition, the Company will share operational facilities with CDIL
during a transitional period anticipated to last approximately four months. CDIL
is owned or controlled by Mark E. Kane, who will be a principal stockholder of
the Company upon completion of the Offering. The Company and CDIL have agreed
that the Company will not incur any lease payment for sharing the CDIL facility
during the transition period. The Company intends to consolidate its executive
and operational offices into a larger facility in Oklahoma City, Oklahoma
following the transition period.

FUTURE TRANSACTIONS

All future and ongoing transactions between the Company and its directors,
officers, principal stockholders or affiliates will be on terms no less
favorable to the Company than may be obtained from unaffiliated third parties,
and any such transactions will be approved by a majority of the disinterested
directors of the Company.

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<PAGE>
PRINCIPAL STOCKHOLDERS

The following table sets forth information as of October 15, 1996, and as
adjusted to reflect the sale of the 1,000,000 shares of Common Stock offered
hereby, concerning the beneficial ownership of Common Stock by each of the
Company's directors, each executive officer named in the table under the heading
"Management-Directors, Executive Officers and Key Employees," and all directors
and executive officers of the Company as a group, and by each person who is
known by the Company to own more than 5% of the outstanding shares of Common
Stock. Unless otherwise indicated, the beneficial owner has sole voting and
investment power with respect to such stock.

<TABLE>
<CAPTION>
PERCENT OF
CLASS PERCENT OF
NAME AND ADDRESS NUMBER OF SHARES BEFORE NUMBER OF SHARES CLASS
OF BENEFICIAL HOLDER(1) BEFORE OFFERING OFFERING AFTER OFFERING AFTER OFFERING
- ------------------------------------------- ----------------- -------------- ----------------- ---------------
<S> <C> <C> <C> <C>
Jerry W. Grizzle* (2)(3)................... 250,000 71.43% 250,000 14.04%

Gary D. Johnson* (2)....................... 75,000 21.43% 75,000 4.21%

Bruce D. MacDonald (4)..................... (5) 0% 80,000(5) 4.49%

Doyle E. Motley (2)........................ 25,000 7.14% 25,000 1.40%

Mark E. Kane (4)........................... (6) 0% 350,000(6) 19.66%

All executive officers and directors as a 350,000 100.00% 430,000 24.14%
group (7 persons)........................
</TABLE>

- ------------------------

* Director

(1) Unless otherwise noted, the Company believes that each person named in the
table has sole voting and investment power with respect to all shares
beneficially owned by such person.

(2) Address is c/o CD Warehouse, Inc., 722 N. Broadway, Oklahoma City, Oklahoma
73102.

(3) 230,000 shares are held in the name of the Jerry W. Grizzle and Shawn L.
Grizzle Revocable Living Trust, dtd. 1/6/94, and 10,000 shares each are held
in the names of Mr. and Mrs. Grizzle's children, Brittany and Matthew.

(4) Address is c/o CDIL, 710 Firman Drive, Suite 300, Richardson, Texas.

(5) The shares shown as owned by Mr. MacDonald after the Offering will be issued
in connection with the MacDonald Acquisition. See "Certain
Transactions--MacDonald Acquisition."

(6) Mr. Kane has subscribed for 350,000 shares of Common Stock, the payment of
which is conditioned upon the consummation of the Offering.

DESCRIPTION OF SECURITIES

The authorized capital stock of the Company consists of (i) 10,000,000
shares of Common Stock, having a par value of $.01 per share, and (ii) 5,000,000
shares of Preferred Stock, having a par value of $.01 per share. Immediately
prior to this Offering, 350,000 shares of Common Stock were issued and
outstanding, and no shares of Preferred Stock were issued and outstanding.

COMMON STOCK

The holders of Common Stock are entitled to one vote for each share on all
matters submitted to a vote of stockholders. There is no cumulative voting with
respect to the election of directors. Accordingly, holders of a majority of the
shares entitled to vote in any election of directors may elect all of the
directors standing for election. Subject to preferences that may be applicable
to any then outstanding class of preferred stock, the holders of Common Stock
are entitled to receive such dividends, if any, as may be

44
<PAGE>
declared by the Board of Directors from time to time out of legally available
funds. Upon liquidation, dissolution or winding up of the Company, the holders
of Common Stock are entitled to share ratably in all assets of the Company that
are legally available for distribution, after payment of all debts and other
liabilities and subject to the prior rights of holders of any class of preferred
stock then outstanding. The holders of Common Stock have no preemptive,
subscription, redemption or conversion rights. The rights, preferences and
privileges of holders of Common Stock are subject to the rights of the holders
of shares of any series of preferred stock that the Company may issue in the
future.

PREFERRED STOCK

Shares of Preferred Stock may be issued from time to time in one or more
series with such designations, voting powers, if any, preferences and relative,
participating, optional or other special rights, and such qualifications,
limitations and restrictions thereof, as are determined by resolution of the
Board of Directors of the Company. The issuance of preferred stock, while
providing flexibility in connection with possible financings, acquisitions and
other corporate purposes, could, among other things, adversely affect the voting
power of holders of Common Stock and, under certain circumstances, be used as a
means of discouraging, delaying or preventing a change in control of the
Company. Currently, the Company has no shares of Preferred Stock outstanding.

CERTAIN ANTI-TAKEOVER PROVISIONS

Certain provisions of the Company's Certificate of Incorporation and By-laws
may be deemed to have anti-takeover effects and may delay, defer or prevent a
tender offer or takeover attempt that a stockholder might consider to be in such
stockholder's best interest, including those attempts that might result in a
premium over the market price for the shares held by stockholders.

CLASSIFIED BOARD. The Company's By-laws provide that (i) the Board of
Directors is divided into three classes of as equal size as possible, (ii) the
number of directors is to be fixed from time to time by the Board of Directors,
and (iii) the term of office of each class expires in consecutive years so that
each year only one class is elected. These provisions may render more difficult
a change in control of the Company or the removal of incumbent management.

NO STOCKHOLDER ACTION BY WRITTEN CONSENT; SPECIAL MEETINGS. The Company's
Certificate of Incorporation provides that no action shall be taken by
stockholders except at an annual or special meeting of stockholders, and
prohibits action by written consent in of lieu of a meeting. The Company's
By-laws provides that, unless otherwise proscribed by law, special meetings of
stockholders can only be held pursuant to a resolution of the Board of
Directors.

ADVANCE NOTICE REQUIREMENTS FOR STOCKHOLDER PROPOSALS AND DIRECTOR
NOMINATIONS. The By-laws establish an advance notice procedure for the
nomination, other than by or at the direction of the Board of Directors or a
committee thereof, of candidates for election as directors as well as for other
stockholder proposals to be considered at stockholders' meetings.

Notice of stockholder proposals and director nominations must be timely
given in writing to the Secretary of the Company prior to the meeting at which
the matters are to be acted upon or Directors are to be elected. In all cases,
to be timely, notice must be received at the principal executive offices of the
Company not less than 40 days before the meeting, or, if on the day notice of
the meeting is given to the stockholders less than 45 days remain until the
meeting, (i) five days after notice is given but not less than five days prior
to the meeting in the case of stockholder proposals, and (ii) 10 days after
notice is given in the case of director nominations.

Notice to the Company from a stockholder who proposes to nominate a person
at a meeting for election as a director must contain all information about that
person as would be required to be included in a proxy statement soliciting
proxies for the election of the proposed nominee (including such person's

45
<PAGE>
written consent to serve as a Director if so elected) and certain information
about the stockholder proposing to nominate that person. Stockholder proposals
must also include certain specified information.

These limitations on stockholder proposals do not restrict a stockholder's
right to include proposals in the Company's annual proxy materials pursuant to
rules promulgated under the Securities Exchange Act of 1934, as amended (the
"Exchange Act").

SECTION 203 OF THE DGCL. Section 203 of the DGCL prohibits a publicly held
Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless (i)
prior to the date of the business combination, the transaction is approved by
the board of directors of the corporation, or (ii) upon consummation of the
transaction which resulted in the stockholder becoming an interested
stockholder, the interested stockholder owns at least 85% of the outstanding
voting stock, or (iii) on or after such date the business combination is
approved by the board of directors and by the affirmative vote of at least
66 2/3% of the outstanding voting stock which is not owned by the interested
stockholder. A "business combination" includes mergers, asset sales and other
transactions resulting in a financial benefit to the stockholder. An "interested
stockholder" is a person who, together with affiliates and associates, owns (or
within three years, did own) 15% or more of the corporation's voting stock. The
effect of such statute may be to discourage certain types of transactions
involving an actual or potential change in control of the Company.

TRANSFER AGENTS, WARRANT AGENT AND REGISTRAR

The transfer agent for the Common Stock is Liberty Bank & Trust Company of
Oklahoma City, N.A.

SHARES ELIGIBLE FOR FUTURE SALE

POSSIBLE RULE 144 SALES. Upon completion of the Offering described in this
Prospectus, the Company will have outstanding 1,780,000 shares of Common Stock.
Of these shares all of the 1,000,000 shares sold in the Offering (assuming no
exercise of the Underwriters' over-allotment option) will be freely transferable
by persons other than affiliates (as defined in regulations under the Securities
Act), without restriction or further registration under the Securities Act.

The remaining 780,000 shares of Common Stock outstanding are "Restricted
Securities" within the meaning of Rule 144 under the Securities Act and may not
be sold in the absence of registration under the Securities Act, unless an
exemption from registration is available, including the exemption provided by
Rule 144. Under Rule 144 as currently in effect, none of such shares are
currently eligible for sale. Additionally, the holders of the aforementioned
Restricted Securities have agreed with Capital West, as Representative of the
Underwriters, not to sell their shares until twenty-four months after the date
of this Prospectus without obtaining the prior written approval of Capital West.
See "Underwriting."

In general, under Rule 144 as currently in effect, any person (or persons
whose shares are aggregated for purposes of Rule 144) who beneficially owns
Restricted Securities with respect to which at least two years have elapsed
since the later of the date the shares were acquired from the Company or from an
affiliate of the Company, is entitled to sell, within any three month period, a
number of shares that does not exceed the greater of (i) 1% of the then
outstanding shares of Common Stock of the Company, or (ii) the average weekly
trading volume in Common Stock during the four calendar weeks preceding such
sale. Sales under Rule 144 are also subject to certain manner-of-sale provisions
and notice requirements, and to the availability of current public information
about the Company. A person who is not an affiliate, has not been an affiliate
within 90 days prior to sale and who beneficially owns Restricted Securities
with respect to which at least three years have elapsed since the later of the
date the shares were acquired from the Company or from an affiliate of the
Company, is entitled to sell such shares under Rule 144(k) without regard to any
of the volume limitations or other requirements described above.

46
<PAGE>
The Company can make no prediction as to the effect, if any, that sales of
shares of Common Stock or the availability of shares for sale will have on the
market price of Common Stock. Nevertheless, sales of significant amounts of
Common Stock could adversely affect the prevailing market price of Common Stock,
as well as impair the ability of the Company to raise capital through the
issuance of additional equity securities. Prior to this Offering, there has been
no trading market for the Common Stock. The Company anticipates that the trading
market in the Common Stock, if any, will be limited based upon the number of
shares currently outstanding and anticipated to be sold in this Offering.

47
<PAGE>
UNDERWRITING

The Underwriters named below, represented by Capital West as Representative
have severally agreed, subject to the terms and conditions of the Underwriting
Agreement, to purchase from the Company the number of shares of Common Stock set
forth opposite their respective names below. The nature of the obligations of
the Underwriters is such that if any of such shares are purchased, all must be
purchased.

<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
- ------------------------------------------------------------ ----------
<S> <C>
Capital West Securities, Inc. ..............................

----------
Total..................................................... 1,000,000
----------
----------
</TABLE>

The Underwriters propose initially to offer the shares of Common Stock
offered hereby to the public at the price to public set forth on the cover page
of this Prospectus. The Underwriters may allow a concession to selected dealers
who are members of the National Association of Securities Dealers, Inc. ("NASD")
not in excess of $ per share, and the Underwriters may allow, and such
dealers may reallow, to members of the NASD a concession not in excess of
$ per share. After the public offering, the price to public, the
concession and the reallowance may be changed by the Representative.

Capital West, the Representative, was first registered as a broker-dealer in
May 1995. Capital West has participated in only four public equity offerings as
an underwriter, although certain of its employees have had experience in
underwriting public offerings while employed by other broker-dealers.
Prospective purchasers of the securities offered hereby should consider this
limited experience in evaluating this Offering.

The Company has granted an option to the Underwriters, exercisable within 30
business days after the date of this Prospectus, to purchase up to an aggregate
of 150,000 additional shares of Common Stock, at the initial price to public,
less the underwriting discount, set forth on the cover page of this Prospectus.
The Underwriters may exercise the option only for the purpose of covering
over-allotments. To the extent that the Underwriters exercise such option, each
Underwriter will be committed, subject to certain conditions, to purchase from
the Company on a pro rata basis that number of additional shares of Common Stock
which is proportionate to such Underwriter's initial commitment.

The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act.

The Company has agreed to pay to the Representative a nonaccountable expense
allowance of 3% of the gross proceeds derived from the sale of the shares of
Common Stock underwritten (including the sale of any shares of Common Stock
subject to the Underwriter's over-allotment option), $50,000 of which has been
paid as of the date of this Prospectus. The Company also has agreed to pay all
expenses in connection with qualifying the Common Stock offered hereby for sale
under the laws of such states as the Representative may designate and
registering the Offering with the NASD, excluding filing fees and fees and
expenses

48
<PAGE>
of counsel retained for such purposes by the Representative (which shall be paid
by the Representative from the nonaccountable expense allowance).

In connection with this Offering, the Company has agreed to sell to the
Representative, for a price of $.001 per warrant, warrants to purchase shares of
Common Stock equal to 10% of the total number of shares sold pursuant to this
Offering. The Representative's Warrants are exercisable at a price equal to 120%
of the initial public offering price ($6.00 assuming an initial public offering
price of $5.00 per share) for a period of four years commencing one year from
the date of this Prospectus. The Representative's Warrants grant to the holder
thereof certain registration rights with respect to the registration under the
Securities Act of the securities directly and indirectly issuable upon exercise
of the Representative's Warrants. The Company, its executive officers and
directors, and all of its stockholders have agreed that for a period of 24
months after the date of this Prospectus, they will not offer, sell or otherwise
dispose of any shares of Common Stock beneficially owned or controlled by them
(including subsequently acquired shares) without the prior written consent of
Capital West.

The Company has agreed with the Representative to use its best efforts to
cause a designee of the Representative who is reasonably satisfactory to the
Company to be elected as a full voting member of its Board of Directors. As of
the date of this Prospectus, the Representative has not named a nominee for
election to board membership.

The Company has agreed to retain the Representative as its consultant to
provide the Company with consulting services for a period of two years from the
date of closing of the Offering for a fee of $24,000 per year.

Prior to this Offering, there has been no market for the Common Stock and
there can be no assurance that a regular trading market will develop upon the
completion of this Offering. The initial public offering price was determined by
negotiations between the Company and the Representative. The primary factors
considered in determining such offering price included the history of and
prospects for the Company's business and the industry in which the Company
competes, market valuation of comparable companies, market conditions for public
offerings, the prospects for future earnings of the Company, an assessment of
the Company's management, the general condition of the securities markets, the
demand for similar securities of comparable companies and other relevant
factors.

The Representative has advised the Company that it does not expect any sales
by the Underwriters to accounts over which they exercise discretionary
authority.

LEGAL MATTERS

The validity of the issuance of the shares of Common Stock offered hereby
has been passed upon for the Company by Day Edwards Federman Propester &
Christensen, P.C., Oklahoma City, Oklahoma. Phillips McFall McCaffrey McVay &
Murrah, P.C., Oklahoma City, Oklahoma, has served as counsel to the Underwriters
in connection with this Offering.

EXPERTS

The consolidated balance sheet of CD Warehouse, Inc. at October 15, 1996,
appearing in this Prospectus and Registration Statement has been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and is included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.

The consolidated financial statements of Compact Discs International, Ltd.
and the financial statements of CD Acquisitions at December 31, 1995 and for
each of the two years in the period then ended, appearing in this Prospectus and
Registration Statement have been audited by Huselton & Morgan, P.C., independent
auditors, as set forth in their reports thereon appearing elsewhere herein, and
are included in reliance upon such reports given upon the authority of such firm
as experts in accounting and auditing.

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<PAGE>
ADDITIONAL INFORMATION

The Company has filed a Registration Statement on Form SB-2 (the
"Registration Statement") with the Commission under the Securities Act with
respect to the securities offered hereby. As permitted by the rules and
regulations of the Commission, this Prospectus does not contain all of the
information set forth in the Registration Statement and in the exhibits and
schedules thereto. For further information with respect to the Company and the
securities offered hereby, reference is made to the Registration Statement and
the exhibits thereto. Statements contained in this Prospectus concerning the
provisions of documents filed with the Registration Statement as exhibits and
schedules are necessarily summaries of such documents, and each such statement
is qualified in its entirety by reference to the copy of the applicable document
filed with the Commission. The Registration Statement, including the exhibits
and schedules thereto, may be inspected without charge and copied upon payment
of the charges prescribed by the Commission at the Public Reference Room of the
Commission, Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549. The
Commission maintains a website that contains reports, proxy and information
statements and other information regarding issuers that file electronically with
the Commission at http://www.sec.gov.

50
<PAGE>
INDEX TO FINANCIAL STATEMENTS

<TABLE>
<S> <C>
FINANCIAL STATEMENT OF CD WAREHOUSE, INC.

Report of Independent Auditors.......................................... F-3

Consolidated Balance Sheet at October 15, 1996.......................... F-4

Notes to Consolidated Balance Sheet..................................... F-5

FINANCIAL STATEMENTS OF COMPACT DISCS INTERNATIONAL, LTD. AND SUBSIDIARY

Independent Auditors' Report............................................ F-8

Consolidated Balance Sheet at December 31, 1995......................... F-9

Consolidated Statements of Income for the years ended December 31, 1994
and 1995.............................................................. F-10

Consolidated Statements of Partners' Capital for the years ended
December 31, 1994 and 1995............................................ F-11

Consolidated Statements of Cash Flows for the years ended December 31,
1994 and 1995......................................................... F-12

Notes to Consolidated Financial Statements.............................. F-13

FINANCIAL STATEMENTS OF CD ACQUISITIONS

Independent Auditors' Report............................................ F-18

Balance Sheet at December 31, 1995...................................... F-19

Statements of Income and Venturers' Capital for the years ended December
31, 1994 and 1995..................................................... F-20

Statements of Cash Flows for the years ended December 31, 1994 and
1995.................................................................. F-21

Notes to Financial Statements........................................... F-22

UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS OF COMPACT DISCS
INTERNATIONAL, LTD. AND SUBSIDIARY FOR THE EIGHT MONTHS ENDED AUGUST 31,
1996 AND COMBINED FINANCIAL STATEMENTS OF COMPACT DISCS INTERNATIONAL,
LTD. AND SUBSIDIARY AND CD ACQUISITIONS FOR THE EIGHT MONTHS ENDED
AUGUST 31, 1995

Consolidated Balance Sheet at August 31, 1996........................... F-24

Statements of Income for the eight months ended August 31, 1995 and
1996.................................................................. F-25

Statements of Partners' Capital for the eight months ended August 31,
1995 and 1996......................................................... F-27

Statements of Cash Flows for the eight months ended August 31, 1995 and
1996.................................................................. F-28

Notes to Financial Statements........................................... F-29
</TABLE>

F-1
<PAGE>
CONSOLIDATED BALANCE SHEET

CD WAREHOUSE, INC.

OCTOBER 15, 1996

WITH REPORT OF INDEPENDENT AUDITORS

F-2
<PAGE>
REPORT OF INDEPENDENT AUDITORS

The Stockholders

CD Warehouse, Inc.

We have audited the accompanying consolidated balance sheet of CD Warehouse,
Inc. as of October 15, 1996. This consolidated balance sheet is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this balance sheet based on our audit.

We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall balance sheet presentation. We
believe that our audit of the balance sheet provides a reasonable basis for our
opinion.

In our opinion, the consolidated balance sheet referred to above presents
fairly, in all material respects, the consolidated financial position of CD
Warehouse, Inc. at October 15, 1996, in conformity with generally accepted
accounting principles.

ERNST & YOUNG LLP

Oklahoma City, Oklahoma

October 26, 1996

F-3
<PAGE>
CD WAREHOUSE, INC.

CONSOLIDATED BALANCE SHEET

OCTOBER 15, 1996

ASSETS

<TABLE>
<CAPTION>
Current assets:
<S> <C>
Cash and cash equivalents....................................................... $ 250,000
Organization costs................................................................ 2,431
Cash in escrow (NOTE 3)........................................................... 100,000
Deferred acquisition costs (NOTE 3)............................................... 59,599
Deferred offering costs (NOTE 3).................................................. 44,364
-------------
$ 456,394
-------------
-------------

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................ $ 55,394
Advances by stockholder (NOTE 3)................................................ 51,000
-------------
Total current liabilities......................................................... 106,394
Commitments (NOTE 3)
Stockholders' equity (NOTE 2):
Preferred stock, $.01 par value; 5,000,000 shares authorized, none issued....... --
Common stock, $.01 par value; 10,000,000 shares authorized, 350,000 shares
issued and outstanding........................................................ 3,500
Paid-in capital................................................................. 346,500
-------------
Total stockholders' equity........................................................ 350,000
-------------
$ 456,394
-------------
-------------
</TABLE>

See accompanying notes.

F-4
<PAGE>
CD WAREHOUSE, INC.

NOTES TO CONSOLIDATED BALANCE SHEET

OCTOBER 15, 1996

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION AND CONSOLIDATION

The consolidated balance sheet includes the accounts of CD Warehouse, Inc.
(the "Company") and its wholly-owned subsidiary, CD Management, Inc. ("CDM").
The Company was formed in Delaware on September 5, 1996. The Company has had no
operations during the period from September 5, 1996 to October 15, 1996.

CASH EQUIVALENTS

Cash equivalents include money-market investments with maturities of three
months or less when purchased.

ORGANIZATION COSTS

Organization costs will be amortized on a straight-line basis over five
years.

DEFERRED ACQUISITION COSTS

Costs incurred related to a proposed business acquisition (NOTE 3) have been
deferred and will be capitalized upon completion of the acquisition or charged
to expense if the acquisition is not completed.

DEFERRED OFFERING COSTS

Specific incremental costs directly attributable to a proposed initial
public offering of common stock (NOTE 3) have been deferred and will be charged
against the gross proceeds of the offering or charged to expense if the offering
is aborted.

2. STOCKHOLDERS' EQUITY

Effective September 5, 1996 and October 1, 1996, the Company obtained stock
subscription agreements for the sale of an aggregate of 700,000 shares of common
stock at $1 per share. During October 1996, the Company received $250,000 in
cash and the assignment of $100,000 cash in escrow (NOTE 3) in exchange for the
issuance of 350,000 shares of common stock. The subscription agreement for the
remaining 350,000 shares provides for payment to the Company concurrently with
the closing of the Company's proposed initial public offering of common stock
(NOTE 3).

3. COMMITMENTS

On October 1, 1996, the Company entered into an Asset Purchase Agreement
(the "Agreement") which provides for the purchase of substantially all of the
assets of Compact Discs International, Ltd. ("CDIL") for $3.2 million, subject
to downward adjustment, in cash. CDIL is engaged principally in the business of
selling new and preowned audio compact discs to its franchisees. On October 4,
1996, $100,000 in earnest money was placed in escrow pursuant to the Agreement.

The Agreement also provides for the Company to enter into an area
development agreement (the "ADA") with the principal owner of CDIL. The ADA
provides for the right to develop franchise operations worldwide, except for the
United States, Canada and Mexico. The Company has the right, during a specified
period of time, to cancel the ADA and to acquire any franchise developed under
the ADA at a

F-5
<PAGE>
CD WAREHOUSE, INC.

NOTES TO CONSOLIDATED BALANCE SHEET

OCTOBER 15, 1996

3. COMMITMENTS (CONTINUED)
specified multiple of earnings. In addition, the Company has agreed to grant to
the principal owner of CDIL (1) ten domestic franchises with no initial
franchise fee and royalties of 2% of net sales and (2) two renewal franchises
with no franchise fee or royalty payments. Except as provided for in the above
mentioned franchise agreements, CDIL and the principal owner of CDIL have
entered into covenants not to compete with the Company for a period of ten
years.

In connection with the Agreement and the proposed initial public offering, a
stockholder has incurred costs of $51,000 (including $20,000 relating to a
contingent finder's fee) through October 15, 1996, on behalf of the Company, for
payment of services related to such transactions. Upon closing of the purchase,
the Company will be liable for the balance of the finder's fee in the amount of
$80,000.

On October 10, 1996, the Company and CDM entered into agreements which
provide for the purchase of all of the franchise interests of the largest CDIL
franchisees in exchange for 80,000 shares of the Company's common stock.

Closings of the above mentioned purchases are subject to the satisfaction of
several conditions precedent, including the Company's completion of an initial
public offering of its common stock, or closing of another financing
arrangement, by February 28, 1997 for at least $3.5 million.

The Company has entered into employment agreements with the four existing or
committed officers of the Company, effective after the Company's completion of
an initial public offering. The employment agreements are for terms of one and
five years with renewal options of one and five years and total $355,000
annually for the four individuals.

F-6
<PAGE>
COMPACT DISCS INTERNATIONAL, LTD.
AND SUBSIDIARY

CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995
WITH
INDEPENDENT AUDITORS' REPORT

F-7
<PAGE>
INDEPENDENT AUDITORS' REPORT

To the General Partner
Compact Discs International, Ltd. and Subsidiary

We have audited the accompanying consolidated balance sheet of Compact Discs
International, Ltd. (A Texas Limited Partnership) and Subsidiary as of December
31, 1995, and the related consolidated statements of income, partners' capital,
and cash flows for each of the two years then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. These standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Compact Discs International, Ltd. and Subsidiary as of December 31, 1995, and
the consolidated results of its operations and its cash flows for each of the
two years then ended in conformity with generally accepted accounting
principles.

HUSELTON & MORGAN, P.C.

Dallas, Texas
March 6, 1996, except for Note 2,
as to which the date is October 10, 1996

F-8
<PAGE>
COMPACT DISCS INTERNATIONAL, LTD. AND SUBSIDIARY
(A TEXAS LIMITED PARTNERSHIP)
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1995

ASSETS

<TABLE>
<S> <C>
Current assets
Cash............................................................................ $ 48,495
Accounts receivable (net of allowance of $70,171)............................... 228,887
Due from CD Acquisitions........................................................ 111,316
Inventory....................................................................... 50,275
Prepaid expenses................................................................ 1,179
---------
Total current assets.......................................................... 440,152
---------
Furniture, fixtures and equipment (net of accumulated depreciation)............... 39,108
---------
Investment in partnerships........................................................ 25,231
Other assets (net of amortization)................................................ 5,288
---------
Total investment and other assets............................................. 30,519
---------
Total assets.................................................................. $ 509,779
---------
---------

LIABILITIES AND PARTNERS' CAPITAL
Current liabilities
Accounts payable................................................................ $ 4,075
Sales tax payable............................................................... 2,219
Payroll taxes payable........................................................... 744
Development fees advanced....................................................... 60,521
---------
Total current liabilities..................................................... 67,559
---------
Minority interest................................................................. 11,981
Partners' capital................................................................. 430,239
---------
Total liabilities and partners' capital....................................... $ 509,779
---------
---------
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-9
<PAGE>
COMPACT DISCS INTERNATIONAL, LTD. AND SUBSIDIARY
(A TEXAS LIMITED PARTNERSHIP)

CONSOLIDATED STATEMENTS OF INCOME

FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995

<TABLE>
<CAPTION>
1994 1995
----------- -----------
<S> <C> <C>
Revenue
Royalty income........................................................................ $ 526,714 $ 946,640
Retail sales.......................................................................... 272,119 291,948
Franchise fees........................................................................ 146,428 109,750
Development fees...................................................................... 7,500 74,500
Software income....................................................................... 62,400 23,683
----------- -----------
Total revenue....................................................................... 1,015,161 1,446,521
----------- -----------
Expenses
Salaries.............................................................................. 215,712 332,333
Cost of goods sold--retail sales...................................................... 183,344 181,312
Bad debts............................................................................. 0 113,539
Travel................................................................................ 33,819 44,029
Telephone & utilities................................................................. 20,774 43,208
Rent.................................................................................. 37,188 41,027
Taxes................................................................................. 21,734 29,289
Professional fees..................................................................... 53,798 19,006
Office expense........................................................................ 8,323 18,487
Advertising........................................................................... 31,266 14,745
Depreciation.......................................................................... 14,065 9,189
Miscellaneous......................................................................... 0 8,666
Printing.............................................................................. 11,208 7,927
Insurance............................................................................. 884 5,768
Auto expense.......................................................................... 4,229 5,314
Entertainment......................................................................... 3,220 4,974
Postage............................................................................... 3,226 4,578
Promotion............................................................................. 1,369 4,218
Licenses.............................................................................. 0 4,136
Supplies.............................................................................. 2,706 4,011
Contract labor........................................................................ 1,780 2,542
Repairs & maintenance................................................................. 3,673 1,594
Security.............................................................................. 0 1,355
Bank charges.......................................................................... 408 820
Amortization.......................................................................... 285 456
Dues & subscriptions.................................................................. 195 455
Photography........................................................................... 69 356
Interest expense...................................................................... 621 46
Fees.................................................................................. 0 21
Litigation settlement................................................................. 39,793 0
Penalty............................................................................... 452 0
Commissions........................................................................... 8,500 0
----------- -----------
Total expenses...................................................................... 702,641 903,401
----------- -----------
Operating income........................................................................ 312,520 543,120
Other income
Equity in income of partnerships...................................................... 0 2,898
Interest income....................................................................... 0 89
Miscellaneous......................................................................... 3,405 0
----------- -----------
Net income before minority interest..................................................... 315,925 546,107
Minority interest....................................................................... (2,632) (7,293)
----------- -----------
Net income.......................................................................... $ 313,293 $ 538,814
----------- -----------
----------- -----------
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-10
<PAGE>
COMPACT DISCS INTERNATIONAL, LTD. AND SUBSIDIARY

(A TEXAS LIMITED PARTNERSHIP)

CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL

FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995

<TABLE>
<CAPTION>
1994 1995
----------- -----------
<S> <C> <C>
Beginning balance....................................................................... $ 101,613 $ 187,702
Net income.............................................................................. 313,293 538,814
Distributions........................................................................... (227,204) (296,277)
----------- -----------
Ending balance.......................................................................... $ 187,702 $ 430,239
----------- -----------
----------- -----------
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-11
<PAGE>
COMPACT DISCS INTERNATIONAL, LTD. AND SUBSIDIARY

(A TEXAS LIMITED PARTNERSHIP)

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995

<TABLE>
<CAPTION>
1994 1995
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income.......................................................................... $ 313,293 $ 538,814
Noncash items
Bad debt expense.................................................................... 0 70,171
Depreciation and amortization....................................................... 14,350 9,645
Minority interest................................................................... 1,227 7,293
Equity in income of partnerships.................................................... 0 (2,898)
Adjustments to reconcile net income to cash provided by operating activities
Increase in accounts receivable................................................... (38,946) (224,071)
Increase in due from CD Acquisitions.............................................. (64,023) (69,791)
Increase in inventory............................................................. (8,811) (11,327)
Increase in prepaid expenses...................................................... (2,087) (1,179)
Increase in organization cost..................................................... (1,400) 0
Increase in development fees advanced............................................. 57,000 13,521
Increase (decrease) in accrued liabilities........................................ 5,976 (11,829)
Increase (decrease) in accounts payable........................................... 2,163 (1,997)
----------- -----------
Net cash provided by operating activities....................................... 278,742 316,352
Cash flows from investing activities
Purchase of fixed assets.............................................................. (37,044) (17,355)
Distributions from partnership--Memphis store......................................... 0 167
Distribution to minority interest owner............................................... 0 (5,040)
----------- -----------
Net cash used by investing activities........................................... (37,044) (22,228)
Cash flows from financing activities
Distributions to partners............................................................. (227,204) (296,277)
Repayment of loan to Leo Kane......................................................... (8,979) (2,842)
Loan from Leo Kane.................................................................... 11,821 0
----------- -----------
Net cash used by financing activities........................................... (224,362) (299,119)
Net increase (decrease) in cash......................................................... 17,336 (4,995)
Cash at beginning of year............................................................... 36,154 53,490
----------- -----------
Cash at end of year..................................................................... $ 53,490 $ 48,495
----------- -----------
----------- -----------
</TABLE>

Supplemental information:

1994-- A note payable in the amount of $11,821 was given for the purchase of
two automobiles.

1995-- Trade receivables in the amount of $22,500 are exchanged for a minority
interest in a general partnership.

-- Development fees advanced in the amount of $22,500 are used to satisfy
various trade receivables.

The accompanying notes are an integral part of these financial statements.

F-12
<PAGE>
COMPACT DISCS INTERNATIONAL, LTD. AND SUBSIDIARY
(A TEXAS LIMITED PARTNERSHIP)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 1994 AND 1995

1. ORGANIZATION

THE COMPANY

Compact Discs International, Ltd. (the "Company") is a Texas limited
partnership which conducts business under the name "CD Warehouse" and maintains
its principal office in Richardson, Texas.

The Company offers and sells single-unit franchises and development rights
for multi-unit franchises for the operation of retail sales outlets which buy,
sell and trade new and used compact discs and related items (Note 8). As of
December 31, 1994 and 1995, the Company has executed 73 and 112 franchise
agreements respectively for the operation of stores, of which 67 were
operational in 1994 and 96 are operational in 1995. The Company has 11
development agreements in place as of December 31, 1995.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company
and CD Warehouse - Fort Worth, an 81.25% owned subsidiary; the remaining 18.75%
is owned by an unrelated third party investor. All significant intercompany
accounts and transactions have been eliminated in consolidation. Minority
interest in the consolidated subsidiary represents the minority owner's
proportionate share of the equity of CD Warehouse - Fort Worth.

INVENTORY

Inventory consists primarily of both new and used compact discs. All
inventory is valued at the lower of cost or market using the first-in, first-out
(FIFO) method. The inventory is located for resale at the subsidiary's location
in Fort Worth, Texas.

FURNITURE, FIXTURES AND EQUIPMENT

Furniture, fixtures and equipment are stated at cost. The provision for
depreciation has been calculated using the straight-line method. Useful lives
range from 3 to 7 years.

OTHER ASSETS

Organization costs and the Company's trademark are being amortized using the
straight-line method over five and fifteen years, respectively.

INVESTMENT IN PARTNERSHIPS

The Company records its ownership in two minority-owned partnerships that
own CD Warehouse stores using the equity method of accounting.

REVENUE RECOGNITION

F-13
<PAGE>
COMPACT DISCS INTERNATIONAL, LTD. AND SUBSIDIARY
(A TEXAS LIMITED PARTNERSHIP)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1994 AND 1995

1. ORGANIZATION (CONTINUED)
against future franchise fees and royalty fees due from development franchisees.
Royalties are recognized when earned. Specially designed software is sold to the
franchisees, and the related income is recognized when earned.

ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Accordingly,
actual results may differ from those estimates.

2. CHANGE IN METHOD OF ACCOUNTING

Subsequent to the original audit date of these financial statements, March
6, 1996, management of the Company changed its method of accounting for
development fee income. In the prior financial statements, the total amount
deposited for development rights was recognized as income upon the opening of
the first franchise within a development agreement. As Note 1 indicates, these
financial statements recognize development fee income on a prorated basis as the
franchise units within a development agreement are opened. The change increased
income $4,095, increased development fee advances $50,321, and decreased
partners' capital $50,321, from what was originally reported in the financial
statements audited March 6, 1996.

3. FURNITURE, FIXTURES AND EQUIPMENT

Components of furniture, fixtures and equipment at December 31, 1994 and
1995 are as follows:

<TABLE>
<CAPTION>
1994 1995
---------- ----------
<S> <C> <C>
Equipment....................................................................... $ 15,708 $ 28,861
Furniture and fixtures.......................................................... 19,339 23,541
Automobiles..................................................................... 12,386 12,386
Leasehold improvements.......................................................... 10,102 10,101
---------- ----------
Total....................................................................... 57,535 74,889
Accumulated depreciation........................................................ (26,592) (35,781)
---------- ----------
Total....................................................................... $ 30,943 $ 39,108
---------- ----------
---------- ----------
</TABLE>

F-14
<PAGE>
COMPACT DISCS INTERNATIONAL, LTD. AND SUBSIDIARY
(A TEXAS LIMITED PARTNERSHIP)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1994 AND 1995

4. OTHER ASSETS

Components of other assets at December 31, 1994 and 1995 are as follows:

<TABLE>
<CAPTION>
1994 1995
--------- ---------
<S> <C> <C>
Deposits............................................................................. $ 3,561 $ 3,560
Organization costs................................................................... 2,150 2,150
Trademark............................................................................ 394 394
--------- ---------
Total............................................................................ 6,105 6,104
Accumulated amortization............................................................. (360) (816)
--------- ---------
Total............................................................................ $ 5,745 $ 5,288
--------- ---------
--------- ---------
</TABLE>

5. INVESTMENT IN PARTNERSHIPS

In the latter part of 1995 the Company entered into two partnership
agreements to own and operate retail CD outlets in Tulsa, Oklahoma and Memphis,
Tennessee. At December 31, 1995, the Company has the following investments in
general partnerships:

<TABLE>
<CAPTION>
PERCENTAGE
PARTNERSHIP OWNED
- -------------------------------------------------------------------------------------------- -----------
<S> <C>
CD Warehouse--Tulsa......................................................................... 50
CD Warehouse--Memphis....................................................................... 25
</TABLE>

At December 31, 1995, the Company's investment in partnerships and equity in
the income of these partnerships for the year then ended consist of the
following:

<TABLE>
<CAPTION>
INVESTMENT IN PARTNERSHIP
PARTNERSHIP INCOME
------------- -----------
<S> <C> <C>
CD Warehouse--Tulsa......................................................... $ 22,853 $ 353
CD Warehouse--Memphis....................................................... 2,378 2,545
------------- -----------
$ 25,231 $ 2,898
------------- -----------
------------- -----------
</TABLE>

The following summarizes the activity of the CD Warehouse--Tulsa and the CD
Warehouse-- Memphis partnerships for the year ended December 31, 1995:

<TABLE>
<CAPTION>
CD WAREHOUSE CD WAREHOUSE
TULSA MEMPHIS
-------------- --------------
<S> <C> <C>
Total assets...................................................................... $ 65,157 $ 58,722
Total liabilities................................................................. 5,388 3,210
------- -------
Net assets.................................................................... $ 59,769 $ 55,512
------- -------
------- -------
Revenues.......................................................................... $ 24,683 $ 98,734
------- -------
------- -------
Net income........................................................................ $ 707 $ 10,180
------- -------
------- -------
</TABLE>

F-15
<PAGE>
COMPACT DISCS INTERNATIONAL, LTD. AND SUBSIDIARY
(A TEXAS LIMITED PARTNERSHIP)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1994 AND 1995

6. COMMITMENTS AND CONTINGENCIES

The Company leases office space under a non-cancelable operating lease
agreement. The agreement expires in 1997. The Company also leases retail space
for its store operation. This agreement expires in 1996. Total rent expense for
the years ended December 31, 1994 and 1995 was $37,188 and $41,027,
respectively.

The following is a schedule of future minimum lease payments for the above
leases as of December 31, 1995:

<TABLE>
<S> <C>
Year ending December 31, 1996.............................................. $ 27,426
Year ending December 31, 1997.............................................. 5,694
---------
$ 33,120
---------
---------
</TABLE>

7. INCOME TAXES

Taxable income of the Company is includable in the income returns of the
individual partners; therefore, no provision for income taxes has been made in
the accompanying financial statements.

8. RELATED-PARTY TRANSACTIONS

In 1994 the Company purchased from Mr. Leo Kane, a limited partner, two
automobiles for a total of $11,821. Mr. Leo Kane received a note for the
purchase. In 1994, the Company was making note payments of $800 per month. For
the year ended December 31, 1994, the Company had reduced the note by $8,979 and
paid Mr. Leo Kane interest of $621. The note was fully paid in 1995, reducing
the note by $2,842. Interest paid to Mr. Leo Kane in 1995 is $44.

The partners of the Company own, through a joint venture, CD Acquisitions,
"CDA." CDA sells new and used merchandise to franchisees. The franchisees
included CD Warehouse--Fort Worth, Tulsa and Memphis. Sales to these three
franchisees amounted to $31,000 and $108,800 in the years ending December 31,
1994 and 1995, respectively. CDA operates out of the Company's location with no
contribution to overhead expenses.

CDA owes the Company $64,023 and $111,316 at December 31, 1994 and 1995,
respectively.

F-16
<PAGE>
CD ACQUISITIONS
FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995
WITH
INDEPENDENT AUDITORS' REPORT

F-17
<PAGE>
INDEPENDENT AUDITORS' REPORT

To the Venturers

CD Acquisitions

We have audited the accompanying balance sheet of CD Acquisitions (A Joint
Venture) as of December 31, 1995, and the related statements of income,
venturers' capital, and cash flows for each of the two years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of CD Acquisitions as of
December 31, 1995, and the results of its operations and its cash flows for each
of the two years then ended in conformity with generally accepted accounting
principles.

HUSELTON & MORGAN, P.C.

Dallas, Texas
October 5, 1996

F-18
<PAGE>
CD ACQUISITIONS
(A JOINT VENTURE)

BALANCE SHEET

DECEMBER 31, 1995

ASSETS

<TABLE>
<S> <C>
Current assets
Cash............................................................................ $ 159,444
Accounts receivable, net of allowance of $12,859................................ 194,441
Inventory....................................................................... 305,757
Prepaid insurance............................................................... 7,913
---------
Total current assets.......................................................... 667,555
---------
---------
Total assets.................................................................. $ 667,555
---------
---------
LIABILITIES AND VENTURERS' CAPITAL

Current liabilities
Accounts payable................................................................ $ 411,805
Due to Compact Discs International, Ltd......................................... 111,316
Advances from CD Stores......................................................... 7,997
Accrued insurance............................................................... 6,430
Sales tax payable............................................................... 1,911
---------
Total current liabilities..................................................... 539,459
---------
Venturers' capital................................................................ 128,096
---------
Total liabilities and venturers' capital...................................... $ 667,555
---------
---------
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-19
<PAGE>
CD ACQUISITIONS
(A JOINT VENTURE)

STATEMENTS OF INCOME AND VENTURERS' CAPITAL

FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995

<TABLE>
<CAPTION>
1994 1995
------------- -------------
<S> <C> <C>
Net Sales........................................................................... $ 1,567,566 $ 2,717,043
Cost of goods sold.................................................................. (1,539,006) (2,511,032)
------------- -------------
Gross profit on sales............................................................... 28,560 206,011
------------- -------------
Administrative and selling expenses................................................. 18,694 77,918
------------- -------------
Net income........................................................................ 9,866 128,093
Venturers' capital (deficit), beginning of year..................................... (9,863) 3
------------- -------------
Venturers' capital, end of year..................................................... $ 3 $ 128,096
------------- -------------
------------- -------------
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-20
<PAGE>
CD ACQUISITIONS
(A JOINT VENTURE)

STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995

<TABLE>
<CAPTION>
1994 1995
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income............................................................................. $ 9,866 $ 128,093
Adjustments to reconcile net income to cash provided by operating activities
Bad debt expense..................................................................... 0 12,859
(Increase) decrease in:
Accounts receivable.................................................................. (203,677) 10,342
Inventory............................................................................ (131,205) (145,948)
Prepaid insurance.................................................................... 0 (7,913)
----------- -----------
Increase in:
Accounts payable..................................................................... 350,636 90,412
Accrued expenses..................................................................... 0 12,522
----------- -----------
Net cash provided by operating activities............................................ 25,620 100,367
Cash at beginning of year................................................................ 33,457 59,077
----------- -----------
Cash at end of year...................................................................... $ 59,077 $ 159,444
----------- -----------
----------- -----------
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-21
<PAGE>
CD ACQUISITIONS
(A JOINT VENTURE)

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 1994 AND 1995

1. ACCOUNTING AND FINANCIAL REPORTING POLICIES

CD Acquisitions (the "Company") is a joint venture among two individuals and
a limited liability company owned by one of the same individuals and his spouse.
The principal office of operations is located in Richardson, Texas. The Company
is a wholesale distributor of new and used compact discs.

The significant accounting policies utilized in the preparation of the
financial statements are as follows:

INVENTORY

Inventory of the Company consists of compact discs for sale to franchisees
of an affiliate (Note 2). Inventory is stated at the lower of cost or market.
Cost is determined by using a moving average method.

ESTIMATES

2. RELATED PARTY TRANSACTIONS

At December 31, 1994 and 1995, the Company has the following balance owed to
related parties:

<TABLE>
<CAPTION>
1994 1995
--------- ----------
<S> <C> <C>
Due to Compact Discs International, Ltd................................ $ 64,023 $ 111,316
--------- ----------
--------- ----------
</TABLE>

Owners of the joint venture also own an interest in Compact Discs
International, Ltd. ("CDIL"). CDIL offers and sells single-unit franchises and
development rights for multi-unit franchises for the operation of retail outlets
which buy, sell and trade new and used compact discs. All of the Company's 1994
and 1995 sales were to franchisees of CDIL. The Company operates out of the
office and warehouse of CDIL at no charge to the Company.

3. INCOME TAXES

Taxable income or loss of the Company is includable in the income tax
returns of the venturers; therefore, no provision for income taxes has been made
in the accompanying financial statements.

F-22
<PAGE>
COMPACT DISCS INTERNATIONAL, LTD. AND SUBSIDIARY
AND CD ACQUISITIONS (A JOINT VENTURE)

UNAUDITED COMBINED FINANCIAL STATEMENTS
FOR THE EIGHT MONTHS ENDED AUGUST 31, 1995
AND
COMPACT DISCS INTERNATIONAL, LTD.
AND SUBSIDIARY
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE EIGHT MONTHS ENDED AUGUST 31, 1996

F-23
<PAGE>
COMPACT DISCS INTERNATIONAL, LTD. AND SUBSIDIARY
(A TEXAS LIMITED PARTNERSHIP)
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
AUGUST 31, 1996

ASSETS

<TABLE>
<S> <C>
Current assets
Cash.......................................................................... $ 326,091
Accounts receivable (net of allowance of $120,702)............................ 290,828
Inventory..................................................................... 498,432
Prepaid expenses.............................................................. 11,919
--------------
Total current assets........................................................ 1,127,270
--------------
Furniture, fixtures and equipment (net of accumulated depreciation)............. 39,924
--------------
Investment in partnerships...................................................... 63,306
Other assets (net of amortization).............................................. 4,984
--------------
Total investment and other assets............................................. 68,290
--------------
Total assets................................................................ $ 1,235,484
--------------
--------------

LIABILITIES AND PARTNERS' CAPITAL

Current liabilities
Accounts payable.............................................................. $ 534,270
Sales tax payable............................................................. 769
Payroll taxes payable......................................................... 222
Development fees advanced..................................................... 44,600
Advances from CD stores....................................................... 60,000
--------------
Total current liabilities................................................... 639,861
--------------
Minority interest............................................................... 1,358
Partners' capital............................................................... 594,265
--------------
Total liabilities and partners' capital..................................... $ 1,235,484
--------------
--------------
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-24
<PAGE>
COMPACT DISCS INTERNATIONAL, LTD. AND SUBSIDIARY
AND CD ACQUISITIONS

COMBINED STATEMENT OF INCOME

(UNAUDITED)
FOR THE EIGHT MONTHS ENDED AUGUST 31, 1995
AND
COMPACT DISCS INTERNATIONAL, LTD. AND SUBSIDIARY
(A TEXAS LIMITED PARTNERSHIP)

CONSOLIDATED STATEMENT OF INCOME

(UNAUDITED)
FOR THE EIGHT MONTHS ENDED AUGUST 31, 1996

<TABLE>
<CAPTION>
1995 1996
------------ ------------
<S> <C> <C>
Revenue
Retail sales........................................................................ $ 1,740,062 $ 2,329,786
Royalty income...................................................................... 587,064 774,283
Computer/Software income............................................................ 91,888 62,585
Franchise fees...................................................................... 45,750 53,000
Development fees.................................................................... 30,000 7,500
------------ ------------
Total revenue....................................................................... 2,494,764 3,227,154
------------ ------------
Expenses
Cost of goods sold--retail sales.................................................... 1,531,304 2,149,187
Salaries............................................................................ 234,339 229,629
Bad debts........................................................................... 71,247 110,394
Cost of goods sold--computer........................................................ 89,044 37,700
Rent................................................................................ 28,150 29,504
Professional fees................................................................... 9,182 28,919
Telephone & utilities............................................................... 34,518 22,394
Travel.............................................................................. 29,237 22,275
Taxes............................................................................... 23,200 19,846
Insurance........................................................................... 777 18,243
Commissions......................................................................... 0 16,917
Office expense...................................................................... 12,894 13,510
Depreciation........................................................................ 8,012 8,298
Printing............................................................................ 6,029 7,063
Promotion........................................................................... 800 6,363
Postage............................................................................. 3,075 5,696
Advertising......................................................................... 23,502 4,877
</TABLE>

F-25
<PAGE>
COMPACT DISCS INTERNATIONAL, LTD. AND SUBSIDIARY
AND CD ACQUISITIONS

COMBINED STATEMENT OF INCOME (CONTINUED)

(UNAUDITED)
FOR THE EIGHT MONTHS ENDED AUGUST 31, 1995
AND
COMPACT DISCS INTERNATIONAL, LTD. AND SUBSIDIARY
(A TEXAS LIMITED PARTNERSHIP)

CONSOLIDATED STATEMENT OF INCOME (CONTINUED)

(UNAUDITED)
FOR THE EIGHT MONTHS ENDED AUGUST 31, 1996

<TABLE>
<CAPTION>
1995 1996
------------ ------------
<S> <C> <C>
Expenses (continued)
Supplies............................................................................ 2,406 3,804
Licenses............................................................................ 4,135 3,770
Miscellaneous....................................................................... 2,092 3,645
Entertainment....................................................................... 3,108 3,445
Auto expense........................................................................ 2,967 3,350
Contract labor...................................................................... 1,592 2,100
Repairs & maintenance............................................................... 1,289 2,089
Security............................................................................ 884 1,930
Dues & subscriptions................................................................ 55 1,142
Bank charges........................................................................ 979 934
Amortization........................................................................ 342 304
Photography......................................................................... 262 118
Interest expense.................................................................... 44 38
Litigation settlement............................................................... 120 0
------------ ------------
Total expenses.................................................................... 2,125,585 2,757,484
------------ ------------
Operating income...................................................................... 369,179 469,670
Other income
Equity in income of partnerships.................................................... 0 21,132
Interest income..................................................................... 66 0
------------ ------------
Net income before minority interest................................................... 369,245 490,802
Minority interest..................................................................... (5,179) (2,898)
------------ ------------
Net income........................................................................ $ 364,066 $ 487,904
------------ ------------
------------ ------------
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-26
<PAGE>
COMPACT DISCS INTERNATIONAL, LTD. AND SUBSIDIARY
AND CD ACQUISITIONS

COMBINED STATEMENT OF PARTNERS' CAPITAL

(UNAUDITED)
FOR THE EIGHT MONTHS ENDED AUGUST 31, 1995
AND
COMPACT DISCS INTERNATIONAL, LTD. AND SUBSIDIARY
(A TEXAS LIMITED PARTNERSHIP)

CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL

(UNAUDITED)
FOR THE EIGHT MONTHS ENDED AUGUST 31, 1996

<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Beginning balance....................................................................... $ 187,706 $ 558,335
Net income.............................................................................. 364,066 487,904
Distributions:
Cash.................................................................................. (208,296) (307,145)
Noncash............................................................................... 0 (144,829)
----------- -----------
Ending balance.......................................................................... $ 343,476 $ 594,265
----------- -----------
----------- -----------
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-27
<PAGE>
COMPACT DISCS INTERNATIONAL, LTD. AND SUBSIDIARY
AND CD ACQUISITIONS

COMBINED STATEMENT OF CASH FLOWS

(UNAUDITED)
FOR THE EIGHT MONTHS ENDED AUGUST 31, 1995
AND
COMPACT DISCS INTERNATIONAL, LTD. AND SUBSIDIARY
(A TEXAS LIMITED PARTNERSHIP)

CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED)
FOR THE EIGHT MONTHS ENDED AUGUST 31, 1996

<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income............................................................................ $ 364,066 $ 487,904
Noncash items
Bad debt expense.................................................................... 71,247 110,394
Depreciation and amortization....................................................... 8,354 8,602
Equity in income of partnerships.................................................... 0 (21,132)
Minority interest................................................................... 5,179 2,898
Adjustments to reconcile net income to cash provided by
operating activities
(Increase) in accounts receivable................................................... (105,824) (28,349)
Increase (decrease) in accounts payable............................................. (24,993) 7,074
(Increase) in inventory............................................................. (112,312) (142,400)
Increase in accrued liabilities..................................................... 72,322 25,769
(Increase) in prepaid expenses...................................................... (1,300) (2,827)
----------- -----------
Net cash provided by operating activities......................................... 276,739 447,933

Cash flows from investing activities
Purchase of fixed assets.............................................................. (14,306) (9,115)
----------- -----------
Net cash used by investing activities............................................. (14,306) (9,115)

Cash flows from financing activities
Distributions to partners............................................................. (208,296) (307,145)
Minority interest distributions....................................................... (4,362) (13,521)
----------- -----------
Net cash used by financing activities............................................. (212,658) (320,666)
----------- -----------
Net increase in cash.................................................................... 49,775 118,152
Cash at beginning of period............................................................. 112,567 207,939
----------- -----------
Cash at end of period................................................................... $ 162,342 $ 326,091
----------- -----------
----------- -----------
</TABLE>

SUPPLEMENTAL INFORMATION:

Accounts receivable due from partners of the Company in the amount of
$144,829 were discharged and recognized as a distribution to the partners.

The accompanying notes are an integral part of these financial statements.

F-28
<PAGE>
COMPACT DISCS INTERNATIONAL, LTD. AND SUBSIDIARY
AND CD ACQUISITIONS

NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS

AUGUST 31, 1995
AND
COMPACT DISCS INTERNATIONAL, LTD. AND SUBSIDIARY
(A TEXAS LIMITED PARTNERSHIP)

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

AUGUST 31, 1996

1. ORGANIZATION

THE COMPANY

Compact Discs International, Ltd. (the "Company") is a Texas limited
partnership which conducts business under the name "CD Warehouse" and maintains
its principal office in Richardson, Texas.

Effective January 1, 1996, CD Acquisitions ("CDA"), a joint venture owned
and operated by CDIL's partners, was merged into CDIL. The financial information
at August 31, 1995 is comprised of combined figures of the Company and CDA in
order to provide comparative totals for August 31, 1996.

The Company offers and sells single-unit franchises and development rights
for multi-unit franchises for the operation of retail sales outlets which buy,
sell and trade new and used compact discs and related items. As of August 31,
1995 and 1996, the Company has executed 99 and 112 franchise agreements,
respectively, for the operation of stores, of which 86 were operational in 1995
and 108 are operational in 1996. The Company has 11 development agreements in
place as of August 31, 1995 and 3 as of August 31, 1996.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company
and CD Warehouse-- Fort Worth, an 81.25% owned subsidiary; the remaining 18.75%
is owned by an unrelated third party investor. All significant intercompany
accounts and transactions have been eliminated in consolidation. Minority
interest in the consolidated subsidiary represents the minority owner's
proportionate share of the equity of CD Warehouse--Fort Worth.

INVENTORY

Inventory consists primarily of both new and used compact discs. All
inventory is valued at the lower of cost or market using the first-in, first-out
(FIFO) method.

FURNITURE, FIXTURES AND EQUIPMENT

Furniture, fixtures and equipment are stated at cost. The provision for
depreciation has been calculated using the straight-line method. Useful lives
range from 3 to 7 years.

OTHER ASSETS

Organization costs and the Company's trademark are being amortized using the
straight-line method over five and fifteen years, respectively.

F-29
<PAGE>
COMPACT DISCS INTERNATIONAL, LTD. AND SUBSIDIARY
AND CD ACQUISITIONS

NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS (CONTINUED)

AUGUST 31, 1995
AND
COMPACT DISCS INTERNATIONAL, LTD. AND SUBSIDIARY
(A TEXAS LIMITED PARTNERSHIP)

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

AUGUST 31, 1996

1. ORGANIZATION (CONTINUED)
INVESTMENT IN PARTNERSHIPS

The Company records its ownership in four minority-owned partnerships that
own CD Warehouse stores using the equity method of accounting.

REVENUE RECOGNITION

Franchise fees are non-refundable. Franchise fee income is recognized upon
the opening of the related store. The Company's commitment and obligations to
franchisees are not significant after the store is opened. Development right
fees paid are recognized as income on a prorated basis as franchise units within
a development agreement are opened. Development fees are non-refundable, but can
be applied against future franchise fees and royalty fees due from development
franchisees. Royalties are recognized when earned. Specially designed software
and computer equipment are sold to the franchisees, and the related income is
recognized when earned.

ESTIMATES

2. FURNITURE, FIXTURES AND EQUIPMENT

Components of furniture, fixtures and equipment at August 31, 1995 and 1996
are as follows:

<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Equipment............................................................. $ 26,235 $ 29,574
Furniture and fixtures................................................ 23,119 24,537
Automobiles........................................................... 12,386 16,528
Leasehold improvements................................................ 10,101 10,101
---------- ----------
Total......................................................... 71,841 80,740
Accumulated depreciation.............................................. (34,604) (40,816)
---------- ----------
Total......................................................... $ 37,237 $ 39,924
---------- ----------
---------- ----------
</TABLE>

F-30
<PAGE>
COMPACT DISCS INTERNATIONAL, LTD. AND SUBSIDIARY
AND CD ACQUISITIONS

NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS (CONTINUED)

AUGUST 31, 1995
AND
COMPACT DISCS INTERNATIONAL, LTD. AND SUBSIDIARY
(A TEXAS LIMITED PARTNERSHIP)

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

AUGUST 31, 1996

3. OTHER ASSETS

Components of other assets at August 31, 1995 and 1996 are as follows:

<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
Deposits.................................................................. $ 3,560 $ 3,560
Organization costs........................................................ 2,150 2,150
Trademark................................................................. 394 394
--------- ---------
Total............................................................. 6,104 6,104
Accumulated amortization.................................................. (702) (1,120)
--------- ---------
Total............................................................. $ 5,402 $ 4,984
--------- ---------
--------- ---------
</TABLE>

4. INVESTMENTS IN PARTNERSHIPS

In the latter part of 1995 and in 1996, the Company entered into partnership
agreements to own and operate retail CD outlets in Tulsa, Oklahoma; Memphis,
Tennessee; Orange Park, Florida; and Edmond, Oklahoma. At August 31, 1996, the
Company has the following investments in general partnerships:

<TABLE>
<CAPTION>
PERCENTAGE
PARTNERSHIP OWNED
- ---------------------------------------------------------------------------------- ---------------
<S> <C>
CD Warehouse--Tulsa............................................................... 50
CD Warehouse--Memphis............................................................. 25
CD Warehouse--Orange Park......................................................... 50
CD Warehouse--Edmond.............................................................. 50
</TABLE>

The Company held no investments prior to August 31, 1995.

At August 31, 1996, the Company's investments in partnerships and equity in
the income of these partnerships for the eight months ended August 31, 1996
consist of the following:

<TABLE>
<CAPTION>
INVESTMENT IN PARTNERSHIP
PARTNERSHIP INCOME
------------- -----------
<S> <C> <C>
CD Warehouse--Tulsa............................................... $ 27,239 $ 7,387
CD Warehouse--Memphis............................................. 132 6,462
CD Warehouse--Orange Park......................................... 15,283 7,283
CD Warehouse--Edmond.............................................. 20,652 0
------------- -----------
$ 63,306 $ 21,132
------------- -----------
------------- -----------
</TABLE>

F-31
<PAGE>
COMPACT DISCS INTERNATIONAL, LTD. AND SUBSIDIARY
AND CD ACQUISITIONS

NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS (CONTINUED)

AUGUST 31, 1995
AND
COMPACT DISCS INTERNATIONAL, LTD. AND SUBSIDIARY
(A TEXAS LIMITED PARTNERSHIP)

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

AUGUST 31, 1996

4. INVESTMENTS IN PARTNERSHIPS (CONTINUED)
The following summarizes the activity of the CD Warehouse equity investments
of the Company for the eight months ending August 31, 1996:

<TABLE>
<CAPTION>
CD WAREHOUSE CD WAREHOUSE CD WAREHOUSE CD WAREHOUSE
EDMOND ORANGE PARK TULSA MEMPHIS
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Total assets...................................... $ 33,361 $ 86,798 $ 67,192 $ 65,560
Total liabilities................................. (32,150) (3,102) (1,910) (1,638)
-------------- -------------- -------------- --------------
Net assets...................................... $ 1,211 $ 83,696 $ 65,282 $ 63,922
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
Revenues.......................................... $ 24,628 $ 153,719 $ 174,243 $ 255,487
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
Net income........................................ $ 1,211 $ 21,094 $ 17,466 $ 38,217
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
</TABLE>

5. COMMITMENTS AND CONTINGENCIES

The Company leases office space under a non-cancelable operating lease
agreement. The agreement expires in 1997. The Company also leases retail space
for its store operation. This agreement expires in 1996. Total rent expense for
the eight months ending August 31, 1995 and 1996 was $28,150 and $29,504,
respectively.

The following is a schedule of future minimum lease payments for the above
leases as of August 31, 1996:

6. INCOME TAXES

Taxable income of the Company is includable in the income tax returns of the
individual partners; therefore, no provision for income taxes has been made in
the accompanying financial statements.

7. RELATED-PARTY TRANSACTIONS

The Company sells new and used merchandise to franchisees. The franchisees
include the investee stores of CD Warehouse--Fort Worth, Tulsa, Memphis, Orange
Park, and Edmond. Sales to these five franchisees amounted to $72,533 and
$124,694 for the eight months ending August 31, 1995 and 1996.

At August 31, 1995, prior to the merger between CDA and CDI, CDA owes the
Company $107,323.

F-32
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE UNDERWRITER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY
SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES OR AN OFFER,
TO, OR A SOLICITATIONOF, ANY PERSON IN ANY JURISDICTION WHERE SUCH OFFER OR
SOLICITATION WOULD BE UNLAWFUL.NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
THE DATE HEREOF.

------------------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 7
Use of Proceeds........................................................... 11
Dividend Policy........................................................... 11
Dilution.................................................................. 12
Capitalization............................................................ 13
Combined Statements of Operations......................................... 14
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 15
Pro Forma Combined Condensed Financial Statement.......................... 20
Business and Properties................................................... 27
Management................................................................ 39
Certain Transactions...................................................... 41
Principal Stockholders.................................................... 44
Description of Securities................................................. 44
Shares Eligible for Future Sale........................................... 46
Underwriting.............................................................. 48
Legal Matters............................................................. 49
Experts................................................................... 49
Additional Information.................................................... 50
Financial Statements...................................................... F-1
</TABLE>

1,000,000 SHARES
CD WAREHOUSE, INC.

COMMON STOCK

---------------------

PROSPECTUS

---------------------

CAPITAL WEST
SECURITIES, INC.

, 1996

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
CD WAREHOUSE, INC.

REGISTRATION STATEMENT ON FORM SB-2

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

The General Corporation Law of the State of Delaware grants every
corporation the power to indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending, or completed action,
suit, or proceeding, whether civil, criminal, administrative, or investigative,
other than an action by or in the right of the corporation, by reason of the
fact that he is or was a director, officer, employee, or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee, or agent of another corporation, partnership, joint
venture, trust, or other enterprise, against expenses, including attorneys'
fees, judgments, fines, and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit, or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful.

The Delaware statute also grants every corporation the power to indemnify
any person who was or is a party or is threatened to be made a party to any
threatened, pending, or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that he is
or was a director, officer, employee, or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer, employee, or
agent of another corporation, partnership, joint venture, trust, or other
enterprise against expenses, including attorneys' fees, actually and reasonably
incurred by him in connection with the defense or settlement of such action or
suit if he acted in good faith and in a manner he reasonably believed to be in
or not opposed to the best interests of the corporation, except that no
indemnification shall be made in respect of any claim, issue, or matter as to
which such person shall have been adjudged to be liable for negligence or
misconduct in the performance of his duty to the corporation unless and only to
the extent that the court in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability but in
view of all the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the court shall deem proper.

The Delaware statute provides that to the extent that a director, officer,
employee, or agent of a corporation has been successful on the merits or
otherwise in defense of any action, suit, or proceeding referred to in the
statute, or in defense of any claim, issue, or matter therein, he shall be
indemnified against expenses, including attorneys' fees, actually incurred by
him in connection therewith.

Articles Nine and Eleven of the Registrant's Certificate of Incorporation
indemnify and exculpate the directors, officers, employees, and agents of the
Registrant from and against certain liabilities. Article Nine provides that the
Registrant shall indemnify to the full extent permitted under the General
Corporation Law of the State of Delaware any director, officer, employee, or
agent of the Registrant. Article Eleven provides that a director of the
Registrant shall have no personal liability to the Registrant or its
shareholders for monetary damages for breach of fiduciary duty as a director,
except for liability (a) for any breach of the director's duty of loyalty to the
Registrant or its shareholders, (b) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (c) for acts
or omissions specified in Section 174 of the General Corporation Law of the
State of Delaware regarding the unlawful payment of dividends and the unlawful
purchase or redemption of the Registrant's stock, and (d) for any transaction
from which the director derived an improper personal benefit.

II-1
<PAGE>
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The following table sets forth the various expenses in connection with the
sale and distribution of the securities being registered, other than
underwriting discounts and commissions. All expenses of registration of the
Shares will be borne by the Company. All of the amounts shown are estimates,
except the registration fee, and assume exercise of the underwriter's
over-allotment option.

<TABLE>
<S> <C>
Securities and Exchange Commission registration fee............ $ 3,108.94
NASD fees...................................................... $ 1,300.00
Underwriter's non-accountable expense allowance................ $241,500.00
Legal fees and expenses........................................ $80,000.00
Accounting fees and expenses................................... $40,000.00
Printing and engraving expenses................................ $25,000.00
Blue sky fees and expenses..................................... $30,000.00
Nasdaq application fees........................................ $ 6,780.00
----------
TOTAL EXPENSES............................................... $427,688.94
----------
----------
</TABLE>

ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.

The following sets forth certain information regarding sales of securities
of the Company issued within the past three years, which were not registered
pursuant to the Securities Act of 1933, as amended (the "Securities Act").

The Company was organized as a Delaware corporation in September 1996. The
initial subscribing stockholders, who each subscribed on September 5, 1996, were
Jerry W. Grizzle for 230,000 shares of Common Stock, Mathew Grizzle (Mr.
Grizzle's son) under the Uniform Transfers to Minors Act ("UTMA") for 10,000
shares of Common Stock, Brittany Grizzle (Mr. Grizzle's daughter) under the UTMA
for 10,000 shares of Common Stock, Gary D. Johnson for 75,000 shares of Common
Stock and Doyle E. Motley for 25,000 shares of Common Stock. Each of such
stockholders paid a purchase price of $1.00 per share for the Common Stock thus
purchased. No sales commissions were paid in connection with such issuance. The
securities were issued in reliance on the exemption from registration provided
by Section 4(2) of the Securities Act.

The Company entered into a subscription agreement on October 1, 1996 with
Mark E. Kane for the sale to him of 350,000 shares of Common Stock, at a
purchase price of $1.00 per share. Payment of the subscription price is
conditioned upon the successful completion of the offering of Common Stock to
which this Registration Statement relates. Additionally, the Company entered
into a subscription agreement on October 10, 1996 with Bruce D. MacDonald for
the aggregate issuance to him of 80,000 shares of Common Stock, in exchange for
the assignment to the Company of certain equity interests owned by MacDonald or
his affiliates in 36 CD Warehouse franchise stores (the "MacDonald
Acquisition"). Issuance of the 80,000 shares, and completion of the MacDonald
Acquisition, is conditioned upon the successful completion of the offering of
Common Stock to which this Registration Statement relates. No sales commissions
were paid in connection with the subscription agreements. The securities, when
issued, will be issued in reliance on the exemption from registration provided
by Section 4(2) of the Securities Act.

II-2
<PAGE>
ITEM 27. EXHIBITS.

<TABLE>
<CAPTION>
EXHIBIT
NUMBER NAME OF EXHIBIT
- ---------- ---------------------------------------------------------------------------------------------------
<C> <S>

1.1* Underwriting Agreement between the Company and Capital West Securities, Inc. ("Capital West")

2.1 Asset Purchase Agreement, dated as of October 1, 1996, by and among Compact Discs International,
Ltd., Mark E. Kane ("Kane") and the Company (filed electronically herewith)

2.2 Asset Purchase Agreement, dated as of October 10, 1996, by and between Bruce D. MacDonald
("MacDonald") and the Company (filed electronically herewith)

2.3 Assignment and Assumption Agreement, dated as of October 10, 1996, by and between MacDonald and the
Company (filed electronically herewith)

2.4 World-Wide Area Development Agreement, dated as of October 10, 1996, by and between Kane and the
Company (filed electronically herewith)

3.1 Certificate of Incorporation (filed electronically herewith)

3.2 Bylaws (filed electronically herewith)

4.1* Specimen Certificate of the Common Stock

4.2 See Articles IV and VIII of the Company's Certificate of Incorporation and Article II of the
Company's Bylaws (included herein as Exhibits 3.1 and 3.2, respectively)

4.3* Form of Warrant Agreement between the Company and Capital West

4.4* Credit Agreement dated as of , 1996 between the Company and Bank of Oklahoma, N.A.

5.1* Opinion of Day Edwards Federman Propester & Christensen, P.C. as to the legality of the securities
being registered

10.1 Employment Agreement by and between the Company and Grizzle (filed electronically herewith)

10.2 Employment Agreement by and between the Company and Johnson (filed electronically herewith)

10.3 Employment Agreement by and between the Company and MacDonald (filed electronically herewith)

10.4 Employment Agreement by and between the Company and Motley (filed electronically herewith)

10.5 Finders and Release Agreement, dated as of September 3, 1996, by and among the Company; Grizzle;
CDI Acquisition JV, a Texas joint venture; and CD Partners JV, a Texas joint venture (filed
electronically herewith)

10.6 Asset Purchase Agreement, dated as of October 1, 1996, by and among Compact Discs International,
Ltd., Kane and the Company (included herein as Exhibit 2.1)

10.7 Asset Purchase Agreement, dated as of October 10, 1996, by and between MacDonald and the Company
(included herein as Exhibit 2.2)

10.8 Assignment and Assumption Agreement, dated as of October 10, 1996, by and between MacDonald and the
Company (included herein as Exhibit 2.3)

10.9* Consulting Agreement between the Company and Capital West

10.10* Credit Agreement dated as of , 1996 between the Company and Bank of Oklahoma, N.A.
(included herein as Exhibit 4.4)
</TABLE>

II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER NAME OF EXHIBIT
- ---------- ---------------------------------------------------------------------------------------------------
<C> <S>
10.12 Lease Agreement dated June 24, 1992 by and between Metropolitan Life Insurance Company and M&L Kane
Company, L.L.C. (filed electronically herewith)

10.13* Form of Franchise Agreement

10.14 Form of Partnership Agreement (filed electronically herewith)

10.15 Form of Development Agreement (filed electronically herewith)

10.16 Lease Agreement dated October 28, 1996 by and between the Company and Magnolia Enterprises, Inc.
(filed electronically herewith)

11.1* Statement re: computation of per share earnings

21.1 List of subsidiaries (filed electronically herewith)

23.1 Consent of Huselton & Morgan, P.C., Independent Accountants (filed electronically herewith)

23.2 Consent of Ernst & Young LLP., Independent Accountants (filed electronically herewith)

23.3* Consent of Day Edwards Federman Propester & Christensen, P.C. (included in Exhibit 5.1)

24.1 Powers of Attorney (filed electronically herewith)
</TABLE>

- ------------------------

* To be filed by amendment.

ITEM 28. UNDERTAKINGS.

1. The undersigned Registrant hereby undertakes:

(a) To provide to the Underwriters at the closing specified in the
Underwriting Agreement certificates in such denominations and registered in such
names as required by the Underwriters to permit prompt delivery to each
purchaser.

(b) For determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act as part of this Registration Statement as of the time
the Commission declared it effective.

(c) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to:

(i) include any prospectus required by Section 10(a)(3) of the
Securities Act;

(ii) reflect in the Prospectus any facts or events which, individually
or together, represent a fundamental change in the information in
the registration statement; and

(iii) include any additional or changed material information on the plan
of distribution.

(d) That, for the purpose of determining liability under the Securities Act,
each post-effective amendment shall be deemed to be a new registration statement
of the securities offered, and the offering of the securities at that time shall
be deemed to be the initial bona fide offering thereof.

(e) To file a post-effective amendment to remove from registration any of
the securities that remain unsold at the termination or end of the offering.

2. Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission

II-4
<PAGE>
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.

II-5
<PAGE>
SIGNATURES

In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
the requirements of filing on Form SB-2 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereon duly authorized
in the City of Oklahoma City, State of Oklahoma, on October 30, 1996.

CD WAREHOUSE, INC.
a Delaware corporation

By: /s/ JERRY W. GRIZZLE
-----------------------------------------
Jerry W. Grizzle,
CHAIRMAN OF THE BOARD OF DIRECTORS,
PRESIDENT AND CHIEF EXECUTIVE OFFICER

Pursuant to the requirement of the Securities Act of 1933, this registration
statement has been signed below by the following persons in the capacities and
on the dates indicated:

NAME TITLE DATE
- ------------------------------ -------------------------- -------------------

/s/ JERRY W. GRIZZLE Chairman of the Board of
- ------------------------------ Directors; President and October 30, 1996
Jerry W. Grizzle Chief Executive Officer

/s/ GARY D. JOHNSON Executive Vice President;
- ------------------------------ Chief Operating Officer; October 30, 1996
Gary D. Johnson Director

/s/ BRUCE D. MACDONALD
- ------------------------------ Vice President--Company October 30, 1996
Bruce D. MacDonald Store Operations

/s/ DOYLE E. MOTLEY
- ------------------------------ Sr. Vice President, Chief October 30, 1996
Doyle E. Motley Financial Officer

/s/ CHRISTOPHER M. SALYER
- ------------------------------ Director October 30, 1996
Christopher M. Salyer

/s/ RONALD V. PERRY
- ------------------------------ Director October 30, 1996
Ronald V. Perry

II-6

<PAGE>

EXHIBIT 2.1

ASSET PURCHASE AGREEMENT

BY AND AMONG

COMPACT DISCS INTERNATIONAL, LTD.,

MARK E. KANE

AND

CD WAREHOUSE, INC.

DATED AS OF OCTOBER 1, 1996

<PAGE>

TABLE OF CONTENTS

ARTICLE I - TERMS OF PURCHASE AND SALE...................................... 1
1.1 Purchase and Sale of Assets..................................... 1
1.2 Treatment of Certain Obligations................................ 3
1.3 Transfer and Conveyance......................................... 4
1.4 Grant of Worldwide Area Development Agreement to Kane/
Buyer's Option to Acquire....................................... 4
1.5 Grant of Ten Domestic Franchise Agreements to Kane.............. 5
1.6 Grant of Ft. Worth and Plano Franchise(s)....................... 5
1.7 Common Stock Being Acquired by Kane............................. 5

ARTICLE II - PURCHASE PRICE................................................. 6
2.1 Purchase Price.................................................. 6
2.2 Allocation of Purchase Price.................................... 6
2.3 Cash Payable at Closing......................................... 6
2.4 Purchase Price Adjustments...................................... 6

ARTICLE III - REPRESENTATIONS AND WARRANTIES OF SELLER...................... 6
3.1 Due Organization and Qualification.............................. 6
3.2 Title........................................................... 7
3.3 Inventory....................................................... 7
3.4 Physical Properties............................................. 7
3.5 Intellectual Property Rights.................................... 7
3.6 Compliance with Laws............................................ 7
3.7 Contracts....................................................... 8
3.8 Contract Defaults............................................... 8
3.9 Litigation...................................................... 8
3.10 Partnership Power and Authority................................. 9
3.11 Collective Bargaining........................................... 9
3.12 Employee Benefits............................................... 9
3.13 True, Correct and Complete Information.......................... 9
3.14 Availability of Documents....................................... 10
3.15 Consents........................................................ 10
3.16 Financial Condition and Result of Operations.................... 10
3.17 Insurance....................................................... 10

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<PAGE>

3.18 Taxes........................................................... 10
3.19 Absence of Certain Changes or Events............................ 11
3.20 Broker's and Finder's Fees...................................... 11
3.21 Receivables..................................................... 11
3.22 Payables........................................................ 11

ARTICLE IV - REPRESENTATIONS AND WARRANTIES OF BUYER........................ 12
4.1 Due Organization and Qualification.............................. 12
4.2 Corporate Power and Authority................................... 12
4.3 Consents........................................................ 12
4.4 Litigation...................................................... 13
4.5 Compliance with Laws............................................ 13

ARTICLE V - COVENANTS OF SELLER AND KANE.................................... 13
5.1 Affirmative Covenants........................................... 13
5.2 Negative Covenants.............................................. 13
5.3 Access to Properties and Records................................ 14
5.4 Approvals of Third Parties...................................... 15
5.5 Notices......................................................... 15
5.6 Access to Books and Records..................................... 15
5.7 Covenant Not to Compete......................................... 15

ARTICLE VI - COVENANTS OF BUYER............................................. 16
6.1 Furnishing of Information....................................... 16
6.2 Approvals of Third Parties...................................... 17
6.3 Buyer's Best Efforts............................................ 17
6.4 Retention of Records............................................ 17

ARTICLE VII - CONDITIONS TO OBLIGATIONS OF BUYER............................ 17
7.1 Representations and Warranties of Seller and Kane............... 17
7.2 Covenants of Seller and Kane.................................... 17
7.3 Certificate of Seller and Kane.................................. 17
7.4 Initial Public Offering......................................... 18
7.5 No Casualty Losses.............................................. 18
7.6 Certificate of Authorities...................................... 18
7.7 Litigation...................................................... 18
7.8 Due Diligence................................................... 18

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<PAGE>

7.9 Opinion of Seller's Counsel..................................... 19
7.10 Franchise Law Survey............................................ 19
7.11 No Material Adverse Changes..................................... 19
7.12 Consents........................................................ 20
7.13 Non-competition Agreements of Seller, Kane and Leo E. Kane...... 20
7.14 Further Assurances.............................................. 20

ARTICLE VIII - CONDITIONS TO OBLIGATIONS OF SELLER.......................... 20
8.1 Representations and Warranties of Buyer......................... 20
8.2 Covenants of Buyer.............................................. 20
8.3 Buyer's Certificate............................................. 20
8.4 Certificates of Authorities..................................... 21
8.5 Opinion of Counsel to Buyer..................................... 21

ARTICLE IX - DATE AND PLACE OF CLOSING...................................... 21
9.1 Date and Place of Closing....................................... 21

ARTICLE X - CLOSING......................................................... 22
10.1 Seller's, Kane's and Grizzle's Performance...................... 22
10.2 Buyer's Performance............................................. 23
10.3 Leo E. Kane Non-competition Agreement........................... 23
10.4 Expenses: Other Instruments.................................... 23

ARTICLE XI - SURVIVAL AND INDEMNIFICATION................................... 24
11.1 Survival........................................................ 24
11.2 Buyer's Losses.................................................. 24
11.3 Employee Compensation and Benefits.............................. 25
11.4 Franchise Claims Against Buyer.................................. 25
11.5 Seller's Losses................................................. 25
11.6 Franchise Claims Against Seller................................. 25
11.7 Notice of Loss.................................................. 26
11.8 Right to Defend................................................. 26
11.9 Indemnification Pledge Agreement................................ 27
11.10 Request to Allocate Responsibility.............................. 27
11.11 Franchise Claims Against Both Seller and Buyer.................. 27

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<PAGE>

ARTICLE XII - POST-CLOSING COVENANTS........................................ 28
12.1 Transition Period............................................... 28
12.2 Payment of Unpaid Receivables................................... 28
12.3 Insurance Policies.............................................. 28

ARTICLE XIII - TERMINATION................................................. 28
13.1 Termination..................................................... 28
13.2 No Further Force or Effect...................................... 29

ARTICLE XIV - MISCELLANEOUS................................................. 29
14.1 Expenses........................................................ 29
14.2 Entire Agreement................................................ 29
14.3 Successors and Assigns.......................................... 29
14.4 Identical Counterparts.......................................... 29
14.5 Headings........................................................ 29
14.6 Use of Certain Terms............................................ 29
14.7 Modification and Waiver......................................... 30
14.8 Other Remedies.................................................. 30
14.9 Notices......................................................... 30
14.10 Governing Law................................................... 31
14.11 No Agent's Fees................................................. 31
14.12 Binding Arbitration............................................. 31

<PAGE>

ASSET PURCHASE AGREEMENT

THIS ASSET PURCHASE AGREEMENT (this "Agreement") is made and entered into
as of the 1st day of October, 1996, by and among COMPACT DISCS INTERNATIONAL,
LTD., a Texas limited partnership with its principal office located at 1710
Firman Drive, Suite 300, Richardson, Texas 75081 ("Seller"); MARK E. KANE, an
individual and a limited partner of Seller ("Kane") and CD WAREHOUSE, INC., a
Delaware corporation with its principal office located at 1506 Squirrel Tree
Place, Edmond, Oklahoma 73034 ("Buyer").

WHEREAS, Seller is engaged in the business of buying, selling and trading
new and used audio compact discs, acting as franchisor of stores ("CD Warehouse
Stores") which buy, sell and trade new and used audio compact discs and selling
new and used audio compact discs to its franchisees (the "Business"); and

WHEREAS, Seller desires to sell to Buyer, and Buyer desires to buy from
Seller, substantially all of the assets of the Business.

NOW THEREFORE, in consideration of the mutual representations, warranties,
covenants and agreements and upon the terms and subject to the conditions
hereinafter set forth, the parties hereby agree as follows:

ARTICLE I
TERMS OF PURCHASE AND SALE

1.1 PURCHASE AND SALE OF ASSETS. Subject to and upon the terms and
conditions contained herein, at the Closing (as defined in Section 9.1), Seller
will sell, transfer, assign, convey and deliver to Buyer, and Buyer will
purchase, accept and acquire from Seller, free and clear of all liens, claims,
security interests and encumbrances of any nature, except for the security
interests on the new compact discs inventory set forth on SCHEDULE 3.2
("Encumbrances"), all of the following properties and assets (whether real or
personal, tangible or intangible) of Seller related to the Business
(collectively, the "Assets"):

(a) all of the Seller's inventory of new and used audio compact discs (the
"Inventory");

(b) All of Seller's right, title and interest in and to all receivables as
of the Closing Date arising out of the operation of the Business,
including, without limitation, accounts receivable, notes receivable,
and warranty receivables (collectively, the "Receivables"); the term
"Receivables" does not, however, include any amount receivable from
any of Seller's franchisees for franchise fees or royalties arising
from the Contracts (as defined below) prior to or on the Closing Date;

1
<PAGE>

(c) All of Seller's right, title and interest in and to all franchise
agreements and franchise and area development agreements to which
Seller is a party, as listed on Schedule 3.7 (collectively, the
"Contracts");

(d) All of Seller's right, title and interest in and to the name "CD
Warehouse," trademarks, patents, trade names, service marks,
copyrights, processes, trade secrets, proprietary and technical
information, know-how, other trade rights and other intangible assets,
together with all right to, and applications and licenses for, any of
the foregoing, relating to Seller's business (the "Intellectual
Property Rights");

(e) All information of Seller with respect to the franchisees of Seller
and all of Seller's records relating to the Business, including,
without limitation, customer lists, vendor lists, prospective
franchisee lists, franchise files, accounting and tax records
concerning the same and sales literature and promotional materials;

(f) All software programs, source and object codes, computer printouts,
data bases and related items created, originated or modified by Seller
and relating to the Assets or to the Business;

(g) The furniture, equipment, files and other assets currently located at
Seller's business headquarters; and

(h) The equity interests of Seller in the two CD Warehouse Stores in
Tulsa, Oklahoma and Memphis, Tennessee.

Buyer will be entitled to all franchise fees and royalties accrued after the
Closing Date. If the Closing Date occurs during any month other than
December, 1996, the amount of franchise fees and royalties to be transferred
to Buyer (pursuant to Section 1.1(b) above) during the month of Closing will
be determined by multiplying the total franchise fees and royalties arising
from the Contracts during the month of the Closing by a fraction, the
numerator of which is the number of days elapsing between the Closing Date
and the first day of the month immediately following the month during which
the Closing Date occurs, and the denominator of which is the number of days
of the month during which the Closing Date occurs. If the Closing Date
occurs during December, 1996, the amount of franchise fees and royalties to
be transferred to Buyer for the month of December, 1996 will be determined by
multiplying the total franchise fees and royalties arising from the Contracts
during December, 1996 by a fraction, the numerator of which is the amount of
franchise fees and royalties arising from the Contracts during the period
beginning at 12:01 a.m. on the day following the Closing Date and ending at
12:01 a.m. on January 1, 1997, and the denominator of which is the total
franchise fees and royalties arising from the Contracts during December,
1996. If and to the extent that any number of franchisees do not provide
adequate docu-

2
<PAGE>

mentation to permit Buyer and Seller to determine the amount of franchise
fees and royalties arising from their particular franchise agreements during
the period beginning at 12:01 a.m. on the day following the Closing Date and
ending at 12:01 a.m. on January 1, 1997, the method of allocation based on
the number of days in the month, as described above, will be used to
determine the amount of franchise fees and royalties to be transferred to
Buyer for the month of December, 1996 for those particular franchisees.

1.2 TREATMENT OF CERTAIN OBLIGATIONS.

(a) The term "Payables" means all of Seller's accounts payable
outstanding as of 12:01 a.m. on the day preceding the Closing Date (as defined
hereinafter), for inventory purchased by Seller in the ordinary course of
business and listed on SCHEDULE 3.22 hereto. The term "Assumed Obligations"
means the Payables and all of Seller's obligations arising after the Closing
Date under the Contracts listed on Schedule 3.7; provided, however, the Assumed
Obligations shall not include any obligation for performance or obligation or
liability of Seller for default or nonperformance under the Contracts or
Payables arising prior to the Closing Date. At Closing, Buyer will assume the
Assumed Obligations pursuant to an assignment and assumption agreement
acceptable to Buyer and Seller (the "Assignment and Assumption Agreement")
effective as of the Closing Date. Buyer will not assume or have any
responsibility, however, with respect to any other obligation or liability of
the Seller not included within the Assumed Obligations.

(b) Until such time as: (i) the Payables have been paid OR (ii)
Seller and Leo E. Kane have been released from liability relating to the
Payables and all collateral currently securing the Payables has been released to
Leo E. Kane, all revenue collected by Buyer after the Closing Date, from the
sale of the Inventory and collection of the Receivables being acquired hereby,
will be deposited into a separate account (the "Temporary Account") established
by Buyer at a financial institution in Dallas, Texas. Until condition (i) or
(ii) as described above have been satisfied, no funds will be distributed from
the Temporary Account unless such distribution is authorized by the signatures
of (1) an officer or other authorized agent of Buyer and (2) either Kane or Leo
E. Kane. Proceeds received from the sale of the Inventory and collection of the
Receivables will be applied to the Payables in the order of the due dates of
such Payables. After condition (i) or (ii) has been satisfied, the joint
signatory authority of Kane or Leo E. Kane with respect to the Temporary
Account will cease, and Kane and Leo E. Kane will take appropriate actions to
confirm the cessation of such authority to the financial institution at which
the Temporary Account is established.

(c) Until the Event, Kane and Leo E. Kane will, during regular
business hours, have full and complete access to and the right to inspect
Buyer's books, records, premises, and Inventory. The right of inspection
granted hereby is intended to permit Kane and Leo E. Kane subject to a
confidentiality undertaking to monitor Buyer's compliance with the terms of
Section 1.2(b) hereof, and Buyer is under no obligation pursuant to this
Section 1.2(c) to

3
<PAGE>

disclose information relating to salaries or other amounts payable to
officers, directors, employees, agents, or shareholders.

1.3 TRANSFER AND CONVEYANCE. Seller shall execute and deliver to Buyer at
the Closing a (i) bill of sale (the "Bill of Sale"), (ii) the Assignment and
Assumption Agreement, (iii) assignment of Intellectual Property Rights (the
"Assignment of Intellectual Property Rights"), in each case in substantially the
forms attached hereto as Exhibits A, B and C, respectively, and (iv) all such
other assignments, endorsements and instruments of transfer as shall be
necessary or appropriate to carry out the intent of this Agreement and as shall
be sufficient to vest in Buyer title to all of the Assets and all right, title
and interest of Seller thereto. Buyer shall execute and deliver to Seller at
the Closing the Assignment and Assumption Agreement.

1.4 GRANT OF WORLDWIDE AREA DEVELOPMENT AGREEMENT TO KANE; BUYER'S
OPTION TO ACQUIRE. At the Closing Buyer will issue to Kane an exclusive
worldwide area development agreement (the "Worldwide Area Development
Agreement"), substantially in the form of the attached Exhibit D, pursuant to
the terms of which Kane will be granted the right to develop, as Buyer's
franchisee, on a worldwide basis (but specifically excluding the United
States, Canada and Mexico), Buyer's franchise operations ("CD Warehouse
Franchise Operations") relating to the franchising of Buyer's compact disc
marketing concept and the Intellectual Property Rights (each such franchise,
a "CD Warehouse Franchise"). Beginning three years from the date of grant and
on an annual basis for seven years thereafter, Buyer will have the right to
cancel and rescind the Worldwide Area Development Agreement and acquire all
of Kane's interest in the CD Warehouse Franchise Operations and CD Warehouse
Franchise owned or controlled by Kane pursuant to the Worldwide Area
Development Agreement (the exercise of which right is referred to as the
"Election"). The purchase price payable upon the Election will be paid in
cash at closing and will be determined by multiplying the quotient derived
from dividing (a)$3,200,000 by (b) a number equal to (i) Buyer's and Seller's
cumulative after tax net profit derived from the Contracts being conveyed
hereby for the twelve month period ending December 31, 1996 less (ii)
$250,000 in salary expense, times the consolidated, annualized after-tax net
profit of the CD Warehouse Franchise Operations developed pursuant to the
Worldwide Area Development Agreement, wherever located and whatever state of
development. The consolidated, annualized after-tax net profit of the CD
Warehouse Franchise Operations is to be computed in accordance with generally
accepted accounting principles, consistently applied. Any countries taxes
that have been incurred but not paid will be reserved for and deducted from
the net profit computation. Additionally, if the net income computation does
not contain an allowance for Kane's salary an expense deduction of $150,000
will be made. For purposes of the Election, any net profit calculation
which is for a period shorter than 365 days will be annualized by dividing
such net profit by the number of days in such period and multiplying the
average per-day profit by 365. Kane will provide Buyer with consolidated
financial statements for the CD Warehouse Operations developed pursuant to
the Worldwide Area Development Agreement during each of the seven years
during which the Election may be made, within ninety (90) days after the end
of each calender year (December 31). Buyer may make the Election, during each

4
<PAGE>

of the seven years during which the Election may be made, by giving written
notice to Seller during the period beginning 90 days after the end of the
fiscal year of the CD Warehouse Franchise Operations (such fiscal year end is
referred to as the "Election Year End") and ending 180 days after the
Election Year End. The closing of the transaction made pursuant to the
Election will occur at a time and place mutually agreed upon by Buyer and
Seller within 180 days after written notice of the Election is delivered to
Seller (unless extended by agreement between Buyer and Seller); if such
closing does not occur, however, Buyer's right to make an Election thereafter
will terminate and become null and void.

1.5 GRANT OF TEN DOMESTIC FRANCHISE AGREEMENTS TO KANE. At Closing, Buyer
will grant to Kane, with no initial franchise fee payable by Kane, ten domestic
CD Warehouse Franchise license agreements (the "Domestic Franchise Agreements"),
pursuant to which Kane: (a) may develop and install, as franchisee, up to ten
separate CD Warehouse Franchise stores, subject to Buyer's approval as to the
locations of such stores; (b) will pay, with respect to each such store, a
royalty of 2% of net sales and (c) agrees that such stores shall be the "test"
stores for any new marketing or other CD Warehouse Franchise concept of Buyer
mutually agreed to by the parties, with the costs for development of any such
concept being borne by Buyer and costs of implementation of any such concept to
be borne by Kane.

1.6 GRANT OF FT. WORTH AND PLANO FRANCHISE(S). At Closing, Buyer shall
enter into new franchise agreements with Seller (or such other entity which
Seller may designate), with no franchise or other fee payable by Seller or its
nominee entity, for the Ft. Worth, Texas and Plano, Texas CD Warehouse Stores
currently owned and operated by Seller, which new franchise agreements shall be
on substantially the same terms and conditions as Seller's current franchise
agreements except that Seller shall not be required to pay any royalty payments
whatsoever to Buyer in respect thereof during the term of such agreements or any
extension of any term thereof.

1.7 COMMON STOCK BEING ACQUIRED BY KANE. Concurrently with the execution
hereof, Kane will enter into a Subscription Agreement (the "Subscription
Agreement") with Buyer to acquire 350,000 shares of the Buyer's common stock for
a purchase price of $1.00 per share in the form of Exhibit E hereto. The
Subscription Agreement will provide that: (i) Kane's obligation to acquire the
Buyer's common stock is conditioned upon the closing of the Buyer's initial
public offering; (ii) for a period beginning two years and ending four years
following the Closing Date, Kane will be entitled to register all of such shares
for sale or distribution in the event that Buyer files (or causes to be filed) a
registration statement with the United States Securities and Exchange Commission
relating to any of Buyer's common stock; and (iii) if Kane elects to participate
as a selling shareholder, all registration costs and expenses will be borne by
the issuer and any participating selling shareholders (including Kane) on a pro
rata basis in accordance with the number of shares being registered for sale.

<PAGE>

ARTICLE II
PURCHASE PRICE

2.1 PURCHASE PRICE. The purchase price for the Assets shall be Three
million two Hundred Thousand Dollars $3,200,000; the "Purchase Price"), subject
to downward adjustments (if any) pursuant to Section 2.4 of this Agreement.

2.2 ALLOCATION OF PURCHASE PRICE. The Purchase Price shall be allocated
among the Assets as set forth on SCHEDULE 2.2, which Schedule may consist of IRS
Form 8594 only.

2.3 CASH PAYABLE AT CLOSING. At the Closing, Buyer shall wire transfer
immediately available funds to Seller in an amount equal to the Purchase Price,
less (i) the $100,000 earnest money deposited pursuant to the terms of that
certain Escrow Agreement by and between the Seller and Buyer, a copy of which
is attached hereto as Exhibit __ and (ii) any downward adjustments made pursuant
to Section 2.4 below; and

2.4 PURCHASE PRICE ADJUSTMENTS.

(a) As of the close of business on the business day immediately
preceding the Closing Date, the parties shall jointly conduct a physical count
of the Inventory and shall value such Inventory at the lower of cost or market,
as of the close of business on such day. All sales of items of Inventory after
the physical count of such items shall be attributable to Buyer and Buyer shall
be entitled to payment therefor; similarly, all inventory items received by
Seller after the physical count of Seller's Inventory will be attributable to
Buyer and Buyer will be responsible for all liabilities relating thereto. If
the aggregate value of the Inventory plus the amount of the Receivables as of
the Closing Date is equal to or greater than the amount of Payables as of the
Closing Date no adjustment in the Purchase Price shall occur. If the aggregate
value of Inventory and the amount of the Receivables as of the Closing Date is
less than the amount of Payables as of the Closing Date, the Purchase Price
shall be reduced by an amount equal to such difference.

ARTICLE III
REPRESENTATIONS AND WARRANTIES OF SELLER

Seller and Kane, jointly and severally, hereby represent and warrant to
Buyer, as follows:

3.1 DUE ORGANIZATION AND QUALIFICATION. Seller is a limited partnership
duly organized, validly existing and in good standing under the laws of the
State of Texas which has all requisite partnership power and authority to own or
lease its properties and to carry on its business as it is presently being
operated and in the place where such properties are owned or leased and such
business is conducted.

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3.2 TITLE. Seller has, and upon conveyance of the Assets to Buyer by
Seller at the Closing, Buyer will acquire and hold, good and marketable title in
fee simple to all Assets, free and clear of any and all Encumbrances, except as
set forth on SCHEDULE 3.2.

3.3 INVENTORY. Set forth on SCHEDULE 3.3 is a description of all the
Inventory, which consists of current items of a quality and quantity that are
usable or marketable in the ordinary course of the business of Seller, and items
not usable in the business of Seller have been written down in value in
accordance with the normal business practice of Seller to estimated net
realizable market values.

3.4 PHYSICAL PROPERTIES. Set forth on SCHEDULE 3.4 is a description of
(i) all office furniture, equipment and supplies owned and to be conveyed by
Seller and (ii) all physical properties (other than the types of properties
referred to in (i) above), real, personal or mixed, owned and to be conveyed by
Seller and included among the Assets. Seller enjoys peaceable possession of all
properties owned or leased by it.

3.5 INTELLECTUAL PROPERTY RIGHTS. Set forth on SCHEDULE 3.5 is a list of
all Intellectual Property Rights, which Intellectual Property Rights comprise
all such rights used by Seller and Kane in connection with the operation of the
Business. Except as disclosed on SCHEDULE 3.5, and to the best of Seller's and
Kane's knowledge, none of the products, activities or operations of Seller
infringe, involve or have resulted in (i) infringement of, or (ii) any claim of
infringement of, any patent or patent application, trade name, trademark or
service mark registration or application, common law trademark or trade dress
rights, copyright or copyright registration or application of any other person,
firm or corporation; and no proceedings have been instituted, are pending, or,
to the knowledge of Seller or Kane threatened, which challenge the rights of
Seller in respect thereof. Except as disclosed on SCHEDULE 3.5, and to the best
of Seller's and Kane's knowledge, none of the Intellectual Property Rights are
being infringed by the products, activities, operations, trade names,
trademarks, service marks, trade dress rights or copyrights of any other person
or persons and none are subject to any outstanding order, judgment decree,
stipulation or agreement restricting the use thereof. Seller has not given and
is not bound by an agreement of indemnification for patent, trade name, service
mark, trademark or copyright infringement as to any property produced, used or
sold by it.

3.6 COMPLIANCE WITH LAWS. Except as disclosed on SCHEDULE 3.6,, Seller
(i) has complied with all laws, regulations, licensing requirements and orders
applicable to its business or personnel the breach or violation of which could
have a material adverse effect on said business, (ii) has filed with the proper
authorities all statements and reports required by the laws, regulations,
licensing requirements and orders to which it or any of its employees (because
of their activities on behalf of their employer) is subject, and (iii) possesses
all necessary licenses, franchises, permits and governmental authorizations to
conduct its business in the manner in which and in the jurisdictions and places
where such business is now conducted. Set forth on SCHEDULE 3.6 is a list of
all material licenses, franchises, permits and governmental

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authorizations and all applications pending before any agency or authority
for the issuance of any licenses, franchises, permits or governmental
authorizations or the renewal thereof.

3.7 CONTRACTS. Set forth on SCHEDULE 3.7 is a list of all material
contracts, leases, arrangements, and commitments (whether oral or written) by
which any of the Assets are directly affected or are bound, including, without
limitation, all franchise and area development agreements which have been
executed by Seller. Except as set forth in SCHEDULE 3.7, neither Seller nor any
of the Assets is a party to or is bound or affected by any contract, lease,
arrangement or commitment (whether oral or written) relating to: (i) the
employment of any person other than personnel employed at will by Seller in the
ordinary course of its business at rates of compensation and on terms consistent
with past business practice; (ii) collective bargaining with, or any
representation of any employees by, any labor union or association; (iii) the
acquisition of services, supplies, equipment or other personal property
involving more than $5,000 or which is not terminable by Seller upon not more
than 30 days' notice without obligation on the part of Seller; (iv) the purchase
or sale of real property; (v) distribution, agency or construction; (vi) lease
of real or personal property as lessor or lessee or sublessor or sublessee;
(vii) lending or advancing of funds (other than the Receivables); (viii)
borrowing of funds or receipt of credit (other than the Payables); (ix)
incurring of any obligation or liability (except for the Payables); (x) the sale
of personal property; and (xi) any matter or transaction not in the ordinary
course of the business of Seller or inconsistent with past business practice of
Seller.

3.8 CONTRACT DEFAULTS. Except as disclosed on SCHEDULE 3.7 or in other
written communications between Seller or Kane and Buyer, Seller is not in
default in any material respect under any of the Contracts, the Contracts are
legal, valid and binding obligations of the respective parties thereto in
accordance with their terms and have not been amended, no defenses, offsets or
counterclaims thereto have been asserted or may be made by any party thereto
other than Seller, and Seller has waived no substantial rights thereunder.

3.9 LITIGATION. Set forth on SCHEDULE 3.9 is a list of all actions,
suits, proceedings, investigations or grievances pending against Seller or, to
the best of Seller's and Kane's knowledge, threatened against Seller, Seller's
business or any property or rights of Seller, at law or in equity or admiralty
or before or by and court or federal, state municipal or other governmental
department, commission, board, bureau, agency or instrumentality, domestic or
foreign (each an "Agency"). To the best of Seller's and Kane's knowledge, none
of the actions, suits, proceedings or investigations listed on SCHEDULE 3.9
either (i) results or would, if adversely determined, result in any material
adverse change in the business, operations or assets or the condition, financial
or otherwise, or results of operations of Seller or (ii) affects or would, if
adversely determined, affect the right or ability of Seller to carry on its
business substantially as now conducted. Seller is not subject to any
continuing court or Agency order, writ, injunction or decree applicable
specifically to the Assets, the business operations of Seller or

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employees of Seller, or in default with respect to any order, writ,
injunction or decree of any court or Agency with respect to the Assets, its
business, operations or employees.

3.10 PARTNERSHIP POWER AND AUTHORITY. The execution, delivery and
performance of this Agreement by Seller and Kane, and all other agreements
executed in connection herewith, and the consummation by it of the transactions
contemplated hereby and thereby, have been duly authorized by all requisite
partnership action and no further action or approval is required in order to
permit Seller and Kane to consummate the transactions contemplated hereby and
thereby. This Agreement constitutes, and all other agreements by and among the
parties, when executed and delivered in accordance with the terms thereof, will
constitute the legal, valid and binding obligations of Seller and Kane,
enforceable in accordance with their terms (subject, as to the enforcement of
remedies, to applicable bankruptcy, insolvency, reorganization, moratorium and
similar laws affecting creditors' rights from time to time in effect). Seller
has full power, authority and legal right to enter into this Agreement, and all
other agreements by and among the parties, and to consummate the transactions
contemplated hereby, the making and performance of this Agreement, and all other
agreements by and among the parties, and the consummation of the transactions
contemplated hereby and thereby in accordance with the terms hereof and thereof
will not (i) conflict with the Limited Partnership Agreement of Seller, (ii)
result in any breach or termination of, or constitute a default under, or
constitute an event which with notice or lapse of time, or both, would become a
default under, or result in the creation of any Encumbrance upon any of the
Assets under, or create any rights of termination, cancellation or acceleration
in any person under, any contract, lease, arrangement or commitment, or violate
any order, writ, injunction or decree, to which Seller or Kane is a party, by
which any of the Assets, business or operations of Seller may be bound or
affected or under which any of the Assets, business or operations of Seller
receive benefits, (iii) result in the loss or adverse modification of any
material license, franchise, permit or other authorization granted to or
otherwise held by Seller or otherwise used in connection with the operation of
the Business or (iv) result in the violation of any provision of law applicable
to Seller, the violation of which could have a material adverse effect upon the
Assets, business or operations of Seller.

3.11 COLLECTIVE BARGAINING. Seller is not a party to any collective
bargaining agreements with respect to any employees or Seller. There are no
labor disturbances, or any threats thereof, with respect to its business
operations.

3.12 EMPLOYEE BENEFITS. Seller has no "employee welfare benefit plan" or
"employee pension benefit plan" as those terms are defined by the Employee
Retirement Income Security Act of 1974, as amended. There are no multi-employer
employee benefit plans in effect with respect to employees of Seller.

3.13 TRUE, CORRECT AND COMPLETE INFORMATION. The information furnished to
Buyer by Seller or Kane prior to or on the date of this Agreement and in any
Schedule referred to herein is true, correct and complete in all material
respects. Such information states all material

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facts required to be stated therein or with respect thereto or necessary to
make the statements therein or with respect thereto, in light of the
circumstances under which such statements are made, true correct and complete.

3.14 AVAILABILITY OF DOCUMENTS. Seller has made available for inspection
by Buyer, at the offices of Seller, true, correct and complete copies of its
certificate of Limited Partnership and Limited Partnership Agreement and all
contracts, leases, arrangements, commitments and documents referred to herein or
in any Schedule referred to herein, in each case together with all amendments
and supplements thereto.

3.15 CONSENT. To the best of Seller's and Kane's knowledge no consent,
approval, authorization or order of any court, Agency or any other person is
required in order to permit Seller to consummate the transactions contemplated
by this Agreement.

3.16 FINANCIAL CONDITION AND RESULT OF OPERATIONS. Seller has previously
delivered to Buyer true, correct and complete copies of the balance sheet of
Seller as of December 31, 1994 and the related statement of cash flows for the
year then ended and the related statement of partners' equity for the year then
ended. The foregoing financial statements at and as of December 31, 1994 have
been examined and reported upon to the extent noted in the report thereon dated
March 15, 1995, by Danny Morris, a Professional Corporation, independent public
accountants (the "1994 Audited Financial Statements"). Seller has previously
delivered to Buyer true, correct and complete copies of the audited balance
sheet of Seller as of December 31, 1995 and the related statement of cash flows
for the year then ended and the audited related statement of partnership equity
for the year then ended (the "1995 Audited Financial Statements" and,
collectively along with the 1994 Audited Financial Statements, the "Financial
Statements"). The 1995 Audited Financial Statements have been examined and
reported upon by Husleton & Morgan. The Financial Statements, together with the
notes thereto, (i) are in accordance with the books and records and accounting
methods of Seller, (ii) present fairly the financial position and results of
operations of Seller as of the dates and for the periods indicated and (iii)
have been prepared in accordance with generally accepted accounting principles
consistently applied throughout the periods involved except as noted therein.

3.17 INSURANCE. Set forth on SCHEDULE 3.17 is a brief description of all
policies of fire, casualty, liability and other forms of insurance and all
fidelity bonds held by Seller.

3.18 TAXES. Except as disclosed on SCHEDULE 3.18, Seller has duly filed
all federal, state, county, local and other excise, franchise, property,
payroll, income, capital stock, sales and use and other tax returns which are
required to be filed by it and such returns are true, correct and complete in
all respects. Seller has paid all taxes which have become due or have been
assessed against it and all taxes, penalties and interest which any taxing
authority has proposed or asserted to be owing. All tax liabilities to which
the properties of Seller may have been subjected have been discharged except for
taxes assessed but not yet payable. There are

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no tax claims presently being asserted against Seller and Seller knows of no
basis for any such claim. Seller has not granted any extension to any taxing
authority of the limitation period during which any tax liability may be
asserted thereby.

3.19 ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as provided on SCHEDULE
3.19, since December 31, 1995, Seller has not (i) suffered any extraordinary
losses or waived any rights of substantial value; (ii) amended its Limited
Partnership Agreement; (iii) made any change in its mode of management or any
change in its method of operation or method of accounting; (iv) made or become
obligated to make any capital expenditures other than such expenditures or
commitments not exceeding $5,000 in the aggregate; (v) experienced or suffered
any adverse change in its business, operations or assets (whether or not covered
by insurance) condition, financial or otherwise, or results of operations; (vi)
entered into any transaction, except in the ordinary course of its business
consistent with past business practice; (vii) received any notice of any claim
asserted against it by any Agency which could have a material adverse effect on
the business or financial condition of Seller; or (viii) incurred or agreed to
incur any material obligation outside the ordinary course of business which has
not heretofore been disclosed in writing to Buyer.

3.20 BROKER'S AND FINDER'S FEES. Seller has not made any agreement with
any person, or taken any action which would cause any person, to become entitled
to an agent's, broker's or finder's fee or commission in connection with the
transactions contemplated by this Agreement.

3.21 RECEIVABLES; EVIDENCES OF INDEBTEDNESS. Set forth on SCHEDULE 3.21 is
a list of all Receivables showing the name of the account debtor, maker or
obligor, the unpaid balance, the age of the Receivable and, if applicable, the
maturity date, the interest rate and the collateral securing the obligation.
All Receivables are legal, valid and binding obligations of the obligors and
Seller has no knowledge of any fact impairing the collectibility of such
Receivables in accordance with their terms. The reserves for doubtful
receivables and uncollectible accounts reflected in the Financial Statements
were established in accordance with generally accepted accounting principles and
are sufficient to provide for any losses which may arise in connection with the
collection of such Receivables. Since December 31, 1995, Seller has not
committed or become obligated to cancel or write off any Receivables or acquired
or permitted to be created any Receivables except in the ordinary course of its
business consistent with past practice.

3.22 PAYABLES. Set forth on SCHEDULE 3.22 is a list of all Payables,
showing the name of the creditor, the unpaid balance, the age of the Payable
and, if applicable, the maturity date, the interest rate and collateral securing
the Payable. Seller received the Inventory to which such Payables relate, and
the Payables were all incurred in the operation of the Business.

<PAGE>

ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF BUYER

Buyer hereby makes the following representations and warranties to Seller
and Kane.

4.1 DUE ORGANIZATION AND QUALIFICATION. Buyer is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware, and has all requisite corporate power and authority to own or lease
its properties and to carry on its business as it is presently being operated
and in the place where such properties are owned or leased and such business is
conducted.

4.2 CORPORATE POWER AND AUTHORITY. The execution, delivery and
performance of this Agreement by Buyer, and all other agreements referred to
herein or executed in connection herewith, and the consummation by it of the
transactions contemplated hereby and thereby, have been duly authorized by all
requisite corporate action and no further action or approval is required in
order to permit Buyer to consummate the transactions contemplated hereby and
thereby. This Agreement constitutes, and all other agreements by and among the
parties, when executed and delivered in accordance with the terms thereof, will
constitute, the legal, valid and binding obligations of Buyer, enforceable in
accordance with their terms (subject, as to the enforcement of remedies, to
applicable bankruptcy, insolvency, reorganization, moratorium and similar laws
affecting creditors' rights from time to time in effect). Buyer has full power,
authority and legal right to enter into this Agreement and all other agreements
by and among the parties and to consummate the transactions contemplated hereby
and thereby. The making and performance of this Agreement, and all other
agreements by and among the parties and the consummation of the transactions
contemplated hereby and thereby in accordance with the terms hereof and thereof
will not (i) conflict with the Certificate of Incorporation or by the Bylaws of
Buyer, (ii) result in any breach or termination of, or constitute a default
under, or constitute an event which with notice or lapse of time, or both, would
become a default under, or result in the creation of any Encumbrance upon any
asset of Buyer under, or create any rights of termination, cancellation or
acceleration in any person under, any contract, lease, arrangement or
commitment, or violate any order, writ, injunction or decree, to which Buyer is
a party or by which Buyer or its assets, business or operations may be bound or
affected or under which Buyer or its assets, business or operations receive
benefits, (ii) result in the loss or adverse modification of any material
license, franchise, permit or other authorization granted to or otherwise held
by Buyer which is material to the business or financial condition of Buyer or
(iv) result in the violation of any provisions of law applicable to Buyer, the
violation of which could have a material adverse effect upon the business,
operations or assets of Buyer.

4.3 CONSENTS. No consent, approval, authorization or order of any court,
Agency or any other person is required in order to permit Buyer to consummate
the transactions contemplated by this Agreement.

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4.4 LITIGATION. There is no pending or threatened litigation in any court
or any proceeding before any Agency (i) in which it is sought to restrain,
prohibit, invalidate or obtain damages in respect of the consummation of the
purchase and sale of the Assets or the other transactions contemplated hereby,
(ii) which could, if adversely determined, result in any material adverse change
in the business, operations or assets or the condition, financial or otherwise,
or results of operations of Buyer or (iii) which could, if adversely determined,
have a material adverse effect on the right or ability of Buyer to carry on its
business substantially as now conducted.

4.5 COMPLIANCE WITH LAWS. Buyer (i) has complied with all laws,
regulations, licensing requirements and orders applicable to its business the
breach or violation of which could have a material adverse effect on said
business, (ii) has filed with the proper authorities all statements and reports
required by the laws, regulations, licensing requirements and order to which it
is subject and (iii) possesses all necessary licenses, franchises, permits and
governmental authorizations to conduct its business in the manner in which and
in the jurisdictions and places where such business is now conducted.

ARTICLE V
COVENANTS OF SELLER AND KANE

Each of Seller and Kane jointly and severally, hereby covenants and agrees
with Buyer as follows:

5.1 AFFIRMATIVE COVENANTS. Prior to the Closing Date (as hereinafter
defined), Seller will operate its Business in the usual, regular and ordinary
course of business consistent with past business practices, and will use its
best efforts to (i) preserve intact its business organization and the Assets;
(ii) maintain its properties, machinery and equipment in good operating
condition and repair; (iii) continue all existing policies of insurance (or
comparable insurance) in full force and effect up to and including the Closing
Date (and will not cancel any such issuance or take (or fail to take) any action
that would enable the insurers under such policies to avoid liability for claims
arising out of any occurrence on or prior to the Closing Date without the prior
written consent of Buyer); (iv) use its best efforts to preserve its present
relationships with lending and other financial institutions, suppliers,
customers, and franchisees; and (v) maintain its books, accounts and records in
the usual, regular and ordinary manner on a basis consistently applied.

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ment or other organizational documents; (iii) make any material change in the
character of its Business; (iv) incur any obligation or liability (fixed or
contingent) except in the ordinary course of business; (v) discharge or
satisfy any Encumbrance or pay any obligation or liability (fixed or
contingent) other than in the ordinary course of business; (vi) mortgage,
pledge, transfer or otherwise dispose of or subject to any Encumbrance any of
the Assets, except in the ordinary course of business; (vii) acquire any
assets or properties, except in the ordinary course of business; (viii)
cancel or compromise any material debt or claim that comprises a part of the
assets to be transferred to Buyer; (ix) waive or release any rights of
material value that comprise a part of the assets to be transferred to Buyer;
(x) transfer, grant or terminate contract, lease, arrangement or commitment
rights under any concessions, leases, licenses, agreements, patents, patent
licenses, inventions, trademarks, trade names, service marks, trade dress or
copyrights or registrations or licenses thereof or applications therefore or
with respect to any know-how or other proprietary or trade rights; (xi)
modify or change in any material respect or terminate any Contract; (xii)
undertake any material borrowing of any nature whatsoever other than in the
ordinary course of business; (xiii) make any loans or extensions of credit,
except in the ordinary course of business, (xiv) make or become obligated to
make any capital expenditures or enter into commitments therefor exceeding
$5,000, and (xv) sell, discount or otherwise dispose of any Receivables.

5.3 ACCESS TO PROPERTIES AND RECORDS. Each of Seller and Kane will
keep Buyer advised of all material developments relevant to the consummation
of the transactions contemplated hereby and will cooperate fully in
permitting Buyer to make a full investigation of the Business, properties,
financial condition and investments of Seller during regular business hours
and upon reasonable notice and in bringing about the consummation of the
transactions contemplated hereby. Seller will, during regular business hours
and upon reasonable notice, afford to Buyer and its representatives full
access to the offices, buildings, real properties, machinery and equipment,
inventory and supplies, records, files, books of account, tax returns,
agreements and commitments, partnership record books and personnel of Seller.
Seller will, upon request by Buyer, request its independent auditors to
afford to Buyer and its representatives access to the working papers for all
audits of the Financial Statements. Seller will furnish to Buyer all such
further information concerning the business and affairs of Seller as Buyer
may reasonably request. Seller will update by amendment or supplement each
of the Schedules referred to herein and any other disclosure in writing from
Seller required by this Agreement to be disclosed in writing by Seller to
Buyer promptly upon any change in the information set forth in such Schedules
or other disclosures, and Seller hereby represents and warrants that such
Schedules and such written disclosures, as so amended or supplemented, shall
be true, correct and complete as of the date or dates thereof; provided,
however, that the inclusion of any information in any such amendment or
supplement, not included in the original Schedule or other disclosure at or
prior to the date of this Agreement, shall not limit or impair any right
which Buyer might otherwise have respecting the representations or warranties
of Seller continued in this Agreement. No investigation pursuant to this
Section 5.3 shall affect any representations or warranties or the conditions
to the obligations of Buyer to consummate the

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transactions contemplated hereby. In the event of the termination of this
Agreement, Buyer will deliver to Seller all documents, work papers and other
material (including copies thereof) obtained by Buyer or on its behalf from
Seller as a result of this Agreement or in connection herewith, whether so
obtained before or after the execution hereof and, if the transactions
contemplated hereby are not consummated, Buyer will hold such information in
strict confidence and will not use or disclose, or permit any other person or
entity to use or disclose, such information until such time as such
information is otherwise publicly available. Regardless of whether the
transactions contemplated by this Agreement are consummated, Buyer will hold
all information acquired from Seller in strict confidence except to the
extent that Buyer is required by applicable law to disclose information in
connection with the anticipated public offering of Buyer's common stock;
further, Buyer will act in good faith with respect to all information
acquired from Seller and will not use, and will not permit any other person
or entity, to use any information acquired from Seller in any manner that is
detrimental to Seller's operation of the Business or is otherwise
inconsistent with Seller's best interests or Buyer's obligations pursuant
this Agreement.

5.4 APPROVALS OF THIRD PARTIES. As soon as practicable after the date
hereof, Seller will use its best efforts to secure all necessary consents,
approvals and clearances of third parties that shall be required to consummate
the transactions contemplated hereby.

5.5 NOTICES. Seller will timely give all notices required to be given
relating to the transactions contemplated hereby, including without limitation,
(i) notices to employees, and (ii) any notices required or requested to be given
to all creditors and claimants against Seller.

5.6 ACCESS TO BOOKS AND RECORDS. Seller agrees to provide Buyer, its
accountants, counsel and other representatives, during normal business hours and
upon reasonable notice, for a period of six years after the Closing Date, access
to the books, records, income tax returns, contracts and other underlying data
and the documentation of Seller relating to the period prior to the Closing Date
and to make available to Buyer personnel of Seller in Buyer's review thereof for
the purpose of enabling them to determine and calculate any tax liabilities in
connection with the Assets. Seller agrees that, for such six year period, it
will preserve and keep intact all such books and records.

5.7 COVENANT NOT TO COMPETE . (a) Except as contemplated and provided
pursuant to the Worldwide Area Development Agreement and the Domestic Franchise
Agreements granted by Buyer to Kane at Closing, each of Kane and Seller
covenants and agrees that (i) neither he nor it will not, at any time during the
period of ten (10) years from the Closing Date, directly or indirectly, in or
pertaining to any location in the United States or worldwide, own, manage,
operate, join, control or participate in the ownership, management, operation or
control of, any business which, or any businesses organization any part of
which, engages in the business of buying, selling or trading of new and/or
used audio compact discs, including without limitation the selling of
franchises which engage in the business of buying, selling or trading of new
and/or

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used audio compact discs of the type and kind and sold by Seller in
the United States, except as a franchisee of Buyer or an affiliate of Buyer
or owner of up to 5% of the outstanding common stock of a corporation so
engaged, and (ii) neither he nor it will, at any time during the period of
ten (10) years from the Closing Date, directly or indirectly own, manage,
operate join, control of participate in the ownership, management, operation
or control of any business which, or any business organization any part of
which engages in the businesses of buying, selling or trading audio compact
discs via the "Internet," "America on Line," "CompuServe" or any other
"on-line" computer communication networks, except as a franchisee of the
Buyer. The remedy at law for any breach or attempted breach by Seller of the
provisions of this Section 5.7 will be inadequate and Buyer shall be entitled
to temporary or permanent injunctive relief against any breach or attempted
breach of such provision without the necessity of posting bond or proving
actual damages. It is the express intention of the parties hereto to comply
with all laws which may be applicable to this Section 5.7. Should any
restriction contained in this Section 5.7 be found to exceed in duration or
scope the restriction permitted by law, it is expressly agreed that the
covenant not to compete contained in this Section 5.7 may be reformed or
modified by the final judgment of a court of competent jurisdiction to
reflect a lawful and enforceable duration or scope. If any one or more of
the provisions contained in this Section 5.7 shall for any reason be held to
be invalid, illegal or unenforceable in any respect, such invalidity,
illegality or unenfoceability shall not affect any other provision of this
Agreement, but any inconsistency in the provisions of this Agreement shall
be construed as if such invalid, illegal or unenforceable provision had never
been contained herein. The terms and conditions of this Section 5.7(a) will
be governed by and construed in accordance with the laws of the State of
Delaware; the foregoing clause will not, however, affect the forum or venue
of any dispute resolution proceeding arising in connection with this
Agreement or any other term or condition of this Agreement whatsoever.

(b) Seller and Kane shall use their best efforts to cause Leo E. Kane to
enter into a non-competition agreement with Buyer, the terms of which shall be
substantially similar to those described in Section 5.7 (a).

ARTICLE VI
COVENANTS OF BUYER

Buyer hereby covenants and agrees with Seller and Kane as follows:

6.1 FURNISHING OF INFORMATION. Buyer will keep Seller advised of all
material developments relevant to the consummation of the transactions
contemplated hereby and will cooperate fully with Seller in bringing about the
consummation of the transactions contemplated hereby. In the event of the
termination of this Agreement, Seller will deliver to the Buyer all documents,
work papers and other material (including copies thereof) obtained by Seller or
on its behalf from Buyer as a result of this Agreement or in connection
herewith, whether so obtained before or after the execution hereof and, if the
transactions contemplated hereby are not consummated,

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Seller will hold such information in confidence until such time as such
information is otherwise publicly available.

6.2 APPROVALS OF THIRD PARTIES. As soon as practicable after the date
hereof, Buyer will use its best efforts to secure all necessary consents,
approvals and clearances of third parties that shall be required to enable it to
consummate the transactions contemplated hereby and will otherwise use its best
efforts to cause the consummation of such transactions in accordance with the
terms and conditions of this Agreement.

6.3 BUYER'S BEST EFFORTS. Buyer will use its best efforts, acting in good
faith, to (i) cause the consummation of the transactions contemplated by this
Agreement in accordance with their terms and conditions, and (ii) complete a
public offering of its common stock or other financing arrangement on or before
February 28, 1997 that results in net proceeds to Buyer of at least $3,500,000.

6.4 RETENTION OF RECORDS. For a period of six years after the Closing,
Buyer will retain all books and records that Buyer receives from Seller. During
such period, Seller and its representatives will have access to all such books
and records during normal business hours. Buyer will, upon request of Seller or
Kane, furnish to Seller or Kane, without charge, copies of any such books or
records.

ARTICLE VII
CONDITIONS TO OBLIGATIONS OF BUYER

The obligations of Buyer hereunder shall be subject to the satisfaction of
each of the following conditions precedent on or prior to the Closing Date,
except such conditions as Buyer may waive in writing.

7.1 REPRESENTATIONS AND WARRANTIES OF SELLER AND KANE. All of the
representations and warranties of Seller and Kane contained in this Agreement
and in any Schedule from Seller and Kane were true and correct when made, and
shall be true and correct in all material respects on and as of the Closing Date
with the same force and effect as though such representations and warranties had
been made on and as of the Closing Date.

7.2 COVENANTS OF SELLER AND KANE. All of the covenants and agreements
herein on the part of Seller and Kane to be complied with or performed on or
before the Closing Date shall have been fully complied with and performed.

7.3 CERTIFICATE OF SELLER AND KANE. There shall be delivered to Buyer
certificates dated as of the Closing Date and signed by each of Kane and Seller
to the effect set forth in

<PAGE>

Sections 7.1 and 7.2, which certificate shall have the effect of a
representation and warranty made by Seller and Kane on and as of the Closing
Date.

7.4 INITIAL PUBLIC OFFERING. Buyer shall have completed an initial
public offering of its common stock by February 28, 1997 for at least
$3,500,000, or shall have otherwise arranged financing of at least such amount
by such date.

7.5 NO CASUALTY LOSSES. The Assets shall not have suffered any
destruction or damage by fire, explosion or other casualty or any taking by
eminent domain which has materially impaired the operation of the Assets or
otherwise had a material adverse effect upon the Business conducted by Seller.

7.6 CERTIFICATE OF AUTHORITIES. Seller shall have furnished to Buyer (i)
a certificate of the Secretary of State of the State of Texas, dated as of a
date not more than five (5) days prior to the Closing Date, attesting to the
organization and good standing of Seller, (ii) a true, correct, and complete
copy of Seller's Limited Partnership Agreement and all amendments thereto, and
(iii) a copy, certified by an authorized officer of Seller, of resolutions duly
adopted by the General Partner of Seller duly authorizing the transactions
contemplated in this Agreement.

7.7 LITIGATION. At the Closing Date, there shall not be pending or
threatened any litigation in any court or any proceeding before any Agency, (i)
in which it is sought to restrain, invalidate, set aside or obtain damages in
respect of the consummation of the purchase and sale of the Assets or the other
transactions contemplated hereby, (ii) which could, if adversely determined,
result in any material adverse change in the Business, operations or Assets or
the condition, financial, or otherwise, or results of operations of Seller,
(iii) which could, if adversely determined, have a material adverse effect on
the right or ability of Seller to carry on its Business as now conducted or (iv)
as a result of which, in the reasonable judgment of Buyer, Buyer would be
deprived of the material benefits of its ownership of the Assets.

7.8 DUE DILIGENCE.

(a) (i) Buyer shall have completed its "due diligence" review of
the Assets, books, records, files, contracts, leases, arrangements, commitments,
documents, tax returns, business operations, financial statements, offices,
buildings, and any other items or matter that Buyer deems relevant which pertain
to the Business or the transactions contemplated hereby, and (ii) the results of
such due diligence review shall be acceptable, in all respects, to Buyer, in its
sole discretion.

(b) All actions, proceedings, instruments and documents required to
carry out this Agreement or incidental thereto and all other related matters
shall have been satisfactory to Day, Edwards, Federman, Propester & Christensen,
P.C., counsel for Buyer.

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7.9 OPINION OF SELLER'S COUNSEL. Buyer shall have received an opinion of
counsel for Seller, dated the Closing Date to the effect that: (i) the Seller
is a limited partnership duly organized, validly existing and in good standing
under the laws of the State of Texas and is duly qualified as a foreign limited
partnership and in good standing in each jurisdiction in which the ownership of
its properties, the employment of its personnel or the conduct of its business
requires it to be so qualified; (ii) each of Seller and Kane has full power,
authority and legal right to enter into this Agreement and all other agreements
by and among the parties and to consummate the transactions contemplated hereby
and thereby; (iii) all partnership action required to be taken by Seller to
approve this Agreement and all other agreements by and among the parties and the
transactions contemplated hereby and thereby and to authorize execution and
delivery of this Agreement and all other agreements by and among the parties and
the performance by Seller and Kane of their respective obligations hereunder and
thereunder, have been duly and properly taken, and no further action or approval
is required in order to permit Seller or Kane to consummate the transactions
contemplated by this Agreement and all other agreements by and among the
parties; (iv) this Agreement and all other agreements contemplated hereby or
executed in connection herewith by and among the parties have been duly executed
and delivered by Seller and Kane and are legal, valid and binding obligations of
Seller and Kane enforceable in accordance with their terms and (v) subject to
the conditions, exceptions and other terms set forth in the opinion letter
prepared by Seller's counsel, the Contracts being sold and assigned by Seller to
Buyer hereby are legal, valid and binding.

7.10 FRANCHISE LAW SURVEY. Buyer shall have received on or before
November 1,1996, from counsel to Seller, a memorandum of law (the "Franchise Law
Survey") relating to the applicable franchise or business opportunity laws of
each state in which the Seller or its franchisees has a CD Warehouse Store. The
Franchise Law Survey will describe: (i) the applicable franchise, business
opportunity or other applicable law in each state in which the Seller or its
franchisees has a CD Warehouse Store; (ii) the compliance procedures undertaken
by Seller to comply with such law(s); (iii) any variance in the state law as
described and the compliance procedures of Seller; and (iv) the contingent
liability, if any is noted, arising from the Seller's non compliance with such
laws. It is agreed by and between Seller and Buyer that in the event that the
Franchise Law Survey reflects a contingent liability of Seller that is so
material to Buyer and/or its underwriter that Buyer is unable to proceed to
consummation of its initial public offering in view of such contingent
liability, Buyer will notify Seller and this Agreement will terminate. Buyer
will thereafter have no obligation to proceed to close the transactions
contemplated by this Agreement.

7.11 NO MATERIAL ADVERSE CHANGES. There shall not have occurred (i) any
material adverse change in the Business or the operations of Seller or the
Assets or (ii) any material loss or damage to any of the Assets (whether or not
covered by insurance) of Seller. Buyer shall receive a certificate from Seller
and Kane, dated as of the Closing Date and in form and substance satisfactory to
Buyer, as to fulfillment of the conditions set forth in Section 7.11.

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7.12 CONSENTS. Seller shall have obtained all orders, approvals or
consents of third parties, including without limitation, any consents or
approvals deemed necessary by counsel to Buyer that shall be required to
consummate the transactions contemplated hereby, including, without limitation,
any landlord's consents.

7.13 NON-COMPETITION AGREEMENTS OF SELLER, KANE AND LEO E. KANE. Each of
Seller, Kane and Leo E. Kane shall have executed and delivered a Non-competition
Agreement substantially in the form attached hereto as Exhibit G.

7.14 FURTHER ASSURANCES. Seller and Kane shall take all such further
action as may be reasonably requested by Buyer in order to effectuate the
consummation of the transactions contemplated by this Agreement. If Buyer shall
reasonably determine that any further conveyance, assignment or other document
or any further action is necessary to vest in it full title to the Assets,
Seller and Kane shall cause the appropriate person or entity to execute and
deliver all such instruments and take all such action as Buyer may reasonably
determine to be necessary.

ARTICLE VIII
CONDITIONS TO OBLIGATIONS OF SELLER

The obligations of Seller and Kane to cause the sale of the Assets and the
other transactions contemplated hereby to occur at Closing shall be subject to
the satisfaction on or prior to the Closing Date of all of the following
conditions, except such conditions as Seller and Kane may waive in writing:

8.1 REPRESENTATIONS AND WARRANTIES OF BUYER. All of the representations
and warranties of Buyer contained in this Agreement and in any Schedule or other
disclosure in writing from Buyer shall have been true and correct when made, and
shall be true and correct in all material respects on and as of the Closing Date
with the same force and effect as though such representations and warranties had
been made on and as of the Closing Date.

8.2 COVENANTS OF BUYER. All of the covenants and agreements herein on
the part of the Buyer to be complied with or performed on or before the Closing
Date shall have been fully complied with and performed.

8.3 BUYER'S CERTIFICATE. There shall be delivered to Seller and Kane a
certificate dated as of the Closing Date and signed by the President or a Vice
President of Buyer to the effect set forth in Sections 8.1 and 8.2, which
certificate shall have the effect of a representation and warranty made by Buyer
on and as of the Closing Date.

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8.4 CERTIFICATES OF AUTHORITIES. Buyer shall have furnished to Seller
(i) a certificate of the Secretary of State of Delaware, dated as of a date not
more than five (5) days prior to the Closing Date, attesting to the organization
and good standing of Buyer, (ii) a copy, certified by the Secretary of State of
Delaware as of a date not more than five (5) days prior to the Closing Date, of
Buyer's Certificate of Incorporation and all amendments thereto, (iii) a copy,
certified by the Secretary of Buyer of the Bylaws of Buyer, as amended and in
effect at the Closing Date and (iv) a copy, certified by an authorized officer
of Buyer, of resolutions duly adopted by the Board of Directors of Buyer duly
authorizing the transactions contemplated in this Agreement.

8.5 OPINION OF COUNSEL TO BUYER. Seller shall have received an opinion
from, counsel for Buyer, dated the Closing Date to the effect that: (i) Buyer
is a corporation duly organized, validly existing and in good standing under the
laws of the State of Delaware; (ii) Buyer has full power, authority and legal
right to enter into this Agreement and all other agreements by and among the
parties and to consummate the transactions contemplated hereby and thereby;
(iii) the execution and delivery of this Agreement and all other agreements by
and among the parties and the performance by Buyer of its obligations hereunder
and thereunder, have been fully authorized by all requisite corporate action,
and no further action or approval is required in order to permit Buyer to
consummate the transactions contemplated by this Agreement and all other
agreements by and among the parties; (iv) this Agreement and all other
agreements contemplated hereby or executed in connection herewith by and among
the parties have been duly executed and delivered by Buyer and are legal, valid
and binding obligations of Buyer enforceable in accordance with their terms.

ARTICLE IX
DATE AND PLACE OF CLOSING

9.1 DATE AND PLACE OF CLOSING. Subject to satisfaction or waiver of the
conditions to the obligations of the parties, the purchase and sale of the
Assets pursuant to this Agreement shall be consummated at a closing (the
"Closing") to be held in the offices of Day, Edwards, Federman, Propester &
Christensen, Inc. at 210 Park Avenue, Oklahoma Tower 29th Floor in Oklahoma
City, Oklahoma or such other place as is mutually agreed to by the parties, at
10:00 A.M. on the earlier to occur of (i) the third business day after Buyer
receives at least $3,500,000 in proceeds from any financing source, or (ii)
February 28, 1997 (the "Closing Date"). Title to the Assets shall pass from
Seller to Buyer as of 12:01 A.M., Dallas, Texas time, on the day following the
Closing Date.

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<PAGE>

ARTICLE X
CLOSING

10.1 SELLER'S, KANE'S, AND GRIZZLE'S PERFORMANCE. At the Closing,
concurrently with performance by Buyer of its obligations to be performed at the
Closing:

(a) CONVEYANCES. Seller shall execute and deliver to Buyer, in
form and substance acceptable to Buyer (i) the Bill of Sale; (ii) the Assignment
and Assumption Agreement; (iii) the Assignment of Intellectual Property Rights;
and (iv) all other assignments, endorsements and instruments of transfer as
shall be necessary or appropriate to carry out the intent of this Agreement and
as shall be sufficient to vest in Buyer title to all of the Assets and all
right, title and interest of Seller thereto. If requested by Buyer, such
documents shall be in form suitable for recording.

(b) RECORDS. Seller shall deliver to Buyer all documents,
agreements, reports, books, records and accounts pertaining specifically to the
Assets which are in Seller's possession, including without limitation any and
all files and documents relating to any litigation described in Schedule 3.9.

(d) KANE NON-COMPETITION AGREEMENT. Each of Kane and Leo E. Kane
shall execute and deliver the Non-competition Agreement required by Section
5.7(b).

(e) WORLDWIDE AREA DEVELOPMENT AGREEMENT AND DOMESTIC FRANCHISE
AGREEMENTS. Kane shall execute and deliver the Worldwide Area Development
Agreement and the Domestic Franchise Agreements.

(f) INDEMNIFICATION PLEDGE AGREEMENT. Seller shall execute and
deliver the Indemnification Pledge Agreement (the "Pledge Agreement") required
by Sections 11.9.

(g) REVISED INVENTORY, PAYABLES AND RECEIVABLES. Seller shall
deliver revised and updated schedules of SCHEDULES 3.3 (Inventory), 3.21
(Receivables) 3.22 (Payables) and any other Schedules that must be updated or
revised pursuant to Section 5.3.

(h) OTHER ACTIONS. Seller shall take all such other steps as may be
necessary or appropriate to put Buyer in actual and complete ownership and
possession of the Assets.

(i) CERTIFICATES OF AUTHORITIES. Seller shall deliver to Buyer the
certificates of authority referred to in Section 7.6.

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<PAGE>

(j) OPINION OF SELLER'S AND KANE'S COUNSEL. Seller and Kane shall
deliver to Buyer the opinion of its counsel, dated the Closing Date, as to the
matters specified in Section 7.9.

(k) FRANCHISE LAW SURVEY. Seller and Kane shall have delivered to
Buyer the Franchise Law Survey as required by Section 7.10.

(l) CONSENTS. Seller shall deliver to Buyer the consents and
approvals required by Section 7.12.

10.2 BUYER'S PERFORMANCE. At the Closing, concurrently with the
performance by Seller of its obligations to be performed at the Closing:

(a) PURCHASE PRICE. Buyer shall wire transfer to Seller the amount
specified in Section 2.3;

(b) ASSIGNMENT ASSUMPTION AGREEMENT. Buyer shall execute and
deliver to Seller the Assignment and Assumption Agreement.

(c) WORLDWIDE AREA DEVELOPMENT AGREEMENT AND DOMESTIC FRANCHISE
AGREEMENTS. Buyer shall execute and deliver the Worldwide Area Development
Agreement and the Domestic Franchise Agreements.

(d) OPINION OF BUYER'S COUNSEL. Buyer shall deliver the opinion of
counsel, dated the Closing Date, as to the matters specified in Section 8.5.

(e) CERTIFICATES. Buyer shall execute and deliver the certificate
referred to in Section 8.3.

10.3 LEO E. KANE NON-COMPETITION AGREEMENT. At the Closing, concurrently
with the performance by Seller and Buyer of their obligations to be performed at
the Closing, Leo E. Kane shall execute and deliver the Non-competition Agreement
required by Section 5.7 (b).

10.4 EXPENSES: OTHER INSTRUMENTS. In addition to the foregoing, Buyer
and Seller agree as follows:

(a) FURTHER ACTION BY SELLER. At any time and form time to time,
at or after the Closing, upon request of Buyer, Seller shall do, execute,
acknowledge and deliver or shall cause to be done, executed, acknowledged and
delivered all such further acts, deeds, assignments, transfers, conveyances,
powers of attorney and assurances as may reasonably be required in order to vest
in and confirm to Buyer full and complete title to, possession of, and the right
to use and enjoy, the Assets.

<PAGE>

(b) FURTHER ACTION BY BUYER. At any time and from time to time,
at or after the Closing, upon request of Seller, Buyer shall do, execute,
acknowledge and deliver or shall cause to be done, executed, acknowledged and
delivered all such further acts and assurances as may reasonably be required
in order to better assure and confirm to Seller the assumption by Buyer of
the obligations to render performance which are to be assumed by Buyer
pursuant to this Agreement.

ARTICLE XI
SURVIVAL AND INDEMNIFICATION

11.1 SURVIVAL. All representations, warranties, covenants and agreements
made in the Agreement shall survive the Closing for a period of 24 months from
the Closing Date, and will not be extinguished by the Closing or any
investigation made by or on behalf of any party hereto prior to the Closing
Date. No party to this Agreement may, directly or indirectly, bring any claim,
action, suit, or other proceeding (an "Action") against any other party to this
Agreement, if such Action is based on a theory of recovery or cause of action
relating to this Agreement, unless such Action is brought or filed within the
24-month period following the Closing Date. Should any Action be brought or
filed after the termination of the 24-month period following the Closing Date,
the party bringing or filing such Action agrees that it will accept no relief or
recovery therefrom. Except as may be prohibited by applicable law, in the event
that any such Action is brought or filed after the termination of the 24-month
period following the Closing Date, it shall be dismissed with prejudice upon
presentation of this Agreement and the party bringing or filing such Action will
reimburse each other party for all legal fees and related costs incurred in
defending such claim, action, suit, or other proceeding.

11.2 BUYER'S LOSSES. Each of Seller and Kane hereby agree, jointly and
severally subject to Section 11.7 below, to indemnify Buyer and save and hold
Buyer harmless from, against, for and in respect of any and all damages
(including, without limitation, amounts paid in settlement with Seller's
consent), losses, obligations, liabilities, liens, deficiencies, costs and
expenses, including, without limitation, reasonable attorneys' fees and other
costs and expenses incident to any suit, action, investigation, claim or
proceeding (hereinafter referred to collectively as "Buyer's Losses"), including
without limitation, any and all of Buyer's Losses suffered, sustained, incurred
or required to be paid by Buyer by reason of (i) that certain accident on
January 8, 1996 at the CD Warehouse franchise located at Juan Tabo Boulevard,
Albuquerque, New Mexico, in which Nolan Green was killed (the "Albuquerque
Accident"); (ii) the breach by Seller or Kane of any provisions of this
Agreement, including any representation or warranty made by Seller in or
pursuant to this Agreement being untrue or incorrect in any material respect;
(iii) any material failure by Seller to observe or perform its covenants and
agreements set forth in this Agreement; (iv) any liability for product
warranties or defective products arising from sales of Inventory sold by Seller
prior to the Closing Date; or (v) any failure by Seller to satisfy and discharge
any other liability or obligation not expressly

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assumed by Buyer pursuant to this Agreement. Notwithstanding anything in this
Agreement to the contrary, Kane's aggregate maximum personal liability for
any obligations whatsoever, direct or indirect, arising under or in
connection with this Agreement or any related agreements will be limited to
the Purchase Price paid to Seller and Kane by the Buyer pursuant to Section 2
of this Agreement, less any federal and state taxes paid by the Seller and
Kane thereon.

11.3 EMPLOYEE COMPENSATION AND BENEFITS. Each of Seller and Kane hereby
agrees, jointly and severally, to indemnify and hold Buyer harmless from and
against any and all claims made by employees of Seller, regardless of when made,
for workmen's compensation, medical insurance, disability, vacation, severance,
sick benefits or other compensation arrangements to the extent the same are
based on injury sickness occurring prior to the Closing Date or based on
employment service rendered to Seller prior the Closing Date.

11.4 FRANCHISE CLAIMS AGAINST BUYER. Each of Seller and Kane hereby
agree, jointly and severally, to indemnify Buyer and save and hold Buyer
harmless from, against, for and in respect of any damages, losses, obligations,
liabilities, deficiencies, costs, or expenses resulting from any and all claims
made by any past or existing franchisee or purported franchisee of Buyer or
Seller to the extent such acts, omissions or occurrences giving rise to the
claim occurs prior to the Closing Date. Any damages, losses, obligations,
liabilities, deficiencies, costs, or expense incurred by Buyer as a result of
any claims made by existing franchisees or purported franchisees of Buyer or
Seller arising from any act, omission or occurrence prior to the Closing Date
are included within the definition of the term "Buyer's Losses."

11.5 SELLER'S LOSSES. Buyer agrees to indemnify Seller and Kane and save
and hold Seller and Kane harmless from, against, for and in respect of any and
all damages (including, without limitation, amounts paid in settlement with
Buyer's consent), losses, obligations, liabilities, claims, deficiencies, cost
and expenses, including, without limitation, reasonable attorneys' fees and
other costs and expenses incident to any suit, action, investigation, claim or
proceeding (hereinafter referred to collectively as "Seller's Losses") suffered,
sustained, incurred or required to be paid by Seller by reason of (i) any
representation or warranty made by Buyer in or pursuant to this Agreement being
untrue or incorrect in any material respect; (ii) any material failure by Buyer
to observe or perform its covenants and agreements set forth in this Agreement;
(iii) any liability for product warranties or defective products arising from
sales of Inventory sold by Buyer after the Closing Date; (iv) any failure by
Buyer to satisfy and discharge any liability or obligation expressly assumed by
Buyer pursuant to this Agreement; or (v) any and all claims made by employees of
Buyer for workmen's compensation, medical insurance, disability, vacation,
severance, sick benefits or other compensation arrangements to the extent the
same are based on injury or sickness occurring after the Closing Date or based
on employment service rendered to Buyer after the Closing Date.

11.6 FRANCHISE CLAIMS AGAINST SELLER. Buyer agrees to indemnify Seller
and Kane and save and hold Seller and Kane harmless from, against, for and in
respect of any damages, losses,

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obligations, liabilities, deficiencies, costs, or expenses resulting from any
and all claims made by any past or existing franchisee or purported
franchisee of Buyer or Seller to the extent such acts, omissions or
occurrences giving rise to the claim occurs after the Closing Date. Any
damages, losses, obligations, liabilities, deficiencies, costs, or expenses
incurred by Seller as a result of any claims made by past or existing
franchisees or purported franchisees of Buyer or Seller arising from any act,
omission or occurrence after the Closing Date are included within the
definition of the term "Seller's Losses."

11.7 NOTICE OF LOSS. Notwithstanding anything herein contained Buyer,
Seller and Kane shall not have any liability under the indemnity provisions of
this Agreement with respect to a particular matter unless a notice setting forth
in reasonable detail the breach which is asserted has been given to the
Indemnifying Party (hereafter defined) and, in addition, if such matter arises
out of a suit, action, investigation or proceeding, such notice is given
promptly after the Indemnified Party (hereafter defined) shall have been given
notice of the commencement of a suit, action, investigation or proceeding. With
respect to Buyer's Losses and claims of employees pursuant to Section 11.2,
hereof, Seller shall be the Indemnifying Party and Buyer shall be the
Indemnified Party. With respect to Seller's Losses, Buyer shall be the
Indemnifying Party and Seller shall be the Indemnified Party.

11.8 RIGHT TO DEFEND. Upon receipt of notice of any suit, action,
investigation, claim or proceeding for which indemnification might be claimed by
an Indemnified Party, the Indemnifying Party shall be entitled promptly to
defend, contest or otherwise protect against such suit, action, investigation,
claim or proceeding or its own cost and expense, including the right to invoke
any arbitration proceeding available in the dispute. The Indemnified Party
shall have the right, but not the obligation, to participate at its own expense
in a defense thereof by counsel of its own choosing, but the Indemnifying Party
shall be entitled to control the defense unless the Indemnified party has
relieved the Indemnifying Party from liability with respect to the particular
matter or the Indemnifying Party fails to assume defense of the matter. In the
event the Indemnifying Party shall fail to defend, contest or otherwise protect
in a timely manner against any such suit, action, investigation, claim or
proceeding, the Indemnified Party shall have the right, but not the obligation,
to defend, contest or otherwise protect against the same and make any compromise
or settlement thereof and recover the entire cost thereof from the Indemnifying
party including reasonable attorneys' fees, disbursements and all amounts paid
as a result of such suit, action, investigation, claim or proceeding or the
compromise or settlement thereof. However, if the Indemnifying Party undertakes
the defense of such matters, the Indemnified Party shall to be entitled to
recover from the Indemnifying Party any legal or other expenses substantially
incurred by the Indemnifying party in connection with the defense thereof other
than the reasonable costs of investigation undertaken by the Indemnified Party
with the prior written consent of the Indemnifying Party. If Buyer is named as
a defendant or if Buyer and Seller are named jointly as defendants by a past,
existing or purported franchisee in a court or arbitration proceeding and Buyer
based on its evaluation of the Franchisee's claim provides notice to Seller of
an indemnification claim against Seller pursuant to Article 11 as to any

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liability arising out of the Franchisee's claim, Seller reserves the right in
his sole discretion to fully settle and compromise the franchisee's claim as
to both Seller and Buyer at any time during the proceeding.

11.9 INDEMNIFICATION PLEDGE AGREEMENT. At Closing, Kane will grant
Buyer a security interest in 300,000 Subscription Shares acquired pursuant to
the the Subscription Agreement described in Section 1.7. The security
interest will terminate as to any shares not foreclosed or otherwise subject
to a then existing claim 24 months after the Closing Date, upon the terms
and conditions set forth in the Indemnification Pledge Agreement attached
hereto as Exhibit E. If any amount is payable by Kane under or in connection
with this Agreement or any related agreements (the "Award Amount"), such
Award Amount will be satisfied (i) first by Buyer's foreclosure on the number
of Subscription Shares equal to the result of dividing the Award Amount by
the Share Value (as defined below), then (ii) by recovery directly from
Kane's other assets. Until such time as the Subscription Shares effective
registration statement or otherwise eligible for sale in the public market
without restriction, the term "Share Value" will mean 75% of the average bid
price of Buyer's common stock for the five trading days preceding the date on
which Buyer seeks to foreclose on any of the Subscription Shares; after such
time, the term "Share Value" means 100% of the average bid price of Buyer's
common stock for the five trading days preceding the date on which Buyer
seeks to foreclose on any of the Subscription Shares. In no event, however,
will the Share Value be less than one dollar..

11.10 REQUEST TO ALLOCATE RESPONSIBILITY. Buyer and Seller agree that
if they are jointly named as parties after Closing in any suit, claim or
proceeding by a past, existing or purported franchisee of Buyer or Seller that
they will jointly request that the arbitrator, panel of arbitrators or court
specify in their judgment or order in the event that any liability is
determined as to the Buyer and Seller whether the liability is attributable to
an act, omission or occurrence before or after the Closing Date or if the
liability is attributable to acts, omissions or occurrences both before and
after the Closing Date the proportionate degree of fault and damages reflected
in the judgment or order, attributable to the Buyer or Seller.

11.11 FRANCHISE CLAIMS AGAINST BOTH SELLER AND BUYER. To the extent
that any damages, losses, obligations, liabilities, deficiencies, costs, or
expenses result from any claims made by any past or existing franchise or
purported franchise of Buyer or Seller for acts, omissions or occurrences
occurring both before and after the Closing Date, such damages, losses,
obligations, liabilities, deficiencies, costs, and expenses will be borne by
Buyer and Seller in proportion to their respective degree of fault.

27
<PAGE>

ARTICLE XII
POST-CLOSING COVENANTS

12.1 TRANSITION PERIOD. Seller and Kane shall use good-faith efforts for
a period of up to one hundred eighty (180) days after the Closing to cooperate
and assist Buyer in connection with the operations of the Business and the
Assets purchased by Buyer under this Agreement.

12.2 PAYMENT OF UNPAID RECEIVABLES. Each of Seller and Kane hereby agree,
jointly and severally, to pay Buyer an amount equal to the outstanding balance
of the Receivables that have not been paid in full within ninety (90) days of
the Closing Date. Buyer shall assign all of its rights, title and interest in
such Receivables to Seller.

12.3 INSURANCE POLICIES. Each of Seller and Kane hereby agree, jointly
and severally, to maintain and keep in force all current insurance policies that
may or could provide coverage for the Albuquerque Accident.

ARTICLE XIII
TERMINATION

13.1 TERMINATION. This Agreement may be terminated and abandoned at any
time on or prior to the Closing Date.

(a) By the mutual consent in writing of Buyer and Seller;

(b) By Buyer in writing if any of the material conditions to the
obligations of Buyer contained herein shall not have been satisfied or, if
unsatisfied, waived as of the Closing Date or if the results of Buyer's due
diligence investigation of the Assets and business of Seller are not
satisfactory to Buyer in all respects.

(c) By Seller in writing if any of the material conditions to the
obligations of Seller contained herein shall not have been satisfied or, if
unsatisfied, waived as of the Closing Date.

(d) By Buyer, Seller or Kane in writing if the Closing shall not have
occurred by February 28, 1997, except that no party shall have the right to
terminate this Agreement if the failure to close shall be the result of such
party's failure to perform, in any material respect, its obligations hereunder.

28
<PAGE>

13.2 NO FURTHER FORCE OR EFFECT. In the event of termination and
abandonment of this Agreement pursuant to the provisions of Section 13.1,
this Agreement shall be of no further force or effect, except for the last
sentences of Sections 5.3 and 6.1 and Section 14.1 which shall not be
affected by termination of this Agreement.

ARTICLE XIV
MISCELLANEOUS

14.1 EXPENSES. Except as otherwise expressly provided herein, Seller and
Buyer shall each pay their own expenses in connection with the preparation of
this Agreement, and the consummation of the transactions contemplated hereby,
including, without limitation, fees of its own counsel, auditors and other
experts, whether or not such transactions be consummated.

14.2 ENTIRE AGREEMENT. This Agreement, together with the Schedules and
other agreements contemplated herein, constitutes the entire contract and shall
supersede all prior agreements and understandings, both written and oral,
between the parties hereto with respect to the subject matter hereof and no
party shall be liable or bound to the other in any manner by any representations
or warranties except as specifically set forth herein or in any Schedule hereto
or agreement executed in connection herewith or expressly required to be made or
delivered pursuant thereto.

14.3 SUCCESSORS AND ASSIGNS. The terms and conditions of this Agreement
shall inure to the benefit of and be binding upon the respective successors and
assigns of the parties hereto. Nothing in this Agreement, express or implied,
is intended to confer upon any party, other than the parties and their
respective successors and assigns, any rights, remedies, obligations or
liabilities under or by reason of such agreements.

14.4 IDENTICAL COUNTERPARTS. This Agreement may be executed in one or
more counterparts, each of which shall for all purposes be deemed to be an
original and all of which shall constitute the same instrument, but only one of
which need be produced.

14.5 HEADINGS. The headings of the paragraphs and subparagraphs of this
Agreement are inserted for convenience only and shall not be deemed to
constitute part of this Agreement or to affect the construction hereof.

14.6 USE OF CERTAIN TERMS. As used in this Agreement, the words "herein,"
"hereof" and "hereunder" and other words of similar import refer to this
Agreement as a whole and not to any particular paragraph, subparagraph or other
subdivision.

<PAGE>

14.7 MODIFICATION AND WAIVER. Any of the terms or conditions of this
Agreement may be waived in writing at any time, whether before or after
action thereon by the party which is entitled to the benefits thereof; and
this Agreement may be modified or amende at any time, whether before or after
action thereon by the parties. No supplement, modification or amendment of
this Agreement shall be binding unless executed in writing by all of the
parties hereto. No waiver of any of the provisions of this Agreement shall
be deemed or shall constitute a waiver of any other provision hereof (whether
or not similar) nor shall such waiver constitute a continuing waiver.

14.8 OTHER REMEDIES. Except as otherwise provided herein, any and all
remedies expressly conferred upon a party will be deemed cumulative with and
not exclusive of any other remedy conferred hereby or by law on such party,
and the exercise of any one remedy will not preclude the exercise of any
other.

14.9 NOTICES. All notices, consents, requests, instructions, approvals
and/or communications provided for herein, shall be validly given, made or
served if in writing and delivered personally or sent by registered or
certified mail, return receipt requested, postage prepaid, addressed as
follows:

(i) If to Seller: Mark E. Kane
1710 Firman, Suite 300
Richardson, Texas

with copy to: Alan W. Tompkins, Esq.
Secore & Waller, L.L.P.
One Galleria Tower, Suite 2290
13355 Noel Road, LB 75
Dallas, TX 75240-6657

(ii) If to Buyer: CD Warehouse, Inc.
Attn: Jerry W. Grizzle
1506 Squirrel Tree Place
Edmond, OK 73054

with copy to: Bruce W. Day, Esq.
Day, Edwards, Federman, Christensen & Propester, P.C.
210 Park Avenue
29th Floor Oklahoma Tower
Oklahoma City, Oklahoma 73102

The designation of the person to be so notified or the address of such person
for the purposes of such notice may be changed from time to time by a similar
notice. Any notice which is

30
<PAGE>

delivered personally in the manner provided herein shall be deemed to have
been duly given to the party to whom it is directed upon actual receipt by
such party (or its agent for notices hereunder). Any notice which is
addressed and mailed in the manner herein provided shall be conclusively
presumed to have been duly given to the party to which it is addressed at the
close of business, local time of the recipient, on the third business day
after the day it is so placed in the mail.

14.10 GOVERNING LAW. This Agreement has been executed and delivered
in the State of Texas and will be construed and enforced in accordance with and
governed by the laws of the State of Texas. This Agreement will not be construed
for or against a party merely because that party prepared it, but will at all
times be construed according to its fair meaning.

14.11 NO AGENT'S FEES. Buyer represents to Seller, and Seller
represents to Buyer, that there is no agent's broker's or finder's fees or
commission payable or that will be payable in connection with the transactions
contemplated hereby by virtue of or resulting from any action or agreement by it
except for the compensation to be paid by Buyer to CDI Acquisition JV, a Texas
joint venture and CD Partners JV, a Texas joint venture (jointly referred to as
the "Joint Venture"), pursuant to the Finders and Release Agreement entered into
by and between the Buyer and the Joint Venture. Buyer hereby agrees to
indemnify and hold harmless Seller, and Seller agrees to indemnify and hold
harmless Buyer, from and against any claim, demand, liability, loss, cost or
expense (including reasonable attorneys' fees and expenses) on account of or in
connection with any agent's, broker's or finder's fees or commissions payable or
alleged to be payable in connection with this Agreement or the transactions
contemplated hereby virtue of or resulting from any action or agreement on the
part of such indemnifying party.

14.12 BINDING ARBITRATION. EACH PARTY TO THIS AGREEMENT AGREES THAT
ANY DISPUTE OR CONTROVERSY ARISING BETWEEN ANY OF THE PARTIES TO THIS AGREEMENT,
OR ANY PERSON OR ENTITY IN PRIVITY THEREWITH, OUT OF THE TRANSACTIONS EFFECTED
AND RELATIONSHIPS CREATED PURSUANT TO THIS AGREEMENT AND EACH OTHER AGREEMENT
CREATED IN CONNECTION HEREWITH, INCLUDING ANY DISPUTE OR CONTROVERSY REGARDING
THE FORMATION, TERMS, OR CONSTRUCTION OF THIS AGREEMENT, REGARDLESS OF KIND OR
CHARACTER, MUST BE RESOLVED THROUGH BINDING ARBITRATION. EACH PARTY TO THIS
AGREEMENT AGREES TO SUBMIT SUCH DISPUTE OR CONTROVERSY TO ARBITRATION BEFORE THE
AMERICAN ARBITRATION ASSOCIATION IN DALLAS, TEXAS, AND FURTHER AGREES TO BE
BOUND BY THE DETERMINATION OF ANY ARBITRATOR OR ARBITRATION PANEL EMPANELED BY
THE AMERICAN ARBITRATION ASSOCIATION TO ADJUDICATE THE DISPUTE. JUDGMENT ON ANY
ARBITRATION AWARD MAY BE ENTERED IN ANY COURT OF COMPETENT JURISDICTION. ANY
PARTY TO THIS AGREEMENT MAY BRING AN ACTION, INCLUDING A SUMMARY OR EXPEDITED
PROCEEDING, TO COMPEL ARBITRATION OF ANY SUCH DISPUTE OR CONTROVERSY IN A COURT
OF COMPETENT JURISDICTION AND, FURTHER, MAY SEEK PROVISIONAL OR ANCILLARY
REMEDIES INCLUDING TEMPORARY OR INJUNCTIVE RELIEF IN CONNECTION WITH SUCH
DISPUTE OR CONTROVERSY IN A COURT OF COMPETENT JURISDICTION, PROVIDED THAT THE
DISPUTE OR CONTROVERSY IS ULTIMATELY RESOLVED THROUGH BINDING ARBITRATION
CONDUCTED IN ACCORDANCE WITH THE TERMS AND CONDITIONS OF THIS SECTION.

31
<PAGE>

IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be
signed in counterparts all as of the date first above written.

SELLER

COMPACT DISCS INTERNATIONAL, LTD.

By: Markshare, L.C.
Its General Partner

BY: /s/ Mark E. Kane
-----------------------------------
Mark E. Kane, President

KANE

/s/ Mark E. Kane
--------------------------------------
Mark E. Kane

CD WAREHOUSE, INC.

By: /s/ Jerry W. Grizzle
-----------------------------------
Jerry W. Grizzle, President

32
<PAGE>

ASSET PURCHASE AGREEMENT

LIST OF SCHEDULES AND EXHIBITS

SCHEDULES

2.2 Allocation of Purchase Price
3.2 Encumbrances
3.3 Inventory
3.4 Physical Properties
3.5 Intellectual Property Rights
3.6 Compliance with Laws and Licenses, Franchises Permits and
Governmental Authorizations
3.7 Contracts - Assumed and Assigned
3.9 Litigation
3.17 Insurance
3.18 Taxes
3.19 Certain Changes or Events
3.21 Receivables
3.22 Payables

EXHIBITS

A Bill of Sale
B Assignment and Assumption Agreement
C Assignment of Intellectual Property Rights
D Worldwide Area Development Agreement.
E Subscription Agreement
F Indemnification Escrow Agreement
G Noncompetition Agreement

<PAGE>

EXHIBIT 2.2

ASSET PURCHASE AGREEMENT

BY AND AMONG

BRUCE D. MACDONALD

AND

CD WAREHOUSE, INC.

DATED AS OF OCTOBER 10, 1996

<PAGE>

TABLE OF CONTENTS

ARTICLE I - TERMS OF PURCHASE AND SALE . . . . . . . . . . . . . . . . . . . . 1
1.1 Purchase and Sale of Assets . . . . . . . . . . . . . . . . . . . . . 1
1.2 Transfer and Conveyance . . . . . . . . . . . . . . . . . . . . . . . 2

ARTICLE II - PURCHASE PRICE . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.1 Purchase Price. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

ARTICLE III - REPRESENTATIONS AND WARRANTIES OF SELLER2
3.1 Title . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
3.2 Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
3.3 Physical Properties . . . . . . . . . . . . . . . . . . . . . . . . . 3
3.4 Contract Defaults. . . . . . . . . . . . .. . . . . . . . . . . . . . 3
3.5 Litigation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
3.6 True, Correct and Complete Information. . . . . . . . . . . . . . . . 3
3.7 Consent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
3.8 Financial Condition and Result of Operations. . . . . . . . . . . . . 4
3.9 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
3.10 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
3.11 Absence of Certain Changes or Events. . . . . . . . . . . . . . . . . 4
3.12 Broker's and Finder's Fees. . . . . . . . . . . . . . . . . . . . . . 5

ARTICLE IV - REPRESENTATIONS AND WARRANTIES OF BUYER . . . . . . . . . . . . . 5
4.1 Corporate Power and Authority . . . . . . . . . . . . . . . . . . . . 5
4.2 Consents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
4.3 Litigation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
4.4 Compliance with Laws. . . . . . . . . . . . . . . . . . . . . . . . . 6

ARTICLE V - COVENANTS OF SELLER. . . . . . . . . . . . . . . . . . . . . . . . 6
5.1 Affirmative Covenants . . . . . . . . . . . . . . . . . . . . . . . . 6
5.2 Negative Covenants. . . . . . . . . . . . . . . . . . . . . . . . . . 7
5.3 Access to Properties and Records. . . . . . . . . . . . . . . . . . . 7
5.4 Approvals of Third Parties. . . . . . . . . . . . . . . . . . . . . . 8
5.5 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

<PAGE>

ARTICLE VI - COVENANTS OF BUYER. . . . . . . . . . . . . . . . . . . . . . . . 9
6.1 Furnishing of Information . . . . . . . . . . . . . . . . . . . . . . 9
6.2 Approvals of Third Parties. . . . . . . . . . . . . . . . . . . . . . 9
6.3 Buyer's Best Efforts. . . . . . . . . . . . . . . . . . . . . . . . . 9
6.4 Retention of Records. . . . . . . . . . . . . . . . . . . . . . . . . 9

ARTICLE VII - CONDITIONS TO OBLIGATIONS OF BUYER . . . . . . . . . . . . . . 10
7.1 Representations and Warranties of Seller. . . . . . . . . . . . . . 10
7.2 Covenants of Seller . . . . . . . . . . . . . . . . . . . . . . . . 10
7.3 No Casualty Losses. . . . . . . . . . . . . . . . . . . . . . . . . 10
7.4 Litigation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
7.5 No Material Adverse Changes . . . . . . . . . . . . . . . . . . . . 10
7.14 Further Assurances. . . . . . . . . . . . . . . . . . . . . . . . . 11

ARTICLE VIII - CONDITIONS TO OBLIGATIONS OF SELLER . . . . . . . . . . . . . 11
8.1 Representations and Warranties of Buyer . . . . . . . . . . . . . . 11
8.2 Covenants of Buyer. . . . . . . . . . . . . . . . . . . . . . . . . 11

ARTICLE IX - DATE AND PLACE OF CLOSING. . . . . . . . . . . . . . . . . . . . 11
9.1 Date and Place of Closing. . . . . . . . . . . . . . . . . . . . . . 11

ARTICLE X - CLOSING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
10.1 Seller's and Buyer's Performance . . . . . . . . . . . . . . . . . . 12
10.2 Buyer's Performance . . . . . . . . . . . . . . . . . . . . . . . . 12
10.3 Expenses: Other Instruments . . . . . . . . . . . . . . . . . . . . 12

ARTICLE XI - POST-CLOSING COVENANTS . . . . . . . . . . . . . . . . . . . . . 13
11.1 Transition Period. . . . . . . . . . . . . . . . . . . . . . . . . . 13

ARTICLE XII - TERMINATION. . . . . . . . . . . . . . . . . . . . . . . . . . 13
12.1 Termination. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
12.2 No Further Force or Effect . . . . . . . . . . . . . . . . . . . . . 13

ARTICLE XIII - MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . 14
13.1 Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
13.2 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . 14
13.3 Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . 14

<PAGE>

13.4 Identical Counterparts . . . . . . . . . . . . . . . . . . . . . . . 14
13.5 Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
13.6 Use of Certain Terms . . . . . . . . . . . . . . . . . . . . . . . . 14
13.7 Modification and Waiver. . . . . . . . . . . . . . . . . . . . . . . 15
13.8 Other Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
13.9 Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
13.10 Governing Law. . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
13.11 No Agent's Fees. . . . . . . . . . . . . . . . . . . . . . . . . . . 16
13.12 Binding Arbitration. . . . . . . . . . . . . . . . . . . . . . . . . 16

iii

<PAGE>

ASSET PURCHASE AGREEMENT

THIS ASSET PURCHASE AGREEMENT (this "Agreement") is made and entered into
as of the 10th day of October, 1996, by and among BRUCE D. MACDONALD, an
individual ("Seller") and CD WAREHOUSE, INC., a Delaware corporation with its
principal address at P.O. Box 602, Edmond, Oklahoma 73083-0602 ("Buyer").

WHEREAS, Seller is engaged, as a franchisee of CD International, Inc. in
the business of buying, selling and trading new and used audio compact discs,
at 5100 Belt Line, Suite 744, Dallas, Texas 75240 (the "CD Warehouse Store" or
"Business"); and

WHEREAS, Seller desires to sell to Buyer, and Buyer desires to buy from
Seller, substantially all of the assets of the Business.

ARTICLE I
TERMS OF PURCHASE AND SALE

1.1 PURCHASE AND SALE OF ASSETS. Subject to and upon the terms and
conditions contained herein, at the Closing (aS defined in Section 9.1), Seller
will sell, transfer, assign, convey and deliver to Buyer, and Buyer will
purchase, accept and acquire from Seller, free and clear of all liens, claims,
security interests and encumbrances of any nature, all of the following
properties and assets (whether real or personal) of Seller related to the
Business (collectively, the "Assets"):

(a) all of the Seller's inventory of new and used audio compact discs (the
"Inventory");

(b) All of Seller's right, title and interest in and to the leasehold
agreements to which Seller is a party, as listed on SCHEDULE 1.1 (the
"Contract");

<PAGE>

(c) All information and all of Seller's records relating to the Business,
including, without limitation, customer lists, vendor lists, franchise
files, accounting and tax records concerning the same and sales
literature and promotional materials;

(d) All software programs, source and object codes, computer printouts,
data bases and related items created, originated or modified by Seller
and relating to the Assets or to the Business;

(e) The furniture, fixtures, equipment, files and other assets currently
located at the CD Warehouse Store.

1.2 TRANSFER AND CONVEYANCE. Seller shall execute and deliver to Buyer at
the Closing (i) a bill of sale (in substantially the form of Exhibit A), and
(iii) all such assignments, endorsements and instruments of transfer as shall be
necessary or appropriate to carry out the intent of this Agreement and as shall
be sufficient to vest in Buyer title to all of the Assets and all right, title
and interest of Seller thereto.

ARTICLE II
PURCHASE PRICE

2.1 PURCHASE PRICE. The purchase price for the Assets shall be
Twenty-Eight Thousand (28,000) shares of Buyer's common stock, to be issued
pursuant to a Subscription Agreement in the form of Exhibit B attached hereto.

ARTICLE III
REPRESENTATIONS AND WARRANTIES OF SELLER

Seller hereby represents and warrants to Buyer as follows:

3.1 TITLE. Seller has, and upon conveyance of the Assets to Buyer by
Seller at the Closing, Buyer will acquire and hold, good and indefeasible title
in fee simple to all Assets, free and clear of any and all Encumbrances except
as set forth on SCHEDULE 3.1.

3.2 INVENTORY. Set forth on SCHEDULE 3.2 is a description of all the
Inventory as of the date stated thereon, which consists of current items of a
quality and quantity that are usable or marketable in the ordinary course of the
business of Seller, and items not usable in the

<PAGE>

business of Seller have been written down in value in accordance with the
normal business practice of Seller to estimated net realizable market values.

3.3 PHYSICAL PROPERTIES. Set forth on SCHEDULE 3.3 is a description of
(i) all office furniture, equipment and supplies owned and to be conveyed by
Seller and (ii) all physical properties (other than the types of properties
referred to in (i) above), real, personal or mixed, owned and to be conveyed by
Seller and included among the Assets. Seller enjoys peaceable possession of all
properties owned or leased by it.

3.4 CONTRACT DEFAULTS. Seller is not in default in any material respect
under the Contract. The Contract is a legal, valid and binding obligation of
the respective parties thereto in accordance with its terms and have not been
amended, no defenses, offsets or counterclaims thereto have been asserted or may
be made by any party thereto other than Seller, and Seller has waived no
substantial rights thereunder.

3.5 LITIGATION. Except as set forth on SCHEDULE 3.5 there are no
actions, suits, proceedings, investigations or grievances pending against Seller
or, to the best of Seller's knowledge, threatened against Seller, Seller's
business or any property or rights of Seller, at law or in equity or admiralty
or before or by and court or federal, state municipal or other governmental
department, commission, board, bureau, agency or instrumentality, domestic or
foreign (each an "Agency") which to the best of Seller's knowledge either (i)
results or would, if adversely determined, result in any material adverse change
in the business, operations or assets or the condition, financial or otherwise,
or results of operations of Seller or (ii) affects or would, if adversely
determined, affect the right or ability of Seller to carry on its business
substantially as now conducted. Seller is not subject to any continuing court
or Agency order, writ, injunction or decree applicable specifically to the
Assets, the business operations of Seller or employees of Seller, or in default
with respect to any order, writ, injunction or decree of any court or Agency
with respect to the Assets, its business, operations or employees.

3.6 TRUE, CORRECT AND COMPLETE INFORMATION. The information furnished to
Buyer by Seller prior to or on the date of this Agreement and in any Schedule
referred to herein is true, correct and complete in all material respects. Such
information states all material facts required to be stated therein or with
respect thereto or necessary to make the statements therein or with respect
thereto, in light of the circumstances under which such statements are made,
true correct and complete.

<PAGE>

3.7 CONSENT. To the best of Seller's knowledge no consent, approval,
authorization or order of any court, Agency or any other person is required in
order to permit Seller to consummate the transactions contemplated by this
Agreement.

3.8 FINANCIAL CONDITION AND RESULT OF OPERATIONS. Seller has previously
delivered to Buyer true, correct and complete copies of the balance sheet of
Seller's business as of December 31, 1994, and 1995, and the related statement
of cash flows for the year then ended. Seller has also previously delivered
true correct and complete copies of the balance sheet of Seller's business as of
August 31, 1996, and the related statement of cash flows for the period. The
financial statements provided (i) are in accordance with the books and records
and accounting methods of Seller's business, (ii) present fairly the financial
position and results of operations of Seller's business as of the dates and for
the periods indicated, and (iii) have been prepared in accordance with generally
accepted accounting principles consistently applied throughout the periods
involved except as noted therein, except that there is no disclosure of items
customarily contained in footnotes, the depreciation has been accelerated as
permitted under Section 179 of the Internal Revenue Code of 1986, as amended,
and such financial statements are unaudited.

3.9 INSURANCE. Set forth on SCHEDULE 3.9 is a brief description of all
policies of fire, casualty, liability and other forms of insurance and all
fidelity bonds held by Seller.

3.10 TAXES. Seller has duly filed all federal, state, county, local and
other excise, franchise, property, payroll, income, capital stock, sales and use
and other tax returns which are required to be filed and such returns are true,
correct and complete in all respects. Except as set forth on SCHEDULE 3.10,
Seller has paid all taxes which have become due or have been assessed and all
taxes, penalties and interest which any taxing authority has proposed or
asserted to be owing. All tax liabilities to which the properties of Seller may
have been subjected have been discharged except for taxes assessed but not yet
payable. There are no tax claims presently being asserted against Seller and
Seller knows of no basis for any such claim. Seller has not granted any
extension to any taxing authority of the limitation period during which any tax
liability may be asserted thereby.

3.11 ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as set forth on Schedule
3.11, since August 31, 1996, Seller has not (i) suffered any extraordinary
losses or waived any rights of substantial value; (ii) made any change in its
mode of management or any change in its method of operation or method of
accounting; (iii) made or become obligated to make any capital expenditures
other than such expenditures or commitments not exceeding $5,000 in the
aggregate; (iv) experienced or suffered any adverse change in its business,
operations or assets

<PAGE>

(whether or not covered by insurance) condition, financial or otherwise, or
results of operations; (v) entered into any transaction, except in the
ordinary course of its business consistent with past business practice; (vi)
received any notice of any claim asserted against it by any Agency which
could have a material adverse effect on the business or financial condition
of Seller; or (vii) incurred or agreed to incur any material obligation
outside the ordinary course of business which has not heretofore been
disclosed in writing to Buyer.

3.12 BROKER'S AND FINDER'S FEES. Seller has not made any agreement with
any person, or taken any action which would cause any person, to become entitled
to an agent's, broker's or finder's fee or commission in connection with the
transactions contemplated by this Agreement.

ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF BUYER

Buyer hereby makes the following representations and warranties to Seller:

4.1 CORPORATE POWER AND AUTHORITY. The execution, delivery and
performance of this Agreement by Buyer, and all other agreements referred to
herein or executed in connection herewith, and the consummation by it of the
transactions contemplated hereby and thereby, have been duly authorized by all
requisite corporate action and no further action or approval is required in
order to permit Buyer to consummate the transactions contemplated hereby and
thereby. This Agreement constitutes, and all other agreements by and among the
parties, when executed and delivered in accordance with the terms thereof, will
constitute, the legal, valid and binding obligations of Buyer, enforceable in
accordance with their terms (subject, as to the enforcement of remedies, to
applicable bankruptcy, insolvency, reorganization, moratorium and similar laws
affecting creditors' rights from time to time in effect). Buyer has full power,
authority and legal right to enter into this Agreement and all other agreements
by and among the parties and to consummate the transactions contemplated hereby
and thereby. The making and performance of this Agreement, and all other
agreements by and among the parties and the consummation of the transactions
contemplated hereby and thereby in accordance with the terms hereof and thereof
will not (i) conflict with the Certificate of Incorporation or by the Bylaws of
Buyer, (ii) result in any breach or termination of, or constitute a default
under, or constitute an event which with notice or lapse of time, or both, would
become a default under, or result in the creation of any Encumbrance upon any
asset of Buyer under, or create any rights of termination, cancellation or
acceleration in any person under, any contract, lease, arrangement or
commitment, or violate any order, writ, injunction or decree, to which Buyer is
a party or

<PAGE>

by which Buyer or its assets, business or operations may be bound or affected
or under which Buyer or its assets, business or operations receive benefits,
(iii) result in the loss or adverse modification of any material license,
franchise, permit or other authorization granted to or otherwise held by
Buyer which is material to the business or financial condition of Buyer, or
(iv) result in the violation of any provisions of law applicable to Buyer,
the violation of which could have a material adverse effect upon the
business, operations or assets of Buyer.

4.2 CONSENTS. No consent, approval, authorization or order of any court,
Agency or any other person is required in order to permit Buyer to consummate
the transactions contemplated by this Agreement.

4.3 LITIGATION. There is no pending or threatened litigation in any court
or any proceeding before any Agency (i) in which it is sought to restrain,
prohibit, invalidate or obtain damages in respect of the consummation of the
purchase and sale of the Assets or the other transactions contemplated hereby,
(ii) which could, if adversely determined, result in any material adverse change
in the business, operations or assets or the condition, financial or otherwise,
or results of operations of Buyer or (iii) which could, if adversely determined,
have a material adverse effect on the right or ability of Buyer to carry on its
business substantially as now conducted.

4.4 COMPLIANCE WITH LAWS. Except as set forth on SCHEDULE 4.4, Buyer (i)
has complied with all laws, regulations, licensing requirements and orders
applicable to its business the breach or violation of which could have a
material adverse effect on said business, (ii) has filed with the proper
authorities all statements and reports required by the laws, regulations,
licensing requirements and order to which it is subject and (iii) possesses all
necessary licenses, franchises, permits and governmental authorizations to
conduct its business in the manner in which and in the jurisdictions and places
where such business is now conducted.

ARTICLE V
COVENANTS OF SELLER

Seller hereby covenants and agrees with Buyer as follows:

5.1 AFFIRMATIVE COVENANTS. Prior to the Closing Date (as hereinafter
defined), Seller will operate his Business in the usual, regular and ordinary
course of business consistent with past business practices, and will use his
best efforts to (i) preserve intact his business and the Assets; (ii) maintain
his properties, machinery and equipment in good operating condition and

<PAGE>

repair; (iii) continue all existing policies of insurance (or comparable
insurance) in full force and effect up to and including the Closing Date (and
will not cancel any such issuance or take (or fail to take) any action that
would enable the insurers under such policies to avoid liability for claims
arising out of any occurrence on or prior to the Closing Date without the
prior written consent of Buyer); (iv) use its best efforts to preserve its
present relationships with lending and other financial institutions,
suppliers, customers, and franchisees; and (v) maintain its books, accounts
and records in the usual, regular and ordinary manner on a basis consistently
applied.

5.2 NEGATIVE COVENANTS. Prior to the Closing Date Seller will operate
its Business in the usual, regular and ordinary course of business consistent
with the past business practices, and will not, without the prior written
consent of Buyer: (i) make any increase in the compensation payable or to
become payable by it to any employee or contribute or make any commitment to
contribute or represent that it will contribute any amounts to any bonus or
other employee benefit plan for employees of Seller except as required by law or
by the terms of any such plan in the ordinary course of business; (ii) make any
material change in the character of its Business; (iii) incur any obligation or
liability (fixed or contingent) except in the ordinary course of business; (iv)
discharge or satisfy any Encumbrance or pay any obligation or liability (fixed
or contingent) other than in the ordinary course of business; (v) mortgage,
pledge, transfer or otherwise dispose of or subject to any Encumbrance any of
the Assets, except in the ordinary course of business; (vi) acquire any assets
or properties, except in the ordinary course of business; (vii) cancel or
compromise any material debt or claim that comprises a part of the assets to be
transferred to Buyer; (viii) waive or release any rights of material value that
comprise a part of the assets to be transferred to Buyer; (ix) transfer, grant
or terminate contract, lease, arrangement or commitment rights under any
concessions, leases, licenses, agreements, patents, patent licenses, inventions,
trademarks, trade names, service marks, trade dress or copyrights or
registrations or licenses thereof or applications therefore or with respect to
any know-how or other proprietary or trade rights; (x) modify or change in any
material respect or terminate any Contract; (xi) undertake any material
borrowing of any nature whatsoever other than in the ordinary course of
business; (xii) make any loans or extensions of credit, except in the ordinary
course of business and (xiii) make or become obligated to make any capital
expenditures or enter into commitments therefor exceeding $5,000.

5.3 ACCESS TO PROPERTIES AND RECORDS. Seller will keep Buyer advised of
all material developments relevant to the consummation of the transactions
contemplated hereby and will cooperate fully in permitting Buyer to make a full
investigation of the Business, properties, financial condition and investments
of Seller during regular business hours and upon reasonable notice and in
bringing about the consummation of the transactions contemplated hereby. Seller

<PAGE>

will, during regular business hours and upon reasonable notice, afford to Buyer
and its representatives full access to the offices, buildings, real properties,
machinery and equipment, inventory and supplies, records, files, books of
account, tax returns, agreements and commitments, partnership record books and
personnel of Seller. Seller will, upon request by Buyer afford to Buyer and its
representatives access to the working papers relating to the Financial
Statements. Seller will furnish to Buyer all such further information
concerning the business and affairs of Seller as Buyer may reasonably request.
Seller will update by amendment or supplement each of the Schedules referred to
herein and any other disclosure in writing from Seller required by this
Agreement to be disclosed in writing by Seller to Buyer promptly upon any change
in the information set forth in such Schedules or other disclosures, and Seller
hereby represents and warrants that such Schedules and such written disclosures,
as so amended or supplemented, shall be true, correct and complete as of the
date or dates thereof; provided, however, that the inclusion of any information
in any such amendment or supplement, not included in the original Schedule or
other disclosure at or prior to the date of this Agreement, shall not limit or
impair any right which Buyer might otherwise have respecting the representations
or warranties of Seller continued in this Agreement. No investigation pursuant
to this Section 5.3 shall affect any representations or warranties or the
conditions to the obligations of Buyer to consummate the transactions
contemplated hereby. In the event of the termination of this Agreement, Buyer
will deliver to Seller all documents, work papers and other material (including
copies thereof) obtained by Buyer or on its behalf from Seller as a result of
this Agreement or in connection herewith, whether so obtained before or after
the execution hereof and, if the transactions contemplated hereby are not
consummated, Buyer will hold such information in strict confidence and will not
use or disclose, or permit any other person or entity to use or disclose, such
information until such time as such information is otherwise publicly available.
Regardless of whether the transactions contemplated by this Agreement are
consummated, Buyer will hold all information acquired from Seller in strict
confidence except to the extent that Buyer is required by applicable law to
disclose information in connection with the anticipated public offering of
Buyer's common stock; further, Buyer will act in good faith with respect to all
information acquired from Seller and will not use, and will not permit any
other person or entity, to use any information acquired from Seller in any
manner that is detrimental to Seller's operation of the Business or is otherwise
inconsistent with Seller's best interests or Buyer's obligations pursuant this
Agreement.

<PAGE>

ARTICLE VI
COVENANTS OF BUYER

Buyer hereby covenants and agrees with Seller as follows:

6.3 BUYER'S BEST EFFORTS. Buyer will use its best efforts, acting in good
faith, to cause the consummation of the transactions contemplated by this
Agreement in accordance with their terms and conditions.

6.4 RETENTION OF RECORDS. For a period of six years after the Closing,
Buyer will retain all books and records that Buyer receives from Seller. During
such period, Seller and its representatives will have access to all such books
and records during normal business hours. Buyer will, upon request of Seller,
furnish to Seller, without charge, copies of any such books or records.

<PAGE>

ARTICLE VII
CONDITIONS TO OBLIGATIONS OF BUYER

7.1 REPRESENTATIONS AND WARRANTIES OF SELLER. All of the representations
and warranties of Seller contained in this Agreement and in any Schedule from
Seller were true and correct when made, and shall be true and correct in all
material respects on and as of the Closing Date with the same force and effect
as though such representations and warranties had been made on and as of the
Closing Date.

7.2 COVENANTS OF SELLER. All of the covenants and agreements herein on
the part of Seller to be complied with or performed on or before the Closing
Date shall have been fully complied with and performed.

7.3 NO CASUALTY LOSSES. The Assets shall not have suffered any
destruction or damage by fire, explosion or other casualty or any taking by
eminent domain which has materially impaired the operation of the Assets or
otherwise had a material adverse effect upon the Business conducted by Seller.

7.4 LITIGATION. At the Closing Date, there shall not be pending or
threatened any litigation in any court or any proceeding before any Agency, (i)
in which it is sought to restrain, invalidate, set aside or obtain damages in
respect of the consummation of the purchase and sale of the Assets or the other
transactions contemplated hereby, (ii) which could, if adversely determined,
result in any material adverse change in the Business, operations or Assets or
the condition, financial, or otherwise, or results of operations of Seller,
(iii) which could, if adversely determined, have a material adverse effect on
the right or ability of Seller to carry on its Business as now conducted or (iv)
as a result of which, in the reasonable judgment of Buyer, Buyer would be
deprived of the material benefits of its ownership of the Assets.

7.5 NO MATERIAL ADVERSE CHANGES. There shall not have occurred (i) any
material adverse change in the Business or the operations of Seller or the
Assets or (ii) any material loss or damage to any of the Assets (whether or not
covered by insurance) of Seller. Buyer shall receive a certificate from Seller,
dated as of the Closing Date and in form and substance satisfactory to Buyer, as
to fulfillment of the conditions set forth in Section 7.11.

<PAGE>

7.6 FURTHER ASSURANCES. Seller shall take all such further action as
may be reasonably requested by Buyer in order to effectuate the consummation of
the transactions contemplated by this Agreement. If Buyer shall reasonably
determine that any further conveyance, assignment or other document or any
further action is necessary to vest in it full title to the Assets, Seller shall
cause the appropriate person or entity to execute and deliver all such
instruments and take all such action as Buyer may reasonably determine to be
necessary.

ARTICLE VIII
CONDITIONS TO OBLIGATIONS OF SELLER

The obligations of Seller to cause the sale of the Assets and the other
transactions contemplated hereby to occur at Closing shall be subject to the
satisfaction on or prior to the Closing Date of all of the following conditions,
except such conditions as Seller may waive in writing:

ARTICLE IX
DATE AND PLACE OF CLOSING

9.1 DATE AND PLACE OF CLOSING. Subject to satisfaction or waiver of the
conditions to the obligations of the parties, the purchase and sale of the
Assets pursuant to this Agreement shall be consummated at a closing (the
"Closing") to be held in the offices of Day, Edwards, Federman, Propester &
Christensen, Inc. at 210 Park Avenue, Oklahoma Tower 29th Floor in Oklahoma
City, Oklahoma or such other place as is mutually agreed to by the parties, at
10:00 A.M. on the __ day of ____, 19__. Title to the Assets shall pass from
Seller to Buyer as of 12:01 A.M., Dallas, Texas time, on the day following the
Closing Date.

<PAGE>

ARTICLE X
CLOSING

10.1 SELLER'S AND BUYER'S PERFORMANCE. At the Closing, concurrently with
performance by Buyer of its obligations to be performed at the Closing:

(a) CONVEYANCES. Seller shall execute and deliver to Buyer, in
form and substance acceptable to Buyer, (i) the Bill of Sale; and (ii) all other
assignments, endorsements and instruments of transfer as shall be necessary or
appropriate to carry out the intent of this Agreement and as shall be sufficient
to vest in Buyer title to all of the Assets and all right, title and interest of
Seller thereto. If requested by Buyer, such documents shall be in form suitable
for recording.

10.2 BUYER'S PERFORMANCE. At the Closing, concurrently with the
performance by Seller of its obligations to be performed at the Closing:

(a) PURCHASE PRICE. Buyer shall convey and deliver to Seller the
common stock described in Section 2.3, and shall execute the Subscription
Agreement.

10.3 EXPENSES: OTHER INSTRUMENTS. In addition to the foregoing, Buyer
and Seller agree as follows:

(b) FURTHER ACTION BY BUYER. At any time and from time to time, at
or after the Closing, upon request of Seller, Buyer shall do, execute,
acknowledge and deliver or shall cause to be done, executed, acknowledged and
delivered all such further acts and assurances as may reasonably be required in
order to better assure and confirm to Seller the assumption by

<PAGE>

Buyer of the obligations to render performance which are to be assumed by
Buyer pursuant to this Agreement.

ARTICLE XI
POST-CLOSING COVENANTS

11.1 TRANSITION PERIOD. Seller shall use good-faith efforts for a period
of up to one hundred eighty (180) days after the Closing to cooperate and assist
Buyer in connection with the operations of the Business and the Assets purchased
by Buyer under this Agreement.

ARTICLE XII
TERMINATION

12.1 TERMINATION. This Agreement may be terminated and abandoned at any
time on or prior to the Closing Date:

(a) By the mutual consent in writing of Buyer and Seller;

(c) By Seller in writing if any of the material conditions to the
obligations of Seller contained herein shall not have been satisfied or, if
unsatisfied, waived as of the Closing Date;

(d) By Buyer or Seller in writing if the Closing shall not have
occurred by February 28, 1997, except that no party shall have the right to
terminate this Agreement if the failure to close shall be the result of such
party's failure to perform, in any material respect, its obligations hereunder.

12.2 NO FURTHER FORCE OR EFFECT. In the event of termination and
abandonment of this Agreement pursuant to the provisions of Section 13.1, this
Agreement shall be of no further force or effect, except for the last sentences
of Sections 5.3 and 6.1 and Section 14.1 which shall not be affected by
termination of this Agreement.

<PAGE>

ARTICLE XIII
MISCELLANEOUS

13.1 EXPENSES. Except as otherwise expressly provided herein, Seller and
Buyer shall each pay their own expenses in connection with the preparation of
this Agreement, and the consummation of the transactions contemplated hereby,
including, without limitation, fees of its own counsel, auditors and other
experts, whether or not such transactions be consummated.

13.2 ENTIRE AGREEMENT. This Agreement, together with the Schedules and
other agreements contemplated herein, constitutes the entire contract and shall
supersede all prior agreements and understandings, both written and oral,
between the parties hereto with respect to the subject matter hereof and no
party shall be liable or bound to the other in any manner by any representations
or warranties except as specifically set forth herein or in any Schedule hereto
or agreement executed in connection herewith or expressly required to be made or
delivered pursuant thereto.

13.3 SUCCESSORS AND ASSIGNS. The terms and conditions of this Agreement
shall inure to the benefit of and be binding upon the respective successors and
assigns of the parties hereto. Nothing in this Agreement, express or implied,
is intended to confer upon any party, other than the parties and their
respective successors and assigns, any rights, remedies, obligations or
liabilities under or by reason of such agreements.

13.4 IDENTICAL COUNTERPARTS. This Agreement may be executed in one or
more counterparts, each of which shall for all purposes be deemed to be an
original and all of which shall constitute the same instrument, but only one of
which need be produced.

13.5 HEADINGS. The headings of the paragraphs and subparagraphs of this
Agreement are inserted for convenience only and shall not be deemed to
constitute part of this Agreement or to affect the construction hereof.

13.6 USE OF CERTAIN TERMS. As used in this Agreement, the words "herein,"
"hereof" and "hereunder" and other words of similar import refer to this
Agreement as a whole and not to any particular paragraph, subparagraph or other
subdivision.

<PAGE>

13.7 MODIFICATION AND WAIVER. Any of the terms or conditions of this
Agreement may be waived in writing at any time, whether before or after action
thereon by the party which is entitled to the benefits thereof; and this
Agreement may be modified or amende at any time, whether before or after action
thereon by the parties. No supplement, modification or amendment of this
Agreement shall be binding unless executed in writing by all of the parties
hereto. No waiver of any of the provisions of this Agreement shall be deemed or
shall constitute a waiver of any other provision hereof (whether or not similar)
nor shall such waiver constitute a continuing waiver.

13.8 OTHER REMEDIES. Except as otherwise provided herein, any and all
remedies expressly conferred upon a party will be deemed cumulative with and not
exclusive of any other remedy conferred hereby or by law on such party, and the
exercise of any one remedy will not preclude the exercise of any other.

13.9 NOTICES. All notices, consents, requests, instructions, approvals
and/or communications provided for herein, shall be validly given, made or
served if in writing and delivered personally or sent by registered or certified
mail, return receipt requested, postage prepaid, addressed as follows:

(i) If to Seller: Bruce D. MacDonald
8080 North Central Expressway, Suite 1610, LB-46
Dallas, Texas 75206

with copy to: Lee Wilkins, Esq.
300 Crescent Court, Suite 500
Dallas, Texas 75201

(ii) If to Buyer: CD Warehouse, Inc.
Attn: Jerry W. Grizzle
P.O. Box 602
Edmond, OK 73083-0602

with copy to: Bruce W. Day, Esq.
Day, Edwards, Federman, Christensen & Propester, P.C.
210 Park Avenue
29th Floor Oklahoma Tower
Oklahoma City, Oklahoma 73102

<PAGE>

The designation of the person to be so notified or the address of such person
for the purposes of such notice may be changed from time to time by a similar
notice. Any notice which is delivered personally in the manner provided herein
shall be deemed to have been duly given to the party to whom it is directed
upon actual receipt by such party (or its agent for notices hereunder). Any
notice which is addressed and mailed in the manner herein provided shall be
conclusively presumed to have been duly given to the party to which it is
addressed at the close of business, local time of the recipient, on the third
business day after the day it is so placed in the mail.

13.10 GOVERNING LAW. This Agreement has been executed and delivered
in the State of Texas and will be construed and enforced in accordance with and
governed by the laws of the State of Texas. This Agreement will not be construed
for or against a party merely because that party prepared it, but will at all
times be construed according to its fair meaning.

13.11 NO AGENT'S FEES. Buyer represents to Seller, and Seller
represents to Buyer, that there is no agent's broker's or finder's fees or
commission payable or that will be payable in connection with the transactions
contemplated hereby by virtue of or resulting from any action or agreement by
it. Buyer hereby agrees to indemnify and hold harmless Seller, and Seller
agrees to indemnify and hold harmless Buyer, from and against any claim, demand,
liability, loss, cost or expense (including reasonable attorneys' fees and
expenses) on account of or in connection with any agent's, broker's or finder's
fees or commissions payable or alleged to be payable in connection with this
Agreement or the transactions contemplated hereby virtue of or resulting from
any action or agreement on the part of such indemnifying party.

13.12 BINDING ARBITRATION. EACH PARTY TO THIS AGREEMENT AGREES THAT
ANY DISPUTE OR CONTROVERSY ARISING BETWEEN ANY OF THE PARTIES TO THIS AGREEMENT,
OR ANY PERSON OR ENTITY IN PRIVITY THEREWITH, OUT OF THE TRANSACTIONS EFFECTED
AND RELATIONSHIPS CREATED PURSUANT TO THIS AGREEMENT AND EACH OTHER AGREEMENT
CREATED IN CONNECTION HEREWITH, INCLUDING ANY DISPUTE OR CONTROVERSY REGARDING
THE FORMATION, TERMS, OR CONSTRUCTION OF THIS AGREEMENT, REGARDLESS OF KIND OR
CHARACTER, MUST BE RESOLVED THROUGH BINDING ARBITRATION. EACH PARTY TO THIS
AGREEMENT AGREES TO SUBMIT SUCH DISPUTE OR CONTROVERSY TO ARBITRATION BEFORE THE
AMERICAN ARBITRATION ASSOCIATION IN DALLAS, TEXAS, AND FURTHER AGREES TO BE
BOUND BY THE DETERMINATION OF ANY ARBITRATOR OR ARBITRATION PANEL EMPANELED BY
THE AMERICAN ARBITRATION ASSOCIATION TO ADJUDICATE THE DISPUTE. JUDGMENT ON ANY
ARBITRATION AWARD MAY BE ENTERED IN ANY COURT OF COMPETENT JURISDICTION. ANY
PARTY TO THIS AGREEMENT MAY BRING AN ACTION, INCLUDING A SUMMARY OR EXPEDITED
PROCEEDING, TO COMPEL ARBITRATION OF ANY SUCH DISPUTE OR CONTROVERSY IN A COURT
OF COMPETENT JURISDICTION AND, FURTHER, MAY SEEK

<PAGE>

PROVISIONAL OR ANCILLARY REMEDIES INCLUDING TEMPORARY OR INJUNCTIVE RELIEF IN
CONNECTION WITH SUCH DISPUTE OR CONTROVERSY IN A COURT OF COMPETENT
JURISDICTION, PROVIDED THAT THE DISPUTE OR CONTROVERSY IS ULTIMATELY RESOLVED
THROUGH BINDING ARBITRATION CONDUCTED IN ACCORDANCE WITH THE TERMS AND
CONDITIONS OF THIS SECTION.

IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be signed in counterparts all as of the date first above written.

SELLER:

BRUCE D. MACDONALD

/s/ BRUCE D. MACDONALD
-------------------------------------
Bruce D. MacDonald

BUYER:

CD WAREHOUSE, INC.

By: /s/ JERRY W. GRIZZLE
-------------------------------------
Jerry W. Grizzle, President

<PAGE>

ASSET PURCHASE AGREEMENT

LIST OF SCHEDULES AND EXHIBITS

SCHEDULES

1.1 Contract - Assumed and Assigned
3.1 Encumbrances
3.2 Inventory
3.3 Physical Properties
3.5 Litigation
3.9 Insurance
3.10 Taxes
3.11 Certain Changes or Events
4.4 Compliance with Laws and Licenses, Franchises Permits and
Governmental Authorization

EXHIBITS

A Bill of Sale
B Subscription Agreement

<PAGE>

EXHIBIT 2.3

ASSIGNMENT AND ASSUMPTION AGREEMENT

THIS ASSIGNMENT AND ASSUMPTION AGREEMENT ("Assignment Agreement") is made
and entered into as of this 10th day of October, by and between BRUCE D.
MACDONALD, an individual, BDMAC, L.L.C., a Texas Limited Liability Company
(jointly referred to herein as the "Assignor"), and CD MANAGEMENT, INC., a
Delaware corporation with its principal address at P.O. Box 602, Edmond,
Oklahoma 73083-0602 ("Assignee").

WITNESSETH

WHEREAS, the Partnerships and Limited Liability Company listed on Schedule
A hereto (collectively, including the Limited Liability Company, the
"Partnerships") are engaged in the business of buying, selling and trading new
and used audio compact discs, acting as franchisee of stores which buy, sell and
trade new and used audio compact discs and selling new and used audio compact
discs to its retail customers; and

WHEREAS, Assignor, the general partner, limited partner, partner, or member
of each of the Partnerships, is a party to certain agreements relating to the
Partnerships which, are identified on Schedule B attached hereto ("Agreements");

WHEREAS, Assignor has agreed to enter into this Assignment Agreement to
assign all of Assignor's right, title, interest, duties and obligations in and
to the Agreements to Assignee and, in consideration therefor, among other
things, Assignee has agreed to accept such assignment of the Agreements and
assume the duties and obligation of Assignor under the Agreements arising from
and after the date of this Assignment Agreement.

NOW, THEREFORE, in consideration of the foregoing and of the mutual
representations, covenants, warranties and agreements and upon the terms and
subject to the conditions hereinafter set forth, the parties hereto agree as
follows:

ARTICLE I
ASSIGNMENT AND ASSUMPTION

1.1 ASSIGNMENT. As of the Effective date (defined below) Assignor does
hereby grant, bargain, sell, transfer, convey, assign and deliver to Assignee
all of Assignor's right, title, interest, duties and obligations in and to the
Agreements for a consideration of fifty two thousand (52,000) shares of
Assignee's common stock.

1.2 ACCEPTANCE AND ASSUMPTION. Assignee does hereby irrevocably accept
such grant, bargain, sale, transfer, conveyance, assignment and delivery of all
of Assignor's right, title, interest, duties and obligations in and to the
Agreements, and does hereby assume all duties and obligations of Assignor under
the Agreements arising from and after the Effective Date for a consideration of
52,000 shares of Assignee's common stock, which shall be issued pursuant to the
Subscription

<PAGE>

Agreement between Assignor and Assignee, in substantially the form of Exhibit
A hereto (the "Subscription Agreement").

1.3 EFFECT OF ASSIGNMENT. Notwithstanding anything in this Assignment
Agreement to the contrary, this Assignment Agreement shall not constitute an
assignment of any of the Agreements if an attempted assignment thereof, without
the consent of a third party thereto, would constitute a breach thereof or in
any way would adversely affect the rights of the Assignee thereunder. If such
consent is not obtained, or if an attempt at an assignment thereof would be
ineffective or would affect the rights of the Assignor thereunder so that
Assignee would not in fact receive all such rights, then Assignor will cooperate
with Assignee in any reasonable arrangement designed to provide for Assignee the
benefits under such Agreements including enforcement for the benefit of Assignee
of any and all rights of the Assignor against a third party thereto arising out
of the breach or cancellation by such third party or otherwise.

1.4 EFFECT OF ASSUMPTION. The assumption by Assignee of the duties and
obligations of the Assignor under the Agreements provided for herein shall in no
way expand the rights or remedies of any third party against Assignee as
compared to the rights and remedies which such third party would have had
against Assignor had Assignee not assumed such duties and obligations. Assignor
shall be responsible for and retains all liabilities for duties and obligations
incurred under the Agreements prior to the date of this Assignment Agreement.

1.5 EFFECTIVE DATE. The assignment of the Agreements by Assignor, and the
acceptance of such assignment and the assumption of the duties and obligations
of Assignor under the Agreements by Assignee, all pursuant to this Assignment
Agreement, shall be effective as of the closing date of Assignee's initial
public offering (the "Effective Date"). If the Effective date does not occur
before February 28, 1997, this Agreement will not become effective and will of
no force or effect, unless mutually extended by the parties in writing .

ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE ASSIGNOR

The Assignor hereby makes the following representations and warranties,
which shall continue in effect after and survive the date of this Assignment
Agreement.

2.1 Subject to the approval of the partners or members of the
Partnerships, the execution, delivery and performance of this Assignment
Agreement are within the legal capacity and power of the Assignor and neither
violate nor constitute a default under the terms of any other agreement,
document, or instrument binding upon the Assignor. This Assignment Agreement is
a legal, valid and binding obligation of the Assignor enforceable in accordance
with its terms, except insofar as the enforcement hereof may be limited by
bankruptcy, insolvency, moratorium or similar laws affecting the enforcement of
creditors' rights generally and subject to equitable principles limiting the
availability of specific performance or other equitable remedies.

2
<PAGE>

2.2 The Assignor covenants to use his best efforts to obtain, on or before
November 30, 1996, all necessary consents of limited partners or other parties
to the Agreements, as may be necessary for Assignor to enter into or consummate
this Assignment Agreement. The name of each limited partner or other party to
the Agreements is listed in Schedule C attached hereto. Assignor will certify
to Assignee in writing on or before November 30, 1996, whether all necessary
consents have been obtained. In the event that Assignor has not obtained all
necessary consents by such date, or if Assignor cannot certify to Assignor by
such date that all necessary consents have been obtained, then Assignee shall
have the right, to be exercised on or before December 10, 1996, to terminate
this Agreement, the Asset Purchase Agreement, the Subscription Agreements
relating to this Agreement and the Asset Purchase Agreement, and the Employment
Agreement, all of which are between MacDonald and the Assignee, and all of which
are dated on or about the date hereof.

2.3 There are no actions, suits or proceedings, and the Assignor has no
knowledge of any actions, suits or proceedings threatened against the Assignor,
which would as of the date hereof prevent or substantially hinder the
consummation of the transactions contemplated by this Assignment Agreement. The
Assignor represents to the Assignee that, except as described in Schedule C,
none of the Agreements has been amended or modified and each of them is in full
force and effect. The Assignor has in all material respects substantially
performed all obligations required to be performed under the Agreements to date
and is not in default in any material respect under any of such Agreements.
Further, neither the Assignor nor, to the best of the Assignor's knowledge, any
of the other parties to the Agreements are in breach of, or default under, any
of the Agreements, and to the best of the Assignor's knowledge, no event has
occurred which, with the passage of time or the giving of notice or both, would
constitute a breach of, or default under, any of the Agreements.

2.4 The December 31, 1995 and August 31, 1996 financial information of the
Partnerships, which has been examined by the Assignee, is prepared in accordance
with generally accepted accounting principles for the periods therein specified,
except that there is no disclosure of items customarily contained in footnotes,
the depreciation has been accelerated as permitted under Section 179 of the
Internal Revenue Code , as amended and such financial statements are not
audited. To the knowledge of the Assignor, there will not be, as the date of
this Assignment Agreement, any liability or obligation of the Assignor
pertaining to any of the Agreements which are not reflected or reserved against
in the financial statements of the Partnerships, except liabilities and/or
obligations that do not have or might reasonably be expected not to have, in the
aggregate, a material and adverse effect on the Agreements.

2.5 All required federal, state and local tax returns or appropriate
extension requests of the Partnerships have been filed.

2.6 Partnerships are limited partnerships duly organized, validly existing
and in good standing under the laws of the state or states of their formation
and have all requisite partnership power and authority to carry on the business
of the Partnerships. The Partnerships are duly qualified and in good standing
in each jurisdiction where the ownership of property or the nature of the
business conducted by the Partnerships requires such qualification.

3
<PAGE>

2.7 Assignor shall execute and deliver to Assignee all assignments,
endorsements and instruments of transfer as shall be necessary or appropriate to
carry out the intent of this Assignment Agreement and as shall be sufficient to
vest in Assignee all of Assignor's right, title, interest, duties and
obligations in and to the Agreements.

2.8 Set forth in Schedule D is a description of Assignor's interest in
each of the Partnerships, including, but not limited to, the percentage of any
back-in arrangements to which the Assignor has any interest.

2.9 On or before the Effective Date, Assignor will prepare and furnish to
Assignee a description of the assets owned by the Partnerships, including, but
not limited to, contract rights, leaseholds and inventory which will be attached
hereto as Schedule E.

2.10 Except as set forth on Schedule F, the Assignor and the Partnerships
have complied in all material respects with all laws and regulations applicable
to the Agreements or with respect to which compliance is a condition of engaging
in the business of the Partnerships as currently conducted by the Partnerships,
including, but not limited to, state and federal securities laws and
regulations. The Assignor and the Partnerships are in compliance with all terms
and conditions in all material respects with, and are in possession of, from the
appropriate agency, commission, board and governmental body or authority,
whether federal, state or local, all of the required licenses, permits,
authorizations, approvals, franchises and rights which (a) are necessary for it
to engage in the business of the Partnerships as currently conducted, and (b) if
not possessed by the Assignor and the Partnerships would have a material and
adverse effect on the business of the Partnerships. The Assignor and the
Partnerships are also in compliance in all material respects with any and all
other limitations, restrictions, conditions, standards, prohibitions,
requirements, obligations, schedules and timetables contained in those laws or
contained in any regulation, code, plan, order, decree, judgment, notice or
demand letter issued, entered, promulgated or approved by any appropriate
agency, commission, board or governmental body or authority, whether federal,
state or local. The Assignor has not received notice of or is aware of, any
past, present or future events, conditions, circumstances, activities,
practices, incidents, actions or plans (other than changes of law, as to which
no representation is made) which may interfere with or prevent continued
compliance by the Assignor, Assignee or the Partnerships with such laws, or
which may give rise to any common law or legal liability, or otherwise form the
basis of any claim, action, suit, proceeding, hearing or investigation under
such laws or which would have a material and adverse effect on the financial
condition, properties, prospects or operations of the Partnerships.

2.11 Neither the Assignor nor any of the Partnerships has made any
commitment for the purchase of goods or services which is (a) outside the
ordinary course of business, or (b) at a price or on terms and conditions that
are less favorable than are commonly available in the industry. Neither the
Assignor nor any of the Partnerships has entered into any contracts for the
provisions of goods or services whereby it is committed to providing such goods
or services to any person or entity at a price or under terms and conditions
which are less favorable than its customary price or terms or conditions or that
will result in the Assignor or the Partnerships receiving less in revenues from
such person or entity than the Assignor or the Partnerships will expend in
connection with

4
<PAGE>

providing such goods and services.

2.12 As of the Effective Date, Assignee will acquire and hold, all of
Assignor's right, title, interest, duties and obligations in and to the
Agreements free and clear of any and all encumbrances and liens.

2.13 The consummation of the transactions contemplated by this Assignment
Agreement will not in any way limit or expand the rights, duties and obligations
of the limited partners under the Agreements. As to the limited partners, the
Agreements will remain in full force and effect.

ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE ASSIGNEE

The Assignee hereby makes the following representations and warranties,
which shall continue in effect and survive the date of this Assignment
Agreement:

3.1 Assignee is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware. The execution, delivery and
performance of this Assignment Agreement are within the legal capacity and power
of the Assignee; have been duly authorized by all requisite action on the part
of the Assignee; require the approval or consent of no other persons; and
neither violate nor constitute a default under the terms of any other agreement,
document, or instrument binding upon the Assignee. This Assignment Agreement is
a legal, valid and binding obligation of the Assignee enforceable in accordance
with its terms, except insofar as the enforcement hereof may be limited by
bankruptcy, insolvency, moratorium, or similar laws affecting the enforcement of
creditors' rights generally and subject to equitable principles limiting the
availability of specific performance or other equitable remedies.

3.2 There are no actions, suits or proceedings, and the Assignee has no
knowledge of any actions, suits or proceedings threatened, against the Assignee
which would as of the date of this Assignment Agreement prevent or substantially
hinder the consummation of the transactions contemplated by this Assignment
Agreement.

3.3 As a condition of the execution of this Assignment Agreement in
Article I, the Assignee covenants and agrees to pay, perform, discharge and
satisfy when due all of Assignor's covenants, agreements and obligations under
the Agreements arising from and after the date of this Assignment Agreement
pursuant to, and in accordance with, the terms and conditions of the respective
Agreement. Further, Assignee agrees not to perform in derogation of the
Agreements as currently in force and effect or limit the rights of the partners
as they currently exist.

<PAGE>

ARTICLE IV
INDEMNIFICATION

4.1 The Assignor hereby agrees to indemnify, defend and hold harmless the
Assignee, its successors and assigns, from and against any and all loss, claims,
or damage, including reasonable attorney's fees, which the Assignee may suffer
either as a result of (a) the failure of the Assignor to transfer to the
Assignee, on the Effective Date, all right, title, and interest of Assignor in
and to the Agreements free and clear of all liens and encumbrances whatsoever;
or (b) the breach of any representation or warranty of the Assignor contained
herein. In the event the Assignee is required to make any payments hereunder or
suffers any actual loss or damage with respect to the matters set forth in this
Section 4.1, the Assignee shall be entitled to reimbursement by the Assignor.

4.2 Assignee agrees to indemnify, defend and hold harmless the Assignor,
his heirs, successors and assigns, from and against any and all loss, claims, or
damage, including reasonable attorney's fees, which the Assignor may suffer as a
result of any claims, demands, or causes of action whatsoever which may
hereafter be asserted against the Assignor arising out of the operation of the
Partnerships after the Effective Date. In the event the Assignor is required to
make any payments hereunder or suffers any actual loss or damage with respect to
the matters set forth in this Section 4.2, the Assignor shall be entitled to
immediate reimbursement by the Assignee.

4.3 With respect to Assignee's losses pursuant to Section 4.1, Assignee
shall be the Indemnified Party and Assignor shall be the Indemnifying Party.
With respect to Assignor's losses pursuant to Section 4.2, Assignor shall be the
Indemnified Party and Assignee shall be the Indemnifying Party. Notwithstanding
anything herein contained, Assignor and Assignee shall not have any liability
under the indemnity provisions of this Assignment Agreement with respect to a
particular matter unless a notice setting forth in reasonable detail the breach
which is asserted has been given to the Indemnifying Party and, in addition, if
such matter arises out of a suit, action, investigation or proceeding, such
notice is given promptly after the Indemnified Party shall have been given
notice of the commencement of a suit, action, investigation or proceeding.

ARTICLE V
MISCELLANEOUS

5.1 EXPENSES. Except as otherwise expressly provided herein, Assignee
and Assignor shall each pay their own expenses in connection with the
preparation of this Assignment Agreement and the consummation of the
transactions contemplated hereby, including, without limitation, fees of their
respective counsel, auditors and other experts, whether or not such transactions
be consummated.

5.2 FURTHER ASSURANCES. Each of the parties hereto further agrees to
execute such additional documents from time to time at the request of the other
party as may be reasonably necessary to accomplish the assignment or assumption
made herein.

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<PAGE>

5.3 OTHER REMEDIES. Except as otherwise provided herein, any and all
remedies expressly conferred upon a party will be deemed cumulative with and not
exclusive of any other remedy conferred hereby or by law on such party, and the
exercise of any one remedy will not preclude the exercise of any other.

5.4 USE OF CERTAIN TERMS. As used in this Assignment Agreement, the words
"herein," "hereof" and "hereunder" and other words of similar import refer to
this Agreement as a whole and not to any particular paragraph, subparagraph or
other subdivision.

5.5 AMENDMENT, MODIFICATION AND WAIVER. This Assignment Agreement may be
amended, modified, superseded, canceled or supplemented at any time by written
agreement of the parties hereto. Any failure by Assignor, on the one hand, or
Assignee, on the other hand, to comply with any term or provision of this
Assignment Agreement may be waived by Assignee or Assignor, respectively, at any
time by an instrument in writing signed by or on behalf of Assignee or Assignor,
but such waiver or failure to insist upon strict compliance with such term or
provision shall not operate as a waiver of, or estoppel with respect to, any
subsequent or other failure to comply.

5.6 NOTICES. All notices, requests, demands, waivers and other
communications required or permitted to be given under this Assignment Agreement
shall be in writing and shall be deemed to have been duly given if delivered
personally, by mail (certified or registered mail, return receipt requested), by
reputable overnight courier or by facsimile transmission (receipt of which is
confirmed):

(a) If to Assignee, to:
CD Management, Inc.
Attention: Jerry W. Grizzle
P.O. Box 602
Edmond, Oklahoma 73083-0602

with a copy to:
Bruce W. Day, Esq.
Day, Edwards, Federman, Propester & Christensen, P.C.
210 Park Avenue
29th Floor Oklahoma Tower
Oklahoma City, Oklahoma 73102
Facsimile: (405) 236-1012

(b) If to Assignor, to:
Bruce D. MacDonald
8080 North Central, Suite 1610
LB - 46
Dallas, Texas 75206

7
<PAGE>

with a copy to:
Lee Wilkins
300 Crescent Court, Suite 500
Dallas, Texas 75201
Facsimile: (214) 978-4150

or to such other person or address as any party shall specify by notice in
writing, given in accordance with this Section 5.6 to the other parties hereto.
All such notices, requests, demands, waivers and communications shall be deemed
to have been given on the date on which so hand-delivered, on the third business
day following the date on which so mailed, on the next business day following
the date on which delivered to such overnight courier and on the date of such
facsimile transmission and confirmation, except for a notice of change of person
or address, which shall be effective only upon receipt thereof.

5.7 GOVERNING LAW. THE PARTIES HEREBY AGREE THAT THIS ASSIGNMENT
AGREEMENT HAS BEEN EXECUTED AND DELIVERED IN THE STATE OF TEXAS AND SHALL BE
CONSTRUED AND ENFORCED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS THEREOF.
THIS ASSIGNMENT AGREEMENT SHALL NOT BE CONSTRUED FOR OR AGAINST A PARTY BECAUSE
THAT PARTY PREPARED IT.

5.8 COUNTERPARTS. This Assignment Agreement may be executed in
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.

5.9 BINDING EFFECT; ASSIGNMENT. This Assignment Agreement and all of the
provisions hereof shall be binding upon and inure to the benefit of the parties
hereto and their respective heirs, executors, successors and permitted assigns,
but, except as contemplated herein, neither this Assignment Agreement nor any of
the rights, interests or obligations hereunder shall be assigned, directly or
indirectly, by Assignee or Assignor without the prior written consent of the
other party hereto; provided, however, that Assignee may assign any or all of
its rights, interests or obligations hereunder to any one or more wholly owned
subsidiary of Assignee, provided, however, that no such assignment by Assignee
shall limit or affect Assignee's obligations hereunder.

5.10 SEVERABILITY. Nothing contained herein shall be construed to require
the commission of any act contrary to law. Should there be any conflict between
any provisions hereof and any present or future statute, law, ordinance,
regulation, or other pronouncement having the force of law, the latter shall
prevail, but the provision of this Assignment Agreement affected thereby shall
be curtailed and limited only to the extent necessary to bring it within the
requirements of the law, and the remaining provisions of this Assignment
Agreement shall remain in full force and effect.

5.11 ENTIRE AGREEMENT. This Assignment Agreement constitutes the
entire agreement and understanding of the parties with respect to the subject
matter hereof and supersedes all prior oral or written agreements, arrangements,
and understandings with respect thereto. No representation, promise,
inducement, statement or intention has been made by any party hereto that is not
embodied

8
<PAGE>

herein, and no party shall be bound by or liable for any alleged
representation, promise, inducement, or statement not so set forth herein.

5.12 THIRD-PARTY BENEFICIARIES. Except as otherwise expressly provided
herein, this Assignment Agreement is not intended, and shall not be deemed, to
confer upon or give any person except the parties hereto and their respective
successors and permitted assigns, any remedy, claim, liability, reimbursement,
cause of action or other right under or by reason of this Assignment Agreement.
The assumption by Assignee of Assignor's obligations under the Agreements shall
not create any third party beneficiary rights.

5.13 INTERPRETATION. The section headings contained in this Assignment
Agreement are solely for the purpose of reference, are not part of the agreement
of the parties and shall not in any way affect the meaning or interpretation of
this Assignment Agreement.

5.14 BINDING ARBITRATION. PURSUANT TO Section 154.027(b) OF THE TEXAS
CIVIL PRACTICE AND REMEDIES CODE, THE PARTIES STIPULATE IN ADVANCE THAT ALL
DISPUTES OR CONTROVERSIES BETWEEN THE PARTIES ARISING FROM OR RELATING TO THIS
AGREEMENT OR ANY OF THE TRANSACTIONS CONTEMPLATED IN THIS AGREEMENT WILL BE
SUBMITTED TO AND RESOLVED BY A BINDING ARBITRATION PROCEEDING HELD IN DALLAS
COUNTY, TEXAS AND CONDUCTED IN ACCORDANCE WITH THE THEN CURRENT RULES OF THE
AMERICAN ARBITRATION ASSOCIATION.

IN WITNESS WHEREOF, each of the parties hereto has caused this Assignment
Agreement to be duly executed as of the day and year first set forth above.

ASSIGNOR:
BRUCE D. MACDONALD

/s/ Bruce D. MacDonald
-----------------------------------------
Bruce D. MacDonald

ASSIGNEE:
CD MANAGEMENT, INC.

By: /s/ Gary Johnson
-------------------------------------
Gary Johnson, Chairman of the Board

9
<PAGE>

ASSIGNMENT & ASSUMPTION AGREEMENT

LIST OF SCHEDULES AND EXHIBITS

SCHEDULES:

Schedule A List of Partnerships and Limited Liability Companies

Schedule B Partnership Agreements

Schedule C Limited Partners

Schedule D Assignor's Interest in Partnerships

Schedule E Partnership Assets

Schedule F Compliance with Laws and Licenses, Franchises
Permits and Governmental Authorizations

EXHIBIT:

Exhibit A Subscription Agreement

<PAGE>

EXHIBIT 2.4

WORLDWIDE AREA DEVELOPMENT AGREEMENT

THIS AGREEMENT is entered into this ___ day of _______, 1996, by and
between CD Warehouse Inc., a Delaware corporation, (the "Company"), and Mark
Kane, a resident of the State of Texas, individually, ("Developer").

W I T N E S S E T H :

WHEREAS, The Company is the franchisor of a retail music system ("CD
Warehouse System") under which compact discs and related products are sold to
the public from retail stores operated under the name "CD Warehouse"; and

WHEREAS, Developer desires to obtain the right to: (i) select proposed
sites on which to develop CD Warehouse stores, (ii) submit the same to the
Company for its acceptance of each proposed site, and (iii) enter into a License
Agreement with the Company on a store site by store site basis to develop, own
and operate a number of CD Warehouse store(s) upon the terms and conditions
set forth herein.

NOW, THEREFORE, in consideration of the foregoing and of the covenants
herein contained, the parties, intending to be legally bound, hereby agree as
follows:

1. AREA EXCLUSIVITY AND DEVELOPMENT SCHEDULE

(a) Subject to the terms and conditions of this Agreement, the Company
hereby grants to the Developer, the exclusive right to develop CD Warehouse
Stores beyond and outside of the legal boundaries of the United States, Canada
and Mexico, (hereinafter referred to as the "Franchised Area") for a period
extending from the effective date hereof through December 1, 2006.

(b) During the term hereof, Developer agrees to develop and to put In
Operation a minimum of one hundred (100) CD Warehouse stores within the
Franchised Area in accordance with the following development and performance
schedule (hereinafter the "Performance Schedule"):

NUMBER OF STORES IN OPERATION ON OR BEFORE
---------------- -------------------------
five (5) December 1, 1997
ten (10) December 1, 1998
fifteen (15) December 1, 1999
ten (10) December 1, 2000
ten (10) December 1, 2001
ten (10) December 1, 2002
ten (10) December 1, 2003
ten (10) December 1, 2004
ten (10) December 1, 2005
ten (10) December 1, 2006
--------
one hundred (100)

<PAGE>

(c) For the purposes of this Agreement, a store shall be deemed to be "In
Operation" once a License Agreement (as hereinafter set forth) has been executed
by Developer and the Company has opened to the public.

2. TERM

The term of this Agreement and all Developmental Rights granted hereunder
shall expire on the date the last of the CD Warehouse Stores to be developed
pursuant to the Performance Schedule set forth in Section 1 hereof is opened for
business, unless sooner terminated in accordance with the terms of this
Agreement.

3. RENEWAL

This Agreement shall not be subject to renewal under the terms of this
document. Renewal of this Agreement, as amended, and the underlying store site
license agreement(s) will be considered at the conclusion of the primary term
of this Agreement.

4. TIMELY PERFORMANCE

Developer hereby acknowledges that its timely development of the CD
Warehouse Stores in the Franchised Area in accordance with the Performance
Schedule is of material importance to the Company and Developer, and agrees, as
a condition of the continuance of the rights granted hereunder, to: (i) develop
and open the CD Warehouse Stores within the Franchised Area in accordance with
the Performance Schedule; (ii) operate such stores pursuant to the terms of the
Unit License Agreements and (iii) maintain all such stores (or the requisite
number of stores) in operation continuously.

5. CONSIDERATION FOR EXCLUSIVE RIGHTS

As consideration for this Agreement, Developer will pay an amount to be
jointly determined between the Company and Developer on a country by country
basis. Company and Developer agree that the fee/royalty amount to be determined
will not be lower than a franchise fee of $3,000 per store, one percent (1%) of
the royalty based on individual store sales volume and twenty percent (20%) of
the total fee received by Developer.

6. SITE SELECTION

(a) Due to the nature of this Agreement, the Company will not be requiring
formal site selection criteria be maintained. The Company will not provide
assistance to the Developer, third party, or any agent in the evaluation of site
selection.

(b) Developer acknowledges that no officer, employee or agent of the
Company has any authority to approve or accept any proposed site and any other
representations, whether oral or written, shall be of no effect; Developer
further acknowledges that the Company's acceptance of said site does not
constitute any representation, warranty or

<PAGE>

guarantee by the Company that said site will be a successful location for a
CD Warehouse Store.

(c) The store/site License Agreements for all units will be the standard
form of license agreement at the time of execution. Within thirty (30) days
after the receipt of a store/site License Agreement from the Company, Developer
shall execute said store/site License Agreement in accordance with the Company's
instructions and return the same along with the applicable license fee to the
Company.

7. FRANCHISE SERVICES

In consideration of the reduced fee/royalty arrangement contemplated by
the parties, Developer understands and agrees that the Company is not obligated
to provide all of the standard franchise services that are generally provided to
domestic locations of CD Warehouse Stores. Developer will also insure that
notification of the lack of franchise services will be properly provided in
writing to any third party or agent that may have an interest in joining
Developer to open CD Warehouse Stores internationally.

8. LIMITATION OF AGREEMENT

Developer acknowledges and agrees that:

(a) This Agreement does not include the grant of a license by the
Company to Developer of any rights to use the Proprietary Marks, the CD
Warehouse System, or to open or operate any CD Warehouse Store with the
Franchised Area. Developer shall obtain the license to use such additional
rights at each CD Warehouse Store upon the execution of each store/site License
Agreement by both Developer and the Company and only in accordance with the
terms of each License Agreement.

(b) The Developmental Rights granted hereunder are personal to Developer
and cannot be sold, assigned, transferred or encumbered, in whole or in part,
except as set forth in Section 12 hereof.

(c) Developer shall have no right to use in its name the name CD Warehouse
or any other names or Proprietary Marks used by the Company.

(d) Except as provided in Section 1 hereof, the Developmental Rights
granted hereunder are nonexclusive, and the Company retains the right, in its
sole discretion:

(i) To continue to construct and operate other CD Warehouse
Stores outside the Franchised Area and to use the CD Warehouse System and
Proprietary Marks at any location outside the Franchised Area, and to license
other to do so.

(ii) To develop, use and franchise the rights to any trade names,
trademarks, service marks, trade symbols, emblems, signs, slogans, insignia or
copyrights not designated by the Company as Proprietary Marks, for use with
similar or different franchise systems for the sale of the same, similar or
different products or services other

<PAGE>

than in connection with the CD Warehouse System at any location, on such
terms and conditions as the Company may deem advisable and without granting
Developer any rights herein.

(e) Because complete and detailed uniformity under many varying conditions
may not be possible or practical, the Company specifically reserves the right
and privilege, at its sole discretion and as it may deem in the best interests
of all concerned in any specific instance, to vary any standards for any
Developer based upon the peculiarities of a particular site or circumstance,
density of population, business potential, population of trade area, existing
business practices or any other condition which the Company deems to be of
importance to the successful operation of such Developer's business. Developer
shall not be heard to complain on account of any variation from standard
specifications and practices granted to any franchise owner and shall not be
entitled to require the Company to grant Developer a like or similar variation
hereunder.

(f) Developer has sole responsibility for the performance of all
obligations arising out of the operations of its business pursuant to this
Agreement, including, but not limited to, the payment when due of any and al
taxes levied or assessed by reason of such operation.

(g) In all public records, in its relationship with other persons, and in
any offering circular, prospectus or similar document, Developer shall indicate
clearly the independent ownership of Developer's business and that the
operations of said business are separate and distinct from the operation of the
Company's business.

(h) Developer agrees to indemnify and hold harmless the Company from any
liability or damage the Company may incur, including reasonable attorney fees,
as a result of claim, demands, costs or judgments of any kind or nature by
anyone whomsoever arising out of or otherwise connected with this Agreement, the
Developmental Rights, the acquisition of any retail music site or ownership,
maintenance or operation of any CD Warehouse Store by Developer.

9. SERVICES BY THE COMPANY

The Company shall, at its expense, make available to Developer the
following:

(a) Such standard construction plans, specifications and layouts for the
structure, equipment, decor and signs identified with the CD Warehouse as the
Company makes available to all new licensees from time to time.

(b) Such periodic continuing individual or group advise, consultation and
assistance, rendered by personal visit or telephone, or by newsletters or
bulletins made available from time to time to all Developers of the Company, as
the Company deem necessary or appropriate.

(c) Such bulletins, brochures and reports as may from time to time be
published by the Company regarding its plans, policies, research, developments
and activities.

<PAGE>

(d) Such other resources and assistance as may hereafter be developed and
offered by the Company to its licensees.

10. DEFAULT; TERMINATION

(a) The occurrence of any of the following events shall constitute a
default under this Agreement:

(i) If Developer shall, in any respect, fail to meet the Performance
Schedule, unless such failure is due to extraordinary events beyond the control
of the Developer (such as acts of God, war and the like, but exclusive of
matters involving the financial wherewithal of the Developer).

(ii) If Developer shall use the CD Warehouse System or Proprietary
Marks, or any other names, marks, systems, insignia, symbols or rights which are
the property of the Company except pursuant to, and in accordance with, a valid
and effective Unit License Agreement.

(iii) If Developer, or persons controlling, controlled by or under
common control with Developer, shall have any interest, direct or indirect, in
the ownership or operation of any retail music store engaged in the sales of
compact discs or related products within the Franchised Area or in any retail
music store which looks like, copies or imitates CD Warehouse Stores or operates
in a manner tending to have such effect other than in accordance with any Unit
License Agreement.

(iv) If Developer shall fail to remit to the Company any payments
pursuant to this Agreement when the same are due.

(v) If Developer shall purport to effect any assignment other than in
accordance with Section 12 hereof.

(vi) Except as provided in Section 12 (a) hereof, if Developer
attempts to sell, assign, transfer or encumber this Agreement.

(vii) If Developer makes, or has made, any misrepresentation to
the Company in connection with obtaining this Worldwide Area Development
Agreement or any Unit License Agreement.

(viii) If Developer defaults in the performance of any other
obligation under this Agreement.

(ix) If Developer defaults in the performance of any obligation under
any store/site License Agreement with the Company, regardless of whether or not
said store/site License Agreement is terminated as a result of such default.

(x) If Developer, or any person controlling, controlled by or under
common control with Developer, shall become insolvent by reason inability to pay
its debts

<PAGE>

as they mature; or if a receiver, permanent or temporary, of the business,
assets or property of Developer or any such person, or any part thereof, is
appointed by a court of competent authority; or if Developer or any such
person requests the appointment of a receiver or

makes a general assignment for the benefit of creditors or if a final
judgment against Developer or any such person in the of $15,000 or more
remains unsatisfied or record for thirty (30) days or longer following the
exhaustion of all appeals; or if the bank accounts, property or receivables
of Developer or any such person are attached and such attachment proceedings
are not dismissed with a thirty (30) day period; or if execution is levied
against the business or property of Developer or any such person or suit to
foreclose any lien (excluding mechanic's and materialman's liens) or mortgage
against any of the CD Warehouse Stores, the premises thereof or equipment
thereon is instituted and not dismissed with thirty (30) days.

(xi) If Developer, or any person controlling, controlled by, or under
common control with Developer, shall be convicted under any law providing for
criminal penalties (excluding misdemeanors).

(b) Upon occurrence of any of the events set forth in Section 11(a), the
Company may, without prejudice to any other rights or remedies contained in this
Agreement or provided by law or equity, terminate this Agreement. Such
termination shall be effective thirty (30) days after written notice (or such
other notice as may be required by applicable state law) is given by the Company
to Developer of any of the events set forth in Subparagraphs (i) through (ix) of
Section 11(a) if such defaults are not cured with such period. Termination
shall be effective immediately and without notice, however, upon occurrence of
any of the events specified in Subparagraphs (x) and (xi) of Section 11(a),
except where prohibited by state law.

(c) Upon termination of this Agreement for any reason, or upon expiration
of the term hereof, Developer agrees as follows:

(i) To cease immediately any attempts to select or develop sites on
which to operate CD Warehouse Stores, and

(ii) To cease immediately to hold itself out in any way as a Developer
of CD Warehouse or to do anything which would indicate any relationship between
it and the Company except to the extent permitted pursuant to Section 11(d).

(d) Termination of this Agreement shall not affect the rights of Developer
to operate CD Warehouse Stores in accordance with the terms of any Unit License
Agreement with the Company until and unless such Unit License Agreements, or any
of them, are terminated in accordance with their terms.

If any of the provisions of this contract governing termination or
nonrenewal are inconsistent with Oklahoma law, then the laws of the State of
Delaware shall apply.

<PAGE>

11. ASSIGNMENT, CONDITIONS AND LIMITATIONS

(a) Developer shall neither sell, assign, transfer nor encumber this
Agreement, the Developmental Rights, or any other interest hereunder, nor suffer
or permit any such assignment, transfer or encumbrance to occur by operation of
law or otherwise, except as provided in this Section 12.

(b) In the event of the death, disability or permanent incapacity of
Developer, the Company shall not unreasonably withhold its consent to the
transfer of all of the interest of Developer to his spouse, heirs or relatives,
by blood or marriage, whether such transfer is made by will or by operation of
law, provided that the requirements of Section 12(c) hereof have been met. In
the event that Developer's heirs do not obtain the consent of the Company as
prescribed herein, the personal representative of Developer shall have a
reasonable time to dispose of Developer's interest hereunder, which disposition
shall be subject to all the terms and conditions for transfers under this
Agreement.

(c) In the event Developer chooses to assign, transfer, or convey its
interest, the Company shall have the right of first refusal to consider
Developer's offer. Beginning three years from the date of grant and on an
annual basis for seven years thereafter, the Company will have the right to
cancel and rescind the Worldwide Area Development Agreement and acquire all of
the Developer's interest owned or controlled by the Developer pursuant to the
Worldwide Area Development Agreement (the exercise of which right is referred
to as the "Election"). The purchase price payable upon the Election will be
paid in cash at closing and will be determined by multiplying the quotient
derived from dividing (a) $3,200,000 by (b) a number equal to (i) cumulative
after tax net profit derived from the Contracts being conveyed pursuant to the
Asset Purchase Agreement (the "Agreement"), dated October 1, 1996 by and
between the Company, Compact Disc International, Ltd and Developer, (a copy of
which Agreement is attached hereto as Exhibit A) for the twelve month period
ending December 31, 1996 less (ii) $250,000 in salary expense, times the
consolidated, annualized after-tax net profit of the CD Warehouse Franchise
Operations developed pursuant to the Worldwide Area Development Agreement,
wherever located and whatever state of development. The consolidated, annualized
after-tax net profit of the CD Warehouse Franchise Operations is to be computed
in accordance with generally accepted accounting principles, consistently
applied. Any countries taxes that have been incurred but not paid will be
reserved for and deducted from the net profit computation. Additionally, if the
net income computation does not contain an allowance for Developer's salary an
expense deduction of $150,000 will be made. For purposes of the Election, any
net profit calculation which is for a period shorter than 365 days will be
annualized by dividing such net profit by the number of days in such period and
multiplying the average per-day profit by 365. Developer will provide Company
with consolidated financial statements for the CD Warehouse Operations developed
pursuant to the Worldwide Area Development Agreement during each of the seven
years during which the Election may be made, within ninety (90) days after the
end of each calender year (December 31). Company may make the Election, during
each of the seven years during which the Election may be made, by giving written
notice to Developer during the period beginning 90 days after the end of the
fiscal year of the CD Warehouse Franchise Operations (such fiscal year end is
referred to as the "Election Year End") and ending 180 days after the Election

<PAGE>

Year End. The closing of the transaction made pursuant to the Election will
occur at a time and place mutually agreed upon by Company and Developer
within 180 days after written notice of the Election is delivered to Seller
(unless extended by agreement between Company and Developer); if such closing
does not occur, however, Company's right to make an Election thereafter will
terminate and become null and void.

(d) In the event Developer assigns, transfers, or conveys its interest
hereunder other than pursuant to the provisions of Section 12(b) of this
Section 12, such assignment, transfer or conveyance shall be void unless carried
out in accordance with this subsection (d).

(i) At least thirty (30) days prior to any such proposed assignment,
conveyance or transfer, Developer shall give written notice to the Company of
such proposed assignment conveyance or transfer, setting forth the name of the
person to whom the rights or obligations are to be granted, information related
to the business background and creditworthiness of the assignee or transferee,
and any other information which the Company may ordinarily require to approve a
franchisee.

(ii) Developer shall disclose (and submit written proof of such
disclosure to the Company) to his assignee or transferee that information
required to be disclosed pursuant to Federal Trade Commission regulations for
subfranchises and any other state laws or regulations applicable to such
assignment or transfer. In the event such assignee or transferee waives its
right to receive such information, both the Developer and his transferee or
assignee shall waive in writing all rights or claims they have against the
Company in connection with such subfranchising by Developer. Regardless of
whether assignee or transferee does waive such rights, the Developer hereby
agrees to indemnify and hold harmless any rights or claims against the Company
brought by Developer's assignee or transferee or by any administrative or
regulatory agency of any state or federal government, or any subdivision
thereof. Such indemnification shall include any attorney's fees, court costs or
judgments rendered against the Company in connection with the transfer or
conveyance by Developer.

(iii) Developer has represented to the Company that he is entering
into this Worldwide Development Agreement with intention of complying with the
terms and conditions himself and not for the purpose of resale of the
Development Rights hereunder. Therefore, Developer agrees that any attempt to
assign this Agreement in whole or in part pursuant to this Section 12(d) within
ten years of the date of this Agreement shall be deemed an event of default
hereunder.

(iv) Developer hereby represents and agrees that to the extent his
assignee or transferee does not perform in accordance with this Agreement,
Developer shall perform and insure that the obligations hereunder are
accomplished.

(v) Developer agrees that the Company may determine to its
satisfaction that any franchise or securities laws in the state of the
transferee/assignee will be complied with in the event Developer transfers,
conveys or assigns any interest herein. In the event the regulatory authorities
of such state require that any interest under this agreement be

<PAGE>

registered with such authorities, Developer agrees to bear the expense of any
such registration and provide the necessary information to the Company to
insure that any such applications or registrations with regulatory
authorities are filed in an accurate and complete manner.

(d) In the event Developer or its successor is a corporation or
partnership or similar entity, it is agreed as follows:

(i) The Partnership Agreement, voting stock of or other ownership
interest therein ("Securities") shall reflect that the Securities are restricted
by the terms of this Agreement. Developer shall furnish the Company at the time
of execution of this Agreement or assignment to the corporation or partnership,
an agreement executed by all stockholders or partners of the Developer, stating
that no stockholder or partner will sell, assign or transfer voluntarily or by
operation of law any Securities of the Developer to any person or entity without
the written consent of the Company. All Securities issued by Developer will
bear the following legend which shall be printed legibly and conspicuously on
each stock certificate or other evidence of ownership interest:

"The transfer of these securities is subject to the terms
and conditions of a Worldwide Area Development with CD
Warehouse Inc. dated October 16, 1996, and certain Unit
License Agreements executed thereunder. Reference is made
to said Worldwide Area Development Agreement and to the
restrictive provisions of the Articles and By-Laws of this
corporation."

A stop transfer order shall be in effect against the transfer of any
securities on the Developer's records during the term of this agreement, unless
the transferee is approved in accordance with Section 12 (c) above.

(e) The Company's consent to a transfer of Developer's interest under
Section 11(b) is expressly conditioned upon the continuing personal guarantee of
the obligations of Developer under this Agreement by all transferees and the
execution by said transferees of personal guarantees of each Unit License
Agreement entered into pursuant to this Agreement.

(f) Developer acknowledges and agrees that the restrictions on transfer
imposed herein are reasonable and are necessary to protect the Developmental
Rights, the CD Warehouse System and the Proprietary Marks, as well as the
Company's excellent reputation and image, and are for the protection of the
Company, Developer and other licensees. Any assignment or transfer permitted by
this Section 12 shall not be effective until the Company receives a completely
executed copy of all transfer documents, and consents in writing.

(g) This Agreement shall inure to the benefit of the Company, its
successors and assigns, and the Company shall have the right to transfer or
assign all or any part of its interest herein to any person or legal entity.

<PAGE>

12. NOTICES

All notices hereunder shall be in writing and shall be duly given if hand
delivered or sent by registered or certified mail, postage prepaid, addressed:

(a) If to the Company at: CD Warehouse Inc.
P.O. Box 602
Edmond, OK 73083-0602

(b) If to Developer at: Mark E. Kane
1710 Firman Drive
Suite 300
Richardson, TX 75081

or at such other address as the Company or Developer shall have specified by
notice to the other party hereunder.

13. NO JOINT VENTURE

Nothing herein contained or done pursuant to this Agreement shall be deemed
to constitute Licensee as an agent, partner, or joint venturer of the Company
and neither party shall have the authority to act for the other in any manner to
create obligations or debts which would be binding on the other; neither party
shall be responsible for any obligations or expenses whatsoever of the other.

14. GOVERNING LAW

This Agreement shall be deemed to have been made and entered into in the
State of Delaware and all rights and obligations of the parties hereto shall be
governed by and construed in accordance with the laws of the State of Delaware.

15. REMEDIES CUMULATIVE; WAIVER; CONSENTS

All rights and remedies of the Company and of Developer enumerated in this
Agreement shall be cumulative and, except as specifically contemplated otherwise
by this Agreement, none shall exclude any other right or remedy allowed at law
or in equity and said rights or remedies may be exercised and enforced
concurrently. No waiver by the Company or by Developer of any covenant or
condition or the breach of any covenant or condition of this Agreement to be
kept or performed by the other party shall constitute a waiver by the waiving
party of any subsequent breach or nonobservance on any other occasion of the
same or any other covenant or condition of this Agreement. Subsequent
acceptance by the Company of any payments due to it hereunder shall not be
deemed to be a waiver by the Company of any preceding breach by Developer of any
terms, covenants or conditions of this Agreement.

Whenever this Agreement requires the Company's prior approval or consent,
Developer shall make a timely written request to the Company therefor and such
approval

<PAGE>

shall be obtained in writing. The Company will also consider granting, in
its sole discretion, other reasonable requests individually submitted by
Developer in writing for the Company's prior waiver of any obligation imposed
by this Agreement. The Company make no warranties or guarantees upon which
Developer may rely, and assumes no liability or obligation to Developer, by
providing any waiver, approval, consent, or suggestion to Developer in
connection with this Agreement, or by reason of any neglect, delay or denial
of any request therefor. Any waiver granted by the Company shall be subject
to the Company's continuing review, may subsequently be revoked for any
reason effective upon Developer's receipt of ten (10) days prior written
notice, and shall be without prejudice to any other rights the Company may
have.

16. SEVERABILITY

If any provision of this Agreement or the application of any provision to
any person or to any circumstances shall be determined to be invalid or
unenforceable, then such determination shall not affect any other provision of
this Agreement or the application of such provision to any other person or
circumstance, all of which other provisions shall remain in full force and
effect, and it is the intention of the Company and Developer that if any
provision of this Agreement is susceptible of two or more constructions, one of
which would render the provision enforceable and the other or others of which
would render the provision unenforceable, then the provision shall have the
meaning which renders it enforceable.

17. ENTIRE AGREEMENT

This Agreement together with all Unit License Agreements executed hereunder
and previous Asset Purchase Agreement constitutes the entire agreement between
the Company and Developer in respect of the subject matter hereof. No officer,
employee or other servant or agent of the Company or Developer is authorized to
make any representation, warranty or other promise not contained in this
Agreement. No change, termination or attempted waiver of any of the provisions
of this Agreement shall be binding upon the Company or Developer unless in
writing and signed by the Company and Developer.

18. JOINT AND SEVERAL OBLIGATION

If the Developer consists of more than one person, their liability under
this Agreement shall be deemed to be joint and several.

19. COUNTERPART; PARAGRAPH HEADINGS; PRONOUNS

This Agreement may be executed in any number of counterparts, each of which
shall be deemed an original but all of which together shall constitute one and
the same instrument. The section headings in this Agreement are for convenience
of reference only and shall not be deemed to alter or affect any provision
thereof. Each pronoun used herein shall be deemed to include the other number
and genders.

<PAGE>

20. ACKNOWLEDGMENTS

Developer acknowledges that:

(a) It has conducted an independent investigation of the business
contemplated by this Agreement and recognizes that it involves business risks
making the success of the venture largely dependent upon the business abilities
of Developer. The Company expressly disclaims the making, and Developer
acknowledges that it has not received or relied upon, any warranty or guarantee,
expressed or implied, as to the potential volume, profits or success of the
business venture contemplated by this Agreement.

(b) It has no knowledge of any representations by the Company or its
officers, directors, shareholders, employees, agents or servants about the
business contemplated by this Agreement, that are contrary to the terms of this
Agreement or the documents incorporated herein, and further represents to the
Company, as an inducement to its entry into this Agreement, that it has made no
misrepresentations in obtaining this Agreement.

(c) It has received, read and understood this Agreement: the Company has
fully and adequately explained the provisions of each to its satisfaction; and
the Company has accorded it ample time and opportunity to consult with advisors
of its own choosing about the potential benefits and risks of entering into this
Agreement.

(d) It is aware of the fact that some present licensees of the Company may
operate under different forms of agreement and consequently, that the Company's
obligations and rights in respect to its various franchise owners may differ
materially in certain circumstances.

21. ARBITRATION CLAUSE

Each party to this Agreement agrees that any dispute or controversy arising
between any of the parties to this Agreement, or any person or entity in privity
therewith, out of the transactions effected and relationships created pursuant
to this Agreement and each other agreement created in connection herewith,
including any dispute or controversy regarding the formation, terms, or
construction of this Agreement, regardless of kind or character, must be
resolved through binding arbitration. Each party to this Agreement agrees to
submit such dispute or controversy to arbitration before the American
Arbitration Association in Dallas, Texas, and further agrees to be bound by the
determination of any arbitrator or arbitration panel empaneled by the American
Arbitration Association to adjudicate the dispute. Judgment on any arbitration
award may be entered in any court of competent jurisdiction. Any party to this
Agreement may bring an action, including a summary or expedited proceeding, to
compel arbitration of any such dispute or controversy in a court of competent
jurisdiction and, further, may seek provisional or ancillary remedies including
temporary or injunctive relief in connection with such dispute or controversy in
a court of competent jurisdiction, provided that the dispute or controversy is
ultimately resolved through binding arbitration conducted in accordance with the
terms and conditions of this Section.

<PAGE>

IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as
of the day and year first written above.

THE COMPANY: CD WAREHOUSE INC.

By:
--------------------------------------
Jerry W. Grizzle, President
ATTEST:

- -----------------------------
Secretary

DEVELOPER: MARK E. KANE

By:
--------------------------------------
Mark E. Kane

<PAGE>

STATE OF DELAWARE PAGE 1

OFFICE OF THE SECRETARY OF STATE

-----------------------

I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO
HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF
INCORPORATION OF "CD WAREHOUSE, INC.", FILED IN THIS OFFICE ON THE FIFTH DAY
OF SEPTEMBER, A.D. 1996, AT 2 O'CLOCK P.M.

A CERTIFIED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE NEW CASTLE
COUNTY RECORDER OF DEEDS FOR RECORDING.

[SEAL] /s/ EDWARD J. FREEL
-------------------------------------
EDWARD J. FREEL, SECRETARY OF STATE

2658418 8100 AUTHENTICATION: 8092930
960257823 DATE: 09-05-96

<PAGE>

EXHIBIT 3.1

CERTIFICATE OF INCORPORATION
OF
CD WAREHOUSE, INC.

ARTICLE I

The name of the corporation is CD Warehouse, Inc. (the "Corporation").

ARTICLE II

The address of the Corporation's registered office in the State of Delaware
is Corporation Trust Center, 1209 Orange Street, Wilmington, New Castle County,
Delaware 19801. The name of its registered agent at such address is The
Corporation Trust Company.

ARTICLE III

The purpose of the Corporation is to engage in any lawful act or activity
for which corporations may be organized under the General Corporation Law of the
State of Delaware.

ARTICLE IV

Section 1. The amount of total authorized capital stock of the
Corporation is 15,000,000 shares, of which 10,000,000 shares shall be Common
Stock, having a par value of $.01 per share ("Common Stock"), and 5,000,000
shares shall be Preferred Stock, having a par value $.01 per share ("Preferred
Stock").

Section 2. Except for and subject to those rights expressly granted to
the holders of Preferred Stock, or any series thereof, by the Board of Directors
of the Corporation (the "Board of Directors"), pursuant to the authority hereby
vested in the Board of Directors or as provided by the laws of the State of
Delaware, the holders of the Corporation's Common Stock shall have exclusively
all rights of stockholders and shall possess exclusively all voting power. Each
holder of Common Stock of the Corporation shall be entitled, on each matter
submitted for a vote to holders of Common Stock, to one vote for each share of
Common Stock standing in such holder's name on the books of the Corporation.

<PAGE>

Section 3. The Board of Directors is hereby expressly authorized, at
any time and from time to time by a resolution or resolutions, to divide the
shares of Preferred Stock into one or more series, to issue from time to time
in whole or in part the shares of Preferred Stock or the shares of any series
thereof, and to fix and determine in the resolution or resolutions providing
for the issue of shares of Preferred Stock of a particular series the voting
rights, if any, of the holders of shares of such series, the designations,
preferences and relative, participating, optional and other special rights of
such series, and the qualifications, limitations and restrictions thereof, to
the fullest extent now or hereafter permitted by the laws of the State of
Delaware. The voting rights, if any, of each such series and the preferences
and relative, participating, optional and other special rights of each such
series, and the qualifications, limitations and restrictions thereof, if any,
may differ from those of any and all other series. Unless otherwise provided
in the resolution or resolutions of the Board of Directors providing for the
issuance thereof, shares of any series of Preferred Stock that shall be
issued and thereafter acquired by the Corporation through purchase,
redemption, exchange, conversion or otherwise shall return to the status of
authorized but unissued Preferred Stock.

Without limiting the generality of the foregoing authority of the Board
of Directors, the Board of Directors from time to time may (if otherwise
permitted under the General Corporation Law of the State of Delaware):

(a) designate a series of Preferred Stock, which may be distinguished by
number, letter or title from other Preferred Stock of the Corporation;

(b) fix and thereafter increase or decrease (but not below the number of
shares thereof then outstanding) the number of shares of Preferred Stock
that shall constitute such series;

(c) provide for dividends on shares of Preferred Stock of such series and,
if provisions are made for dividends, determine the dividend rate and the
times at which holders of shares of Preferred Stock of such series shall be
entitled to receive the dividends, whether the dividends shall be
cumulative and, if so, from what date or dates, and the other conditions,
if any, including rights of priority, if any, upon which the dividends
shall be paid;

(d) determine the rights, if any, to which holders of the shares of
Preferred Stock of such series shall be entitled in the event of any
liquidation, dissolution or winding up of the Corporation; provided,
however, that in the event of any such liquidation, dissolution or winding
up of the Corporation, the holders of the shares of Preferred Stock of such
series shall not be entitled to be paid out of the assets of the
Corporation available for distribution to its shareholders, whether from
capital, surplus or earnings, an amount in cash greater than

2
<PAGE>

$100.00 per share, plus accrued and unpaid dividends to the date fixed for
liquidation, dissolution or winding up, whether or not declared;

(e) provide for the redemption or purchase of shares of Preferred Stock of
such series and, if provisions are made for redemption, determine the time
or times and the price or prices at which the shares of Preferred Stock of
such series shall be subject to redemption in whole or in part, and the
other terms and conditions, if any, on which shares of Preferred Stock of
such series may be redeemed or purchased;

(f) provide for a sinking fund or purchase fund for the redemption or
purchase of shares of Preferred Stock of such series and, if any such fund
is so provided for the benefit of such shares of Preferred Stock, the
amount of such fund and the manner of its application;

(g) determine the extent of the voting rights, if any, of the shares of
Preferred Stock of such series, including but not limited to the right of
the holders of such shares to vote as a separate class acting alone or with
the holders of one or more other series of Preferred Stock and the right to
have more (or less) than one vote per share;

(h) provide for whether or not the shares of Preferred Stock of such
series shall be convertible into, or exchangeable for, shares of any other
class or classes of capital stock, or any series thereof, of the
Corporation and, if so convertible or exchangeable, determine the
conversion or exchange price or rate, the adjustments thereof and the other
terms and conditions, if any, on which such shares of Preferred Stock shall
be so convertible or exchangeable; and

(i) provide for any other preferences, any relative, participating,
optional or other special rights, any qualifications, limitations or
restrictions thereof, or any other terms or provisions of shares of
Preferred Stock of such series as the Board of Directors may deem
appropriate or desirable.

Section 4. Shares of Common Stock or Preferred Stock may be issued by
the Corporation from time to time for such consideration, having a value of not
less than the par value, if any, thereof, as is determined from time to time by
the Board of Directors. Any and all shares issued and for which full
consideration has been paid or delivered shall be deemed fully paid stock and
the holder thereof shall not be liable for any further payment thereon.

Section 5. The Corporation may issue rights and options to purchase
shares of Common

3
<PAGE>

Stock or Preferred Stock of the Corporation to directors, officers or
employees of the Corporation or any affiliate thereof, and no shareholder
approval or ratification of any such issuance of rights and options shall be
required.

ARTICLE V

The name and mailing address of the incorporator is as follows:

Jeanette C. Timmons, Esq.
Day, Edwards, Federman, Propester & Christensen, P.C.
210 Park Ave., Ste. 2900
Oklahoma City, Oklahoma 73102

ARTICLE VI

The number of directors which shall constitute the whole Board of Directors
of the Corporation shall be as specified pursuant to the By-Laws of the
Corporation and may be altered from time to time as may be provided therein;
provided, however, the name and mailing address of the person who is to serve as
the initial director until the first annual meeting of the stockholders or until
his successors are elected and qualified are as follows:

Jerry Grizzle
210 Park Avenue, Ste. 2900
Oklahoma City, Oklahoma 73102

ARTICLE VII

The Board of Directors of the Corporation is expressly authorized to adopt,
amend or repeal the By-Laws of the Corporation. The stockholders of the
Corporation may not adopt, amend or repeal the By-Laws of the Corporation other
than by the affirmative vote of 75% of the combined voting power of all
outstanding voting securities of the Corporation entitled to vote generally in
the election of directors of the Board of Directors of the Corporation ("Voting
Power"), voting together as a single class. In addition to any affirmative vote
required by applicable law and in addition to any vote of the holders of any
series of Preferred Stock provided for or fixed pursuant to the provisions of
Article IV of this Certificate of Incorporation, any alteration, amendment or
repeal relating to this Article VII must be approved by the affirmative vote of
the holders of at least 75% of the Voting Power, voting together as a single
class.

4
<PAGE>

ARTICLE VIII

No action that is required or permitted to be taken by the stockholders of
the Corporation at any annual or special meeting of stockholders may be effected
by written consent of stockholders in lieu of a meeting of stockholders, unless
the action to be effected by written consent of stockholders and the taking of
such action by such written consent have expressly been approved in advance by
the Board.

In addition to any affirmative vote required by applicable law and in
addition to any vote of the holders of any series of Preferred Stock provided
for or fixed pursuant to the provisions of Article IV of this Certificate of
Incorporation, any alteration, amendment or repeal relating to this Article VIII
must be approved by the affirmative vote of the holders of at least 75% of the
Voting Power, voting together as a single class.

ARTICLE IX

Section 1. Any person who was or is a party or is threatened to be
made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative (other
than an action by or in the right of the Corporation) by reason of the fact
that he is or was a director or officer of the Corporation or, while a
director or officer of the Corporation, is or was serving at the request of
the Corporation as a director or officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, shall be
indemnified by the Corporation (funds paid or required to be paid to any
person as a result of the provisions of this Article IX shall be returned to
the Corporation or reduced, as the case may be, to the extent that such
person receives funds pursuant to an indemnification from any such other
corporation or organization) against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably
incurred by such person in connection with the defense or settlement of such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in, or not opposed to, the best interests of the
Corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. Any such person who
could be indemnified pursuant to the preceding sentence except for the fact
that the subject action or suit is or was by or in the right of the
Corporation shall be indemnified by the Corporation against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit, except that
no indemnification shall be made in respect of any claim, issue or matter as
to which such person shall have been adjudged to be liable to the Corporation
unless and only to the extent that the Court of Chancery of

5
<PAGE>

the State of Delaware or the court in which such action or suit was brought
shall determine upon application that, despite the adjudication of liability
but in view of all the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses which the Court of
Chancery or such other court shall deem proper. As used herein, the term
"proceeding" means any threatened, pending, or completed action, suit,
hearing or other matter, whether civil, criminal, administrative,
arbitrative, or investigative, any appeal in such an action, suit, hearing or
other matter, and any inquiry or investigation that could lead to such an
action, suit, hearing or other matter.

Section 2. To the extent that a director or officer of the Corporation
has been successful on the merits or otherwise in defense of any action, suit or
proceeding referred to in Section 1 of this Article IX, or in defense of any
claim, issue or matter therein, including the dismissal of an action without
prejudice, he shall be indemnified by the Corporation against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection therewith without the necessity of any action being taken by the
Corporation other than the determination, in good faith, that such defense has
been successful. In all other cases wherein indemnification is provided by this
Article IX, unless ordered by a court, indemnification shall be made by the
Corporation only as authorized in the specific case upon a determination that
indemnification of the director or officer is proper under the circumstances
because he has met the applicable standard of conduct specified in this Article
IX. Such determination shall be made (1) by the Board of Directors by a
majority vote of a quorum consisting of directors who were not parties to such
action, suit or proceeding, or (2) if such a quorum is not obtainable, or, even
if obtainable, a quorum of disinterested directors so directs, by independent
legal counsel in a written opinion, or (3) by the holders of a majority of the
shares of capital stock of the Corporation entitled to vote thereon.

Section 3. The termination of any action, suit or proceeding by
judgment, order, settlement, conviction or upon a plea of nolo contendere or its
equivalent shall not, of itself, create a presumption that the person seeking
indemnification did not act in good faith and in a manner which he reasonably
believed to be in, or not opposed to, the best interests of the Corporation,
and, with respect to any criminal action or proceeding, had reasonable cause to
believe that his conduct was unlawful. Entry of a judgment by consent as part
of a settlement shall not be deemed a final adjudication of liability for
negligence or misconduct in the performance of duty, nor of any other issue or
matter.

Section 4. Expenses (including attorneys' fees) incurred by an officer
or director in defending any action, suit or proceeding may be paid by the
Corporation in advance of the final disposition of such action, suit or
proceeding as authorized by the Board of Directors in the specific

6
<PAGE>

case upon receipt of an undertaking by or on behalf of such director or
officer to repay such amount if it shall ultimately be determined that he is
not entitled to be indemnified by the Corporation as authorized in this
Article IX.

Section 5. The indemnification and advancement of expenses hereby
provided shall not be deemed exclusive of any other rights to which those
seeking indemnification or advancement of expenses may be entitled under any
By-Law, agreement, vote of stockholders or disinterested directors or otherwise,
both as to action in an official capacity and as to action in another capacity
while holding such office, and shall continue as to a person who has ceased to
be a director or officer, and shall inure to the benefit of the heirs, executors
and administrators of such person.

Section 6. By action of the Board of Directors, notwithstanding any
interest of the directors in the action, the Corporation, at its expense, may
purchase and maintain insurance, in such amounts as the Board of Directors deems
appropriate, on behalf of any person who is or was a director or officer of the
Corporation, or, while a director or officer of the Corporation, is or was
serving at the request of the Corporation as a director, officer, employee or
agent (including trustee) of another corporation, partnership, joint venture,
trust or other enterprise against any liability asserted against him and
incurred by him in any such capacity, or arising out of his status as such,
whether or not the Corporation would have the power to indemnify him against
such liability under the provisions of this Article IX or under the provisions
of the General Corporation Law of the State of Delaware.

Section 7. All rights to indemnification and advancement of expenses
under this Article IX shall be deemed to be provided by contract between the
Corporation and the director or officer who serves in such capacity at any time
while this Article IX and other relevant provisions of the General Corporation
Law of the State of Delaware and other applicable law, if any, are in effect.

Section 8. Any repeal or modification of the foregoing paragraphs by
the stockholders of the Corporation shall not adversely affect any right or
protection of a director or officer of the Corporation existing at the time of
such repeal or modification.

Section 9. The Corporation may additionally indemnify any employee or
agent of the Corporation to the fullest extent permitted by law.

ARTICLE X

Whenever a compromise or arrangement is proposed between this Corporation
and its

7
<PAGE>

creditors or any class of them and/or between this Corporation and its
stockholders or any class of them, any court of equitable jurisdiction within
the State of Delaware may, on the application in a summary way of this
Corporation or of any creditor or stockholder thereof or on the application
of any receiver or receivers appointed for this Corporation under the
provisions of Section 291 of the General Corporation Law of the State of
Delaware or on the application of trustees in dissolution or of any receiver
or receivers appointed for this Corporation under the provisions of Section
279 of the General Corporation Law of the State of Delaware, order a meeting
of the creditors or class of creditors, and/or of the stockholders or class
of stockholders of this Corporation, as the case may be, to be summoned in
such manner as the said court directs. If a majority in number representing
three-fourths in value of the creditors or class of creditors, and/or of the
stockholders or class of stockholders of this Corporation, as the case may
be, agrees to any compromise or arrangement and to any reorganization of this
Corporation as consequence of such compromise or arrangement, the said
compromise or arrangement and the said reorganization shall, if sanctioned by
the court to which the said application has been made, be binding on all of
the creditors or class of creditors, and/or on all of the stockholders or
class of stockholders, of this Corporation, as the case may be, and also on
this Corporation.

ARTICLE XI

A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (a) for any breach of the director's
duty of loyalty to the Corporation or its stockholders, (b) for acts or
omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (c) under Section 174 of the General Corporation
Law of the State of Delaware, as the same exists at the time this Certificate
of Incorporation becomes effectives or as the same hereafter may be amended,
or (d) for any transaction from which the director derived an improper
personal benefit. If the General Corporation Law of the State of Delaware is
amended after the date of filing of this Certificate of Incorporation to
authorize corporate action further eliminating or limiting the personal
liability of directors, then the liability of a director of the Corporation
shall be limited to the fullest extent permitted by the amended General
Corporation Law of the State of Delaware. Any repeal or modification of this
Article XI by the stockholders of the Corporation shall be prospective only,
and shall not adversely affect any limitation on the personal liability of a
director of the Corporation existing at the time of such repeal or
modification.

ARTICLE XII

The Corporation reserves the right to amend and repeal any provision
contained in this

8
<PAGE>

Certificate of Incorporation in the manner from time to time prescribed by
the laws of the State of Delaware. All rights herein conferred are granted
subject to this reservation.

THE UNDERSIGNED, being the sole incorporator hereinbefore named, for the
purpose of forming a corporation pursuant to the General Corporation Laws of the
State of Delaware, do make this Certificate, hereby declaring and certifying
that this is my act and deed and the facts herein stated are true, and
accordingly have hereunto set my hand this 5th day of September, 1996.

/s/ JEANETTE C. TIMMONS
----------------------------------
Jeanette C. Timmons

<PAGE>

EXHIBIT 3.2

BYLAWS

CD WAREHOUSE, INC.

DATED SEPTEMBER 5, 1996

<PAGE>

TABLE OF CONTENTS

Page
----
Article I -- Offices

Section 1 Registered Office . . . . . . . . . . . . . . . 1
Section 2 Other Offices . . . . . . . . . . . . . . . . . 1

Article II -- Stockholders

Section 1 Annual Meeting. . . . . . . . . . . . . . . . . 1
Section 2 Special Meetings. . . . . . . . . . . . . . . . 1
Section 3 Notice of Meetings. . . . . . . . . . . . . . . 1
Section 4 List of Stockholders. . . . . . . . . . . . . . 2
Section 5 Quorum. . . . . . . . . . . . . . . . . . . . . 2
Section 6 Organization. . . . . . . . . . . . . . . . . . 2
Section 7 Order of Business and Procedure . . . . . . . . 3
Section 8 Voting. . . . . . . . . . . . . . . . . . . . . 3
Section 9 Inspectors. . . . . . . . . . . . . . . . . . . 3
Section 10 Proxies . . . . . . . . . . . . . . . . . . . . 3
Section 11 No Action by Consent. . . . . . . . . . . . . . 3
Section 12 Advance Notice of Stockholders' Proposals . . . 4

Article III -- Directors

Section 1 General Powers of Board . . . . . . . . . . . . 5
Section 2 Number of Directors and Term of Office. . . . . 5
Section 3 Election of Directors . . . . . . . . . . . . . 6
Section 4 Nominations of Directors. . . . . . . . . . . . 6
Section 5 Chairman of the Board . . . . . . . . . . . . . 6
Section 6 Resignations. . . . . . . . . . . . . . . . . . 6
Section 7 Vacancies . . . . . . . . . . . . . . . . . . . 6
Section 8 Removal of Directors. . . . . . . . . . . . . . 6
Section 9 Regular Meetings. . . . . . . . . . . . . . . . 7
Section 10 Special Meetings. . . . . . . . . . . . . . . . 7
Section 11 Notice. . . . . . . . . . . . . . . . . . . . . 7
Section 12 Quorum and Organization of Meetings . . . . . . 7
Section 13 Action by Unanimous Consent . . . . . . . . . . 8
Section 14 Telephonic Participation. . . . . . . . . . . . 8
Section 15 Committees of Directors . . . . . . . . . . . . 8

<PAGE>
TABLE OF CONTENTS (continued)

Page
----
Article III--Directors (continued)

Section 14 Minutes of Committee Meetings . . . . . . . . . 8
Section 15 Compensation of Directors . . . . . . . . . . . 8
Section 16 Minutes of Committee Meetings . . . . . . . . . 8
Section 17 Compensation of Directors . . . . . . . . . . . 8

Article IV -- Notices

Section 1 Method. . . . . . . . . . . . . . . . . . . . . 9
Section 2 Waiver. . . . . . . . . . . . . . . . . . . . . 9

Article V -- Officers

Section 1 Election. . . . . . . . . . . . . . . . . . . . 9
Section 2 President . . . . . . . . . . . . . . . . . . . 9
Section 3 Vice Presidents . . . . . . . . . . . . . . . . 9
Section 4 Treasurer . . . . . . . . . . . . . . . . . . . 10
Section 5 Secretary . . . . . . . . . . . . . . . . . . . 10
Section 6 Compensation. . . . . . . . . . . . . . . . . . 10

Article VI -- Capital Stock

Section 1 Certificates. . . . . . . . . . . . . . . . . . 10
Section 2 Facsimile Signatures. . . . . . . . . . . . . . 11
Section 3 Transfer Agents and Registrars. . . . . . . . . 11
Section 4 Lost Certificates . . . . . . . . . . . . . . . 11
Section 5 Transfer of Shares. . . . . . . . . . . . . . . 11
Section 6 Fixing Record Date. . . . . . . . . . . . . . . 12
Section 7 Registered Stockholders . . . . . . . . . . . . 12

Article VII -- General Provisions

Section 1 Dividends. . . . . . . . . . . . . . . . . . . 12
Section 2 Reserves. . . . . . . . . . . . . . . . . . . . 12
Section 3 Checks . . . . . . . . . . . . . . . . . . . . 12
Section 4 Execution of Proxies. . . . . . . . . . . . . . 13

Article VIII -- Amendments

Section 1 Amendments. . . . . . . . . . . . . . . . . . . 13

<PAGE>

BYLAWS
OF
CD WAREHOUSE, INC.
(hereinafter called the "Corporation")

ARTICLE I
OFFICES

SECTION 1. REGISTERED OFFICE. The registered office of the Corporation
shall be in the State of Delaware, address C.T. Corporation, Corporation Trust
Center, 1209 Orange Street, Wilmington, New Castle County, Delaware, 19801.

SECTION 2. OTHER OFFICES. The Corporation may also have offices at
such other places both within and without the State of Delaware as the Board of
Directors may from time to time determine as the business of the Corporation may
require. The corporate headquarters of the Corporation shall be in Oklahoma
City, Oklahoma.

ARTICLE II
STOCKHOLDERS

SECTION 1. ANNUAL MEETING. An annual meeting of stockholders for the
purpose of electing directors and of transacting such other business as may come
before it shall be held each year at such date, time, and place, either within
or without the State of Delaware, as may be specified by the Board of Directors.

SECTION 2. SPECIAL MEETINGS. Unless otherwise proscribed by law,
special meetings of stockholders for any purpose or purposes may be held at any
time only upon call of a majority of the Board of Directors, at such time and
place either within or without the State of Delaware as may be stated in the
notice (as described herein at Section 3 of this Article II).

SECTION 3. NOTICE OF MEETINGS. (a) Unless waived, a notice of each
annual or special meeting, stating the date, hour and place and the purpose or
purposes for which the meeting is called, shall be given to each stockholder of
record entitled to vote or entitled to notice, not more than sixty (60) days nor
less than ten (10) days before the date of any such meeting, unless a different
period is prescribed by law. If mailed, such notice shall be directed to a
stockholder at his or her address as the same appears on the records of the
Corporation. If a meeting is adjourned to another time or place and such
adjournment is for 30 days or less and no new record date is fixed for the
adjourned meeting, no further notice as to such adjourned meeting need be given
if the time and place to which it is adjourned are fixed and announced at such
meeting. In the event of a transfer of shares

<PAGE>

after notice has been given and prior to the holding of the meeting, it shall
not be necessary to serve notice on the transferee. If the adjournment is
for more than 30 days, or after the adjournment a new record date is fixed
for the adjourned meeting, a notice of the adjourned meeting shall be given
to each stockholder of record entitled to vote at the meeting.

(b) A written waiver of any such notice signed by the person
entitled thereto, whether before or after the time stated therein, shall be
deemed equivalent to notice. Attendance of a person at a meeting shall
constitute a waiver of notice of such meeting, except when the person
attends the meeting for the express purpose of objecting, at the beginning
of the meeting, to the transaction of any business because the meeting is
not lawfully called or convened. Business transacted at any special
meeting of stockholders shall be limited to the purposes stated in the
notice.

SECTION 4. LIST OF STOCKHOLDERS. The officer who has charge of the
stock ledger of the Corporation shall prepare and make available, at least ten
(10) days before every meeting of stockholders, a complete list of the
stockholders entitled to vote at the meeting, arranged in alphabetical order,
and showing the address of each stockholder and the number of shares registered
in the name of each stockholder. Such list shall be open to the examination of
any stockholder, for any purpose germane to the meeting, during ordinary
business hours, for a period of at least ten (10) days prior to the meeting,
either at a place within the city where the meeting is to be held, which place
shall be specified in the notice of the meeting, or, if not so specified, at the
place where the meeting is to be held. The list shall also be produced and kept
at the time and place of the meeting during the whole time thereof, and may be
inspected by any stockholder who is present.

SECTION 5. QUORUM. Except as otherwise provided by law or in the
Certificate of Incorporation or these Bylaws, at any meeting of stockholders,
the holders of a majority of shares issued and outstanding of each class
entitled to vote, shall be present or represented by proxy in order to
constitute a quorum for the transaction of business. If, however, such quorum
shall not be present or represented at any meeting of the stockholders, a
majority in voting interest of the stockholders present in person or represented
by proxy, or, in the absence of a decision by the majority, any officer entitled
to preside at such meeting, shall have power to adjourn the meeting from time to
time, without notice other than an announcement at the meeting of the time and
place of the adjourned meeting, until a quorum shall be present or represented.
At any such adjourned meeting at which a quorum is present, any business may be
transacted which might have been transacted at the meeting as originally
notified. If the adjournment is for more than thirty (30) days, or if after the
adjournment a new record date is fixed for the adjourned meeting, a notice of
the adjourned meeting shall be given to each stockholder of record entitled to
vote at the meeting.

SECTION 6. ORGANIZATION. The Chairman of the Board, if any, or, in his
absence, the Vice Chairman, if any, or, in their absence, the President, shall
call to order meetings of stockholders and shall act as Chairman of such
meetings. The Board of Directors or, if the Board fails to act, the
stockholders may appoint any stockholder, director, or officer of the
Corporation to act as Chairman of any meeting in the absence of the Chairman of
the Board, the Vice Chairman, or the President. The Secretary of the
Corporation, or, if the Secretary of the Corporation not be present, the
Assistant Secretary, or if the Secretary and

<PAGE>

the Assistant Secretary not be present, any person whom the Chairman of the
meeting shall appoint, shall act as Secretary of the meeting.

SECTION 7. ORDER OF BUSINESS AND PROCEDURE. The order of business at
all meetings of the stockholder and all matters relating to the manner of
conducting the meeting shall be determined by the Chairman of the meeting.
Meetings shall be conducted in a manner designed to accomplish the business of
the meeting in a prompt and orderly fashion and to be fair and equitable to all
stockholders, but it shall not be necessary to follow any manual of
parliamentary procedure.

SECTION 8. VOTING. Except for the election of directors, at any
meeting duly called and held at which a quorum is present, the vote of the
holders of a majority of the stock having voting power present in person or
represented by proxy shall decide any questions brought before such meeting,
unless the question is one upon which by express provision of law or of the
Certificate of Incorporation or these Bylaws, a greater vote is required in
which case such express provision shall govern and control the decision of such
question. At any meeting duly called and held for the election of directors at
which a quorum is present, directors shall be elected by a plurality of the
votes cast by the holders (acting as such) of shares of stock of the Corporation
entitled to elect such directors.

SECTION 9. INSPECTORS. The Board of Directors in advance of any
stockholders' meeting may appoint one or more inspectors to act at the meeting
or any adjournment thereof. If inspectors are not so appointed, the person
presiding at a stockholders' meeting may, and on the request of any stockholder
entitled to vote thereat shall, appoint one or more inspectors. In case any
person appointed as inspector fails to appear or act, the vacancy may be filled
by the Board of Directors in advance of the meeting or at the meeting by the
person present thereat. Each inspector, before entering upon the discharge of
his duties, shall take and sign an oath faithfully to discharge the duties of
inspector at such meeting with strict impartiality and according to the best of
his ability.

SECTION 10. PROXIES. Unless otherwise provided in the Certificate of
Incorporation, each stockholder shall at every meeting of the stockholders be
entitled to one vote in person or by proxy for each share of the capital stock
having voting power held by such stockholder, but no proxy shall be voted on
after three years from its date, unless the proxy provides for a longer period.

SECTION 11. NO ACTION BY CONSENT. No action that is required or permitted
to be taken by stockholders of the Corporation at any annual or special meeting
of stockholders may be effected by written consent of stockholder in lieu of a
meeting of stockholders, unless the action to be effected by written consent of
stockholders and the taking of such action by such written consent have
expressly been approved in advance by the Board of Directors. Except as
otherwise provided herein, no action shall be taken by stockholders except at an
annual or special meeting of stockholders.

SECTION 12. ADVANCE NOTICE OF STOCKHOLDERS' PROPOSALS. (a) At an annual
or special meeting of the stockholders, only such business shall be conducted as
shall have

<PAGE>

been properly brought before the meeting. To be properly brought before a
meeting, business must be (i) specified in the notice of meeting (or any
supplement thereto) given by or at the direction of the Board of Directors,
(ii) brought before the meeting by or at the direction of the Board of
Directors, (iii) properly brought before an annual meeting by a stockholder
or (iv) if, and only if, the notice of a special meeting provides for
business to be brought before the meeting by stockholders, properly brought
before the meeting by a stockholder. For business to be properly brought
before the meeting by a stockholder, the stockholder must have given timely
notice thereof in writing to the Secretary of the Corporation. To be timely,
a stockholder's notice must be delivered to or mailed by first class United
States mail, postage prepaid, and received at the principal executive offices
of the Corporation not less than forty (40) days prior to the meeting;
provided, however, that in the event less than forty-five (45) days' notice
or prior public disclosure of the date of the meeting is given or made to
stockholders, notice by the stockholder to be timely must be so received no
later than the fifth day following the day on which such notice of the date
of the meeting was mailed or such disclosure was made, but not less than five
(5) days prior to the meeting.

(b) A stockholder's notice to submit business to a meeting of
stockholders shall set forth (i) the name and address, as they appear on
the Corporation's books, of the stockholder proposing such business, (ii)
the class and number of shares of the Corporation which are beneficially
owned by the stockholder, (iii) a representation that the stockholder
intends to appear at the meeting in person or by proxy to submit the
business specified in such notice, (iv) any material interest of the
stockholder in such business, and (v) a brief description of the business
desired to be brought before the meeting and the reasons for conducting
such business at the meeting, including the complete text of any
resolutions to be presented at the annual meeting, and the reasons for
conducting such business at the meeting. In addition, the stockholder
making such proposal shall promptly provide any other information
reasonably requested by the Corporation. Notwithstanding anything in the
Bylaws to the contrary, no business shall be conducted at a meeting except
in accordance with the procedures set forth in this Section 12. The
Chairman of a meeting shall, if the facts warrant, determine that business
was not properly brought before the meeting and in accordance with the
provisions of this Section 12, and, if he should so determine, he shall so
declare to the meeting and any such business not properly brought before
the meeting shall not be transacted.

(c) In addition to the information required above to be given by a
stockholder who intends to submit business to a meeting of stockholders, if
the business to be submitted is the nomination of a person or persons for
election to the Board of Directors then such stockholder's notice must also
set forth, as to each person whom the stockholder proposes to nominate for
election as a director, (i) the name, age, business address and, if known,
residence address of such person, (ii) the principal occupation or
employment of such person, (iii) the class and number of shares of stock of
the Corporation which are beneficially owned by such person, (iv) any other
information relating to such person that is required to be disclosed in
solicitations of proxies for election of directors or is otherwise required
by the rules

<PAGE>

and regulations of the Securities and Exchange Commission promulgated
under the Securities Exchange Act of 1934, as amended, (v) the written
consent of such person to be named in the proxy statement as a nominee
and to serve as a director if elected and (vi) a description of all
arrangements or understandings between such stockholder and each nominee
and any other person or persons (naming such person or persons) pursuant
to which the nomination or nominations are to be made by such
stockholder. Nominations other than those made by the Board of Directors
or its designated committee must comply with the procedures set forth in
this Section 12, and no person nominated by a stockholder shall be
eligible for election as a director unless nominated in accordance with
the terms of this Section 12. The Chairman of a meeting shall, if the
facts warrant, determine that a nomination was not properly made in
accordance with the foregoing procedures of this Section 12, and, if he
should so determine, he shall so declare to the meeting and the
defective nomination disregarded.

(d) Notwithstanding the foregoing provisions of this Section 12, a
stockholder who seeks to have any proposal included in the corporation's
proxy statement shall comply with the requirements of Regulation 14A under
the Securities Exchange Act of 1934, as amended.

ARTICLE III
DIRECTORS

SECTION 1. GENERAL POWERS OF BOARD. The business of the Corporation
shall be managed by or under the direction of its Board of Directors which may
exercise all such powers of the Corporation and do all such lawful acts and
things as are not by statute or by the Certificate of Incorporation or by these
Bylaws directed or required to be exercised or done by the stockholders.

SECTION 2. NUMBER OF DIRECTORS AND TERM OF OFFICE. The Board of
Directors shall consist of at least five (5) and not more than nine (9)
directors; provided, however, that the Board of Directors, by resolution adopted
by vote of a majority of the then authorized number of directors, may increase
or decrease the number of directors within such minimum and maximum limitations.
The Board of Directors shall be divided into three classes, as nearly equal in
number as reasonably possible, with the terms of office of the first class to
expire at the 1997 annual meeting of stockholders, the term of office of the
second class to expire at the 1998 annual meeting of stockholders and the term
of office of the third class to expire at the 1999 annual meeting of
stockholders. At each annual meeting of stockholder following such initial
classification and election, directors elected to succeed those directors whose
terms expire shall be elected for a term of office to expire at the third
succeeding annual meeting of stockholders after their election. Directors need
not be stockholders nor residents of the United States or the State of Delaware.

SECTION 3. ELECTION OF DIRECTORS. The directors shall be elected by the
holders of shares entitled to vote thereon at the annual meeting of
stockholders, and each shall

<PAGE>

serve as provided herein and until his respective successor has be
elected and qualified. At each meeting of the stockholders for the
election of directors, the persons receiving the greatest number of
votes shall be the directors.

SECTION 4. NOMINATIONS OF DIRECTORS. Nomination of persons for election
to the Board of Directors may be made by the Board of Directors or any committee
designated by the Board of Directors or by any stockholder entitled to vote for
the election of directors at the applicable meeting of stockholders. Such
nominations, if not made by the Board of Directors, shall be made by timely
notice in writing to the Secretary of the Corporation and comply with the
provisions of Article II, Section 12.

SECTION 5. CHAIRMAN OF THE BOARD. The Board of Directors may elect one
of their members to be Chairman of the Board. The Chairman of the Board shall
be subject to the control of and may be removed by the Board of Directors. If
he is present, the Chairman of the Board shall preside at all meetings of the
Board of Directors and of the stockholders, and he shall have and perform such
other duties as from time to time may be assigned to him by the Board of
Directors.

SECTION 6. RESIGNATIONS. Any director of the Corporation may resign at
any time by giving written notice to the Chairman of the Board, if any, or the
Secretary of the Corporation. Such resignation shall take effect at the time
specified therein, and, unless otherwise specified therein, the acceptance of
such resignation shall not be necessary to make it effective.

SECTION 7. VACANCIES. In the event that any vacancy shall occur in the
Board of Directors, whether because of death, resignation, removal, newly
created directorships resulting from any increase in the authorized number of
directors, the failure of the stockholders to elect the whole authorized number
of directors, or any other reason, such vacancy may be filled by the vote of a
majority of the directors then in office, although less than a quorum, or by a
sole remaining director, and the directors so chosen shall hold office until the
next annual election or until their successors are duly elected and shall
qualify, unless sooner displaced. If there are no directors in office, then an
election of directors may be held in the manner provided by statute.

SECTION 8. REMOVAL OF DIRECTORS. Any director may be removed at any
annual or special stockholders' meeting only for cause and shall receive a copy
of the charges against him, delivered to him personally or by mail at his last
known address at least ten (10) days prior to the date of the stockholders'
meeting.

SECTION 9. REGULAR MEETINGS. The Board of Directors of the Corporation
may hold meetings, both regular and special, either within or without the State
of Delaware. Regular meetings of the Board of Directors may be held without
notice at such time and at such place as shall from time to time be determined
by the Board of Directors. After such determination and notice thereof has been
once given to each person then a member of the Board of Directors, regular
meetings may be held at such intervals and time and place without further notice
being given.

<PAGE>

SECTION 10. SPECIAL MEETINGS. Special meetings of the Board of Directors
may be called by the Chairman of the Board or the President or by a majority of
directors then in office and shall be held at such time and place as shall be
designated in the notice of the meeting.

SECTION 11. NOTICE. Notice of each special meeting or, where required,
each regular meeting, of the Board of Directors shall be given to each
director either by being mailed on at least the third day prior to the date
of the meeting or by being telegraphed, faxed or given personally or by
telephone on at least 24 hours notice prior to the date of meeting. Such
notice shall specify the place, date and hour of the meeting and, if it is
for a special meeting, the purpose or purposes for which the meeting is
called. At any meeting of the Board of Directors at which every director
shall be present, even though without such notice, any business may be
transacted. Any acts or proceedings taken at a meeting of the Board of
Directors not validly called or constituted may be made valid and fully
effective by ratification at a subsequent meeting which shall be legally and
validly called or constituted. Notice of any regular meeting of the Board of
Directors need not state the purpose of the meeting and, at any regular
meeting duly held, any business may be transacted. If the notice of a
special meeting shall state as a purpose of the meeting the transaction of
any business that may come before the meeting, then at the meeting any
business may be transacted, whether or not referred to in the notice thereof.
A written waiver of notice of a special or regular meeting, signed by the
person or persons entitled to such notice, whether before or after the time
stated therein shall be deemed the equivalent of such notice, and attendance
of a director at a meeting shall constitute a waiver of notice of such
meeting except when the director attends the meeting and prior to or at the
commencement of such meeting protests the lack of proper notice.

SECTION 12. QUORUM AND ORGANIZATION OF MEETINGS. At all meetings of the
Board of Directors, a majority shall constitute a quorum for the transaction of
business, and the act of a majority of the directors present at any meeting at
which there is a quorum shall be the act of the Board of Directors, except as
may be otherwise specially provided by statute or by the Certificate of
Incorporation. If a quorum shall not be present at the meeting of the Board of
Directors, a majority of the directors present may adjourn the meeting to
another time and place, and the meeting may be held as adjourned without further
notice or waiver other than an announcement at the meeting, until a quorum shall
be present. Meetings shall be presided over by the Chairman of the Board, if
any, or, in his absence, by the Vice Chairman, if any, or, in the absence of
both, the President. The Secretary of the Corporation shall act as secretary of
the meeting, but, in his absence, the, the Chairman of the meeting may appoint
any person to act as secretary of the meeting.

SECTION 13. ACTION BY UNANIMOUS CONSENT. Unless otherwise restricted by
the Certificate of Incorporation or these Bylaws, any action required or
permitted to be taken at any meeting of the Board of Directors, or of any
committee thereof, may be taken without a meeting, if all members of the Board
of Directors or committee, as the case may be, consent thereto in writing, and
the writing or writings are filed with the minutes of proceedings of the Board
of Directors or committee.

<PAGE>

SECTION 14. TELEPHONIC PARTICIPATION. Unless otherwise restricted by the
Certificate of Incorporation or these Bylaws, members of the Board of Directors
may participate in a meeting of the Board of Directors, or any committee, by
means of conference telephone or similar communications equipment by means of
which all persons participating in the meeting can hear each other, and such
participation in a meeting shall constitute presence in person at the meeting.

SECTION 15. COMMITTEES OF DIRECTORS. The Board of Directors may, by
resolution passed by a majority of the whole Board, designate one or more
committees, each committee to consist of one or more of the directors of the
Corporation. The Board may designate one or more directors as alternate members
of any committee, who may replace any absent or disqualified member at any
meeting of the committee. In the absence or disqualification of a member of a
committee, the member or members thereof present at any meeting and not
disqualified from voting, whether or not he or they constitute a quorum, may
unanimously appoint another member of the Board of Directors to act at the
meeting in the place of any such absent or disqualified member. Any such
committee, to the extent provided in the resolution of the Board of Directors,
shall have and may exercise all the power or authority of the Board of Directors
in the management of the business and affairs of the Corporation, and may
authorize the seal of the Corporation to be affixed to all papers which may
require it; but no such committee shall have the power or authority in reference
to amending the Certificate of Incorporation, adopting an agreement of merger or
consolidation, recommending to the stockholders a dissolution of the Corporation
or a revocation of a dissolution, or amending the Bylaws of the Corporation;
and, unless the resolution or the Certificate of Incorporation expressly so
provides, no such committee shall have the power or authority to declare a
dividend or to authorize the issuance of stock. Such committee or committees
shall have such name or names as may be determined from time to time by
resolution adopted by the Board of Directors.

SECTION 16. MINUTES OF COMMITTEE MEETINGS. Each committee shall keep
regular minutes of its meetings and report the same to the Board of Directors
when required.

SECTION 17. COMPENSATION OF DIRECTORS. No stated salary shall be paid
directors as such for their services, but by resolution of the Board of
Directors, a fixed sum may be allowed for attendance at regular or special
meetings of the Board of Directors; provided, however, that nothing herein
contained shall be construed to preclude any director from serving the
Corporation in any other capacity and receiving compensation therefor. The
Corporation may reimburse directors for out-of-pocket expenses for attendance at
regular or special meetings of the Board of Directors.

ARTICLE IV
NOTICES

SECTION 1. METHOD. Whenever, unless the provisions of any statutes or
of the Certificate of Incorporation or of these Bylaws provide otherwise, notice
is required to be given to any director or stockholder, it shall be construed to
mean personal notice, but such notice may be given in writing, by mail,
addressed to such director or stockholder, at his

<PAGE>

address as it appears on the records of the Corporation, with postage
thereon prepaid, and such notice shall be deemed to be given at the time
when the same shall be deposited in the United States mail or delivered
to the custody of a commercial courier service. Notice to directors may
also be given by telephone or facsimile.

SECTION 2. WAIVER. Whenever any notice is required to be given under
the provisions of any statute or of the Certificate of Incorporation or of these
bylaws, a waiver thereof in writing, signed by the person or persons entitled to
said notice, whether before or after the time stated therein, shall be deemed
equivalent thereto.

ARTICLE V
OFFICERS

SECTION 1. ELECTION. The officers of the Corporation shall be chosen
by the Board of Directors. Each officer shall hold office for such term as may
be prescribed by the Board of Directors from time to time. It shall not be
necessary for any officer to be a director, and any number of offices may be
held by the same person.

SECTION 2. PRESIDENT. The President shall be the chief executive
officer of the Corporation, shall preside at all meetings of the stockholders
and the Board of Directors (unless the Chairman of the Board shall attend such
meeting, in which event the Chairman of the Board shall preside), shall have
general and active management of the business of the Corporation and shall see
that all orders and resolutions of the Board of Directors are carried into
effect. He shall execute bonds, mortgages and other contracts requiring a seal,
under the seal of the Corporation, except where required or permitted by law to
be otherwise signed and executed and except where the signing and execution
thereof shall be expressly delegated by the Board of Directors to some other
officer or agent of the Corporation.

SECTION 3. VICE PRESIDENTS. In the absence of the President or in the
event of his inability or refusal to act, the Vice President, if any (or in the
event there be more than one Vice President, the Vice Presidents in the order
designated by the Board of Directors, or in the absence of any designation, then
in the order of their election), shall perform the duties of the President, and
when so acting, shall have all the powers of and be subject to all the
restrictions upon the President. The Vice Presidents shall perform such other
duties and have such other powers as the Board of Directors may from time to
time prescribe.

SECTION 4. TREASURER. The Treasurer shall have the custody of the
corporate funds and securities and shall keep full and accurate accounts of
receipts and disbursements in books belonging to the Corporation and shall
deposit all monies and other valuable effects in the same and to the credit of
the Corporation in such depositories as may be designated by the Board of
Directors. He shall disburse the funds of the Corporation as may be ordered by
the Board of Directors, taking proper vouchers for such disbursements, and shall
render to the President and the Board of Directors, at its regular meetings, or
when the Board of Directors so requires, an account of all his transactions as
treasurer and of the financial condition of the Corporation. If required by the
Board of

<PAGE>

Directors, he shall give the Corporation a bond (which shall be renewed
every six years) in such sum and with such surety or sureties as shall
be satisfactory to the Board of Directors for the faithful performance
of the duties of his office and for the restoration to the Corporation,
in case of his death, resignation, retirement or removal from office, of
all books, papers, vouchers, money and other property of whatever kind
in his possession or under his control belonging to the Corporation.

SECTION 5. SECRETARY. The Secretary shall attend all meetings of the
Board of Directors and all meetings of the stockholders and record all the
proceedings of the meetings of the Corporation and of the Board of Directors in
a book to be kept for that purpose and shall perform like duties for the
standing committees when required. He shall give, or cause to be given, notice
of all meetings of the stockholders and special meetings of the Board of
Directors, and shall perform such other duties as may be prescribed by the Board
of Directors or president, under whose supervision he shall be. He shall have
custody of the corporate seal of the Corporation and he, or an assistant
secretary, shall have authority to affix the same to any instrument requiring it
and when so affixed, it may be attested by his signature or by the signature of
such assistant secretary. The Board of Directors may give general authority to
any other officer to affix the seal of the Corporation and to attest the
affixing by his signature.

SECTION 6. COMPENSATION. The salaries and other compensation of all
officers and agents of the Corporation shall be fixed by the Board of Directors.

ARTICLE VI
CAPITAL STOCK

SECTION 1. CERTIFICATES. Every holder of stock in the Corporation
shall be entitled to have a certificate signed by, or in the name of the
Corporation by, the Chairman or Vice-Chairman of the Board of Directors, or the
President or a Vice President and the Treasurer, or an Assistant Treasurer, or
the Secretary or an Assistant Secretary of the Corporation, certifying the
number of shares owned by him in the Corporation. If the Corporation shall be
authorized to issue more than one class of stock or more than one series of any
class, the powers, designations, preferences and relative, participating, option
or other special rights of each class of stock or series thereof and the
qualification, limitations or restrictions of such preferences and/or rights
shall be set forth in full or summarized on the face or back of the certificates
which the Corporation shall issue to represent such class or series of stock,
provided that, except as otherwise provided under the General Corporation Law of
Delaware, in lieu of the foregoing requirements, there may be set forth on the
face or back of the certificate which the Corporation shall issue to represent
such class or series of stock, a statement that the Corporation will furnish
without charge to each stockholder who so requests the powers, designations,
preferences and relative, participating, optional or other special rights of
each class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights.

SECTION 2. FACSIMILE SIGNATURES. The signatures of the officers upon
the certificate may be facsimiles if the certificate is countersigned by a
Transfer Agent or

<PAGE>

registered by a registrar other than the Corporation or its employee.
In case any officer, transfer agent or registrar who has signed or whose
facsimile signature has been placed upon a certificate shall have ceased
to be such officer, transfer agent or registrar before such certificate
is issued, it may be issued by the Corporation with the same effect as
if he were such officer, transfer agent or registrar at the date of
issue.

SECTION 3. TRANSFER AGENTS AND REGISTRARS. The Board of Directors may
in its discretion, appoint one or more banks or trust companies in such city or
cities as the Board of Directors may deem advisable, from time to time, to act
as Transfer Agents and Registrars of the shares of stock of the Corporation;
and, upon such appointments being made, no certificate representing shares shall
be valid until countersigned by one of such Transfer Agents and registered by
one of such Registrars.

SECTION 4. LOST CERTIFICATES. In case any certificate representing
shares shall be lost, stolen or destroyed, the Board of Directors, or any
officer or officers authorized by the Board of Directors, may authorize the
issue of a substitute certificate in place of the certificate so lost, stolen or
destroyed, and, if the Corporation shall have a Transfer Agent and Registrar,
may cause or authorize such substitute certificate to be countersigned by the
appropriate Transfer Agent and registered by the appropriate Registrar. In each
such case, the applicant for a substitute certificate shall furnish to the
Corporation and to such of its Transfer Agents and Registrars as may require the
same, evidence to their satisfaction, in their discretion, of the loss, theft or
destruction of such certificate and of the ownership thereof, and also such
security or indemnity as may by them be required.

SECTION 5. TRANSFER OF SHARES. Transfers of shares shall be made on
the books of the Corporation only by the person named in the certificate or by
his attorney lawfully constituted in writing, and upon surrender and
cancellation of a certificate or certificates of a like number of shares, with
duly executed assignment and power of transfer endorsed thereon or attached
thereto, and with such proof of the authenticity of the signatures as the
Corporation or its agents may reasonably require. Upon the surrender to the
Corporation or the transfer agent of the Corporation of a certificate for shares
duly endorsed or accompanied by proper evidence of succession, assignation, or
authority to transfer, it shall issue a new certificate to the person entitled
thereto, cancel the old certificate and record the transaction upon its books.

SECTION 6. FIXING RECORD DATE. In order that the Corporation may
determine the stockholders entitled to notice of or to vote at any meeting of
stockholders or any adjournment thereof, or to express consent to corporate
action in writing without a meeting, or to receive payment of any dividend or
other distribution or allotment of any rights, or to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of any
other lawful action, the Board of Directors may fix, in advance, a record date,
which shall not be more than sixty (60) nor less than ten (10) days before the
date of such meeting, nor more than sixty days prior to any other action. A
determination of stockholders of record entitled to notice of or to vote at a
meeting of stockholders shall apply to any adjournment of the meeting; provided,
however, that the Board of Directors may fix a new date for the adjourned
meeting.

<PAGE>

SECTION 7. REGISTERED STOCKHOLDERS. The Corporation shall be entitled
to recognize the exclusive right of a person registered on its books as the
owner of shares (a) to receive dividends, (b) to vote as such owner, and (c) to
be held liable for calls and assessments. The Corporation shall not be bound to
recognize any equitable or other claim to or interest in such share or shares on
the part of any other person, whether or not it shall have express or other
notice thereof, except as otherwise provided by the law.

ARTICLE VII
GENERAL PROVISIONS

SECTION 1. DIVIDENDS. Dividends upon the capital stock of the
Corporation, subject to the provisions of the Certificate of Incorporation, if
any, may be declared by the Board of Directors as and when they deem expedient
at any regular or special meeting, out of funds legally available thereof
pursuant to law. Dividends may be paid in cash, in property, or in shares of
the Corporation's capital stock, subject to the provisions of the Certificate of
Incorporation.

SECTION 2. RESERVES. Before payment of any dividend, there may be set
aside out of any funds of the Corporation available for dividends such sum or
sums as the directors from time to time, in their absolute discretion, think
proper as a reserve or reserves to meeting contingencies, or for equalizing
dividends, or for repairing or maintaining any property of the Corporation, or
for such other purpose as the directors shall think conducive to the interest of
the Corporation, and the directors may modify or abolish any such reserve in the
manner in which it was created.

SECTION 3. CHECKS. All checks or demands for money, notes or other
evidence of indebtedness of the Corporation shall be signed by such officer or
officers or such other person or persons as the Board of Directors may from time
to time designate by resolution.

SECTION 4. EXECUTION OF PROXIES. The Chairman of the Board or the
President, or in the absence or disability of the Chairman of the Board and the
President, a Vice President, may authorize from time to time the signature and
issuance of proxies to vote upon shares of stock of other corporations standing
in the name of the Corporation or authorize the execution of consents to action
taken or to be taken by such other corporation. All such proxies and consents
shall be signed in the name of the Corporation by the Chairman of the Board or
the President or a Vice President and by the Secretary or an Assistant
Secretary.

ARTICLE VIII
AMENDMENTS

SECTION 1. AMENDMENTS. These Bylaws may be altered, amended or
repealed, and new Bylaws may be adopted by the Board of Directors. The
stockholders of the Corporation may not adopt, amend or repeal these Bylaws
other than by the affirmative vote of seventy-five percent (75%) of the combined
voting power of all outstanding voting

<PAGE>

securities of the Corporation entitled to vote generally in the election
of directors of the Board of Directors of the Corporation, voting
together as a single class.

The undersigned, the duly qualified and sole director of CD Warehouse,
Inc., a Delaware corporation, hereby certifies the foregoing to be a true and
complete copy of the Bylaws of such corporation.

/s/ JERRY W. GRIZZLE
-----------------------------------------
Jerry W. Grizzle

DATED: September 5, 1996

<PAGE>

CERTIFICATE OF ADOPTION

BYLAWS

CD WAREHOUSE, INC.

The undersigned, being the sole director of CD Warehouse, Inc., hereby
certify that the foregoing Bylaws were adopted on the 5th day of September,
1996, by unanimous written consent.

DIRECTOR:

/s/ JERRY W. GRIZZLE
-----------------------------------
Jerry W. Grizzle

<PAGE>

EXHIBIT 10.1

EMPLOYMENT AGREEMENT
BETWEEN
CD WAREHOUSE, INC.
AND
JERRY W. GRIZZLE

<PAGE>
EMPLOYMENT AGREEMENT

THIS EMPLOYMENT AGREEMENT is made and entered into this 26th day of
October, 1996, by and between CD WAREHOUSE, INC., a Delaware corporation
("the Company"), and Jerry W. Grizzle, an individual ("the Executive").

RECITALS

WHEREAS, the Company desires to be assured of the association and
services of the Executive and to enter into an agreement embodying the terms
of such employment ("Agreement"); and

WHEREAS, the Executive is willing and desires to be employed by the
Company and enter into such Agreement.

NOW, THEREFORE, in consideration of the mutual terms, covenants and
conditions hereinafter set forth, the parties hereto do hereby agree as
follows:

ARTICLE I
EMPLOYMENT

1.1 AGREEMENT TO EMPLOY. Upon the terms and subject to the conditions
of this Agreement, the Company hereby agrees to employ the Executive as
President and Chief Executive Officer, subject to the supervision and
direction of the Company's Board of Directors ("Board") and the Executive
hereby agrees to become employed by the Company.

1.2 TERM OF EMPLOYMENT. The term of this Agreement will be for a
period of five (5) years commencing on the effective date hereof and, subject
to annual review and approval by the Board, will automatically renew for
successive five (5) year terms, unless terminated earlier pursuant to
Article 7 below ("Employment Period"), provided however, that the
Executive's obligations in Section 6 and Section 8 below will continue in
effect after such termination.

1.3 EFFECTIVE DATE. This Agreement will be effective as of the closing
date of the Company's initial public offering. If the closing of the
Company's initial public offering does not occur on or before February 28,
1997, this Agreement will not become effective and will be of no further
force and effect.

ARTICLE II
COMPENSATION

2.1 BASE SALARY. For all services rendered by the Executive under this
Agreement, the Company will pay the Executive a base salary of one hundred
thousand dollars ($100,000) per year

1
<PAGE>

("Base Salary"). The Board will annually review the Executive's Base Salary
in light of competitive practices, the base salaries paid to other executive
officers of the Company and the performance of the Executive and the Company,
and may, at its sole discretion, increase such Base Salary by an amount it
determines to be appropriate. The Executive's Base Salary (as set forth
above or as may be increased from time to time) will not be reduced. No such
change will in any way abrogate, alter, terminate or otherwise affect the
other terms of this Agreement. The Company will pay the Executive his Base
Salary not less frequently than in equal biweekly installments in arrears.

2.2 ANNUAL TARGET BONUS PLAN. In the Board's sole discretion, during
the term of the Executive's Employment Period, the Executive will have the
opportunity to receive an annual bonus ("Annual Target Bonus"), beginning at
and equal to, twenty-five percent (25%) of his Base Salary, with open ended
incremental increases commensurate with length of service and performance
after the first year . The Annual Target Bonus earned will be awarded based
upon the performance of the Executive and the Company against annual target
objectives established jointly by the Board and the Executive. Any Annual
Target Bonus payable under this Paragraph 2.2 will be paid to the Executive
as soon as practicable following a fiscal year.

2.3 LONG-TERM INCENTIVE COMPENSATION. During the Employment Period,
the Executive will participate in all of the Company's existing and future
long-term incentive compensation programs for key executives at a level
commensurate with his position at the Company and consistent with the
Company's then currentp olicies and practices, as determined in good faith by
the Board or a committee thereof.

ARTICLE III
BENEFITS, PERQUISITES AND EXPENSES

3.1 BENEFITS. During the Employment Period, the Executive will be
eligible to participate in (a) each welfare benefit plan sponsored or
maintained by the Company, including, without limitation, each group life,
hospitalization, medical, dental, health, accident or disability insurance or
similar plan or program of the Company, and (b) each pension, retirement,
deferred compensation or savings plan sponsored or maintained by the Company,
in each case, whether now existing or established hereafter, to the extent
that the Executive is eligible to participate in any such plan under the
generally applicable provisions thereof. Nothing in this Paragraph 3.1 will
limit the Company's right to amend or terminate any such plan in accordance
with the procedures set forth therein. The Company shall pay the cost of an
annual medical physical examination of the Executive.

3.2 VACATION. During the Employment Period, the Executive will be
entitled to sick leave and two (2) weeks, increasing based on length of
service to a maximum of four (4) weeks, paid vacation annually as is
generally provided to other senior officers of the Company in accordance with
the then current policies and practices of the Company.

3.3 EXPENSES. (a) BUSINESS EXPENSES. The Executive will be reimbursed
for all reasonable "out-of-pocket" business expenses for business travel and
business entertainment incurred

<PAGE>

in connection with the performance of his duties under this Agreement (i) so
long as such expenses constitute business deductions from taxable income for
the Company and is excludable from taxable income to the Executive under the
governing laws and regulations of the Internal Revenue Code of 1986, as
amended (the "Code") (provided, however, that the Executive will be entitled
to full reimbursement in any case where the Internal Revenue Service may,
under Section 274(n) of the Code, disallow to any such company 50% of meals
and entertainment expenses); and (ii) to the extent such expenses do not
exceed the amounts allocable for such expenses in budgets that are approved
from time to time by the Board. The reimbursement of the Executive's
business expenses will be made upon monthly presentation to, and approval by,
the Board of valid receipts and other appropriate documentation for such
expenses.

(b) AUTOMOBILE EXPENSES. The Company will pay the Executive $750
per month in arrears to cover the Executive's use (including all
associated expenses) of his automobile for the Company's business.

ARTICLE IV
INDEMNIFICATION

4.1 INDEMNIFICATION. (a) RIGHT TO INDEMNIFICATION. During the
Employment Period, the Company will indemnify the Executive and hold the
Executive harmless from and against any claim, loss or cause of action
arising from or out of the Executive's performance as an officer, director,
or employee of the Company or its subsidiaries, if any, or in any other
capacity, including any fiduciary capacity, in which the Executive serves at
the request of the Company to the maximum extent permitted by the Delaware
General Corporation Act and the Company's Certificate of Incorporation and
By-Laws ("Governing Documents"), provided that in no event will the
protection afforded to the Executive hereunder be less than that afforded
under the Governing Documents as in effect at the time this Agreement becomes
effective.

(b) CULPABLE ACTION:

(i) Notwithstanding the provisions of Paragraph
4.1(a), the Executive will not be entitled to indemnification if
(A) the Company is prohibited from paying such indemnification
under applicable law, or (B) the Executive's actions or omissions
involved intentional misconduct or knowing violation of law (any
existence or occurrence described in the foregoing clauses (A) and
(B), individually, is a "Culpable Action").

(ii) The existence or occurrence of a Culpable
Action will be conclusively determined by a non-appealable, final
decision of the court having jurisdiction over the applicable
proceeding. Such determination will be final and binding upon the
parties hereto.

(iii) If a proceeding involves more than one claim, issue or
matter, the

3
<PAGE>

determination as to whether a Culpable Action exists or has occurred
will be severable as to each and every claim, issue and matter.

(iv) The termination of any proceeding by judgment, order,
settlement or conviction, or upon a plea of nolo contendere or its
equivalent, does not affect the provisions of Paragraph 4.1(a) for
indemnification hereunder and does not create a presumption that
there exists a Culpable Action.

(c) PAYMENT OF COSTS. The reasonable costs incurred by the
Executive in connection with any proceeding based on this Agreement,
including any proceeding brought pursuant to Paragraph 4.1(a) and
Paragraph 4.1(b)(ii), will be paid by the Company on an "as incurred"
basis; provided, however, that if it will ultimately be determined
that there exists or has occurred a Culpable Action with respect to
such proceeding, the Executive will repay to the Company the amount
(or the appropriate portion thereof as contemplated by Paragraph
4.1(b)(iii)) so advanced, including the costs of obtaining a
determination pursuant to Paragraph 4.1(b)(ii).

ARTICLE V
SCOPE OF DUTIES

5.1 ASSIGNMENT OF DUTIES. The Executive will have such duties as may
be assigned to him from time to time by the Board commensurate with the
Executive's experience and responsibilities in the position for which he is
employed pursuant to Article 1 above. Such duties will be exercised subject
to the control and supervision of the Board.

5.2 GENERAL SPECIFICATION OF DUTIES. The Executive, during the term
hereof, will be responsible for performing all services, acts, or things
necessary or advisable to manage and conduct the business of the Company
consistent with the position of President and Chief Executive Officer subject
to such policies and procedures as may be established by the Board.

ARTICLE VI
NONSOLICITATION, CONFIDENTIALITY AND NONCOMPETITION

6.1 THE EXECUTIVE'S DEVOTION OF TIME. The Executive hereby agrees to
devote the majority of his time, abilities and energy to the faithful
performance of the duties assigned to him and to the promotion and forwarding
of the business affairs of the Company and not to divert any business
opportunities from the Company to himself or to any other person or business
entity.

6.2 CONFLICTING ACTIVITIES. The Executive will not, during the term of
this Agreement, be engaged in any other business activity without the prior
written consent of the Board, provided however, that this restriction will
not be construed as preventing the Executive from fulfilling his ongoing
military obligations or investing his personal assets in purely passive
investments in business entities which are not in competition with the
Company, its subsidiaries or affiliates.

<PAGE>

6.3 HONORING OBLIGATIONS TO PREVIOUS EMPLOYER(S). The Executive has
not and will not breach any lawful obligations owed or owing by him to any
his former employers.

6.4 CONFIDENTIALITY. Without the prior written consent of the
Company, except to the extent required by an order of a court having
competent jurisdiction or under a subpoena from an appropriate government
agency, the Executive will not communicate or disclose to any third person,
or use for the benefit of himself or any third person, (a) trade secrets,
customer or supplier lists or information, marketing plans, sales plans,
management organization information (including data and other information
relating to members of the Board and management), operating policies or
manuals, business plans, processes and techniques, financial records, or
other financial, commercial, or business information relating to the Company
or its investors or the purchase and sale of its securities or any of its
subsidiaries, or (b) information designated as confidential or proprietary
that the Company or its subsidiaries, if any, may receive from its suppliers,
customers or others who do business with the Company or any of its
subsidiaries (collectively, "Confidential Information") to any third person
unless such Confidential Information has been previously disclosed to the
public by the Company or is in the public domain (other than by reason of the
Executive's breach of this Paragraph 6.4).

6.5 THE COMPANY PROPERTY. The Executive hereby agrees that all
documents, reports, plans, proposals, marketing and sales plans, client
lists, client files and materials made by him or by the Company and its
subsidiaries are the properties of such entity and will not be used by him
in any way adverse to the Company's interests. The Executive will not
deliver, reproduce or in any way allow such documents or things to be
delivered or used by any third party without specific written direction or
written consent of the Board of the Company as appropriate. The Executive
hereby assigns to the Company any rights which he may have in any such trade
secret or proprietary information. Further, except as expressly provided
herein, promptly following the Executive's termination of employment, the
Executive will return to the Company all property, documents or papers used
or owned by the Company and all copies, abstracts or summaries thereof in the
Executive's possession or under his control.

6.6 NONSOLICITATION OF EMPLOYEES. During the Employment Period and the
two-year period following any termination of the Executive's employment, the
Executive will not directly or indirectly solicit, encourage or induce any
employee of the Company or any of its subsidiaries to terminate employment
with such entity, and will not directly or indirectly, either individually or
as owner, agent, employee, consultant or otherwise, employ or offer
employment to any person who is or was employed by the Company or a
subsidiary thereof unless such person will have ceased to be employed by such
entity for a period of at least six months.

6.7 COMPETITION WITH THE COMPANY. The Executive agrees that during the
term of the Executive's Employment Period and for a two year period of time
thereafter will not to the maximum extent permitted by then existing
Delaware law , directly or indirectly, for his own benefit or on behalf of
others, compete with, or be an officer, director, employee or holder of more
than 5% of the capital stock or other equity interest of any corporation or
other entity which competes with

<PAGE>

the Company or any of its subsidiaries at the date of his termination from
the Company ("Competitive Activity"). The limitations imposed by this
Paragraph 6.7 will extend to all geographic areas in which the Company
conducts business at the date of termination of the Executive's employment by
the Company. If Executive becomes affiliated with a franchise or franchisees
of the Company after the termination of his employment by the Company, it
will not be deemed a competitive activity.

6.8 INJUNCTIVE RELIEF AND OTHER REMEDIES WITH RESPECT TO COVENANTS.
The Executive acknowledges and agrees that the covenants and obligations of
the Executive with respect to nonsolicitation, confidentiality, the Company
property, noncompetition, and conflicting activities, relate to special,
unique and extraordinary maters and that a violation of any of the terms of
such covenants and obligations will cause the Company irreparable injury for
which adequate remedies are not available at law. Therefore, the Executive
agrees that the Company will (a) be entitled to an injunction, restraining
order or such other equitable relief (without the requirement to post a bond)
restraining the Executive from committing any violation of the covenants and
obligations contained in this Article 6 and (b) have no further obligation to
make any payments to the Executive hereunder following any material violation
of the covenants and obligations contained in this Article 6. These remedies
are cumulative and are in addition to any other rights and remedies the
Company may have at law or in equity.

ARTICLE VII
TERMINATION

7.1 BASIS FOR TERMINATION. The Executive's employment hereunder may be
canceled at any time by mutual agreement of the parties.

7.2 INCAPACITY. This Agreement will automatically terminate on the
last day of the month in which the Executive dies or becomes permanently
incapacitated. "Permanent incapacity" as used herein will mean mental or
physical incapacity, or both, reasonably determined by the Board based upon a
certification of such incapacity by, in the discretion of such Board, either
the Executive's regularly attending physician or a duly licensed physician
selected by the Board, rendering the Executive unable to perform
substantially all of his duties hereunder and which appear reasonably certain
to continue for at least six consecutive months without substantial
improvement. The Executive will be deemed to have "become permanently
incapacitated" on the date the Board has determined that the Executive is
permanently incapacitated and so notifies the Executive.

7.3 WITH CAUSE. The Executive's employment may be terminated by the
Company "with cause," if any of the following occur:

(a) any material breach of the Executive's obligations to the
Company pursuant to this Agreement; or

(b) any material acts or events which inhibit the Executive from
fully performing

<PAGE>

his responsibilities to the Company in good faith, including, but not
limited to (i) a felony criminal conviction; (ii) any other criminal
conviction involving the Executive's lack of honesty or the Executive's
moral turpitude; (iii) drug or alcohol abuse; or (iv) material acts of
insubordination, dishonesty, gross carelessness or gross misconduct.

7.4 WITH CAUSE/ EFFECTIVE DATE / RIGHT TO BE HEARD. The Executive
shall not be deemed to have been terminated for cause unless and until there
shall have been delivered to him by the Board a notice of termination and a
written statement of the reasons for Executive's termination for cause and
Executive has had an opportunity to appear before the Board to state any
protest that Executive may have concerning his termination for cause. If
the Executive does not request an appearance before the Board pursuant to
this subsection within five days from the date of receipt of the notice of
termination and written statement of the reasons for his termination, the
right to appear before the Board to protest shall be deemed to be waived and
the Executive's termination shall be effective as of the date the notice of
termination is delivered to Executive. If Executive elects to appear before
the Board to protest his termination for cause, a specially called Board
meeting will be called as soon as practicable. At the specially called Board
meeting, the Executive will have the opportunity to state any protest that he
might have, orally (not to exceed one hour) or in writing, to his termination
and the Board will thereafter re-consider its decision to terminate the
Executive for cause. If the Board decides to affirm its decision to
terminate the Executive for cause , after the Executive's appearance and
protest before it, the Board's decision: (i) will not require a written
statement of the reasons for the Board's decision; (ii) will thereafter be
final and non-appealable and (iii) effective as of the date of the Board's
final decision. The Executive will be suspended from his responsibilities
with pay, between the date that his original notice of termination is
delivered and the Board final decision as to his termination for cause, if
the Executive elects to protest his termination to the Board, as set forth
above.

7.5 WITHOUT CAUSE. The Executive's employment may be terminated by the
Company "without cause" (for any reason or no reason at all) at any time by
giving the Executive thirty (60) days' prior written notice of termination,
but only upon an affirmative vote of at least three-fourths (3/4) of the
Board's membership. Termination of employment will occur at the conclusion
of the notice period, unless otherwise agreed to in writing by the Company
and the Executive.

7.6 TERMINATION BY THE EXECUTIVE. The Executive may terminate his
employment hereunder by giving the Company sixty (60) days' prior written
notice. Termination of employment will occur at the conclusion of the notice
period, unless otherwise agreed to in writing by the Company and the
Executive.

7
<PAGE>

obligated to compensate the Executive, his estate or representatives except
for the foregoing compensation then due and owing, nor provide the benefits
to the Executive described in Article 3 (except as may be required by law).

7.8 PAYMENT UPON TERMINATION WITHOUT CAUSE BY THE COMPANY. Upon
termination of the Executive's employment by the Company without cause
pursuant to subsection 7.4, the Company will grant pay to the Executive
within 14 days after termination an amount equal to the sum of (a) the
Executive's Base Salary accrued to the date of termination; (b) the
Executive's Base Salary for a sixty (60) month period; and (c) any
unreimbursed expenses accruing to the date of termination. Additionally,
Executive will be entitled at the Company's expense to participate for a
twelve month period after termination in any group life, hospitalization,
medical, dental, health, accident or disability insurance or similar plan or
program of the Company, to the extent that such participation would not be
inconsistent with such plans contractual provisions and/or applicable
regulations.

ARTICLE VIII
MISCELLANEOUS

8.1 SURVIVAL. Articles Six and Seven and Paragraphs 8.2, 8.3 and 8.15
will survive the termination hereof.

8.2 ARBITRATION. Any dispute or controversy arising under or in
connection with this Agreement will be resolved by binding arbitration. The
arbitration will be held in the city of Oklahoma City, Oklahoma and except to
the extent inconsistent with this Agreement, will be conducted in accordance
with the Rules of the American Arbitration Association then in effect at the
time of the arbitration, and otherwise in accordance with principles which
would be applied by a court of law or equity. The arbitrator will be
acceptable to both the Company and the Executive. If the parties cannot
agree on an acceptable arbitrator, the dispute will be heard by a panel of
three arbitrators one appointed by each of the parties and the third
appointed by the other two arbitrators.

8.3 LEGAL FEES AND EXPENSES. (a) OF THE EXECUTIVE. If the Executive
prevails, in whole or in part, as to any material issue in any contest
(whether initiated by the Executive or by the Company) as to the validity,
enforceability or interpretation of any provision of this Agreement, the
Company will pay all reasonable expenses incurred by the Executive with
respect to such contest, including, without limitation, his reasonable
attorney's fees.

(b) OF THE COMPANY. If the Company will prevail, in whole or in
part, as to any material issue in any contest (whether initiated by the
Company or by the Executive) as to the validity, enforceability or
interpretation of any provision of this Agreement, the Executive will
pay all reasonable expenses incurred by the Company with respect to such
contest, including, without limitation, its reasonable attorney's fees.

8.4 BINDING EFFECT. This Agreement will be binding on, and will
inure to the benefit of, the Company and any person or entity that
succeeds to the interest of the Company (regardless of

<PAGE>

whether such succession does or does not occur by operation of law) by
reason of the sale of all or a portion of the Company's stock, a merger,
consolidation or reorganization involving the Company or, unless the Company
otherwise elects in writing, a sale of the assets of the business of the
Company (or portion thereof) in which the Executive performs a majority of
his services. This Agreement will also inure to the benefit of the
Executive's heirs, executors, administrators and legal representatives.

8.5 ASSIGNMENT. Except as provided under Paragraph 8.4, neither this
Agreement nor any of the rights or obligations hereunder will be assigned or
delegated by any party hereto without the prior written consent of the other
party.

8.6 ENTIRE AGREEMENT. This Agreement constitutes the entire
understanding between the parties hereto with respect to the matters referred
to herein. No other agreement relating to the terms of the Executive's
employment by the Company, oral or otherwise, will be binding between the
parties unless it is in writing and signed by the party against whom
enforcement is sought. There are no promises, representations, inducements
or statements between the parties other than those that are expressly
contained herein. The Executive acknowledges that he is entering into this
Agreement of his own free will and accord, and with no duress, that he has
read this Agreement and that he understands the Agreement and its legal
consequences.

8.7 SEVERABILITY; REFORMATION. In the event that one or more of the
provisions of this Agreement will become invalid, illegal or unenforceable in
any respect, the validity, legality and enforceability of the remaining
provisions contained herein will not be affected thereby. In the event that
any of the provisions of any of Paragraph 6.4, 6.6 or 6.7 are not enforceable
in accordance with its terms, the Executive and the Company agree that such
Paragraph will be reformed to make such Paragraph enforceable in a manner
which provides the Company the maximum rights permitted at law.

8.8 WAIVERS. Waiver by any party hereto of any breach or default by
the other party of any of the terms of this Agreement will not operate as a
waiver of any other breach or default, whether similar to or different from
the breach or default waived. No waiver of any provision of this Agreement
will be implied from any course of dealing between the parties hereto or from
any failure by either party hereto to assert it's or his rights hereunder on
any occasion or series of occasions.

8.9 NOTICES. Any notice required or desired to be delivered under this
Agreement will be in writing and will be delivered personally, by courier
service, by registered mail, return receipt requested, or by facsimile and
will be effective upon actual receipt by the party to which such notice will
be directed, and will be addressed as follows (or to such other address as
the party entitled to notice will hereafter designate in accordance with the
terms hereof):

<PAGE>

If to the Company:

CD Warehouse, Inc.
Attention: Board of Directors
P.O. Box 602
Edmond, Oklahoma 73083-0602

with a copy to:

Day, Edwards, Federman, Propester & Christensen, P.C.
Attention: Bruce W. Day, Esq.
210 Park Avenue
Suite 2900
Oklahoma City, Oklahoma 73102

If to the Executive:

The home address of the Executive noted on the records of the Company.

8.10 AMENDMENTS. This Agreement may not be altered, modified or amended
except by a written instrument signed by each of the parties hereto.

8.11 CHANGE IN CONTROL PROTECTION. Nothing contained herein will be
construed to preclude the Company from providing the Executive different or
additional severance benefits as a result of a change in control of the
Company, whether pursuant to an agreement that is in addition to, or as a
supplement to, this Agreement.

8.12 HEADINGS. Headings to paragraphs in this Agreement are for the
convenience of the parties only and are not intended to be part of or to
affect the meaning or interpretation hereof.

8.13 COUNTERPARTS. This Agreement may be executed in counterparts, each
of which will be deemed an original but all of which together will constitute
one and the same instrument.

8.14 WITHHOLDING. Any payments provided for herein will be reduced by
any amounts required to be withheld by the Company from time to time under
applicable federal, state or local income or employment tax laws or similar
statutes or other provisions of law then in effect.

8.15 GOVERNING LAW. This Agreement will be governed by the laws of the
State of Delaware, without reference to principles of conflicts or choice of
law under which the law of any other jurisdiction would apply. This
Agreement will not be construed for or against a party because that party
prepared it.

<PAGE>

8.16 RIGHT OF SET-OFF. Upon termination or expiration of this
Agreement, the Company will have the right to set-off against the amounts due
the Executive hereunder the amount of any outstanding loan or advance from
the Company to the Executive.

IN WITNESS WHEREOF, the Corporation has caused this Agreement to be
executed by its duly authorized officer and the Employee has hereunto set his
hand as of the day and year first above written.

The Executive:

Jerry W. Grizzle

/s/ Jerry W. Grizzle
------------------------------------
Jerry W. Grizzle

The Company:

CD Warehouse, Inc.

By: /s/ Jerry W. Grizzle
-------------------------------
Jerry W. Grizzle,
Chairman of the Board of Directors

<PAGE>
EXHIBIT 10.2

EMPLOYMENT AGREEMENT

THIS EMPLOYMENT AGREEMENT is made and entered into this 26th day of
October, 1996, by and between CD WAREHOUSE, INC., a Delaware corporation
("the Company"), and Gary D. Johnson, an individual ("the Executive").

RECITALS

WHEREAS, the Company desires to be assured of the association and
services of the Executive and to enter into an agreement embodying the terms
of such employment ("Agreement"); and

WHEREAS, the Executive is willing and desires to be employed by the
Company and enter into such Agreement.

NOW, THEREFORE, in consideration of the mutual terms, covenants and
conditions hereinafter set forth, the parties hereto do hereby agree as
follows:

ARTICLE I
EMPLOYMENT

1.1 AGREEMENT TO EMPLOY. Upon the terms and subject to the conditions
of this Agreement, the Company hereby agrees to employ the Executive as Chief
Operating Officer and Executive Vice President, subject to the supervision
and direction of the Company's Chief Executive Officer ("Chief Executive
Officer") and the Company's Board of Directors ("Board") and the Executive
hereby agrees to become employed by the Company.

1.2 TERM OF EMPLOYMENT. The term of this Agreement will be for a
period of one (1) year commencing on the effective date hereof and will
automatically renew for successive one (1) year terms, unless terminated
earlier pursuant to Article 7 below ("Employment Period"), provided
however, that the Executive's obligations in Section 6 and Section 8 below
will continue in effect after such termination.

<PAGE>

ARTICLE II
COMPENSATION

2.1 BASE SALARY. For all services rendered by the Executive under this
Agreement, the Company will pay the Executive a base salary of ninety
thousand dollars ($90,000) per year ("Base Salary"). The Chief Executive
Officer will annually review the Executive's Base Salary in light of
competitive practices, the base salaries paid to other executive officers of
the Company and the performance of the Executive and the Company, and may, in
his sole discretion, increase such Base Salary by an amount he determines to
be appropriate. The Executive's Base Salary (as set forth above or as may be
increased from time to time) will not be reduced. No such change will in any
way abrogate, alter, terminate or otherwise affect the other terms of this
Agreement. The Company will pay the Executive his Base Salary not less
frequently than in equal biweekly installments in arrears.

2.2 ANNUAL TARGET BONUS PLAN. In the Chief Executive Officer's sole
discretion, during the term of the Executive's Employment Period, the
Executive will have the opportunity to receive an annual bonus ("Annual
Target Bonus"), beginning at and equal to, twenty-five percent (25%) of his
Base Salary, with open ended incremental increases commensurate with length
of service and performance after the first year . The Annual Target Bonus
earned will be awarded based upon the performance of the Executive and the
Company against annual target objectives established jointly by the Chief
Executive Officer and/or Board and the Executive. Any Annual Target Bonus
payable under this Paragraph 2.2 will be paid to the Executive as soon as
practicable following a fiscal year.

2.3 LONG-TERM INCENTIVE COMPENSATION. During the Employment Period,
the Executive will participate in all of the Company's existing and future
long-term incentive compensation programs for key executives at a level
commensurate with his position at the Company and consistent with the
Company's then current policies and practices, as determined in good faith by
the Board or a committee thereof.

ARTICLE III
BENEFITS, PERQUISITES AND EXPENSES

<PAGE>

Company shall pay the cost of an annual medical physical examination of the
Executive.

3.3 EXPENSES. (a) BUSINESS EXPENSES. The Executive will be reimbursed
for all reasonable "out-of-pocket" business expenses for business travel and
business entertainment incurred in connection with the performance of his
duties under this Agreement (i) so long as such expenses constitute business
deductions from taxable income for the Company and is excludable from taxable
income to the Executive under the governing laws and regulations of the
Internal Revenue Code of 1986, as amended (the "Code") (provided, however,
that the Executive will be entitled to full reimbursement in any case where
the Internal Revenue Service may, under Section 274(n) of the Code, disallow
to any such company 50% of meals and entertainment expenses); and (ii) to the
extent such expenses do not exceed the amounts allocable for such expenses in
budgets that are approved from time to time by the Chief Executive Officer.
The reimbursement of the Executive's business expenses will be made upon
monthly presentation to, and approval by, the Chief Executive Officer of
valid receipts and other appropriate documentation for such expenses.

(b) AUTOMOBILE EXPENSES. The Company will pay the Executive $750
per month in arrears to cover the Executive's use (including all
associated expenses) of his automobile for the Company's business.

ARTICLE IV
INDEMNIFICATION

(b) CULPABLE ACTION:

(i) Notwithstanding the provisions of Paragraph 4.1(a), the
Executive will

<PAGE>

not be entitled to indemnification if (A) the Company is prohibited
from paying such indemnification under applicable law, or (B)
the Executive's actions or omissions involved intentional misconduct
or knowing violation of law (any existence or occurrence described in
the foregoing clauses (A) and (B), individually, is a "Culpable
Action").

(ii) The existence or occurrence of a Culpable Action will be
conclusively determined by a non-appealable, final decision of the
court having jurisdiction over the applicable proceeding. Such
determination will be final and binding upon the parties hereto.

(iii) If a proceeding involves more than one claim, issue or
matter, the determination as to whether a Culpable Action exists or
has occurred will be severable as to each and every claim, issue and
matter.

(c) PAYMENT OF COSTS. The reasonable costs incurred by the
Executive in connection with any proceeding based on this Agreement,
including any proceeding brought pursuant to Paragraph 4.1(a) and
Paragraph 4.1(b)(ii), will be paid by the Company on an "as incurred"
basis; provided, however, that if it will ultimately be determined that
there exists or has occurred a Culpable Action with respect to such
proceeding, the Executive will repay to the Company the amount (or the
appropriate portion thereof as contemplated by Paragraph 4.1(b)(iii))
so advanced, including the costs of obtaining a determination pursuant
to Paragraph 4.1(b)(ii).

ARTICLE V
SCOPE OF DUTIES

5.1 ASSIGNMENT OF DUTIES. The Executive will have such duties as may
be assigned to him from time to time by the Chief Executive Officer
commensurate with the Executive's experience and responsibilities in the
position for which he is employed pursuant to Article 1 above. Such duties
will be exercised subject to the control and supervision of the Chief
Executive Officer.

5.2 GENERAL SPECIFICATION OF DUTIES. The Executive, during the term
hereof, will be responsible for performing all services, acts, or things
necessary or advisable to manage and conduct the business of the Company
consistent with the position of Chief Operating Officer and Executive Vice
President subject to such policies and procedures as may be established by
the Chief Executive Officer.

<PAGE>

ARTICLE VI
NONSOLICITATION, CONFIDENTIALITY AND NONCOMPETITION

6.1 THE EXECUTIVE'S DEVOTION OF TIME. The Executive hereby agrees to
devote his full time, abilities and energy to the faithful performance of the
duties assigned to him and to the promotion and forwarding of the business
affairs of the Company and not to divert any business opportunities from the
Company to himself or to any other person or business entity.

6.3 HONORING OBLIGATIONS TO PREVIOUS EMPLOYER(S). The Executive has
not and will not breach any lawful obligations owed or owing by him to any
his former employers.

<PAGE>

6.7 COMPETITION WITH THE COMPANY. The Executive agrees that during the
term of the Executive's Employment Period and for a two year period of time
thereafter will not, directly or indirectly, for his own benefit or on
behalf of others, compete, or be an officer, director, employee or holder of
more than 5% of the capital stock or other equity interest of any corporation
or other entity which competes with the Company or any of its subsidiaries at
the date of his termination from the Company ("Competitive Activity"). The
limitations imposed by this Paragraph 6.7 will extend to all geographic areas
in which the Company conducts business at the date of termination of the
Executive's employment by the Company. If Executive becomes affiliated with
a franchise or franchisees of the Company after the termination of his
employment by the Company, it will not be deemed a competitive activity.

ARTICLE VII
TERMINATION

7.1 BASIS FOR TERMINATION. The Executive's employment hereunder may be
canceled at any time by mutual agreement of the parties.

<PAGE>

Executive unable to perform substantially all of his duties hereunder and
which appear reasonably certain to continue for at least six consecutive
months without substantial improvement. The Executive will be deemed to have
"become permanently incapacitated" on the date the Board has determined that
the Executive is permanently incapacitated and so notifies the Executive.

7.3 WITH CAUSE. The Executive's employment may be terminated by the
Company "with cause," if any of the following occur:

(a) any material breach of the Executive's obligations to the
Company pursuant to this Agreement; or

(b) any material acts or events which inhibit the Executive from
fully performing his responsibilities to the Company in good
faith, including, but not limited to (i) a felony criminal
conviction; (ii) any other criminal conviction involving the
Executive's lack of honesty or the Executive's moral turpitude;
(iii) drug or alcohol abuse; or (iv) material acts of
insubordination, dishonesty, gross carelessness or gross
misconduct.

7.4 WITH CAUSE/EFFECTIVE DATE/RIGHT TO BE HEARD. The Executive
shall not be deemed to have been terminated for cause unless and until there
shall have been delivered to him by either the Chief Executive Officer or
Board a notice of termination and a written statement of the reasons for
Executive's termination for cause and Executive has had an opportunity to
appear before the Board to state any protest that Executive may have
concerning his termination for cause. If the Executive does not request an
appearance before the Board pursuant to this subsection within five days from
the date of receipt of the notice of termination and written statement of the
reasons for his termination, the right to appear before the Board to protest
shall be deemed to be waived and the Executive's termination shall be
effective as of the date the notice of termination is delivered to
Executive. If Executive elects to appear before the Board to protest his
termination for cause, a specially called meeting will be called as soon as
practicable. At the specially called Board meeting, the Executive will have
the opportunity to state any protest that he might have, orally (not to
exceed one hour) or in writing, to his termination and the Board will
thereafter re-consider its decision to terminate the Executive for cause. If
the Board decides to affirm its decision to terminate the Executive for cause,
after the Executive's appearance and protest before it, the Board's
decision: (i) will not require a written statement of the reasons for the
Board's decision; (ii) will thereafter be final and non-appealable and (iii)
effective as of the date of the Board's final decision. The Executive will
be suspended from his responsibilities with pay, between the date that his
original notice of termination is delivered and the Board final decision as
to his termination for cause, if the Executive elects to protest his
termination to the Board, as set forth above.

7.5 WITHOUT CAUSE. The Executive's employment may be terminated by the
Company "without cause" (for any reason or no reason at all) at any time by
giving the Executive thirty (30) days' prior written notice of termination.
Termination of employment will occur at the conclusion of the notice period,
unless otherwise agreed to in writing by the Company and the Executive.

<PAGE>

7.7 PAYMENT UPON TERMINATION WITH CAUSE BY THE COMPANY OR VOLITIONAL
TERMINATION BY THE EXECUTIVE. Upon termination of the Executive's employment
by the Company for cause pursuant to subsection 7.3 or volitional termination
by the Executive pursuant to subsection 7.5, the Company will grant pay to
the Executive within 14 days after termination an amount equal to the sum of
(a) the Executive's Base Salary accrued to the date of termination; and (b)
any unreimbursed expenses accruing to the date of termination. After any
such termination, the Company will not be obligated to compensate the
Executive, his estate or representatives except for the foregoing
compensation then due and owing, nor provide the benefits to the Executive
described in Article 3 (except as may be required by law), and the Executive
agrees that, immediately upon any such termination, he will forthwith return
to the Company any benefits provided him hereunder which are capable of being
physically returned.

7.8 PAYMENT UPON TERMINATION WITHOUT CAUSE BY THE COMPANY. Upon
termination of the Executive's employment by the Company without cause
pursuant to subsection 7.4, the Company will grant pay to the Executive
within 14 days after termination an amount equal to the sum of (a) the
Executive's Base Salary accrued to the date of termination; (b) the
Executive's Base Salary for a twelve month period; and (c) any unreimbursed
expenses accruing to the date of termination. Additionally, Executive will
be entitled at the Company's expense to participate for a twelve month period
after termination in any group life, hospitalization, medical, dental,
health, accident or disability insurance or similar plan or program of the
Company, to the extent that such participation would not be inconsistent with
such plans contractual provisions and/or applicable regulations.

ARTICLE VIII
MISCELLANEOUS

8.1 SURVIVAL. Articles Six and Seven and Paragraphs 8.2, 8.3 and 8.15
will survive the termination hereof.

<PAGE>

8.3 LEGAL FEES AND EXPENSES. (a) OF THE EXECUTIVE. If the Executive
will prevail, in whole or in part, as to any material issue in any contest
(whether initiated by the Executive or by the Company) as to the validity,
enforceability or interpretation of any provision of this Agreement, the
Company will pay all reasonable expenses incurred by the Executive with
respect to such contest, including, without limitation, his reasonable
attorney's fees.

(b) OF THE COMPANY. If the Company will prevail, in whole or in
part, as to any material issue in any contest (whether initiated by the
Company or by the Executive) as to the validity, enforceability or
interpretation of any provision of this Agreement, the Executive will pay
all reasonable expenses incurred by the Company with respect to such
contest, including, without limitation, its reasonable attorney's fees.

8.4 BINDING EFFECT. This Agreement will be binding on, and will inure
to the benefit of, the Company and any person or entity that succeeds to the
interest of the Company (regardless of whether such succession does or does
not occur by operation of law) by reason of the sale of all or a portion of
the Company's stock, a merger, consolidation or reorganization involving the
Company or, unless the Company otherwise elects in writing, a sale of the
assets of the business of the Company (or portion thereof) in which the
Executive performs a majority of his services. This Agreement will also
inure to the benefit of the Executive's heirs, executors, administrators and
legal representatives.

8.8 WAIVERS. Waiver by any party hereto of any breach or default by
the other party of any of

<PAGE>

the terms of this Agreement will not operate as a waiver of any other breach
or default, whether similar to or different from the breach or default
waived. No waiver of any provision of this Agreement will be implied from
any course of dealing between the parties hereto or from any failure by
either party hereto to assert it's or his rights hereunder on any occasion or
series of occasions.

If to the Company:

CD Warehouse, Inc.
Attention: Jerry W. Grizzle, Chief Executive Officer
P.O. Box 602
Edmond, Oklahoma 73083-0602

with a copy to:

Day, Edwards, Federman, Propester & Christensen, P.C.
Attention: Bruce W. Day, Esq.
210 Park Avenue
Suite 2900
Oklahoma City, Oklahoma 73102

If to the Executive:

The home address of the Executive noted on the records of the Company.

8.10 AMENDMENTS. This Agreement may not be altered, modified or amended
except by a written instrument signed by each of the parties hereto.

8.12 HEADINGS. Headings to paragraphs in this Agreement are for the
convenience of the parties only and are not intended to be part of or to
affect the meaning or interpretation hereof.

8.13 COUNTERPARTS. This Agreement may be executed in counterparts, each
of which will be deemed an original but all of which together will constitute
one and the same instrument.

<PAGE>

IN WITNESS WHEREOF, the Corporation has caused this Agreement to be
executed by its duly authorized officer and the Employee has hereunto set his
hand as of the day and year first above written.

The Executive:

Gary D. Johnson

------------------------------------------------
Gary D. Johnson

The Company:

CD Warehouse, Inc.

By: --------------------------------------------
Jerry W. Grizzle, Chief Executive Officer

<PAGE>

EXHIBIT 10.3

EMPLOYMENT AGREEMENT

This EMPLOYMENT AGREEMENT is made and entered into this 10th day of October
1996, by and between CD WAREHOUSE, INC., a Delaware corporation ("the Company"),
and Bruce D. MacDonald, an individual ("the Executive").

RECITALS

WHEREAS, the Company desires to be assured of the association and services
of the Executive and to enter into an agreement embodying the terms of such
employment ("Agreement"); and

WHEREAS, the Executive is willing and desires to be employed by the Company
and enter into such Agreement.

NOW, THEREFORE, in consideration of the mutual terms, covenants and
conditions hereinafter set forth, the parties hereto do hereby agree as follows:

ARTICLE I
EMPLOYMENT

1.1 AGREEMENT TO EMPLOY. Upon the terms and subject to the conditions
of this Agreement, the Company hereby agrees to employ the Executive as
Vice-President Company Store Operations and as the President of the
Company's wholly owned subsidiary, CD Management, Inc., subject to the
supervision and direction of the Company's Chief Executive Officer ("Chief
Executive Officer") or his designee and the Board of Directors ("Board") or
the Board of Directors of CD Management, Inc. as appropriate, and the
Executive hereby agrees to become employed by the Company and CD Management,
Inc.

1.2 TERM OF EMPLOYMENT. The term of this Agreement will be for a period
of one (1) year commencing on the effective date hereof and will automatically
renew for successive one (1) year terms, unless terminated earlier pursuant to
Article 7 below ("Employment Period"), provided however, that the Executive's
obligations in Section 6 and Section 8 below will continue in effect after such
termination.

1.3 EFFECTIVE DATE. This Agreement will be effective as of the closing
date of the Company's initial public offering. If the closing of the Company's
initial public offering does not occur on or before February 28, 1997, this
Agreement will not become effective and will be of no further force and effect
unless mutually extended by the parties in writing.

<PAGE>

ARTICLE II
COMPENSATION

2.1 BASE SALARY. For all services rendered by the Executive under this
Agreement, including service as the President of CD Management, Inc., the
Company will pay the Executive a base salary of $100,000 per year ("Base
Salary"). The Company's Chief Executive Officer or his designee will annually
review the Executive's Base Salary in light of competitive practices, the base
salaries paid to other executive officers of the Company and the performance of
the Executive, the Company and CD Management, Inc., and may, in his sole
discretion, increase such Base Salary by an amount he determines to be
appropriate. The Executive's Base Salary (as set forth above or as may be
increased from time to time) will not be reduced. No such change will in any
way abrogate, alter, terminate or otherwise affect the other terms of this
Agreement. The Company will pay the Executive his Base Salary not less
frequently than in equal biweekly installments in arrears.

2.2 ANNUAL TARGET BONUS PLAN. In the Chief Executive Officer's or his
designee's sole discretion, during the term of the Executive's Employment
Period, the Executive will have the opportunity to receive an annual bonus
("Annual Target Bonus"), beginning at and equal to,, 25% of his Base Salary,
with open ended incremental increases commensurate with length of service and
performance after the first year. The Annual Target Bonus earned will be
awarded based upon the performance of the Executive and the Company against
annual target objectives established jointly by the Chief Executive Officer
and/or Board of Directors and the Executive. Any Annual Target Bonus payable
under this Paragraph 2.2 will be paid to the Executive as soon as practicable
following a fiscal year.

2.3 LONG-TERM INCENTIVE COMPENSATION. During the Employment Period, the
Executive will participate in all of the Company's existing and future long-term
incentive compensation programs for key executives at a level commensurate with
his position at the Company and consistent with the Company's then current
policies and practices, as determined in good faith by the Board or a committee
thereof.

ARTICLE III
BENEFITS, PERQUISITES AND EXPENSES

3.1 BENEFITS. During the Employment Period, the Executive will be
eligible to participate in (a) each welfare benefit plan sponsored or maintained
by the Company, including, without limitation, each group life, hospitalization,
medical, dental, health, accident or disability insurance or similar plan or
program of the Company, and (b) each pension, retirement, deferred compensation
or savings plan sponsored or maintained by the Company, in each case, whether
now existing or established hereafter, to the extent that the Executive is
eligible to participate in any such plan under the generally applicable
provisions thereof. Nothing in this Paragraph 3.1 will limit the Company's
right to amend or terminate any such plan in accordance with the procedures set
forth therein.

3.2 VACATION. During the Employment Period, the Executive will be
entitled to sick leave and two (2) weeks, increasing based on length of service
to a maximum of four (4) weeks, paid

<PAGE>

vacation annually as is generally provided to other senior officers of the
Company in accordance with the then current policies and practices of the
Company.

3.3 EXPENSES. (a) BUSINESS EXPENSES. The Executive will be reimbursed
for all reasonable "out-of-pocket" business expenses for business travel and
business entertainment incurred in connection with the performance of his duties
under this Agreement (i) so long as such expenses constitute business deductions
from taxable income for the Company and is excludable from taxable income to the
Executive under the governing laws and regulations of the Internal Revenue Code
of 1986, as amended (the "Code") (provided, however, that the Executive will be
entitled to full reimbursement in any case where the Internal Revenue Service
may, under Section 274(n) of the Code, disallow to any such company 50% of meals
and entertainment expenses); and (ii) to the extent such expenses do not exceed
the amounts allocable for such expenses in budgets that are approved from time
to time by the board of directors of the Company or CD Management, Inc., as
applicable. The reimbursement of the Executive's business expenses will be made
upon monthly presentation to, and approval by, the Chief Executive Officer of
the Company or Chairman of the Board of Directors of CD Management, Inc. as
applicable, of valid receipts and other appropriate documentation for such
expenses.

(b) AUTOMOBILE EXPENSES. The Company will pay the Executive $750 per
month in arrears to cover the Executive's use (including all associated
expenses) of his automobile for the Company's business.

ARTICLE IV
INDEMNIFICATION

4.1 INDEMNIFICATION. (a) RIGHT TO INDEMNIFICATION. During the
Employment Period, the Company will indemnify the Executive and hold the
Executive harmless from and against any claim, loss or cause of action arising
from or out of the Executive's performance as an officer, director, or employee
of the Company or its subsidiaries, if any, or in any other capacity, including
any fiduciary capacity, in which the Executive serves at the request of the
Company to the maximum extent permitted by the Delaware General Corporation Act
and the Company's Certificate of Incorporation and By-Laws ("Governing
Documents"), provided that in no event will the protection afforded to the
Executive hereunder be less than that afforded under the Governing Documents as
in effect at the time this Agreement becomes effective.

(b) CULPABLE ACTION:

(i) Notwithstanding the provisions of Paragraph 4.1(a), the
Executive will not be entitled to indemnification if (A) the Company is
prohibited from paying such indemnification under applicable law, or
(B) the Executive's actions or omissions involved intentional
misconduct or knowing violation of law (any existence or occurrence
described in the foregoing clauses (A) and (B), individually, is a
"Culpable Action").

<PAGE>

(ii) The existence or occurrence of a Culpable Action will be
conclusively determined by a non-appealable, final decision of the
court having jurisdiction over the applicable proceeding. Such
determination will be final and binding upon the parties hereto.

(c) PAYMENT OF COSTS. The reasonable costs incurred by the Executive
in connection with any proceeding based on this Agreement, including any
proceeding brought pursuant to Paragraph 4.1(a) and Paragraph 4.1(b)(ii),
will be paid by the Company on an "as incurred" basis; provided, however,
that if it will ultimately be determined that there exists or has occurred
a Culpable Action with respect to such proceeding, the Executive will repay
to the Company the amount (or the appropriate portion thereof as
contemplated by Paragraph 4.1(b)(iii)) so advanced, including the costs of
obtaining a determination pursuant to Paragraph 4.1(b)(ii).

ARTICLE V
SCOPE OF DUTIES

5.1 ASSIGNMENT OF DUTIES. The Executive will have such duties as may be
assigned to him from time to time by the Chief Executive Officer, his designee
or the Board of the Company or CD Management, Inc. commensurate with the
Executive's experience and responsibilities in the position for which he is
employed pursuant to Article 1 above. Such duties will be exercised subject to
the control and supervision of the Chief Executive Officer or his designee and
the Board of the Company or CD Management, Inc. as appropriate.

5.2 GENERAL SPECIFICATION OF DUTIES. The Executive, during the term
hereof, will be responsible for performing all services, acts, or things
necessary or advisable to manage and conduct the business of the Company
consistent with the position of Vice-President of Company Store Operations and
the President of CD Management, Inc. subject to such policies and procedures as
may be established by the Chief Executive Officer or his designee and/or the
Board of the Company or CD Management, Inc. as appropriate.

<PAGE>

ARTICLE VI
NONSOLICITATION, CONFIDENTIALITY AND NONCOMPETITION

6.1 THE EXECUTIVE'S DEVOTION OF TIME. The Executive hereby agrees to
devote his full time, abilities and energy to the faithful performance of the
duties assigned to him and to the promotion and forwarding of the business
affairs of the Company and CD Management, Inc., and not to divert any business
opportunities from the Company to himself or to any other person or business
entity.

6.2 CONFLICTING ACTIVITIES. The Executive will not, during the term of
this Agreement, be engaged in any other business activity without the prior
written consent of the Board, provided however, that this restriction will not
be construed as preventing the Executive from investing his personal assets in
purely passive investments in business entities which are not in competition
with the Company, its subsidiaries or affiliates. Provided, however, that
nothing in Section 6.1 or 6.2 shall prevent Executive from continuing the
accounting services of Bruce MacDonald & Co., so long as Executive faithfully
performs his duties to the Company and CD Management, Inc.

6.3 HONORING OBLIGATIONS TO PREVIOUS EMPLOYER(S). The Executive has
not and will not breach any lawful obligations owed or owing by him to any his
former employers or of the limited partnerships for which he has acted as
general partner.

6.4 CONFIDENTIALITY. Without the prior written consent of the Company,
except to the extent required by an order of a court having competent
jurisdiction or under a subpoena from an appropriate government agency, the
Executive will not communicate or disclose to any third person, or use for the
benefit of himself or any third person, (a) trade secrets, customer or supplier
lists or information, marketing plans, sales plans, management organization
information (including data and other information relating to members of the
Board and management), operating policies or manuals, business plans, processes
and techniques, financial records, or other financial, commercial, or business
information relating to the Company or its investors or the purchase and sale of
its securities or any of its subsidiaries, or (b) information designated as
confidential or proprietary that the Company or its subsidiaries, if any, may
receive from its suppliers, customers or others who do business with the Company
or any of its subsidiaries (collectively, "Confidential Information") to any
third person unless such Confidential Information has been previously disclosed
to the public by the Company or is in the public domain (other than by reason of
the Executive's breach of this Paragraph 6.4).

<PAGE>

such trade secret or proprietary information. Further, except as expressly
provided herein, promptly following the Executive's termination of
employment, the Executive will return to the Company or CD Management, Inc.
all property, documents or papers used or owned by the Company or CD
Management, Inc., and all copies, abstracts or summaries thereof in the
Executive's possession or under his control.

6.6 NONSOLICITATION OF EMPLOYEES. During the Employment Period and the
two-year period following any termination of the Executive's employment, the
Executive will not directly or indirectly solicit, encourage or induce any
employee of the Company or any of its subsidiaries to terminate employment with
such entity, and will not directly or indirectly, either individually or as
owner, agent, employee, consultant or otherwise, employ or offer employment to
any person who is or was employed by the Company or a subsidiary thereof unless
such person will have ceased to be employed by such entity for a period of at
least six months.

6.7 COMPETITION WITH THE COMPANY OR CD MANAGEMENT, INC.. The Executive
agrees that during the term of the Executive's Employment Period and for a two
year period of time thereafter will not, directly or indirectly, for his own
benefit or on behalf of others, compete, or be an officer, director, employee or
holder of more than 5% of the capital stock or other equity interest of any
corporation or other entity which competes with the Company or any of its
subsidiaries at the date of his termination from the Company ("Competitive
Activity"). The limitations imposed by this Paragraph 6.7 will extend to all
geographic areas in which the Company or CD Management, Inc. conducts business
at the date of termination of the Executive's employment by the Company. If
Executive becomes affiliated with a franchise or franchisees of the Company
after the termination of his employment by the Company, it will not be deemed a
competitive activity.

6.8 INJUNCTIVE RELIEF AND OTHER REMEDIES WITH RESPECT TO COVENANTS. The
Executive acknowledges and agrees that the covenants and obligations of the
Executive with respect to nonsolicitation, confidentiality, the Company or CD
Management, Inc. property, noncompetition, and conflicting activities, relate
to special, unique and extraordinary maters and that a violation of any of the
terms of such covenants and obligations will cause the Company and/or CD
Management, Inc. irreparable injury for which adequate remedies are not
available at law. Therefore, the Executive agrees that the Company and/or CD
Management, Inc. will (a) be entitled to an injunction, restraining order or
such other equitable relief (without the requirement to post a bond) restraining
the Executive from committing any violation of the covenants and obligations
contained in this Article 6 and (b) have no further obligation to make any
payments to the Executive hereunder following any material violation of the
covenants and obligations contained in this Article 6. These remedies are
cumulative and are in addition to any other rights and remedies the Company or
CD Management, Inc. may have at law or in equity.

ARTICLE VII
TERMINATION

7.1 BASIS FOR TERMINATION. The Executive's employment hereunder may be
canceled at any time by mutual agreement of the parties.

<PAGE>

7.2 INCAPACITY. This Agreement will automatically terminate on the last
day of the month in which the Executive dies or becomes permanently
incapacitated. "Permanent incapacity" as used herein will mean mental or
physical incapacity, or both, reasonably determined by the Board based upon a
certification of such incapacity by, in the discretion of such Board, either
the Executive's regularly attending physician or a duly licensed physician
selected by the Board, rendering the Executive unable to perform substantially
all of his duties hereunder and which appear reasonably certain to continue for
at least six consecutive months without substantial improvement. The Executive
will be deemed to have "become permanently incapacitated" on the date the Board
has determined that the Executive is permanently incapacitated and so notifies
the Executive.

7.3 WITH CAUSE. The Executive's employment may be terminated by the
Company or CD Management, Inc. "with cause," if any of the following occur:

(a) any material breach of the Executive's obligations to the
Company or CD Management, Inc. pursuant to this Agreement; or

(b) any material acts or events which inhibit the Executive from
fully performing his responsibilities to the Company or CD
Management, Inc. in good faith, including, but not limited to (i)
a felony criminal conviction; (ii) any other criminal conviction
involving the Executive's lack of honesty or the Executive's
moral turpitude; (iii) drug or alcohol abuse; or (iv) material
acts of insubordination, dishonesty, gross carelessness or gross
misconduct.

7.4 WITH CAUSE/ EFFECTIVE DATE / RIGHT TO BE HEARD. The Executive shall
not be deemed to have been terminated for cause unless and until there shall
have been delivered to him by either the Chief Executive Officer or Board of
Directors a notice of termination and a written statement of the reasons
for Executive's termination for cause and Executive has had an opportunity to
appear before the Company's and/or CD Management, Inc's Board of Directors
to state any protest that Executive may have concerning his termination for
cause. If the Executive does not request an appearance before the Board of
Directors pursuant to this subsection within five days from the date of
receipt of the notice of termination and written statement of the reasons for
his termination, the right to appear before the Board to protest shall be
deemed to be waived and the Executive's termination shall be effective as of
the date the notice of termination is delivered to Executive. If Executive
elects to appear before the Board of Directors to protest his termination for
cause, a specially called meeting will be called as soon as practicable. At
the specially called Board meeting, the Executive will have the opportunity
to state any protest that he might have, orally (not to exceed one hour) or
in writing, to his termination and the Board will thereafter re-consider its
decision to terminate the Executive for cause. If the Board decides to
affirm its decision to terminate the Executive for cause , after the
Executive's appearance and protest before it, the Board's decision: (i) will
not require a written statement of the reasons for the Board's decision;
(ii) will thereafter be final and non-appealable and (iii) effective as of
the date of the Board's final decision. The Executive will be suspended from
his responsibilities with pay, between the date that his original notice of
termination is delivered and the Board of Directors final decision as to his
termination for cause, if the Executive elects to protest his termination to
the Board, as set forth above.

<PAGE>

7.5 WITHOUT CAUSE. The Executive's employment may be terminated by the
Company or CD Management, Inc. "without cause" (for any reason or no reason at
all) at any time by giving the Executive ninety (60) days' prior written notice
of termination. Termination of employment will occur at the conclusion of the
notice period, unless otherwise agreed to in writing by the Company or CD
Management, Inc. and the Executive.

7.6 TERMINATION BY THE EXECUTIVE. The Executive may terminate his
employment hereunder by giving the Company or CD Management, Inc. sixty (60)
days' prior written notice. Termination of employment will occur at the
conclusion of the notice period, unless otherwise agreed to in writing by the
Company or CD Management, Inc. and the Executive.

7.7 PAYMENT UPON TERMINATION WITH CAUSE BY THE COMPANY OR VOLITIONAL
TERMINATION BY THE EXECUTIVE. Upon termination of the Executive's employment by
the Company for cause pursuant to subsection 7.3 or volitional termination by
the Executive pursuant to subsection 7.5, the Company will grant pay to the
Executive within 14 days after termination an amount equal to the sum of (a)
the Executive's Base Salary accrued to the date of termination; and (b) any
unreimbursed expenses accruing to the date of termination. After any such
termination, the Company will not be obligated to compensate the Executive, his
estate or representatives except for the foregoing compensation then due and
owing, nor provide the benefits to the Executive described in Article 3 (except
as may be required by law), and the Executive agrees that, immediately upon any
such termination, he will forthwith return to the Company any benefits provided
him hereunder which are capable of being physically returned.

7.8 PAYMENT UPON TERMINATION WITHOUT CAUSE BY THE COMPANY. Upon
termination of the Executive's employment by the Company without cause pursuant
to subsection 7.4, the Company will grant pay to the Executive within 14 days
after termination an amount equal to the sum of (a) the Executive's Base Salary
accrued to the date of termination; (b) the Executive's Base Salary for a twelve
month period; and (c) any unreimbursed expenses accruing to the date of
termination. Additionally, Executive will be entitled at the Company's expense
to participate for a twelve month period after termination in any group life,
hospitalization, medical, dental, health, accident or disability insurance or
similar plan or program of the Company, to the extent that such participation
would not be inconsistent with such plans contractual provisions and/or
applicable regulations.

ARTICLE VIII
MISCELLANEOUS

8.1 SURVIVAL. Articles Six and Seven and Paragraphs 8.2, 8.3 and 8.15
will survive the termination hereof.

8.2 ARBITRATION. Any dispute or controversy arising under or in
connection with this Agreement will be resolved by binding arbitration. The
arbitration will be held in the city of

<PAGE>

Oklahoma City, Oklahoma and except to the extent inconsistent with this
Agreement, will be conducted in accordance with the Rules of the American
Arbitration Association then in effect at the time of the arbitration, and
otherwise in accordance with principles which would be applied by a court of
law or equity. The arbitrator will be acceptable to both the Company and the
Executive. If the parties cannot agree on an acceptable arbitrator, the
dispute will be heard by a panel of three arbitrators one appointed by each
of the parties and the third appointed by the other two arbitrators.

8.3 LEGAL FEES AND EXPENSES. (a) OF THE EXECUTIVE. If the Executive
will prevail, in whole or in part, as to any material issue in any contest
(whether initiated by the Executive or by the Company) as to the validity,
enforceability or interpretation of any provision of this Agreement, the Company
will pay all reasonable expenses incurred by the Executive with respect to such
contest, including, without limitation, his reasonable attorney's fees.

(b) OF THE COMPANY. If the Company will prevail, in whole or in
part, as to any material issue in any contest (whether initiated by the
Company or by the Executive) as to the validity, enforceability or
interpretation of any provision of this Agreement, the Executive will pay
all reasonable expenses incurred by the Company with respect to such
contest, including, without limitation, its reasonable attorney's fees.

8.4 BINDING EFFECT. This Agreement will be binding on, and will inure to
the benefit of, the Company and any person or entity that succeeds to the
interest of the Company (regardless of whether such succession does or does not
occur by operation of law) by reason of the sale of all or a portion of the
Company's stock, a merger, consolidation or reorganization involving the
Company or, unless the Company otherwise elects in writing, a sale of the assets
of the business of the Company (or portion thereof) in which the Executive
performs a majority of his services. This Agreement will also inure to the
benefit of the Executive's heirs, executors, administrators and legal
representatives.

8.6 ENTIRE AGREEMENT. This Agreement constitutes the entire understanding
between the parties hereto with respect to the matters referred to herein. No
other agreement relating to the terms of the Executive's employment by the
Company, oral or otherwise, will be binding between the parties unless it is in
writing and signed by the party against whom enforcement is sought. There are
no promises, representations, inducements or statements between the parties
other than those that are expressly contained herein. The Executive
acknowledges that he is entering into this Agreement of his own free will and
accord, and with no duress, that he has read this Agreement and that he
understands the Agreement and its legal consequences.

<PAGE>

that any of the provisions of any of Paragraph 6.4, 6.6 or 6.7 are not
enforceable in accordance with its terms, the Executive and the Company
agree that such Paragraph will be reformed to make such Paragraph enforceable
in a manner which provides the Company the maximum rights permitted at law.

8.8 WAIVERS. Waiver by any party hereto of any breach or default by the
other party of any of the terms of this Agreement will not operate as a waiver
of any other breach or default, whether similar to or different from the breach
or default waived. No waiver of any provision of this Agreement will be implied
from any course of dealing between the parties hereto or from any failure by
either party hereto to assert it's or his rights hereunder on any occasion or
series of occasions.

8.9 NOTICES. Any notice required or desired to be delivered under this
Agreement will be in writing and will be delivered personally, by courier
service, by registered mail, return receipt requested, or by facsimile and will
be effective upon actual receipt by the party to which such notice will be
directed, and will be addressed as follows (or to such other address as the
party entitled to notice will hereafter designate in accordance with the terms
hereof):

If to the Company:

CD Warehouse, Inc.
Attention: Jerry W. Grizzle, Chief Executive Officer
P.O. Box 602
Edmond, Oklahoma 73083-0602

with a copy to:

Day, Edwards, Federman, Propester & Christensen, P.C.
Attention: Bruce W. Day, Esq.
210 Park Avenue
Suite 2900
Oklahoma City, Oklahoma 73102

If to the Executive:

The home address of the Executive noted on the records of the Company.

8.10 AMENDMENTS. This Agreement may not be altered, modified or amended
except by a written instrument signed by each of the parties hereto.

8.11 CHANGE IN CONTROL PROTECTION. Nothing contained herein will be
construed to preclude the Company from providing the Executive different or
additional severance benefits as a result of a change in control of the Company,
whether pursuant to an agreement that is in addition to, or as a supplement to,
this Agreement.

<PAGE>

8.12 HEADINGS. Headings to paragraphs in this Agreement are for the
convenience of the parties only and are not intended to be part of or to affect
the meaning or interpretation hereof.

8.13 COUNTERPARTS. This Agreement may be executed in counterparts, each of
which will be deemed an original but all of which together will constitute one
and the same instrument.

8.14 WITHHOLDING. Any payments provided for herein will be reduced by any
amounts required to be withheld by the Company from time to time under
applicable federal, state or local income or employment tax laws or similar
statutes or other provisions of law then in effect.

8.15 GOVERNING LAW. This Agreement will be governed by the laws of the
State of Delaware, without reference to principles of conflicts or choice of law
under which the law of any other jurisdiction would apply. This Agreement will
not be construed for or against a party because that party prepared it.

8.16 RIGHT OF SET-OFF. Upon termination or expiration of this Agreement,
the Company will have the right to set-off against the amounts due the Executive
hereunder the amount of any outstanding loan or advance from the Company to the
Executive.

IN WITNESS WHEREOF, the Corporation has caused this Agreement to be
executed by its duly authorized officer and the Employee has hereunto set his
hand as of the day and year first above written.

The Executive:

BRUCE MACDONALD

/s/ Bruce D. MacDonald
---------------------------------------------
Bruce D. MacDonald

The Company:

CD WAREHOUSE, INC.

By: /s/ Jerry W. Grizzle
-----------------------------------------
Jerry W. Grizzle, Chief Executive Officer

<PAGE>

EXHIBIT 10.4

EMPLOYMENT AGREEMENT
BETWEEN
CD WAREHOUSE, INC.
AND
DOYLE MOTLEY

<PAGE>

EMPLOYMENT AGREEMENT

THIS EMPLOYMENT AGREEMENT is made and entered into this 26th day of
October, 1996, by and between CD WAREHOUSE, INC., a Delaware corporation
("the Company"), and Doyle E. Motley, an individual ("the Executive").

RECITALS

WHEREAS, the Company desires to be assured of the association and
services of the Executive and to enter into an agreement embodying the terms
of such employment ("Agreement"); and

WHEREAS, the Executive is willing and desires to be employed by the
Company and enter into such Agreement.

NOW, THEREFORE, in consideration of the mutual terms, covenants and
conditions hereinafter set forth, the parties hereto do hereby agree as
follows:

ARTICLE I
EMPLOYMENT

1.1 AGREEMENT TO EMPLOY. Upon the terms and subject to the conditions
of this Agreement, the Company hereby agrees to employ the Executive as Chief
Financial Officer and Senior Vice President, subject to the supervision and
direction of the Company's Chief Executive Officer ("Chief Executive
Officer") and the Company's Board of Directors ("Board") and the Executive
hereby agrees to become employed by the Company.

1.2 TERM OF EMPLOYMENT. The term of this Agreement will be for a
period of one (1) year commencing on the effective date hereof and will
automatically renew for successive one (1) year terms, unless terminated
earlier pursuant to Article 7 below ("Employment Period"), provided however,
that the Executive's obligations in Section 6 and Section 8 below will
continue in effect after such termination.

<PAGE>

ARTICLE II
COMPENSATION

2.1 BASE SALARY. For all services rendered by the Executive under this
Agreement, the Company will pay the Executive a base salary of sixty-five
thousand dollars ($65,000) per year ("Base Salary"). The Chief Executive
Officer will annually review the Executive's Base Salary in light of
competitive practices, the base salaries paid to other executive officers of
the Company and the performance of the Executive and the Company, and may, in
his sole discretion, increase such Base Salary by an amount he determines to
be appropriate. The Executive's Base Salary (as set forth above or as may be
increased from time to time) will not be reduced. No such change will in any
way abrogate, alter, terminate or otherwise affect the other terms of this
Agreement. The Company will pay the Executive his Base Salary not less
frequently than in equal biweekly installments in arrears.

2.3 LONG-TERM INCENTIVE COMPENSATION. During the Employment Period,
the Executive will participate in all of the Company's existing and future
long-term incentive compensation programs for key executives at a level
commensurate with his position at the Company and consistent with the
Company's then current policies and practices, as determined in good faith by
the Board or a committee thereof.

ARTICLE III
BENEFITS, PERQUISITES AND EXPENSES

3.2 VACATION. During the Employment Period, the Executive will be
entitled to sick leave and two (2) weeks, increasing based on length of
service to a maximum of four (4) weeks, paid

<PAGE>

vacation annually as is generally provided to other senior officers of the
Company in accordance with the then current policies and practices of the
Company.

(b) AUTOMOBILE EXPENSES. The Company will pay the Executive $850
per month in arrears to cover the Executive's use (including all associated
expenses) of his automobile for the Company's business.

ARTICLE IV
INDEMNIFICATION

(b) CULPABLE ACTION:

(i) Notwithstanding the provisions of Paragraph 4.1(a), the
Executive will not be entitled to indemnification if (A) the
Company is prohibited from paying such indemnification under
applicable law, or (B) the Executive's actions or omissions
involved intentional misconduct or knowing violation of law (any
existence or occurrence described in the foregoing clauses (A) and
(B), individually, is a "Culpable Action").

(ii) The existence or occurrence of a Culpable Action will
be conclusively

<PAGE>

determined by a non-appealable, final decision of the court having
jurisdiction over the applicable proceeding. Such determination will
be final and binding upon the parties hereto.

ARTICLE V
SCOPE OF DUTIES

5.2 GENERAL SPECIFICATION OF DUTIES. The Executive, during the term
hereof, will be responsible for performing all services, acts, or things
necessary or advisable to manage and conduct the business of the Company
consistent with the position of Chief Financial Officer and Senior Vice
President subject to such policies and procedures as may be established by
the Chief Executive Officer.

<PAGE>

ARTICLE VI
NONSOLICITATION, CONFIDENTIALITY AND NONCOMPETITION

6.3 HONORING OBLIGATIONS TO PREVIOUS EMPLOYER(S). The Executive has
not and will not breach any lawful obligations owed or owing by him to any
his former employers.

<PAGE>

ARTICLE VII
TERMINATION

7.1 BASIS FOR TERMINATION. The Executive's employment hereunder may be
canceled at any time by mutual agreement of the parties.

<PAGE>

certain to continue for at least six consecutive months without substantial
improvement. The Executive will be deemed to have "become permanently
incapacitated" on the date the Board has determined that the Executive is
permanently incapacitated and so notifies the Executive.

7.3 WITH CAUSE. The Executive's employment may be terminated by the
Company "with cause," if any of the following occur:

(a) any material breach of the Executive's obligations to the
Company pursuant to this Agreement; or

(b) any material acts or events which inhibit the Executive from
fully performing his responsibilities to the Company in good faith,
including, but not limited to (i) a felony criminal conviction; (ii) any
other criminal conviction involving the Executive's lack of honesty or
the Executive's moral turpitude; (iii) drug or alcohol abuse; or (iv)
material acts of insubordination, dishonesty, gross carelessness or
gross misconduct.

7.4 WITH CAUSE/ EFFECTIVE DATE / RIGHT TO BE HEARD. The Executive
shall not be deemed to have been terminated for cause unless and until
there shall have been delivered to him by either the Chief Executive
Officer or Board a notice of termination and a written statement of the
reasons for Executive's termination for cause and Executive has had an
opportunity to appear before the Board to state any protest that
Executive may have concerning his termination for cause. If the
Executive does not request an appearance before the Board pursuant to
this subsection within five days from the date of receipt of the notice
of termination and written statement of the reasons for his termination,
the right to appear before the Board to protest shall be deemed to be
waived and the Executive's termination shall be effective as of the date
the notice of termination is delivered to Executive. If Executive
elects to appear before the Board to protest his termination for cause,
a specially called meeting will be called as soon as practicable. At
the specially called Board meeting, the Executive will have the
opportunity to state any protest that he might have, orally (not to
exceed one hour) or in writing, to his termination and the Board will
thereafter re-consider its decision to terminate the Executive for
cause. If the Board decides to affirm its decision to terminate the
Executive for cause , after the Executive's appearance and protest
before it, the Board's decision: (i) will not require a written
statement of the reasons for the Board's decision; (ii) will thereafter
be final and non-appealable and (iii) effective as of the date of the
Board's final decision. The Executive will be suspended from his
responsibilities with pay, between the date that his original notice of
termination is delivered and the Board final decision as to his
termination for cause, if the Executive elects to protest his
termination to the Board, as set forth above.

7.5 WITHOUT CAUSE. The Executive's employment may be terminated
by the Company "without cause" (for any reason or no reason at all) at
any time by giving the Executive thirty (30) days' prior written notice
of termination. Termination of employment will occur at the conclusion
of the notice period, unless otherwise agreed to in writing by the
Company and the Executive.

7.6 TERMINATION BY THE EXECUTIVE. The Executive may terminate his
employment

<PAGE>

hereunder by giving the Company sixty (60) days' prior written notice.
Termination of employment will occur at the conclusion of the notice
period, unless otherwise agreed to in writing by the Company and the
Executive.

7.7 PAYMENT UPON TERMINATION WITH CAUSE BY THE COMPANY OR
VOLITIONAL TERMINATION BY THE EXECUTIVE. Upon termination of the
Executive's employment by the Company for cause pursuant to subsection
7.3 or volitional termination by the Executive pursuant to subsection
7.5, the Company will grant pay to the Executive within 14 days after
termination an amount equal to the sum of (a) the Executive's Base
Salary accrued to the date of termination; and (b) any unreimbursed
expenses accruing to the date of termination. After any such
termination, the Company will not be obligated to compensate the
Executive, his estate or representatives except for the foregoing
compensation then due and owing, nor provide the benefits to the
Executive described in Article 3 (except as may be required by law), and
the Executive agrees that, immediately upon any such termination, he
will forthwith return to the Company any benefits provided him hereunder
which are capable of being physically returned.

7.8 PAYMENT UPON TERMINATION WITHOUT CAUSE BY THE COMPANY. Upon
termination of the Executive's employment by the Company without cause
pursuant to subsection 7.4, the Company will grant pay to the Executive
within 14 days after termination an amount equal to the sum of (a) the
Executive's Base Salary accrued to the date of termination; (b) the
Executive's Base Salary for a twelve month period; and (c) any
unreimbursed expenses accruing to the date of termination.
Additionally, Executive will be entitled at the Company's expense to
participate for a twelve month period after termination in any group
life, hospitalization, medical, dental, health, accident or disability
insurance or similar plan or program of the Company, to the extent that
such participation would not be inconsistent with such plans contractual
provisions and/or applicable regulations.

ARTICLE VIII
MISCELLANEOUS

8.1 SURVIVAL. Articles Six and Seven and Paragraphs 8.2, 8.3 and
8.15 will survive the termination hereof.

8.2 ARBITRATION. Any dispute or controversy arising under or in
connection with this Agreement will be resolved by binding arbitration.
The arbitration will be held in the city of Oklahoma City, Oklahoma and
except to the extent inconsistent with this Agreement, will be conducted
in accordance with the Rules of the American Arbitration Association
then in effect at the time of the arbitration, and otherwise in
accordance with principles which would be applied by a court of law or
equity. The arbitrator will be acceptable to both the Company and the
Executive. If the parties cannot agree on an acceptable arbitrator, the
dispute will be heard by a panel of three arbitrators one appointed by
each of the parties and the third appointed by the other two arbitrators.

8.3 LEGAL FEES AND EXPENSES. (a) OF THE EXECUTIVE. If the
Executive will prevail, in whole or in part, as to any material issue
in any contest (whether initiated by the Executive or by

<PAGE>

the Company) as to the validity, enforceability or interpretation of any
provision of this Agreement, the Company will pay all reasonable
expenses incurred by the Executive with respect to such contest,
including, without limitation, his reasonable attorney's fees.

<PAGE>

by either party hereto to assert it's or his rights hereunder on any occasion
or series of occasions.

If to the Company:

CD Warehouse, Inc.
Attention: Jerry W. Grizzle, Chief Executive Officer
P.O. Box 602
Edmond, Oklahoma 73083-0602

with a copy to:

Day, Edwards, Federman, Propester & Christensen, P.C.
Attention: Bruce W. Day, Esq.
210 Park Avenue
Suite 2900
Oklahoma City, Oklahoma 73102

If to the Executive:

The home address of the Executive noted on the records of the
Company.

8.10 AMENDMENTS. This Agreement may not be altered, modified or amended
except by a written instrument signed by each of the parties hereto.

8.12 HEADINGS. Headings to paragraphs in this Agreement are for the
convenience of the parties only and are not intended to be part of or to
affect the meaning or interpretation hereof.

8.13 COUNTERPARTS. This Agreement may be executed in counterparts, each
of which will be deemed an original but all of which together will constitute
one and the same instrument.

<PAGE>

IN WITNESS WHEREOF, the Corporation has caused this Agreement to be
executed by its duly authorized officer and the Employee has hereunto set his
hand as of the day and year first above written.

The Executive:

DOYLE E. MOTLEY

/s/ Doyle E. Motley
----------------------------------------------
Doyle E. Motley

The Company:

CD WAREHOUSE, INC.

By: /s/ Jerry W. Grizzle
------------------------------------------
Jerry W. Grizzle, Chief Executive Officer

<PAGE>
EXHIBIT 10.5

FINDERS AND RELEASE AGREEMENT

This Finders and Release Agreement is entered into by and between Jerry
Grizzle ("Grizzle"), an individual; CDI Acquisition JV, a Texas joint venture;
CD Partners JV, a Texas joint venture ( jointly referred to herein as the "Joint
Venture"); and CD Warehouse, Inc., a Delaware corporation, ("CD Warehouse") for
the purpose of setting forth the compensation and consideration received and to
be received by the Joint Venture for its assistance in identifying Compact Disc
International, Ltd., a Texas limited partnership ("Compact Disc"), for potential
investment or acquisition by CD Warehouse and/or Grizzle and to release any and
all other claims by and between CD Warehouse, Grizzle and the Joint Venture.

1. IDENTIFICATION OF COMPACT DISC INTERNATIONAL, LTD. The parties agree by
and among themselves that the Joint Venture has performed a valuable service
by identifying Compact Disc and/or its assets for potential investment or as
an acquisition opportunity for CD Warehouse or Grizzle;

2. ACQUISITION OF COMPACT DISC ASSETS PURSUANT TO AN INITIAL PUBLIC OFFERING
BY CD WAREHOUSE. It is presently contemplated by the parties hereto that CD
Warehouse will enter into a binding agreement to acquire the business or
assets of Compact Disc and its subsidiaries. CD Warehouse's acquisition will
be subject to the completion of an initial public offering ("IPO") of its
common stock within one hundred and twenty days from the date hereof.

3. COMPENSATION/ CONSIDERATION. Joint Venture and CD Warehouse hereby agree
to the following consideration:

(a) FINDER'S FEE. CD Warehouse will pay the Joint Venture a finder's fee
of $100,000 payable as follows:

(i) A non-refundable payment of $20,000 (the "First Non-Refundable
Payment"), will be placed in escrow by CD Warehouse with Inwood National
Bank ("Inwood") in Dallas, Texas, concurrently with the date of the
execution hereof; and

(ii) The balance of $80,000 (or $60,000 if a Second Non-refundable
Payment in the amount of $20,000 is made as described below) at the closing
of the IPO; provided, however, if within four months from the date of
execution hereof the registration statement for the IPO (the "Registration
Statement") has not been declared effective by the Securities and Exchange
Commission (the "SEC") and CD Warehouse elects to withdraw such
Registration Statement, no additional monies

<PAGE>

with respect to the finder's fee shall be payable to the Joint Venture
and the Joint Venture's compensation hereunder shall be limited to the First
Non-Refundable Payment; PROVIDED, FURTHER, that if by such date CD Warehouse
has not withdrawn the Registration Statement, CD Warehouse will make a
second non-refundable payment of $20,000 (the "Second Non-Refundable
Payment" and, together with the First Non-Refundable Payment, the
"Non-Refundable Payments"), into escrow pending the consummation of
the IPO; PROVIDED, FURTHER, if within eight months from the date of
execution hereof the Registration Statement has not been declared
effective by the SEC and CD Warehouse elects to withdraw such
Registration Statement, no additional monies in respect of the
finder's fee shall be payable to the Joint Venture and the Joint
Venture's compensation hereunder shall be limited to the Non-Refundable
Payments.

(iii) The escrow agreement to be entered into by CD Warehouse will
be in substantially the same form attached hereto as Exhibit A, and shall
provide that Inwood will pay the First Non-Refundable Payment to the Joint
Venture four months from the execution date hereof or the earlier
notification to Inwood by the IPO underwriter that the IPO has been
consummated or that the Registration Statement has been withdrawn. The
escrow agreement shall also provide that Inwood will pay the Second
Non-Refundable Payment to the Joint Venture eight months from the date of
execution hereof or upon the earlier notification to Inwood by the IPO
underwriter that the IPO has been consummated or that the Registration
Statement has been withdrawn.

(iv) Anything contained in this Agreement to the contrary
notwithstanding, in the event CD Warehouse withdraws the Registration
Statement but CD Warehouse and/or Grizzle nevertheless consummates the
acquisition of Compact Disc and/or its assets by any other means prior to
September 6, 1997, the entire finder's fee or any outstanding balance
thereof shall be payable at the closing of such acquisition.

(b) CANCELLATION AND RELEASE OF JOINT VENTURE AFFILIATES FRANCHISE
AGREEMENTS AND PRE-PAYMENTS DUE THE FRANCHISEES. As part of the acquisition
contemplated by and between Compact Disc and CD Warehouse, CD Warehouse will
be assigned all of Compact Disc's right, title and interest as the franchisor
in various outstanding franchise and development agreements. Certain
affiliated entities of the Joint Venture are currently franchisees pursuant
to the franchise agreements that would be assigned/acquired by CD

<PAGE>

Warehouse. As additional consideration, CD Warehouse hereby agrees that if
the acquisition agreement contemplated by and between CD Warehouse and
Compact Disc is consummated either through the IPO or by any other means
prior to September 6, 1997, CD Warehouse will cancel and release the
franchise and development agreement(s) by and between Northwest C.D. Traders,
L.L.C., a Texas limited liability company, and Northwest Broadway Joint
Venture, a Texas joint venture, as franchisees, and Compact Disc as
franchisor (collectively, the "Joint Venture Franchise Agreements") and
release the franchisees and all guarantors and other related parties from all
obligations thereunder or with respect thereto (including without limitation
all post termination obligations and other obligations which, by their terms,
survive the termination or expiration of the Joint Venture Franchise
Agreements except those provisions prohibiting the use of the name and
proprietary software as noted below). Joint Venture agrees that CD
Warehouse's cancellation and release of the Joint Venture Franchise
Agreements would also be subject to the payment of all franchise royalty
payments to the date of cancellation and release of such franchise agreements
and the cancellation of any and all Pre-paid Development Fee Advance(s) that
Compact Disc may then owe the franchisees. Joint Venture also agrees that if
the Joint Venture Franchise Agreements are ultimately canceled and released
as set forth above, that the Joint Venture will cause its individual members,
the franchisees and all related guarantors and parties pursuant to such
agreements to agree that, within one-hundred twenty (120) days from the date
of such cancellation and release, they will cease using the CD Warehouse name
and any proprietary software provided by Compact Disc.

4. RELEASE AND WAIVER. Effective as of the date this Finders and Release
Agreement is executed and the First Non-Refundable Payment is placed in
escrow with Inwood, CD Warehouse, Grizzle and Joint Venture hereby agree to
mutually release and waive any and all claims that they may have one against
the other, other than as stated herein. Grizzle and CD Warehouse and Joint
Venture specifically waive and release one from the other, any obligation or
claim that they may currently or hereafter possess pursuant to the terms of
the Non-Disclosure and Non-Circumvention Agreement, dated September 5, 1995,
a copy of which is attached hereto as Exhibit B and the Memorandum of
Understanding, dated November 25, 1995, a copy of which is attached hereto as
Exhibit C.

5. MISCELLANEOUS. The obligations of the parties shall be binding on and inure
to the benefit of their respective heirs, successors, assigns and affiliates.
This agreement may be amended or modified only by a subsequent agreement in
writing. This agreement shall be construed and enforced according to the laws of
Texas without regard to conflicts of laws principles, and jurisdiction and venue
shall be in the Federal District Court for the Northern District of Texas,
Dallas Division.

<PAGE>

Dated this 3rd day of September, 1996.

Joint Venture: CDI Acquisition JV / CD Partners J.V.
Texas Joint Venture(s)

/s/ Mitchell Hurwitz
----------------------------------------
Mitchell Hurwitz, individually and
as a Joint Venturer

/s/ Harry B. Lucas
----------------------------------------
Harry B. Lucas, individually and
as a Venturer

/s/ Yalonda X. Ferris
----------------------------------------
Yalonda X. Ferris, individually and as a
Venturer

CD Warehouse: CD Warehouse, Inc.
a Delaware Corporation

/s/ Jerry Grizzle
----------------------------------
Jerry Grizzle, President

Grizzle:
/s/ Jerry Grizzle
----------------------------------
Jerry Grizzle, an individual

<PAGE>
Exhibit 10.12

- -------------------------------------------------------------------------------

* * * * *

VILLAGE ON THE PARKWAY
SHOPPING CENTER LEASE

BETWEEN

METROPOLITAN LIFE INSURANCE COMPANY,
AS LANDLORD,

AND

M&L KANE COMPANY, L.L.C.
AS TENANT

DATED JUNE 24, 1992

* * * * *

- -------------------------------------------------------------------------------

<PAGE>

VILLAGE ON THE PARKWAY

TABLE OF CONTENTS

ARTICLE 1: DEFINITIONS AND CERTAIN BASIC PROVISIONS................. 1
ARTICLE 2: GRANTING CLAUSE.......................................... 3
ARTICLE 3: CONSTRUCTION AND ACCEPTANCE OF PREMISES.................. 4
ARTICLE 4: RENT..................................................... 5
ARTICLE 5: SALES REPORTS AND RECORDS................................ 9
ARTICLE 6: COMMON AREAS............................................. 10
ARTICLE 7: USE AND CARE OF PREMISES................................. 15
ARTICLE 8: MAINTENANCE AND REPAIR OF PREMISES........................ 21
ARTICLE 9: ALTERATIONS.............................................. 23
ARTICLE 10: LANDLORD'S RIGHT OF ACCESS; RELOCATION................... 25
ARTICLE 11: SIGNS; STORE FRONTS...................................... 26
ARTICLE 12: UTILITIES................................................ 27
ARTICLE 13: INDEMNITY AND PUBLIC LIABILITY INSURANCE................. 27
ARTICLE 14: NON-LIABILITY FOR CERTAIN DAMAGES........................ 29
ARTICLE 15: DAMAGES BY CASUALTY...................................... 29
ARTICLE 16: EMINENT DOMAIN........................................... 32
ARTICLE 17: ASSIGNMENT AND SUBLETTING................................ 33
ARTICLE 18: TAXES AND INSURANCE...................................... 35
ARTICLE 19: DEFAULT BY TENANT AND REMEDIES........................... 36
ARTICLE 20: LANDLORD'S CONTRACTUAL SECURITY INTEREST................. 41
ARTICLE 21: HOLDING OVER............................................. 42
ARTICLE 22: SUBORDINATION; ATTORNMENT; ESTOPPEL CERTIFICATES......... 42
ARTICLE 23: MERCHANTS ASSOCIATION.................................... 44
ARTICLE 24: DIRECTION OF TENANT'S ENERGIES........................... 44

-i-
<PAGE>

ARTICLE 25: NOTICES.................................................. 45
ARTICLE 26: COMMISSIONS.............................................. 46
ARTICLE 27: MISCELLANEOUS............................................ 46

Attachments:

Exhibit "A" - Site Plan Depicting Demised Premises
Exhibit "B" - Legal Description
Exhibit "C" - Work Letter - None
Exhibit "D" - Rules and Regulations
Exhibit "E" - Lease Guaranty
Exhibit "F" - Renewal Option

-ii-

<PAGE>
VILLAGE ON THE PARKWAY
SHOPPING CENTER LEASE

This Shopping Center Lease (the "Lease") is entered into as of the
day of , 19 by and between the Landlord and the
- ------- -------------- --
Tenant hereinafter named.

ARTICLE 1: DEFINITIONS AND CERTAIN BASIC PROVISIONS

1.1 PRIMARY DEFINITIONS:

(a) "Landlord": Metropolitan Life Insurance Company, a New York
corporation.

(b) "Landlord's Address": 5100 Beltline Road, Suite 436, Addison,
Texas 75240

(d) Tenant's address: 435 Countryside, Richardson, Texas 75081.

(e) Tenant's trade name: "CD Warehouse".

(f) "Demised Premises": Being approximately 838 square feet in area
(subject to adjustment pursuant to Section 2.2); the approximate
configuration of the Demised Premises being shown and outlined on
the plan attached hereto as EXHIBIT A and being a part of the
Shopping Center, as hereinafter defined.

(g) "Shopping Center": The real property and certain multi-tenant
and single-tenant buildings and other improvements thereon known
as "Village on the Parkway," in the City of Addison, Dallas
County, Texas, being more particularly described in the legal
description attached hereto as EXHIBIT B, and including such real
property and improvements as Landlord may from time to time
designate as included within the Shopping Center, and excluding
such real property and improvements as Landlord may from time to
time designate as excluded from the Shopping Center.

(h) "Lease Term": Commencing on the earlier to occur of (i) the
date of this Lease, or (ii) the "Commencement Date", as defined
below, and continuing for three (3) years (unless sooner
terminated as hereinafter provided) following the Commencement
Date; plus any partial calendar month

SHOPPING CENTER LEASE AGREEMENT - Page 1

<PAGE>

following the Commencement Date if the Commencement Date is a
date other than the first (1st) day of a calendar month. As used
herein, subject to Section 3.2, "Commencement Date" shall mean the
earlier to occur of (i) August 1, 1992, or (ii) the date upon
which Tenant opens the Demised Premises to the public for
business.

(i) "Minimum Guaranteed Rental": $15,084.00 per annum (being the
product of $18.00 per square foot multiplied by the 838 square
feet in the Demised Premises), payable in equal installments of
$1,257.00 monthly in advance.

(j) "Percentage Rental Rate": Five percent (5%).

(k) "Operating Costs Charge": $1,969.30 per annum (being the
product of $2.35 per square foot multiplied by the 838 square
feet in the Demised Premises), payable in equal installments of
$164.11, monthly in advance, subject to annual adjustment as
provided in Section 6.4 hereof.

(l) "Prepaid Rent": Minimum Guaranteed Rental and Operating Costs
Charge for the first month of the Lease Term totalling $1,421.11
shall be paid by the Tenant on or before the date Tenant executes
and delivers this Lease to Landlord.

(m) "Security Deposit": $1,257.00.

(n) "Permitted Use": Tenant shall use and occupy the Demised
Premises solely for the operation of a retail compact disc and
video game cartridge sales and rental store of the highest
quality and image offering in all respects the highest quality in
service, management and merchandise, which merchandise shall
consist solely of: New and used compact discs, video game
cartridges and related merchandise.

(o) "Gross Leasable Retail Area": The number of square feet of
covered floor space on all levels in all buildings and all
outdoor space in the Shopping Center designated by Landlord to
be occupied for the purpose of engaging in any retail business
and/or any office business associated with such retail business,
including basements, mezzanines, penthouses or other areas
housing mechanical equipment and storage areas, [but excluding,
without limitation, "Common Area", as defined hereafter,] such
square footage being calculated

SHOPPING CENTER LEASE AGREEMENT - Page 2

<PAGE>

from measurements to the exterior surface of the exterior walls
of each building and to the center walls common to any premises
constituting a portion of the Gross Leasable Retail Area and any
other portion of the Shopping Center.

(p) "Rent": Collectively, Minimum Guaranteed Rental, Percentage
Rental, Operating Costs Charges and any other sums of money
becoming due and payable to Landlord hereunder.

(q) Other: None.

1.2 CONSTRUCTION OF TERMS. Each of the foregoing definitions and basic
provisions shall be construed in conjunction with and limited by the
references thereto in the other provisions of this Lease.

ARTICLE 2: GRANTING CLAUSE

2.1 DEMISE OF PREMISES. In consideration of the obligation of Tenant to
pay Rent as hereinafter provided and in consideration of the other terms,
covenants and conditions hereof, Landlord hereby demises and leases to
Tenant, and Tenant hereby takes from Landlord, the Demised Premises, TO HAVE
AND TO HOLD said Demised Premises for the Lease Term, all upon the terms and
conditions set forth in this Lease. Landlord further agrees that if Tenant
shall perform all of the covenants and agreements herein required to be
performed by Tenant, Tenant shall, subject to the terms of this Lease, at all
times during the continuance of this Lease have peaceful and quiet possession
of the Demised Premises. If this Lease provides for construction prior to
occupancy, refer to the Work Letter attached hereto as EXHIBIT C.

2.2 AREA. The Demised Premises shall be conclusively deemed to contain
the number of square feet of area specified above in Section 1.1(f), unless
Landlord elects to have the area of the Demised Premises determined by
Landlord's architect, as hereinafter provided. After completion of
construction of the Demised Premises, and if Landlord so elects, in
Landlords's sole discretion, the "area" of the Demised Premises shall be
determined by the certificate of Landlord's architect or other authorized
representative of Landlord, which certificate shall be conclusive. Tenant
agrees, at the request of Landlord, to execute a formal amendment to this
Lease satisfactory to Landlord reflecting the revised square footage of the
area of the Demised Premises and any appropriate adjustments in the amount of
Minimum Guaranteed Rental and other charges hereunder based on the area of
the Demised Premises as so determined. Any measurements of the Demised
Premises pursuant to this Section shall be from the exterior of outside walls
of the building in which the Demised Premises is located and to the center of
walls common to the Demised Premises

SHOPPING CENTER LEASE AGREEMENT - Page 3

<PAGE>

and any mail or other tenant's premises, and the "area" of the Demised
Premises shall include all space therein on all levels leased to Tenant,
without deduction for columns, conduits, or penetrations of the floor or
ceiling. There is specifically excepted from the Demised Premises, and
reserved to Landlord, the use of exterior walls (other than store fronts),
the roof, the space above the ceiling, the space below the floor, and the
right to install, maintain, use, repair and replace beams, columns and other
structural support elements for the building (and any addition thereto) in
which the Demised Premises is contained, pipes, ductwork, conduits, utility
lines, and wiring in the Demised Premises. Without limiting the generality of
the foregoing, Landlord shall specifically have the right to install upon the
roof equipment, signs, antennae, displays and other objects.

ARTICLE 3: CONSTRUCTION AND ACCEPTANCE OF PREMISES

3.1 INSPECTION. Tenant acknowledges that Landlord has afforded Tenant
adequate access and opportunity to inspect the Demised Premises. Occupancy of
the Demised Premises by Tenant shall constitute the acknowledgment and
agreement of Tenant that Tenant is fully familiar with the physical condition
of the Demised Premises and that the Demised Premises complies in all
respects with the requirements of this Lease. Landlord hereby disclaims, and
Tenant hereby waives, any warranty or representation on the part of Landlord,
either express or implied, as to the fitness, condition or suitability of any
aspect of the Demised Premises, including, without limitation, any warranty
that the Demised Premises is suitable for a particular purpose, and Tenant
hereby agrees, as a material inducement to Landlord to enter into this Lease,
to accept the Demised Premises in "as is" condition.

3.2 IF PRIOR TENANT IS IN OCCUPANCY. If this Lease is executed before
the Demised Premises become vacant, or if any present tenant or occupant of
the Demised Premises or any portion thereof holds over, and Landlord cannot
acquire possession of the Demised Premises prior to the Commencement Date of
this Lease, Landlord shall not be deemed to be in default hereunder, and
Tenant agrees to accept possession of the Demised Premises at such time as
Landlord is able to tender the same. Landlord hereby waives the payment of
Rent covering any period prior to tender of possession to Tenant hereunder.
Upon request of either party following the occurrence of the Commencement
Date, both parties agree to execute and deliver to the other a memorandum
confirming the actual date of the Commencement Date. If Tenant fails to open
the Demised Premises to the public for business on the Commencement Date,
Tenant shall pay to Landlord, in addition to other charges hereunder, an
amount equal to twice the amount of Minimum Guaranteed Rental until such time
as Tenant opens the Demised Premises to the public for business. If Tenant
fails to open the Demised Premises to the public for business within ninety
(90) days after the Commencement Date, such failure shall constitute an event

SHOPPING CENTER LEASE AGREEMENT - Page 4

<PAGE>

of default hereunder and Landlord may, without any notice which may be
required in Article 19 or otherwise or demand whatsoever, exercise one or
more of the remedies set forth in Article 19. Any occupancy of the Demised
Premises by Tenant prior to the Commencement Date (including any construction
activities in the Demised Premises by Tenant) shall be subject to all of the
terms and provisions of this Lease (except the payment of Rent, but only if
this Lease expressly permits Tenant to occupy the Demised Premises early
without the payment of Rent).

3.3 FIRE PROTECTION. Tenant shall, at Tenant's expense, install in the
Demised Premises such fire extinguishers, smoke detectors, heat sensors and
other fire detection or prevention equipment, and make any changes,
modifications, alterations or additions thereto, as may be required or
recommended by any law, regulation or order of any governmental authority, by
any national or local board of fire underwriters or insurance exchange
(or other bodies exercising similar functions thereto) or by any insurance
company providing insurance upon the Demised Premises, or required in order
to prevent the imposition of any penalty, additional charge or increase in
the fire insurance rate as fixed by said board or exchange from time to time.
Any sprinkler equipment, smoke detectors, heat sensors and other fire
prevention or detection equipment installed in the Demised Premises shall be
maintained in good order and repair by Tenant, at Tenant's sole cost and
expense, shall be subject to all requirements of this Lease applicable to any
construction by Tenant in the Demised Premises, shall remain upon and be
surrendered with the Demised Premises and become the property of Landlord at
the termination of this Lease and shall be subject to Landlord's prior written
approval, which approval may be conditioned upon, without limitation, the
requirement that Tenant comply with all applicable laws, ordinances, and
governmental regulations and all applicable requirements, orders and
regulations of any insurance company providing coverage on any part of the
Shopping Center and that any such equipment shall be compatible and/or
integrated with any sprinkler or fire protection or detection system
installed in, or planned for, the building in which the Demised Premises is
located.

3.4 TRUCK ACCESS. Any delivery or construction vehicles serving the
Demised Premises shall travel only on designated paths of travel approved
by Landlord. Delivery vehicles shall only deliver goods to the approved
loading areas of the Shopping Center.

ARTICLE 4: RENT

4.1 PAYMENT TERMS. Rent shall accrue hereunder from the Commencement
Date, and shall be payable to Landlord at Landlord's Address, or at such
other address as Landlord may specify in writing.

SHOPPING CENTER LEASE AGREEMENT - Page 5

<PAGE>

4.2 MINIMUM GUARANTEED RENTAL. Tenant shall pay to Landlord Minimum
Guaranteed Rental in monthly installments in the amount specified in Section
1.1(i) above. The first (1st) such monthly installment shall be due and
payable, without notice or demand, on or before the date Tenant executes and
delivers to Landlord this Lease, and subsequent installments shall be due and
payable without notice or demand, on or before the first (1st) day of each
succeeding calendar month during the Lease Term; provided, however, that, if
the Commencement Date is a date other than the first (1st) day of a calendar
month, there shall be due and payable, without notice or demand, on or before
such date, as Minimum Guaranteed Rental for the balance of such calendar
month, a sum equal to that proportion of the Minimum Guaranteed Rental
specified for the first (1st) full calendar month as herein provided, which
the number of days from the Commencement Date to the end of the calendar
month during which the Commencement Date shall fall bears to the total number
of days in such month.

4.3 OPERATING COSTS CHARGE. Tenant shall pay to Landlord Operating Costs
Charge in monthly installments in the amount specified in Section 1.1(k)
above. The first (1st) such monthly installment shall be due and payable,
without notice or demand, on or before the date Tenant executes and delivers
to Landlord this Lease, and subsequent installments shall be due and payable,
without notice or demand, or or before the first (1st) day of each succeeding
calendar month during the Lease Term; provided, however, that, if the
Commencement Date is a date other than the first (1st) day of a calendar
month, there shall be due and payable, without notice or demand, on or before
such date, as Operating Costs Charge for the balance of such calendar month,
a sum equal to that proportion of the Operating Costs Charge specified for
the first (1st) full calendar month as herein provided, which the number of
days from the Commencement Date to the end of the calendar month during which
the Commencement Date shall fall bears to the total number of days in such
month.

4.4 PERCENTAGE RENTAL. In addition to the Minimum Guaranteed Rental,
Tenant shall also pay to Landlord for each year during the term of this
Lease, percentage rental ("Percentage Rental") determined by (i) multiplying
the total Gross Sales, as defined hereafter, made in or from the Demised
Premises during the particular calendar year by the Percentage Rental Rate
stated in Section 1.1(j) and then (ii) subtracting from the product thus
obtained the Minimum Guaranteed Rental paid by Tenant to Landlord for such
calendar year. The Percentage Rental shall be paid in monthly installments as
follows: On or before the tenth (10th) day of each calendar month during the
Lease Term, Tenant shall pay to Landlord, after deducting therefrom the
Minimum Guaranteed Rental paid for the preceding calendar month, a sum of
money equal to the product of the Percentage Rental rate specified,
multiplied by the total Gross Sales made in or from the Demised Premises
during such month. In the event that the total of the monthly payments of

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Percentage Rental for any calendar year is not equal to the annual Percentage
Rental computed on the amount of Gross Sales for such calendar year in
accordance with the Percentage Rental Rate, then Tenant shall pay to Landlord
any deficiency within sixty (60) days after the end of such calendar year, or
Landlord shall refund to Tenant any overpayment within sixty (60) days after
receipt by Landlord of the certified annual report of sales required by
Section 5.1. In no event shall the Rent to be paid by Tenant and retained by
Landlord for any calendar year be less than the annual Minimum Guaranteed
Rental herein specified.

Notwithstanding the generality of the foregoing, if (a) Tenant fails to open
the Demised Premises to the public for business on the Commencement Date, or
(b) Tenant shall cease to keep its business in the Demised Premises open to
the public for any reason during any portion of the Lease Term, then the
amount of Minimum Guaranteed Rental paid by Tenant to Landlord during the
period from the Commencement Date to the date that Tenant opens the Demised
Premises to the public for business and during any such period when Tenant's
business in the Demised Premises shall not be open to the public for
business, shall not, for the purpose of computation of Percentage Rental for
the applicable calendar year or years during which the Demised Premises was
not open to the public for business in accordance with this Section 4.4 be
excluded from the Minimum Guaranteed Rental paid by Tenant to Landlord for
the applicable calendar year and shall not be subtracted from the product
obtained in clause (i) of the first sentence of this Section 4.4

4.5 PERCENTAGE RENTAL FOR PARTIAL CALENDAR YEARS. If this Lease should
commence on a date other than the first (1st) day of a calendar year or
terminate on a date other than the last day of a calendar year,
Percentage Rental for such fractional part of the calendar year following the
Commencement Date or preceding the termination date, as the case may be,
shall be paid at the Percentage Rental Rate for all Gross Sales made during
such fractional part of a calendar year, after deducting from such Percentage
Rental all payments of Minimum Guaranteed Rental for such fractional period,
such Percentage Rental to be paid in monthly installments as provided above
with respect to full calendar years.

4.6 GROSS SALES. The term "Gross Sales" as used herein shall be
construed to include the entire amount of the sales price, whether for cash,
credit, trade-ins, or otherwise, of all sales and leases of merchandise
(including gift and merchandise certificates), food, beverages, services, and
other receipts whatsoever of all business conducted at, in or from the
Demised Premises, including without limitation, mail or telephone orders
received or filled at the Demised Premises, deposits not refunded to
purchasers, orders taken, although said orders may be filled elsewhere,
catalog sales, sales to employees, sales through vending machines or other
devices, and sales by any sublessee,

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concessionaire or licensee or otherwise in said Demised Premises, sales made
at, in or from other premises more particularly described in Section 24.1, if
any, and insurance proceeds and/or condemnation awards received for loss of
sale, profits or business. Each sale upon installment or credit shall be
treated as a sale for the full price in the month during which such sale was
made irrespective of the time when Tenant receives payment from its customer.
Each lease of goods or services by Tenant shall be treated as a sale in the
month during which such lease is made in an amount equal to the total rent or
other consideration payable during the term thereof, irrespective of the time
when Tenant shall receive payment from its customer. No deduction shall be
allowed for uncollected or uncollectible credit accounts. Gross Sales shall
not include, however, any sums collected and paid out for any sales or excise
tax imposed by any duly constituted governmental authority where the amount
of such tax is separately charged to the customer, nor shall it include the
exchange of merchandise between the stores of Tenant, if any, where such
exchanges are made solely for the convenient operation of the business of
Tenant and not for the purpose of consummating a sale which has theretofore
been made at, in or from the Demised Premises and/or for the purpose of
depriving Landlord of the benefit of a sale which otherwise would be made at,
in or from the Demised Premises, nor the amount of returns to shippers or
manufacturers, nor the amount of any cash or credit refund made upon any sale
where the merchandise sold, or some part thereof, is thereafter returned by
purchaser and accepted by Tenant, nor sales of Tenant's fixtures.

4.7 DEADLINE FOR PAYMENT OF RENT. It is understood that the Minimum
Guaranteed Rental is payable on or before the first (1st) day of each
calendar month (in accordance with Section 4.2 above) and Percentage Rental,
if any, is payable on or before the tenth (10th) day of each calendar month,
without offset or deduction of any nature. In the event any Rent is not
received within five (5) days after its due date for any reason whatsoever,
it is agreed that the amount thus due shall bear interest at the maximum
contractual rate which could legally be charged in the event of a loan of
such amount to Tenant (but in no event to exceed 1 1/2% per month), such
interest to accrue continuously on any unpaid balance due to Landlord by
Tenant during the period commencing with the aforesaid due date and
terminating with the date on which Tenant makes full payment of all amounts
owning to Landlord at the time of said payment. Any such increase shall be
payable as additional Rent hereunder, shall not be considered as a deduction
from Percentage Rental, and shall be payable immediately on demand.

4.8 CONSECUTIVE LATE PAYMENTS. If Tenant fails in two (2) consecutive
months to make Rent payments within ten (10) days after the date due,
Landlord in order to reduce its administrative costs, may require, by giving
written notice to Tenant (and in addition to any interest accruing pursuant
to Section 4.7 above, as well as any other rights and remedies accruing
pursuant to Article 10 or 20

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below, or any other term, provision or covenant of this Lease), that Minimum
Guaranteed Rentals are to be paid quarterly in advance instead of monthly and
that all future Rent payments are to be made on or before the due date by
cash, cashier's check, or money order, and that the delivery of Tenant's
personal or corporate check will no longer constitute a payment of Rent as
provided in this Lease. Any acceptance of a monthly Rent payment or of a
personal or corporate check thereafter by Landlord shall not be construed as
a subsequent waiver of said rights.

ARTICLE 5: SALES REPORTS AND RECORDS

5.1 CERTIFIED STATEMENT OF GROSS SALES. On or before the tenth (10th)
day of each calendar month during the Lease term, Tenant shall prepare and
deliver to Landlord at the place where Rent is then payable a certified
statement of Gross Sales (including, without limitation, Gross Sales made at,
in or from the Demised Premises and Gross Sales made at, in or for other
premises more particularly described in Section 24.1, if any) made during the
preceding calendar month. In addition, within sixty (60) days after the
expiration of each calendar year and within sixty (60) days after the
termination of this Lease if this Lease should not terminate at the end of a
calendar year, Tenant shall prepare and deliver to Landlord at the place
where Rent is then payable, a statement of Gross Sales (including, without
limitation, Gross Sales made at, in or from the Demised Premises and Gross
Sales made at, in or from other premises more particularly described in
Section 24.1, if any) during the preceding calendar year (or partial calendar
year), certified to be correct by an independent certified public accountant.
Tenant shall furnish similar statements for its licensees, concessionaries,
and subtenants, if any. All such statements shall be in such form as the
Landlord may require. Without limiting the other remedies that Landlord may
have hereunder, at law or in equity, if Tenant fails to timely prepare and
deliver to Landlord any statement of Gross Sales, Landlord may require Tenant
to pay a fine equal to Fifty Dollars ($50.00) per day from the date such
statement of Gross Sales is due until the date it is received by Landlord to
reimburse Landlord for the extra expense involved in handling such delinquent
statement of Gross Sales. If Tenant fails to timely prepare and deliver to
Landlord any two (2) consecutive statements of Gross Sales, Landlord shall
have the right to have its auditors make a special audit of all books and
records, wherever located, pertaining to such Gross Sales, and regardless of
the correctness of such statements the expense of such audit shall be borne
by Tenant, and such audit shall, in all other respects, be governed by the
provisions of Section 5.3.

5.2 CASH REGISTERS, BOOKS AND RECORDS. Tenant and each subtenant,
licensee or concessionaire of Tenant shall in connection with all sales
utilize in a manner satisfactory to Landlord cash registers equipped with
sealed continuous totals and shall from

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time to time furnish to Landlord serial numbers of all cash registers at any
time utilized in the Demised Premises. Tenant and each subtenant, licensee or
concessionaire of Tenant shall keep in the Demised Premises or at some other
location in Dallas, Texas a permanent, accurate set of books and records of
all sales of merchandise and revenue derived from business conducted in the
Demised Premises (and other premises more particularly described in Section
24.1, if any), and all supporting records such as tax reports and banking
records. All such books and records shall be retained and preserved for at
least thirty-six (36) months after the end of the calendar year to which they
relate and shall be subject to inspection and audit by Landlord and its
agents at all reasonable times.

5.3 AUDITS. In the event Landlord is not satisfied with the statements
of Gross Sales submitted by Tenant, Landlord shall have the right to have its
auditors make a special audit of all books and records, wherever located,
pertaining to sales made at, in or from the Demised Premises. If such
statements are found to be incorrect to an extent of more than two percent
(2%) over the figures submitted by Tenant, Tenant shall pay for such audit.
Tenant shall promptly pay to Landlord any deficiency or Landlord shall
promptly pay to Tenant any overpayment, as the case may be, which is
established by such audit. In addition, without limiting the other remedies
that Landlord may have hereunder, at law or in equity, if such statements are
found to be incorrect to an extent of more than five percent (5%) from the
figures submitted by Tenant, Landlord may terminate this Lease upon ten (10)
days' prior written notice to Tenant.

ARTICLE 6: COMMON AREAS
- ------------------------

6.1 DESCRIPTION OF COMMON AREAS. The term "Common Area" is defined for
all purposes of this Lease as that part of the Shopping Center intended for
the common use of all tenants, including among other facilities (as such may
be applicable to the Shopping Center) parking areas, decks, private streets
and alleys, landscaping, curbs, loading areas, sidewalks, malls and
promenades (enclosed or otherwise), lighting facilities, drinking fountains,
meeting rooms, public toilets, and the like but excluding space in buildings
(now or hereafter existing) designed for rental for commercial purposes, as
the same may exist from time to time, and further excluding streets and alleys
maintained by a public authority. Landlord reserves the right to change from
time to time the dimensions, size and location of the Common Area, as well as
the dimensions, identity and type of any buildings in the Shopping Center and
to construct additional buildings or additional stories on existing buildings
(including, without limitation, the building in which the Demised Premises is
located) or other improvements in the Shopping Center, for any purpose
whatsoever at Landlord's sole discretion. Landlord reserves the right to add
additional land to the Shopping Center, to be used as remote or off-site
parking areas or for any

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other purpose suitable for the Shopping Center, and in such event, Landlord
may designate such additional land as "Common Area" or for any other purpose.
Landlord reserves the right from time to time to restripe portions of the
Common Area to provide for parking spaces as Landlord in its discretion
shall determine, including, without limitation, to provide for parking spaces
for small automobiles. Landlord also reserves the right to dedicate portions
of the Common Area and other portions of the Shopping Center (excepting only
the Demised Premises) for street, park, utility and other public purposes.
Tenant, and its employees and customers, and when duly authorized pursuant to
the provisions of this Lease, its subtenants, licensees and concessionaires,
shall have the non-exclusive right to use the Common Area as constituted from
time to time, such use to be in common with Landlord, other tenants to the
Shopping Center and other persons permitted by Landlord to use the same, and
subject to such reasonable rules and regulations governing use as Landlord
may from time to time prescribe, including the designation of specific areas
within the Shopping Center or in reasonable proximity thereto in which
automobiles owned by Tenant, its employees, subtenants, licensees and
concessionaires shall be parked. In this regard, Tenant shall furnish to
Landlord upon request a complete list of license numbers of all automobiles
operated by Tenant, its employees, subtenants, licensees or concessionaires,
and Tenant agrees that if any automobile or other vehicles owned by Tenant or
any of its employees, subtenants, licensees, or concessionaires shall at any
time be parked in any part of the Shopping Center other than the specified
areas designated for employee parking, Tenant shall pay to Landlord, as
additional Rent, within ten (10) days of demand an amount equal to the daily
rate or charge for such parking as established by Landlord from time to time
for each day or part thereof, such automobile or other vehicle is so parked
and Landlord shall be, and is hereby, authorized to cause such automobile or
other vehicle to be removed to another location, either within or beyond the
Shopping Center, using such force or other means as may be necessary or
convenient to such purpose, and Tenant shall pay all costs of such removal
and shall indemnify Landlord, its employees and agents, and hold each of them
harmless from any and all claims of whatsoever sort which may arise by reason
of such removal. Without limiting the foregoing, Landlord shall have the
right to establish parking by permit or such other procedures or formats for
parking as Landlord shall deem appropriate to control use of the parking
facilities and shall have the right to operate, or permit to be operated,
valet parking. Landlord shall have the right to restrict parking for
particular users during particular hours of the day in such manner as
Landlord deems advisable for the benefit of the Shopping Center. Landlord
shall also have the right to establish and enforce fees for the right to use
the parking spaces within the Shopping Center by Tenant, or any of its
employees, subtenants, licensees or concessionaires or any of their
respective employees or invitees. Parking fees collected by Landlord for use
of the parking facilities by retail tenants of the

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Shopping Center, their employees and customers, shall be applied to reduce
Operating Costs, as defined in Section 6.4, generated by such parking
facilities; provided, however, that any parking fee, revenue or charge
collected by Landlord from the tenants or occupants, or their respective
employees or invitees, of any hotel, residential building, office space or
other non-retail building or premises shall not be applied to reduce
Operating Costs. Tenant shall not solicit business or display merchandise
within the Common Area or distribute handbills therein, or take any action
which would interfere with the rights of other persons to use the Common Area
for such periods of time as may be necessary to make repairs or alterations
or to prevent the public from obtaining prescriptive rights.

6.2 SUBSTITUTE PARKING. Landlord may from time to time substitute for
any parking area other areas reasonably accessible to the tenants of the
Shopping Center, which areas may be elevated, surface or underground.

6.3 OPERATION AND MAINTENANCE. Landlord shall be responsible for the
operation, management, and maintenance of the Common Area, the manner of
maintenance and the expenditures therefor to be in the sole discretion of
Landlord.

6.4 TENANT'S PROPORTIONATE SHARE OF OPERATING COSTS. Tenant agrees to
pay as additional Rent, as hereinafter provided, the Operating Costs Charge
which represents Tenant's proportionate share of certain costs relating to
the operation and maintenance of the Shopping Center (such costs referred to
in this Lease as "Operating Costs") described as the aggregate of:

(a) the cost of operation and maintenance of the Common Area, including
specifically, without limitation, such maintenance and repair as Landlord in
its discretion shall determine; pedestrian traffic direction and control
(including, among other costs, maintenance and repair of any stairs,
elevators or escalators); costs and expenses of planting, maintaining,
replanting and replacing flowers, plants, shrubbery, trees and other
landscaping; water and sewerage charges; interior and exterior painting;
required licenses and permits; costs and expenses of supplies; illumination
of the buildings and the Common Area (including, among other costs,
maintenance of fixtures, the cost of light bulbs, and special holiday
lighting); maintenance, repair and replacement of heating, ventilating, air
conditioning and other equipment, if any, in the Common Area, and sanitary
control facilities; maintenance, repair and replacement of parking facilities
(including, among other costs, sweeping and restriping); removal of snow,
ice, trash, rubbish, garbage and other refuse; all costs and expenses of fire
protection and sprinkler installation and maintenance; security services
(both on and off site); traffic control and policing (including, among other
costs, traffic signs and markers, both on

SHOPPING CENTER LEASE AGREEMENT - Page 12

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and off site); holiday and other decorations; depreciation of the capital
costs of, and rent for the leasing of, any machinery, equipment and vehicles
used in connection with the operation and maintenance of the Common Area;
maintenance, repair and replacement of all utility mains, lines, conduits and
other facilities on, under or above the Common Area; all charges for utility
services to the extent not billed directly to tenants (including, in the
event of an enclosed mall or promenade in the Shopping Center, the cost of
energy consumed by heating, ventilating and air conditioning the enclosed
mall or promenade); premiums for hazard, public liability, rent loss, boiler
and such other insurance as Landlord shall deem appropriate; ad valorem
taxes, or taxes levied in lieu thereof, assessments and other governmental
charges (foreseen or unforeseen, general or special, ordinary or
extraordinary); any and all governmental impositions and surcharges; the
costs of obtaining, operating and maintaining any shuttle bus system or other
public transportation system, if the same are required by any law, rule,
regulation, guideline or order of any governmental authority or if the same
provide service to or from the Shopping Center available to the tenants of
the Shopping Center or their employees or customers; the costs of
acquisition, operation, repair, maintenance and replacement of any intercom
system, loud speaker system or other communication system; the costs of
shopping bags, tenant directories and indexes, tenant information kiosks and
other amenities for the benefit of customers of tenants of the Shopping
Center; the costs of operating, repairing, maintaining and insuring any works
of art or other decorative elements in the Common Area; and the costs of
acquisition, operation, repair, maintenance and replacement of any music
program services or other entertainment services provided in the Common Area
for the benefit of the tenants of the Shopping Center or their employees or
customers; and

(b) the following costs of operation and maintenance of the Shopping
Center (notwithstanding that any of the following costs may not be associated
with the Common Area): the costs of any capital improvements which (i) are made
for the purpose of reducing Operating Costs, or (ii) may be required by any
governmental authority under any governmental law, restriction, code or
regulation which was enacted or became effective with respect to the Shopping
Center after the initial date of completion of the Shopping Center, which such
costs in subparagraphs (i) and (ii) above shall be amortized over the useful
life or economic life of any such improvement as shall be determined in
accordance with generally accepted accounting standards consistently applied,
together with interest on the unamortized balance thereof at the rate of twelve
percent (12%) per annum or such higher rate as may have been reasonably paid by
Landlord on funds borrowed for the purpose of construction or installation of
such capital improvements; salaries and wages (including, without limitation,
taxes, insurance, pension, retirement, fringe and other benefits) of all
employees and management personnel; management fees paid to any management
company for managing the Shopping Center (which

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management company may be affiliated with Landlord) or the costs of all general
and administrative expenses, plus a reasonable allowance for Landlord's
overhead costs, if Landlord directly manages the Shopping Center; the costs of
repair, maintenance and replacement (including, without limitation, the costs
of any inspection, testing and assessment in connection therewith) of all
portions of the improvements and buildings (both interior and exterior) of the
Shopping Center containing Common Area, premises leased to tenants, or both,
including, but not limited to, floors, foundations, floor coverings, ceilings,
walls, insulation, roofs and roof flashings, canopies, skylights, signs,
fountains, windows, doors and hardware; and a reasonable reserve for non-annual
major repairs and other expenses and costs otherwise includable in Operating
Costs.

(c) To the extent that any equipment, improvements, areas, services,
facilities or other amenities are shared by the Shopping Center and other
projects, a fair and reasonable allocation of the aggregate costs and expenses
attributable to such shared amenities shall be made between the Shopping Center
and such other projects. The proportionate share to be paid by Tenant of
Operating Costs shall be computed by multiplying the total Operating Costs by a
fraction, the numerator of which shall be the area of the Demised Premises, and
the denominator of which shall be the Grass Leasable Retail Area within the
Shopping Center, or, at the option of Landlord, the Gross Leasable Retail Area
within the Shopping Center which is occupied by tenants from time to time,
excluding the ground floor within any department store, office building (or
office premises within any building also containing premises for retail
tenants) or hotel now or hereafter within the Shopping Center. For any
calendar year or partial calendar year period, the Gross Leasable Retail Area
occupied shall be the average of the Gross Leasable Retail Area occupied on the
first day of each month falling within such calendar year or partial calendar
year period. If Tenant's share for any calendar year shall be more than the
aggregate of the Operating Costs Charge paid by Tenant for that calendar year,
as specified in Section 1.1(k) hereof, Tenant shall pay the additional amount
to Landlord within ten (10) days of demand. If Tenant's share for any calendar
year shall be less than the aggregate of such Operating Costs Charge payments,
Landlord shall refund the excess amount to Tenant within one hundred twenty
(120) days after the end of such year. Landlord shall assess monthly or other
periodic charges as the Operating Costs Charge as specified in Section 1.1(k)
based upon the estimated annual Operating Costs, payable in advance but subject
to adjustment after the end of the year on the basis of the actual cost for
such year. Within one hundred twenty (120) days after the close of each
calendar year or as soon thereafter as reasonably practicable, Landlord will
furnish to Tenant a detailed statement of Operating Costs for such year, such
statement to be prepared in accordance with standard accounting practices and
to include an allocation of Tenant's shares of Operating Costs computed as
herein provided. Any

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necessary adjustments to the Operating Costs Charge shall be made promptly
after delivery of such statement.

ARTICLE 7: USE AND CARE OF PREMISES
- -----------------------------------

7.1 USE; HOURS; TRADENAMES. The Demised Premises may be used only for the
purpose or purposes specified as the "Permitted Use" in Section 1.1(n) above,
and no other purposes without the prior written consent of Landlord.
Tenant shall comply with all rules and regulations established for the Shopping
Center by Landlord from time to time, including the rules and regulations
contained in EXHIBIT D attached to this Lease. Tenant shall use in the
transaction of business in the Demised Premises the trade name specified in
Section 1.1(e) above and no other trade name without the prior written consent
of the Landlord. Tenant shall not at any time leave the Demised Premises
vacant, but shall in good faith continuously throughout the Lease term conduct
and carry on in the entire Demised Premises the type of business for which the
Demised Premises are leased. Tenant shall operate its business in an
efficient, high class and reputable manner so as to produce the maximum amount
of Gross Sales from the Demised Premises, and shall, except during reasonable
periods for repairing, cleaning and decorating, keep the Demised Premises open
to the public for business properly equipped with fixtures, stocked with
adequate supply of seasonal merchandise and staffed with adequate personnel in
attendance on all days and during all hours (including evenings) during any
hours when the Shopping Center generally is open to the public for business,
except to the extent Tenant may be prohibited from being open for business by
applicable law, ordinance or governmental regulation. Tenant may, in Tenant's
discretion, and subject to any applicable law, ordinance or governmental
regulation, and subject further to any rules and regulations governing hours as
Landlord may from time to time prescribe in Landlord's sole discretion, keep
the Demised Premises open to the public for business on all days and during all
hours in excess of the minimum hours of operation imposed above; provided,
however, that Landlord shall not be obligated to provide security services,
heating, air conditioning or light in or access through the mall, if any, or
other portions of the Common Area or security services or light in the parking
areas, decks and other parking facilities, past the normal hours of operating
of such facilities or services as determined by Landlord in Landlord's sole
discretion; and, provided further, that Tenant shall pay to Landlord all costs
incurred by Landlord in connection therewith as additional Rent within ten (10)
days of demand. Tenant shall not take inventory during any period that Tenant
is obligated to be open to the public for business. Without limiting Tenant's
other obligations under this Section 7.1 or any other provision of this Lease,
as partial consideration for the grant of the non-exclusive license to Tenant
to use Landlord's tradename "Village on the Parkway" in Section 7.6, Tenant
agrees to operate its business in the Demised Premises at a standard which is
equal to or better than the standard it is

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currently maintaining at the most successful store operated by Tenant under
the trade name specified in Section 1.1(e) as of the date of this Lease, if
any, or, alternatively, comparable to the most successful store operated by
Tenant's competitors in the geographic markets in which Tenant operates, and
which Tenant has represented to Landlord, as a material inducement to
Landlord in making this Lease, that it shall maintain in the Demised Premises
at the above-described standard throughout the Lease term; which such
standard of operation of Tenant's business shall encompass, without
limitation, the quality of the merchandise it offers for sale, its methods of
doing business, the quality and quantity of its advertising, the quality of
its interior displays, the type and quality of its fixtures, the adequate
staffing of its personnel and the general conduct of its business. Landlord
and Tenant agree, without limiting the other remedies that Landlord may have
hereunder, at law or in equity, that because of the difficulty
or impossibility of determining Landlord's damages which would result from
Tenant's violation of this Section 7.1 or Section 7.6, including, without
limitation, damages from loss of Percentage Rental from Tenant and other
tenants, and diminished economic value, Landlord shall, if Landlord so
elects, be entitled to liquidated damages in an amount equal to Minimum
Guaranteed Rental, prorated on a daily basis and increased by fifty percent
(50%), for each day that Tenant shall fail to strictly and fully comply with
the provisions of this Section 7.1 or Section 7.6. In addition, Landlord
shall have the right to obtain specific performance by Tenant upon Tenant's
failure to strictly and fully comply with the provisions of this Section 7.1
or Section 7.6.

7.2 NO USES WHICH INCREASE OR INVALIDATE INSURANCE. Tenant shall not,
without Landlord's prior written consent, keep anything within the Demised
Premises or use of the Demised Premises for any purpose which increases the
insurance premium cost or invalidates any insurance policy carried on the
Demised Premises or other parts of the Shopping Center. If Landlord shall
consent to such use and occupancy by Tenant, Tenant shall pay on demand as
additional Rent the additional insurance premiums resulting from such use and
occupancy. Tenant shall not keep anything within the Demised Premises or use
the Demised Premises for any purpose which would require Landlord to make any
alteration to the Demised Premises or any other portion of the Shopping
Center. All property kept, stored or maintained within the Demised Premises
by Tenant shall be at Tenant's sole risk.

7.4 NO FIRM SALES, ETC. Tenant shall not conduct within the Demised
Premises any fire, auction, bankruptcy, moving, "going-out-of-business,"
"lost-our-lease," or similar sales or operate within the Demised Premises a
"wholesale" or "factory outlet" store, a cooperative store, a "second hand"
store, a "surplus" store or a store commonly referred to as a "discount
house". Tenant shall not advertise that it sells its products or services at
"discount", "cut-price", or "cut-rate" prices. Tenant

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shall not permit any objectionable or unpleasant odors or loud noises to
emanate from the Demised Premises; nor place or permit any radio, television,
loudspeaker or amplifier on the roof or outside the Demised Premises or where
the name can be seen or heard from outside the Demised Premises nor place any
antenna, awning or other projection on the exterior of the Demised Premises
nor place or display any merchandise, fixtures or other property or any signs
or other advertising media in the Shopping Center outside the perimeter of
the Demised Premises; nor take any other action which would constitute a
nuisance or would disturb or endanger other tenants or occupants of the
Shopping Center or unreasonably interfere with their use of their respective
premises; nor do anything which would tend to injure the reputation of the
Shopping Center. If Tenant shall place or display any such merchandise,
fixtures or other property or any signs or other advertising media in the
Shopping Center outside the perimeter of the Demised Premises, Landlord may,
without limiting the other remedies that Landlord may have hereunder, at law
or in equity, require Tenant to pay, as additional Rent, within ten (10) days
of demand, a fine equal to Fifty Dollars ($50.00) per day any such property,
signs or other advertising media remain in any portion of the Shopping Center
outside of the perimeter of the Demised Premises, and Landlord shall be, and
is hereby, authorized to move any such property, signs or other advertising
media into the Demised Premises or, at Landlord's election, to remove and
store, at Tenant's expense, the same at some other location either within or
outside the Shopping Center, using such means as Landlord deems necessary or
convenient to such purpose, without being liable to Tenant for protection or
any claim for damages therefor. In no event shall any portion of the Demised
Premises be used for the sale, service or consumption of any alcoholic
beverages.

7.4 NO WASTE. Tenant shall take good care of the Demised Premises and
keep the same free from waste at all times. Tenant shall keep the Demised
Premises and sidewalks, service-ways and loading areas adjacent to the
Demised Premises neat, clean and free from dirt or rubbish at all times, and
shall carefully store in an orderly manner all trash and garbage within the
Demised Premises, arranging for the regular pick-up of such trash and garbage
at Tenant's expense. Notwithstanding the foregoing, Landlord may elect, in
its sole discretion, to procure services for trash and garbage pick-up for
Tenant and other tenants in the Shopping Center, in which event the cost for
such Landlord-provided services will be included as an Operating Cost.
Receiving and delivery of goods and merchandise and removal or garbage and
trash shall be made only in the manner and areas prescribed by Landlord.
Tenant shall not operate an incinerator or burn trash or garbage within the
Shopping Center area.

7.5 DISPLAY WINDOWS. Tenant shall maintain all display windows in a
neat, attractive condition, and shall keep all display windows, exterior
electric signs and exterior lighting under any

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<PAGE>

canopy in front of the Demised Premises lighted from dusk until 11:00 P.M.
every day, including Sundays and holidays. If Tenant shall fail to maintain
such display windows and exterior electric signs lighted from dusk until
11:00 P.M. every day, including Sundays and holidays, Landlord may require
Tenant to pay an additional Rent upon demand a fine equal to Fifty Dollars
($50.00) per day.

7.6 ADVERTISING; TRADENAME LICENSE. Tenant shall, at Tenant's sole
cost and expense, advertise the business activities of Tenant within the
Demised Premises only (and not the business activities of Tenant within any
of Tenant's other commercial establishments) in a single special "grand
opening" advertisement satisfactory to Landlord, promoting the opening of the
Demised Premises to the public for business. Tenant shall include the address
and identity of its business activities in the Demised Premises in all
advertisements made by Tenant in which the address and identity of any
similar local business activity of Tenant is mentioned and shall not divert
from the Demised Premises any business which normally would be transacted
there. Tenant acknowledges that the name of the Shopping Center "Village on
the Parkway" is a distinctive tradename of Landlord used to describe a
Class A multi-tenant retail shopping center located at the southeast corner
of the intersection of Beltline Road and the Dallas Parkway in the City of
Addison, Dallas County, Texas. Landlord hereby grants Tenant a non-exclusive
license to use the name of the Shopping Center "Village on the Parkway" in
Tenant's advertisements of its business activities in the Demised Premises,
provided that use by Tenant in advertising, letterheads or otherwise of the
name of the Shopping Center or pictures or drawings of the Shopping Center
and buildings contained therein, or any other distinctive trade name or
trademark used by Landlord shall be subject to such restrictions and
regulations as Landlord may from time to time prescribe.

7.7 PERMITS AND LICENSES. Tenant shall procure at its sole expense any
permits and licenses required for the transaction of business in the Demised
Premises and otherwise and otherwise comply with all applicable laws,
ordinances, and governmental regulations and any order or regulation of any
insurance company providing coverage on any part of the Shopping Center.
Tenant shall also comply with all reasonable rules and regulations which
Landlord may from time to time prescribe governing the conduct of business
within the Shopping Center. Tenant will be responsible for causing its
employees, customers, subtenants, licensees and concessionaires to comply
with all such laws, ordinances and regulations.

7.8 ENVIRONMENTAL COMPLIANCE. Landlord makes no warranties regarding the
environmental condition of the Demised Premises and Shopping Center. Tenant
acknowledges it has been afforded an opportunity prior to the execution of
this Lease to conduct the investigations and inspections it deems necessary
to determine that

SHOPPING CENTER LEASE AGREEMENT - Page 18
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the environmental condition of the Demised Premises and Shopping Center are
acceptable. The term "Hazardous Materials" as used herein shall mean (a) any
substance the presence of which requires special handling, investigation,
notification or remediation under any federal, state or local statute,
regulation, ordinance, order, action, policy or common law; (b) any substance
which is or becomes defined as a "hazardous waste," "hazardous substance,"
pollutant or contaminant under any federal, state or local statute, regulation,
rule or ordinance or amendments thereto, including, without limitation, the
Comprehensive Environmental Response, Compensation and Liability Act (42
U.S.C. section 9601 et seq.), the Resource Conservation and Recovery Act (42
U.S.C section 6901 et seq.), the Toxic Substances Control Act (15 U.S.C.
section 2601 et seq.), the Federal Insecticide Fungicide and Rodenticide
Control Act (7 U.S.C. section 136 et seq.), the Texas Solid Waste Disposal Act
(Tex.Rev.Civ.Stat.Ann. Art. 4477-7 et seq.), the Occupational Safety and
Health Act of 1970 (29 U.S.C. section 651 et seq.), the Emergency Planning
and Community Right to Know Act of 1986 (42 U.S.C. section 11001 et seq.),
the Clean Water Act (33 U.S.C. section 1251 et seq.), the Texas Water Code
(Section 26.001 et seq.), the Safe Drinking Water Act (42 U.S.C. section 300f
et seq.), the Hazardous and Solid Waste Amendments of 1984 (Public Law
86-616, Nov. 9, 1984), the Hazardous Materials Transportation Act (49 U.S.C.
section 1801 et seq.), the Federal Clean Air Act (42 U.S.C. section 7401 et
seq.) and the Texas Clean Air Act (Tex.Rev.Civ.Stat.Ann. Art. 4477-5 et
seq.); (c) any substance which is toxic, explosive, corrosive, flammable,
infectious, radioactive, carcinogenic, mutagenic, or otherwise hazardous and
is or becomes regulated by any governmental authority, agency, department,
commission, board, agency or instrumentality of the United States, the State
of Texas or any political subdivision thereof; any substance the presence of
which on the Property causes or threatens to cause an erosion, contamination,
drainage or nuisance problem upon the Property or to adjacent properties
(including on nearby public roads and rights-of-way) or poses or threatens to
pose a hazard to the health or safety of persons on or about the Property):
any substance which contains gasoline, diesel fuel or other petroleum
hydrocarbons; and (d) any substance which contains polychlorinated biphenyls,
asbestos, or urea formaldehyde foam insulation. Tenant shall not use, and
shall not permit any subtenant, licensee, concessionaire, employee, agent or
invitee to use, any portion of the Demised Premises or the Shopping Center,
for the placement, storage, manufacture, disposal or handling of any
Hazardous Materials. Landlord shall have the right to conduct from time to
time such inspections of the Demised Premises as Landlord deems appropriate
in its sole discretion to determine the existence of any Hazardous Materials
therein. In the event Tenant places or discovers any Hazardous Materials in
the Demised Premises, Tenant shall immediately notify Landlord thereof.
Tenant shall not attempt any removal, abatement or remediation of any
Hazardous Materials in the Demised Premises, or any remodeling or
construction in the Demised Premises which might disturb or release

SHOPPING CENTER LEASE AGREEMENT - Page 19

<PAGE>

any Hazardous Materials, without first obtaining the prior written consent of
Landlord. Landlord shall have the right to inspect, review and approve any
removal, abatement or remediation of any Hazardous Materials, including,
without limitation, the right to approve the scope, timing and techniques of
any such work and the appointment of all contractors, engineers, inspectors,
and consultants in connection with any such work. Upon obtaining the written
approval of Landlord therefor, Tenant shall proceed with reasonable diligence
to effect the removal, abatement or remediation of any Hazardous Materials in
the Demised Premises, or to proceed with remodeling or reconstruction which
might be disturbed or released as a result of any remodeling or construction
in the Demised Premises, in accordance with Landlord's requirements therefor.
Tenant shall be responsible for the cost of any removal, abatement or
remediation work of any Hazardous Materials placed, stored, manufactured,
disposed of or handled by Tenant or Tenant's subtenants, licensees, or
concessionaires, or any of their respective employees, agents, invitees, in
the Demised Premises or any other portion of the Shopping Center and for the
cost of any removal, abatement, or remediation of any Hazardous Materials
which might be disturbed or released as a result of any remodeling or
construction in the Demised Premises by Tenant, or Tenant's subtenants,
licensees or concessionaires, or any of their respective employees or agents.
Such costs shall include, without limitation, the cost of any consultant
retained by Landlord in connection with such work. Tenant shall indemnify
the Protected Parties, as defined in Section 13.1, and hold them harmless,
from and against any loss, cost, liability or expense (including reasonable
attorneys' fees and expenses and court costs) arising out of the placement,
storage, manufacture, disposal, handling, removal, abatement or remediation
of any Hazardous Materials by Tenant, or any removal, abatement or
remediation of any Hazardous Materials required hereunder to be performed or
paid for by Tenant, with respect to any portion of the Shopping Center, or
arising out of any breach by Tenant of its obligations under this Section 7.8.

7.9 WASTE MANAGEMENT. Without limiting its obligations under this
Article 7 generally and under the Rules and Regulations in EXHIBIT D of the
Lease, Tenant covenants and agrees to comply with all laws, rules,
regulations and guidelines now or hereafter made applicable to the Demised
Premises respecting the disposal of waste, trash, garbage and other matter
(liquid or solid), generated by Tenant, the disposal of which is not
otherwise the express obligation of Landlord under this Lease (the provision
of janitorial services, if any, or trash collection, if any, by Landlord
under this Lease shall not be construed as an express obligation of Landlord
for the purposes of this Section), including, but not limited to, laws,
rules, regulations and guidelines respecting recycling and other forms of
reclamation (all of which are herein collectively referred to as "Waste
Management Requirements"). Tenant covenants and agrees to comply with all
rules and regulations established by Landlord to enable Landlord

SHOPPING CENTER LEASE AGREEMENT - Page 20

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from time to time to comply with Waste Management Requirements applicable to
Landlord (i) as owner of the Demised Premises, and (ii) in performing
Landlord's obligations under this Lease, if any. Tenant further covenants
and agrees to comply with all rules and regulations established by Landlord
to enable Landlord from time to time to avail itself of the lowest rate
available for the disposal of waste, trash, garbage and other matter (liquid
or solid), generated by Tenant. Tenant covenants and agrees to indemnify,
defend, protect and hold Landlord harmless [in accordance with Article 13.1
of the Lease] from and against all liability (including costs, expenses and
attorneys' fees) that Landlord may sustain by reason of Tenant's breach of
its obligations under this paragraph. Tenant's obligations under this
paragraph shall survive the expiration of the Lease term and any renewal or
extension thereof.

7.10 AMERICANS WITH DISABILITIES ACT. Tenant agrees to comply with all
requirements of the Americans with Disabilities Act (Public Law 101-336
(July, 26 1990)) applicable to the Demised Premises and the Common Area
associated with Tenant's use of the Demised Premises. Tenant agrees to
indemnify and hold Landlord harmless for any and all expenses, liabilities,
costs or damages suffered by Landlord as a result of additional obligations
which may be imposed on the Shopping Center under the Americans with
Disabilities Act by virtue of Tenant's operations. Tenant acknowledges that
it will be wholly responsible for any accommodations or alterations which
need to be made to the Demised Premises and/or Shopping Center to accommodate
disabled employees and customers of Tenant. No provision in this Lease
should be construed in any manner as permitting, consenting to or authorizing
Tenant to violate requirements under the Americans with Disabilities Act and
any provision of the Lease which could arguably be construed as authorizing a
violation of the Act shall be interpreted in a manner which permits compliance
with the Act and is hereby amended to permit such compliance.

ARTICLE 8: MAINTENANCE AND REPAIR OF PREMISES

8.1 LANDLORD'S MAINTENANCE. Landlord shall keep the foundation
(excluding any special foundation poured at Tenant's insistence and the slab
floor and other elements), the exterior walls (except plate glass windows,
doors, door closure devices and other exterior openings; window and door
frames, molding, locks and hardware; special store fronts; lighting, heating,
air conditioning, plumbing and other electrical, mechanical and electromotive
installation, equipment and fixtures; signs, placards, decorations or
advertising media of any type; and interior painting or other treatment of
exterior walls) and roof of the Demised Premises (hereinafter collectively
called "Landlord's Repair Work") in good repair. Landlord, however, shall
not be required to make any repairs occasioned by the act or negligence of
Tenant its agents, employees, subtenants, licensees,

SHOPPING CENTER LEASE AGREEMENT - Page 21
<PAGE>

concessionaires, contractors or subcontractors. In the event that the Demised
Premises should become in need of repairs required to be made by "Landlord
hereunder, Tenant shall give immediate written notice thereof to Landlord;
and Landlord shall not be responsible in any way for failure to make any
actual repairs which need to be made until a reasonable time shall have
elapsed after receipt by Landlord of such written notice.

8.2 TENANT'S MAINTENANCE. Tenant shall keep the Demised Premises in
good, clean and habitable condition and shall at its sole cost and expense
keep the Demised Premises free of insects, rodents, vermin and other pests
and make all needed repairs and replacements, including replacement of
cracked or broken glass and repairs, replacements and alterations required by
any governmental authority or any insurance company providing coverage on any
part of the Shopping Center, except for repairs and replacements required to
be made by Landlord under the provisions of Section 8.1, Article 15 and
Article 16. Without limiting the coverage of the previous sentence, it is
understood that Tenant's responsibilities therein include the repair and
replacement of all lighting, heating, air conditioning, plumbing and other
electrical, mechanical and electromotive installation, equipment and fixtures
and also include all utility repairs in ducts, conduits, pipes and wiring,
and any sewer stoppage located in, under or above the Demised Premises.
Tenant shall, at Tenant's sole cost and expense, maintain the Demised
Premises (including, without limitation, the furniture, furnishings, trade
fixtures, partitions, ceiling, floor coverings, equipment, signs, painting,
decorating and other items therein) in substantially the same condition and
appearance as at the date that Tenant opened the Demised Premises to the
public for business. Tenant shall construct, install, operate and maintain
its leasehold improvements, furniture, fixtures, equipment and other property
in the Demised Premises in such a manner so as to not overload any portion of
the floor or foundation of the Demised Premises. Tenant shall throughout the
Lease term maintain at Tenant's sole cost and expense a maintenance contract
covering the heating, ventilating and air conditioning facilities within the
conditions as Landlord may reasonably request. If Tenant fails to do so,
Landlord may, but shall have no obligation to, retain a service company to do
so on behalf of and for the account of Tenant, and the cost thereof shall be
payable by Tenant to Landlord as additional Rent on demand. If any repairs
required to be made by Tenant hereunder are not made within ten (10) days after
written notice delivered to Tenant by Landlord, Landlord may at its option
make such repairs without liability to Tenant for any loss or damage which
may result to its Stock or business by reason of such repairs; and Tenant
shall pay to Landlord within ten (10) days of demand, as additional Rent
hereunder, the cost of such repairs plus interest at the maximum contractual
rate which could legally be charged in the event of a loan of such payment to
Tenant (but in no event to exceed 1-1/2 per month), such interest to accrue

SHOPPING CENTER LEASE AGREEMENT - Page 22
<PAGE>

continuously from date of payment by Landlord on behalf of Tenant. At the
expiration or earlier termination of this Lease, Tenant shall surrender the
Demised Premises in good condition, excepting reasonable wear and tear and
losses required to be restored by Landlord in Section 8.1, Article 15 and
Article 16 of this Lease.

ARTICLE 9: ALTERATIONS

9.1 TENANT'S ALTERATIONS. Tenant shall not make any alterations,
additions or improvements to the Demised Premises without the prior written
consent of Landlord, except for the work described in EXHIBIT C, if any, and
the installation of unattached, movable trade fixtures which may be installed
without drilling, cutting or otherwise defacing the Demised Premises. All
alterations, additions, improvements and fixtures (other than Tenant's
unattached, readily movable furniture and office equipment) which may be made
or installed by either party upon the Demised Premises shall remain upon and
be surrendered with the Demised Premises and become the property of Landlord
at the termination of this Lease without credit or compensation; provided,
however, if Landlord requests their removal, Tenant shall remove the same and
restore the Demised Premises to their original condition at Tenant's expense.
Subject to the provisions of Section 20.1, upon the termination of this
Lease, Tenant shall, at Tenant's expense, remove all of its unattached,
movable trade fixtures from the Demised Premises and repair any damage
occasioned by such removal. Any such trade fixtures or other property of
Tenant not so removed shall be deemed abandoned by Tenant, and Landlord, at
Landlord's option, shall have the right to retain all or any part of such
property, in such property, in which event title thereto shall thereupon vest
Landlord, or remove from the Demised Premises and dispose of in any manner
all or any part of such property, in which latter event Tenant shall pay to
Landlord as additional Rent within ten (10) days of demand the actual expense
of such removal and disposition and the actual expense of repair of any
damage to the Demised Premises resulting from or caused by such removal. The
obligations of this Section 9.1 shall survive the termination of this Lease.
At the termination of this Lease, Tenant shall remove Tenant's signs and
shall restore the face brick to its original condition at Tenant's sole cost
and expense.

9.2 CONSTRUCTION STANDARDS. All construction work done by Tenant
within the Demised Premises shall be performed in a good and workmanlike
manner, in compliance with all governmental requirements, and in such manner
as to cause a minimum of interference with other construction in progress and
with the transaction of business in the Shopping Center. Without limitation
on the generality of the foregoing, Landlord shall have the right to require
that such work be performed during hours when the Shopping Center is not open
for business, and in accordance with the provisions of this Lease, including,
without limitation, Section 7.8 on hazardous materials, and any other rules
and

SHOPPING CENTER LEASE AGREEMENT - Page 23
<PAGE>

regulations which Landlord may from time to time prescribe. During any period
of such work, Tenant shall have adequate fire extinguishers within the
Demised Premises. All costs of such work shall be paid promptly so as to
prevent the assertion of any liens for labor or materials. Tenant agrees to
indemnify the Protected Parties, as defined in Section 13.1 and hold
Protected Parties harmless against any loss, liability or damage resulting
from such work, even if any such loss, liability or damage arises from or is
attributable to the concurrent negligence of any of the Protected Parties
where such concurrent negligence is not the primary cause thereof, and Tenant
shall, if requested by Landlord, furnish bond or other security satisfactory
to Landlord against any such loss, liability or damage. Whenever Tenant
proposes to do any construction work within the Demised Premises, it shall
first furnish to Landlord plans and specifications in such detail as Landlord
may request covering all such work. Such plans and specifications shall
comply with such requirements as Landlord may from time to time prescribe for
construction within the Shopping Center. In no event shall any construction
work be commenced within the Demised Premises without Landlords's written
approval of such plans and specifications. Tenant shall employ workmen and
contractors approved in advance in writing by Landlord and in a manner and
upon terms and conditions and at times satisfactory to and approved in
advance in writing by Landlord. In any instance where Landlord grants such
approval, Landlord may grant such consent contingent and conditioned upon
Tenant's employees, contractors, laborers, materialmen and others furnishing
labor or materials for Tenant's job working in harmony and not interfering
with any labor utilized by Landlord, Landlord's contractors or mechanics or
by any other tenant or such other tenant's contractors or mechanics; and if
at any any time such entry by one or more persons furnishing labor or
materials for Tenant's work shall cause disharmony or interference for any
reason whatsoever without regard to fault, the approval granted by Landlord
to Tenant may be withdrawn at any time upon written notice to Tenant, and
Tenant expressly agrees to have such person immediately removed from the
Shopping Center. Nothing contained in this Lease shall be deemed or construed
in any way constituting the consent of or request by Landlord, express or
implied, to any contractor, subcontractor, laborer or materialman for the
performance of any labor or the furnishing or any materials for the
performance of any labor or the furnishing of any materials for any specific
improvement, alteration or repair of the Demised Premises, the Shopping
Center, or any part thereof, nor as giving Tenant any right, power or
authority to contract for or permit the rendering of any services or the
furnishing of any materials that would give rise to a lien against the
Demised Premises, the Shopping Center, or any part thereof, or against the
estate of Landlord or Tenant therein.

9.3 REFURBISHMENT. If the Lease term is four (4) years or more, then
upon the written request of Landlord, which may be given at any time and from
time to time after the earlier of the midpoint of the Lease term or the fifth
(5th) anniversary of the

SHOPPING CENTER LEASE AGREEMENT - Page 24

<PAGE>

Commencement Date, Tenant shall, at Tenant's sole cost and expense, refurbish
all or any portion of the interior or exterior of the Demised Premises
comprising any portion of Tenant's Work described in EXHIBIT C specified in
such written request of Landlord (which written request may be general or
specific) to the end that the furniture, furnishings, trade fixtures,
partitions, ceiling, floor coverings, equipment, signs, painting, decorating
and other items so specified shall be restored to substantially the same
condition and appearance as at the date that Tenant opened the Demised
Premises to the public for business. Tenant shall, within thirty (30) days
from the date of such written request, submit to Landlord plans and
specifications for such refurbishing in such detail as Landlord may request.
Such plans and specifications shall comply with such requirements as Landlord
may from time to time prescribe for refurbishing. Tenant shall commence any
such refurbishing promptly after receipt of Landlord's written approval of
such plans and specifications ( which written approval may require
modifications thereto) and shall complete the same in a good and workmanlike
manner and in accordance with such plans and specifications approved by
Landlord within ninety (90) days thereafter. In no event shall any
refurbishing be commenced within the Demised Premises without Landlord's
prior written approval of the plans and specifications therefor. Tenant shall
conduct any such refurbishing in an efficient manner so as to not interfere
with the operation of its business and in a manner not inconsistent with its
obligations pursuant to Section 7.1.

ARTICLE 10: LANDLORD'S RIGHT OF ACCESS; RELOCATION

10.1. ENTRY. Landlord shall have the right to enter upon the Demised
Premises at any time for the purpose of inspecting the same, or of making
repairs or additions to the Demised Premises, or of making repairs,
alterations or additions to other premises, or of exercising any right of
Landlord under Sections 2.4, 6.1 or 10.3 or any other provision of this
Lease, or of showing the Demised Premises to prospective purchasers, lessees
or lenders, without being liable to Tenant for any claim for damages or
indemnification from Landlord or abatement of Rent or other charges hereunder.

10.2 RELOCATION. Landlord hereby reserves the right at any time and from
time to time to relocate the Demised Premises to other premises within the
Shopping Center upon ninety (90) days' prior written notice to Tenant. Such
relocation of the Demised Premises shall be at Landlord's sole cost and
expense, and shall in no way affect the obligations or duties of either
Landlord or Tenant hereunder. In the event that Tenant shall fail to promptly
occupy, and open for business to the public in accordance with this Lease in,
the new location within the Shopping Center designated by Landlord, Landlord
may, at its option and in addition to any other remedies that Landlord may
have hereunder, at law or in equity on

SHOPPING CENTER LEASE AGREEMENT - Page 25

<PAGE>

account of such breach by Tenant of its obligations hereunder, terminate this
Lease upon thirty (30) days' prior written notice to Tenant.

10.3 BUILDING ALTERATIONS. Landlord hereby reserves the right at any
time and from time to time to remove, demolish, make alterations or additions
to the building in which the Demised Premises is located, the buildings
adjoining the same and any other buildings in the Shopping Center. Landlord
further reserves the right at any time and from time to time to construct, or
to permit others to construct, other buildings or improvements within the
Shopping Center. Such rights set forth in the two preceding sentences
include, without limitation, the right to construct additional stories on
any such building or buildings, the right to build adjoining the building or
buildings, the right to construct multi-level, elevated, underground and
other parking facilities within the Shopping Center and the right to erect in
connection with any such construction or building temporary scaffolds and
other aids to such construction or building. Landlord shall have the right at
any time and from time to time to change the street address of the Demised
Premises or the Shopping Center or to change the name of the Shopping Center
without incurring any liability to Tenant.

10.4 EXCAVATION. If an excavation shall be made upon land adjacent to
the Demised Premises, Tenant shall permit the person authorized to do such
excavation to enter the Demised Premises for the purpose of doing such work
as such person deems necessary to preserve the building of which the Demised
Premises is a part and to support the same by proper foundations without any
claim for damages or indemnification from Landlord or abatement of Rent or
other charges hereunder.

10.5 LANDLORD'S SIGNS. Tenant will permit Landlord to place and maintain
"For Rent" or "For Lease" signs on the Demised Premises during the last
forty-five (45) days of the Lease term, it being understood that such signs
shall in no way affect Tenant's obligations pursuant to Section 7.3, Section
11.1 or any other provision of this Lease.

ARTICLE 11: SIGNS; STORE FRONTS

11.1 TENANT'S SIGNS. Tenant shall not, without Landlord's prior written
consent (a) make any changes to the store front or (b) erect or install any
signs, banners, window or door lettering, placards, decorations or
advertising media of any type which can be viewed from the exterior of the
Demised Premises, excepting only dignified displays of customary type for its
display windows. All signs, banners, lettering, placards, decorations and
advertising media shall conform in all respects to the sign criteria
established by Landlord for the Shopping Center from time to time in the
exercise of its sole discretion, and shall be subject to the

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prior written approval of Landlord as to construction, method of attachment,
size, shape, height, lighting, color and general appearance. All signs shall
be kept in good condition and in proper operating order at all times.

ARTICLE 12: UTILITIES

12.1 FACILITIES. Landlord agrees within the Shopping Center to cause to
be provided and maintained the necessary mains, conduits and other facilities
necessary to supply water, gas, electricity, telephone service and sewerage
service to the Demised Premises.

12.2 PAYMENT. Tenant shall promptly pay all charges for electricity,
water, gas, telephone service, sewerage service and other utilities furnished
to the Demised Premises. Landlord may, if it so elects, furnish one or more
utility services to Tenant, and in such event Tenant shall purchase the use
of such services as are tendered by landlord, and shall pay on demand as
additional Rent the rates established therefor by Landlord. Landlord may at
any time discontinue furnishing any such service without obligation to Tenant
other than to connect the Demised Premises to the public utility, if any,
furnishing such service.

12.3 INTERRUPTIONS. Landlord shall not be liable for any interruption
whatsoever in utility service.

ARTICLE 13: INDEMNITY AND PUBLIC LIABILITY INSURANCE

13.1 INDEMNITY. Landlord, Landlord's management company and their
respective directors, partners, officers, employees and agents (all of such
persons and entities herein collectively called the "Protected Parties")
shall not be liable to Tenant or to Tenant's subtenants, licensees or
concessionaires, or their respective employees, agents or visitors, or to any
other person whomsoever, for any death, injury to person or damage to
property caused by the negligence or misconduct of Tenant, Tenant's
subtenants, licensees or concessionaires, or their respective employees or
agents, or of any other person entering the Shopping Center under express or
implied invitation of Tenant or Tenant's subtenants, licensees or
concessionaires, or arising out of any act or occurrence in the Demised
Premises, or arising out of any use of, or the conduct of any business in,
the Demised Premises, or arising out of any use of, or conduct of any
business in, any other portion of the Shopping Center by Tenant, Tenant's
subtenants, licensees or concessionaires, or their respective employees,
agents or invitees, or arising out of any breach or default by Tenant in the
performance of its obligations hereunder; and Tenant hereby agrees to
indemnify the Protected Parties, and to hold them harmless, from and against
any liability, loss, cost, claim or expense (including, without limitation,
attorneys' fees and expenses, court costs and costs of investigation) arising
out of,

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or alleged to have arisen out of, any such death, damage or injury, even if
any such liability, loss, cost, claim or expense arises from or is attributed
to the concurrent negligence of any of the Protected Parties where such
concurrent negligence is not the primary cause therefor.

13.2 LIABILITY INSURANCE. Tenant, at Tenant's sole cost and
expense, shall procure prior to the commencement of any occupancy or
construction in the Demised Premises and maintain throughout the Lease term a
policy or policies of: (a) comprehensive commercial general liability
insurance (with no limiting endorsements but including, without limitation,
protective liability coverage on operations of independent contractors
engaged in construction, products and completed operations liability
coverage, form 294 endorsement (or comparable coverage) removing the
exclusion of property "leased or occupied" by the insured, and broad form
liability endorsement, without exclusions) against claims for "personal
injury" liability (including, without limitation, bodily injury), death,
property damage and advertising liability, with a limit of not less than One
Million Dollars ($1,000,000.00) arising out of any one occurrence and an
annual aggregate limit applicable to the Demised Premises only of at least
One Million Dollars ($1,000,000.00), or with such other limits as may be
required by Landlord, (b) workers' compensation insurance with a limit of not
less than the minimum limit prescribed by applicable law, (c) employer's
liability insurance with a limit of not less than Two Hundred Fifty Thousand
Dollars ($250,000.00), and (d) automobile liability insurance with a limit of
not less than Five Hundred Thousand Dollars ($500,000.00). All such insurance
policies shall be written protecting Tenant as named insured and Landlord as
additional insured, and shall be written on an "occurrence" basis, with
deductibles satisfactory to Landlord, by an insurance company or companies of
recognized responsibility, licensed and in good standing in the State of
Texas, having a financial rating of not less than A+, XII as rated in the
most current "Best's Insurance Reports" and shall be otherwise satisfactory
to Landlord. All such insurance policies shall state that such insurance
maintained by Tenant is primary over any insurance carried by Landlord, and
each workers' compensation, employer's liability and automobile liability
policy shall include a waiver of subrogation in favor of Landlord. Tenant
shall obtain a written obligation on the part of each insurance company to
notify Landlord at least thirty (30) days prior to cancellation or material
modification of such insurance. Such policies or duly executed certificates
of insurance evidencing such insurance shall be promptly delivered to
Landlord prior to the commencement of any occupancy or construction in the
Demised Premises and renewals thereof as required shall be delivered to
Landlord at least thirty (30) days prior to the expiration of the respective
policy terms. If Tenant should fail to comply with the foregoing requirements
relating to insurance, Landlord may obtain such insurance and Tenant shall
pay to Landlord within ten (10) days of demand as additional Rent the premium
cost thereof.

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Notwithstanding the generality of the foregoing, Landlord may at any time
and from time to time require that the amount(s) of insurance to be
maintained by Tenant under this Section 13.2 be increased if Landlord shall
determine that such additional amounts are necessary to adequately protect
Landlord's interest.

ARTICLE 14: NON-LIABILITY FOR CERTAIN DAMAGES

14.1 INJURY OR DAMAGE. The Protected Parties, as defined in
Section 13.1, shall not be liable to Tenant for any injury to person or
damage to property sustained by Tenant or any person claiming through Tenant
resulting from any accident or occurrence in the Demised Premises or any
other portion of the Shopping Center, including but not limited to, injury
or damage caused by the Demised Premises or any other portion of the Shopping
Center becoming out of repair or by defect in or failure of equipment, pipes,
or wiring, or by broken glass, or by the backing up of drains, or by gas,
water, steam, electricity, or oil leaking, escaping or flowing into the
Demised Premises (except where due to Landlord's willful failure to make
repairs required to be made hereunder, after the expiration of a reasonable
time after written notice to Landlord of the need for such repairs), nor shall
Landlord be liable to Tenant for any loss or damage that may be occasioned by
or through the acts or omissions of other tenants of the Shopping Center or
of any other persons whomsoever.

14.2 SECURITY SERVICES. To the extent permitted by law,
Landlord shall in no event be liable for any loss, cost, expense or damage
suffered by Tenant as a result of any failure to supply security services, or
for any loss, cost, expense or damage of any nature whatsoever attributable
to such security services if furnished by Landlord. It is expressly
understood and agreed that any security services furnished by Landlord shall
not release, or in any way diminish, and shall not be deemed to release, or in
any way diminish, Tenant's obligation to maintain security within and with
respect to the Demised Premises. It is further expressly understood that the
supply of any security services by Landlord is intended only to provide
courtesy patrols of the Shopping Center and that if Tenant believes that in
order to perform its obligations hereunder and its business operations that
additional security services are required, Tenant may, at Tenant's sole cost,
provide such additional security services Tenant believes necessary, provided
that such additional security services shall be provided in such a manner as
to cause the least amount of interference with the performance of Landlord's
obligations under this Lease.

ARTICLE 15: DAMAGES BY CASUALTY

15.1 NOTICE OF CASUALTY. Tenant shall give immediate written
notice to Landlord of any damage caused to the Demised Premises by fire or
other casualty.

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15.2 REBUILDING OR REPAIRS. In the event that the Demised
Premises shall be damaged or destroyed by fire or other casualty insured
under standard fire and extended coverage insurance and Landlord does not
elect to terminate this Lease as hereinafter provided, Landlord shall proceed
with reasonable diligence and at its sole cost and expense to rebuild and
repair the Demised Premises, but Landlord shall not be required to spend for
such rebuilding and repair an amount in excess of the insurance proceeds
actually received by Landlord for the building and improvements as a result
of such loss. In the event (a) the Demised Premises or the building in which
the Demised Premises is located shall be destroyed or damaged by a casualty
not covered by Landlord's insurance or (b) the Shopping Center, the Anchor
Building, the Demised Premises or the building in which the Demised Premises
is located shall be damaged or destroyed by a casualty covered by Landlord's
insurance such that substantial alteration or reconstruction of the Shopping
Center, Anchor Building, Demised Premises or the building in which the
Demised Premises is located, in Landlord's sole opinion, is required (whether
or not the Demised Premises shall have been damaged by such casualty), or (c)
the holder of a mortgage, deed of trust or other lien on the Demised Premises
at the time of the casualty elects, pursuant to such mortgage, deed of trust
or other lien; to require the use of all or part of Landlord's insurance
proceeds in satisfaction of all or part of the indebtedness secured by the
mortgage, deed of trust or other lien, then Landlord may elect either to
terminate this Lease or to proceed to rebuild and repair the Demised
Premises. Landlord shall give written notice to Tenant of such election
within ninety (90) days after the occurrence of such casualty and if it
elects to rebuild and repair shall proceed to do so with reasonable diligence.

15.3 EXTENT OF REPAIR. Landlord's obligation to rebuild and
repair under this Article 15 shall in any event be limited to restoring
Landlord's Repair Work, as defined in Section 8.1, to substantially the same
condition in which the same existed prior to the casualty, and Tenant agrees
that promptly after completion of such work by Landlord, Tenant will proceed
with reasonable diligence and at Tenant's sole cost and expense to restore,
repair and replace all alterations, additions, improvements, fixtures, signs
and equipment installed by or on behalf of Tenant, and, if an EXHIBIT C is
attached hereto, all items of Tenant's Work as described in EXHIBIT C.

15.4 CONTINUATION OF TENANT'S BUSINESS. Tenant agrees that
during any period of reconstruction or repair of the Demised Premises it will
continue the operation of its business within the Demised Premises to the
extent practicable. During the period from the occurrence of the casualty not
caused, in whole or in part, by Tenant or Tenant's agents, employees,
subtenants, licensees, concessionaires or contractors until restoration of
Landlord's Repair Work is completed, the Minimums Guaranteed Rental shall be

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reduced to such extent as may be fair and reasonable under the circumstances;
however, there shall be no abatement of the Percentage-Rental and other
charges provided for herein.

15.5 TENANT'S CASUALTY INSURANCE. Tenant agrees at all times at its
expense to keep its merchandise, fixtures and other property situated within
the Demised Premises which Tenant is obligated to rebuild, repair and restore
pursuant to Section 15.3 insured against fire, with extended coverage, to the
extent of the full replacement cost thereof. Such insurance shall be carried
with companies satisfactory to Landlord and shall be in form satisfactory to
Landlord. Tenant shall obtain a written obligation of each insurance company
to notify Landlord at least thirty (30) days prior to cancellation or material
modification of such insurance. Such policies or duly executed certificates
of insurance evidencing such insurance shall be delivered to Landlord prior
to the commencement of Tenant's occupancy hereunder and renewals thereof as
required shall be delivered to Landlord at least thirty (30) days prior to
the expiration of the respective policy terms. The proceeds to Tenant of such
insurance shall not be used, except with the consent of Landlord, for any
purpose other than the repair or replacement of merchandise, fixtures and
other property situated within the Demised Premises. Notwithstanding anything
to the contrary in this Lease or otherwise, in the event of any damage to any
merchandise, equipment, furniture, fixtures, leasehold improvements or other
property of Tenant situated within the Demised Premises, including without
limitation, any damage caused, in whole or in part, by the acts or omissions
of Landlord, Landlord's management company or their respective agents or
employees, then Tenant agrees to look solely to the proceeds, if any,
accruing from Tenant's own insurance, and Tenant shall have no right or
action against Landlord, Landlord's management company or their respective
agents or employees on account of any such damage, and no third party shall
have any such right by way of assignment, subrogation or otherwise.

15.6 SUBROGATION. Subject to the conditions hereinafter specified in
this Section 15.6 and only to the extent that and so long as the same is
permitted under the laws and regulations governing the writing of insurance
within the State of Texas with respect to the respective insurance that is to
be carried by either Landlord or Tenant covering losses arising out of the
destruction or damage to the Demised Premises or its contents or to other
portions of the Shopping Center or to Tenant's occupancy and operation of the
Demised Premises without invalidating or nullifying any such policy, or
providing a defense to the applicable insurance carrier with respect to the
coverage of any such policy, all such insurance carried by either Landlord
or Tenant shall provide for a waiver of rights of subrogation against
Landlord and Tenant on the part of the insurance carrier. Notwithstanding the
foregoing, nothing contained herein shall require either party to obtain the
inclusion of such a waiver of

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rights of subrogation in the event that, because of the cost or premium
attributable to such waiver, the obtaining of such waiver is not feasible and
reasonable. Unless such waivers contemplated by this sentence will
invalidate, nullify, or provide a defense to coverage under any such
insurance policy or are not obtainable for the reasons described in this
Section 15.6, Landlord and Tenant each hereby waive any and all rights of
recovery, claims, actions or causes of action against the other, its agents,
officers, or employees, for any loss or damage that may occur to the Demised
Premises or the Shopping Center, or any improvements thereto, which loss or
damage is covered by valid and collectible insurance policies, to the extent
that such loss and damage is actually recovered under such insurance policy.
Nothwithstanding the foregoing, the failure of Tenant to take out or maintain
any insurance policy required under Section 15.5 hereof shall be a defense to
any claim asserted by Tenant against Landlord by reason of any loss sustained
by Tenant that would have been covered by any such required policy. The
waivers set forth in the immediately preceding sentence shall be in addition
to, and not substitution for, any other waivers, indemnities, or exclusions
of liabilities as set forth in this Lease.

ARTICLE 16: EMINENT DOMAIN

16.1 SUBSTANTIAL. If more than thirty percent (30%) of the area of the
Demised Premises should be taken for any public or quasi-public use under any
governmental law, ordinance or regulation or by right of eminent domain or by
private purchase in lieu thereof, then, at Landlord's option, this Lease
shall terminate and the Rent shall be abated during the unexpired portion of
this Lease, effective on the date physical possession is taken by the
condemning authority.

16.2 PARTIAL. If less than thirty percent (30%) of the area of the
Demised Premises should be taken as aforesaid, this Lease shall not
terminate; however, the Minimum Guaranteed Rental (but not Percentage Rental)
payable hereunder during the unexpired portion of this Lease shall be reduced
in proportion to the area taken, effective on the date physical possession is
taken by the condemning authority. Following such partial taking, Landlord
shall make all necessary repairs or alterations within the scope of
Landlord's Repair Work, as defined in Section 8.1, to the remaining premises,
exclusive of any alterations, additions, improvements, fixtures and equipment
installed by Tenant, required to make the remaining portions of the Demised
Premises an architectural whole. Tenant agrees that promptly after completion
of such work by Landlord, Tenant will proceed with reasonable diligence and
at Tenant's sole cost and expense to restore, repair and replace all
alterations, additions, improvements, fixtures, signs and equipment installed
by Tenant's, and, if an EXHIBIT C is attached hereto, all items of Tenant's
Work as described in EXHIBIT C.

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16.3 CONDEMNATION OF COMMON AREA. If any part of the Common Area should
be taken as aforesaid, this Lease shall not terminate, nor shall the Rent
payable hereunder be reduced, except that either Landlord or Tenant may
terminate this Lease if the area of the Common Area remaining following such
taking plus any additional parking area provided by Landlord in reasonable
proximity to the Shopping Center shall be less than seventy percent (70%) of
the area of the Common Area immediately prior to the taking. Any election to
terminate this Lease in accordance with this provision shall be evidenced by
written notice of termination delivered to the other party within sixty (60)
days after the date physical possession is taken by the condemning authority.

16.4 CONDEMNATION AWARDS. All compensation awarded for any taking (or
the proceeds of private sale in lieu thereof) of the Shopping Center, Demised
Premises and/or Common Area shall be the property of Landlord and Tenant
hereby assigns its interest in any such award to Landlord; provided, however,
Landlord shall have no interest in any award made to Tenant for Tenant's
moving and relocation expenses or for the loss of Tenant's fixtures and other
tangible personal property if a separate award for such items are made to
Tenant and such award does not diminish Landlord's award.

ARTICLE 17: ASSIGNMENT AND SUBLETTING

17.1 DIRECT TRANSFERS. Tenant shall not assign or in any manner transfer
this Lease or any estate or interest therein, or sublet the Demised Premises
or any part thereof, or create any leased departments, or grant any license,
concession or other right of occupancy of any portion of the Demised Premises
without the prior written consent of Landlord. Consent by Landlord to one or
more assignments or sublettings shall not operate as a waiver of Landlord's
rights as to any subsequent assignments and sublettings.

17.2 INDIRECT TRANSFERS. If Tenant is a corporation and if at any time
during the Lease term, the person or persons who own a majority of either the
outstanding voting shares or all outstanding shares of capital stock of
Tenant at the time of execution of this Lease cease to own a majority of such
shares (except as the result of transfers by devise or descent), the loss of
a majority of such shares for any reason, including without limitation,
merger, consolidation or other reorganization involving another corporation
or entity, the loss shall be deemed an assignment of this Lease by Tenant and
therefore subject in all respects to the provisions of Section 17.1 above.
The previous sentence shall not apply, however, if at the time of the
execution of this Lease the outstanding voting shares of capital stock of
Tenant are listed on a recognized security exchange or over-the-counter
market. If Tenant is a partnership and if at any time during the Lease term,
the person or persons who own a majority partnership interest (general and/or
limited) at the time of this Lease cease to own such majority interest
(except as the result of transfers by devise

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or descent), the loss of such majority interest shall be deemed an assignment
of this Lease by Tenant and therefore subject in all respects to the
provisions of Section 17.1 above. If Tenant is a trust and if at any time
during the Lease term, the person or persons who own a majority beneficial
interest at the time of this Lease cease to own such majority interest
(except as the result of transfers by devise or descent), the loss of such
majority interest shall be deemed an assignment of this Lease by Tenant and
therefore subject in all respects to the provisions of Section 17.1 above.

17.3 CONTINUING LIABILITY. Notwithstanding any assignment or subletting,
Tenant and any guarantor of Tenant's obligations under this Lease shall at
all times remain fully responsible and liable for the payment of Rent herein
specified and for compliance with all of its other obligations under this
Lease (even if future assignments and sublettings occur subsequent to the
assignment or subletting by Tenant, and regardless of whether or not
Landlord's approval has been obtained for such future assignments and
sublettings). Moreover, in the event that the rental due and payable by a
sublessee (or a combination of the rental payable under such sublease plus
any bonus or other consideration therefor or incident thereto)
exceeds the Rent payable under this Lease, or if with respect to a permitted
assignment, permitted license or other transfer by Tenant permitted by
Landlord, the consideration payable to Tenant by the assignee, licensee,
leased departments, or other transferee exceeds the Rent payable
under this Lease, then Tenant shall be obligated to pay Landlord all such
excess rental and other excess consideration within ten (10) days following
receipt thereof by Tenant from such sublessee, assignee, licensee or other
transferee, as the case may be. Finally, in any event of assignment or
subletting it is understood and agreed that all rentals paid to Tenant by an
assignee or sublessee shall be received by Tenant in trust for Landlord, to
be forwarded immediately to Landlord without offset or reduction of any kind;
or upon election by Landlord, such rentals shall be paid directly to Landlord
as specified in Section 4.1 of this Lease (to be applied as a credit and
offset to Tenant's Rent obligations).

17.4 ENCUMBRANCES. Tenant shall not mortgage, pledge or otherwise
encumber its interest in this Lease or in the Demised Premises.

17.5 LANDLORD'S TRANSFER. In the event of the transfer and assignment by
Landlord if its interest in this Lease and in the building containing the
Demised Premises to a person expressly assuming Landlord's obligations under
this Lease, Landlord shall thereby be released from any further obligations
hereunder, and Tenant agrees to look solely to such successor in interest of
the Landlord for performance of such obligations. Any security given by
Tenant to secure performance of Tenant's obligations hereunder

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may be assigned and transferred by Landlord to such successor in interest,
and Landlord shall thereby be discharged of any further obligation relating
thereto.

ARTICLE 18: TAXES AND INSURANCE

18.1 PERSONAL PROPERTY TAXES. Tenant shall be liable for all taxes
levied against personal property and trade fixtures placed by Tenant in the
Demised Premises. If any such taxes are levied against Landlord or Landlord's
property and if Landlord elects to pay the same or if the assessed value of
Landlord's property is increased by inclusion of personal property and trade
fixtures placed by Tenant in the Demised Premises and Landlord elects to pay
the taxes based on such increase, Tenant shall pay to Landlord within ten
(10) days of demand that part of such taxes for which Tenant is primarily
liable hereunder.

18.2 AD VALOREM TAXES. Tenant shall pay to Landlord as additional Rent
within ten (10) days of demand a proportionate share of the ad valorem taxes,
or taxes levied in lieu thereof, taxes on real estate rental receipts, taxes
on Landlord's gross receipts, assessments and other governmental charges
(foreseen or unforeseen, general or special, ordinary or extraordinary) paid
with respect to the Shopping Center during the Lease term after the
Commencement Date (without duplication of taxes included in Operating Costs
under Section 6.4), and a proportionate share of any cost or expense incurred
by Landlord in an effort to effect a reduction in any such taxes, assessments
and/or other governmental charges paid with respect to the Shopping Center
during the Lease term (including, without limitation, attorneys' and
appraisers' fees), computed on the same ratio that Tenant's proportionate
share of Operating Costs is computed in accordance with Section 6.4, except
as hereinafter provided. For any tax year or partial tax year period, the
Gross Leasable Retail Area of the Shopping Center occupied shall be
determined on the first day of January of each such tax year or partial tax
year period. Tenant shall pay to Landlord monthly or other periodic charges
based upon the estimated amount of such taxes, assessments and/or other
governmental charges with respect to the Shopping Center for the next ensuing
calendar year, payable in advance but subject to adjustment after the end of
the calendar year on the basis of the actual cost for such year. Within one
hundred twenty (120) days after the close of each calendar year, or as soon
thereafter as reasonably practicable, Landlord will furnish to Tenant a
detailed statement of such taxes, assessments and/or other governmental
charges for such year, such statement to be prepared in accordance with
standard accounting practices and to include an allocation of Tenant's share
thereof computed as herein provided. Any necessary adjustments shall be made
promptly after delivery of such statement. The payment to be made by Tenant
for the tax year, in which the Commencement Date falls and in which this
Lease terminates shall bear the same ratio to the payment which would be
required to be made for the full tax

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year as the number of days falling within such partial tax year bears to a
full tax year. Landlord shall have the exclusive right (but not the
obligation) to contest or appeal any such taxes, assessments or other
governmental charges assessed or levied with respect to the Shopping Center.

18.3 INCREASES IN AD VALOREM TAXES. If at any time during the Lease term,
any alteration, addition or improvement shall be made by Tenant, and such
alteration, addition or improvement shall cause an increase in ad valorem
taxes, or taxes levied in lieu thereof, assessments or other governmental
charges, Tenant shall pay to Landlord as additional Rent within ten (10) days
of demand the amount of any such increase in addition to the payment of its
proportionate share as provided in Section 18.2.

18.4 TAXES ON RENT. If at any time during the Lease term, a tax or
excise on Rent, or other tax however described (except any franchise, estate,
inheritance, capital stock, income or excess profits tax imposed upon
Landlord) is levied or assessed against Landlord by any lawful taxing
authority on account of Landlord's interest in this Lease or the rent or
other charges reserved hereunder, as a substitute in whole or in part, or in
addition to the general taxes described in this Article 18. Tenant agrees to
pay to Landlord as additional Rent within ten (10) days of demand the amount
of such tax or excise. In the event any such tax or excise is levied or
assessed directly against Tenant, then Tenant shall be responsible for and
shall pay the same at such times and in such manner as the taxing authority
shall require.

18.5 INSURANCE PREMIUMS. The premiums for any fire and extended coverage
insurance maintained by Landlord; covering the Shopping Center shall be paid
by Landlord; provided, however, Tenant shall pay to Landlord as additional
Rent monthly in advance a proportionate share of the cost of such insurance
(without duplication of insurance reimbursed under Section 6.4) computed on
the same ratio that Tenant's proportionate share of Operating Costs is
computed under Section 6.4.

ARTICLE 19: DEFAULT BY TENANT AND REMEDIES

19.1 DEFAULTS. The following events shall be deemed to be events of
default by Tenant under this Lease:

(a) Tenant shall fail to pay any installment of Rent or any other sum of
money required hereunder and such failure shall continue for a period of five
(5) days after the date due.

(b) Tenant shall fail to comply with any term, provision or covenant of
this Lease, other than as described in subsection (a) above, and shall not
cure such failure within fifteen (15) days after written notice thereof to
Tenant.

SHOPPING CENTER LEASE AGREEMENT - Page 36
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(c) Tenant or any guarantor of Tenant's obligations under this Lease
shall become insolvent, or shall make a transfer in fraud of creditors, or
shall make an assignment for the benefit of creditors.

(d) Tenant or any guarantor of Tenant's obligations under this Lease
shall file a petition for relief (or such petition for relief shall be filed
against Tenant or such guarantor) under any section or chapter or the Federal
Bankruptcy Code, as amended, or under any similar law or statute of the
United States or any state thereof; or Tenant or any guarantor of Tenant's
obligations under this Lease shall be adjudged bankrupt or insolvent in
proceedings filed against Tenant or such guarantor thereunder; or an order
for relief shall be entered with respect to Tenant or such guarantor under
any section or chapter of the Federal Bankruptcy Code, as amended, or under
any similar law or statute of the United States or any state thereof; or an
order shall be entered by any governmental authority for the dissolution or
liquidation of Tenant or any guarantor of Tenant's obligations under this
Lease.

(e) A receiver, liquidator or trustee shall be appointed for the
Demised Premises or for all or substantially all of the assets of Tenant or
any guarantor of Tenant's obligations under this Lease.

(f) Tenant shall desert or vacate or shall commence to desert or vacate
the Demised Premises or any substantial portion of the Demised Premises or
shall remove or attempt to remove, without the prior written consent of
Landlord, all or a substantial portion or value of Tenant's goods, wares,
equipment, fixtures, furniture, or other personal property.

(g) Tenant shall do or permit to be done anything which creates a lien
upon the Demised Premises or Shopping Center.

(h) Tenant or any guarantor of Tenant's obligations under this Lease
shall default under any other lease or agreement with Landlord, now existing
or hereafter entered into.

19.2 REMEDIES. Upon the occurrence of any such events of default,
Landlord shall have the option to pursue any one or more of the following
remedies without any notice or demand whatsoever:

(i) Terminate this Lease, in which event Tenant shall immediately
surrender the Demised Premises to Landlord, and if Tenant fails to do so,
Landlord may, without prejudice to any other remedy which he may have for
possession or arrearages in Rent, enter upon and take possession of the
Demised Premises by picking or changing locks or any other means deemed
necessary or convenient by Landlord and lock-out, expel or remove Tenant and
any other person who may be occupying the Demised Premises or any part
thereof, by force if necessary, without being liable for

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prosecution or any claim for damages therefor; and Tenant agrees to pay to
Landlord on demand the amount of all loss and damage which Landlord may
suffer by reason of such termination, whether through inability to relet the
Demised Premises on terms satisfactory to Landlord or otherwise.

(ii) Enter upon and take possession of the Demised Premises by
picking or changing locks or any other means deemed necessary or convenient
by Landlord and lock-out, expel or remove Tenant and any other person who may
be occupying the Demised Premises or any part thereof, by force if necessary,
without being liable for prosecution or any claim for damages therefor and
without terminating this Lease, and Tenant shall remain liable to Landlord
for the payment of the Rent herein specified (both accrued and unaccrued) and
for the amount of all loss and damage which Landlord may suffer by reason of
Tenant's default, and, if Landlord so elects, Landlord may relet the Demised
Premises on such terms as Landlord may deem advisable and receive the rent
therefor; and Tenant agrees to pay to Landlord on demand the Rent
(both accrued and unaccrued) herein specified (or any deficiency which may
arise by reason of such reletting) together with all other loss and damage
which Landlord may suffer by reason of Tenant's default. Tenant hereby
expressly waives all rights under Section 93.002 of the Texas Property Code
(Commercial Lockout Statute).

(iii) Enter upon the Demised Premises, by force if necessary,
without being liable for prosecution or any claim for damages therefor and
without terminating this Lease, and do whatever Tenant is obligated to do
under the terms of this Lease; and Tenant agrees tp reimburse Landlord on
demand for any expenses which Landlord may incur in thus effecting
compliance with Tenant's obligations under this Lease, and Tenant further
agrees that Landlord shall not be liable for any damage resulting to Tenant
from such action, whether caused by the negligence of Landlord or otherwise.

Pursuit of any of the foregoing remedies shall not preclude pursuit of
any of the other remedies herein provided or any other remedies provided by
law or in equity, nor shall pursuit of any remedy herein provided constitute
a forfeiture or waiver of any Rent due Landlord hereunder or of any damages
accruing to Landlord by reason of the violation of any of the terms,
provisions and covenants herein contained. Forbearance by Landlord to
enforce once or more of the remedies herein provided upon an event of default
shall not be deemed or construed to constitute a waiver of such default. In
determining the amount of loss and damage which Landlord may suffer by reason
of termination of this Lease or by reason of Tenant's default in the event of
repossession of the Demised Premises by Landlord without termination of this
Lease or the deficiency arising by reason of any reletting of the Demised
Premises by Landlord as above provided, there shall be added to such loss or
damage or such deficiency all expenses of repossession

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and any reletting of the Demised Premises (including, without limitation,
costs of repairs, remodeling and decoration following repossession or in
order to relet, costs of removing and storing Tenant's property, costs of
advertising, costs of concessions granted to any replacement tenant in
connection with any reletting, brokerage fees, attorneys' fees and expenses
and similar expenses) and there shall be added to Minimum Guaranteed Rental
herein provided for the period from the date of the event of default by
Tenant until the end of the Lease term a sum equal to the average annual
Percentage Rental and the annual average amount of other charges required to
be paid hereunder by Tenant during the two (2) full calendar years (January 1
through December 31) immediately preceding the date of such termination or
repossession (or if two (2) full calendar years have not then elapsed then
the period between the Commencement Date of this Lease and the date of such
termination or repossession with proportionate adjustment for partial years)
multiplied by the number of calendar years or portions thereof falling within
such period. Without limiting or precluding any other remedies provided
herein, at law or in equity, Landlord shall have the right at any time to
demand, in Landlord's sole discretion, and collect from Tenant, payment of
all such Rent and other loss and damage due Landlord in connection with any
such event of default by Tenant and/or termination of this Lease in (x) such
installments, as Landlord may elect or (y) a single payment equal to the
outstanding aggregate of all such Rent and other loss and damage, provided
that Landlord's election to demand payment in installments pursuant to
subsection (x) above shall not prejudice Landlord's right at any time
thereafter to elect a single payment pursuant to subsection (y) above.
Landlord shall have the right to bring an action to collect one or more
installments of the amount due by Tenant to Landlord hereunder without
prejudicing Landlord's right to later bring a similar action to collect any
subsequent installment of such amount due Landlord. In no event shall Tenant
be entitled to the excess of any monthly rentals and other payments collected
by Landlord as a result of any reletting of the Demised Premises over the
monthly Rent and other payments provided for in this Lease. Landlord shall
not be obligated to mitigate damages, to relet, or attempt to relet, the
Demised Premises or to collect rental from any replacement tenant in the
event of any reletting. To the extent Landlord is nonetheless obligated by
law to mitigate its damages, mitigation for these purposes shall only mean
that Landlord agrees to list or advertise the Demised Premises for rent in
accordance with Landlord's standard advertising and rental policies, and to
rent the Demised Premises to prospective tenants only if there are no other
comparable available leasehold premises in the Shopping Center or in other
projects of Landlord or its affiliates in the vicinity of the Shopping
Center. To the extent permitted by applicable law, Tenant agrees that the
provisions of this Lease shall supersede any conflicting provisions of any
applicable statute or law with respect to the rights of Tenant in the event
of a breach of this Lease by Tenant; and, without limiting the foregoing,
Tenant hereby agrees that if Landlord

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changes the door lock of the Demised Premises following an event of default
by Tenant, in no event shall Landlord have any obligation to provide Tenant a
key to the Demised Premises, notwithstanding any payment by Tenant to
Landlord of any delinquent Rent or any other attempt by Tenant to cure such
event of default; and Tenant also hereby waives notice of any breach,
termination or forfeiture of this Lease or of any reentry or repossession of
the Demised Premises, except as expressly provided for in this Lease.

19.3 REPEATED DEFAULTS. Notwithstanding anything contained in this lease
to the contrary, if Tenant commits any event of default hereunder for or with
respect to which written notice is herein expressly provided and at any time
within the twelve (12) month period thereafter commits the same or similar
event of default, no notice after the first such notice shall be required to
be given by Landlord for or with respect to any such subsequent event of
default (Tenant hereby expressly waiving the same) before the pursuit of any
one or more of the remedies provided herein.

19.4 ATTORNEY'S FEES. If it shall become necessary for either party to
employ counsel to enforce any term, covenant or provision of this Lease, or
to defend any action brought by the other party in connection with this Lease
or otherwise, or to recover possession of the Demised Premises, then, in any
such event, the non-prevailing party agrees to pay any attorneys' fees and
expenses incurred by the prevailing party. In addition, in the event it
should be necessary or proper for Landlord to consult an attorney concerning
the review of instruments evidencing a proposed assignment, subletting or
other transfer by Tenant submitted to Landlord for consent, then Tenant
agrees in each such event to pay Landlord as additional Rent within ten (10)
days of demand any attorneys' fees and expenses reasonably incurred by
Landlord.

19.5 PREPAID RENT AND SECURITY DEPOSIT. On the execution and delivery of
this Lease by Tenant, Tenant shall pay to Landlord the sum stated in
Section 1.1(l), to be applied to the first accruing monthly installments of
Rent. On the date of this Lease, Tenant shall pay to Landlord the Security
Deposit sum stated in Section 1.1(m) to be held by Landlord without interest as
security for the performance by Tenant of Tenant's covenants and obligations
under this Lease, it being expressly understood that such Security Deposit is
not an advance payment of Rent or a measure of Landlord's damages in case of
default by Tenant. Landlord may commingle any such Security Deposit with such
other funds as Landlord in its sole discretion may determine. Upon the
occurrence of any event of default by Tenant, Landlord may, from time to time,
without prejudice to any other remedy provided herein or provided by law, use
such fund to the extent necessary to make good any arrearages of Rent and any
other damage, injury, expense or liability caused to Landlord by such event
of default. Following any such application of the Security Deposit, Tenant
shall pay to Landlord on demand the amount so applied in order to restore the

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Security Deposit to its original amount. Upon expiration of the Lease term,
if Tenant is not then in default hereunder, and if it is not necessary to
repair any damage or injury to the Demised Premises caused by Tenant or any
subtenant, concessionaire or licenses of Tenant (excepting reasonable wear
and tear), any remaining balance of such Security Deposit shall be returned by
Landlord to Tenant.

ARTICLE 20: LANDLORD'S CONTRACTUAL SECURITY INTEREST

20.1 LANDLORD'S LIEN. In addition to the statutory Landlord's lien,
Landlord shall have at all times a valid security interest to secure payment
of all Rent and other sums of money becoming due hereunder to Landlord, and
to secure payment of any damages or loss which Landlord may suffer by reason
of the breach by Tenant of any covenant, agreement or condition contained
herein, upon all goods, wares, equipment, fixtures, furniture, improvements
and other personal property of Tenant presently, or which may hereafter be,
situated on the Demised Premises, and all proceeds therefrom, and such
property shall not be removed without the consent of Landlord until all
arrearages in Rent as well as any and all other sums of money then due to
Landlord or to become due to Landlord hereunder shall first have been paid
and discharged and all the covenants, agreements and conditions hereof have
been fully complied with and performed by Tenant. Upon the occurrence of an
event of default by Tenant, Landlord may, in addition to any other remedies
provided herein, enter upon the Demised Premises and take possession of any
and all goods, wares, equipment, fixtures, furniture, improvements and other
personal property of Tenant situated on the Demised Premises, without
liability for trespass or conversion, and sell the same at public or private
sale, with or without having such property at the sale, after giving Tenant
reasonable notice of the time and place of any public sale or of the time
after which any private sale is to be made, at which sale the Landlord or its
assigns may purchase unless otherwise prohibited by law. Unless otherwise
provided by law, and without intending to exclude any other manner of giving
Tenant reasonable notice, the requirement of reasonable notice shall be met
if such notice is given in the manner prescribed in this Lease at least ten
(10) days before the time of sale. Any sale made pursuant to the provision of
this Section shall be deemed to have been a public sale conducted in
commercially reasonable manner if held in the Demised Premises or where the
property is located after the time, place and method of sale and a general
description of the types of property to be sold have been advertised in a
daily newspaper published in the county in which the property is located, for
five (5) consecutive days before the date of the sale. The proceeds from any
such disposition, less any and all expenses connected with the taking of
possession, holding and selling of the property (including reasonable
attorneys' fees and legal expenses), shall be applied as a credit against the
indebtedness secured by the security interest granted in this Section. Any
surplus shall be

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paid to Tenant or as otherwise required by law; Tenant shall pay any
deficiencies forthwith. Upon request by Landlord, Tenant agrees to execute
and deliver to Landlord a financing statement in form sufficient to perfect
the security interest of Landlord in the aforementioned property and proceeds
thereof under the provision of the Uniform Commercial Code (or corresponding
state statute or statutes) in force in the State of Texas, as well as any
other state the laws of which Landlord may at any time consider to be
applicable, or at Landlord's option, Landlord shall have the right to file of
record a photocopy of this Lease in order to perfect the security interest of
Landlord created herein. The statutory lien for Rent is not hereby waived,
the security interest herein granted being in addition to and supplementary
thereto. Tenant hereby waives its lien rights under Section 91.004 of the
Texas Property Code.

ARTICLE 21: HOLDING OVER

21.1 TENANT HOLDOVER. In the event Tenant remains in possession of the
Demised Premises after the expiration of this Lease and without the execution
of a new lease, it shall be deemed to be occupying the Demised Premises as a
tenant at will at a daily rental equal to twice the Rent (including any
Percentage Rental and other charges) payable by Tenant on the day immediately
prior to the expiration of this Lease prorated on a daily basis and otherwise
subject to all the conditions, provisions and obligations of this Lease
insofar as the same are applicable to a tenancy at will; provided, however,
that nothing herein shall be construed as the consent of Landlord to any such
holding over or a waiver by Landlord of any rights or remedies against Tenant
which landlord may have on account of such occupancy or possession of the
Demised Premises after the expiration or termination of the Lease term.

ARTICLE 22: SUBORDINATION; ATTORNMENT; ESTOPPEL CERTIFICATES

22.1 SUBORDINATION. Tenant accepts this Lease subject and subordinate to
any Financing Interest, as hereafter defined, presently existing upon the
Shopping Center, or any part thereof, including, without limitation, the
Demised Premises, and to any increases, renewals, modifications,
consolidations, replacements or extensions thereof. Tenant agrees that the
holder of any Financing Interest, whether presently existing or hereafter
placed upon any portion of the Shopping Center, shall have the right at any
time to subordinate such Financing Interest to this Lease. Landlord and/or
the holder of any Financing Interest presently existing or hereafter placed
upon any portion of the Shopping Center shall also have the right to
subordinate this Lease and the rights and interests of Tenant thereunder to
such Financing Interests. The foregoing rights and options reserved to
Landlord and the holder of a Financing Interest shall be self-operative, and
no further instrument of subordination shall be required, unless Landlord or
the holder of such Financing Interest requests the same, in which

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case Tenant, within ten (10) days after delivery to Tenant of such written
request, will execute and deliver without charge such instruments acceptable
to Landlord and the holder of such Financing Interest appropriate to confirm
the provisions of this Article 22. In the event that Tenant shall fail to
execute any such instruments within such ten (10) day period, Tenant hereby
irrevocably constitutes Landlord its attorney-in-fact to execute such
instruments in Tenant's name, place and stead. If the holder of any Financing
Interest becomes the owner of the Shopping Center or any portion thereof
which includes the Demised Premises, by reason of foreclosure, acceptance of
a deed in lieu of foreclosure, termination of a ground lease, or otherwise,
then, at the election of the holder of such Financing Interest, Tenant will
be bound to such holders of such Financing Interest, or its designee, upon
all of the terms and conditions of this Lease, and Tenant shall be deemed to
have attorned to and recognized and hereby attorns to and recognizes such
holder, or its designee, as Landlord's successor-in-interest for the
remainder of the Lease term. The term "Financing Interest" as used herein
shall mean any mortgage, deed of trust, security interest, lien or ground
lease, or any other similar interest, together with any modification,
consolidation, replacement, renewal and extension thereof, covering the
Shopping Center or any part thereof.

22.2 NOTICE TO MORTGAGEE. At any time when the holder of an
outstanding mortgage, deed of trust or other lien covering Landlord's
interest in the Demised Premises has given Tenant written notice of its
interest in this Lease, Tenant may not exercise any remedies for default by
Landlord hereunder unless and until the holder of the indebtedness secured by
such mortgage, deed of trust or other lien shall have received written notice
of such default and a reasonable time for curing such default shall
thereafter have elapsed.

22.3 ESTOPPEL CERTIFICATES. Tenant agrees that it will from time to
time upon request by Landlord execute and deliver to such persons as Landlord
shall request a statement in recordable form certifying that this Lease is
unmodified and in full force and effect (or if there have been modifications,
that the same is in full force and effect as so modified), stating the dates
to which Rent and other charges payable under this Lease have been paid,
stating that the Landlord is not in default hereunder (or if Tenant alleges a
default stating the nature of such alleged default in particularity) and
further stating such other matters as Landlord shall reasonably require.
Tenant agrees to deliver such statement within ten (10) days after written
request from Landlord. Failure to timely deliver such estoppel certificate
shall be a default under this Lease and shall entitle Landlord to pursue any
and all remedies it deems appropriate, including the levying of a $1,000.00
per day fine for each day that such estoppel certificate is not furnished
after the tenth (10th) day. The parties acknowledge that such a fine is
reasonable under the circumstances, represents a

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reasonable estimate of Landlord's probable loss, based upon the anticipated
harm to Landlord from a delay in Tenant's furnishing such an estoppel
certificate; such fine amount is also reasonable in light of the difficulties
of proof of loss and the inconvenience and/or nonfeasibility of Landlord
obtaining other appropriate relief upon such default.

ARTICLE 23: MERCHANTS ASSOCIATION

23.1 MEMBER OF ASSOCIATION. In the event that Landlord shall organize
a merchants association composed of tenants in the Shopping Center, Tenant
agrees that it will join and maintain membership in such association, will
pay such dues and assessments as may be fixed and determined from time to
time by the association and will comply with such other bylaws, rules and
regulations as may be adopted from time to time by the association. Tenant
shall take such actions as may be necessary to remain in good standing in
said association and shall participate and cooperate in all of the activities
of said association. Landlord shall have the right, on behalf of said
association, to collect from Tenant, and to enforce payment by Tenant, of any
such dues, assessments and other charges due said association.

ARTICLE 24: DIRECTION OF TENANT'S ENERGIES

24.1 TENANT'S OTHER BUSINESSES. Tenant acknowledges that Tenant's
monetary contribution to Landlord (in the form of Rent) and Tenant's general
contribution to commerce within the Shopping Center (also important in
Landlord's determination to execute this Lease with Tenant) will be
substantially reduced if during the Lease term, either Tenant or any person,
firm or corporation, directly or indirectly controlling, controlled by or
under common control with Tenant shall directly or indirectly operate,
manage, conduct or have any interest in any establishment within commercial
proximity of the Shopping Center. Accordingly, Tenant agrees that during the
Lease term neither Tenant nor any person, firm or corporation, directly or
indirectly controlling, controlled by or under common control with Tenant
(and also, in the event Tenant is a corporation, if any officer or director
thereof or shareholder owning more than ten percent (10%) of the outstanding
stock thereof, or parent, subsidiary or related or affiliated corporation)
shall directly or indirectly operate, manage, conduct or have any interest in
any commercial establishment within three (3) miles of the Shopping Center,
except that any such commercial establishment existing at the date of this
Lease may continue to be operated, managed, conducted and owned in the same
manner as on the date of this Lease, provided there is no change in the size
or trade name of such commercial establishment. If during the Lease term
either Tenant or any person, firm or corporation, directly or indirectly
controlling, controlled by or under common control with Tenant shall directly
or indirectly operate, manage, conduct or have any interest in any commercial
establishment within three (3)

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miles of the Shopping Center, then, in any such event, for the purpose of
computing Percentage Rental, all Gross Sales made at, in or from any such
other commercial establishment shall be included in the computation of
Percentage Rental as though such Gross Sales had actually been made at, in or
from the Demised Premises, and Tenant agrees to pay such Percentage Rental to
Landlord computed on the basis of such combined Gross Sales.

ARTICLE 25: NOTICES

25.1 DELIVERY OF NOTICE. Wherever any notice is required or permitted
hereunder such notice shall be in writing. Any notice or document required or
permitted to be delivered hereunder shall be deemed to be delivered when
actually received by the designated addresses or, if earlier and regardless
of whether actually received or not, when deposited in the United States
Mail, postage prepaid, Certified Mail, Return Receipt Requested, addressed to
the parties hereto at the respective addresses set out in Section 1.1 above
(or at Landlord's option, to Tenant at the Demised Premises), or at such
other addresses as they have theretofore specified by written notice. Any
notices to be sent to Landlord shall also be sent to:

Metropolitan Life Insurance Company
5420 LBJ Freeway, Suite 1300
Dallas, Texas 75240

Attention: Territorial Vice President
Real Estate Investments

and

Metropolitan Life Insurance Company
5420 LBJ Freeway
Suite 1310
Dallas, Texas 75240

Attention: Regional Manager

25.2 PARTIES BOUND BY NOTICE. If and when included within the term
"Tenant," used in this Lease, there is more than one person, firm or
corporation, all shall jointly arrange among themselves for their joint
execution of such a notice specifying some individual at some specific
address for the receipt of notices and payments to Tenant. If such persons,
firms or corporations included within the term "Tenant" fail to so jointly
arrange for such a notice specifying such individual at such specific address
for the receipt of notices and payments to Tenant, then all parties included
within the term "Tenant" shall be bound by notices and payments given in
accordance with the provisions of this Article to any party included within
the term "Tenant". All parties included within the term "Tenant" shall be
bound by notices and payments

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given in accordance with the provisions of this Article to the same effect as if
each had received such notice or payment. Tenant agrees that any notice to be
given by Landlord to Tenant may be given on behalf of Landlord by Landlord's
attorney, property management company or other agent.

ARTICLE 26: COMMISSIONS

26.1 BROKERS. Tenant warrants that it has had no dealings with any broker
or agent in connection with the negotiation or execution of this Lease other
than Landlord's broker (that is, Grubb & Ellis Company), if any, and Tenant
agrees to indemnify the Protected Parties and hold the Protected Parties
harmless from and against any and all claims, loss, cost or expense (including
attorneys' fees and expenses) for commissions or other compensation and charges
claimed by any other broker or agent with respect to this Lease.

ARTICLE 27: MISCELLANEOUS

27.1 RELATIONSHIP OF LANDLORD AND TENANT. Nothing herein contained shall
be deemed or construed by the parties hereto, nor by any third party, as
creating the relationship of principal and agent or of partnership or of joint
venture between the parties hereto, it being understood and agreed that neither
the method of computation of Rent, nor any other provision contained herein, nor
any acts of the parties hereto, shall be deemed to create any relationship
between the parties hereto other than the relationship of landlord and tenant.

27.2 INDEPENDENT OBLIGATIONS; COUNTERCLAIMS. Tenant shall not for any
reason withhold or reduce Tenant's required payments of Rent and other charges
provided in this Lease, it being agreed that the obligations of Landlord
hereunder are independent of Tenant's obligations except as may be otherwise
expressly provided. In this regard it is specifically understood and agreed
that in the event Landlord commences any proceedings against Tenant for
non-payment of Rent or any other sum due and payable by Tenant hereunder, Tenant
will not interpose any counterclaim or other claim against Landlord for whatever
nature or description in any such proceedings; and in the event that Tenant
interposes any such counterclaim or other claim against Landlord in such
proceedings, Landlord and Tenant stipulate and agree that, in addition to any
other lawful remedy of Landlord, upon notion of Landlord, such counterclaim or
other claim asserted by Tenant shall be severed out of the proceedings
instituted by Landlord and the proceedings instituted by Landlord may proceed to
final judgment separately and apart from and without consolidation with or
reference to the status of such counterclaim or any other claim asserted by
Tenant. Under no circumstances whatsoever shall Landlord ever be liable
hereunder for consequential damages or special damages.

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27.3 NO PERSONAL LIABILITY. The liability of Landlord to Tenant for any
default by Landlord under the terms of this Lease shall be limited to the
interest of Landlord in the Shopping Center and Tenant agrees to look solely to
Landlord's interest in the Shopping Center for the recovery of any judgment from
Landlord, it being intended that neither Landlord, nor any party comprising
Landlord, shall be personally liable for any judgment or deficiency, except that
Landlord shall, subject to the provisions of Section 17.5 and 19.4, remain
personally liable to account to Tenant for any security given by Tenant to
Landlord to secure performance of Tenant's obligations hereunder. This clause
shall not be deemed to limit or deny any remedies which Tenant may have in the
event of default by Landlord hereunder which do not involve the personal
liability of Landlord.

27.4 CONSENT. Except as may be otherwise herein provided, in all
circumstances under this Lease where prior consent or permission of one party
("first party"), whether it be Landlord or Tenant, is required before the other
party ("second party") is authorized to take any particular type of action, the
matter of whether to grant such consent or permission shall be within the sole
and exclusive judgment and discretion of the first party; and it shall not
constitute any nature of breach by the first party hereunder or any defense to
the performance of any covenant, duty or obligation of the second party
hereunder that the first party delayed or withheld the granting of such consent
or permission, whether or not the delay or withholding of such consent or
permission was, in the opinion of the second party, prudent or reasonable or
based on good cause. The consent or approval by either party to or of any act
by the other party requiring such consent or approval shall not be deemed to
waive or render unnecessary consent to or approval of any subsequent similar
act.

27.5 FORCE MAJEURE. Whenever a period of time is herein prescribed for
action to be taken by Landlord, Landlord shall not be liable or responsible for,
and there shall be excluded from the computation of any such period of time, any
delays due to strikes, riots, acts of God, shortages of labor or materials, war,
governmental laws, regulations or restrictions, litigation brought by third
parties to enjoin Landlord's activities at the Project, or any other causes of
any kind whatsoever which are beyond the reasonable control of Landlord.

27.6 NO MODIFICATION STATEMENT. Tenant agrees that it will from time to
time upon request by Landlord execute and deliver to Landlord a statement in
recordable form certifying that this Lease is unmodified and in full force and
effect (or if there have been modifications, that the same is in full force and
effect as so modified).

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27.7 NON-WAIVER. Receipt of Rent by Landlord with knowledge of any breach
of this Lease by Tenant shall not be deemed a waiver of such breach, and no
provision of this Lease shall be deemed to have been waived by Landlord unless
such waiver be in writing and signed by Landlord. Receipt by Landlord of Rent
from any assignee, subleases, or occupant of the Demised Premises shall not be
deemed the consent of Landlord to any such assignment, subletting or occupancy,
nor a waiver of the covenant in this Lease prohibiting assignment and subletting
without the consent of Landlord nor a release of Tenant or any guarantor of
Tenant's obligations under this Lease.

27.8 NO QUALIFYING ENDORSEMENTS ON CHECKS. Any charges or other sums
payable by Tenant to Landlord under the terms of this Lease shall be considered
as additional Rent. No payment by Tenant or receipt by Landlord of a lesser
amount than the total Rent herein stipulated shall be deemed to be other than on
account of the earliest Rent required to be paid hereunder, nor shall any
endorsement or statement on any check or any letter accompanying the check or
payment as Rent be deemed an accord and satisfaction, and Landlord may accept
such check or payment without prejudice to Landlord's right to recover the
balance of such Rent or pursue any other remedy available under this Lease, at
law or in equity. Tenant agrees that time is of the essence with respect to all
obligations to be performed by Tenant hereunder.

27.9 EFFECTIVE ONLY UPON EXECUTION. The submission of this Lease to
Tenant for examination does not constitute a reservation of or offer or option
for the Demised Premises, and this Lease shall become effective only upon
execution by Landlord and Tenant.

27.10 RENT CONTROL. If by reason of any federal, state, county or
municipal law, order, rule, directive or regulation (collectively referred to
hereinafter as the "Regulations"), the payment to, or collection by, Landlord of
any Rent or other charge (collectively referred to hereinafter as "Lease
Payments") payable by Tenant to Landlord pursuant to the provisions of this
Lease is in excess of the amount (the "Maximum Charge") permitted therefor by
the Regulations, then Tenant, during the period (the "Freeze Period") when the
Regulations shall be in force and effect shall not be required to pay, nor shall
Landlord be permitted to collect, any sum in excess of the Maximum Charge. Upon
the earlier of (i) the expiration of the Freeze Period, or (ii) the issuance of
a final order or judgment of a court of competent jurisdiction declaring the
Regulations to be invalid or not applicable to the provisions of this Lease,
Tenant, to the extent not then proscribed by law, and commencing with the first
(1st) day of the month immediately following, shall pay to Landlord as
additional Rent, in equal monthly installments during the balance of the Lease
term, a sum equal to the cumulative difference between the Maximum Charges and
the Lease Payments during the Freeze Period. If any provisions of this section,
or the application thereof, shall to any extent be

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declared to be invalid and unenforceable, the same shall not be deemed to
affect any of the other provisions of this section or of this Lease, all of
which shall be deemed valid and enforceable to the fullest extent permitted
by law.

27.11 NO USURY. Notwithstanding anything contained herein seemingly to
the contrary, in no event shall any rate of interest contracted for, charged
or received hereunder exceed the highest rate of interest permitted by
applicable law.

27.12 GOVERNING LAW. The laws of the State of Texas shall govern the
interpretation, validity, performance and enforcement of this Lease. If any
provision of this Lease should be held to be invalid or unenforceable, the
validity and enforceability of the remaining provisions of this Lease shall
not be affected thereby. Venue for any action under this lease shall be the
county in which Rent is due pursuant to Sections 1.1 and 4.1 of this Lease.

27.13 ADDITIONAL DEFINITIONS. When used in this Lease the term "will" is
a mandatory word denoting an obligation to pay or perform. "May" is a
permissive word denoting an option. The term "including" when following any
general statement, will not be construed to limit the statement to the
specific item or items described, or to limit the statement to similar items,
whether or not non-limiting language is used (such as "without limitation,"
or "but not limited to" or words of similar import), but rather "including"
will be deemed to refer to all other items which could reasonably fall within
the broadest possible scope of the referenced general statement.

27.14 CAPTIONS. The captions used herein are for convenience only and do
not limit or amplify the provisions hereof.

27.15 GENDER. Whenever herein the singular number is used, the same shall
include the plural, and words of any gender shall include each other gender.

27.16 RECORDATION. Tenant agrees not to record this Lease of any
memorandum thereof.

27.17 BINDING EFFECT. The terms, provisions and covenants contained in
this Lease shall apply to, inure to the benefit of and be binding upon the
parties hereto and their respective heirs, successors in interest and legal
representatives except as otherwise herein expressly provided.

27.18 ENTIRE AGREEMENT. This Lease contains the entire agreement between
the parties, and no agreement shall be effective to change, modify or
terminate this Lease in whole or in part unless such is in writing and only
signed by the party against whom enforcement of such change, modification or
termination is sought. Tenant acknowledges that Landlord has made no
representations

SHOPPING CENTER LEASE AGREEMENT - Page 49

<PAGE>

concerning any other tenant in the Shopping Center regarding such other
tenant's financial stability, term of lease or any other material matter.
Tenant specifically acknowledges that Landlord has made no representations
regarding any anchor tenant, potential or otherwise. Tenant further makes
known to Landlord that it enters into this Lease agreement without relying on
any statements made by Landlord not specifically within this Lease.

EXECUTED as of the date hereinabove stated.

LANDLORD:

METROPOLITAN LIFE INSURANCE COMPANY
a New York corporation

By: /s/ David G. Rogers
--------------------------------
David G. Rogers
Regional Manager

TENANT

M&L KANE COMPANY, L.L.C.
a Texas Limited Liability Company

By: /s/ Mark E. Kane
-------------------------------
Name: Mark E. Kane
Title: Manager

Attachments

Exhibit A - Site Plan Depicting Demised Premises
Exhibit B - Legal Description
Exhibit C - Work Letter - None
Exhibit D - Rules and Regulations
Exhibit E - Lease Guaranty
Exhibit F - Renewal Option

SHOPPING CENTER LEASE AGREEMENT - Page 50
<PAGE>

FIRST AMENDMENT TO SHOPPING CENTER LEASE
----------------------------------------

This First Amendment to Village on the Parkway Shopping Center Lease
("First Amendment"), by and between METROPOLITAN LIFE INSURANCE COMPANY, a
New York corporation ("Landlord"), and M&L KANE COMPANY, L.L.C., a Texas
Limited Liability Company ("Tenant"), is entered into as of the last day and
year written below.

W I T N E S S T H:
- - - - - - - - -

WHEREAS, Landlord and Tenant heretofore entered into that certain
Shopping Center Lease dated June 24, 1992 ("Lease"), under and pursuant to
the terms of which Tenant has leased from Landlord certain retail space
containing approximately 838 square feet in area ("Demised Premises") in that
certain shopping center commonly known as "Village on the Parkway" ("Shopping
Center"), which is located in the City of Addison, Dallas County, Texas, as
more particularly described in the Lease; and

WHEREAS, Landlord and Tenant desire that the Lease Term be extended as
and upon the terms and conditions hereinafter specified;

NOW, THEREFORE, for and in consideration of the premises and the mutual
covenants contained herein and in the Lease, the parties hereto do hereby
covenant and agree as follows:

1. DEFINED TERMS. Terms defined in the Lease and delineated herein by
initial capital letters shall have the same meaning ascribed thereto in the
Lease, except to the extent that the meaning of such term is specifically
modified by the provisions hereof. In addition, other terms not defined in
the Lease but defined herein will, when delineated with initial capital
letters, have the meanings ascribed thereto in this First Amendment. Terms
and phrases which are not delineated by initial capital letters shall have
the meanings commonly ascribed thereto.

2. LEASE TERM. The Lease Term is hereby extended by a period (the
"Second Lease Term") of thirty-six (36) full calendar months from the August
1, 1995, through and including July 31, 1998. The defined term "Lease Term"
shall be deemed to include the Second Lease Term.

3. BROKERAGE FEES AND COMMISSIONS. Tenant represents that it has
dealt with no broker, agent or other person in connection with this First
Amendment and that no broker, agent or other person brought about this First
Amendment, and Tenant shall indemnify and hold Landlord harmless from and
against any and all claims, losses, costs or expenses (including attorney's
fees and expenses) by any broker, agent, or other person claiming a
commission or other form of compensation by virtue of having dealt with
Tenant with regard to the transaction contemplated by this Lease. The
provisions of this Paragraph 3 shall survive the expiration of the Lease Term
or any renewal or extension thereof.

4. EFFECT OF FIRST AMENDMENT. Except as expressly amended by the
provisions hereof, the terms and provisions contained in the Lease shall
continue to govern the rights and obligations of the parties; and all
provisions and covenants in the Lease shall remain in full force and effect
as stated therein, except to the extent specifically modified by the
provisions of this First Amendment. This First Amendment and the Lease shall
be construed as one instrument.

NOTICE OF INDEMNIFICATION: THE PARTIES TO THIS FIRST AMENDMENT HEREBY
ACKNOWLEDGE AND AGREE THAT THIS FIRST AMENDMENT CONTAINS CERTAIN
INDEMNIFICATION PROVISIONS.

IN WITNESS WHEREOF, Landlord and Tenant have executed this First
Amendment in multiple counterparts as of the last day and year written below.

LANDLORD:

METROPOLITAN LIFE INSURANCE COMPANY,
a New York corporation

By: /s/ DAVID G. ROGERS
---------------------------------
David G. Rogers,
Assistant Vice-President

Date: 8-10-95
--------------------------------

TENANT:

M&L KANE COMPANY, L.L.C.
dba CD WAREHOUSE,
a Texas Limited Liability company

By: /s/ BRUCE D. MACDONALD
---------------------------------
Name: BDMAC, L.C.
-------------------------------
Title: Gen. Mgr.
------------------------------
Date: 8-9-95
-------------------------------

FIRST AMENDMENT TO SHOPPING CENTER LEASE - Page 1
- ----------------------------------------

<PAGE>

THE LIMITED PARTNER INTERESTS IN THE PARTNERSHIP REPRESENTED BY
THIS LIMITED PARTNERSHIP AGREEMENT HAVE BEEN ACQUIRED FOR
INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. WITHOUT SUCH
REGISTRATION, SUCH INTERESTS MAY NOT BE SOLD, PLEDGED, HYPOTHECATED
OR OTHERWISE TRANSFERRED AT ANY TIME WHATSOEVER, EXCEPT UPON
DELIVERY TO THE GENERAL PARTNER OF AN OPINION OF COUNSEL THAT SUCH
REGISTRATION IS NOT REQUIRED FOR SUCH TRANSFER OR THE SUBMISSION TO
THE GENERAL PARTNER OF SUCH OTHER EVIDENCE THAT MAY BE
SATISFACTORY TO THE GENERAL PARTNER TO THE EFFECT THAT ANY SUCH
TRANSFER SHALL NOT BE IN VIOLATION OF THE SECURITIES ACT OF 1933, AS
AMENDED, OR APPLICABLE STATE SECURITIES LAWS OR ANY RULE OR
REGULATION PROMULGATED THEREUNDER.

---------------------

AGREEMENT OF
LIMITED PARTNERSHIP OF
COMPACT DISC INVESTMENTS XV, LTD.

This Agreement of Limited Partnership (this "Agreement") is entered into
to be effective as of April 30, 1996, by and among BDMAC, L.C., a Texas
limited liability company, as General Partner (herein so called), and each of
the other parties whose Subscription Agreements with respect to Units are
accepted by the General Partner (such other parties collectively referred to
herein as to "Limited Partners").

I. FORMATION

The parties hereby form a limited partnership (the "Partnership") pursuant
to the provisions of the Texas Revised Limited Partnership Act, for the
purposes and upon the terms and conditions set forth in this Agreement.

II. CERTIFICATE OF LIMITED PARTNERSHIP

A Certificate of Limited Partnership of the Partnership shall be filed or
recorded in such public offices as is required under applicable law or deemed
advisable in the discretion of the General Partner. Amendments to this
certificate also shall be file or recorded in such public offices as is
required under applicable law or deemed advisable in the discretion of the
General Partner.

III. NAME AND PRINCIPAL PLACE OF BUSINESS

The name of the Partnership is "Compact Disc Investments XV, Ltd.," and
its principal place of business shall be 8080 North Central, Suite 1610,
Dallas, Texas 75206. Additional or
<PAGE>

other places of business may be established at such locations and in such
jurisdictions as the General Partner may from time to time determine. The
General Partner shall promptly notify the Partners of any change in the
Partnership's principal place of business.

IV. TERM OF PARTNERSHIP

The Partnership shall continue for a period ending the earlier of (i)
December 31, 2046, which date may be extended to a later date by the General
Partner in its discretion, (ii) the date of occurrence of any of the events
specified in Section 19.1 hereof as causing the Partnership to be dissolved,
or (iii) the date on which the Partnership is dissolved by operation of law
or judicial decree.

V. DEFINITIONS

5.1 AFFILIATE means (a) any other person directly or indirectly
controlling, controlled by or under common control with such person, (b) any
other person owning or controlling ten percent or more of the outstanding
voting securities of such person, (c) any officer, director or partner of
such person, and (d) if such person is an officer, director or partner, any
company for which such person acts in any such capacity.

5.2 CAPITAL ACCOUNT. With respect to each Partner, the account computed
and maintained for such Partner pursuant to Section 8.3.

5.3 CAPITAL ACCOUNT DEDUCTION. For any taxable year of the
Partnership, each item of deduction or loss of the Partnership for such
taxable year, determined in the same manner as such item of deduction or loss
is determined for federal income tax purposes.

5.4 CAPITAL ACCOUNT GROSS INCOME. For any taxable year of the
Partnership, each item of gross income of the Partnership for such taxable
year, determined in the same manner as such item of gross income is
determined for federal income tax purposes, except any income received by the
Partnership that is exempt from federal income tax shall be included.

5.5 CAPITAL CONTRIBUTION means the amount of money contributed to the
capital of the Partnership by a Partner.

5.6 CODE means the Internal Revenue Code of 1986, as may be amended
from time to time. All references herein to sections of the Code shall
include any corresponding provision or provisions of succeeding law.

5.7 CONSENT OF THE LIMITED PARTNERS means the written consent of Limited
Partners whose Units constitute a majority of the aggregate Units held by all
Limited Partners.

5.8 DISTRIBUTION VALUE. With respect to any property distributed to a
Partner by the Partnership, the fair market value (determined without regard
to Section 7701(g) of the Code) of such property at the time of distribution
(net of liabilities secured by such distributed property

AGREEMENT OF LIMITED PARTNERSHIP - PAGE 3
<PAGE>

that such Partner assumes or takes subject to in connection with such
distribution), as determined by the General Partner using such reasonable
method of valuation as he deems appropriate.

5.9 EVENT OF WITHDRAWAL. Any of the following occurrences with respect
to the General Partner: (1) the General Partner makes an assignment for the
benefit of creditors, (2) the General Partner files a voluntary petition in
bankruptcy, (3) the General Partner becomes the subject of an order for
relief or is declared insolvent in any federal or state bankruptcy or
insolvency proceeding, (4) the General Partner files a petition or answer
seeking for itself any reorganization, arrangement, composition,
readjustment, liquidation, dissolution, or similar relief under any law, (5)
the General Partner files an answer or other pleading admitting or failing to
contest the material allegations of a petition filed against it pursuant to
parts (1) through (4) above, (6) the General Partner seeks, consents to or
acquiesces in the appointment of a trustee, receiver or liquidator of the
General Partner or of all or any substantial part of its properties, (7) the
lapse of 120 days after the commencement of any proceeding against the
General Partner seeking reorganization, arrangement, composition,
readjustment, liquidation, dissolution or similar relief under any law if
such proceeding has not been previously dismissed, (8) the lapse of 90 days
after the appointment, without the consent or acquiescence of the General
Partner, of a trustee, receiver or liquidator of the General Partner or all
or any substantial part of the properties of the General Partner if such
appointment has not previously been vacated or stayed, (9) the lapse of 90
days after the date of expiration of a stay, if the appointment has not
previously been vacated, (10) the dissolution of the General Partner, or the
filing by the General Partner of articles of dissolution with the Secretary
of State, (11) the withdrawal of the General Partner in accordance with
Section 18.2, or (12) the termination of the General Partner's status as a
General Partner pursuant to Section 15.1.

5.10 GENERAL PARTNER means BDMAC, L.C., a Texas limited partnership, or
any other person or entity who succeeds it in that capacity.

5.11 LIMITED PARTNER means the persons described at Section 7.2 of this
Agreement, any person or entity who is admitted to the Partnership as a
Limited Partner following the formation of the Partnership in accordance with
the provisions of this Agreement, or an assignee of any such person or entity
who has been admitted to the Partnership as a Limited Partner.

5.12 MEMORANDUM. The Personal and Confidential Private Placement
Memorandum dated April 30, 1996, which offers Units in the Partnership.

5.13 ORGANIZATION AND OFFERING EXPENSES. All costs of organizing the
Partnership and offering and selling the Units, including, but not limited
to, expenses for travel, printing, engraving, mailing, expenses of
qualification of the sale of such Units under federal and state law,
including taxes and fees, and accountants' and attorneys' fees, and other
front-end fees, but excluding dealer allowances or commissions, if any.

5.14 PARTNERS mean collectively the General Partner and the Limited
Partners, and reference to a "Partner" shall be to any one of the Partners.

AGREEMENT OF LIMITED PARTNERSHIP - PAGE 4
<PAGE>

5.15 PAYOUT means that point in time at which the aggregate amount of
cash theretofore distributed to a Limited Partner is equal to such Limited
Partner's Capital Contribution plus the twelve percent preferred return.
Payout will be determined separately for each Limited Partner.

5.16 REGULATIONS means the regulations promulgated by the United States
Department of the Treasury pursuant to and in respect of provisions of the
Code. All references herein to sections of the Regulations shall include any
corresponding provision or provisions of succeeding, similar, substitute,
proposed or final Regulations.

5.17 SUBSCRIPTION means the Capital Contribution made by a Limited
Partner.

5.18 SUBSCRIPTION AGREEMENT means a Subscription Agreement for the
Partnership, in the form set forth as Attachment I to this Agreement,
pursuant to which a Limited Partner subscribes to purchase Units.

5.19 UNIT means a Limited Partner interest representing a Capital
Contribution of $10,000 made pursuant to a Limited Partner's Subscription
Agreement.

5.20 PREFERRED RETURN means a twelve percent preferred return will be
paid to all limited partners prior to any distributions which are shared
between the limited and general partner. The preferred return is paid on the
current balance of the limited partner's capital contribution less any
capital returned over and above the preferred return.

VI. PURPOSE OF PARTNERSHIP

6.1 PURPOSE AND BUSINESS. The purpose and business for which the
Partnership is formed shall be to engage in any lawful business for which
limited partnerships may be formed under the Texas Revised Limited
Partnership Act, including, without limitation, to engage in any or all of
the following acts:

(a) Sue, be sued, complain and defend in all courts;

(b) Transact its business, carry on its operations and have and exercise
the powers granted by this section in any state, territory, district or
possession of the United States, and in any foreign country;

AGREEMENT OF LIMITED PARTNERSHIP - PAGE 5
<PAGE>

(d) Sell, convey, lease, exchange, transfer, mortgage, pledge, and
otherwise dispose of all or any part of its property and assets;

(e) Acquire by purchase or in any other manner, take, receive, own, hold,
improve, and otherwise deal with any interest in real or personal
property, wherever located;

(f) Issue notes, bonds and other obligations and secure any of them by
mortgage, deed of trust, pledge or security interest of or in any or
all of its assets;

(g) Purchase, take, receive, subscribe for or otherwise acquire, own,
hold, vote, use, employ, sell, mortgage, loan, pledge or otherwise
dispose of and otherwise use and deal in and with stock or other
interests in and obligations of domestic and foreign corporations,
associations, general or limited partnerships, limited liability
companies, business trusts, and individuals;

(h) Invest its surplus funds, lend money from time to time in any manner
which may be appropriate to enable it to carry on the operations or
fulfill the purposes set forth in this Agreement, and take and hold
real property and personal property as security for the payment of
funds so loaned or invested;

(i) Elect or appoint agents and define their duties and fix their
compensation;

(j) Be a promoter, stockholder, partner, member, associate, or agent of
any corporation, partnership, limited liability company, joint venture,
trust or other enterprise;

(k) Make and alter operating agreements, not inconsistent with this
Agreement or with the laws of this state, for the administration and
regulation of the affairs of the Partnership;

(l) Cease its activities and dissolve;

(m) Do every other act not inconsistent with law which is appropriate to
promote and attain the purposes set forth in this Agreement; and

(n) Transact any or all other lawful business for which limited
partnerships may be formed under Texas law.

AGREEMENT OF LIMITED PARTNERSHIP - PAGE 6
<PAGE>

VII. PARTNERS

7.1 GENERAL PARTNER. The General Partner and its address are as follows:

BDMAC L.C.
8080 North Central, Suite 1610
Dallas, TX 75206

7.2 LIMITED PARTNERS

(a) LIMITED PARTNERS. The Limited Partners shall be those persons
whose Subscription Agreements with respect to Units are accepted by the
General Partner. The addresses of the Limited Partners are set forth in their
respective Subscription Agreements.

(b) ADMISSION OF ADDITIONAL LIMITED PARTNERS. Following the formation
of the Partnership, additional Limited Partners may be admitted only with the
written consent of the General Partner and the Consent of the Limited
Partners, except as provided by Section 15.5 hereof.

VIII. CAPITAL CONTRIBUTIONS; CAPITAL ACCOUNTS

8.1 CAPITAL CONTRIBUTIONS

(a) CAPITAL CONTRIBUTIONS OF THE GENERAL PARTNER.

(i) As each Limited Partner Subscription is received and
accepted by the General Partner, the General Partner will make a
Capital Contribution in an amount equal to one percent (1%) of
such subscription (including for such purpose the amount of the
Capital Contribution of the General Partner).

(ii) The General Partner may make additional Capital
Contributions, but shall not be required to make any additional
Capital Contributions, except as may be required herein or by
applicable law.

(b) CAPITAL CONTRIBUTIONS OF THE LIMITED PARTNERS.

(i) Each Limited Partner shall make a Capital Contribution of
the amount set forth in his Subscription Agreement, which shall be
$10,000 per Unit subscribed. Units shall be issued to Limited Partners
whose executed Subscription Agreements are accepted by the General
Partner.

(ii) Except as may be required by applicable law, the Limited
Partners shall not have any obligation to make further contributions to
the capital of the Partnership.

AGREEMENT OF LIMITED PARTNERSHIP - PAGE 7
<PAGE>

8.2 WITHDRAWAL OF CAPITAL. No Partner shall have any right to withdraw or
make a demand for withdrawal of any Partner's Capital contribution but shall
only be entitled to distributions as provided herein.

8.3 CAPITAL ACCOUNTS. The Partnership shall maintain for each Partner a
Capital Account in accordance with the following rules:

(a) BALANCE. The balance of a Partner's Capital Account shall be
increased and decreased as follows:

(i) The balance of a Partner's Capital Account shall be
increased by (a) the amount of such Partner's Capital Contribution to
the Partnership and (b) the amount of Capital Account Gross Income
that is allocated to such Partner pursuant to this Agreement.

(ii) The balance of a Partner's Capital Account shall be
decreased by (a) the amount of money and the Distribution Value of
any property that the Partnership distributes to such Partner and
(b) the amount of Capital Account Deductions and expenditures of the
Partnership described in Section 705(a)(2)(B) of the Code that is
allocated to such Partner pursuant to this Agreement.

(b) ADJUSTMENTS FOR UNREALIZED GAIN AND UNREALIZED LOSS. For purposes
of computing and maintaining Capital Accounts pursuant to Section 8.3(a),
immediately prior to the distribution of any property of the
Partnership to a Partner (including a distribution in liquidation
of the Partnership), the amount of unrealized income or gain with
respect to such property shall be deemed to be an item of Capital
Account Gross Income recognized by the Partnership and shall be
allocated to the Partners as provided in Section 10.3, and the
amount of unrealized loss or deduction with respect to such
property shall be deemed to be an item of Capital Account Deduction
recognized by the Partnership and shall be allocated to the
Partners as provided in Section 10.3. For purposes of this
Subsection (b), the unrealized income or gain with respect to a
property of the Partnership shall be equal to the excess of the
fair market value of such property (taking Section 7701(g) of the
Code into account) on the date of distribution over the adjusted
tax basis of such property and the unrealized loss or deduction
with respect to a property of the Partnership shall be equal to the
adjusted tax basis of such property over the fair market value of
such property (taking Section 7701(g) of the Code into account) on
the date of distribution. For purposes of this Subsection (b), the
fair market value of distributed property shall be determined by
the General Partner using such reasonable method of valuation as it
deems appropriate.

(c) CAPITAL ACCOUNTS OF TRANSFEREES. A transferee of an
interest in the Partnership shall succeed to the Capital Account
attributable to such interest, and there shall be no adjustment to
the Capital Accounts as a result of such transfer; provided,

AGREEMENT OF LIMITED PARTNERSHIP - PAGE 8
<PAGE>

however, that in the event the Partnership makes an election under
Section 754 of the Code, appropriate adjustments pursuant to such
Section shall be made to the Capital Account of each Partner
affected by such election; provided further, that if the transfer
causes a termination of the Partnership pursuant to Section
708(b)(1)(B) of the Code, the assets of the Partnership shall be
deemed to have been distributed to the Partners (including such
transferee) in liquidation of the Partnership pursuant to Article XX
and recontributed by such Partners in reconstitution of the
Partnership. The Capital Accounts of the Partnership following such
deemed reconstitution shall be maintained in accordance with the
principles of this Section 8.3.

(d) COMPLIANCE WITH REGULATIONS. The Partners intend that
the terms of this Agreement with respect to the computation and
maintenance of Capital Accounts comply in all respects with the
provisions of Regulation Section 1.704l(b)(2)(iv). Notwithstanding
any other provisions of this Agreement, (1) the Partnership shall
make all adjustments to the Capital Accounts required by Regulation
Section 1.704l(b)(2)(iv), and (2) if at any time during the term of
the Partnership it shall be determined by the General Partner that
the Capital Accounts have not been computed and maintained in
accordance with Regulation Section 1.704-l(b)(2)(iv), the Capital
Accounts shall be retroactively adjusted so that they are computed
and maintained in accordance with Regulation Section
1.704-l(b)(2)(iv).

8.4 NO INTEREST ON CAPITAL CONTRIBUTIONS. No interest shall be paid on
any Capital Contribution.

IX. BOOKS, FISCAL YEAR, REPORTS AND TAX MATTERS

9.1 BOOKS. The General Partner shall maintain full and complete books
and records for the Partnership at its principal office. Each Limited Partner
and his representative shall have the right to inspect the books and records
of the Partnership at any time during normal business hours upon written
request to the General Partner, at which time such books and records shall be
available for copying upon payment of reasonable charges therefor by the
Limited Partner or his representative.

9.2 FISCAL YEAR. The Partnership shall adopt a fiscal year beginning on
the first day of January and ending on the last day of December of each year.

9.3 REPORTS. The Partnership shall provide a quarterly financial summary
to the Limited Partners entitled "Financial Status Report and Distributions."
Such report shall not be prepared in accordance with generally accepted
accounting principles. The quarterly report shall be provided to the Limited
Partners no later than 15 days after the end of the month to which such
report relates, provided that the reports for the first three months of the
Partnership's operations may be provided within 15 days after the end of the
fourth month of such operations. The General Partner shall also furnish a
report to each Limited Partner containing such information as is pertinent
for the preparation of such Limited Partner's federal income tax return no
later than 90 days after the end of each tax year.

AGREEMENT OF LIMITED PARTNERSHIP - PAGE 9
<PAGE>

9.4 TAXATION AS A PARTNERSHIP. The General Partner, while serving as
such, agrees to use its best efforts to cause there to be compliance at all
times with applicable law to ensure that the Partnership will be classified
as a partnership for federal income tax purposes.

9.5 TAX MATTERS PARTNER. It is hereby agreed by all Partners that the
General Partner shall be the "tax matters partner" for the Partnership, as
that term is defined in Section 6231(a)(7) of the Code. As the tax matters
partner, the General Partner shall be empowered to represent the Partnership
and the Partners, at Partnership expense, in any administrative or judicial
proceeding involving the federal income tax liability of the Partners
resulting from Partnership activities.

X. CASH DISTRIBUTIONS AND ALLOCATIONS OF INCOME AND LOSS

10.1 DETERMINATION OF PROFIT AND LOSS. At the end of each fiscal year of
the Partnership, all Partnership costs, realized losses, realized gains, and
revenues shall be determined in accordance with generally accepted accounting
principles and shall be charged or credited, as the case may be, to the
Partners in accordance with the provisions of this Article X.

10.2 CHARGING OF COSTS AND CREDITING OF REVENUES.

(a) All dealer allowances and commissions and Organization and
Offering Expenses incurred by the Partnership during any period in
connection with the offer and sale of Units, shall be charged 99% to
the Limited Partners and one percent (1%) to the General Partner. All
other costs incurred by the Partnership during any period shall be
allocated to the Partners in the same proportion as revenues are
allocated to such Partners for such period.

(b) All revenues of the Partnership for any period shall be credited
as follows:

(i) 100% shall be credited to the limited partners until they have
received their twelve percent preferred rate of return.

(ii) 85% shall be credited to the Limited Partners, until Payout
has been achieved, in the percentage (the "Pre-Payout Ratio") for each
Limited Partner that bears the same ratio to 85% as the number of Units owned
by such Limited Partner bears to the aggregate number of Units outstanding,
and the remaining 15% shall be credited to the General Partner. Payout
shall be determined separately for each Limited Partner.

(iii) As Payout is achieved for each Limited Partner, paragraph
(ii) above shall no longer apply to such Limited Partner, and the revenue
that would otherwise be credited to such Limited Partner pursuant to be
Pre-Payout Ratio pursuant to paragraph (ii) above shall be reduced to a
percentage (the "Post-Payout Ratio") equal to such Limited Partner's
Pre-Payout Ratio multiplied by 50.505%. The excess of such Limited Partner's
Pre-Payout Ratio over his Post-

AGREEMENT OF LIMITED PARTNERSHIP - PAGE 10
<PAGE>

Payout Ratio shall be allocated to the General Partner. The intent of
this paragraph (ii) is to establish allocation ratios, once Payout has
been achieved for all Limited Partners, of 50% for the Limited Partner
in the aggregate and 50% for the General Partner.

(iv) After Payout has been achieved for all Limited Partners,
revenue shall be credited 50% to the Limited Partners (pro rata in
accordance with the ratio of the Post-Payout Ratios to one another) and
50% to the General Partner.

10.3 ALLOCATIONS FOR CAPITAL ACCOUNT PURPOSES. For purposes of computing
and maintaining Capital Accounts pursuant to Section 8.3(a), each item of
Capital Account Deduction shall be allocated to the Partners in the same
proportions as the cost giving rise to such Capital Account Deduction was
charged to the Partners pursuant to Section 10.2 and each item of Capital
Account Gross Income shall be allocated to the Partners in the same
proportions as the revenue giving rise to such Capital Account Gross Income
was credited to the Partners pursuant to Section 10.2.

10.4 ALLOCATIONS FOR FEDERAL INCOME TAX PURPOSES

(a) For federal income tax purposes, (i) each item of Partnership income
and gain shall be allocated to the Partners in the same proportions as the
corresponding item of Capital Account Gross Income was allocated to the
Partners pursuant to Section 10.3 and (ii) each item of Partnership loss and
deduction shall be allocated to the Partners in the same proportions as the
corresponding item of Capital Account Deduction was allocated to the Partners
pursuant to Section 10.3.

(b) Notwithstanding any other provision of this Section, if any property
is contributed to the Partnership as a Capital Contribution, the General
Partner shall make such allocations of Partnership income, gains, losses and
deductions and such adjustments to the Capital Accounts of the Partners that
shall be necessary or appropriate to comply, to the extent possible, with the
provisions of Section 704(c) of the Code with respect to such contributed
property.

10.5 SPECIAL PROVISIONS REGARDING CERTAIN ALLOCATIONS TO LIMITED PARTNERS.
Notwithstanding any other provisions of this Article X, if, and to the extent
that, an allocation of Capital Account Deduction to a Limited Partner
pursuant to Section 10.3 would cause such Partner's Capital Account to be
negative as of the end of the Partnership's taxable year to which such
allocation relates, (a) such Capital Account Deduction (and the corresponding
item of deduction or loss for federal income tax purposes) shall instead be
allocated to the General Partner and (b) the cost giving rise to such Capital
Account Deduction shall be charged to the General Partner rather than to such
Limited Partner.

10.6 QUALIFIED INCOME OFFSET. Notwithstanding any other provision of this
Agreement to the contrary, for each taxable year of the Partnership, each
Partner's Capital Account shall be reduced for all adjustments, allocations
and distributions described in Section 1.704-

AGREEMENT OF LIMITED PARTNERSHIP - PAGE 11
<PAGE>

l(b)(2)(ii)(d)(4),(5) and (6) of the Regulations. If, with respect to any
taxable year of the Partnership, a Partner receives an adjustment, allocation
or distribution described in Section 1.704-l(b)(2)(ii)(d)(4), (5) or (6) of
the Regulations that results in such Partner's Capital Account having a
negative balance, Capital Account Gross Income (and the corresponding items
of income for federal income tax purposes) for such taxable year and all
subsequent taxable years shall be allocated to such Partner in an amount and
manner sufficient to eliminate such negative balance in such Partner's
Capital Account as quickly as possible. The provisions of this Section 10.6
are intended to constitute a "qualified income offset" within the meaning of
Section 1.704-l(b)(2)(ii)(d)(3) of the Regulations.

10.7 ALLOCATIONS ATTRIBUTABLE TO TRANSFERRED INTERESTS. If an interest in
the Partnership is considered to have been transferred during any taxable
year of the Partnership, unless otherwise required by law, all amounts
attributable to such interest for such taxable year shall be divided and
allocated proportionately to the transferor and the transferee based upon the
number of days during such taxable year for which each party was the owner of
such interest. Notwithstanding any provisions above to the contrary, all
items (for purposes of computing and maintaining Capital Accounts pursuant to
Section 8.3(a) and for federal income tax purposes) resulting from a
disposition of all or substantially all of the assets of the Partnership
shall be allocated solely to the persons owning interests in the Partnership
as of the date such disposition occurs.

10.8 DISTRIBUTIONS.

(a) The General Partner will make distributions of the Partnership's
available cash, after adequate reserves determined in the sole discretion of
the General Partner, to the Partners on a monthly basis by the 15th day of
the following month. Cash distributions to the Partners will be made in the
same proportions that the revenue giving rise to the distributed funds were
credited to such Partners pursuant to Section 10.2 above.

(b) The provisions of this Section 10.8 shall not apply to distributions
in liquidation of the Partnership, which are governed by the provisions of
Section 20.1.

10.9 POSSIBLE ADDITIONS AND REVISIONS. The provisions of this Article have
been prepared in such a manner that certain circumstances deemed unlikely to
arise (e.g., the contribution of appreciated or depreciated property to the
Partnership, the incurrence of non recourse indebtedness by the Partnership
or the subsequent contribution of money or property to the Partnership by a
new Partner in consideration for an interest in the Partnership) have not
been dealt with in terms of Capital Account adjustment and allocations
provisions. Should such unlikely circumstances nevertheless exist, the
General Partner is hereby authorized to amend or supplement this Agreement,
in a manner that is consistent with the existing provisions of this Agreement
to the extent reasonable possible) and the Code and the Regulations, to deal
with such circumstances.

XI. MANAGEMENT OF PARTNERSHIP BY GENERAL PARTNER

AGREEMENT OF LIMITED PARTNERSHIP - PAGE 12
<PAGE>

11.1 MANAGEMENT. The General Partner shall manage the business of the
Partnership. The General Partner shall devote to the Partnership so much of
its time as is necessary or required for the effective conduct and operation
of the Partnership's business.

11.2 POWERS OF THE GENERAL PARTNER. The General Partner shall have
full charge of overall management, conduct, and operation of
the Partnership in all respects and in all matters, and shall
have the authority to act on behalf of the Partnership in all
matters respecting the Partnership, its business, and its
property, subject to any limitations provided by law or in
this Agreement. Notwithstanding the foregoing, the General
Partner may not take any of the following actions on behalf of
the Partnership without the prior Consent of Limited Partners:

(a) Commingle the funds of the Partnership with the funds of any
other person or entity.

(b) Take any action in contravention of this Agreement.

11.3 RIGHT TO RELY UPON THE AUTHORITY OF GENERAL PARTNER. Persons dealing
with the Partnership may rely upon the representation of the General Partner
that it has the authority to make any commitment or undertaking on behalf of
the Partnership. No purchaser of any property or interest therein owned by
the Partnership shall be required to determine the sole and exclusive
authority of the General Partner to sign and deliver on behalf of the
Partnership any instrument of transfer with respect thereto or to see to the
application or distribution of revenues or proceeds paid or credited in
connection therewith unless such purchaser shall have received written notice
from the Partnership affecting the same.

11.4 COMPENSATION OF THE GENERAL PARTNER. For managing the Partnership on
a day-to-day basis, the General Partner will receive a management equal to
$500.00 per month per operating store.

11.5 EXCULPATION AND INDEMNIFICATION OF THE GENERAL PARTNER. Neither the
General Partner nor any Affiliate thereof shall have any liability to the
Partnership or to any Limited Partner for any loss incurred by the
Partnership or such Limited Partner which arises out of any action or
inaction of either or both of the General Partner or Affiliate thereof if the
General Partner involved or Affiliate thereof in good faith determined that
such course of conduct was in the best interest of the Partnership and such
course of conduct did not constitute gross negligence or gross misconduct of
the General Partner involved or Affiliate thereof. The General Partner and
each Affiliate thereof shall be indemnified by the Partnership against
losses, judgments, liabilities, expense and amounts paid in settlement of any
claims sustained in connection with the Partnership, provided the losses were
not the result of gross negligence of gross misconduct on the part of the
General Partner involved or an Affiliate thereof.

AGREEMENT OF LIMITED PARTNERSHIP - PAGE 13
<PAGE>

XII. INDEPENDENT ACTIVITIES OF PARTNERS

Any of the Partners may engage in or possess an interest in other business
ventures of every nature and description, independently or with others,
including but not limited to, the ownership, financing, leasing, management,
syndication or investments in real or personal property of any kind
whatsoever, and neither the Partnership nor any of the Partners shall have
any right by virtue of this Agreement in and to such independent ventures or
to the income or profits derived therefrom.

XIII. POWER OF ATTORNEY

Each Limited Partner does irrevocably constitute and appoint the General
Partner as such Limited Partner's true and lawful attorney-in-fact, with full
power and authority in such Limited Partner's name, place and stead to:

(a) Execute, swear to, acknowledge, deliver, file and record in the
appropriate public offices the following:

(1) This Agreement and the Partnership's Certificate of the
Limited Partnership, for the purpose of forming the Partnership and
admitting to the Partnership as Limited Partners each person to be so
admitted.

(2) One or more amendments to this Agreement or the Certificate
of Limited Partnership as may be adopted from time to time pursuant to
Section 21.3;

(3) All fictitious name certificates and other certificates and
instruments (including counterparts of this Agreement) which the General
Partner deems appropriate to qualify or continue the Partnership as a
limited partnership or to form additional partnerships wherein the
Limited Partners will have limited liability in the jurisdictions in
which the Partnership or such additional partnerships may conduct
business; and

(4) All filings with agencies of the federal government or any
other jurisdiction which the General Partner deems appropriate to carry
out the business of the Partnership.

(b) Compromise, on behalf of such Limited Partner, any obligation of
a Limited Partner to return money or property paid or distributed to such
Limited Partner in violation of law.

AGREEMENT OF LIMITED PARTNERSHIP - PAGE 14
<PAGE>

The power of attorney granted herein is hereby declared irrevocable and a
power coupled with an interest, shall survive the death or disability of a
Limited Partner and shall extend to such Limited Partner's heirs, successors
and assigns.

XIV. POWERS OF THE LIMITED PARTNERS: LIMITED LIABILITY

14.1 POWERS OF THE LIMITED PARTNERS. The Limited Partners as such shall
not take part in the management of the business of, or transact any business
for, the Partnership and shall have no power to sign for or bind the
Partnership, except where a Limited Partner is also a General Partner.

14.2 LIMITED LIABILITY.

(a) Anything to the contrary herein expressed or implied
notwithstanding, no Limited Partner (except where a Limited Partner
is also a General Partner) shall be personally liable for any of
the debts of the Partnership or any of the losses thereof in excess
of his share of Partnership assets, Capital Contributions which he
has made or is obligated to make to the Partnership, and his share
of the Partnership's income and gains.

(b) Except as otherwise provided by the Texas Revised
Limited Partnership Act or herein, the Partnership may not make a
distribution to the Partners to the extent that, immediately after
giving effect to the distribution and despite any compromise of a
claim as provided in Section 14.2(d), all liabilities of the
Partnership, other than liabilities to Partners with respect to
their Partnership interests and liabilities for which the recourse
of creditors is limited to specified property of the Partnership,
exceed the fair value of Partnership assets, except that the fair
value of the property that is subject to a liability for which
recourse of creditors is limited shall be included in the
Partnership assets only to the extent that the fair value of that
property exceeds that liability.

(c) A Limited Partner who receives a distribution that is not
permitted by Section 14.2(b) has no liability to return the
distribution unless the Limited Partner knew that the distribution
violated Section 14.2(b). This Section 14.2(c) does not affect any
obligation of a Limited Partner under applicable law to return the
distribution.

(d) The General Partner will have the power and authority to
compromise, without the consent of any Limited Partner, any
obligation a Limited Partner may have to so repay amounts
previously distributed to him in violation of the Texas Revised
Limited Partnership Act or this Agreement.

14.3 MEETINGS OF, OR ACTIONS BY, THE LIMITED PARTNERS

(a) Meetings of the Limited Partners to vote upon any
matters as to which the Limited Partners are authorized to take
action under this Agreement or the Texas Revised Limited
Partnership Act may be requested at any time by the General Partner
or by the Limited Partners whose Units constitute not less than ten
percent of the aggregate Units

AGREEMENT OF LIMITED PARTNERSHIP - PAGE 15
<PAGE>

held by all Limited Partners by delivering written notice, either
in person or by registered mail, of such call to the Limited
Partners entitled to vote at such meeting to the effect that a
meeting will be held at a time and place designated in such notice,
which shall be not less than five days after notice of the meeting
is given in the manner provided in Section 21.1 hereof. Included
with the notice of a meeting shall be a detailed statement of the
action proposed, including a verbatim statement of the wording of
any resolution proposed for adoption by any Limited Partners and of
any proposed amendment to this Agreement. All expenses of the
meeting and notification shall be borne by the Partnership;
provided, however, that all expenses of Limited Partners traveling
to attend such meeting shall be borne by the Limited Partner
incurring such expense.

(b) Except as otherwise provided herein, action by the
Limited Partners requires the Consent of the Limited Partners.
Attendance by a Limited Partner at any meeting and voting in person
shall revoke any written proxy submitted with respect to action
proposed to be taken at such meeting.

(c) A photographic, photostat, facsimile or similar
reproduction of a writing signed by a Partner shall be regarded as
signed by the Partner for purposes of this Agreement.

XV. ASSIGNABILITY OF GENERAL AND LIMITED PARTNER INTERESTS

15.1 GENERAL PARTNER INTERESTS. The General Partner shall have the right
to sell, transfer or assign all or a portion of its interest without the
approval of the Limited Partners. The assignee of the General Partner's
interest may become a General Partner in the place of its assignor with
respect to the assigned interest only with the Consent of the Limited
Partners unless the assignee of the General Partner's interest is an
Affiliate of the General Partner, in which event the Consent of the Limited
Partners shall not be required. In the event of an assignment of the General
Partner's entire interest in the Partnership and the substitution of the
assignee as General Partner, the assignor's status as a General Partner shall
be terminated.

15.2 LIMITED PARTNER INTERESTS. Except as provided in this Article XV, no
Limited Partner shall sell, transfer, encumber or otherwise dispose of, by
operation of law or otherwise, the whole or any part of its interest in the
Partnership or withdraw or retire from the Partnership. No assignment shall
be valid or effective unless in compliance with the conditions contained in
this Agreement, and any unauthorized transfer or assignment shall be void ab
initio.

15.3 RESTRICTIONS ON TRANSFER. The Limited Partner interests have been
acquired for investment and have not been registered under the Securities Act
of 1933, as amended, or applicable state securities laws. Without such
registration, such interests may not be sold, pledged, hypothecated or
otherwise transferred at any time whatsoever, except upon delivery to the
General Partner of an opinion of counsel that such registration is not
required for such transfer or the submission to the General Partner of such
other evidence as shall be satisfactory to the General Partner to the effect
that any such transfer shall not be in violation of the Securities

AGREEMENT OF LIMITED PARTNERSHIP - PAGE 16
<PAGE>

Act of 1933, as amended, or applicable state securities laws or any rule or
regulation promulgated thereunder.

15.4 ASSIGNMENT OF LIMITED PARTNER INTEREST WITHOUT SUBSTITUTION. Upon
compliance with Section 15.3 hereof, together with the prior written consent
of the General Partner, a Limited Partner may transfer all or any part of
such Limited Partner's interest by a written instrument of assignment, the
terms of which shall not be in contravention of any of the provisions of this
Agreement, provided that the assignee thereof shall not become a substituted
Limited Partner except in accordance with Section 15.5 hereof. The assigning
Limited Partner shall deliver to the General Partner a written instrument of
assignment in form and substance satisfactory to the General Partner, duly
executed by the assigning Limited Partner or his personal representative or
authorized agent. Said assignment shall be accompanied by such assurance of
genuineness and effectiveness and by such consents or authorizations of any
governmental or other authorities as may be reasonably required by the
General Partner. An assignee shall be entitled to receive distributions from
the Partnership attributable to the Partnership interest acquired by reason
of any such assignment from and after the effective date of the assignment of
such interest to such assignee; provided, however, that the Partnership shall
be entitled to treat the assignor of such Partnership interest as the
absolute owner thereof in all respects, and shall incur no liability for
distributions made in good faith to such assignor until such time as the
written instrument of assignment has been approved by the General Partner and
recorded on its books and the effective date of the assignment has passed.

15.5 SUBSTITUTED LIMITED PARTNER. Except as otherwise provided in this
Agreement, an assignee of the whole or any portion of a Limited Partner's
interest in the Partnership shall not have the right to become a Limited
Partner in place of its assignor unless (i) the General Partner is provided
with all documents and agreements it reasonably requests and (ii) the General
Partner shall give its written consent thereto. An assignee of a Limited
Partner interest will be recognized by the Partnership as a Limited Partner
as of the day following the date of satisfaction of the foregoing conditions.

15.6 DEATH LEGAL INCOMPETENCY, OR DISSOLUTION OF LIMITED PARTNER. The
death, legal incompetency, dissolution, or other disability of a Limited
Partner shall not dissolve or terminate the Partnership.

XVI. LOANS TO THE PARTNERSHIP

The Partnership may from time to time, borrow such amounts from such
persons (including the Partners or their Affiliates) payable on such terms as
the General Partner may determine, and may pledge, mortgage, or otherwise
encumber the assets of the Partnership in connection with any such borrowing.

XVII. REPRESENTATIONS OF THE LIMITED PARTNERS

AGREEMENT OF LIMITED PARTNERSHIP - PAGE 17
<PAGE>

A Limited Partner, by executing this Agreement, represents that:

(a) Such Partner, if a natural person, has reached the age of majority.

(b) Such Partner is sufficiently experienced in business matters to
recognize that the Partnership will be newly organized, has no history of
operations or earnings and is a speculative venture.

(c) Such Partner has carefully reviewed this Agreement and
the exhibits hereto and all pertinent literature and in making an
investment in the Partnership, has relied solely on his independent
investigation and upon his own tax and legal counsel. Such Partner
has not construed the provisions of this Agreement or any other
information provided by the Partnership as legal or tax advice.

(d) Such Partner has had an opportunity to ask questions of
and receive satisfactory answers from the Partnership, or any
person or persons acting on its behalf, concerning the terms and
conditions of this investment, and all such questions have been
answered to the full satisfaction such Partner.

(e) Such Partner is purchasing his interest for his own
account for investment and not with the view toward resale or
distribution in a manner which would require registration under the
Securities Act of 1933, as amended, or any applicable state
securities laws, and he does not now have any reason to anticipate
any change in his circumstances or other particular occasion or
event which would cause him to sell the interest.

XVIII. WITHDRAWAL OF GENERAL PARTNER

18.1 EVENT OF WITHDRAWAL. The General Partner shall cease to be a General
Partner of the Partnership upon the occurrence of an Event of Withdrawal with
respect to such General Partner.

18.2 VOLUNTARY WITHDRAWAL. The General Partner shall not voluntarily
withdraw from the Partnership except with the Consent of the Limited
Partners.

18.3 CONVERSION TO LIMITED PARTNER INTEREST UPON OCCURRENCE OF EVENT OF
WITHDRAWAL. Upon the occurrence of an Event of Withdrawal with respect to the
General Partner except as described in Section 5.9(12) relating to assignment
of all the General Partner's interest in the Partnership, the interest of the
General Partner shall be converted, as of the date of the Event of
Withdrawal, to that of a Limited Partner, without any change in allocations
of income and loss allocable to such interest or such General Partner's
Capital Account and right to distributions.

XIX. DISSOLUTION OF THE PARTNERSHIP

AGREEMENT OF LIMITED PARTNERSHIP - PAGE 18
<PAGE>

19.1 DISSOLUTION. Except as otherwise provided in this Agreement, no
Partner shall have the right to cause dissolution of the Partnership before
the expiration of the term for which it is formed. The Partnership shall be
dissolved upon the happening of the earlier to occur of the following events,
and no other events shall cause dissolution of the Partnership:

(a) The expiration of the term of the Partnership as specified in
Article IV;

(b) The decision of the General Partner to dissolve the Partnership;
or

(c) The occurrence of an Event of Withdrawal with respect to the
General Partner, unless (i) there remains at least one other General Partner,
in which event the remaining General Partner shall continue the business of
the Partnership, or (ii) if there is no remaining General Partner, then,
within a period of 90 days from the date of occurrence of such Event of
Withdrawal, Limited Partners, with the Consent of the Limited Partners, elect
to continue the business of the Partnership and elect, effective as of the
date of occurrence of such Event of Withdrawal, a successor General Partner.

19.2 CONTINUATION OF THE BUSINESS OF THE PARTNERSHIP FOLLOWING AN EVENT OF
WITHDRAWAL.

(a) Notwithstanding anything contained in Section 19.1, if
upon the occurrence of an event as specified in Section 19.1(c)
there is no remaining General Partner, a meeting of the Limited
Partners shall be held at a place designated by the Limited
Partners, which location will be decided by and among the Limited
Partners within 45 days after the happening of such event to
consider whether (a) to elect a successor General Partner, which
successor General Partner shall then become the General Partner,
and continue the Partnership on the same terms and conditions as
are contained in this Agreement or (b) to wind up the affairs of
the Partnership, liquidate its assets and distribute the proceeds
therefrom in accordance with Article XX.

(b) The continuance of the Partnership pursuant to the terms
of Section l9.1(c) is conditioned upon (i) the amendment of the
Certificate of Limited Partnership to reflect that the General
Partner with respect to which the Event of Withdrawal has occurred
(the "Terminated General Partner") has ceased to be a General
Partner, and (ii) delivery to the Terminated General Partner of an
indemnification agreement by the Partnership, in form and substance
reasonably satisfactory to the Terminated General Partner,
indemnifying and holding the Terminated General Partner harmless
against all future liabilities of the Partnership. The indemnity
described in clause (ii) of the preceding sentence shall require
the Terminated General Partner to give the Partnership prompt
notice of all claims against it pertaining to the Partnership and
an opportunity to defend against all such claims.

XX. DISTRIBUTION ON TERMINATION OF PARTNERSHIP

20.1 LIQUIDATION.

AGREEMENT OF LIMITED PARTNERSHIP - PAGE 19
<PAGE>

(a) In the event of the dissolution of the Partnership, the
General Partner shall wind up the affairs of the Partnership and,
after payment of all liabilities of the Partnership (including
liabilities to Partners who are creditors), shall distribute the
remaining assets of the Partnership to the Partners in accordance
with the positive balances in their respective Capital Accounts
(after taking into account all adjustments thereto required by the
provisions of Section 8.3 and Article X as a result of the
operations of the Partnership during its final accounting period,
as a result of the sale or other disposition of assets of the
Partnership in connection with the winding up and liquidation of
the Partnership and as a result of any unrealized gain or
unrealized loss inherent in assets of the Partnership to be
distributed in kind). In the discretion of the General Partner,
assets of the Partnership distributed in liquidation may be
distributed subject to liabilities in lieu of payment of such
liabilities.

(b) Notwithstanding any other provision of this Agreement,
if at the time of the liquidation of the General Partner's interest
in the Partnership (as described in this paragraph) General Partner
has a negative balance in its Capital Account, after taking into
account all adjustments required by the terms of this Agreement
with respect to events occurring prior to or simultaneously with
such liquidation, such General Partner, on or before the later of
the end of the taxable year of the Partnership (determined without
regard to Section 706(c)(2)(A) of the Code) in which such
liquidation occurs or the 90th day after the date of such
liquidation, shall make a Capital Contribution in an amount equal
to the amount of such negative balance. For purposes of this
subsection, a liquidation of the General Partner's interest in the
Partnership shall be deemed to occur upon the earlier of (1) the
date on which the Partnership is terminated pursuant to Section
708(b)(1) of the Code, (2) the date on which the Partnership ceases
to be a going concern or (3) the date on which there is a
liquidation of the Partner's interest in the Partnership within the
meaning of Section 1.761-l(d) of the Regulations.

20.2 NO LIABILITY FOR RETURN OF CAPITAL. The General Partner
shall not be liable for the return of all or any part of the
Capital Contributions of a Limited Partner. Any such return shall
be made solely from Partnership assets.

20.3 NO RIGHT OF PARTITION. The Partners shall have no right to
receive Partnership property in kind, nor shall such Partners have
the right to partition the Partnership property, whether or not
upon dissolution and termination of the Partnership.

XXI. GENERAL PROVISIONS

21.1 NOTICES. Except as otherwise provided herein, any notice, payment,
distribution or other communication which shall be required to be given to a
Limited Partner in connection with the business of the Partnership shall be
duly given if in writing and delivered personally to the person to whom it is
authorized to be given at the time of such delivery or, if sent by mail or
telegraph, to the last address furnished by such Limited Partner in writing
for such purpose as of the time of such mailing; and if to a General Partner
or the Partnership, shall be given when

AGREEMENT OF LIMITED PARTNERSHIP - PAGE 20
<PAGE>

actually received at the principal office of the Partnership or at such other
address as such General Partner may hereafter specify.

21.2 SURVIVAL OF RIGHTS. This Agreement shall be binding upon and inure to
the benefit of the Partners and their respective heirs, legal
representatives, successors and permitted assigns.

21.3 AMENDMENT. This Agreement may be amended, modified and changed only
with the consent of the General Partner and the Consent of the Limited
Partners.

21.4 LANGUAGE. Whenever the context requires, references in this Agreement
to the singular number shall include the plural, the plural number shall
include the singular, and words denoting gender headings in this Agreement
are for convenience of reference only and shall not be considered in
construing or interpreting this Agreement.

21.5 AGREEMENT IN COUNTERPARTS. This Agreement, or any amendment thereto,
may be executed in multiple counterparts, each of which shall be deemed an
original Agreement, and all of which shall constitute one agreement
notwithstanding that all of the Partners are not signatories to the original
or the same counterpart. The execution of any or all of such counterparts may
be evidenced by facsimile reproduction of the signature of the party so
executing, with the same force and effect as an original signature.

21.6 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED AND CONSTRUED
ACCORDING TO THE LAWS OF THE STATE OF TEXAS.

21.7 ADDITIONAL DOCUMENTS. Each Partner, upon the request of the others,
agrees to perform any further acts and execute and deliver any documents
which may be reasonably necessary to carry out the provisions of this
Agreement.

21.8 LIMITATION ON CREDITOR INTERESTS. No creditor who makes a
non-recourse loan to the Partnership shall have or acquire at any time, as a
result of making such loan, any direct or indirect interest in the profits,
capital or property of the Partnership, other than as a secured creditor.

21.9 VALIDITY AND SEVERABILITY. If any provision of this Agreement is held
to be illegal, invalid, or unenforceable under the present or future laws
effective during the term of this Agreement, such provision shall be fully
severable; this Agreement shall be construed and enforced as if such illegal,
invalid, or unenforceable provision had never comprised a part of this
Agreement; and the remaining provisions of this Agreement shall remain in
full force and effect and shall not be affected by the illegal, invalid, or
unenforceable provision or by its severance from this Agreement.
Furthermore, in lieu of such illegal, invalid, or unenforceable provision,
there shall be added automatically as a part of this Agreement a provision as
similar in terms to such illegal, invalid, or unenforceable provision as may
be possible and still be legal, valid, and enforceable.

AGREEMENT OF LIMITED PARTNERSHIP - PAGE 21
<PAGE>

IN WITNESS WHEREOF, the undersigned hereby execute this Agreement of
Limited Partnership as of the date indicated above.

GENERAL PARTNER:

BDMAC, L.C..
By: Bruce MacDonald, General Manager

By:
--------------------------------------
Bruce MacDonald, General Manager

LIMITED PARTNERS:

BDMAC, L.C.

[As attorney-in-fact for each of the parties
who has executed a Subscription Agreement in the
form attached hereto as Attachment I which has
been accepted by the General Partner with respect
to the Partnership.]
By: BDMAC, L.C., General Partner

By:
--------------------------------------
Bruce MacDonald, Manager

AGREEMENT OF LIMITED PARTNERSHIP - PAGE 22

<PAGE>

COMPACT DISCS INTERNATIONAL, LTD.

d/b/a

CD WAREHOUSE

DEVELOPMENT AGREEMENT

<PAGE>

TABLE OF CONTENTS

SECTION PAGE
- ------- ----

1. Certain Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2. Development Rights and Obligations. . . . . . . . . . . . . . . . . . . 3
3. Grant of Franchises to Developer. . . . . . . . . . . . . . . . . . . . 4
4. Initial Payments. . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
5. Confidential Information. . . . . . . . . . . . . . . . . . . . . . . . 6
6. Covenants of Non-Competition. . . . . . . . . . . . . . . . . . . . . . 8
7. Proprietary Marks . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
8. Obligations of Developer. . . . . . . . . . . . . . . . . . . . . . . . 11
9. Transfer of Interest. . . . . . . . . . . . . . . . . . . . . . . . . . 12
10. Termination of Agreement. . . . . . . . . . . . . . . . . . . . . . . . 17
11. Obligations Upon Termination and Expiration . . . . . . . . . . . . . . 19
12. Independent Contractor and Indemnification. . . . . . . . . . . . . . . 21
13. Representations and Warranties of Corporate and Partnership Developers. 23
14. Entire Agreement, Modifications . . . . . . . . . . . . . . . . . . . . 24
15. Waiver of Obligations . . . . . . . . . . . . . . . . . . . . . . . . . 24
16. Force Majeure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
17. Rights and Remedies are Cumulative. . . . . . . . . . . . . . . . . . . 25
18. Injunctive Relief . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
19. Arbitration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
20. Payment of Obligations Owed to Franchisor, Costs and Attorneys Fees . . 27

i
<PAGE>
21. Governing Law and Consent to Jurisdiction . . . . . . . . . . . . . . . 27
22. Notices and Payments. . . . . . . . . . . . . . . . . . . . . . . . . . 27
23. Severability and Construction . . . . . . . . . . . . . . . . . . . . . 28
24. Acknowledgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

GUARANTY

Exhibit A - Development Areas

Exhibit B - Franchise Fee Schedule

Exhibit C - Statement of Ownership Interests

Exhibit D - Lease Addendum

Exhibit E - Franchise Agreement

ii
<PAGE>

C.D. WAREHOUSE
DEVELOPMENT AGREEMENT

THIS AGREEMENT is made and entered into by and between Compact Discs
International, Ltd., a Texas limited partnership ("Franchisor"), and
_______________________, ("Developer").

W I T N E S S E T H:
-------------------

WHEREAS, Franchisor, as the result of the expenditures of time, skill,
effort and money, has developed a system for the operation of businesses
which specialize in the sale of new and used compact discs;

WHEREAS, the distinguishing characteristics of the System include,
without limitation, distinctive exterior and interior design, exterior and
interior signage, color scheme and fixtures; uniform standards, know-how and
procedures for the acquisition and sale of new and used compact discs;
inventory, management and financial control methods; and training and
assistance, all of which may be changed, improved and further developed by
Franchisor from time to time;

WHEREAS, Franchisor identifies the System by means of certain trade
names, service marks, trademark and logos, including, without limitation, the
mark "C.D. Warehouse" and such other trade names and trademark as Franchisor
may develop in the future for the purpose of identifying for the public the
source of services and products marketed under such marks and the System and
representing the System's high standards of quality, appearance and service
(collectively, "Proprietary Marks"); and

WHEREAS, Developer desires to use the System to develop and operate one
or more Stores, at the locations specified herein, upon the terms and subject
to the conditions hereinafter set forth;

NOW THEREFORE, in consideration of the premises and of the mutual
undertakings, obligations and commitments contained herein, it is agreed
between the parties as follows:

1. CERTAIN DEFINITIONS

For purposes of this Agreement, the terms listed below have the meanings
that follow them. Other terms used in this Agreement are defined and
construed in the context in which they occur.

AFFILIATE. Any person, entity or company that directly or indirectly
owns or controls Franchisor, that is directly or indirectly owned or
controlled by Franchisor, or that is under common control with Franchisor.
As used herein, the term "control" means the possession, directly or
indirectly, of the power to direct or cause the direction of the management
and policies of an entity, whether through ownership of voting securities, by
contract, or otherwise.

<PAGE>

AUTHORIZED ENTITY. An entity controlled by Developer which meets
Franchisor's then current standards and requirements for franchise owners,
including without limitation financial requirements and limits on the total
number of holders of equity interests and requirements for owners of
non-controlling ownership interest. For the purposes of this definition, an
entity shall be deemed to be controlled by Developer if and only during such
times as: (i) Developer owns a minimum of fifty percent (50%) of all classes
of equity interests in such entity (including without limitation both general
and limited partnership interests and common and preferred stock); (ii) if
the entity is a corporation, Developer has at least the percentage of voting
power required under applicable law to authorize a transfer of substantially
all of the assets of a corporation; (iii) if the entity is a limited
partnership, Developer is the sole general partner of the limited
partnership; (iv) if the entity us a general partnership, Developer is the
managing general partner of the general partnership; and (v) Developer
establishes to the satisfaction of Franchisor that Developer has, and during
the term of the Franchise Agreement of the Stores to be owned and operated by
such entity, will have the right and power to control the operation of such
Stores and the sale or other disposition of such Stores.

DEVELOPMENT AREA. The geographic area described in Exhibit A to this
Agreement.

DEVELOPMENT PERIOD. Each period of time defined as a Development Period
in Exhibit A to this Agreement.

DEVELOPMENT QUOTA. The number of Stores indicated in Exhibit A hereto
that Developer is obligated to Develop within a Development Area.

DEVELOPMENT SCHEDULE. The schedule Developer is obligated to meet for
the development of Stores within a Development Area, until Developer has
satisfied its Development Quota within such Development Area.

FRANCHISE AGREEMENT. The then current form of franchise agreement
(including any attachments, exhibits, riders, collateral assignments of lease
or sublease, guarantees and any other agreements used in connection
therewith) used by Franchisor in the offering and granting of a franchise for
the ownership and operation of a Store pursuant to Franchisor's standard form
of development agreement. A copy of such franchise agreement is attached
hereto as Exhibit E.

OWNERS. All persons or entities holding ownership interests in
Developer. As used herein, this term also includes any person who has direct
or indirect community property rights in Developer or this Agreement and any
person or entity which has any legal or equitable interest in the revenue,
profits, rights or assets thereof.

PRINCIPAL OWNERS. Each Owner having an equity ownership interest in
Developer of five percent (5%) or more (regardless of whether such Owner is
entitled to vote thereon), and any other Owner designated as a Principal
Owner in Exhibit C of this Agreement.

STORES. Retail businesses known as "C.D. Warehouse" stores which
specialize in the sale of new and used compact discs.

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<PAGE>

2. DEVELOPMENT RIGHTS AND OBLIGATIONS

A. TERM OF AGREEMENT

Subject to the provisions contained herein, this Agreement shall be for
a term commencing on the date hereof and expiring on the earlier of (1) the
last day of the last Development Period set forth in Exhibit A to this
Agreement, or (2) the first date on which the number of Stores open and
operating in the Development Areas is equal to the Development Quota (defined
below) for the last Development Period.

B. RIGHTS DURING TERM

Provided that Developer is in full compliance with all of the terms and
conditions of this Agreement, including the development obligations contained
in Section 2.D, and Developer and any Authorized Entities are in full
compliance with all of their obligations under all Franchise Agreements
executed pursuant hereto, then during the term of this Agreement Franchisor
hereby grants to Developer the right to develop Stores in the Development
Areas and use the Proprietary Marks in connection therewith and agrees it:
(1) will grant to Developer (or an Authorized Entity), in accordance with the
provisions of Section 3 hereof, a franchise for the operation of each Store
in each of the Development Areas; and (2) will not (directly or through its
Affiliates) operate or grant franchises for the operation of Stores to be
located within the Development Areas (except such franchises as are granted
to Developer or an Authorized Entity pursuant to this Agreement).
Notwithstanding the above, upon the expiration of this Agreement in
accordance with Section 2.A, or the termination of this Agreement in
accordance with Section 10, Developer's exclusive rights with respect to that
Development Area will terminate and Franchisor may grant other development
rights and franchises to develop and operate Stores within that Development
Area.

C. RIGHTS RETAINED BY FRANCHISOR

Except as expressly limited by Section 2.B above, Franchisor (on behalf
of itself and any Affiliates) retains all rights with respect to the System
and the Proprietary Marks, and the right to operate, franchise or license
others to develop, market, distribute and sell any other products or services
under the Proprietary Marks or a different trade name, trademark or service
mark, including, without limitation: (a) the right to operate or grant others
the right to operate Stores at such locations and on such terms and
conditions as the Franchisor, in its sole discretion, deems appropriate and
(b) the right to develop, market, distribute and sell any other product or
service or own or operate any other business under the Proprietary Marks or
any other trademark which would not directly compete with Developer's or an
Authorized Entity's Stores.

D. DEVELOPMENT OBLIGATIONS

(1) Developer agrees that, during the term of this Agreement and any
extensions thereof, he will at all times, faithfully, honestly, and
diligently perform his obligations hereunder and will continuously exert his
best efforts to promote and enhance the development of C.D.

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<PAGE>

Warehouse Stores within the Development Areas. Without limiting the
foregoing obligation, Developer agrees to meet its Development Quota for each
Development Area by the end of the Development Period for such Development
Area. Developer further agrees to develop and open Stores within each
Development Area according to the Development Schedule for such Development
Area.

(2) Developer may develop Stores within a Development Area in excess of
the Development Quota for such Development Area only with the written
approval of Franchisor, which approval shall be within the sole discretion of
Franchisor.

3. GRANT OF FRANCHISES TO DEVELOPER

Subject to the provisions of Section 2 hereof, Franchisor agrees to
offer to Developer or an Authorized Entity a franchise for the ownership and
operation of each Store within each Development Area, on the following terms
and conditions:

(a) Developer assumes all cost, liability, expense, and
responsibility for locating, obtaining, and developing a site for any
Store to be established under this Agreement.

(b) Within thirty (30) days after the commencement of each
Development Period or any extended time period approved by Franchisor
in writing, Developer shall locate three (3) potential sites for a
Store within the Development Area which Developer believes to conform
to certain minimum site selection criteria established by Franchisor
from time to time. Developer shall submit a site report to Franchisor
in the form specified by Franchisor containing a description of the
three sites, together with such other information and materials as
Franchisor may reasonably require. Franchisor shall review Developer's
proposed sites based upon such matters as it deems material, including,
without limitation, demographic characteristics of the proposed site,
traffic patterns, visibility, accessibility, the predominant character
of the neighborhood, competition from other businesses selling used
compact discs in the area, the proximity to other businesses (including
other Stores, the exclusivity granted to other Developers of
Franchisor, the nature of other businesses in proximity to the site,
and other commercial characteristics (including the rental obligations
and other lease terms for the proposed site) and the size of the
premises, appearance, and other physical characteristics. Franchisor
may withhold acceptance of a site for any BONA FIDE reason that
Franchisor, in the exercise of its reasonable business judgment, deems
necessary. DEVELOPER HEREBY ACKNOWLEDGES AND AGREES THAT FRANCHISOR'S
ACCEPTANCE OF A SITE DOES NOT CONSTITUTE AN ASSURANCE, REPRESENTATION
OR WARRANTY OF ANY KIND, EXPRESS OR IMPLIED, AS TO THE SUITABILITY OF
THE SITE FOR A STORE OR FOR ANY OTHER PURPOSE. FRANCHISOR'S ACCEPTANCE
OF THE SITE INDICATES ONLY THAT FRANCHISOR BELIEVES THAT THE SITE FALLS
WITHIN THE ACCEPTABLE MINIMUM CRITERIA ESTABLISHED BY FRANCHISOR AS OF
THE TIME OF THE EVALUATION. BOTH DEVELOPER AND FRANCHISOR ACKNOWLEDGE
THAT APPLICATION OF CRITERIA THAT HAVE BEEN EFFECTIVE WITH RESPECT TO
OTHER SITES AND PREMISES MAY NOT BE PREDICTIVE OF POTENTIAL FOR ALL
SITES AND THAT, SUBSEQUENT TO FRANCHISOR'S ACCEPTANCE OF A SITE,
DEMOGRAPHIC AND/OR ECONOMIC

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<PAGE>

FACTORS INCLUDED IN OR EXCLUDED FROM FRANCHISOR'S CRITERIA COULD
CHANGE, THEREBY ALTERING THE POTENTIAL OF A SITE. SUCH FACTORS ARE
UNPREDICTABLE AND ARE BEYOND FRANCHISOR'S CONTROL AND FRANCHISOR SHALL
NOT BE RESPONSIBLE FOR THE FAILURE OF A SITE ACCEPTED BY FRANCHISOR TO
MEET EXPECTATIONS AS TO REVENUE OR OPERATIONAL CRITERIA. DEVELOPER FURTHER
ACKNOWLEDGES AND AGREES THAT ACCEPTANCE OF A FRANCHISE FOR THE OPERATION
OF A STORE AT THE SITE IS BASED ON HIS OWN INDEPENDENT INVESTIGATION OF
THE SUITABILITY OF THE SITE.

If the Development Quota for a Development Area exceeds one Store,
Developer shall locate potential sites and submit site reports, in
accordance with the procedures of this Section 3, for each additional
Store. Site reports for subsequent Stores shall be submitted at the
interval specified in the Development Schedule for the Development
Area, commencing thirty (30) days after the beginning of the
Development Period for such Development Area. (E.g. If the
Development Schedule for a Development Area is one Store every sixty
days, then site reports for each subsequent Store in the Development
Area must be submitted every sixty days following the submission of the
first site reports.)

(b) A representative of Franchisor shall travel to Developer's
proposed sites for an initial on-site evaluation of the sites for each
Store. Franchisor agrees to exert its best efforts to conduct such
initial on-site evaluation within ten (10) business days of
Franchisor's receipt of a complete site report on the proposed sites
for a Store. All costs incurred by Franchisor for such initial on-site
evaluation of the proposed sites for a Store to be developed hereunder
shall be paid by Franchisor; provided, if Developer must relocate a
Store for any reason, all such costs incurred by Franchisor for site
selection activities associated with such relocation shall be paid by
Developer. Developer shall also pay all costs incurred for any
additional site evaluations for a Store, if deemed necessary by
Franchisor or requested by Developer.

(c) Franchisor will accept or reject sites proposed by Developer
for the operation of a Store (a site approved by Franchisor is
hereinafter referred to as an "Accepted Site"). Franchisor agrees to
exert its best efforts to deliver such notification to Developer within
five (5) business days after (i) receipt by Franchisor of the complete
site reports and other materials requested by Franchisor, containing
all information reasonably required by Franchisor and (ii) the
completion of Franchisor's on-site evaluation. Developer shall not make
any binding commitment to a prospective vendor or lessor of real estate
with respect to a site for a Store unless the site is accepted in
accordance with the procedure herein set forth. If Developer or an
Authorized Entity shall have failed to obtain lawful possession of an
Accepted Site (through acquisition or lease) within thirty (30) days
after delivery of Franchisor's approval thereof, Franchisor may, in its
sole discretion, withdraw acceptance of such site by written notice to
Developer.

(d) If Developer is to occupy the premises of a Store under a
lease, Developer shall submit to Franchisor the lease prior to its
execution for Franchisor's acceptance and shall furnish to Franchisor a
copy of the executed lease within ten (10) days after execution
thereof. Any lease for a Store premises shall contain substantially
the terms and provisions

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<PAGE>

set forth in Exhibit D of this Agreement, except as Franchisor may
otherwise consent to in writing. If Developer is to purchase the
premises for a Store, Developer shall submit the contract of sale to
Franchisor for approval prior to its execution and shall furnish to
Franchisor a copy of the executed contract of sale within ten (10) days
after execution thereof.

(e) Provided Developer or an Authorized Entity shall have
obtained lawful possession of an Accepted Site through purchase or
lease in accordance with the terms of this Section 3, Franchisor shall
offer to Developer or such Authorized Entity a franchise to operate a
Store at such Accepted Site by delivering to Developer a Franchise
Agreement for execution by Developer or such Authorized Entity,
providing for a franchise fee, software license fee and royalty fee in
accordance with Section 3(f) below. Such Franchise Agreement shall be
executed by Developer or such Authorized Entity (and its partners or
shareholders, as required by the terms thereof) and returned to
Franchisor within ten (10) business days of Franchisor's delivery
thereof, with payment of the franchise fee and any other fees required
to be paid upon execution thereof. If Developer or an Authorized
Entity fails to execute such Franchise Agreement and tender payment of
the fees, as above provided, Franchisor may, at its sole discretion,
terminate its offer to grant to Developer or such Authorized Entity a
franchise to operate a Store at such Accepted Site and withdraw its
approval of such site.

(f) For each Store required to be developed by Developer
hereunder: (i) the franchise fee payable shall be $6,000.00, (ii) the
software license fee shall be $1,200.00, and (iii) the royalty fee
shall be five percent (5%) of the gross sales (as defined in the
Franchise Agreement) of such Store. These terms shall also apply to
any additional Stores opened in a Development Area pursuant to Section
2.D(2).

4. INITIAL PAYMENTS

Concurrently with the execution of this Agreement, Developer shall pay
to Franchisor the sum set forth in Exhibit B hereof as a nonrefundable
deposit to be applied, in the manner set forth in Exhibit B, to initial
franchise fees payable by Developer or Authorized Entities under Franchise
Agreements entered pursuant to this Agreement.

5. CONFIDENTIAL INFORMATION

A. Franchisor possesses and will further develop and acquire certain
confidential and proprietary information and trade secrets relating to the
System, consisting of the following categories of information, methods,
techniques, procedures, and knowledge developed or to be developed by
Franchisor, its Affiliates, or its franchise owners and developers (the
"Confidential Information"): (i) methods, techniques, specifications,
standards, policies, procedures, information, concepts, systems, and
knowledge of and experience in the development, operation, and franchising of
Stores; (ii) marketing programs for Stores; (iii) knowledge concerning the
proprietary computer software programs developed for use in the operation of
Stores, including any modifications and enhancements thereto, all related
documentation, the tangible media upon which such programs are

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<PAGE>

recorded, the data base file structure thereof, and the bar code format used
in connection with the proprietary software; (iv) knowledge of specifications
for and suppliers of certain materials, equipment, furniture and fixtures
used in Stores; (v) knowledge of operating results and financial performance
of Stores.

B. Franchisor will disclose such parts of the Confidential Information
to Developer as are required for the development of Stores hereunder during
training, in the Manuals (as defined in Section 8.B), and such other manuals
for the operation and development of a Store as are given to Developer
pursuant to this Agreement or a Franchise Agreement. Developer may learn
additional Confidential Information during the term hereof. Developer
acknowledges and agrees that Developer will not acquire any interest in the
Confidential Information, other than the right to use it in the development
and operation of Stores pursuant to this Agreement, and that the use or
duplication of the Confidential Information in any other business would
constitute an unfair method of competition with Franchisor and with other
Store developers and franchise owners. Developer agrees to disclose the
Confidential Information to Owners and to its employees only to the extent
reasonably necessary for the development of Stores hereunder.

C. Developer and its Owners acknowledge and agree that the
Confidential Information is a valuable asset of Franchisor, is proprietary,
includes trade secrets of Franchisor and is disclosed to Developer solely on
condition that Developer and its Owners agree, and Developer and its Owners
do hereby agree, that they: (1) shall not, during the term of this Agreement
or any time thereafter, communicate, divulge, or use for the benefit of any
other person, partnership, association, corporation or other entity any
Confidential Information which may be communicated or provided to Developer
or of which they may be apprised by virtue of Developer's or an Authorized
Entity's operation of Stores under the terms of this Agreement; (2) will not
use the Confidential Information in any other business or capacity; (3) will
not, at any time, copy, duplicate, record or otherwise reproduce any
Confidential Information, in whole or in part, or otherwise make the same
available to any unauthorized person, without the prior written consent of
Franchisor; and (4) will adopt and implement all reasonable procedures
prescribed from time to time by Franchisor to prevent unauthorized use or
disclosure of the Confidential Information.

D. Developer agrees to fully and promptly disclose to Franchisor and
provide Franchisor with all necessary information concerning any new
concepts, processes, techniques or improvements relating to the development,
operation or promotion of a business offering the goods and services offered
by Stores developed by Developer or an Authorized Entity or any employee of
Developer or an Authorized Entity during the term of this Agreement.
Developer acknowledges that any such concept, process, technique or
improvement shall become the property of Franchisor, without compensation,
and Franchisor shall have the perpetual right to utilize or disclose such
information to its developers, franchisees and other parties as it deems
appropriate.

E. Developer and each of the Principal Owners acknowledge that any
failure to comply with the requirements of this Section 5 shall constitute a
material event of default under this Agreement; that such failure will cause
Franchisor irreparable injury and that money damages will not adequately
compensate Franchisor; and that Franchisor may obtain specific performance
of, or an injunction against a violation of, the requirements of this Section
5 without the necessity of

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posting bond. Developer and each of the Principal Owners agree to pay all
court costs and reasonable attorneys' fees incurred by Franchisor in
enforcing its rights under this Section 5.

6. COVENANTS OF NON-COMPETITION

A. Developer and the Principal Owners specifically acknowledge that,
pursuant to this Agreement, Developer and the Principal Owners will receive
valuable specialized training, trade secrets, and confidential information,
including, without limitation, information regarding the management,
operational and marketing methods and techniques of Franchisor and the System
which are beyond the present skills and experience of Developer and the
Principal and Developer's managers and employees. Developer and Principal
Owners acknowledge that such specialized training, trade secrets, and
confidential information provide a competitive advantage and will be valuable
to them in the development and operation of Stores, and that gaining access
to such specialized training, trade secrets, and confidential information is,
therefore, a primary reason why they are entering into this Agreement.

B. In consideration for such specialized training, trade secrets,
confidential information and exclusive rights described in Section 6.A above,
Developer and the Principal Owners covenant as follows: With respect to
Developer, during the term of this Agreement, or with respect to each of
Principal Owners, during the term of this Agreement for so long as such
individual or entity satisfies the definition of "Principal Owner" and for a
continuous uninterrupted period commencing upon the expiration or termination
of this Agreement or with respect to each of Principal Owners, for a
continuous uninterrupted period commencing upon the earlier of: (i) the
expiration or termination of this Agreement or (ii) the time such individual
or entity ceases to satisfy the definition of "Principal Owner" and for two
(2) years thereafter, except as otherwise approved in writing by Franchisor,
neither Developer nor any Principal Owners shall, either directly or
indirectly, for themselves, or through, on behalf of, or in conjunction with
any person, persons, partnership, or corporation:

(1) Divert or attempt to divert any business or customer of the
Store to any competitor, by direct or indirect inducement or otherwise,
or do or perform, directly or indirectly, any other act injurious or
prejudicial to the goodwill associated with Franchisor's Proprietary
Marks and the System;

(2) Employ or seek to employ any person who is at that time
employed by Franchisor or by any other franchisee of Franchisor, or
otherwise directly or indirectly induce such person to leave his or her
employment;

(3) Own, maintain, operate, engage in, or have any direct or
indirect interest in any business in the United States which is the
same as or similar to the Store including, but not limited to, any
business which offers for sale or rental of new or used compact discs,
laser discs, or video games (a "Competitive Business");

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(4) Own, maintain, operate, engage in, or have any direct or indirect
interest in any business in the United States which is granting franchises
or licenses to others to operate a Competitive Business; or

(5) Perform services as a director, officer, manager, employee,
consultant, representative, agent, or otherwise for any Competitive
Business or any entity which is granting franchises or licenses to others
to operate Competitive Businesses.

C. It is the express intention of the parties to this Agreement to comply
with all laws applicable to the covenants contained in this Agreement. If any
of the covenants contained in this Section 6 are found to exceed in duration,
geographic area, or scope of business activity prohibited those permitted by
applicable law, it is expressly agreed that such restrictive covenant may be
reformed or modified by the final judgment of a court of competent jurisdiction
or other lawful constituted authority to reflect a lawful and enforceable
duration or scope, and such covenant automatically shall be deemed to be amended
and modified so as to comply with the judgment or order of such court or
authority. If any one or more of the provisions contained in this Section 6
shall for any reason be held invalid, illegal or unenforceable in any respect,
such invalidity, illegality or unenforceability shall not affect any other
provisions of this Agreement, and this Agreement shall be construed as if such
invalid, illegal or unenforceable provisions had never been contained herein.

D. Developer and Principal Owners understand and acknowledge that
Franchisor shall have the right, in its sole discretion, to reduce the scope of
any covenant set forth in Section 6.B in this Agreement, or any portion thereof,
without their consent, effective immediately upon notice to Developer; and
Developer and the Principal Owners agree that they shall comply forthwith with
any covenant as so modified, which shall be fully enforceable notwithstanding
the provisions of Section 14 hereof.

E. Developer and the Principal Owners expressly agree that the existence
of any claims they may have against Franchisor, whether or not arising from this
Agreement, shall not constitute a defense to the enforcement by Franchisor of
the covenants in this Section 6.

F. Developer and the Principal Owners understand and agree that the
restrictions contained in Section 6.B are reasonable and necessarily protect the
legitimate interests of Franchisor.

G. Nothing contained in this Agreement shall prevent Developer or
Principal Owners from owning less than a one percent (1%) interest in any
publicly traded equity or stock listed on a recognized national stock exchange
or NASDAQ.

H. The restrictions of this Section shall not be construed to prohibit
Developer or any Principal Owner of Developer from having a direct or indirect
interest in any Store, or any development agreement or franchise agreement for
the development or operation of any Stores, or any entity owning, controlling or
operating a Store, or from providing services to any Store.

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I. Developer and each of the Principal Owners acknowledge that any
failure to comply with the requirements of this Section 6 shall constitute a
material event of default under this Agreement; that such failure will cause
Franchisor irreparable injury and that money damages will not adequately
compensate Franchisor; and that Franchisor may seek specific performance of, or
an injunction against a violation of, the requirements of this Section 6 without
the necessity of posting bond. Franchisee and each of the Principal Owners
agree to pay all court costs and reasonable attorneys' fees incurred by
Franchisor in enforcing its rights under this Section 6.

7. PROPRIETARY MARKS

A. GOODWILL AND OWNERSHIP OF PROPRIETARY MARKS

Developer acknowledges that Developer's right to use the Proprietary
Marks is derived solely from this Agreement and is limited to the development
of Stores by Developer pursuant to and in compliance with this Agreement and all
applicable standards, specifications, and operating procedures prescribed by
Franchisor from time to time during the term hereof. Any unauthorized use of
the Proprietary Marks by Developer shall constitute a breach of this Agreement
and an infringement of the rights of Franchisor in and to the Proprietary Marks.
Developer acknowledges and agrees that all usage of the Proprietary Marks by
Developer and any goodwill established thereby shall inure to the exclusive
benefit of Franchisor and that this Agreement does not confer any goodwill or
other interests in the Proprietary Marks upon Developer (other than the right to
develop Stores in compliance with this Agreement). All provisions of this
Agreement applicable to the Proprietary Marks shall apply to any other
trademarks, service marks and commercial symbols hereafter authorized for use by
and licensed to Developer by Franchisor.

B. LIMITATIONS ON DEVELOPER'S USE OF PROPRIETARY MARKS

With respect to Franchisee's licensed use of the Proprietary Marks pursuant
to this Agreement, Developer agrees that:

(1) Developer shall use only the Proprietary Marks designated by
Franchisor and shall use them only in the manner authorized and permitted
by Franchisor. Developer shall use the Proprietary Marks only for the
operation of Stores or in advertising for Stores;

(2) Developer shall not use the name "C.D. Warehouse" or any other
Proprietary Mark in the corporate or other legal name of any corporation
or other entity formed by or affiliated with Developer, or with any prefix,
suffix, or other modifying words, terms, designs, or symbols, or in any
modified form;

(3) Developer shall not use the Proprietary Marks in connection with
the performance or sale of any unauthorized services or products or in any
manner not expressly authorized in writing by Franchisor;

(4) Developer shall not use the Proprietary Marks to incur any
obligation or indebtedness on behalf of Franchisor or any of its
Affiliates; and

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<PAGE>

(5) Developer shall comply with Franchisor's instructions in filing
and maintaining the requisite trade name or fictitious name registrations,
and shall execute any documents deemed necessary by Franchisor or its
counsel to obtain protection for the Proprietary Marks or to maintain their
continued validity and enforceability, and upon request of Franchisor,
Developer shall provide it with a copy of such document(s).

C. NOTIFICATION OF INFRINGEMENTS AND CLAIMS

Developer shall immediately notify Franchisor of any infringement of the
Proprietary Marks or challenge to its use of any of the Proprietary Marks or
claim by any person of any rights in any of the Proprietary Marks. Developer
and the Owners agree that Developer will not communicate with any person other
than Franchisor and Franchisor's counsel in connection with any such
infringement, challenge, or claim. Franchisor shall have sole discretion to
take such action as it deems appropriate and the right to exclusively control
and conduct any litigation, or Patent and Trademark Office or other proceeding
arising out of any infringement, challenge, or claim relating to any of the
Proprietary Marks. Developer agrees to execute any and all instruments and
documents, render such assistance, and perform such acts as may, in the opinion
of Franchisor's counsel, be necessary or advisable to protect and maintain
Franchisor's interests in any such litigation or Patent and Trademark Office or
other proceeding or to otherwise protect and maintain Franchisor's interest in
the Proprietary Marks.

D. DISCONTINUANCE OF USE OF PROPRIETARY MARKS

Franchisor reserves the right to substitute different Proprietary Marks for
use in identifying the System and the businesses operating thereunder if the
Proprietary Marks no longer can be used or such use is restricted, or if
Franchisor, in its sole business judgment, determines that substitution of
different marks will be beneficial to the System. Any costs incurred by
Developer to comply with any change or modification of the Proprietary Marks
shall be paid solely by Developer; provided that, for each Store requiring such
change or modification, Franchisor shall reimburse Developer for reasonable
expenses incurred which are directly related to such change or modification upon
receipt of documentation satisfactory to Franchisor, such reimbursement to be
limited to fifty percent (50%) of Developer's total expenses or $2,000.00,
whichever is less.

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8. OBLIGATIONS OF DEVELOPER

A. RECORDS AND REPORTS

(1) Developer agrees, at its expense, to maintain and preserve at its
principal office, full, complete and accurate records and reports pertaining to
the operation of Stores within the Development Areas and the performance by
Developer of its obligations under this Agreement, including but not limited to
records and information on the following: site reports, leases for Stores,
supervisory reports on the operation of Stores, records reflecting the financial
condition of Developer, and such other records and reports as may be prescribed
by Franchisor from time to time.

(2) Developer shall, upon the request of Franchisor, deliver to Franchisor
in the form from time to time prescribed by Franchisor: (1) within ninety (90)
days after the end of Developer's fiscal year, a fiscal year end balance sheet
for Developer and an income statement for such fiscal year prepared in
accordance with generally accepted accounting principals, consistently applied;
and (2) upon request by Franchisor, such other data, reports, information and
supporting records as Franchisor may from time to time prescribe. Developer
shall immediately report to Franchisor any events or developments which may have
a significant or material adverse impact on the operation of any Stores within
the Development Areas, the performance of Developer under this Agreement, or the
goodwill of any of the Stores. Each such report and financial statement
submitted by Developer shall be verified as correct and signed by Developer in
the manner prescribed by Franchisor.

B. OPERATIONS MANUALS

Franchisor will loan to Developer for Developer's sole use during the term
of this Agreement one (1) copy of the operating manuals, which may consist of
one or more manuals or handbooks, including, but not limited to an operations
manual, computer manual, store specifications manual, site selection manual,
advertising manual, and other written manuals and guides as may be added or
supplemented by Franchisor from time to time (collectively, the "Manuals"). The
Manuals shall contain specifications, standards, policies and procedures
prescribed from time to time by Franchisor for Store developers and franchise
owners and information relative to other obligations of Developer hereunder and
the operation of a Store. The Manuals may be modified from time to time to
reflect changes in the System or specifications, standards, policies and
procedures relating thereto. Developer shall keep its copy of the Manuals
current by immediately inserting all modified pages furnished by Franchisor. In
the event of a dispute about the contents of the Manuals, the master copies
maintained by Franchisor at its principal office shall be controlling.
Developer may not at any time copy any part of the Manuals.

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9. TRANSFER OF INTEREST

A. TRANSFER BY FRANCHISOR

Franchisor shall have the right to transfer or assign this Agreement and
all or any part of its rights or obligations hereunder to any person or legal
entity and all rights hereunder shall inure to the benefit of Franchisor and
its successors and assigns.

B. TRANSFER BY FRANCHISEE

(1) Developer acknowledges and agrees that the rights and duties set
forth in this Agreement are personal to Developer and its Owners, and that
Franchisor has granted the development rights hereunder in reliance on the
business skill, financial capacity and personal character of Developer and
its Owners. Accordingly neither this Agreement (or any interest herein), any
part or all of the ownership of Developer, Stores developed pursuant to this
Agreement (or any interest therein), nor any Franchise Agreement executed
pursuant to this Agreement (or any interest therein), may be transferred
without the prior written approval of Franchisor, and any such transfer
without such approval shall constitute a breach hereof and a material event
of default under Section 10.B(8) of this Agreement, and shall convey no
rights to or interests in this Agreement, Developer, such Stores, or such
Franchise Agreement.

(2) As used in this Agreement, the term "transfer" shall mean and
include the voluntary, involuntary, direct or indirect assignment, sale, gift
or other transfer by Developer or a Principal Owner of Developer of any
interest in: (1) this Agreement, (2) the ownership of Developer, (3) Stores
developed pursuant to this Agreement, (4) the assets of any Store developed
pursuant to this Agreement (other than in the ordinary course of business),
or (5) any Franchise Agreement entered into pursuant to this Agreement. An
assignment, sale, gift or other transfer shall include the following events:
(1) the transfer of ownership of capital stock or partnership interests, (2)
merger or consolidation, or issuance of additional securities representing an
ownership interest in Developer, (3) any sale of voting stock of Developer or
any security convertible to voting stock of Developer, (4) transfer of
interest in this Agreement, Developer, any franchise granted pursuant hereto,
or a Store or any of its assets in a divorce, insolvency, corporate or
partnership dissolution proceeding, or otherwise by operation of law, or (5)
transfer of an interest in this Agreement, Developer, any franchise granted
pursuant hereto, or the revenue, profits, rights or assets of a Store, in the
event of the death of Developer or a Principal Owner by will, declaration of
or transfer in trust, or under the laws of intestate succession.

C. CONDITIONS FOR APPROVAL OF TRANSFER

If Developer and its Owners are in full compliance with this Agreement,
Franchisor shall not unreasonably withhold its approval of a transfer that
meets all of the applicable requirements of this Section 9.C.

If the transfer is of this Agreement, or of a Principal Owner's
interest, or a controlling interest in Developer, or is one of a series of
transfers which in the aggregate constitute the transfer

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of a controlling interest in Developer, Franchisor may in its sole discretion
require, as conditions of its approval, any or all of the following
conditions to be met prior to, or concurrently with, the effective date of
the transfer:

(1) Developer must pay all amounts owed to Franchisor and its subsidiaries
and affiliates which are then due and unpaid;

(2) Developer or its Principal Owners shall not be in default under any
provision of this Agreement, any amendment or supplement hereto or any other
agreement between Developer or any of the Principal Owners and Franchisor or
any of its Affiliates;

(3) Developer, its Owners or its transferring Owner(s) must execute a
general release, in a form prescribed by Franchisor, of any and all claims,
of whatever kind or nature, against Franchisor, its Affiliates, successors
and assigns and their respective officers, directors, shareholders, partners,
employees, agents and representatives, including, without limitation, claims
arising under this Agreement or any other agreement between Developer and
Franchisor or its Affiliates and federal, state and local laws, regulations,
rules or orders;

(4) The transferee and its principals shall have demonstrated to
Franchisor's satisfaction that transferee meets the then current criteria
considered by Franchisor when reviewing a prospective developer of Stores,
including Franchisor's educational, managerial and business standards,
transferee's character, business reputation, credit rating and financial
capability, and transferee's aptitude and ability to conduct the business
contemplated hereunder (as may be evidenced by prior related business
experience or otherwise);

(5) The transferee shall have entered into a written agreement, in a
form prescribed by Franchisor, assuming full, unconditional, joint and
several liability for, and agreeing to perform from the date of the transfer,
all obligations, covenants and agreements contained in this Agreement;

(6) All Franchise Agreements between Franchisor and Developer or any
Authorized Entity must be transferred, in form satisfactory to Franchisor, to
the transferee of this Agreement (or the transferee of a controlling interest
in Developer);

(7) The transferee (or, if transferee is a corporation or a
partnership, one of transferee's shareholders, partners or investors, as
designated by Franchisor) and transferee's personnel must agree to complete
Franchisor's training program to Franchisor's satisfaction;

(8) If transferee is a corporation or a partnership, transferee shall
make and will be bound by any or all of the representations, warranties, and
covenants set forth in Section 13 as Franchisor requests. Transferee shall
provide to Franchisor evidence satisfactory to Franchisor that the terms of
Section 13 have been satisfied and are true and correct on the date of
transfer;

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(9) Transferee, at its expense, shall renovate and modernize the
facilities and equipment used in the Stores to Franchisor's then-current
standards for C.D. Warehouse Stores under the System, as Franchisor may
require; and

(10) Except in the case of a transfer to an entity formed solely for the
convenience of ownership, Developer or its transferring Principal Owners or
the transferee shall have paid a transfer fee of Two Thousand Dollars
($2,000.00) or such greater amount as is reasonably necessary to reimburse
Franchisor for its expenses in connection with the approval of the transfer
of this Agreement and any Franchise Agreements executed hereunder.

Developer shall not grant a security interest in this Agreement or the
rights hereunder without Franchisor's prior written consent, which consent
shall not be unreasonably withheld. In connection therewith, the secured
party shall be required by Franchisor to agree that in the event of any
default by Developer under any documents related to the security interest,
Franchisor shall have the right and option (but not the obligation) to be
substituted as obligor to the secured party and to cure any default of
Developer.

Developer and its Principal Owners acknowledge and agree that each
condition which must be met by the transferee is reasonable and necessary to
assure such transferee's full performance of the obligations hereunder.

D. TRANSFER FOR CONVENIENCE OF OWNERSHIP

In the event that the proposed transfer is to a business entity formed
by Developer solely for the convenience of ownership, Franchisor's consent to
such transfer shall be conditioned upon the requirements set forth in this
Section 9 except for the requirements of Sections 9.C(3), (4), (6), and (7);
and provided that Developer shall pay a transfer fee of Five Hundred Dollars
($500.00), or such greater amount as is reasonably necessary to reimburse
Franchisor for its expenses in connection with the approval of the transfer
and shall deliver to Franchisor the documents described in Section 13.B with
respect to such business entity. Developer shall be the owner of all the
voting stock or equity interest of the entity and if Developer has more than
one Owner, each Owner shall have the same proportionate ownership interest in
the entity as he had in Developer prior to the transfer.

E. FRANCHISOR'S RIGHT OF FIRST REFUSAL

(1) Any Principal Owner or any Owner holding a twenty-five percent
(25%) or more interest in Developer, or this Agreement, or a controlling
interest if less than twenty-five percent (25%), who desires to accept any
BONA FIDE offer from a third party to purchase such interest shall promptly
notify Franchisor in writing of each such offer and shall provide such
information and documentation relating to the offer as Franchisor may require
including, without limitation, the name and address of the prospective
purchaser, the terms of the offer and a copy of any letter of intent or
proposed purchase contract. Franchisor shall have the right and option,
exercisable for thirty (30) days after receipt of such written notification,
to send written notice to the seller that Franchisor intends to purchase the
seller's interest on the same terms and conditions offered by the

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third party. In the event Franchisor elects to purchase the seller's
interest, closing on such purchase must occur within sixty (60) days from the
date of notice to the seller of the election to purchase by Franchisor or
such later date as may be provided in the third party offer. Any material
change in the terms of any offer prior to closing shall constitute a new
offer subject to the same rights of first refusal by Franchisor as in the
case of an initial offer. Failure of Franchisor to exercise the option
afforded by this Section 9.E shall not constitute a waiver of any other
provision of this Agreement, including all of the requirements of this
Section 9, with respect to a proposed transfer.

(2) In the event an offer from a third party provides for payment of
consideration other than cash or involves certain intangible benefits,
Franchisor may elect to purchase the interest proposed to be sold for the
reasonable equivalent in cash. If the parties cannot agree within a
reasonable time on the reasonable equivalent in cash of the non-cash part of
the offer, an independent appraiser, qualified by training and experience to
appraise such non-cash consideration, shall be designated by Franchisor and
Developer to determine such amount, and his determination shall be binding on
the parties. If the parties cannot agree on an independent appraiser in a
reasonable time, an independent appraiser shall be designated by each party
and the two (2) independent appraisers so designated shall select a third
independent appraiser. the determination of a reasonable equivalent in cash
by a majority of the appraisers so chosen shall be binding. Franchisor and
Franchisee shall each bear an equal share of the costs of the appraisal.

F. TRANSFER UPON DEATH OR PERMANENT DISABILITY

(1) Upon the death of Developer (if Developer is an individual) or, if
Developer is a corporation or partnership, upon the death of a Principal Owner
of Developer (the "Deceased"), the executor, administrator or other personal
representative of the Deceased will have six (6) months from the date of death
to transfer such interest to a third party approved by Franchisor. If Developer
is a corporation or other entity and the Deceased's interest will be transferred
to an existing Principal Owner of Developer, the transfer is permitted and
requires no approval by Franchisor. If no personal representative is designated
or appointed or no probate proceedings are instituted with respect to the estate
of the Deceased, then the distributee of such interest must be approved by
Franchisor. If the distributee is not approved by Franchisor, then the
distributee must transfer such interest to a third party approved by Franchisor
within six (6) months after the death of the Deceased.

(2) Upon the permanent disability of Developer (if Developer is an
individual) or, if Developer is a corporation or partnership, upon the permanent
disability of Principal Owner, Franchisor may, in its sole discretion, require
such interest to be transferred to a third party approved by Franchisor within
six (6) months after notice to Developer. If Developer is a corporation or
other entity and the Deceased's interest will be transferred to an existing
Principal Owner of Developer, the transfer is permitted and requires no approval
by Franchisor. "Permanent disability" means any physical, emotional, or mental
injury, illness, or incapacity which would prevent a person from performing the
obligations set forth in the Agreements for at least 90 consecutive days and
from which condition recovery within ninety days from the date of determination
of disability is unlikely. Permanent disability will be determined upon
examination of the person by a licensed practicing physician selected by
Franchisor; or if the person refuses to

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submit to an examination, then such person will be automatically deemed
permanently disabled as of the date of such refusal. The cost of any
examination required by the Agreements will be paid by Franchisor.

(3) Upon the death or claim of permanent disability of any person
described in Sections 9.F(1) and (2), Developer must promptly notify
Franchisor of such death or claim of permanent disability. Any transfer upon
death or permanent disability shall be subject to the same terms and
conditions as described in Section 9.C for any INTER VIVOS transfer. If an
interest is not transferred upon death or permanent disability as required in
this Section 9.F, and in accordance with the terms and conditions of Section
9, such failure shall constitute a material event of default under Section
10.B(8).

G. NON-WAIVER OF CLAIMS

Franchisor's consent to a transfer of this Agreement, or any Franchise
Agreement entered into pursuant to this Agreement, or any interest in
Developer subject to the conditions of this Section shall not constitute a
waiver of any claims it may have against the transferring party, nor shall it
be deemed a waiver of Franchisor's right to demand exact compliance with any
of the terms of this Agreement by the transferee.

H. OFFERINGS BY DEVELOPER

If securities or partnership interests in Developer are offered to the
public by Developer after the date hereof, Franchisor shall require
Developer's offering materials to contain a written statement prescribed by
Franchisor stating that Franchisor has not approved or reviewed the offering
materials. Developer shall give Franchisor written notice at least thirty
(30) days prior to the date of commencement of any offering or other
transaction covered by this Section 9.H.

10. TERMINATION OF AGREEMENT

A. BY DEVELOPER

If Developer is in substantial compliance with this Agreement and
Franchisor materially breaches this Agreement, Developer may terminate this
Agreement effective (10) days after written notice of termination if
Developer gives written notice of such breach to Franchisor and Franchisor
does not: (a) correct such breach within thirty (30) days after delivery of
such notice; or (b) if such breach cannot reasonably be cured within thirty
(30) days after deliver of such notice, undertake within ten (10) days after
delivery of such notice, and continue until completion, efforts to cure such
breach. Any termination by Developer other than as provided in this Section
10.A shall be deemed a termination by Developer without cause.

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B. BY FRANCHISOR

Developer shall be in default and Franchisor may, in its sole
discretion, immediately terminate this Agreement and all rights granted
hereunder, without affording Developer any opportunity to cure the default
(except as specifically noted below or otherwise required by law) effective
upon notice to Developer, upon the occurrence of any of the following events,
each of which shall be deemed to be a material event of default:

(1) If Developer shall become insolvent or shall have made a general
assignment for the benefit of creditors; or a petition under any section or
chapter of federal bankruptcy laws or under any similar law or statute of
the United States or any state thereof shall have been filed by Developer
or such a petition shall have been filed against and not opposed by
Developer; or Developer admits in writing its inability to pay its debts
when due; or Developer shall have been adjudicated bankrupt or insolvent in
proceedings filed against Developer under any section or chapter of federal
bankruptcy law or any similar law or statute of the United States or any
state thereof; or a bill in equity or other proceeding for the appointment
of a receiver of Developer or other custodian for Developer's business or
assets shall have been filed and not opposed by Developer; or a receiver or
other custodian (permanent or temporary) of Developer's assets or property,
or any part thereof, shall have been appointed by any court of competent
jurisdiction; or proceedings for a composition with creditors under any
state or federal law shall have been instituted by or against Developer;
or a final judgment against Developer shall have remained unsatisfied or
of record for thirty (30) days or longer (unless supersedeas bond shall
have been filed); or if Developer is dissolved; or execution shall have
been levied against Developer, Developer's Store or property; or suit to
foreclose any lien or mortgage against the premises or equipment shall have
been instituted against the premises or equipment of any business operated
hereunder and not dismissed within thirty (30) days; or the real or
personal property of any business operated hereunder shall be sold after
levy thereupon by any sheriff, marshall or constable;

(2) If Developer fails to acquire a site for a Store within forty-
five (45) days following the date of this Agreement; provided, however,
under such circumstances, Franchisor shall, subject to Developer's
compliance with the post-termination obligations under Section 11, refund
the initial franchise fee actually paid by Developer pursuant to Section 4,
without interest, less Five Hundred Dollars ($500.00) of such franchise fee
plus any expenses incurred by Franchisor in the process of attempting to
open the new franchise. Such payment shall be made within thirty (30) days
after the effective date of the termination. Franchisor shall not be
obligated to return any fees paid by Developer in the event this Agreement
is terminated by Franchisor pursuant to any other term of this Agreement or
by Developer for any reason other than the reasons expressly set forth
above;

(3) If Developer fails to satisfy the development obligations set
forth in Section 2.D hereof with respect to any Development Area; upon such
event of default Franchisor shall be free to (directly or through its
Affiliates) operate or grant franchises for the operation of Stores
anywhere within such Development Area except within a two (2) mile

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radius around any existing Stores operated by Developer or an Authorized
Entity pursuant to Franchise Agreements executed pursuant to this
Agreement;

(4) If Developer or an Authorized Entity operates any Store or sells
any products or services authorized by Franchisor for sale at a Store at a
location which has not been approved by Franchisor;

(5) Developer knowingly shall have made a false representation to
Franchisor in any of the reports or statements which Developer may be
required to furnish to Franchisor pursuant to this Agreement or pursuant to
the Manuals;

(6) Developer or any Principal Owner shall have been convicted of or
shall have entered a plea of NOLO CONTENDERE to a felony, a crime
involving moral turpitude, or any other crime or offense that Franchisor
shall believe reasonably likely to have an adverse effect on the System,
the Proprietary Marks, the goodwill associated therewith or Franchisor's
interest therein;

(7) Developer breaches or is in default under any of the
representations, warranties and covenants contained in Section 13;

(8) Developer (or any Principal Owner of Developer, if Developer is a
corporation or partnership) or an Authorized Entity makes a transfer or
attempts to transfer of any rights or obligations under this Agreement, any
ownership interest in Developer, any Stores (or interests therein), or any
Franchise Agreement (or interest therein) to any third party without
Franchisor's prior written consent, or without offering Franchisor a right
of first refusal with respect to such transfer, contrary to the terms of
Section 9 of this Agreement;

(9) Developer fails to comply with the covenants in Section 5 or 6
hereof;

(10) An approved transfer upon death or permanent disability is not
effected within the time period prescribed by Section 9.F hereof;

(11) Developer misuses or makes any unauthorized use of the
Proprietary Marks or otherwise materially impairs the goodwill associated
therewith or with the System, or Franchisor's rights therein and does not
cure such default within twenty-four (24) hours following notice thereof
from Franchisor;

(12) Developer fails, refuses, or neglects to promptly pay any
monetary obligation owing to Franchisor or its subsidiaries or affiliates
when due, or to submit the financial or other information required by
Franchisor under this Agreement, and does not cure such default within ten
(10) days following notice thereof from Franchisor;

(13) Franchisor has delivered a notice of termination of a Franchise
Agreement executed pursuant to this Agreement in accordance with its terms
and conditions; or

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(14) Developer fails on three (3) or more separate occasions within
any period of twenty four (24) consecutive months to comply with any of the
requirements imposed by this Agreement whether or not cured after notice by
Franchisor.

11. OBLIGATIONS UPON TERMINATION AND EXPIRATION

Upon termination or expiration of this Agreement, all rights granted
hereunder to Developer shall forthwith terminate, and each of the following
provisions apply:

A. Developer shall immediately and permanently cease to use in any
manner whatsoever any equipment, methods, procedures and techniques
associated with the System, the name C.D. Warehouse and all Proprietary Marks
and distinctive trade dress and devices associated with the System, and
Developer shall not thereafter, directly or indirectly, represent to the
public or hold itself out as a present or former developer of Franchisor.
Developer shall take such action as may be necessary to cancel any assumed
name or equivalent registration which contains the mark C.D. Warehouse or any
other trademark or service mark of Franchisor, and Developer shall furnish
Franchisor with evidence satisfactory to Franchisor of compliance with this
obligation within five (5) days after termination or expiration of this
Agreement. Notwithstanding the foregoing, Developer shall continue to have
the right to use the Proprietary Marks pursuant to any Franchise Agreements
it has entered into pursuant to this Agreement.

B. Developer shall pay all sums owing to Franchisor and its
subsidiaries and affiliates within fifteen (15) days after the effective date
of termination or expiration of this Agreement, or such later date that the
amounts due to Franchisor are determined. Such sums shall include all
damages, costs and expenses, including reasonable attorneys' fees, incurred
by Franchisor as a result of the termination or expiration of this Agreement
(including damages, expenses and attorneys' fees incurred in obtaining
injunctive or other relief for the enforcement of any provision of this
Section 11).

C. Developer shall continue to comply with the restrictions on the use
of Confidential Information contained in Section 5 and shall (1) immediately
cease to use any Confidential Information of Franchisor disclosed to or
otherwise learned or acquired by Developer in any business or otherwise; and
(2) immediately deliver to Franchisor all manuals, including the Manuals,
records, files, instructions, correspondence, and any and all other materials
relating to the System and the operation of the business developed hereunder
in Developer's possession, and all copies thereof (all of which are
acknowledged to be Franchisor's property), and Developer shall retain no copy
or record of any of the foregoing, except Developer's copy of this Agreement,
any Franchise Agreements executed pursuant to this Agreement, and any
correspondence between the parties, and any other documents which Developer
reasonably needs for compliance with any provision of law. Notwithstanding
the foregoing, Developer shall continue to have the right to use the
Confidential Information and the Manuals and other aforementioned documents
in connection with any Franchise Agreement it has entered into pursuant to
this Agreement.

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D. Developer and each of the Principal Owners agree, in the event any
such party continues to operate or subsequently begins to operate any other
business, not to use any reproduction, counterfeit, copy, or colorable imitation
of the Proprietary Marks, either in connection with such other business or the
promotion thereof, which is likely to cause confusion, mistake, or deception, or
which is likely to dilute Franchisor's rights in and to the Proprietary Marks,
and further agree not to utilize any designation of origin or description or
representation which falsely suggests or represents an association or connection
with Franchisor constituting unfair competition.

E. Upon termination of this Agreement by Franchisor in accordance with
its terms and conditions or by Developer without good cause, or upon expiration
of this Agreement, Developer and the Principal Owners shall comply with the
restrictions and the covenants contained in Section 6 of this Agreement.

F. All obligations of Franchisor and Developer under this Agreement which
expressly or by their nature survive the expiration or termination of this
Agreement shall continue in full force and effect subsequent to and
notwithstanding the expiration or termination of this Agreement and until they
are satisfied in full or by their nature expire.

12. INDEPENDENT CONTRACTOR AND INDEMNIFICATION.

A. It is understood and agreed by the parties hereto that this Agreement
does not create a fiduciary relationship between them, that Developer shall be
an independent contractor, and that nothing in this Agreement is intended to
constitute either party an agent, legal representative, subsidiary, affiliate,
joint venture, partner, employee, employer, joint employer or servant of the
other for any purpose whatsoever.

B. During the term of this Agreement, Developer shall hold itself out
to the public as an independent contractor operating the business pursuant to
a franchise from Franchisor. Developer agrees to take such action as shall
be necessary to that end, including, without limitation, exhibiting a notice
of that fact in a conspicuous place in any franchised premises, the content
and form of which Franchisor reserves the right to specify in the Manuals or
otherwise in writing.

C. Developer and the Principal Owners understand and agree that nothing
in this Agreement authorizes Developer or the Principal Owners to make any
contract, agreement, warranty, or representation on Franchisor's behalf, or to
incur any debt or other obligation in Franchisor's name, and that Franchisor
shall in no event assume liability for, or be deemed liable hereunder as a
result of, any such action, nor shall Franchisor be deemed liable by reason of
any act or omission of Developer or Principal Owners in the conduct of business
at any Store or for any claim or judgment arising therefrom.

D. (1) Developer and each of the Principal Owners shall, at all times,
indemnify and hold harmless to the fullest extent permitted by law Franchisor,
its subsidiaries, affiliates, successors, and assigns and their respective
directors, officers, shareholders, partners, servants, employees, agents, and
representatives from all "losses and expenses" (as defined in Section

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12.D(2)) incurred in connection with any action, suit, proceeding, claim,
demand, investigation or inquiry (formal or informal), or any settlement
thereof (whether or not a formal proceeding or action has been instituted)
which arises out of or is based upon any of the following:

(a) The infringement, alleged infringement, or any other violation or
alleged violation by Developer or any of Principal Owners of any patent,
mark or copyright or other proprietary right owned or controlled by third
parties (except as such may occur with respect to any rights in the
Proprietary Marks or copyrights granted hereunder);

(b) The violation, breach or asserted violation or breach by
Developer or any of Principal Owners of any contract, federal, state or
local law regulation, ruling, standard or, directive or any industry
standard;

(c) Libel, slander or any other form of defamation of Franchisor or
the System, by Developer or by any of Principal Owners;

(d) The violation or breach by Developer or by any of Principal
Owners of any warranty, representation, agreement or obligation in this
Agreement or other agreement between Developer and Franchisor or its
subsidiaries or affiliates; and

(e) Acts, errors or omissions of Developer or any of Principal
Owners, or any of Developer's subsidiaries or affiliates or the officers,
directors, shareholders, partners, agents, servants, employees, or
representatives of Developer, its subsidiaries or affiliates in connection
with the performance of the operation of the Store.

(2) All losses and expenses incurred under this Section 12.D shall be
chargeable to and paid by Developer or any of the Principal Owners pursuant to
their obligations of indemnity under this Section 12.D, regardless of any
actions, activity or defense undertaken by Franchisor or the subsequent success
or failure of such actions, activity or defense. As used in this Section 12.D,
the phrase "losses and expenses" shall include, without limitation, all losses,
compensatory, exemplary or punitive damages, fines, charges, costs, expenses,
lost profits, attorney's fees, court costs, settlement amounts, judgment,
compensation for damages to Franchisor's reputation and goodwill, costs of or
resulting from delays, financing, costs of advertising material and media
time/space, and costs of changing, substituting or replacing the same, and any
and all expenses of recall, refunds, compensation, public notices and other such
amounts incurred in connection with the matters described.

(3) Developer agrees to give Franchisor notice of any such action, suit,
proceeding, claim, demand, inquiry or investigation. At the expense and risk of
Developer, Franchisor may elect to assume (but under no circumstance is
obligated to undertake), the defense and/or settlement of any such action, suit,
proceeding, claim, demand, inquiry or investigation. Such an undertaking by
Franchisor shall, in no manner or form, diminish the obligation of Developer and
the Principal Owners to indemnify Franchisor and to hold it harmless.

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(4) In order to protect persons or property, or its reputation or
goodwill, or the reputation or goodwill of others, Franchisor may, at any time
and without notice, as it, in its judgment deems appropriate, consent or agree
to settlements or take such other remedial or corrective action as it deems
expedient with respect to the action, suit, proceeding, claim, demand, inquiry
or investigation if, in Franchisor's sole judgment, there are reasonable grounds
to believe that:

(a) any of the acts or circumstances enumerated in Section 12.D(1)
above have occurred; or

(b) any act, error, or omission of Developer or any Principal Owner
may result directly or indirectly in damage, injury or harm to any person
or any property.

(5) The persons indemnified pursuant to Section 12.D do not assume any
liability whatsoever for acts, errors, or omissions of those with whom
Developer, any Principal or Developer's subsidiaries and affiliates may
contract, regardless of the purpose. Developer and each of the Owners shall
hold harmless and indemnify the persons indemnified pursuant to this Section
12.D for all losses and expenses which may arise out of any acts, errors or
omissions of Developer, any Principal Owner, any of Developer's subsidiaries
or affiliates or the officers, directors, shareholders, partners, agents,
servants, employees or representatives of Developer, its subsidiaries or
affiliates and any such third parties without limit and without regard to the
cause or causes thereof or the negligence of Franchisor or any other party or
parties arising in connection therewith, and whether such negligence be sole,
joint or concurrent, active or passive.

(6) Under no circumstances shall the persons indemnified pursuant to
this Section 12.D be required or obligated to seek recovery from third
parties or otherwise mitigate their losses in order to maintain a claim
against Developer or any Principal Owner. Developer and each Principal Owner
agree that the failure to pursue such recovery or mitigate loss will in no
way reduce the amounts recoverable from Developer or any Principal Owner by
the persons indemnified pursuant to this Section 12.D.

13. REPRESENTATIONS AND WARRANTIES OF CORPORATE OR PARTNERSHIP DEVELOPERS

A. In the event Developer is a corporation or a partnership, Developer
represents, warrants, and covenants that:

(1) Developer is duly organized and validly existing under the state
law of its formation;

(2) Developer is duly qualified and is authorized to do business in
each jurisdiction in which its business activities or the nature of the
properties owned by it require such qualification;

23
<PAGE>

(3) The execution of this Agreement and the transactions contemplated
hereby are within Developer's corporate power if Developer is a
corporation, or if Developer is a partnership, are authorized under
Developer's written partnership agreement; and

(4) The ownership interests in Developer are accurately and
completely described in Exhibit C.

B. If Developer is a corporation, copies of Developer's articles of
incorporation, bylaws, other governing documents, any amendments to the
foregoing, and resolutions of the Board of Directors authorizing entry into
and performance of this Agreement shall be furnished to Franchisor prior to
the execution of this Agreement; or, if Developer is a partnership, copies of
the written partnership agreement, other governing documents, and any
amendments to the foregoing, shall be furnished upon request to Franchisor
prior to the execution of this Agreement, including evidence of consent or
approval of the entry into and performance of this Agreement by the requisite
number or percentage of partners, if such approval or consent is required by
Developer's written partnership agreement.

C. If Developer is a corporation, Developer shall maintain at all
times a current list of all owners of record and all beneficial owners of any
class of voting securities in Developer or, if Developer is a partnership,
all current owners of an interest in the partnership. In the event there is
a change in the information contained in Exhibit C, Developer agrees to
provide such information to Franchisor within five (5) days subsequent to any
such change and to execute any documents deemed necessary by Franchisor to
amend Exhibit C in order to reflect such changes.

D. If Developer is a corporation, Developer shall maintain
stop-transfer instructions against the transfer on its records of any of its
equity securities and each stock certificate of the corporation shall have
conspicuously endorsed upon it a statement in a form satisfactory to
Franchisor that it is held subject to and that the further assignment or
transfer thereof is subject to all restrictions imposed upon assignments by
this Agreement; provided, however, that the requirements of this Section 13.D
shall not apply to the transfer of equity securities of a publicly-held
corporation. If Developer is a partnership, its written partnership
agreement shall provide that ownership of an interest in the partnership is
held subject to and that further assignment or transfer is subject to all
restrictions imposed upon assignments by this Agreement.

E. Developer acknowledges and agrees that the representations,
warranties, and covenants set forth above in this Sections 13 are continuing
obligations of Developer and that any failure to comply with such
representations, warranties, and covenants shall constitute a material event
of default under Section 10.B.

F. The Principal Owners and such other holders of equity interests in
Developer, as determined by Franchisor, shall personally, jointly and
severally, guarantee Developer's performance under this Agreement by
executing the Guaranty attached hereto, and shall bind themselves to the
terms of this Agreement. Franchisor may, in its sole discretion, exempt
certain individuals and/or classes of individuals from providing such a
guarantee.

24
<PAGE>

14. ENTIRE AGREEMENT, MODIFICATION

This Agreement, the documents referred to herein and the Exhibits
hereto, set forth all of the promises, covenants, agreements and conditions
between the parties hereto and supersedes all prior and contemporaneous
agreements and understandings, express or implied, oral or written. Except
as otherwise provided herein, this Agreement may be amended, modified or
canceled and any of the terms, covenants or conditions hereof may be waived
only in writing and signed by both Franchisor and Developer.

15. WAIVER OF OBLIGATIONS

A. Franchisor and Developer may by written instrument unilaterally
waive or reduce any obligation or restriction upon the other under this
Agreement, effective upon delivery of written notice thereof to the other or
such other effective date stated in the notice of the waiver. Whenever this
Agreement requires the prior approval or consent of Franchisor, Developer
shall make a timely written request to Franchisor therefor, and such approval
or consent granted shall be in writing. Franchisor makes no warranties or
guarantees upon which Developer may rely and assumes no liability or
obligation to Developer or any third party to which it would not otherwise be
subject, by providing any waiver, approval, advice, consent, or suggestion to
Developer in connection with this Agreement, or by reason of any neglect,
delay, or denial of any request therefor.

B. Franchisor shall not be deemed to have waived or impaired any
right, power or option reserved by this Agreement (including, without
limitation, the right to demand exact compliance with every term, condition
and covenant herein, or to declare any breach thereof to be a default and to
terminate this Agreement prior to the expiration of its term), by virtue of
any (i) custom or practice of the parties at variance with the terms hereof;
(ii) any failure, refusal, or neglect of Franchisor to exercise any right
under this Agreement or to insist upon exact compliance by Developer with its
obligations hereunder, including, without limitation, any mandatory
specification, standard or operating procedure; (iii) any waiver,
forbearance, delay, failure, or omission by Franchisor to exercise any right,
power, or option, whether of the same, similar or different in nature, with
respect to any Store under any other development or franchise agreement
therefor; (iv) any grant of a Franchise Agreement to Developer or an
Authorized Entity; or (v) the acceptance by Franchisor of any payment from
Developer after any breach of this Agreement.

16. FORCE MAJEURE

A. As used in this Agreement, the term "Force Majeure" shall mean any
act of God, strike, lock-out or other industrial disturbance, war (declared
or undeclared), riot, epidemic, fire or other catastrophe, act of any
government and any other similar cause not within the control of the party
affected thereby.

B. If the performance of any obligation by any party under this
Agreement is prevented, hindered or delayed by reason of Force Majeure, which
cannot be overcome by use of normal commercial measures, the parties shall be
relieved of their respective obligations to the extent the parties are
respectively necessarily prevented, hindered or delayed in such performance

25
<PAGE>

during the period of such Force Majeure; provided, however, that a party
shall not be released of its obligation to pay amounts then owing hereunder.
The party whose performance is affected by an event of Force Majeure shall
give prompt notice of such Force Majeure event to the other party by
telephone or telegram (in each case to be confirmed in writing), setting
forth the nature thereof and an estimate as to its duration, and shall be
liable for failure to give such timely notice only to the extent of damage
actually caused.

17. RIGHTS AND REMEDIES ARE CUMULATIVE

All rights and remedies of the parties hereto shall be cumulative and
not alternative, in addition to and not exclusive of any other rights or
remedies which are provided for herein or which may be available at law or in
equity in case of any actual or threatened breach, failure or default of any
term, provision or condition of this Agreement or any other agreement between
Developer and Franchisor or its subsidiaries and affiliates. The rights and
remedies of the parties hereto shall be continuing and may be exercised at
any time or from time to time. The expiration, earlier termination, or
exercise of Franchisor's rights pursuant to Section 10 of this Agreement
shall not discharge or release Developer or any Principal Owner from any
liability or obligation then accrued, or any liability or obligation
continuing beyond, or arising out of, the expiration, the earlier
termination, or the exercise of such rights under this Agreement.

18. INJUNCTIVE RELIEF

Nothing in this Agreement shall bar Franchisor's right to seek specific
performance of the provisions of this Agreement and injunctive relief against
threatened conduct that will cause it loss or damages under customary equity
rules, including applicable rules for obtaining restraining orders and
preliminary injunctions. Developer agrees that Franchisor may seek such
injunctive relief in addition to such further or other relief as may be
available at equity or law. Developer agrees that Franchisor will not be
required to post a bond to obtain any injunctive relief and that Developer's
only remedy if an injunction is entered against Developer will be the
dissolution of that injunction, if warranted, upon due hearing (all claims
for damages by reason of the wrongful issuance of such injunction being
expressly waived hereby).

26
<PAGE>

19. ARBITRATION

A. Except as provided in this agreement, Franchisor and Developer
agree that any claim, controversy or dispute arising under, or in connection
with, this Agreement including, without limitation, those occurring
subsequent to the termination or expiration of this Agreement, which cannot
be amicably settled shall, except for those claims, controversies and
disputes which as a matter of law or public policy cannot be submitted to
arbitration, be referred to arbitration in accordance with the rules of the
American Arbitration Association, as amended. If such rules are in any way
contrary to or in conflict with this Agreement, the terms of this Agreement
shall control. Only claims, controversies or disputes involving Developer
and no claims for or on behalf of any other developer or franchisee may be
brought by Developer hereunder. The law of the state of Texas (except for
Texas choice of law and conflict of law rules) shall govern the construction
and interpretation of this Agreement in arbitration.

B. Franchisor and Developer shall each select one independent
arbitrator. If the party upon whom the demand for arbitration is served fails
to select an arbitrator within fifteen (15) days after the receipt of the
demand for arbitration, then the arbitrator so designated by the party
requesting arbitration shall act as the sole arbitrator to resolve the
controversy at hand. The two arbitrators designated by the parties shall
select a third arbitrator. If the two arbitrators designated by the parties
fail to select a third arbitrator within fifteen (15) days, the third
arbitrator shall be selected by the American Arbitration Association or any
successor thereto, upon application by either party. Arbitration shall take
place at Franchisor's principal place of business. The award of the
arbitrators shall be final and judgment upon the award rendered in
arbitration may be entered in any court having jurisdiction thereof. The
costs and expenses of arbitration, including compensation and expenses of the
arbitrators, shall be borne by the parties as the arbitrators determine.

C. In proceeding with arbitration and in making determinations
hereunder, the arbitrators shall not extend, modify or suspend any terms of
this Agreement or the reasonable standards of business performance and
operation established by Franchisor in good faith. Notice of or request to
or demand for arbitration shall not stay, postpone or rescind the
effectiveness of any termination of this Agreement.

20. PAYMENT OF AMOUNTS OWED TO FRANCHISOR, COSTS AND ATTORNEYS FEES

Developer shall, during the term of this Agreement and thereafter,
promptly pay all sums owing to Franchisor and its subsidiaries and
affiliates. If a claim for amounts owed by Developer to Franchisor is
asserted in any judicial proceeding, or Franchisor or Developer is required
to enforce this Agreement in a judicial or arbitration proceeding, the party
prevailing in such proceeding shall be entitled to reimbursement of its costs
and expenses, including, but not limited to, reasonable accountants',
attorneys', attorneys assistants', arbitrators' and expert witness fees, cost
of investigation and proof of facts, and court costs, whether incurred prior
to, in preparation for or in contemplation of the filing of any such
proceeding. If Franchisor is required to engage legal counsel in connection
with any failure by Developer to pay when due all monies owed hereunder or
submit when due any reports, information or supporting records, in connection
with any failure to

27
<PAGE>

otherwise comply with this Agreement, Developer shall reimburse Franchisor
for any of the above-listed costs and expenses incurred by it.

21. GOVERNING LAW AND CONSENT TO JURISDICTION

Except to the extent governed by federal law, this Agreement, the
franchise rights granted herein and the relationship of the parties hereto
shall be governed by the internal laws of the state of Texas (without
reference to its choice of law and conflict of law rules). All claims which,
as a matter of law or public policy cannot be submitted to arbitration in
accordance with Section 19 shall be brought within the State of Texas in the
judicial district in which Franchisor has its principal place of business;
provided, however, with respect to any action which includes injunctive
relief, Franchisor may bring such action in any court in any state which has
jurisdiction. Franchisee irrevocably submits to the jurisdiction of such
courts and waives any objection he may have to either the jurisdiction or
venue of such court.

22. NOTICES AND PAYMENTS

A. Any and all written notices and reports required or permitted to be
delivered under this Agreement shall be in writing and shall be personally
delivered or mailed by expedited delivery service or certified or registered
mail, return receipt requested, first-class postage prepaid, or sent by
prepaid telex, or facsimile (provided that the sender confirms the telex or
facsimile by sending an original confirmation copy thereof by certified or
registered mail or expedited delivery service within three (3) business days
after transmission thereof) to the respective parties at the following
addresses unless and until a different address has been designated by written
notice to the other party:

If to Franchisor:

Compact Discs International, Ltd.
1710 Firman Drive, Suite 300
Richardson, Texas 75081
(214) 437-3559

If to Developer:

---------------------------------
---------------------------------
---------------------------------
---------------------------------

B. Any notice or report given hereunder by certified or registered
mail shall be deemed to have been delivered five (5) business days after the
date of mailing, and any notice given hereunder by telex or facsimile shall
be deemed to have been given upon receipt thereof, provided that the telex or
facsimile is confirmed as provided in this Section. Business days for the
purpose of this Section exclude Saturday, Sunday, and the following national
holidays: New Year's Day,

28
<PAGE>

Martin Luther King Day, Washington's Birthday, Memorial Day, Independence
Day, Labor Day, Columbus Day, Veteran's Day, Thanksgiving, and Christmas.

C. All payments required by this Agreement shall be directed to
Franchisor at the above address or such other place as Franchisor may direct
from time to time. Any required payment not actually received by Franchisor
during regular business hours on the date due (or postmarked at least two (2)
days prior thereto) shall be deemed delinquent.

23. SEVERABILITY AND CONSTRUCTION

A. Except as expressly provided to the contrary herein, each portion,
section, part, term, and provision of this Agreement shall be considered
severable and if, for any reason, any portion, section, part, term, or
provision herein is determined to be invalid and contrary to, or in conflict
with, any existing or future law or regulation by a court or agency having
valid jurisdiction, such shall not impair the operation of, or have any other
effect upon, such other portions, sections, parts, terms, or provisions of
this Agreement as may remain otherwise enforceable, and the latter shall
continue to be given full force and effect and bind the parties hereto and
said invalid portions, sections, parts, terms, or provisions shall be deemed
not to be part of this Agreement.

B. Except as expressly provided to the contrary herein, nothing in
this Agreement is intended, nor shall be deemed, to confer upon any person or
legal entity other than Developer, Franchisor, Franchisor's officers,
directors, and employees, and such of Developer's and Franchisor's respective
successors and assigns as may be contemplated (and, as to Developer,
permitted) by Section 9 hereof, any rights or remedies under or by reason of
this Agreement.

C. All captions in this Agreement are intended solely for the
convenience of the parties, and shall not affect the meaning or construction
of any provision hereof.

D. All references herein to the masculine, neuter, or singular shall
be construed to include the masculine, feminine, neuter or plural, where
applicable and, without limiting the obligations individually undertaken by
the Principal Owners hereunder, all acknowledgments, promises, covenants,
agreements and obligations herein made or undertaken by Developer shall be
deemed jointly and severally undertaken by all Principal Owners.

E. This Agreement may be executed in counterparts, and each copy so
executed shall be deemed an original.

29
<PAGE>

24. ACKNOWLEDGMENTS

Developer and the Principal Owners hereby represent, warrant, covenant
and acknowledge to Franchisor that:

A. Developer has read this Agreement and Franchisor's Uniform
Franchise Offering Circular, including the copy of the current form of
Franchise Agreement contained therein, and that he understands and accepts
the terms, conditions, and covenants contained in this Agreement as being
reasonably necessary to maintain Franchisor's standards for the System and
the uniformity of those standards at all Stores in order to protect and
preserve the goodwill of the Proprietary Marks;

B. Neither Developer nor any Principal Owner had any part in the
creation or development of the System or the Proprietary Marks provided by
Franchisor;

C. Franchisor has made no representations or promises to or with
Developer or a Principal Owner which are not contained in this Agreement;

D. Developer has conducted an independent investigation of the
business venture contemplated by this Agreement and understands that the
nature of the business conducted by Stores may evolve and change over time,
that this business venture involves substantial financial risks and that the
success of this venture largely depends upon the abilities and efforts of
Developer;

E. DEVELOPER HAS NOT RELIED UPON, NOR HAS FRANCHISOR MADE, ANY
REPRESENTATIONS, WARRANTIES OR GUARANTEES, EXPRESSED OR IMPLIED, AS TO THE
ACTUAL OR POTENTIAL VOLUME, PROFITS OR EARNINGS OF THE BUSINESS VENTURE
CONTEMPLATED HEREIN;

F. Developer has the full right and authority to enter into this
Agreement without joinder of any other person;

G. All information and materials provided to Franchisor by Developer
and the Principal Owners, individually or collectively, are true and correct
and complete to the best of their knowledge, information and belief;

H. Developer has received, read and understood this Agreement, the
Exhibits hereto, and all agreements relating hereto, if any, and Franchisor
has accorded Developer ample time and opportunity to consult with advisors of
Developer's own choosing about the potential benefits and risks of entering
into this Agreement; and

I. Franchisor's obligations and Developer's rights pursuant to this
Agreement are expressly conditioned upon the continued truth of the
representations and warranties set forth above at the time of execution
hereof and throughout the term hereof.

30
<PAGE>

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the ___ day of ___________, 1996.

COMPACT DISCS INTERNATIONAL, LTD.
By Markshare, L.C.,
Its General Partner

By: -----------------------------------
Mark E. Kane
President, Markshare, L.C.

DEVELOPER

By: -----------------------------------
Name:----------------------------------
Title: --------------------------------

31
<PAGE>

GUARANTY

Each of the undersigned acknowledges and agrees as follows:

1. Each has read the terms and conditions of this Agreement;

2. Each are included in the term " Principal Owners" as described in
Section 1 of this Agreement;

3. Each individually, jointly and severally makes all the covenants,
representations and agreements of Principal Owners set forth in this
Agreement and is obligated to perform thereunder;

4. Each individually, jointly and severally, unconditionally and
irrevocably guarantees to Franchisor and its successors and assigns that all
of Developer's obligations under this Agreement will be punctually paid and
performed during the term of this Agreement and thereafter, as applicable.
Upon default by Developer or notice from Franchisor, the Principal Owners
will immediately make each payment and perform each obligation required of
Developer under this Agreement. Without affecting the obligations of any of
the Principal Owners under this guaranty Franchisor may, without notice to
the Principal Owners, waive, renew, extend, modify amend or release any
indebtedness or obligation of Developer or any Principal Owner, or settle,
adjust or compromise any claims against Developer or any Principal Owner.
The Principal Owners waive all demands and notices of every kind with respect
to enforcement of this guaranty including, without limitation, notice of
presentment, demand for payment or performance by Developer, any default by
Developer or any guarantor, and any release of any guarantor or other
security for this Agreement or the obligations of Developer. Franchisor may
pursue its rights against any of the Principal Owners without first
exhausting its remedies against Developer and without joining any other
guarantor hereto and no delay on the part of Franchisor in the exercise of
any right or remedy shall operate as a waiver of such right or remedy, and no
single or partial exercise of such right or remedy shall preclude the further
exercise of such right or remedy. Upon receipt by Franchisor of notice of
the death of one the Principal Owners, the estate of the deceased shall be
bound by the foregoing guaranty, but only for defaults and obligations under
this Agreement existing at the time of death; the obligations of the other of
the Principal Owners shall continue in full force and effect.

PRINCIPAL OWNERS

------------------------------
Name:
-------------------------

<PAGE>

LEASE AGREEMENT

THIS LEASE AGREEMENT, made and entered into this 29th day of October,
1996, by and between Magnolia Enterprises, Inc. hereinafter referred to as
"Landlord", and, CD Warehouse, Inc. hereinafter referred to as "Tenant".

WITNESSETH;

That for and in consideration of the rentals to be paid and other
promises and covenants hereinafter set forth, Landlord does, by these
presents, demise, lease and let unto Tenant that certain space, hereinafter
referred to as "Leased Premises", representing approximately 800 net rentable
square feet m.o.l. on the second floor located in the building at 722 N.
Broadway, Oklahoma City, Oklahoma, subject to the provisions hereinafter
contained for a Month to Month term beginning on the 29th day of October,
1996, upon the following terms and conditions:

Tenant agrees to pay Landlord at the address shown in paragraph XIV
hereof, or at such other place as Landlord may hereafter designate in
writing, as rental for said Leased Premises, the sum of six hundred and
no/100 dollars ($600) per month, payable monthly in advance, with the first
and last months' rental payable on the execution hereof. All rents are due
and payable on the 1st day of each month. Any rents received on or after the
25th day of the month will be assessed a 5% late fee plus interest at 15% per
annum from due date. Tenant agrees to pay the proportionate part of the
monthly rental for such period between October 29th and October 31, 1996.

II.

Tenant covenants and agrees as follows:

(a) To pay the Landlord the rental herein stipulated at the time and in
the manner provided;

(b) To keep and maintain all portions of the Leased Premises including
air conditioning and heating equipment and plate glass in as good condition
as the same are turned over to Tenant, natural wear and tear alone excepted,
and to deliver the premises to the Landlord in as good a state and condition
as received by Tenant upon the termination of this lease;

(c) To promptly comply with and fulfill all obligations of the
Ordinances of the City of Oklahoma City, Oklahoma, applicable to Leased
Premises, and all orders and requirements imposed by said municipality or the
laws of the State of Oklahoma imposed in connection with Tenant's activities
contemplated or hereafter conducted upon the Leased Premises by Tenant during
the term

<PAGE>

of this lease, at Tenant's own expense;

(d) To use the Leased Premises as executive offices and related
services, and for no other purposes without the prior written consent of
Landlord;

(e) To put no signs on the building that do not have the prior approval
of Landlord in writing.

III.

Landlord covenants and agrees as follows:

(a) That it has full right and authority to lease the Leased Premises
upon the terms herein set out.

(b) That it will keep the exterior of the Leased Premises in good
repair and will maintain, at its own expense, the parking lot, roof (except
as stated in Paragraph IV), foundation and exterior walls of the building,
and that it will deliver to the Tenant air conditioning and heating equipment
in good working order.

(c) That Tenant, so long as no default exists in the payment of rent,
or in the performance by Tenant of any of the other covenants and obligations
contained herein shall peacefully and quietly hold and enjoy the Leased
Premises for the term herein provided.

(d) That Tenant may assign this lease or sublet all or any part of the
Leased Premises only with the prior written consent of the Landlord,
providing that such assignment or subletting will in all respects be subject
to the terms of this lease and that Tenant shall be obligated for the full
performance of all of the covenants and obligations of this lease and the
payment of all rentals provided for hereunder during the term of this lease.
Should Tenant assign this lease or sublet the whole or any part of said
premises without first obtaining the specific written consent of Landlord,
neither the acceptance of rent by Landlord from Tenant or from other persons
thereafter, nor failure on the part of Landlord for any particular period to
take action on account of such breach, or to enforce its rights, shall be a
continuing breach for so long as such subtenancy or occupancy continues.

(e) That Landlord will pay all real estate taxes with respect to the
Leased Premises and Tenant will pay all taxes with respect to his property
located on the Leased Premises.

IV.

(a) It is understood and agreed that Tenant will not make any
alterations or changes to the

<PAGE>

Leased Premises without the express written consent of the Landlord. If
alterations or changes to the Leased Premises are made by Tenant with the
written consent of the Landlord, it shall be then determined and expressly
stated in said written consent as to whether said alterations and
improvements to be made by Tenant shall be and become a part of the Leased
Premises, or be removable by Tenant, or whether Tenant shall be entitled to
reimbursement; otherwise such alterations and/or improvements shall become a
part of the Leased Premises. If Tenant makes any penetrations through the
roof for exhaust fans or any other purpose, Tenant then becomes responsible
for all roof problems caused by these penetrations. Landlord, along with its
contractors, will be the sole judge of what causes the leak.

In the event the Leased Premises are partially damaged or destroyed or
rendered partially unfit for occupancy by fire, tornado, or other casualty,
Tenant shall give notice to Landlord who, thereupon, shall, at its own
expense, repair the damage and restore the premises to the same condition in
which they were immediately prior to the happening of such casualty. In such
event, and in the event that Tenant, during the period of such repair, is
able to conduct some activities on the Leased Premises, there shall be a
diminution of rent in such sum as may be agreed upon by the Landlord and
Tenant during the time the premises are thus partially unfit for occupancy;
provided, however, that this diminution of rent, in the event the Leased
Premises are damaged, shall be based upon the ratio that the total non-usable
square feet of said area bears to the total square feet of said Leased
Premises.

In the event the Leased Premises are totally destroyed or damaged by
fire, tornado, or other casualty to such an extent that the building or
improvements thereon are unfit for use and occupancy, Landlord shall have
thirty (30) days thereafter in which to elect to commence to repair and/or
restore said building and improvements. If the Landlord elects not to restore
or repair said building or improvements it will give Tenant notice to this
effect within said thirty (30) day period, in which event this Lease
Agreement shall terminate.

In the event the Landlord elects to restore and repair said building and
improvements it will give notice to this effect to Tenant within the thirty
(30) day period from and after such damage. In the event the premises and
buildings are repaired or restored after such damage the rent specified
herein shall be abated during the period of time the premises are so damaged
and shall not again be payable until the premises, building and improvements
have been made tenantable and restored and offered to tenants.

VI.

All property of Tenant which may be at any time during the term of this
lease in or upon the said Leased Premises, whether exempt from execution or
not, shall be found and subject to a lien for the payment of any delinquent
rent and for any damages arising from any breach by Tenant of any of the
covenants or agreements of this Lease to be performed by Tenant. In case
substantial

<PAGE>

default be made in the payment of any installments of the rents reserved
herein, or any part or parts thereof, when the same become due, and if such
substantial default continues for a period of ten (10) days after written
notice by Landlord to Tenant that he is in default, the Landlord, its
successors or assigns, may take possession of said property or any pad or
parts thereof, and sell or cause the same to be sold at public or private
sale, with or without notice, to the highest bidder for cash, and apply the
proceeds of said sale toward the cost thereof, and then toward the debt
and/or damages as aforesaid, the remainder, if any, to be returned to Tenant.

Tenant covenants and agrees to pay all reasonable attorneys' fees and
expenses of the Landlord incurred in enforcing any of the obligations of the
Tenant under this lease in all cases in which it shall be determined that the
Tenant is at fault.

Tenant expressly waives any and all statutory requirements as to notice
by Landlord to Tenant, in writing, to quit the Leased Premises after
non-payment of rental due on any date under this lease and specifically
including the provisions of Title 41 O.S. (1961) Section 6.

VII

Landlord shall not be liable to Tenant or to Tenant's patrons,
employees, or visitors for any damage to person or property caused by any
action, omission or negligence of Tenant or sub-tenant of said Leased
Premises and Tenant agrees to hold the Landlord harmless from all claims for
any such damage Tenant will release Landlord from any and all liability of
whatsoever kind arising out of the ownership, leasing, or maintenance of said
Leased Premises and improvements for which the Tenant is responsible and not
those areas over which the Landlord is responsible.

VIII.

In case of default of the Tenant in any of the covenants on his part
herein contained, Landlord may enforce the performance of this lease in any
manner provided by law, and, at the option of the Landlord, this lease may be
forfeited if any such default continues for a period of thirty (30) days
after Landlord notifies Tenant of such default and of Landlord's intention to
declare this lease forfeited, such notice to be sent by Landlord by
registered or certified mail, postage prepaid, to the Tenant at:

CD Warehouse, Inc.
722 N Broadway
Oklahoma City, OK 73102

or delivered in person to the Tenant, and upon the expiration of said thirty
(30) day period (unless within such period the Tenant shall have commenced
the removal of such default and thereafter shall proceed with due diligence
until the default complained of has been removed or cured) this lease shall
cease and come to an end as if that were the day originally fixed for the
expiration of the term hereof, and the Landlord's agent or attorney shall
have the right without further notice or demand

<PAGE>

to enter and remove all persons from Tenant's property without being deemed
guilty of any manner of trespass and without prejudice to any remedies of
arrears of rent or breach of covenant, or the Landlord's agent or attorney
may take possession of the premises and relet the same for the remainder of
the term at the best rental such agent or attorney may obtain for the account
of the Tenant, who shall pay to the Landlord any deficiency and Landlord
shall have a lien as security for the rent reserved upon all the goods,
wares, chattels, implements, machinery, equipment, fixtures, tools and other
personal property belonging to Tenant which are or may be upon the Leased
Premises.

IX.

In the event of the bankruptcy or insolvency of the Tenant, and for that
purpose the appointment of a receiver and the assignment for the benefit of
creditors or an adjudication of bankruptcy shall be conclusive evidence of
such bankruptcy or insolvency, this agreement may be terminated by the
Landlord immediately at its option and without further notice.

In the event of such termination the Landlord shall have a lien upon any
property of the Tenant then situated in or upon the Leased Premises securing
the payment of any rental due or to become due and owing by Tenant to
Landlord.

Tenant agrees to carry Public Liability Insurance covering the Leased
Premises and the business conducted therein, which insurance shall be in
amount not less than $100,000.00 for each person and $300,000.00 for each
accident for bodily injury and $20,000.00 for each occurrence for property
damage. Such policies shall be for the benefit of Landlord and Tenant as
their interests may appear and shall contain a clause that the insurer shall
not cancel or change the insurance without first giving Landlord ten (10)
days written notice thereof A certificate or copy of said insurance policy
shall be furnished to Landlord.

Tenant shall indemnify Landlord from any and all damages, suits, claims
or causes of action asserted against the Landlord arising from the Tenant's
maintenance, operation or use of the Leased premises. In any suit or action
for damages arising from the alleged negligence of Tenant in which Landlord
is named as a defendant, Tenant will assume the burden, cost and expenses of
the defense, including reasonable attorneys fees.

Landlord and Tenant agree, each with the other, to furnish certificates
from their respective insurers of Waiver of Subrogation with respect to fire
and extended coverage insurance policies.

XI.

If the whole of the Leased Premises, or a substantial part of the
building on said premises should be taken by virtue of eminent domain then
when possession should be taken thereunder or

<PAGE>

the Leased Premises, the term herein provided and all rights of the Tenant
hereunder shall immediately cease and terminate and the rent shall be
adjusted to the time of termination, and the Tenant shall have no claim
against the Landlord for the value of the unexpired term hereof and the
Tenant shall not be entitled to any part of the condemnation award.

XII.

It is further covenanted and agreed that the Landlord shall have free
access, at all reasonable times during business hours, after notification to
tenant of intent to enter said Leased Premises, for inspection as to the
condition thereof; provided, however, that this right to inspect shall not in
any way make the Landlord responsible for any condition found with reference
to said premises.

XIII.

Throughout the term of this Lease or any renewal or extension thereof,
the Landlord shall have the right and option, upon thirty (30) days notice to
Tenant to relocate the Leased Premises to any substantially similar Premises
within the Building. In the event of Landlord's exercise of its option to
relocate the Tenant in the manner set forth above, all reasonable expenses of
moving the Tenant and of decorating the new Leased Premises shall be at the
expense of Landlord. In the event that comparable Leased Premises are not
available within the Building, and the Tenant shall agree to relocate to less
desirable Premises or to reduce the size of the Leased Premises, the Landlord
and the Tenant shall agree to a reduction in the amount of the Base Rental
contained within the Leased Premises so as to effect an equitable adjustment
in Rentals commensurate with the relocated Leased Premises. If no suitable
relocation arrangements can be agreed upon between Landlord and Tenant,
Tenant may elect to terminate this Lease prior to the expiration of the
primary term or the expiration of any renewal or extension thereof.

XIV.

No modification of this lease shall be binding unless in writing and
executed and acknowledged by both parties.

XV.

All notices required or permitted herein to be given to the Landlord
shall be sent by registered or certified mail, postage prepaid, addressed to
the Landlord at:

722 N. Broadway
Oklahoma City, OK 73102

or at such other place as the Landlord may hereafter designate in writing.

<PAGE>

THIS LEASE AGREEMENT and all of its provisions shall inure to the
benefit of and be binding upon the heirs, successors and assigns of the
parties hereto.

IN WITNESS WHEREOF, the parties hereto have set their hands and seals
the day and year first above written.

MAGNOLIA ENTERPRISES, INC.
ATTEST:

_______________________________
"Landlord"

Tenant:
ATTEST:

__________________________________________
"Tenant"

<PAGE>

EXHIBIT 21.1

LIST OF SUBSIDIARIES

The only subsidiary of the Company is CD Management, Inc., a Delaware
corporation, which is 100% owned by the Company.

<PAGE>

EXHIBIT 23.1

CONSENT OF INDEPENDENT AUDITORS

We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated March 6, 1996, except for Note 2, as to which the
date is October 10, 1996, with respect to the financial statements of Compact
Discs International, Ltd. and to our report dated October 5, 1996 with
respect to the financial statements of CD Acquisitions included in the
Registration Statement (Form SB-2 No. 333-_________ ) and related Prospectus
of CD Warehouse, Inc. for the registration of 1,000,000 shares of its common
stock.

HUSELTON & MORGAN, P.C.

Dallas, Texas
October 30, 1996

<PAGE>

EXHIBIT 23.2

CONSENT OF INDEPENDENT AUDITORS

We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated October 26, 1996, in the Registration Statement
(Form SB-2 No. 333-___________) and related Prospectus of CD Warehouse, Inc.
for the registration of 1,000,000 shares of its common stock.

ERNST & YOUNG LLP

Oklahoma City, Oklahoma
October 30, 1996

<PAGE>

EXHIBIT 24.1

POWERS OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Jerry W. Grizzle and Gary D. Johnson, and each
of them, each with full power to act without the other, his true and lawful
attorney-in-fact and agent, with full power of substitution, for him and in
his name, place and stead, in any and all capacities, to sign any or all
amendments to this Registration Statement, and to file the same, with all
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agent, full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises, as fully
to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorney-in-fact and agent, or his
substitute, may lawfully do or cause to be done by virtue hereof.

NAME AND TITLE DATE
-------------- ----

/s/ Jerry W. Grizzle October 29, 1996
- --------------------------------------
Jerry W. Grizzle
Chairman of the Board of Directors,
President and Chief Executive Officer

/s/ Gary D. Johnson October 29, 1996
- --------------------------------------
Gary D. Johnson
Chief Operating Officer,
Executive Vice President and Director

/s/ Bruce D. MacDonald October 29, 1996
- --------------------------------------
Bruce D. MacDonald
Vice President Company Store Operations

/s/ Doyle E. Motley October 29, 1996
- --------------------------------------
Doyle E. Motley
Senior Vice President and
Chief Financial Officer

/s/ Christopher M. Salyer October 29, 1996
- --------------------------------------
Christopher M. Salyer
Director

/s/ Ronald V. Perry October 29, 1996
- --------------------------------------
Ronald V. Perry
Director