CD WAREHOUSE INC, 424B1, 1997-01-22

CD WAREHOUSE INC
424B1, 1997-01-22
RECORD & PRERECORDED TAPE STORES

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FILE PURSUANT TO RULE 424(b)(1)
REGISTRATION NO. 333-15139

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. See "Underwriting" for information relating
to the method of determining the initial public offering price. The Common Stock
has been approved for quotation on the Nasdaq SmallCap Market under the trading
symbol "CDWI" subject to notice of issuance.

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.............................. $5.00 $.50 $4.50
Total (3).............................. $5,000,000 $500,000 $4,500,000
</TABLE>

(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other matters.

(2) Before deducting expenses in connection with this Offering payable by the
Company, including a nonaccountable expense allowance to be paid to Capital
West Securities, Inc. in the amount of $150,000 ($172,500 if the
Underwriters' over-allotment option is exercised in full), estimated at
$325,000. 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 $5,750,000,
$575,000 and $5,175,000, 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 January 27, 1997.

CAPITAL WEST SECURITIES, INC.

WESTPORT RESOURCES INVESTMENT SERVICES, INC.

BERTHEL FISHER & COMPANY

FINANCIAL SERVICES, INC.

The date of this Prospectus is January 22, 1997.
<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.

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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 THAT THE
UNDERWRITERS' OVER-ALLOTMENT OPTION IS NOT EXERCISED; AND (II) 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, COMPACT DISCS 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 September 30, 1996, there were 109 franchised CD Warehouse
stores in 26 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 CD's, 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.

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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-Registered Trademark- and The Wherehouse are the only
national chains engaged in the sale of preowned CD's. Based on the Quarterly
Report on Form 10-Q for the Quarter Ended June 29, 1996 of Grow Biz
International, Inc. the parent corporation of Disc-Go-Round-Registered
Trademark-, and the Quarterly Report on Form 10-Q for the Quarter Ended July 31,
1996 of Wherehouse Entertainment, Inc., the Company believes that the 109 stores
in the CD Warehouse system 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." 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
$40,000 in partial satisfaction of this obligation and is required to pay the
balance of $60,000 at the closing of the CDIL Acquisition. None of the proceeds
of the Offering will be used to pay the remaining obligation relating to the
finder's fee.

In a related transaction (the "MacDonald Acquisition"), which also will
occur simultaneously with the closing of the Offering, the Company's wholly
owned subsidiary, Compact Discs 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, 15 partnerships and two limited
liability companies 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 109 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 franchise
agreements to which CDIL is a party and manage and have an interest in the CD
Warehouse Stores in which MacDonald has an interest.

During the year ended December 31, 1995, and the nine months ended September
30, 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 $3,545,000, respectively, and pro forma net income, as adjusted,
of approximately $168,000 and $140,000, 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.

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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)(2)

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 SmallCap Market
Symbol...................... CDWI
</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.

(2) Excludes 400,000 shares of Common Stock reserved for issuance pursuant to
the Company's 1996 Stock Option Plan. See "Management--1996 Stock Option
Plan" and "Description of Securities."

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 nine
months ended September 30, 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>
NINE MONTHS ENDED
SEPTEMBER 30,
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 $ 2,772 $ 3,545
Operating income (1)........................... 85 126 370 206 120 166
Pro forma net income (1)(2).................... 67 110 277 168 104 140
Pro forma net income per share (2)............. .09 .06 .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>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
($ IN THOUSANDS)
STORE DATA:
System-wide sales............................................. $ 2,778 $ 11,550 $ 20,868 $ 15,119 $ 18,891
Store Count:
Beginning................................................... 2 19 67 67 96
Open........................................................ 17 51 36 28 16
Close....................................................... -- 3 7 4 3
Ending...................................................... 19 67 96 91 109
</TABLE>

6
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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
109 stores, 35 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 91 to 97 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 nine months ended September 30,
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
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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." Additionally, while royalty
payments are required to be paid on the sale of new CD's, no such payments are
currently required on the sale of preowned CD's. The future enactment, adoption
or amendment of laws or regulations, such as establishing basic franchisee
rights, or the imposition of royalties on the sales of preowned CD's, 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-Registered Trademark-, and one national music and video retail
chain, Wherehouse Entertainment, Inc., 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." The Company
has no plan, proposal, agreement, understanding or arrangement to acquire or
merge with any specific business or company, nor has it identified any specific
business or company for investigation and evaluation.

LACK OF INDEPENDENT APPRAISALS OF PURCHASE PRICE OF CDIL ASSETS AND
MACDONALD ASSETS. No independent appraisals were obtained in determining the
purchase price of the CDIL Assets and the MacDonald Assets. Although the terms
of the purchase prices were negotiated at arm's-length by the respective
parties, no assurance can be given that the consideration paid by the Company
with respect to the CDIL Assets and the MacDonald Assets accurately reflects the
fair market value of such assets. See "Certain Transactions."

RISKS OF LEVERAGE. There are currently no limitations relating to the
Company's ability to borrow funds to increase the amount of capital available to
the Company to effect a business combination or otherwise finance the operations
of any acquired business. The amount and nature of any borrowings by

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<PAGE>
the Company will depend on numerous considerations, including the Company's
capital requirements, the Company's perceived ability to meet debt services on
any such borrowings, and then-prevailing conditions in the financial markets, as
well as general economic conditions. There can be no assurance that debt
financing, if required or otherwise sought, will be available on terms deemed to
be commercially acceptable and in the best interest of the Company. The
inability of the Company to borrow funds required to effect or facilitate a
business combination, or to provide funds for an additional infusion of capital
into an acquired business, may have a material adverse effect on the Company's
financial condition and future prospects. Additionally, to the extent that debt
financing ultimately proves to be available, any borrowings may subject the
Company to various risks traditionally associated with incurring of
indebtedness, including (i) if the Company's operating revenues after the
business combination were to be insufficient to pay debt service, there would be
a risk of default and foreclosure on the Company's assets; (ii) if a loan
agreement contains covenants that require the maintenance of certain financial
ratios or reserves, and any such covenant is breached without a waiver or
renegotiation of the terms of that covenant, then the lender could have the
right to accelerate the payment of the indebtedness even if the Company has made
all principal and interest payments when due; (iii) if the interest rate on a
loan fluctuated or the loan was payable on demand, the Company would bear the
risk of variations in the interest rate or demand for payment; and (iv) if the
terms of a loan did not provide for amortization prior to maturity of the full
amount borrowed and the "balloon" payment could not be refinanced at maturity on
acceptable terms, the Company might be required to seek additional financing
and, to the extent that additional financing is not available on acceptable
terms, to liquidate its assets. Furthermore, an acquired business may have
previously incurred debt financing and, therefore, may already be subject to the
risks inherent thereto, as discussed above.

DEPENDENCE ON KEY PERSONNEL; NO KEY MAN INSURANCE. 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 Company presently does not own any key man life insurance
policies with respect to any of such individuals, and 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 is presently reviewing the
desirability of obtaining key man life insurance policies with respect to the
Chief Executive Officer and the Chief Operating Officer. 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 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."

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<PAGE>
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. Assuming the consummation of the CDIL Acquisition and
the MacDonald Acquisition, this Offering involves an immediate dilution of
approximately $4.04 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."

LIMITED UNDERWRITING EXPERIENCE. Capital West Securities, Inc., one of the
Underwriters, was first registered as a broker-dealer in May 1995 and has
participated in only four public equity offerings as an underwriter. Prospective
purchasers of the securities offered hereby should consider this limited
experience in evaluating this Offering. See "Underwriting."

ABSENCE OF PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE. Prior
to the Offering, there has been no public market for the Common Stock. Although
the Company's Common Stock has been approved for listing on the Nasdaq SmallCap
Market under the trading symbol "CDWI," there can be no assurance 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
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 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."

10
<PAGE>
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.

POSSIBLE DELISTING FROM NASDAQ SMALLCAP MARKET; DISCLOSURE RELATING TO LOW
PRICED STOCKS. Although the Company's Common Stock has been approved for listing
on the Nasdaq SmallCap Market, there can be no assurance that a trading market
will develop or, if developed, that it will be maintained. In addition, there
can be no assurance that the Company will in the future meet the maintenance
criteria for continued quotation of the securities on the Nasdaq SmallCap
Market. The maintenance criteria for the Nasdaq SmallCap Market include, among
other things, $2,000,000 in total assets, $1,000,000 in capital and surplus, a
public float of 100,000 shares with a market value equal to $200,000, two market
makers and a minimum bid price of $1.00 per share of common stock. If an issuer
does not meet the $1.00 minimum bid price standard, it may, however, remain on
the Nasdaq SmallCap Market if the market value of its public float is at least
$1,000,000 and the issuer has at least $2,000,000 in equity. If the Company were
removed from the Nasdaq SmallCap Market, trading, if any, in the Common Stock
would thereafter have to be conducted in the over-the-counter market in the
so-called "pink sheets" or, if then available, the NASD's OTC Electronic
Bulletin Board. As a result, an investor would find it more difficult to dispose
of, and to obtain accurate quotations as to the value of, such securities.

In addition, if the Common Stock is delisted from trading on the Nasdaq
SmallCap Market and the trading price of the Common Stock is less than $5.00 per
share at a time when the net tangible assets of the Company are less than
$5,000,000, trading in the Common Stock would also be subject to the
requirements of Rule 15g-9 promulgated under the Securities Exchange Act of
1934, as amended (the "Exchange Act"). Under such rule, broker/dealers who
recommend such low-priced securities to persons other than established customers
and accredited investors must satisfy special sales practice requirements,
including a requirement that they make an individualized written suitability
determination for the purchaser and receive the purchaser's written consent
prior to the transaction. The Securities Enforcement Remedies and Penny Stock
Reform Act of 1990 also requires additional disclosure in connection with any
trades involving a stock defined as a penny stock (generally, according to
recent regulations adopted by the Commission, any equity security not traded on
an exchange or quoted on the Nasdaq SmallCap Market that has a market price of
less than $5.00 per share, subject to certain exceptions), including the
delivery, prior to any penny stock transaction, of a disclosure schedule
explaining the penny stock market and the risks associated therewith. Such
requirements could severely limit the market liquidity of the Common Stock and
the ability or purchasers in this Offering to sell their securities in the
secondary market. There can be no assurance that the Common Stock will not be
delisted or treated as a penny stock.

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 of 1933, as amended (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 (the
"Affiliate Shares"), or approximately 43.8%, of the outstanding shares of Common
Stock after the Offering. Such individuals have agreed not to, directly or

11
<PAGE>
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 Securities, Inc. Upon expiration of the 24-month period,
244,706 of the Affiliate Shares 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 (with 162,353 of such shares entitled to piggyback registration
rights for a period of two years thereafter). The remaining 535,294 Affiliate
Shares are subject to escrow agreements required by certain state securities
regulatory agencies, the terms of which provide that such shares be held in
escrow for up to six years, subject to earlier release if the Company attains
certain levels of earnings for any two consecutive fiscal years or the Common
Stock trades at 175% of the public offering price per share for at least 90
consecutive trading days at least one year after the effective date of the
Offering. 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. Bank of Oklahoma, N.A., Oklahoma City,
Oklahoma has agreed to provide the Company a $2,000,000 credit facility (the
"Credit Facility") upon completion of the Offering. 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 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."

12
<PAGE>
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 $4,175,000
(approximately $4,801,250 if the Underwriters' over-allotment option is
exercised in full). The Company expects to use the net proceeds (assuming no
exercise of the Underwriters' over-allotment option) approximately as follows:

<TABLE>
<CAPTION>
APPROXIMATE APPROXIMATE PERCENTAGE
USE DOLLAR AMOUNT OF NET PROCEEDS
- -------------------------------------------------------------------------- -------------- -----------------------
<S> <C> <C>

Funding of CDIL Acquisition (1)........................................... $ 3,100,000 74.2%
Opening or remodeling of Company stores (2)............................... 800,000 19.2%
Working capital and general corporate purposes............................ 275,000 6.6%
-------------- ------
Total................................................................... $ 4,175,000 100.0%
-------------- ------
-------------- ------
</TABLE>

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

(1) Represents the balance of the $3,200,000 purchase price for the CDIL Assets.
See "Business and Properties--General" and "Certain Transactions."

(2) Represents anticipated costs of approximately $84,000 per store for a
minimum of nine Company-owned stores which the Company plans to open in
1997. See "Business and Properties--Company Store Program."

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.

13
<PAGE>
DILUTION

At October 15, 1996, the pro forma, as adjusted, net tangible book value of
the Company's Common Stock was approximately $1,714,000, or $.96 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 $4.04 per share to new investors purchasing
shares of Common Stock in this Offering.

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.......................... 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."

14
<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 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)(2).................................... $ 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 5,257,200
Retained earnings..................................................................... -- --
---------- ------------
Total capitalization................................................................ $ 350,000 $ 5,275,000
---------- ------------
---------- ------------
</TABLE>

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

(2) Excludes 400,000 shares of Common Stock reserved for issuance pursuant to
the Company's 1996 Stock Option Plan. See "Management--1996 Stock Option
Plan" and "Description of Securities."

15
<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>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Revenues:
Retail store sales............................................... $ 372 $ 316 $ 281 $ 213 $ 178
Wholesale merchandise sales...................................... 139 1,568 2,717 1,746 2,442
Software income, net............................................. 10 62 24 1 8
Royalty income................................................... 112 527 947 670 856
Franchise and development fees................................... 86 154 184 142 61
--------- --------- --------- --------- ---------
Total revenues................................................. 719 2,627 4,153 2,772 3,545

Costs and expenses:
Cost of sales--retail store sales................................ 272 196 180 134 109
Cost of sales--wholesale merchandise sales....................... 139 1,539 2,511 1,584 2,298
Retail store operating expenses.................................. 88 79 68 51 51
General and administrative (2)................................... 135 681 1,015 782 972
Depreciation and amortization.................................... -- 6 9 8 9
--------- --------- --------- --------- ---------
Total costs and expenses....................................... 634 2,501 3,783 2,559 3,439
--------- --------- --------- --------- ---------

Operating income................................................... 85 126 370 213 106
Other income....................................................... 16 40 49 39 47
--------- --------- --------- --------- ---------

Income before pro forma provision for income taxes................. 101 166 419 252 153
Pro forma provision for income taxes (2)........................... 34 56 142 86 52
--------- --------- --------- --------- ---------
Pro forma net income (2)........................................... $ 67 $ 110 $ 277 $ 166 $ 101
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</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, Nine months ended September 30,
1993--$ 82,000 1995--$252,000
1994--$227,000 1996--$405,000
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.

16
<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 106
domestic units operating in 26 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 109 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 franchise agreements to which CDIL is a party and manage
and have an interest in the CD Warehouse stores in which MacDonald has 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
nine months ended September 30, 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

17
<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>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------- ------------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
REVENUES:
Retail store sales.............................. 51.7% 12.0% 6.8% 7.7% 5.0%
Wholesale merchandise sales..................... 19.3% 59.7% 65.4% 63.0% 68.9%
Software income, net............................ 1.4% 2.4% .6% --% .2%
Royalty income.................................. 15.6% 20.1% 22.8% 24.2% 24.2%
Franchise and development fees.................. 12.0% 5.8% 4.4% 5.1% 1.7%
----- ----- ----- ----- -----
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% 62.9% 61.2%
Cost of sales--wholesale merchandise sales
(2)........................................... 100.0% 98.2% 92.4% 90.7% 94.1%
Retail store operating expenses (1)............. 23.7% 25.0% 24.2% 23.9% 28.7%
General and administrative...................... 18.8% 25.9% 24.4% 28.2% 27.4%
Depreciation and amortization................... -- % .2% .2% .3% .3%

OPERATING INCOME.................................. 11.8% 4.8% 8.9% 7.7% 3.0%
PRO FORMA NET INCOME.............................. 9.3% 4.2% 6.7% 6.0% 2.8%
</TABLE>

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

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

(2) As a percentage of wholesale merchandise sales.

NINE MONTHS ENDED SEPTEMBER 30, 1995 COMPARED WITH THE NINE MONTHS ENDED
SEPTEMBER 30, 1996

REVENUES

Total revenues increased by $773,000, or 28%, to $3,545,000 for the nine
months ended September 30, 1996 compared to $2,772,000 for the nine months ended
September 30, 1995. This increase resulted primarily from the 16 franchised
stores opened during the nine months ended September 30, 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 royalties and
merchandise sales to more stores.

Wholesale sales to franchised stores increased $696,000, or 40%, to
$2,442,000 for the nine months ended September 30, 1996 compared to $1,746,000
for the nine months ended September 30, 1995. This increase resulted primarily
from the opening inventory packages purchased by the 16 new franchised stores
opened during the nine months ended September 30, 1996.

Royalties from franchised stores increased $186,000, or 28%, to $856,000 for
the nine months ended September 30, 1996 compared to $670,000 for the nine
months ended September 30, 1995. This increase resulted primarily from the 16
new franchised stores opened during the nine months ended September 30, 1996, as
well as from the 36 stores opened periodically throughout 1995 (which
contributed revenues for the entire period in 1996).

18
<PAGE>
COSTS AND EXPENSES

Cost of sales for wholesale sales to franchised stores increased $714,000,
or 45%, to $2,298,000 for the nine months ended September 30, 1996 compared to
$1,584,000 for the nine months period September 30, 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 $190,000, or 24%, to
$972,000 for the nine months ended September 30, 1996 compared to $782,000 for
the nine months ended September 30, 1995. This increase resulted from the 16 new
franchised stores opened during the nine months ended September 30, 1996 and the
increase of executive salaries taken by the previous officers of $405,000 for
the nine months ended September 30, 1996 compared to $252,000 for the same
period of 1995.

NET INCOME

Net income decreased $65,000, or 39%, to $101,000 for the nine months ended
September 30, 1996 compared to $166,000 for the same period ended September 30,
1995. This decrease was primarily due to the additional $153,000 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), and the resulting increase in royalties and merchandise sales.

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).

The Company recognized approximately $113,500 as bad debt expense for the
year ended December 31, 1995 compared to no bad debt expense for the previous
year. The increase was due to the closing of seven franchised stores during
1995, as well as to royalty revenues previously recognized which were deemed
uncollectible in 1995 because of the operating status of certain franchised
stores.

19
<PAGE>
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 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 $279,000 and $316,000 for the years
ended December 31, 1994 and December 31, 1995, respectively, and $587,000 for
the nine months ended September 30, 1996.

The Company will have available approximately $1,500,000 in working capital
from the proceeds of the Offering and the stock subscription of Mark E. Kane in
connection with 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.

20
<PAGE>
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.

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 $40,000 in partial satisfaction of this obligation and
is required to pay the balance of $60,000 at the closing of the CDIL
Acquisition. 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, Bank of
Oklahoma, N.A., Oklahoma City, Oklahoma has agreed to provide the Company a
$2,000,000 credit facility upon completion of the Offering. 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.

21
<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 September 30, 1996
assumes capitalization 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 nine months ended September 30, 1995 and September
30, 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.

22
<PAGE>
CD WAREHOUSE, INC.

PRO FORMA COMBINED CONDENSED BALANCE SHEET (NOTE)

SEPTEMBER 30, 1996

(UNAUDITED)

ASSETS

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

<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents............. $ 250,000 $ 220,343 $ 457 $ 4,219,364(1)
(220,343)(2)
(3,100,000)(2)
(80,000)(3)
350,000(5) $ 1,639,821
Accounts receivable, net.............. -- 361,677 -- (178,736)(2) 182,941
Merchandise inventory................. -- 579,169 46,762 (47,291)(2) 578,640
Prepaid expenses and other............ -- 12,423 2,345 (12,423)(2) 2,345
----------- ------------- ------------- ------------- -------------
Total current assets.................... 250,000 1,173,612 49,564 930,571 2,403,747
Furniture, fixtures and equipment,
net................................... -- 40,893 824 (4,860)(2) 36,857
Investment in partnerships.............. -- 70,219 39,329 (18,290)(2) 91,258
Intangible and other assets, net........ 206,394 4,946 -- (44,364)(1)
(1,474)(2)
3,001,791(2)
80,000(3)
313,234(4) 3,560,527
----------- ------------- ------------- ------------- -------------
Total assets............................ $ 456,394 $ 1,289,670 $ 89,717 $ 4,256,608 $ 6,092,389
----------- ------------- ------------- ------------- -------------
----------- ------------- ------------- ------------- -------------

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable...................... $ 55,394 $ 636,822 $ -- $ (27,082)(2) $ 665,134
Accrued liabilities................... -- 4,017 2,951 (6,813)(2) 155
Advances and deposits................. 51,000 101,100 -- -- 152,100
----------- ------------- ------------- ------------- -------------
Total current liabilities............... 106,394 741,939 2,951 (33,895) 817,389
Minority interest....................... -- 905 -- (905)(2) --
Stockholders' equity:
Common stock.......................... 3,500 -- -- 10,000(1)
800(4)
3,500(5) 17,800
Additional paid-in capital............ 346,500 -- -- 4,165,000(1)
399,200(4)
346,500(5) 5,257,200
Partners' capital..................... -- 546,826 86,766 (546,826)(2)
(86,766)(4) --
----------- ------------- ------------- ------------- -------------
350,000 546,826 86,766 4,291,408 5,275,000
----------- ------------- ------------- ------------- -------------
Total liabilities and stockholders'
equity................................ $ 456,394 $ 1,289,670 $ 89,717 $ 4,256,608 $ 6,092,389
----------- ------------- ------------- ------------- -------------
----------- ------------- ------------- ------------- -------------
</TABLE>

23
<PAGE>
CD WAREHOUSE, INC.
PRO FORMA COMBINED CONDENSED BALANCE SHEET (NOTE)
SEPTEMBER 30, 1996
(UNAUDITED)

NOTE: The Company was formed in September 1996. For purposes of this Pro Forma
Combining Balance Sheet, it is assumed capitalization occurred at
September 30, 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)............. 825,000
------------
Estimated net proceeds of Offering.............................................. 4,175,000
Offering expenses previously incurred........................................... 44,364
------------
Estimated net cash proceeds..................................................... $ 4,219,364
------------
------------
(2) Acquisition of specified assets of CDIL and assumption of specified liabilities:
Net assets at September 30, 1996................................................ $ 546,826
Less net assets retained by CDIL:...............................................
Retail store.................................................................... (56,264)
Investment in partnership....................................................... (18,290)
Cash and accounts receivable, net of accounts payable and accrued liabilities... (374,063)
------------
Net assets acquired............................................................. 98,209
Acquisition price............................................................... 3,200,000
------------
Excess of purchase price over assets acquired................................... 3,101,791
Escrow deposit--to be paid to CDIL.............................................. (100,000)
------------
$ 3,001,791
------------
------------
(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 September 30, 1996........................................... 86,766
------------
Excess of purchase price over assets acquired................................... $ 313,234
------------
------------
(5) Payment of Common Stock subscription by initial stockholders.................... $ 350,000
------------
------------
</TABLE>

24
<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>

25
<PAGE>
CD WAREHOUSE, INC.

PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS

NINE MONTHS ENDED SEPTEMBER 30, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL--ACQUIRED OPERATIONS
-------------------------------
COMPACT DISCS
INTERNATIONAL, MACDONALD
LTD. (NOTE) ASSETS
------------- -------------
<S> <C> <C>
Revenues:
Company operations:
Retail store sales....................... $ 220,887 $ 213,080
Wholesale merchandise sales.............. 1,745,403 --
Software income, net..................... 1,242 --
Franchise operations:
Royalty income........................... 670,401 --
Franchise and development fees........... 142,250 --
------------- -------------
Total revenues............................. 2,780,183 213,080

Operating costs and expenses:
Cost of sales--retail store sales........ 137,551 133,843
Cost of sales--wholesale merchandise
sales.................................. 1,583,822 --
Retail store operating expenses.......... 53,275 50,738
General and administrative............... 530,410
Depreciation and amortization............ 8,555
Minority interest........................ 5,637
------------- -------------
2,319,250 184,581
------------- -------------
Operating income........................... 460,933 28,499
Other income............................... 89 38,637
------------- -------------
Income before income taxes................. 461,022 67,136
Pro forma provision for income taxes....... -- --
------------- -------------
Pro forma net income....................... $ 461,022 $ 67,136
------------- -------------
------------- -------------
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....................... $ (220,887)(1) $ 213,080 $ 213,080
Wholesale merchandise sales.............. -- 1,745,403 1,745,403
Software income, net..................... -- 1,242 1,242
Franchise operations:
Royalty income........................... -- 670,401 670,401
Franchise and development fees........... -- 142,250 142,250
------------- ------------- -------------
Total revenues............................. (220,887) 2,772,376 2,772,376
Operating costs and expenses:
Cost of sales--retail store sales........ (137,551)(1) 133,843 133,843
Cost of sales--wholesale merchandise
sales.................................. 1,583,822 1,583,822
Retail store operating expenses.......... (53,275)(1) 50,738 50,738
General and administrative............... 251,997(3) 782,407 $ (41,622)(5) 740,785
Depreciation and amortization............ 8,555 135,000(6) 143,555
Minority interest........................ (5,637)(1) -- --
------------- ------------- ------------- -------------
55,534 2,559,365 93,378 2,652,743
------------- ------------- ------------- -------------
Operating income........................... (276,421) 213,011 (93,378) 119,633
Other income............................... -- 38,726 -- 38,726
------------- ------------- ------------- -------------
Income before income taxes................. (276,421) 251,737 (93,378) 158,359
Pro forma provision for income taxes....... 86,000(4) 86,000 (32,000)(7) 54,000
------------- ------------- ------------- -------------
Pro forma net income....................... $ (362,421) $ 165,737 $ (61,378) $ 104,359
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Pro forma net income per share............. $ .06
-------------
-------------
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.

26
<PAGE>
CD WAREHOUSE, INC.

PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS

NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL--ACQUIRED OPERATIONS
-------------------------------
COMPACT DISCS
INTERNATIONAL, MACDONALD
LTD. (NOTE) ASSETS
------------- -------------
<S> <C> <C>
Revenues:
Company operations:
Retail store sales....................... $ 200,329 $ 178,399
Wholesale merchandise sales.............. 2,442,442
Software income, net..................... 8,057
Franchise operations:
Royalty income........................... 856,175
Franchise and development fees........... 60,500
------------- -------------
Total revenues............................. 3,567,503 178,399

Operating costs and expenses:
Cost of sales--retail store sales........ 125,419 109,255
Cost of sales--wholesale merchandise
sales.................................. 2,297,730
Retail store operating expenses.......... 58,517 50,597
General and administrative............... 567,102
Depreciation and amortization............ 9,218
Minority interest........................ 3,165
------------- -------------
3,061,151 159,851
------------- -------------
Operating income........................... 506,352 18,547
Other income............................... 31,965 27,270
------------- -------------
Income before income taxes................. 538,317 45,817
Pro forma provision for income taxes....... --
------------- -------------
Pro forma net income....................... $ 538,317 $ 45,817
------------- -------------
------------- -------------
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....................... $ (200,329)(1) $ 178,399 $ 178,399
Wholesale merchandise sales.............. 2,442,442 2,442,442
Software income, net..................... 8,057 8,057
Franchise operations:
Royalty income........................... 856,175 856,175
Franchise and development fees........... 60,500 60,500
------------- ------------- -------------
Total revenues............................. (200,329) 3,545,573 3,545,573
Operating costs and expenses:
Cost of sales--retail store sales........ (125,419)(1) 109,255 109,255
Cost of sales--wholesale merchandise
sales.................................. 2,297,730 2,297,730
Retail store operating expenses.......... (58,517)(1) 50,597 50,597
General and administrative............... 405,184(3) 972,286 $ (194,809)(5) 777,477
Depreciation and amortization............ 9,218 135,000(6) 144,218
Minority interest........................ (3,165)(1) -- --
------------- ------------- ------------- -------------
218,083 3,439,085 (59,809) 3,379,276
------------- ------------- ------------- -------------
Operating income........................... (418,412) 106,487 59,809 166,296
Other income............................... (12,290)(2) 46,945 -- --
------------- ------------- ------------- -------------
Income before income taxes................. (430,702) 153,432 59,809 213,241
Pro forma provision for income taxes....... 52,000(4) 52,000 21,000(7) 73,000
------------- ------------- ------------- -------------
Pro forma net income....................... $ (482,702) $ 101,432 $ 38,809 $ 140,241
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
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.

27
<PAGE>
CD WAREHOUSE, INC.

PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS

PRO FORMA ADJUSTMENTS
(UNAUDITED)

<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
YEAR ENDED ENDED ENDED
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1995 1995 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 $ 220,887 $ 200,329

Cost of sales............................................... 181,312 137,551 125,419
Retail store operating expense.............................. 71,253 53,275 58,517
Depreciation and amortization............................... 487 -- --
Minority interest........................................... 7,293 5,637 3,165
------------- ------------- -------------
260,345 196,463 187,101
------------- ------------- -------------
Net......................................................... $ 31,603 $ 24,424 $ 13,228
------------- ------------- -------------
------------- ------------- -------------
(2) Eliminate equity in earnings of investment in partnership of
retail store located in Orange Park, Florida--to be
retained by CDIL.......................................... $ -- $ -- $ 12,290
------------- ------------- -------------
------------- ------------- -------------
(3) Allocate partner cash distributions as salaries of officers
of CDIL................................................... $ 296,277 $ 251,997 $ 405,184
------------- ------------- -------------
------------- ------------- -------------
(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 $ 528,158 $ 584,134
Adjustments, net--above..................................... (327,880) (276,421) (430,702)
------------- ------------- -------------
$ 418,510 $ 251,737 $ 153,432
------------- ------------- -------------
------------- ------------- -------------
Pro forma income taxes...................................... $ 142,000 $ 86,000 $ 52,000
------------- ------------- -------------
------------- ------------- -------------
(5) Adjust executive compensation as a result of employment
arrangements with new officers of the Company:
New officers' compensation.................................. $ 280,500 $ 210,375 $ 210,375
Pro forma adjustment for partners' cash draws............... (296,277) (251,997) (405,184)
------------- ------------- -------------
Net......................................................... $ (15,777) $ (41,622) $ (194,809)
------------- ------------- -------------
------------- ------------- -------------
(6) Amortization of estimated goodwill on purchase transaction
over twenty-year period................................... $ 180,000 $ 135,000 $ 135,000
------------- ------------- -------------
------------- ------------- -------------
(7) Pro forma income tax effect of adjustments for the offering
and acquisition........................................... $ (56,000) $ (32,000) $ 21,000
------------- ------------- -------------
------------- ------------- -------------
</TABLE>

28
<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 September 30, 1996, there were 109 CD Warehouse stores
in 26 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 CD's 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 CD's, 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 CD's are
essentially indistinguishable from new CD's 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 franchise
agreements to which CDIL was a party and manage and have an interest in the CD
Warehouse Stores in which MacDonald had an interest.

29
<PAGE>
During the year ended December 31, 1995 and the nine months ended September
30, 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 $3,545,000, respectively, and pro forma net income, as adjusted,
of approximately $168,000 and $140,000, 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 records point-of-sale data for 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.

30
<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.

31
<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 September 30, 1996:

DOMESTIC

ALABAMA
Decatur
Huntsville

ARKANSAS
Little Rock*

COLORADO
Colorado Springs
Denver*
Ft. Collins*

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

GEORGIA
Atlanta
Martinez

IDAHO
Idaho Falls

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
September 30, 1996 there were a total of 109 CD Warehouse stores in 26 states
and England, all but two of which were

32
<PAGE>
franchised. In 1997, 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
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.

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; however, the
opportunities for greater sales must be balanced against

33
<PAGE>
the increased inventory costs. 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 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 franchisees and
Company-owned stores with a weekly sales program which lists 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 with vendors 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 reviewing 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 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 managed by
the Company 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.

34
<PAGE>
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 73 franchised stores in 26 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 entitles the franchisee to use the
Company's trade names, service marks and trademark. Additionally, pursuant to
the franchise agreement, the Company provides franchisees with 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 SEPTEMBER 30, 1996 TOTAL
----- ----- ----- ----- ------------------- -----
<S> <C> <C> <C> <C> <C> <C>
Opened.................................... 2 17 51 36 16 122
Closed.................................... 0 0 3 7 3 13
---
109
</TABLE>

FRANCHISE SOURCING AND SELECTION. The majority of new franchises are
awarded to persons referred by existing franchisees, interested consumers who
have visited CD Warehouse stores and existing franchisees. 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 information concerning CD Warehouse franchise
opportunities.

TRAINING AND SUPPORT. The Company's philosophy is one of service and
commitment to its franchise system and it intends to implement a plan to enhance
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

35
<PAGE>
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 an initial franchise fee of $6,000 and royalties equal to 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 franchise 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.

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

36
<PAGE>
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-- 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

37
<PAGE>
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, The Wherehouse). 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 The Wherehouse, which has generally
offered an inventory of preowned CD's in less than 500 square feet of space with
limited selections.

Other retailers offering pre-recorded music include major national discount
stores, such as 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
Company believes that, while many of its competitors in the new CD market offer
a greater number of selections, the Company competes favorably with such
competitors on the basis of price. Additionally, while many competitors selling
new releases are located in more desirable locations, the Company believes that
its focus on preowned CD's offers a competitive advantage in attracting
purchasers of both new and preowned CD's.

The CD Warehouse system competes currently with one other national company
specializing in the sale of preowned CD's. Disc-Go-Round-Registered Trademark-
is a Minneapolis-based company owned by Grow Biz International, Inc., a
franchisor of several other concepts including Play It Again Sports.
Disc-Go-Round-Registered Trademark-

38
<PAGE>
maintains smaller quantities of preowned inventory than does CD Warehouse. Both
CD Warehouse and Disc-Go-Round-Registered Trademark- sell preowned CD's 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 from $9.99 to $12.99 per
selection. Grow Biz International, Inc.'s Form 10-Q for the Quarter Ended June
29, 1996 indicates that there are currently 107 units in the
Disc-Go-Round-Registered Trademark- system, as compared to 109 units in the CD
Warehouse system.

The Company believes that CD Warehouse stores compete favorably with its
competition in the preowned CD market in terms of price, selection, service and
location.

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

In connection with the CDIL Acquisition, the Company will acquire all right,
title and interest in the name "CD Warehouse" which is registered with the
United States Patent and Trademark Office. The Company believes that the
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 consists of office space and
the remainder 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 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. None of the proceeds from this
Offering will be used in connection with the establishment of the Company's
office and warehouse facility in Oklahoma City.

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.

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. The
basis for the cease and desist order was that 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.

39
<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

40
<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 Underwriters that it will recommend and use
its best efforts to cause a designee of Capital West Securities, Inc. 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, Capital West
Securities, Inc. 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.

1996 STOCK OPTION PLAN

The Company's Board of Directors and stockholders have approved the 1996
Stock Option Plan. The description in this Prospectus of the principal terms of
the 1996 Option Plan is a summary, does not purport to be complete, and is
qualified in its entirety by the full text of the 1996 Option Plan, a copy of
which has been filed as an exhibit to the Registration Statement of which this
Prospectus is a part.

Pursuant to the 1996 Option Plan, employees, officers, directors,
consultants and advisers of the Company are eligible to receive awards of stock
options. The 1996 Stock Option Plan provides for grants of "incentive stock
options" ("ISO's") meeting the requirements of Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"), and "non-qualified stock options"
("NQSO's").

Under the 1996 Option Plan, the Company has reserved 400,000 shares of
Common Stock for issuance of awards under the 1996 Option Plan (subject to
antidilution and similar adjustments).

The 1996 Option Plan will be administered by a Compensation Committee (the
"Committee") composed of two or more directors of the Company who are
"Non-Employee Directors" as such term is

41
<PAGE>
used in Rule 16b-3 promulgated under the Exchange Act. Subject to the provisions
of the 1996 Option Plan, the Committee will determine the type of award, when
and to whom awards will be granted, the number of shares covered by each award
and the terms, provisions and kind of consideration payable with respect to
awards. The Committee may interpret the 1996 Option Plan and may at any time
adopt such rules and regulations for the 1996 Option Plan as it deems advisable.
The Committee may, additionally, cancel or amend awards.

In determining the persons to whom awards shall be granted and the number of
shares covered by each award the Committee shall take into account the duties of
the respective persons, their present and potential contribution to the success
of the Company and such other factors as the Committee shall deem relevant in
connection with accomplishing the purposes of the 1996 Option Plan.

An option may be granted on such terms and conditions as the Committee may
approve, and generally may be exercised for a period of up to 10 years from the
date of grant. Generally, both NQSO's and ISO's will be granted with an exercise
price equal to the "Fair Market Value" (as defined in the 1996 Option Plan) on
the date of grant. In the case of ISO's, certain limitations will apply with
respect to the aggregate value of option shares which can become exercisable for
the first time during any one calendar year, and certain additional limitations
will apply to ISO's granted to an employee who possesses more than 10% of the
total combined voting power of all classes of stock of the Company. The
Committee may provide for the payment of the option price in cash, by delivery
of other Common Stock having a Fair Market Value equal to such option price, by
a combination thereof or by such other manner as the Committee shall determine.
Options granted under the 1996 Option Plan will become exercisable at such times
and under such conditions as the Committee shall determine. Other than in the
case of death, options generally may not be exercised more than three months
after an employee terminates employment with the Company for any reason other
than termination for cause or voluntary termination without the consent of the
Company (in which event options shall terminate immediately, unless the
Committee shall otherwise determine). Each year that a director is elected or
reelected to his position at the Company, an option to purchase 6,000 shares of
Common Stock will be granted with an exercise price equal to the Fair Market
Value on the date of grant. No options have been granted to date. Pursuant to
the terms of the 1996 Stock Option Plan, directors elected prior to the closing
of the Offering shall be granted 6,000 shares of Common Stock on the effective
date of the registration statement to which this Offering relates, with an
exercise price equal to the Offering price per share on the effective date,
subject to pro-rata vesting over a three-year period.

The Board may at any time and from time to time suspend, amend, modify or
terminate the 1996 Option Plan; provided, however, that, to the extent required
by Rule 16b-3 promulgated under the Exchange Act or any other law, regulation or
stock exchange rule, no such change shall be effective without the requisite
approval of the Company's stockholders. In addition, no such change may
adversely affect any award previously granted, except with the written consent
of the grantee.

No awards may be granted under the 1996 Option Plan after the tenth
anniversary of the approval of the 1996 Option Plan.

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

42
<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, or misappropriation or embezzlement of property of the
Company; willful misconduct with respect to the duties or obligations of the
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 any area in
which Employee rendered services to the Company. Each agreement contains a
provision prohibiting the Employees 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 existing 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 CD Warehouse stores
in Tulsa (two), Oklahoma, Edmond, Oklahoma and Memphis, Tennessee. The Company
will be entitled to all

43
<PAGE>
franchise fees and royalties 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. If the aggregate value of the inventory and the amount
of receivables as of the closing date of the CDIL Acquisition is less than the
amount of payables as of such date, the purchase price shall be reduced by an
amount equal to such difference.

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
that transaction. 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, in accordance with an agreed schedule. Failure to open the requisite
number of stores pursuant to the schedule could result in termination of the
World Wide Area Development Agreement, although such termination would not
affect any rights of Mr. Kane to operate CD Warehouse stores already opened and
operating under an existing franchise agreement. 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 by Mr. Kane from each subfranchisee. Additionally, at the closing of
the CDIL Acquisition, the Company will grant Mr. Kane, pursuant to a Domestic
Area Development Agreement, the exclusive right to develop ten domestic CD
Warehouse stores, subject to the Company's approval as to the location of such
stores. Pursuant to the Domestic Area Development Agreement, no initial
franchise fee will be payable by Mr. Kane with respect to the ten franchise
stores, although 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 15
partnerships and two limited liability companies 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 109 stores in the CD
Warehouse system. The MacDonald Equity Interests to be acquired by the Company
range from 1% to 50%, although certain percentages of ownership are earned only
after partnership

44
<PAGE>
payout, as defined in the respective partnership agreement. Upon consummation of
the MacDonald Acquisition, the Company will be vested with equity interests
ranging from 1% to 50%. Pursuant to the MacDonald Acquisition, the Company will
issue to MacDonald 80,000 shares of the Company's Common Stock.

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 disinterested and
independent 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. A
total of 400,000 shares of Common Stock has been reserved for grants of options
under the 1996 Stock Option Plan.

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

46
<PAGE>
preferred stock, the holders of Common Stock are entitled to receive such
dividends, if any, as may be 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

47
<PAGE>
in a proxy statement soliciting proxies for the election of the proposed nominee
(including such person's 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 held by certain
directors and executive officers of the Company (including Bruce D. MacDonald),
as well as Mark E. Kane (collectively, the "Affiliate Shares"). Such Affiliate
Shares 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
Affiliate Shares have agreed not to sell their shares until 24 months after the
date of this Prospectus without obtaining the prior written approval of Capital
West Securities, Inc. See "Underwriting." Upon expiration of the 24-month
period, 244,706 of the Affiliate Shares 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 (with 162,353 of such
shares entitled to piggyback registration rights for a period of two years
thereafter). The remaining 535,294 Affiliate Shares are subject to escrow
agreements required by certain state securities regulatory agencies, the terms
of which provide that such shares be held in escrow for up to six years, subject
to earlier release if the Company attains certain levels of earnings for any two
consecutive fiscal years or the Common Stock trades at 175% of the public
offering price per share for at least 90 consecutive trading days at least one
year after the effective date of the Offering.

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

48
<PAGE>
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.

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.

49
<PAGE>
UNDERWRITING

Capital West Securities, Inc., Westport Resources Investment Services, Inc.
and Berthel Fisher & Company Financial Services, Inc. (the "Underwriters") 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. .............................. 500,000
Westport Resources Investment Services, Inc. ............... 200,000
Berthel Fisher & Company Financial Services, Inc............ 300,000
----------
Total..................................................... 1,000,000
----------
----------
</TABLE>

The Underwriters have advised the Company that 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 $.25
per share. After the public offering, the price to public, the concession and
the reallowance may be changed by the Underwriters.

Capital West, one of the Underwriters, 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 Underwriters' 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 Capital West Securities, Inc. 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 Underwriters' 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 Underwriters
may designate and registering the Offering with the NASD, excluding filing fees
and fees and expenses of counsel retained for such purposes by the Underwriters
(which shall be paid by Capital West Securities, Inc. from the nonaccountable
expense allowance).

In connection with this Offering, the Company has agreed to sell to the
Underwriters, for a price of $.001 per warrant, warrants (the "Underwriters'
Warrants") to purchase shares of Common Stock equal to 10% of the total number
of shares sold pursuant to this Offering, excluding shares subject to the over-
allotment option. The Underwriters' Warrants are exercisable at a price equal to
150% of the initial public offering price for a period of four years commencing
one year from the date of this Prospectus (the "Exercise Period"). The
Underwriters' Warrants grant to the holders thereof, with respect to the
registration under the Securities Act of the securities directly and indirectly
issuable upon exercise of the

50
<PAGE>
Underwriters' Warrants, one demand registration right during the Exercise
Period, as well as piggyback registration rights at any time. The Company, its
executive officers and directors, and all of its current 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 Securities, Inc.

The Company has agreed with the Underwriters to use its best efforts to
cause a designee of Capital West Securities, Inc. 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, Capital West Securities, Inc. has not named a
nominee for election to board membership.

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 Underwriters. 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 Underwriters have advised the Company that the Underwriters do 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.

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

51
<PAGE>
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.

52
<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 COMBINED FINANCIAL STATEMENTS OF COMPACT DISCS INTERNATIONAL,
LTD. AND SUBSIDIARY AND CD ACQUISITIONS FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND CONSOLIDATED FINANCIAL STATEMENTS OF COMPACT
DISCS INTERNATIONAL, LTD. AND SUBSIDIARY FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996

Consolidated Balance Sheet at September 30, 1996........................ F-24

Statements of Income for the nine months ended September 30, 1995 and
1996.................................................................. F-25

Statements of Partners' Capital for the nine months ended September 30,
1995 and 1996......................................................... F-27

Statements of Cash Flows for the nine months ended September 30, 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.

/s/ ERNST & YOUNG LLP

Oklahoma City, Oklahoma

October 26, 1996

except for the second paragraph of Note 2 as to which the date is
December 10, 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).

On December 10, 1996, the Company adopted the 1996 Stock Option Plan which
provides for grants of up to 400,000 shares of common stock to certain
employees, officers, directors and others. Generally, the purchase price of
stock issuable upon exercise of the options will be at least equal to the fair
market value of the stock on the dates of grant. Generally, options are
exercisable no longer than ten years from the dates of grant. No options have
been granted to date. The Company has agreed to grant options to purchase 6,000
shares annually, subject to pro-rata vesting over a three-year period, to each
director.

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

F-5
<PAGE>
CD WAREHOUSE, INC.

NOTES TO CONSOLIDATED BALANCE SHEET

OCTOBER 15, 1996

3. COMMITMENTS (CONTINUED)
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 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
finder's fee contingent upon the closing of the purchase) 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
franchisee 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.

/s/ 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 based on a percentage of franchisees' monthly gross sales and are
recognized when earned. Specially designed software and computer equipment are
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.

/s/ 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 NINE MONTHS ENDED SEPTEMBER 30, 1995
AND
COMPACT DISCS INTERNATIONAL, LTD.
AND SUBSIDIARY
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996

F-23
<PAGE>
COMPACT DISCS INTERNATIONAL, LTD. AND SUBSIDIARY
(A TEXAS LIMITED PARTNERSHIP)
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
SEPTEMBER 30, 1996

ASSETS

<TABLE>
<S> <C>
Current assets
Cash.......................................................................... $ 220,343
Accounts receivable (net of allowance of $107,158)............................ 361,677
Inventory..................................................................... 579,169
Prepaid expenses.............................................................. 12,423
--------------
Total current assets........................................................ 1,173,612
--------------
Furniture, fixtures and equipment (net of accumulated depreciation)............. 40,893
--------------
Investments in partnerships..................................................... 70,219
Other assets (net of amortization).............................................. 4,946
--------------
Total investments and other assets............................................ 75,165
--------------
Total assets................................................................ $ 1,289,670
--------------
--------------

LIABILITIES AND PARTNERS' CAPITAL

Current liabilities
Accounts payable.............................................................. $ 636,822
Sales tax payable............................................................. 3,868
Payroll taxes payable......................................................... 149
Development fees advanced..................................................... 41,100
Advances from CD stores....................................................... 60,000
--------------
Total current liabilities................................................... 741,939
--------------
Minority interest............................................................... 905
Partners' capital............................................................... 546,826
--------------
Total liabilities and partners' capital..................................... $ 1,289,670
--------------
--------------
</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 NINE MONTHS ENDED SEPTEMBER 30, 1995
AND
COMPACT DISCS INTERNATIONAL, LTD. AND SUBSIDIARY
(A TEXAS LIMITED PARTNERSHIP)

CONSOLIDATED STATEMENT OF INCOME

(UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996

<TABLE>
<CAPTION>
1995 1996
------------ ------------
<S> <C> <C>
Revenue
Retail sales........................................................................ $ 1,966,290 $ 2,642,771
Royalty income...................................................................... 670,401 856,175
Computer/Software income............................................................ 96,814 53,295
Franchise fees...................................................................... 61,250 53,000
Development fees.................................................................... 81,000 7,500
------------ ------------
Total revenue....................................................................... 2,875,755 3,612,741
------------ ------------
Expenses
Cost of goods sold--retail sales.................................................... 1,721,373 2,423,149
Salaries............................................................................ 274,935 255,886
Bad debts........................................................................... 87,210 106,213
Cost of goods sold--computer........................................................ 95,572 45,238
Professional fees................................................................... 9,557 35,408
Rent................................................................................ 31,298 32,841
Telephone & utilities............................................................... 39,286 26,395
Travel.............................................................................. 30,775 25,978
Taxes............................................................................... 25,664 22,303
Commissions......................................................................... 0 21,478
Insurance........................................................................... 1,761 20,031
Office expense...................................................................... 15,481 15,588
Advertising......................................................................... 25,487 9,054
Promotion........................................................................... 800 9,015
Depreciation........................................................................ 8,184 8,876
Printing............................................................................ 6,393 7,966
Postage............................................................................. 3,075 6,496
Supplies............................................................................ 3,093 4,849
Auto expense........................................................................ 3,142 4,105
</TABLE>

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

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

COMBINED STATEMENT OF INCOME (CONTINUED)

(UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995
AND
COMPACT DISCS INTERNATIONAL, LTD. AND SUBSIDIARY
(A TEXAS LIMITED PARTNERSHIP)

CONSOLIDATED STATEMENT OF INCOME (CONTINUED)

(UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996

<TABLE>
<CAPTION>
1995 1996
------------ ------------
<S> <C> <C>
Expenses (continued)
Repairs & maintenance............................................................... 1,289 3,929
Entertainment....................................................................... 3,141 3,783
Licenses............................................................................ 4,136 3,770
Miscellaneous....................................................................... 10,929 3,750
Contract labor...................................................................... 1,792 2,400
Security............................................................................ 884 1,879
Dues & subscriptions................................................................ 455 1,382
Bank charges........................................................................ 992 939
Amortization........................................................................ 371 342
Photography......................................................................... 288 140
Interest expense.................................................................... 44 41
Litigation settlement............................................................... 1,778 0
------------ ------------
Total expenses.................................................................... 2,409,185 3,103,224
------------ ------------
Operating income...................................................................... 466,570 509,517
Other income
Equity in income of partnerships.................................................... 0 31,962
Interest income..................................................................... 89 3
------------ ------------
Net income before minority interest................................................... 466,659 541,482
Minority interest..................................................................... (5,637) (3,165)
------------ ------------
Net income........................................................................ $ 461,022 $ 538,317
------------ ------------
------------ ------------
</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 NINE MONTHS ENDED SEPTEMBER 30, 1995
AND
COMPACT DISCS INTERNATIONAL, LTD. AND SUBSIDIARY
(A TEXAS LIMITED PARTNERSHIP)

CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL

(UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996

<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Beginning balance....................................................................... $ 187,705 $ 558,335
Net income.............................................................................. 461,022 538,317
Distributions:
Cash.................................................................................. (251,997) (405,184)
Noncash............................................................................... 0 (144,642)
----------- -----------
Ending balance.......................................................................... $ 396,730 $ 546,826
----------- -----------
----------- -----------
</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 NINE MONTHS ENDED SEPTEMBER 30, 1995
AND
COMPACT DISCS INTERNATIONAL, LTD. AND SUBSIDIARY
(A TEXAS LIMITED PARTNERSHIP)

CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996

<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income............................................................................ $ 461,022 $ 538,317
Noncash items
Bad debt expense.................................................................... 87,210 106,213
Depreciation and amortization....................................................... 8,555 9,218
Equity in income of partnerships.................................................... 0 (31,962)
Minority interest................................................................... 5,637 3,165
Adjustments to reconcile net income to cash provided by
operating activities
(Increase) in accounts receivable................................................... (45,516) 53,728
Increase (decrease) in accounts payable............................................. (14,146) 109,626
(Increase) in inventory............................................................. (233,287) (223,137)
Increase in accrued liabilities..................................................... 5,015 25,295
(Increase) in prepaid expenses...................................................... 0 (3,332)
----------- -----------
Net cash provided by operating activities......................................... 274,490 587,131

Cash flows from investing activities
Purchase of fixed assets.............................................................. (14,306) (10,660)
----------- -----------
Net cash used by investing activities............................................. (14,306) (10,660)

Cash flows from financing activities
Distributions to partners............................................................. (251,997) (549,826)
Minority interest distributions....................................................... (4,610) (14,241)
----------- -----------
Net cash used by financing activities............................................. (256,607) (564,067)
----------- -----------
Net increase in cash.................................................................... 3,577 12,404
Cash at beginning of period............................................................. 112,567 207,939
----------- -----------
Cash at end of period................................................................... $ 116,144 $ 220,343
----------- -----------
----------- -----------
</TABLE>

SUPPLEMENTAL INFORMATION:

Accounts receivable due from partners of the Company in the amount of
$144,642 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

SEPTEMBER 30, 1995
AND
COMPACT DISCS INTERNATIONAL, LTD. AND SUBSIDIARY
(A TEXAS LIMITED PARTNERSHIP)

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 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 September 30, 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 September 30,
1995 and 1996, the Company has executed 104 and 114 franchise agreements,
respectively, for the operation of stores, of which 91 were operational in 1995
and 109 are operational in 1996. The Company has 11 development agreements in
place as of September 30, 1995 and 3 as of September 30, 1996.

FINANCIAL STATEMENTS

These financial statements are unaudited and reflect all adjustments,
consisting only of adjustments of a normal recurring nature, which are, in the
opinion of management, necessary for a fair presentation of the interim periods.
The results of operations for the nine months ended September 30, 1996 are not
necessarily indicative of the results to be expected for the full year.

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.

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

NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 1995
AND
COMPACT DISCS INTERNATIONAL, LTD. AND SUBSIDIARY
(A TEXAS LIMITED PARTNERSHIP)

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 1996

1. ORGANIZATION (CONTINUED)
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 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 based on a percentage of franchisees' monthly gross
sales, and 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 September 30, 1996 are as
follows:

<TABLE>
<S> <C>
Equipment......................................................... $ 31,607
Furniture and fixtures............................................ 24,537
Automobiles....................................................... 16,528
Leasehold improvements............................................ 10,101
---------
Total..................................................... 82,773
Accumulated depreciation.......................................... (41,880)
---------
Total..................................................... $ 40,893
---------
---------
</TABLE>

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

NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 1995
AND
COMPACT DISCS INTERNATIONAL, LTD. AND SUBSIDIARY
(A TEXAS LIMITED PARTNERSHIP)

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 1996

3. OTHER ASSETS

Components of other assets at September 30, 1996 are as follows:

<TABLE>
<S> <C>
Deposits........................................................... $ 3,560
Organization costs................................................. 2,150
Trademark.......................................................... 394
---------
Total...................................................... 6,104
Accumulated amortization........................................... (1,158)
---------
Total...................................................... $ 4,946
---------
---------
</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 September 30, 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 September 30, 1995.

At September 30, 1996, the Company's investments in partnerships and equity
in the income of these partnerships for the nine months ended September 30, 1996
consist of the following:

<TABLE>
<CAPTION>
INVESTMENT IN PARTNERSHIP
PARTNERSHIP INCOME
------------- -----------
<S> <C> <C>
CD Warehouse--Tulsa............................................... $ 27,888 $ 9,285
CD Warehouse--Memphis............................................. 3,389 10,386
CD Warehouse--Orange Park......................................... 18,290 12,291
CD Warehouse--Edmond.............................................. 20,652 0
------------- -----------
$ 70,219 $ 31,962
------------- -----------
------------- -----------
</TABLE>

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

NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 1995
AND
COMPACT DISCS INTERNATIONAL, LTD. AND SUBSIDIARY
(A TEXAS LIMITED PARTNERSHIP)

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 1996

4. INVESTMENTS IN PARTNERSHIPS (CONTINUED)
The following summarizes the activity of the CD Warehouse equity investments
of the Company for the nine months ending September 30, 1996:

<TABLE>
<CAPTION>
CD WAREHOUSE CD WAREHOUSE CD WAREHOUSE CD WAREHOUSE
EDMOND ORANGE PARK TULSA MEMPHIS
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Total assets...................................... $ 32,716 $ 85,608 $ 64,208 $ 66,912
Total liabilities................................. 32,630 2,425 321 2,193
-------------- -------------- -------------- --------------
Net assets...................................... $ 86 $ 83,183 $ 63,887 $ 64,719
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
Revenues.......................................... $ 36,001 $ 176,381 $ 192,094 $ 283,702
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
Net income........................................ $ 86 $ 24,580 $ 18,570 $ 41,545
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
</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 nine months ending September 30, 1995 and 1996 was $31,298 and $32,841,
respectively.

The following is a schedule of future minimum lease payments for the above
leases as of September 30, 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 $77,644 and
$145,267 for the nine months ending September 30, 1995 and 1996.

F-32
<PAGE>
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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........................................................... 13
Dividend Policy........................................................... 13
Dilution.................................................................. 14
Capitalization............................................................ 15
Combined Statements of Operations......................................... 16
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 17
Pro Forma Combined Condensed Financial Statement.......................... 22
Business and Properties................................................... 29
Management................................................................ 40
Certain Transactions...................................................... 43
Principal Stockholders.................................................... 46
Description of Securities................................................. 46
Shares Eligible for Future Sale........................................... 48
Underwriting.............................................................. 50
Legal Matters............................................................. 51
Experts................................................................... 51
Additional Information.................................................... 51
Financial Statements...................................................... F-1
</TABLE>

1,000,000 SHARES

[LOGO]

COMMON STOCK

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

PROSPECTUS

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

CAPITAL WEST
SECURITIES, INC.

WESTPORT RESOURCES
INVESTMENT SERVICES, INC.

BERTHEL FISHER & COMPANY
FINANCIAL SERVICES, INC.

JANUARY 22, 1997

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