HANDLEMAN CO /MI/, DEF 14A, 1998-08-06

HANDLEMAN CO /MI/
DEF 14A, 1998-08-06
DURABLE GOODS, NEC

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<PAGE> 1
SCHEDULE 14A
(RULE 14a-101)

INFORMATION REQUIRED IN PROXY STATEMENT

SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )

Filed by the registrant [X]

Filed by a party other than the registrant [ ]

Check the appropriate box:

[ ] Preliminary proxy statement [ ] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive proxy statement

[ ] Definitive additional materials

[ ] Soliciting material pursuant to Rule 14a-11(c) or Rule 14a-12

HANDLEMAN COMPANY
- - -------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)

HANDLEMAN COMPANY
- - -------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of filing fee (Check the appropriate box):

[X] No fee required.

[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.

(1) Title of each class of securities to which transaction applies:

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

(2) Aggregate number of securities to which transaction applies:

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

(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing
fee is calculated and state how it was determined):

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

(4) Proposed maximum aggregate value of transaction:

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

(5) Total fee paid:

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

[ ] Fee paid previously with preliminary materials.

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

[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the form or schedule and the date of its filing.

(1) Amount previously paid:

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

(2) Form, schedule or registration statement no.:

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

(3) Filing party:

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

(4) Date filed:

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

<PAGE> 2
HANDLEMAN COMPANY
- - --------------------------------------------------------------------------------

August 6, 1998

Dear Shareholder:

You are cordially invited to join the Board of Directors and Management of
Handleman Company at the Somerset Inn, 2601 West Big Beaver, Troy, Michigan for
the Annual Meeting of Shareholders on Tuesday, September 8, 1998 at 2:00 p.m.

The Notice of Annual Meeting, proxy statement and proxy card accompanying
this letter describe in detail the matters to be acted upon at the meeting.

It is important that your shares be represented and voted at the Annual
Meeting, regardless of the number that you hold. Whether or not you plan to
attend the meeting, you are urged to sign, date and return your proxy card as
soon as possible in the enclosed envelope to which no postage need be affixed if
mailed in the United States. This will not prevent you from voting your shares
in person at the meeting before voting closes, if you wish to do so.

We look forward to seeing you on September 8.

Sincerely,

Stephen Strome

Stephen Strome
President and Chief Executive Officer

<PAGE> 3
HANDLEMAN COMPANY
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD SEPTEMBER 8, 1998

To the Shareholders of Handleman Company:

The Annual Meeting of Shareholders of Handleman Company (the "Company")
will be held at the Somerset Inn, 2601 West Big Beaver, Troy, Michigan
48084-3390, on Tuesday, September 8, 1998, at 2:00 p.m., Eastern Daylight Time,
for the following purposes:

(1) To elect two Directors of the Company to serve until the Annual
Meeting of Shareholders in 2001.

(2) To approve the Handleman Company 1998 Stock Option and Incentive Plan,
which authorizes the granting of stock options, stock appreciation
rights and restricted stock, as set forth in the accompanying proxy
statement.

(3) To consider such other business as may properly come before the
meeting.

Only shareholders of record of Handleman Company at the close of business
on July 14, 1998 will be entitled to vote at the meeting.

A copy of the Annual Report of the Company for the fiscal year ended
May 2, 1998 accompanies this Notice.

By Order of the Board of Directors

Leonard A. Brams

Leonard A. Brams
Senior Vice President/Finance
Chief Financial Officer and Secretary

Troy, Michigan
August 6, 1998

<PAGE> 4

HANDLEMAN COMPANY
500 Kirts Boulevard
Troy, Michigan 48084-4142

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

PROXY STATEMENT FOR THE ANNUAL MEETING OF SHAREHOLDERS

TO BE HELD SEPTEMBER 8, 1998

GENERAL INFORMATION

This proxy statement contains information related to the Annual Meeting of
Shareholders of Handleman Company (the "Company) to be held at the Somerset
Inn, 2601 West Big Beaver, Troy, Michigan 48084-3390, on Tuesday, September 8,
1998, at 2:00 p.m., Eastern Daylight Time. The approximate mailing date for this
proxy statement and the proxy is August 6, 1998.

At the Company's Annual Meeting, shareholders will act upon the matters
outlined in the accompanying Notice of Annual Meeting, including the election of
Directors and approval of the Company's 1998 Stock Option and Incentive Plan. In
addition, the Company's management will report on the performance of the Company
during fiscal 1998 and respond to questions from shareholders.

It is important that your shares be represented at the meeting. If it is
impossible for you to attend the meeting, please sign and date the enclosed
proxy and return it to the Company. The proxy is solicited by the Board of
Directors of the Company. The shares represented by valid proxies in the
enclosed form will be voted if received in time for the Annual Meeting. The
expenses in connection with the solicitation of proxies will be borne by the
Company and may include requests by mail and personal contact by its Directors,
Officers and employees. In addition, the Company has retained Corporate Investor
Communications, Inc., 111 Commerce Road, Carlstadt, New Jersey 07072-2586, to
aid in the solicitation of proxies from brokers, banks, other nominees and
institutional holders at a fee not to exceed $4,000 plus out-of-pocket expenses.
The Company will reimburse brokers or other nominees for their expenses in
forwarding proxy materials to principals. Any person giving a proxy has the
power to revoke it at any time before it is voted.

VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF

Only holders of record of shares of $.01 par value common stock (the
"Common Stock") at the close of business on July 14, 1998 are entitled to notice
of, and to vote at, the meeting or at any adjournment or adjournments thereof,
each share having one vote. On such record date, the Company had issued and
outstanding 31,657,480 shares of Common Stock.

Based on information filed with the Securities and Exchange Commission
("SEC"), or otherwise provided to the Company, as of July 14, 1998, a) Franklin
Resources Inc., 777 Mariners Island Blvd., San Mateo, California 94404, owns
2,409,000 shares (7.6%) of the Company's outstanding Common Stock, b)
Dimensional Fund Advisors, 1299 Ocean Avenue, Santa Monica, California 90401,
owns 2,106,236 shares (6.7%) of the Company's outstanding Common Stock, and c)
the State of Wisconsin Investment Board, P.O. Box 7842, Madison, Wisconsin
53707, owns 1,831,000 (5.8%) of the Company's outstanding Common Stock.
Management does not know of any other person who, as of July 14, 1998,
beneficially owned more than 5% of the Company's Common Stock.

<PAGE> 5

I. ELECTION OF DIRECTORS

The Board of Directors proposes that Messrs. Alan E. Schwartz and John M.
Barth be elected as Directors of the Company to hold office until the Annual
Meeting of Shareholders in 2001 or until their successors are elected and
qualified. The persons named in the accompanying proxy intend to vote all valid
proxies received by them for the election of the nominees named above, unless
such proxies are marked to the contrary. The two nominees receiving the greatest
number of votes cast at the meeting or its adjournment shall be elected.
Abstentions, withheld votes and broker non-votes will not be deemed votes cast
in determining which nominees receive the greatest number of votes cast. In case
any nominee is unable or declines to serve, which is not anticipated, it is
intended that the proxies be voted in accordance with the best judgment of the
proxy holders.

The following information is furnished with respect to each nominee for
election as a Director, each person whose term of office as a Director will
continue after the meeting and each Executive Officer of the Company as of May
2, 1998 named in the Summary Compensation Table herein.

<TABLE>
<CAPTION>
Percentage of
Total
Shares Common
of Common Stock of the
Stock Company
Positions and Officers Beneficially Beneficially Term
Name and Year First with the Company and Other Owned as of Owned as of to
Became a Director Age Principal Occupations July 14, 1998 July 14, 1998 Expire
- - ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NOMINEES FOR ELECTION AS DIRECTORS FOR A THREE YEAR TERM
Alan E. Schwartz (1969).......72 Partner of the law firm of Honigman Miller
Schwartz and Cohn.......................................... 895 * 2001
John M. Barth (1995)..........52 Executive Vice President of Johnson Controls, Inc............. 1,000 * 2001

DIRECTORS CONTINUING IN OFFICE
Stephen Strome (1989) ........53 President and Chief Executive Officer of the Company.......... 369,270 (1) 1.2% 2000
James B. Nicholson (1991).....55 President and Chief Executive Officer of PVS Chemicals, Inc... 4,100 * 2000
Lloyd E. Reuss (1993).........62 Former President of General Motors Corporation................ 6,200 * 2000
David Handleman (1946)........82 Chariman of the Board......................................... 367,667 (2) 1.2% 1999
Richard H. Cummings (1962)....76 Retired Senior Vice Chairman of the Board of Directors of
NBD Bancorp., Inc. and of NBD Bank......................... 10,000 * 1999
Gilbert R. Whitaker, Jr.
(1990)........................66 Dean and H. Joe Nelson Professor of Business Economics, Jesse H.
Jones Graduate School of Management, Rice University....... 3,000 * 1999

OTHER EXECUTIVE OFFICERS
Peter J. Cline................51 Executive Vice President - President of
Handleman Entertainment Resources.......................... 88,252 (1) * --
Stephen Nadelberg.............57 Senior Vice President - President of North Coast
Entertainment.............................................. 7,009 (1) * --
Arnold Gross..................57 Senior Vice President - President of Handleman International.. 28,116 (1) * --
Leonard A. Brams..............47 Senior Vice President - Finance, Chief
Financial Officer and Secretary (4)........................ 11,447 (1) * --

All Directors and Executive Officers as a group (13 persons)..................................... 921,070 (3) 2.9% --
- - ---------------------
*Less than 1%
</TABLE>

(1) The number shown above as beneficially owned by Messrs. Strome, Cline,
Nadelberg and Gross includes 314,891, 63,750, 2,500 and 22,500 shares,
respectively, which they have the right to acquire within 60 days of July
14, 1998 pursuant to the Company's stock option plans (assuming, in certain
instances that the stock price reaches certain levels - see "Aggregated
Option Exercise in the Last Fiscal Year and Fiscal Year-End Option
Values"), 36,828, 23,324, 4,501, 5,299 and 11,447 shares which represent
restricted stock awards granted to Messrs. Strome, Cline, Nadelberg, Gross
and Brams, respectively, in June 1998, and 566, 376, 8 and 20 shares,
respectively, which have been credited to each of Messrs. Strome, Cline,
Nadelberg and Gross under the Company's salary deferral plan (the "401(k)
Plan").

(2) Mr. Handleman owns outright and has the sole voting and investment power
for 367,667 shares. The number of shares shown above does not include
243,175 shares owned outright by Marion Handleman, his wife. Mr. Handleman
disclaims beneficial ownership of the shares owned by his wife.

(3) All Executive Officers and Directors of the Company as a group (13 persons)
beneficially owned 921,070 shares (2.9%) of the Company's outstanding
Common Stock as of July 14, 1998, including 417,391 shares which they have
the right to acquire within 60 days of that date pursuant to the Company's
stock option plans, 86,841 shares representing restricted stock awards
granted in June 1998, and 1,392 shares which have been credited to them
under the 401(k) Plan. The total excludes 243,175 shares held by Marion
Handleman, wife of David Handleman.

(4) Mr. Brams was elected Senior Vice President/Finance, Chief Financial
Officer and Secretary effective June 2, 1997.

<PAGE> 6

OTHER INFORMATION RELATING TO NOMINEES AND DIRECTORS

Following each Director's name and the year in which he first became a
Director is a brief account of the business experience of each nominee and
Director of the Company during the past five years.

DAVID HANDLEMAN 1946

Mr. Handlem an has served as Chairman of the Board since December 1, 1974.
Mr. Handleman was also Chief Executive Officer from December 1, 1974 to March 9,
1988 and from December 12, 1989 to May 1, 1991. Mr. Handleman retired as an
Officer and employee of the Company effective July 1, 1993, but is continuing in
the non-officer position of Chairman of the Board. Mr. Handleman also performs
services for the Company as part of an advisory and non-compete agreement
entered into with the Company in 1989.

RICHARD H. CUMMINGS 1962

Mr. Cummings is the retired Senior Vice Chairman of the Board of Directors
of NBD Bancorp, Inc. and NBD Bank.

ALAN E. SCHWARTZ 1969

Mr. Schwartz is a partner of the law firm of Honigman Miller Schwartz and
Cohn, Detroit, Michigan, which firm serves as general counsel for the Company.
It is expected that such law firm will continue to be retained by the Company in
the current fiscal year. Mr. Schwartz is also a Director of the following
corporations: Detroit Edison Company, DTE Energy Company and Pulte Corporation.

STEPHEN STROME 1989

Mr. Strome has served as President and Chief Executive Officer of the
Company since May 1, 1991. From May 3, 1990 through April 30, 1991, Mr. Strome
served as President and Chief Operating Officer of the Company. From June 7,
1989 through May 2, 1990, Mr. Strome served as Executive Vice President and
Chief Operating Officer of the Company.

GILBERT R. WHITAKER, JR. 1990

Mr. Whitaker has served as Dean and H. Joe Nelson Professor of Business
Economics, Jesse H. Jones Graduate School of Management, Rice University, since
July 1, 1997. From September 1, 1995 through June 30, 1997, he was Professor of
Business Economics and Provost Emeritus, the University of Michigan. Mr.
Whitaker served as Provost and Executive Vice President for Academic Affairs,
the University of Michigan from September 1, 1993 to August 31, 1995. From
September 1, 1990 through August 31, 1993, Mr. Whitaker served as Provost and
Vice President for Academic Affairs, the University of Michigan. Mr. Whitaker is
a Director of the following corporations: Johnson Controls, Inc., Lincoln
National Corporation and Structural Dynamics Research Corporation.

JAMES B. NICHOLSON 1991

Mr. Nicholson has served as President and Chief Executive Officer of PVS
Chemicals, Inc. since 1979. Mr. Nicholson is a Director of PVS Chemicals, Inc.
and Standard Federal Bank. Mr. Nicholson is also Chairman of the Board of
Amerisure Companies.

LLOYD E. REUSS 1993

Mr. Reuss served as General Motors Corporation's Executive Vice President
of New Vehicles and Systems from April 6, 1992 through his retirement on January
1, 1993. Mr. Reuss served as President of General Motors Corporation from August
1, 1990 through April 5, 1992. Mr. Reuss is a Director of International Speedway
Corporation and U.S. Sugar Corporation. He is also Vice Chairman of the Board of
Directors of Detroit Mortgage & Realty.

JOHN M. BARTH 1995

Mr. Barth has served as Executive Vice President of Johnson Controls, Inc.
since October 1, 1992. Mr. Barth served as Vice President and General Manager of
the Plastics Technology Group and the Automotive Systems Group of Johnson
Controls, Inc. from March 27, 1990 to September 30, 1992. Mr. Barth is a
Director of Johnson Controls, Inc., Comerica Bank-Ann Arbor, N.A. and Edwards
Brothers.

During the fiscal year ended May 2, 1998, the Board of Directors held ten
meetings.

3
<PAGE> 7

COMMITTEES OF THE BOARD OF DIRECTORS

The Company has a standing Audit Committee. The current members of the
Audit Committee are Richard H. Cummings (Chairman), John M. Barth and Lloyd E.
Reuss. During fiscal year 1998, the Audit Committee held four meetings. The
duties of the Audit Committee are briefly: recommending to the Board of
Directors the retention or discharge of the independent public accountants;
reviewing the arrangements and scope of the audit and non-audit engagements and
the compensation of the independent public accountants; reviewing with the
independent public accountants and the Company's financial officers the adequacy
of the Company's internal auditing, accounting and financial controls; reviewing
major changes in accounting policies; and reviewing the scope, status and
results of examinations conducted by the internal audit department of the
Company.

The Company has a standing Compensation and Stock Option Committee. The
current members of the Compensation and Stock Option Committee are James B.
Nicholson (Chairman), Lloyd E. Reuss and Gilbert R. Whitaker, Jr. During fiscal
year 1998, the Committee held two meetings and made recommendations to the Board
of Directors. The duties of the Committee are: recommending to the Board of
Directors the remuneration arrangements for senior management; recommending to
the Board of Directors compensation plans in which Officers are eligible to
participate; and granting stock options, stock appreciation rights and
restricted stock awards under the Company's 1992 Performance Incentive Plan.

The Company has a standing Nominating Committee. The current members of the
Nominating Committee are Alan E. Schwartz (Chairman), John M. Barth, James B.
Nicholson and Stephen Strome. In lieu of formal meetings, members of the
Committee held informal discussions during fiscal 1998. The Nominating Committee
considers the performance of incumbent Directors and recommends to the
shareholders nominees for election as Directors. The Nominating Committee will
consider nominees for Directors recommended by shareholders, which
recommendations for the 1999 Annual Meeting of Shareholders should be submitted
to the Chairman of the Nominating Committee at the Company's executive offices,
no later than March 8, 1999.

The Board of Directors disbanded the Executive Committee during fiscal
1998. The Executive Committee was authorized to meet on call and had authority
to act on most matters between Board meetings. The Committee did hold two
meetings during fiscal 1998.

In September 1997, the Board of Directors established a Corporate
Governance Committee (the "Governance Committee"). The current members of the
Governance Committee are Gilbert R. Whitaker, Jr. (Chairman), John M. Barth and
Alan E. Schwartz. During fiscal year 1998, the Governance Committee held two
meetings. In February 1998, the Board of Directors adopted corporate governance
guidelines recommended by the Governance Committee. The guidelines will be
reviewed at least annually and will be monitored by the Governance Committee.
The guidelines establish corporate governance standards, outline the respective
responsibilities of management and the Board and provide a process for
evaluating the performance of the Board. The Board has the discretion to change
the guidelines and also to make exceptions to the guidelines when it is deemed
to be in the best interest of the Company and its shareholders to do so.
A copy of the guidelines is attached as Appendix B to this Proxy Statement.

Each of the Directors attended at least 75% of the meetings held during
fiscal 1998 by the Board and by each Committee of which he is a member.

CERTAIN TRANSACTIONS WITH EXECUTIVE OFFICERS AND DIRECTORS

Mr. David Handleman, Chairman of the Board of the Company since 1974,
retired as an Officer and employee of the Company effective July 1, 1993. Mr.
Handleman continues as a Director of the Company and as the non-officer Chairman
of the Board. Effective July 1, 1993, and during his lifetime, Mr. Handleman
will receive annual payments of $300,000 per year in consideration of his
performance of advisory and related services to the Company and execution of a
non-competition covenant entered into with the Company in 1989. Such amount is
in addition to the annual amount ($288,564) Mr. Handleman receives pursuant to
the Company's pension plan. In addition, the Company paid $66,947 for certain
life insurance, health insurance, automotive and club dues benefits for Mr.
Handleman pursuant to his agreement with the Company.

4
<PAGE> 8
COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS

DIRECTOR'S COMPENSATION IN FISCAL 1998

Officers of the Company who are Directors do not receive any additional
compensation for services as a Director or as a Committee member. During fiscal
1998, all other Directors received annual retainers of $18,000 and meeting fees
of $1,000 for each Board of Directors meeting attended. Each member on a
Committee of the Board of Directors was paid at the rate of $750 for each
Committee meeting attended. Non-Committee Directors who are requested in advance
to participate in any Committee meeting were also paid the $750 meeting fee. In
addition, during fiscal year 1998, each Committee Chairman received an annual
fee of $3,000. Directors are reimbursed for travel and other expenses related to
attendance at Board and Committee meetings. The Company has approved a Deferral
Plan for Payment of Director Fees which permits members of the Board of
Directors to elect to defer to a future date all or any portion of their
Director fees (including retainer fees, attendance fees and Committee fees),
with interest to be added to deferred amounts. The Company had adopted a
Director Retirement Plan which provides that after 10 years of service any
outside Director will be, upon retirement, entitled to receive 50% of the annual
Director fee then in effect for the lesser of the number of years the
participant served as a outside Director of the Company or the life of the
participant. Refer to "Director's Compensation in Fiscal 1999" following, with
respect to stock compensation and the termination of the Director Retirement
Plan.

Mr. David Handleman is not entitled to receive any Director or Committee
member fees during the term of his advisory agreement. See "Certain Transactions
with Executive Officers and Directors" for additional information regarding
amounts paid to Mr. Handleman for advisory services.

Under resolutions of the Board of Directors presently in effect, if a
Corporate, Division or Subsidiary Officer or Director should die while serving
in such capacity, the Company will pay to the surviving spouse, or if there is
no surviving spouse then to the decedent's estate, the equivalent of one year's
salary (excluding bonuses) based upon the amount being received by the decedent
at the time of his or her death, in 24 equal monthly installments commencing one
month after death.

DIRECTOR'S COMPENSATION EFFECTIVE IN FISCAL 1999

In view of the continuing desire to align interest with shareholders, the
Company engaged an independent consulting firm to provide assistance and
recommendations on Board compensation for outside Directors. Among other
considerations, the consulting firm reviewed current industry practices with
respect to stock compensation and retirement benefits. A recommendation was made
to the Board of Directors which was adopted in June 1998. Following is a summary
of the compensation structure for outside Directors commencing in September 1998
based upon the recommendation of the independent consultant:

Annual Retainer:
- $12,000 in restricted stock with 100% vesting after one year.
- $10,000 in cash payable in four quarterly installments of $2,500.

Board Meeting Fee:
- $1,000 per meeting as is currently paid.

Committee Fees:
- Committee fees will remain the same--$3,000 annual Chairman fee and $750
per meeting for Committee members.

Stock Awards:
- A one-time award of 500 shares of the Company's stock to be awarded to
new outside Directors when first elected to the Board.
- A one-time award of 500 shares of the Company's stock to current outside
Directors.
These stock awards are restricted with 100% vesting after three years.

Stock Options:
- The proposed Handleman Company 1998 Stock Option and Incentive Plan
allows stock option grants to outside Directors. If approved by the
shareholders, it is contemplated that options for 1,500 shares will be
granted annually with a three-year graded vesting.

Director Retirement Plan:
- The Director Retirement Plan has been terminated. As of the termination
date, Messrs. Cummings and Schwartz were fully vested and therefore
eligible to receive the retirement compensation upon retirement from the
Board. However, no additional years of service will be accrued and their
benefits will be frozen as of the termination date of the Retirement
Plan. No other outside Directors will receive any retirement benefits.

Deferral Plan for Payment of Director Fees:

- The deferred compensation plan will remain the same.

Refer to "Report of the Compensation and Stock Option Committee - Stock
Ownership Program" for minimum stock ownership guidelines for outside Directors.

5
<PAGE> 9

SUMMARY COMPENSATION TABLE

The following table sets forth information for each of the fiscal years
ended May 2, 1998, May 3, 1997 and April 27, 1996 concerning the compensation of
the Company's Chief Executive Officer and each of the Company's other four most
highly compensated Executive Officers as of May 2, 1998 (collectively, the
"named Executive Officers") whose annual salary and bonus exceeded $100,000.

Annual Compensation Long-Term Compensation Awards
------------------- -----------------------------
(2) (4) (5)
Restricted Options/SARs
Other Annual Stock Underlying All Other
(1) Fiscal Salary Bonus Compensation Awards Securities Compensation
Name and Principal Position Year ($) ($) ($) (#) (#) ($)
- - ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Stephen Strome 1998 447,115 - - - 60,000 1,375
President and Chief 1997 425,000 - - - 59,000 1,177
Executive Officer 1996 422,692 - - - 115,000 717

Peter J. Cline 1998 275,409 108,944 - - 14,000 1,327
Executive Vice President - 1997 260,769 33,000 - - 15,000 515
President of Handleman 1996 252,692 - - - 30,000 1,302
Entertainment Resources

Stephen Nadelberg 1998 213,846 9,736 - - 12,000 338
Senior Vice President - 1997 48,854 10,000 - - 10,000 -
President of North Coast
Entertainment

Arnold Gross 1998 182,385 9,212 30,850 (3) - 10,000 1,690
Senior Vice President - 1997 163,077 15,000 75,996 (3) - 10,000 129
President of Handleman 1996 137,254 25,000 66,035 (3) - 20,000 -
International

Leonard A. Brams 1998 165,192 37,600 - - 12,000 -
Senior Vice President -
Finance, Chief Financial
Officer and Secretary
- - ------------------------
</TABLE>

(1) Salary deferred by the named Executive Officers pursuant to the Company's
401(k) Plan follows:

1998 1997 1996
----- ----- ----
<S> <C> <C> <C>
Stephen Strome $5,173 $4,871 $3,468
Peter J. Cline 4,444 2,269 6,000
Stephen Nadelberg 1,015 -- --
Arnold Gross 5,874 775 --
Leonard A. Brams -- -- --
</TABLE>

(2) Non-cash compensation did not exceed the lesser of $50,000 or 10% of
individual cash compensation for any named Executive Officer other than
noted below for Mr. Gross.

(3) Includes net payments to or on behalf of Mr. Gross for certain life
insurance, automobile benefits, relocation expenses and housing expenses as
follows:

INSURANCE AUTO RELOCATION HOUSING TOTAL
--------- ---- ---------- -------- -----
<S> <C> <C> <C> <C> <C>
1998 $1,300 $7,250 $22,300 $ -- $30,850
1997 1,275 7,217 67,504 -- 75,996
1996 1,222 6,971 17,503 40,339 66,035
</TABLE>

(4) Restricted shares granted during the fiscal year ended April 1996 were
issuable if consolidated return on shareholders' equity exceeded a
predetermined threshold of performance in the fiscal 1996 through fiscal
1998 performance period. The threshold performance level was not met and,
therefore, the restricted stock awards of 14,783, 8,845 and 3,478 shares
granted to Messrs. Strome, Cline and Gross, respectively, were canceled.

(5) Represents amounts contributed to the named Executive Officers' 401(k) Plan
accounts for the Company matching of employee contributions.

6
<PAGE> 10

OPTION GRANTS IN THE LAST FISCAL YEAR

The following table provides details regarding stock options granted to the
named Executive Officers in the last fiscal year.

(4)
Potential Realizable Value
(1) at Assumed Annual Rates
% of Total of Stock Price Appreciation
Options Granted For Option Term
Number of to Employees in Exercise Price (3) --------------------------------
Name Options Granted Fiscal Year Per Share Expiration Date 5% 10%
- - --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Stephen Strome 60,000 15.4 $6.531 June 17, 2007 $246,420 $624,540

Peter J. Cline 14,000 3.6 6.531 June 17, 2007 57,498 145,726

Stephen Nadelberg 12,000 3.1 6.531 June 17, 2007 49,284 124,908

Arnold Gross 10,000 2.6 6.531 June 17, 2007 41,070 104,090

Leonard A. Brams 12,000 3.1 6.531 June 17, 2007 49,284 124,908
- - ------------------
</TABLE>

(1) The total number of shares subject to options granted to employees in
fiscal 1998 was 389,425.

(2) The exercise price (which corresponded to the fair market value of the
Common Stock on the date of grant) may be paid in cash, by delivery of
already owned shares subject to certain conditions, or pursuant to a
cashless exercise procedure under which the optionee provides irrevocable
instructions to a brokerage firm to sell the purchased shares and to remit
to the Company, out of the sale proceeds, an amount equal to the exercise
price plus all applicable withholding taxes. The Compensation and Stock
Option Committee has approved the issuance of reload options in certain
circumstances and with certain restrictions. A reload option is an option
granted to an employee when the employee exercises an option using
previously owned shares.

(3) The options become exercisable up to 25% on or after June 18, 1999 and
prior to June 17, 2000; up to 50% on or after June 18, 2000 and prior to
June 17, 2001; up to 100% on or after June 18, 2001.

(4) The Potential Realizable Value is calculated based on the fair market value
on the date of grant, which is equal to the exercise price of options
granted in fiscal 1998, assuming that the stock appreciates in value from
the date of grant until the end of the option term at the annual rate
specified (5% and 10%). Potential Realizable Value is net of the option
exercise price. The assumed rates of appreciation are specified in rules of
the SEC, and do not represent the Company's estimate or projection of
future stock price. Actual gains, if any, resulting from stock option
exercises and Common Stock holdings are dependent on the future performance
of the Common Stock and overall stock market conditions, as well as the
optionee's continued employment through the exercise/vesting period. There
can be no assurance that the amounts reflected in this table will be
achieved.

7
<PAGE> 11

AGGREGATED OPTION EXERCISES IN THE LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES

There were no stock options exercised by the named Executive Officers
during the fiscal year ended May 2, 1998. The following table sets forth the
number of shares covered by both exercisable and non-exercisable stock options
as of the last day of the fiscal year. The values for in-the money options
(which represent the positive spread between the exercise price of any such
existing stock options and $10.69 per share, representing the market price of
the Common Stock on the last day of fiscal year 1998) are also included. The
number of exercisable stock options shown in the following table includes
options exercisable within 60 days of July 14, 1998 when the Company's stock
price reaches certain levels.

VALUE OF
NUMBER OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
FISCAL YEAR-END FISCAL YEAR-END
------------------------------------------
Stephen Strome
Exercisable................ 314,891 $304,071
Unexercisable.............. 104,250 423,885

Peter J. Cline
Exercisable................ 63,750 33,600
Unexercisable.............. 25,250 102,551

Stephen Nadelberg
Exercisable................ 2,500 9,850
Unexercisable.............. 19,500 79,458

Arnold Gross
Exercisable................ 22,500 22,400
Unexercisable.............. 17,500 71,440

Leonard A. Brams
Exercisable................ -- --
Unexercisable.............. 12,000 49,908

8
<PAGE> 12

PENSION PLAN

The Company has a pension plan (the "plan") covering all employees of the
Company who have reached the age of 21 and completed one year of service, except
for employees covered by a collective bargaining agreement which does not
provide for plan coverage. The plan provides pension benefits, death benefits
and disability benefits for covered employees. For the fiscal year ended May 2,
1998, employees with five or more years of service were entitled to monthly
pension benefits beginning at normal retirement age (65). The computation of
benefits under the plan is based upon a formula which takes into consideration
retirement age, years of service up to 30 years, average annual compensation
during the highest five consecutive year period within the 10 years preceding
retirement, and the average of the taxable wage base for social security
purposes over the employee's career. The plan permits early retirement at ages
55-64 for employees with 10 or more years of service. A death benefit equal to a
portion of the employee's accrued benefit is paid to the employee's spouse if
the employee dies after becoming vested under the plan. An employee with 10 or
more years of service whose employment by the Company terminates prior to his or
her normal retirement date due to his or her permanent and total disability is
entitled to receive a disability retirement benefit.

The compensation covered by the plan includes all earnings from the Company
as reported on the employee's W-2 form, for base pay plus overtime and bonus
payments only, plus salary deferrals under the Company's 401(k) Plan, up to a
maximum of $160,000 for calendar year 1998.

The following table illustrates current annual benefits payable under the
plan upon retirement at age 65 to persons in certain compensation and years of
service classifications. The benefits are computed on the basis of a straight
life annuity and are not subject to deductions for social security or other
offset amounts.

Final Average Ten Years Twenty Years Thirty Years
Compensation of Service of Service of Service
- - ------------------------------------------------------------------------------
$160,000* $20,377 $40,753 $61,130

* Compensation which may be considered for any purpose under a qualified pension
plan is limited for 1998 to $160,000.

The Internal Revenue Code limits the benefits which can be paid from any
funded pension plan that qualifies for federal tax exemption. The amount for
calendar year 1998 is $130,000.

As of May 2, 1998, the credited years of service under the plan for the
named Executive Officers were as follows: 20 for Stephen Strome; 4 for Peter J.
Cline, 1 for Stephen Nadelberg, 4 for Arnold Gross and 0 for Leonard A. Brams.

SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN

The Company sponsors a Supplemental Executive Retirement Plan (the "SERP")
covering a select group of management employees of the Company. The SERP
provides supplemental retirement income, and death and disability benefits.
Covered employees with five or more years of service are entitled to monthly
retirement income beginning at normal retirement age (65). The SERP permits
early retirement at ages 55-64 for employees with 10 or more years of service.
The computation of benefits under the SERP is based upon a formula which takes
into consideration retirement age, years of service up to a maximum of 30 years,
and average annual compensation during the highest five consecutive years within
the 10 years preceding retirement. A death benefit equal to a portion of the
employee's accrued benefit is paid to the employee's spouse if the employee dies
after becoming vested under the SERP. An employee with 10 or more years of
service whose employment by the Company terminates prior to his or her normal
retirement date due to his or her total and permanent disability is entitled to
receive a disability retirement benefit.

The compensation covered by the SERP includes all earnings from the Company
as reported on the employee's W-2 form, for base pay, overtime, and bonus
payments, plus salary deferrals under the Company's 401(k) Plan. No maximum
applies to compensation covered under the SERP.

The benefit amount calculated under the formula is computed on the basis of
a straight life annuity and is subject to an offset by benefits provided under
the pension plan.

The following table illustrates current annual benefits payable under the
SERP upon normal retirement at age 65 to persons in certain compensation and
years of service classifications. These benefits are in addition to benefits
payable under the Company pension plan.

Final Ten Years Twenty Years Thirty Years
Compensation of Service of Service of Service
- - --------------------------------------------------------------------------------
$160,000 $ 3,623 $ 7,247 $ 10,870
250,000 17,123 34,247 51,370
350,000 32,123 64,247 96,370
450,000 47,123 94,247 141,370
550,000 62,123 124,247 186,370

As of May 2, 1998 the credited years of service under the SERP for the
named Executive Officers were as follows: 20 for Stephen Strome; 4 for Peter J.
Cline; 1 for Stephen Nadelberg; 4 for Arnold Gross and 0 for Leonard A. Brams.

9
<PAGE> 13

CHANGE IN CONTROL AGREEMENTS

The Company entered into Change in Control Agreements (the "Agreements")
with each of the named Executive Officers in the event their employment is
terminated as a result of, or in the connection with, a change in control (as
defined in the Agreements). The Agreements end December 31, 1999 and are
automatically renewed to December 31 of each subsequent year unless and until
the Company or the named Executive Officer sends a written notice of termination
to the other party.

In event of termination of employment or other specified changes in the
employment relationship within 24 months following a change in control, the
Agreements generally provide for payments of accrued salary and bonus not paid
plus a severance payment equal to the sum of base salary and the average of the
annual bonus accrued during the three fiscal years prior to the termination date
times (i) 1.99 if the named Executive Officer has been employed by the Company
for less than two years; (ii) 2.99 when the named Executive Officer has been
employed by the Company for two years or more. The Agreements also entitle each
named Executive Officer to continue participation in the Company's life and
health insurance benefits for 36 months following the termination date. In
addition, all stock options granted to the named Executive Officer under the
Company's 1992 Performance Incentive Plan or any other incentive plan or
arrangement will become 100% vested and immediately exercisable.

The Agreements with Messrs. Strome and Cline became effective on March 17,
1997. The Agreements with Messrs. Nadelberg, Gross and Brams became effective on
October 30, 1997. Based on current salaries, if Messrs. Strome, Cline,
Nadelberg, Gross or Brams had terminated their employment as of May 2, 1998
under circumstances entitling them to severance pay as described above, they
would have been entitled to receive lump sum cash payments of $1,345,500,
$993,621, $457,437, $602,198 and $445,970, respectively.

PERFORMANCE GRAPH

The following line graph compares the cumulative total shareholder return
for the Company's Common Stock with the cumulative total return of the Standard
& Poor's 500 Composite Index and the Russell 2500 Index, for the past five-year
period.

1993 1994 1995 1996 1997 1998
-------------------------------------------------
Handleman 100 78 79 47 48 82
S&P 500 100 105 124 161 201 284
Russell 2500 100 113 124 165 174 244

Assumes an investment of $100 in the Company's Common Stock, the S&P 500
Composite Index and Russell 2500 Index as of the last day of fiscal 1993. It
shows the cumulative total return for the Company's last five fiscal years
assuming reinvestment of dividends.

The Company does not believe it feasible to provide a peer group
comparison since any entities that could conceivably be deemed "peers" are
either privately-held companies or subsidiaries or divisions of larger
publicly-held companies. Therefore, the Company has selected the Russell 2500
Index on the basis of similar market capitalization.

<PAGE> 14

REPORT OF THE COMPENSATION AND STOCK OPTION COMMITTEE

INTRODUCTION

The Compensation and Stock Option Committee (the "Committee") of the Board
is composed of three independent outside Directors who have no interlocking
relationships as defined by the SEC. The members of the Committee are Messrs.
James B. Nicholson (Chairman), Lloyd E. Reuss and Gilbert R. Whitaker, Jr. The
Committee establishes the compensation policy for the Company's executives and
reviews the salaries, bonuses and stock incentives of each of the Executive
Officers including the Chief Executive Officer. The Committee administers the
Company's 1992 Performance Incentive Plan.

GENERAL POLICIES

The Company's compensation policies reflect its belief that the
compensation of its key employees (including Executive Officers) should: (1)
provide a compensation program that motivates key employees to achieve their
strategic goals by tying compensation to the performance of the Company and
applicable business units, as well as, to individual performance; (2) provide
compensation reasonably comparable to that offered by other leading companies to
attract and retain talented executives; and to (3) align the interests of its
key employees with the long-term interests of the Company's shareholders through
the award of stock incentives. The compensation packages offered to key
employees are based on the review of compensation survey studies and the advice
of compensation consultants. In assessing salary levels from a comparability
standpoint, the Committee refers to compensation surveys based on different
groups of corporations with approximately the same sales volume as the Company.

The Committee has not taken into the account the impact of Section 162(m)
of the Internal Revenue Code (which disallows certain deductions for executive
compensation exceeding $1,000,000 per year) in determining the level of
executive compensation since there is no immediate relationship between the
Company's compensation levels and the provisions of Section 162(m).

BASE SALARIES

Base salaries are established by analyzing and evaluating the
responsibilities of a given position and a comparison of compensation levels of
similar positions in the competitive marketplace on both a regional and national
basis. Each position is included in a structure of graduated salary levels that
have been set up by reference to the pay practices of the companies included in
the outside consultant's compensation surveys. Salary levels are reviewed
annually and are subject to adjustment based on the general movement in salaries
in the job market, as well as the individual's job performance, contributions to
the Company and changes in job responsibilities.

BONUSES

The Company's bonus program is intended to encourage and reward the
achievement of corporate objectives. Under the Company's bonus program, the
Committee establishes a bonus pool and specific bonus payments based on a
targeted return on beginning shareholders' equity. Key management employees
participate in the bonus program. Awards under the program are based, first, on
attaining the targeted return on equity and, second, on each participant's
contribution to the Company's business results based on both quantitative
results and subjective performance review. Bonuses are paid annually, based upon
whether the participant meets annual objectives. In 1998, Messrs. Cline,
Nadelberg, Gross and Brams received bonuses based on their individual initiative
and contribution to corporate performance.

STOCK PLANS

The Company's shareholders approved the adoption of the Handleman Company
1992 Performance Incentive Plan (the "Plan") which authorizes the granting of
stock options, stock appreciation rights and restricted stock.

The Committee believes that stock ownership by key employees (including
Executive Officers) and stock-based performance compensation arrangements foster
an interest in the enhancement of shareholder value and thus align management's
interests with that of the shareholders. In fiscal 1998, stock options were
awarded pursuant to the Plan to key employees in amounts reflecting the
participant's position and ability to influence the Company's overall
performance. In determining the size of individual awards, the Committee
considered the amount of options outstanding and previously granted, both in the
aggregate and with respect to the particular executive, and the amount of
options remaining available for grant under the Plan. The Committee's policy has
been to utilize vesting periods to encourage key employees to continue in the
employ of the Company, and to grant options to provide a long-term incentive.
The exercise price of the options is based on the fair market value of the
underlying shares on the date of the grant. Thus, such options have value only
if the price of the underlying share increases.

11
<PAGE> 15

STOCK OWNERSHIP PROGRAM

The Company has adopted certain minimum stock ownership guidelines for key
management. For the Chief Executive Officer it is expected that he would own
shares having a value of three times his base salary. For other members of
management the value of shares owned would range from .33 to 2.0 times base
salary.

The employees will be given until April 30, 2002 to achieve the stock
ownership guidelines, which may be satisfied through direct ownership of shares,
including shares received upon exercise of options. Restricted shares, however,
are not taken into account until the shares vest.

The Company also adopted minimum stock ownership guidelines for outside
Directors. Each outside Director of the Company will be expected to own
Handleman Company Common Stock by April 30, 2002 generally equivalent to a
market price equal to three times the annual retainer paid to the outside
Director by the Company.

OTHER COMPENSATION

At various times in the past the Company has adopted certain broad-based
employee benefit plans in which key management employees have been permitted to
participate and has adopted certain Executive Officer retirement, life and
health insurance and automotive plans. Other than with respect to the Company's
401(k) Plan, which includes a Company Common Stock Fund so as to further align
employees' and shareholders' long-term financial interests, benefits under these
plans are not directly or indirectly tied to Company performance.

CHIEF EXECUTIVE OFFICER COMPENSATION

The annual base salary earned in fiscal 1998 by Stephen Strome, the
Company's Chief Executive Officer, was $450,000. Compensation for the Chief
Executive Officer is determined through a process similar to that discussed
above for other Executive Officers. No bonus was paid to Mr. Strome for fiscal
year 1998 since the Company's performance goal under its bonus program was not
met. The Chief Executive Officer's bonus is based solely on the Company meeting
a targeted return on shareholders' equity. In fiscal 1998, Mr. Strome was
awarded a Nonqualified Stock Option grant to purchase 60,000 shares of the
Company's stock (see "Option Grants in the Last Fiscal Year"). The goal of the
option is to ensure attention to the Company's long-term strategies and
objectives, and provide payouts for performance that increases shareholder
value. During fiscal 1996, Mr. Strome was awarded 14,783 restricted shares.
These shares were to vest based on the extent that consolidated return on
shareholders' equity exceeded the performance target for the fiscal 1996 - 1998
performance period. The threshold performance level was not met and these shares
were canceled in fiscal 1998. The Committee believes Mr. Strome's compensation
to be competitive with compensation practices of the companies included in the
survey prepared by the outside consultant.

BY THE COMPENSATION AND STOCK OPTION COMMITTEE:

James B. Nicholson (Chairman)
Lloyd E. Reuss
Gilbert R. Whitaker, Jr.

12
<PAGE> 16

II. PROPOSAL TO ADOPT THE HANDLEMAN COMPANY
1998 STOCK OPTION AND INCENTIVE PLAN

The Board of Directors proposes that the shareholders approve the Company's
1998 Stock Option and Incentive Plan (the "Plan"). Under the Plan, stock options
(both Nonqualified Options and Incentive Options, as defined in the Plan), stock
appreciation rights and restricted stock may be granted to key employees and
outside Directors (the "Participants") of the Company or of any corporation in
which the Company owns stock possessing more than 25% of the combined voting
power of all classes of stock (a "Subsidiary"). The stock options, stock
appreciation rights and restricted stock to be granted or awarded under the Plan
relate to shares of the Company's Common Stock.

The Board of Directors adopted the Plan on June 17, 1998 subject to
approval by the Company's shareholders. The Board of Directors believes that it
is in the best interests of the Company and its shareholders to be able to offer
stock options, stock appreciation rights and restricted stock to key employees
(including officers who are also key employees) in accordance with the terms of
the Plan in order to provide increased incentives for such employees to make
significant and extraordinary contributions to the long-term performance and
growth of the Company and its Subsidiaries, to join the interests of key
employees and outside Directors with the interests of the shareholders of the
Company, and to help the Company and its Subsidiaries attract and retain key
employees and outside Directors. Adoption of the Plan, however, could have an
"anti-takeover" effect, particularly with regard to the award of restricted
stock which generally will require no payment from the employee.

The Company's 1992 Performance Incentive Plan, under which 110,486 shares
remained available for award as of June, 1998, would be terminated upon approval
of the Plan by the Company's shareholders.

In order to obtain shareholder approval of the Plan, a majority of the
votes cast by shareholders present, in person or by proxy, at the Annual Meeting
of Shareholders must be cast in favor of the Plan.

A FULL COPY OF THE PLAN IS ATTACHED AS APPENDIX A TO THIS PROXY STATEMENT.
THE MAJOR FEATURES OF THE PLAN ARE SUMMARIZED BELOW, BUT THIS IS ONLY A SUMMARY
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE ACTUAL TEXT OF THE PLAN.
CAPITALIZED TERMS NOT OTHERWISE DEFINED HEREIN HAVE THE MEANINGS GIVEN THEM IN
THE PLAN.

ADMINISTRATION

The Plan will be administered by a committee (the "Committee") appointed by
the Board of Directors. The Committee will be comprised of outside Directors who
meet the standards of Rule 16b-3 under the Securities Act of 1934, as amended
(the "Exchange Act"), or any similar successor rule and would be deemed "outside
Directors" under Section 162(m) of the Code. Subject to the provisions of the
Plan, the Committee will determine, from those eligible to be Participants under
the Plan, the persons to be granted stock options, stock appreciation rights and
restricted stock, the amount of stock or rights to be optioned or granted to
each such person, and the terms and conditions of any stock options, stock
appreciation rights and restricted stock. In addition, the Committee is
authorized to interpret the Plan, to make, amend and rescind rules and
regulations relating to the Plan and to make all other determinations necessary
or advisable for its administration, all subject to the provisions of the Plan.

PLAN PARTICIPANTS

The selection of persons who are eligible to participate in the Plan and
grants and awards to those individuals are determined by the Committee, in its
sole discretion. The only established criterion to determine eligibility under
the Plan is that individuals must be outside Directors or key employees
(including officers who are also key employees) of the Company or any
Subsidiary. Each grant or award under the Plan is to be evidenced by a written
agreement which will contain such provisions as may be approved by the
Committee.

SHARES SUBJECT TO GRANT OR AWARD

In general, the Plan limits the maximum number of shares of stock which may
be issued pursuant to restricted stock awards, stock options and stock
appreciation rights to 1,500,000. In addition, the maximum number of stock
options or stock appreciation rights that can be granted to any Participant
during any calendar year cannot exceed 200,000 shares and the maximum number of
shares that can be granted to any outside Director Participant during a calendar
year cannot exceed 10,000 shares.

13
<PAGE> 17

AMENDMENT OR TERMINATION OF THE PLAN

The Board of Directors may without shareholder approval terminate or amend
the Plan or any award or agreement pursuant to the Plan at any time, provided
the Board may not, without shareholder approval, amend the Plan so as to
increase the maximum number of shares in the aggregate which are subject to the
Plan, modify the requirements as to eligibility for participation under the Plan
or materially increase the benefits accruing to the Participants under the Plan,
and the Board may not, without consent of the holder of a stock option, stock
appreciation right or restricted stock award, change the stock option price or
alter any stock option, stock appreciation right or restricted stock which has
been previously granted or awarded under the Plan.

Unless sooner terminated by the Board of Directors, the Plan will terminate
on June 16, 2008, which is 10 years after its adoption by the Board of
Directors. The termination of the Plan will not affect the validity of any stock
option, stock appreciation right or restricted stock award outstanding on the
date of termination.

STOCK OPTIONS AND STOCK APPRECIATION RIGHTS

GRANT AND EXERCISE OF STOCK OPTIONS

Both Incentive Options and Nonqualified Options may be granted under the
Plan. An Incentive Option is intended to qualify as an incentive stock option
within the meaning of Section 422 of the Code. Any Incentive Option granted
under the Plan will have an exercise price of not less than 100% of the fair
market value of the shares on the date on which such option is granted. With
respect to an Incentive Option granted to a Participant who owns more than 10%
of the total combined voting stock of the Company or of any parent or Subsidiary
of the Company, the exercise price for such option must be at least 110% of the
fair market value of the shares subject to the option on the date the option is
granted. A Nonqualified Option granted under the Plan (i.e., an option to
purchase the Common Stock that does not meet the Code's requirements for
Incentive Options) must have an exercise price of not less than 100% of the fair
market value of the shares subject to the option on the date on which the option
is granted.

The Committee is to specify in its grants of stock options the time or
times at which such options will be exercisable. At the time of exercise of any
option granted pursuant to the Plan, the Participant must pay the full option
price of all shares purchased in cash or, with the consent of the Committee, (i)
in Common Stock of the Company, (ii) by a promissory note payable to the order
of the Company which is acceptable to the Committee, (iii) by a cash down
payment and delivery of such a promissory note in the amount of the unpaid
exercise price or (iv) in such other manner as the Committee determines is
appropriate, in its sole discretion. The fair market value of stock with respect
to which Incentive Options are first exercisable in any one year by a
Participant under the Plan cannot exceed $100,000.

No stock option or stock appreciation right granted in conjunction
therewith may be exercised prior to six months (12 months for an outside
Director) from the date of grant unless the Participant retires, dies or becomes
disabled prior thereto.

GRANT AND EXERCISE OF STOCK APPRECIATION RIGHTS

Stock appreciation rights may be granted in conjunction with the grant of
an Incentive or Nonqualified Option under the Plan or independently of any such
stock option. A stock appreciation right granted in conjunction with a stock
option may be an alternative right. In such case, the exercise of the stock
option terminates the stock appreciation right to the extent of the shares
purchased upon exercise of the stock option and, correspondingly, the exercise
of the stock appreciation right terminates the stock option to the extent of the
shares with respect to which such right is exercised. Alternatively, a stock
appreciation right granted in conjunction with a stock option may be an
additional right, in which case both the stock appreciation right and the stock
option may be exercised. A stock appreciation right may not, however, be granted
in conjunction with an Incentive Option under circumstances in which the
exercise of the stock appreciation right affects the right to exercise the
Incentive Option or vice versa, unless certain terms and conditions are met.

Upon exercise of a stock appreciation right, a Participant is not required
to make any payment to the Company (except for applicable withholding taxes) and
is entitled to receive an amount equal to a certain percentage (which is
specified in the stock appreciation right) of the excess of the then aggregate
fair market value of the number of shares with respect to which the Participant
exercises the stock appreciation right over the aggregate fair market value of
such number of shares at the time the stock appreciation right was granted. This
amount is payable by the Company, in the sole discretion of the Committee or as
provided in the grant of the stock appreciation right, in cash, in shares of the
Common Stock, or any combination thereof.

TERMS OF STOCK OPTION AND STOCK APPRECIATION RIGHTS

No stock option or stock appreciation right granted under the Plan may
remain outstanding for more than 10 years from the date of grant. With respect
to an Incentive Option or a related stock appreciation right granted to a
Participant who, at the time of the grant, owns more than 10% of the total
combined voting stock of all classes of stock of the Company or of any parent or
Subsidiary, such option and stock appreciation right will, however, expire not
more than five years after the date of the grant.

14
<PAGE> 18

CONTINUATION OF EMPLOYMENT

Unless the Committee in its discretion determines otherwise, stock options
and stock appreciation rights granted under the Plan may be exercised only while
a Participant is an employee of the Company or a Subsidiary (or an outside
Director). If the Participant's employment is terminated, the Committee may, in
its discretion and on certain terms and conditions specified in the Plan, extend
the period of time in which stock option and stock appreciation rights may be
exercised. Nevertheless, no stock option or stock appreciation right is to be
exercisable after its expiration date and a stock option or stock appreciation
right may only be exercised after termination of a Participant's employment to
the extent that it would have been exercisable on the date of termination of the
Participant's employment, provided, however, that if the termination of
employment (or of an outside Director's service as a Director) is due to death,
disability or retirement at a permitted retirement age, all stock options or
stock appreciation rights to such Participant thereupon become exercisable in
full.

The Plan provides that, as a condition to granting a stock option or stock
appreciation right under the Plan, the Committee may require that the
prospective Participant agree in writing to remain in the employ of the Company
or a Subsidiary for a designated minimum period from the date of the granting of
such stock option or stock appreciation right and may further require that any
Participant agree in writing to comply with any confidentiality,
non-solicitation, non-competition and non-disparagement provisions.
Nothing in the Plan or any grant or award confers any right to continued
employment.

NON-TRANSFERABILITY OF STOCK OPTIONS AND STOCK APPRECIATION RIGHTS

No stock option or stock appreciation right granted under the Plan is
permitted to be transferred by a Participant other than by will or by the laws
of descent and distribution, and such stock option or stock appreciation right
may be exercisable, during the lifetime of the Participant, only by the
Participant.

RESTRICTED STOCK

Subject to the terms of the Plan, the Committee may award shares of
restricted stock to the Participants. Generally, a restricted stock award will
not require the payment of any option price by the Participant, but will call
for the transfer of shares to the Participant subject to forfeiture, without
payment of any consideration by the Company, if the Participant's employment
terminates during a "restricted" period (which must be at least six months)
specified in the award of the restricted stock. If the Participant's employment
terminates as a result of his or her death or permanent disability or retirement
at a permitted retirement age, the restrictions shall lapse. Although the
Participant is not permitted to sell, transfer, pledge, hypothecate or otherwise
encumber shares acquired upon the grant of restricted stock during the
restricted period, the Participant has the right to vote, and receive any
dividends payable with respect to, such shares. The Committee may also prescribe
other terms and conditions in connection with the award of restricted stock.

FEDERAL INCOME TAX CONSEQUENCES

The rules governing the tax treatment of stock options, stock appreciation
rights, restricted stock and shares acquired upon the exercise of stock options
and stock appreciation rights are quite technical. Therefore, the description of
federal income tax consequences set forth below is necessarily general in nature
and does not purport to be complete. Moreover, statutory provisions are subject
to change, as are their interpretations, and their application may vary in
individual circumstances. Finally, the tax consequences under applicable state
and local income tax laws may not be the same as under the federal income tax
laws.

INCENTIVE OPTIONS

If the Participant makes no disposition of the shares acquired pursuant to
exercise of an Incentive Option within one year after the transfer of shares to
such Participant and within two years from the grant of the option, such
Participant will realize no taxable income as a result of the grant or exercise
of such option, and any gain or loss that is subsequently realized may be
treated as long-term capital gain or loss, as the case may be. Under these
circumstances, the Company will not be entitled to a deduction for federal
income tax purposes with respect to either the issuance of such Incentive
Options or the transfer of shares upon their exercise.

If shares acquired upon exercise of Incentive Options are disposed of prior
to the expiration of the above time periods, the Participant will recognize
ordinary income in the year in which the disqualifying disposition occurs, the
amount of which will generally be the lesser of (i) the excess of the market
value of the shares on the date of exercise over the option price, or (ii) the
gain recognized on such disposition. Such amount will ordinarily be deductible
by the Company for federal income tax purposes in the same year, provided that
the amount constitutes reasonable compensation and that the Company satisfies
certain federal income tax withholding requirements. In addition, the excess, if
any, of the amount realized on a disqualifying disposition over the market value
of the shares on the date of exercise will be treated as capital gain.

15
<PAGE> 19

NONQUALIFIED OPTIONS

A Participant who acquires shares by exercise of a Nonqualified Option
generally realizes as taxable ordinary income, at the time of exercise, the
difference between the exercise price and the fair market value of the shares on
the date of exercise. Such amount will ordinarily be deductible by the Company
in the same year, provided that the amount constitutes reasonable compensation
and that the Company satisfies certain federal income tax withholding
requirements. Subsequent appreciation or decline in the value of the shares on
the sale or other disposition of the shares will generally be treated as a
capital gain or loss.

STOCK APPRECIATION RIGHTS

A Participant generally will recognize ordinary income upon the exercise of
a stock appreciation right in an amount equal to the amount of cash received and
the fair market value of any shares received at the time of exercise, plus the
amount of any taxes withheld. Such amount will ordinarily be deductible by the
Company in the same year, provided that the amount constitutes reasonable
compensation and that the Company satisfies certain federal income tax
withholding requirements.

RESTRICTED STOCK

A Participant granted shares of restricted stock under the Plan is not
required to include the value of such shares in ordinary income until the first
time such Participant's right in the shares are transferable or are not subject
to substantial risk of forfeiture, whichever occurs earlier, unless such
Participant timely files an election under Section 83(b) of the Code to be taxed
on the receipt of the shares. In either case, the amount of such income will be
equal to the excess of the fair market value of the stock at the time the income
is recognized over the amount (if any) paid for the stock. The Company will
ordinarily be entitled to a deduction, in the amount of the ordinary income
recognized by the Participant, for the Company's taxable year in which the
Participant recognizes such income, provided that the amount constitutes
reasonable compensation and that the Company satisfies certain federal income
tax withholding requirements.

WITHHOLDING PAYMENTS

If, upon exercise of a Nonqualified Option or stock appreciation right, or
upon the award of restricted stock or the expiration of restrictions applicable
to restricted stock, or upon a disqualifying disposition of shares acquired upon
exercise of an Incentive Option, the Company or any Subsidiary must pay amounts
for income tax withholding, then in the Committee's sole discretion, either the
Company will appropriately reduce the amount of stock or cash to be delivered or
paid to the Participant or the Participant must pay such amount to the Company
to reimburse the Company for such payment. The Committee may permit a
Participant to satisfy such withholding obligations by electing to reduce the
number of shares of the Common Stock delivered or deliverable to the Participant
upon exercise of a stock option or stock appreciation right or award of
restricted stock, or by electing to tender an appropriate number of shares of
the Common Stock back to the Company subsequent to exercise of a stock option or
stock appreciation right or award of restricted stock (with such restrictions as
the Committee may adopt).

THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF THE PROPOSED 1998
STOCK OPTION AND INCENTIVE PLAN, AND YOUR PROXY WILL BE SO VOTED UNLESS YOU
SPECIFY OTHERWISE.

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III. OTHER MATTERS

RELATIONSHIP WITH INDEPENDENT PUBLIC ACCOUNTANT

PricewaterhouseCoopers LLP is the independent public accountant for the
Company and its subsidiaries and has reported on the Company's consolidated
financial statements for the fiscal year ended May 2, 1998. The Company's
independent accountant is appointed by the Board of Directors after receiving
recommendations from the Audit Committee. PricewaterhouseCoopers LLP has been
reappointed for fiscal year 1999.

Representatives from PricewaterhouseCoopers LLP are expected to be present
at the Annual Meeting of Shareholders and will have the opportunity to make a
statement at the meeting if they desire to do so, and are expected to be
available to respond to appropriate questions.

OTHER PROPOSALS

Neither the Company nor the members of its Board of Directors intend to
bring before the Annual Meeting any matters other than those set forth in the
Notice of Annual Meeting, and they have no present knowledge that any other
matters will be presented for action at the meeting by others. However, if any
other matters properly come before the meeting, it is the intention of the
persons named in the enclosed form of proxy to vote in accordance with their
best judgment.

A shareholder proposal which is intended to be presented at the 1999 Annual
Meeting of Shareholders must be received by the Company at its principal
executive offices by March 8, 1999.

By Order of the Board of Directors

Leonard A. Brams

Leonard A. Brams
Senior Vice President/Finance
Chief Financial Officer and Secretary

Dated: August 6, 1998

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APPENDIX A
HANDLEMAN COMPANY
1998 STOCK OPTION AND INCENTIVE PLAN

1. DEFINITIONS: As used herein, the following definitions shall apply:

(a) "Plan" shall mean this Handleman Company 1998 Stock Option and
Incentive Plan.

(b) "Corporation" shall mean Handleman Company, a Michigan corporation, or
any successor thereof.

(c) "Committee" shall mean a committee consisting of two or more members of
the Board of Directors of the Corporation, each of whom (1) shall be an "outside
Director" as defined under Section 162(m) of the Code (as hereinafter defined),
and the Treasury Regulations thereunder, and (2) shall be a "outside Director"
as defined under Rule 16b-3 of the Rules and Regulations under the Securities
Exchange Act of 1934, as amended (the "Exchange Act") or any similar or
successor provision, as appointed by the Board of Directors of the Corporation
to administer the Plan.

(d) "Participant shall mean any Director who is not an employee of the
Corporation or any Subsidiary (hereinafter defined as an "outside Director") and
any officer or employee of the Corporation or any Subsidiary designated by the
Committee under Paragraph 6, for participation in the Plan.

(e) "Nonqualified Option" shall mean an option to purchase Common Stock of
the Corporation which meets the requirements set forth in the Plan but does not
meet the definition of an incentive stock option set forth in Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code").

(f) "Incentive Option" shall mean an option to purchase Common Stock of the
Corporation which meets the requirements set forth in the Plan and also meets
the definition of an incentive stock option set forth in Section 422 of the
Code.

(g) "Stock appreciation right" shall mean a right to receive the
appreciation in value, or percent thereof of a specified number of shares of the
Common Stock of the Corporation, as provided in Paragraph 12.

(h) "Subsidiary" shall mean any corporation, limited liability company,
partnership, or any other entity, in which the Corporation owns, directly or
indirectly, stock or interest therein, possessing more than twenty-five percent
of the combined voting power of all classes of stock or interests.

(i) "Restricted stock" shall mean a grant of Common Stock of the
Corporation which is subject to restrictions against transfer, forfeiture and
such other terms and conditions determined by the Committee, as provided in
Paragraph 18.

2. PURPOSE OF PLAN: The purpose of the Plan is to provide key employees
(including officers who are also key employees) and outside Directors of the
Corporation and its Subsidiaries with incentives to make significant and
extraordinary contributions to the long-term performance and growth of the
Corporation and its Subsidiaries, to join the interests of key employees and
outside Directors with the interests of the shareholders of the Corporation, and
to facilitate attracting and retaining key employees and outside Directors.

3. ADMINISTRATION: The Plan shall be administered by the Committee. Subject to
the provisions of the Plan, the Committee shall determine, from those eligible
to be Participants under the Plan, the persons to be granted stock options,
stock appreciation rights and restricted stock, the amount of stock or rights to
be optioned or granted to each such person, and the terms and conditions of any
stock options, stock appreciation rights and restricted stock. Subject to the
provisions of the Plan, the Committee is authorized to interpret the Plan, to
promulgate, amend and rescind rules and regulations relating to the Plan and to
make all other determinations necessary or advisable for its administration.
Interpretation and construction of any provision of the Plan by the Committee
shall be final and conclusive. Acts approved by a majority of the members
present at any meeting at which a quorum is present, or acts approved in writing
by a majority of the Committee, shall be the acts of the Committee.

4. INDEMNIFICATION OF COMMITTEE MEMBERS: In addition to such other rights of
indemnification as they may have, the members of the Committee shall be
indemnified by the Corporation against the reasonable expenses, including
attorneys' fees, actually and necessarily incurred in connection with the
defense of any action, suit or proceeding, or in connection with any appeal
therein, to which they or any of them may be a party by reason of any action
taken or failure to act under or in connection with the Plan or any option,
stock appreciation right or restricted stock granted hereunder, and against all
amounts paid by them in settlement thereof (provided such settlement is approved
by the Board of Directors of the Corporation) or paid by them in satisfaction of
a judgment in any such action, suit or proceeding, except in relation to matters
as to which it shall be adjusted in such action, suit or proceeding that such
Committee member has acted in bad faith; provided, however, that within sixty
(60) days after receipt of notice of institution of any such action, suit or
proceeding a Committee member shall offer the Corporation in writing the
opportunity, at its own cost, to handle and defend the same.

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5. MAXIMUM NUMBER OF SHARES SUBJECT TO PLAN: At any given time, the maximum
number of shares of stock which may be issued pursuant to restricted stock
awards or with respect to which stock options or stock appreciation rights may
be granted under the Plan shall not exceed 1,500,000 shares (subject to
adjustments as provided in this Paragraph 5).

The maximum number of shares with respect to which stock options or stock
appreciation rights may be granted to any Participant (other than an outside
Director) during any calendar year shall not exceed 200,000 shares (subject to
adjustments as provided in this Paragraph 5) and the maximum number of shares
with respect to which stock options may be granted to any outside Director
Participant during any calendar year shall not exceed 10,000 shares (subject to
adjustments as provided in this Paragraph 5).

The number of shares with respect to which a stock appreciation right is
granted, but not the number of shares which the Corporation delivers or could
deliver to a Participant upon exercise of a stock appreciation right, shall be
charged against the aggregate number of shares available at any time under the
Plan; provided, however, that in the case of a stock appreciation right granted
in conjunction with a stock option under circumstances in which the exercise of
the stock appreciation right results in termination of the stock option and vice
versa, only the number of shares subject to the stock option shall be charged
against the aggregate number of shares available at any time under the Plan.

The number of shares subject to each outstanding stock option or stock
appreciation right or restricted stock award, the option price with respect to
outstanding stock options, the grant value with respect to outstanding stock
appreciation rights, and the aggregate number of shares available at any time
under the Plan shall be subject to such adjustment as the Committee, in its
discretion, deems appropriate to reflect such events as stock dividends, stock
splits, recapitalizations, mergers, consolidations or reorganizations of or by
the Corporation; provided, however, that no fractional shares shall be issued
pursuant to the Plan, no rights may be granted under the Plan with respect to
fractional shares, and any fractional shares resulting from such adjustments
shall be eliminated from any outstanding stock option, stock appreciation right,
or restricted stock award.

6. PARTICIPANTS: The Committee shall determine and designate from time to time,
in its sole discretion, those outside Directors and key employees (including
officers who are also key employees) of the Corporation or any Subsidiary to
whom stock options, stock appreciation rights, or restricted stock are to be
granted or awarded and who thereby become Participants under the Plan.

7. WRITTEN AGREEMENT: Each stock option and stock appreciation right granted and
each restricted stock awarded shall be evidenced by a written agreement between
the Corporation and the Participant and shall contain such provisions as may be
approved by the Committee. Such agreements shall constitute binding contracts
between the Corporation and the Participant, and every Participant, upon
acceptance of such agreement, shall be bound by the terms and restrictions of
the Plan and of such agreement. The terms of each such agreement shall be in
accordance with the Plan, but the agreements may include such additional
provisions and restrictions determined by the Committee, provided that such
additional provisions and restrictions do not violate the terms of the Plan.

8. ALLOTMENT OF SHARES: The Committee shall determine and fix the number of
shares of stock with respect to which each Participant may be granted stock
options and stock appreciation rights and the number of shares of restricted
stock which each Participant may be awarded; provided, however, that no
Incentive Option may be granted under the Plan to any one Participant which
would result in the aggregate fair market value, determined as of the date the
option is granted, of underlying stock with respect to which Incentive Options
are exercisable for the first time by such Participant during any calendar year
under any plan maintained by the Corporation (or any parent or Subsidiary of the
Corporation) exceeding $100,000.

9. STOCK OPTIONS: Subject to the terms of the Plan, the Committee may grant to
Participants either Incentive Options, Nonqualified Options or any combination
thereof, provided, however, that outside Director Participants may only be
granted Nonqualified Options. Each option granted under the Plan shall designate
the number of shares covered thereby, if any, with respect to which the option
is an Incentive Option, and the number of shares covered thereby, if any, with
respect to which the option is a Nonqualified Option.

10. STOCK OPTION PRICE: Subject to the rules set forth in this Paragraph 10, at
the time any stock option is granted, the Committee shall establish the price
per share for which the shares covered by the option may be purchased. With
respect to an Incentive Option, such option price shall not be less than 100% of
the fair market value of the stock on the date on which such option is granted;
provided, however, that with respect to an Incentive Option granted to an
employee who at the time of the grant owns (after applying the attribution rules
of Section 424(d) of the Code) more than 10% of the total combined voting stock
of the Corporation or of any parent or Subsidiary, the option price shall not be
less than 110% of the fair market value of the stock on the date such option is
granted. With respect to a Nonqualified Option, the option price shall not be
less than 100% of the fair market value of the stock on the date such option is
granted. Fair market value of a share shall be determined by the Committee and
may be determined by taking the mean between the highest and lowest quoted
selling prices of the Corporation's stock on any exchange or other market on
which the shares of Common Stock of the Corporation shall be traded on such
date. The option price shall be subject to adjustment in accordance with the
provisions of Paragraph 5 of the Plan.

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11. PAYMENT OF STOCK OPTION PRICE: At the time of the exercise in whole or in
part of any stock option granted hereunder, payment of the option price in full
in cash or, with the consent of the Committee, in Common Stock of the
Corporation or by a promissory note payable to the order of the Corporation
which is acceptable to the Committee, shall be made by the Participant for all
shares so purchased. Such payment may, with the consent of the Committee, also
consist of a cash down payment and delivery of such a promissory note in the
amount of the unpaid exercise price. Such payment may also be made in such other
manner as the Committee determines is appropriate, in its sole discretion. No
Participant shall have any of the rights of a shareholder of the Corporation
under any stock option until the actual issuance of shares to said Participant,
and prior to such issuance no adjustment shall be made for dividends,
distributions or other rights in respect of such shares, except as provided in
Paragraph 5.

12. STOCK APPRECIATION RIGHTS: Subject to the terms of the Plan, the Committee
may grant stock appreciation rights to Participants either in conjunction with,
or independently of, any stock options granted under the Plan. A stock
appreciation right granted in conjunction with a stock option may be an
alternative right wherein the exercise of the stock option terminates the stock
appreciation right to the extent of the number of shares purchased upon exercise
of the stock option and, correspondingly, the exercise of the stock appreciation
right terminates the stock option to the extent of the number of shares with
respect to which the stock appreciation right is exercised. Alternatively, a
stock appreciation right granted in conjunction with a stock option may be an
additional right wherein both the stock appreciation right and the stock option
may be exercised; provided, however, that a stock appreciation right may not be
granted in conjunction with an Incentive Option under circumstances in which the
exercise of the stock appreciation right affects the right to exercise the
Incentive Option or vice versa, unless the stock appreciation right, by its
terms, meets all of the following requirements:

(a) The stock appreciation right will expire no later than the Incentive
Option;
(b) The stock appreciation right may be for no more than the difference
between the option price of the Incentive Option and the fair market
value of the shares subject to the Incentive Option at the time the
stock appreciation right is exercised;
(c) The stock appreciation right is transferable only when the Incentive
Option is transferable, and under the same conditions;
(d) The stock appreciation right may be exercised only when the Incentive
Option is eligible to be exercised; and
(e) The stock appreciation right may be exercised only when the fair
market value of the shares subject to the Incentive Option exceeds the
option price of the Incentive Option.

Upon exercise of a stock appreciation right, a Participant shall be
entitled to receive, without payment to the Corporation (except for applicable
withholding taxes), an amount equal to the applicable percentage, as specified
in the right, of the excess of (i) the then aggregate fair market value of the
number of shares with respect to which the Participant exercises the stock
appreciation right, over (ii) the aggregate fair market value of such number of
shares at the time the stock appreciation right was granted. This amount shall
be payable by the Corporation, in the sole discretion of the Committee or as
provided in the grant of the right, in cash, in shares of Common Stock of the
Corporation or any combination thereof, at the times provided in the grant of
right.

13. GRANTING AND EXERCISE OF STOCK OPTIONS AND STOCK APPRECIATION RIGHTS: Each
stock option and stock appreciation right granted hereunder shall be exercisable
at any such time or times or in any such installments as may be determined by
the Committee at the time of the grant; provided, however, that no stock option
or stock appreciation right granted in conjunction therewith may be exercisable
prior to the expiration of six (6) months from the date of grant unless the
Participant retires from employment at a permitted retirement age or dies or
becomes disabled prior thereto; and provided further that no Nonqualified Option
granted to an outside Director Participant may be exercisable prior to the
expiration of twelve (12) months from the date of grant unless the outside
Director Participant dies or becomes disabled prior thereto or terminates
services as an outside Director prior thereto. Notwithstanding anything
contained in the Plan to the contrary, stock appreciation rights shall always be
granted and exercised in such a manner as to conform to the provisions of any
applicable rule adopted pursuant to the provisions of the Exchange Act. In
addition, the aggregate fair market value (determined at the time the option is
granted) of the stock with respect to which Incentive Options are exercisable
for the first time by a Participant during any calendar year shall not exceed
$100,000.

A Participant may exercise a stock option or stock appreciation right, if
then exercisable, in whole or in part by delivery to the Corporation of written
notice of the exercise, in such form as the Committee may prescribe,
accompanied, in the case of a stock option, by payment for the shares with
respect to which the stock option is exercised as provided in Paragraph 11.
Except as provided in Paragraph 17, stock options and stock appreciation rights
may be exercised only while the Participant is an employee or an outside
Director, as the case may be, of the Corporation or a Subsidiary.

Successive stock options and stock appreciation rights may be granted to
the same Participant, whether or not the stock option(s) and stock appreciation
right(s) previously granted to such Participant remain unexercised. A
Participant may exercise a stock option or a stock appreciation right, if then
exercisable, notwithstanding that stock options and stock appreciation rights
previously granted to such Participant remain unexercised, provided that an
Incentive Option may only be exercised in the order permitted by the Code.

14. NON-TRANSFERABILITY OF STOCK OPTIONS AND STOCK APPRECIATION RIGHTS: No stock
option or stock appreciation right granted under the Plan to a Participant shall
be transferable by such Participant otherwise than by will, or by the laws of
descent and distribution, and such option and stock appreciation right shall be
exercisable, during the lifetime of the Participant, only by the Participant.

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15. TERM OF STOCK OPTIONS AND STOCK APPRECIATION RIGHTS: If not sooner
terminated, each stock option and stock appreciation right granted hereunder
shall expire not more than ten (10) years from the date of the granting thereof;
provided, however, that with respect to an Incentive Option or a related stock
appreciation right granted to a Participant who, at the time of the grant, owns
(after applying the attribution rules of Section 424(d) of the Code) more than
10% of the total combined voting stock of all classes of stock of the
Corporation or any parent or Subsidiary, such option and stock appreciation
right shall expire not more than five (5) years after the date of granting
thereof.

16. CONTINUATION OF EMPLOYMENT: The Committee may require, in its discretion,
that any Participant under the Plan to whom a stock option or stock appreciation
right shall be granted shall agree in writing as a condition of the granting of
such stock option or stock appreciation right to remain in the employ of the
Corporation or a Subsidiary for a designated minimum period from the date of the
granting of such stock option or stock appreciation right as shall be fixed by
the Committee and may further require, in its discretion, that any Participant
agree in writing to comply with any confidentiality, non-solicitation,
non-competition and non-disparagement provisions and covenants that the
Committee may require as a condition precedent to the exercise of a stock option
or stock appreciation right.

17. TERMINATION OF EMPLOYMENT: If the employment of a Participant by the
Corporation or a Subsidiary shall be terminated (or an outside Director's
service as a Director shall terminate), the Committee may, in its discretion,
permit the exercise of stock options and stock appreciation rights granted to
such Participant (a) for a period not to exceed one year following such
termination of employment with respect to Incentive Options or related stock
appreciation rights, and (b) for a period not to extend beyond the expiration
date with respect to Nonqualified Options or related stock appreciation rights;
provided, however, that no Incentive Option or related stock appreciation right
may be exercised after three months following a Participant's termination of
employment unless such termination of employment is due to the Participant's
death, permanent disability or retirement at a permitted retirement age, in
which event the Incentive Option and related stock appreciation right may be
permitted to be exercised for up to one year following the Participant's
termination of employment for such reason. In no event, however, shall a stock
option or stock appreciation right be exercisable subsequent to its expiration
date. A stock option or stock appreciation right may only be exercised after
termination of a Participant's employment (or of an outside Director's service
as a Director) to the extent exercisable on the date of termination of
employment (or termination of service as an outside Director); provided,
however, that if the termination of a Participant's employment (or of an outside
Director's service as a Director) is due to the Participant's death, permanent
disability or retirement at a permitted retirement age, all stock options or
stock appreciation rights granted to such Participant shall thereupon become
exercisable in full.

18. RESTRICTED STOCK AWARDS: Subject to the terms of the Plan, the Committee may
award shares of restricted stock to Participants (other than outside Directors).
All shares of restricted stock granted to Participants under the Plan shall be
subject to the following terms and conditions (and to such other terms and
conditions prescribed by the Committee):

(a) At the time of each award of restricted shares, there shall be
established for the shares a restricted period, which shall be no less
than six (6) months. Such restricted period may differ among
Participants and may have different expiration dates with respect to
portions of shares covered by the same award.
(b) Shares of restricted stock awarded to Participants may not be sold,
assigned, transferred, pledged, hypothecated or otherwise encumbered
during the restricted period applicable to such shares. Except for such
restrictions on transfer, a Participant shall have all of the rights of
a shareholder in respect of restricted shares awarded to him or her
including, but not limited to, the right to receive dividends on, and
the right to vote, the shares.
(c) If a Participant ceases to be employed by the Corporation or a
Subsidiary for any reason other than death, permanent disability or
retirement at a permitted retirement age, all shares theretofore
awarded to the Participant which are still subject to the restrictions
imposed by Paragraph 18(b) shall upon such termination of employment be
forfeited and transferred back to the Corporation, without payment of
any consideration by the Corporation; provided, however, that in the
event such employment is terminated by action of the Corporation or a
Subsidiary without cause or by agreement between the Corporation or a
Subsidiary and the Participant, the Committee may, in its discretion,
release some or all of the shares from the restrictions. For this
purpose, the Committee's definition of "cause" shall be final and
conclusive.
(d) If a Participant ceases to be employed by the Corporation or a
Subsidiary by reason of death, permanent disability or retirement at a
permitted retirement age, the restrictions imposed by Paragraph 18(b)
shall lapse with respect to shares then subject to such restrictions.
(e) Stock certificates shall be issued in respect of shares of restricted
stock awarded hereunder and shall be registered in the name of the
Participant. Such certificates shall be deposited with the Corporation
or its designee, together with a stock power endorsed in blank, and, in
the discretion of the Committee, a legend shall be placed upon such
certificates reflecting that the shares represented thereby are subject
to restrictions against transfer and forfeiture.
(f) At the expiration of the restricted period applicable to the shares,
the Corporation shall deliver to the Participant or the legal
representative of the Participant's estate the stock certificates
deposited with it or its designee and as to which the restricted period
has expired. If a legend has been placed on such certificates, the
Corporation shall cause such certificates to be reissued without the
legend.

In the case of events such as stock dividends, stock splits,
recapitalizations, mergers, consolidations or reorganizations of or by the
Corporation, any stock, securities or other property which a Participant
receives or is entitled to receive by reason of his ownership of restricted
shares shall, unless otherwise determined by the Committee, be subject to the
same restrictions applicable to the restricted shares and shall be deposited
with the Corporation or its designee.

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19. INVESTMENT PURPOSE: If the Committee in its discretion determines that as a
matter of law such procedure is or may be desirable, it may require a
Participant, upon any acquisition of stock hereunder (whether by reason of the
exercise of stock options or stock appreciation rights or the award of
restricted shares) and as a condition to the Corporation's obligation to deliver
certificates representing such shares, to execute and deliver to the Corporation
a written statement in form satisfactory to the Committee, representing and
warranting that the Participant's acquisition of shares of stock shall be for
such person's own account, for investment and not with a view to the resale or
distribution thereof and that any subsequent offer for sale or sale of any such
shares shall be made either pursuant to (a) a Registration Statement on an
appropriate form under the Securities Act of 1933, as amended (the "Securities
Act"), which Registration Statement has become effective and is current with
respect to the shares being offered and sold, or (b) a specific exemption from
the registration requirements of the Securities Act, but in claiming such
exemption the Participant shall, prior to any offer for sale or sale of such
shares, obtain a favorable written opinion from counsel for or approved by the
Corporation as to the availability of such exemption. The Corporation may
endorse an appropriate legend referring to the foregoing restriction upon the
certificate or certificates representing any shares issued or transferred to the
Participant under the Plan.

20. RIGHTS TO CONTINUED EMPLOYMENT: Nothing contained in the Plan or in any
stock option, stock appreciation right or restricted stock granted or awarded
pursuant to the Plan, nor any action taken by the Committee hereunder, shall
confer upon any Participant any right with respect to continuation of employment
by the Corporation or a Subsidiary as an employee nor interfere in any way with
the right of the Corporation or a Subsidiary to terminate such person's
employment as an employee at any time with or without cause.

21. WITHHOLDING PAYMENTS: If upon the exercise of a Nonqualified Option or stock
appreciation right, or upon the award of restricted stock or the expiration of
restrictions applicable to restricted stock, or upon a disqualifying disposition
(within the meaning of Section 421 of the Code) of shares acquired upon exercise
of an Incentive Option, there shall be payable by the Corporation or a
Subsidiary any amount for income tax withholding, in the Committee's sole
discretion, either the Corporation shall appropriately reduce the amount of
stock or cash to be paid to the Participant or the Participant shall pay such
amount to the Corporation or Subsidiary to reimburse it for such income tax
withholding. The Committee may in its sole discretion permit Participants to
satisfy such withholding obligations in whole or in part, by electing to have
the amount of Common Stock delivered or deliverable by the Corporation upon
exercise of a stock option or stock appreciation right or upon award of
restricted stock appropriately reduced, or by electing to tender Common Stock
back to the Corporation subsequent to exercise of a stock option or stock
appreciation right or award of restricted stock, to reimburse the Corporation
for such income tax withholding, subject to such rules and regulations as the
Committee may adopt. The Committee may make such other arrangements with respect
to income tax withholding as it shall determine.

22. EFFECTIVENESS OF PLAN: The Plan shall be effective as of June 17, 1998;
provided that the shareholders of the Corporation approve the Plan within twelve
(12) months of that date. Stock options, stock appreciation rights and
restricted stock may be granted or awarded prior to shareholder approval of the
Plan, but each such stock option, stock appreciation right or restricted stock
grant or award shall be subject to shareholder approval of the Plan. No stock
option or stock appreciation right may be exercised prior to shareholder
approval, and any restricted stock awarded is subject to forfeiture if such
shareholder approval is not obtained.

23. TERMINATION, DURATION AND AMENDMENTS OF PLAN: The Plan may be abandoned or
terminated at any time by the Board of Directors of the Corporation. Unless
sooner terminated by the Board of Directors, the Plan shall terminate on the
date ten (10) years after its adoption by the Board of Directors, and no stock
options, stock appreciation rights or restricted stock may be granted or awarded
thereafter. The termination of the Plan shall not affect the validity of any
stock option, stock appreciation right or restricted stock outstanding on the
date of termination.

For the purpose of conforming to any changes in applicable law or
governmental regulations, or for any other lawful purpose, the Board of
Directors shall have the right, without approval of the shareholders of the
Corporation, to amend or revise the terms of the Plan or any award or agreement
pursuant to the Plan at any time; provided, however that no such amendment or
revision shall (i) with respect to the Plan increase the maximum number of
shares in the aggregate which are subject to the Plan (subject, however, to the
provisions of Paragraph 5), materially change the class of persons eligible to
be Participants under the Plan or materially increase the benefits accruing to
Participants under the Plan, without approval or ratification of the
shareholders of the Corporation; or (ii) with respect an award or agreement
pursuant to the Plan change the stock option price (except as contemplated by
Paragraph 5) or alter or impair any stock option, stock appreciation right, or
restricted stock which shall have been previously granted or awarded under the
Plan, without the consent of the holder thereof.

As adopted by the Board of Directors on June 17, 1998.

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APPENDIX B
HANDLEMAN COMPANY
GUIDELINES ON CORPORATE GOVERNANCE ISSUES

1. SELECTION OF CHAIRMAN AND CEO; LEAD DIRECTOR: Currently, the Chairman of the
Board is not an executive officer of Handleman Company and the President is the
Chief Executive Officer (CEO). If the Board does not designate the Chairman of
the Board as the CEO, then the President by virtue of his office is the CEO.

The Board has no policy respecting the need to separate or combine the
offices of Chairman and CEO. The Board believes that this issue is part of the
succession planning process and that it is in the best interests of the Company
to make a determination whenever it elects a new CEO. The Board recognizes that
there may be circumstances in the future that would lead it to consolidate these
offices, but the Board believes there is no reason to do so at this time.

The Board may designate an independent Director to serve as Lead Director,
with such duties and responsibilities as determined by the Board. If no Lead
Director is designated by the Board, reference in these Guidelines to the Lead
Director shall refer to the Chair of the Compensation and Stock Option
Committee.

2. MEETING WITHOUT CEO: In those instances where the outside Directors meet
without the CEO, the Lead Director will chair the meeting.

3. NUMBER OF COMMITTEES: The Board has the following committees: Audit,
Compensation and Stock Option, Nominating, and Corporate Governance. The Board
has the flexibility to form a new committee or disband a current committee. It
is the policy of the Board that only independent Directors serve on the Audit
and Compensation and Stock Option committees.

4. ASSIGNMENT AND ROTATION OF COMMITTEE MEMBERS: The CEO and Chairman suggest
the appointment of members to the committees, the composition of which are
discussed and ratified by the entire Board, taking into account the desires and
suggestions of individual Directors. It is the belief of the Board that
committee rotation is a desirable principle, but should not be mandated as a
policy since there may be reasons at a given point in time to maintain an
individual Director's committee membership for a longer period or to shorten the
period. The learning time to become an active contributor on a particular
committee is also a factor.

5. FREQUENCY AND LENGTH OF COMMITTEE MEETINGS: The Chair of each committee, in
consultation with its members, determines the frequency and length of the
meetings of the committee.

6. COMMITTEE AGENDA: The Chair of each committee, in consultation with the
appropriate officers, will develop the committee's agenda. At the beginning of
the Board year (from annual shareholders meeting to annual meeting) each
committee will establish a schedule of agenda subjects to be discussed during
the year (to the extent these can be foreseen); the schedule for each committee
will be furnished to all Directors. The agenda for each meeting will be
distributed to all Directors in advance, and suggestions for changes or
additions will be solicited.

7. SELECTION OF AGENDA ITEMS FOR BOARD MEETINGS: The CEO, in consultation with
the Chairman, will establish the agenda for each Board meeting. At the beginning
of the Board year the Chairman will establish a schedule of agenda subjects to
be discussed during the year (to the extent these can be foreseen). The agenda
for each meeting will be distributed to all Directors in advance, and
suggestions for changes or additions will be solicited. At least one Board
meeting each year will be a Board "retreat," the principal purpose of which will
be a Board review of long-term strategic plans and the principal issues that
Handleman Company will face in the future. The Board will have a minimum of six
scheduled meetings per Board year and will be on call for additional meetings as
needed.

8. BOARD MATERIALS DISTRIBUTED IN ADVANCE: Information and data that is
important to the Board's understanding of the business will be distributed in
writing to the Board the week before the scheduled Board meeting. The officers
will strive to make the information concise yet comprehensive, and will make an
ongoing effort to solicit suggestions from outside Directors on how to best meet
their information needs.

9. REGULAR ATTENDANCE OF NON-DIRECTORS AT BOARD MEETINGS: The CEO and Chairman
will invite senior officers to attend the meeting when their presence is
expected to significantly enhance the quality of Board decisions. Generally,
attendance of non-Directors will take place when their expertise is required or
where attendance is encouraged as noted in Item 11 (e.g. at the Board retreat).

10. EXECUTIVE SESSIONS OF OUTSIDE DIRECTORS: The outside Directors will meet in
executive session at the conclusion of each scheduled Board meeting. The Lead
Director will report to the CEO on the nature of the discussion immediately
following the Board meeting.

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11. BOARD ACCESS TO SENIOR MANAGEMENT: Board members have complete access to
Handleman's officers and counsel. It is assumed that Board members will use
appropriate judgment to be sure that this contact is not distracting to the
business operation of the Company and that such contact, if in writing, be
copied to the CEO under normal circumstances. Furthermore, the Board encourages
the CEO to, from time to time, bring executives into Board meetings who: (a) can
provide additional insight into the items being discussed because of personal
involvement in these areas or (b) represent executives with future potential
that the CEO believes should be given exposure to the Board. The Board may
retain outside counsel of its choice with respect to any issue relating to its
activities. The CEO will be advised on each such occasion of the law firm
selected and the issues to be addressed by it on behalf of the Board.

12. BOARD COMPENSATION REVIEW: It is appropriate for the officers to report once
a year to the Compensation and Stock Option Committee the status of Board
compensation in relation to other comparable U.S. companies and in consideration
of the most current best practices. Changes in Board compensation, if any,
should come at the suggestion of the Compensation and Stock Option Committee,
but with full discussion and concurrence by the Board.

13. SIZE OF THE BOARD: It is the opinion of the Board that the optimal size of
the Board under normal circumstances is 8 to 10 members. This size permits both
a diversity of skills and views available to contribute to the duties of the
Board and its Committees as well as the coordination and participation of all
Directors in Board deliberations. However, the Board would be willing to go to a
somewhat larger size in order to accommodate the availability of an outstanding
candidate.

14. MIX OF INSIDE AND OUTSIDE DIRECTORS: The Board believes that as a matter of
policy there should be a majority of independent Directors on the Handleman
Board.

15. DEFINITION OF INDEPENDENCE FOR OUTSIDE DIRECTORS: The Company has adopted
the following definition of an independent Director: one who (a) is not and has
not been employed by the Company or its subsidiaries in an executive capacity;
(b) is not a significant advisor or consultant to the Company; (c) is not
affiliated with a significant customer or supplier of the Company; (d) does not
have a significant personal services contract with the Company; (e) is not
affiliated with a tax-exempt entity that receives significant contributions from
the Company; or (f) is not a spouse, parent, sibling or child of a Board member
or senior executive of the Company. The Board believes that all outside
Directors with the exception of Alan E. Schwartz and David Handleman are
independent. Compliance with the definition of independence is reviewed annually
by the Nominating Committee. The ownership of stock in the Company by Directors
is encouraged. The Board's policy is that each Director should, by April 30,
2002, own Company stock valued at market price equal to three times the annual
retainer.

16. FORMER CHIEF EXECUTIVE OFFICER'S BOARD MEMBERSHIP: The Board believes this
is a matter to be decided in each individual instance. It is assumed that when
the Chief Executive Officer resigns from that position, he/she should offer
his/her resignation from the Board at the same time. Whether the individual
continues to serve on the Board is a matter for discussion at that time with the
new CEO and the Board.

17. BOARD MEMBERSHIP CRITERIA: The Nominating Committee is responsible for
reviewing with the Board periodically the appropriate skills and characteristics
required of Board members in the context of the current make-up of the Board.
This assessment should include issues of diversity, age, skills such as
understanding of marketing, finance, regulation and public policy, international
background, commitment to Handleman's shared values, etc. -- all in the context
of an assessment of the perceived needs of the Company and the Board at that
point in time.

18. SELECTION OF NEW DIRECTOR CANDIDATE/EXTENDING INVITATIONS TO BOARD: The
Board itself should be responsible, in fact as well as procedure, for selecting
its own members. The Board delegates the screening process involved to the
Nominating Committee with the direct input from the Chairman and the CEO. The
invitation to join the Board should be extended by the CEO and the Chair of the
Nominating Committee.

19. ASSESSING THE BOARD'S PERFORMANCE: The Board commits to participate in a
process of self-evaluation annually, led by the Nominating Committee. This will
be discussed with the full Board following the end of each fiscal year. This
assessment should be of the Board's contribution as a whole and should
specifically review areas in which the Nominating Committee or the CEO believe a
better contribution could be made. Its purpose is to increase the effectiveness
of the Board. The purpose of the evaluation will be to discover if there are
changes to the Board's structure and operations which will maximize the value
that the Board adds to the Company.

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20. DIRECTORS WHO CHANGE THEIR PRESENT JOB RESPONSIBILITY: It is the sense of
the Board that individual Directors who change in a substantial way the business
responsibility they held when they were elected to the Board, or who develop a
conflict as a Director of the Company with the person's position in or role with
another entity, should inform the Chairman and the Chair of the Nominating
Committee of the change. In addition, they must volunteer to resign from the
Board. It is not the sense of the Board that the Directors who retire from or
change substantially the position they held when they became a Director should
necessarily leave the Board. There should, however, be an opportunity for the
Board via the Nominating Committee to review the continued appropriateness of
Board membership under these circumstances.

21. RETIREMENT AGE: Directors will submit a written resignation to the Board
upon reaching the age of 72. The Nominating Committee will review the
desirability of continued service by that Director in light of the needs of the
Company at that time and make a recommendation to the Board. If continued
service is requested, that Director will then annually submit a written
resignation to be considered by the Board.

22. FORMAL EVALUATION OF THE CHIEF EXECUTIVE OFFICER: At the beginning of each
fiscal year, the CEO will set forth in writing to the Chair of the Compensation
and Stock Option Committee the CEO's personal goals for the performance of his
duties and responsibilities during such fiscal year. The outside Directors
should make this evaluation annually, and it should be communicated to the CEO
by the Chair of the Compensation and Stock Option Committee. The evaluation
should be based on objective criteria, including comparison of the CEO's goals
for the year against actual results, performance of the business, accomplishment
of long-term strategic objectives, management development, and the like. The
evaluation will be used by the Compensation and Stock Option Committee in the
course of its deliberations when considering the compensation of the CEO.

23. SUCCESSION PLANNING: There will be an annual report by the CEO to the Board
on succession planning. There should also be available, on a continuing basis,
the CEO's recommendations as to a successor should the CEO be unexpectedly
disabled.

24. MANAGEMENT DEVELOPMENT: There will be an annual report to the Board by the
CEO on Handleman's program for management development. This report should be
given to the Board at the same time as the succession planning report.

25. BOARD INTERACTION WITH INSTITUTIONAL INVESTORS, THE PRESS, CUSTOMERS, ETC.:
The Board believes that, in general, it is optimal for the appropriate Officers
to speak for the Company. Individual Board members may, from time to time, meet
or otherwise communicate with various constituencies that are involved with the
Company, including investors. It is expected that Board members would do this
with the knowledge of the CEO and, absent unusual circumstances, only at the
request of the CEO.

26. ADHERENCE TO CODE OF BUSINESS PRACTICES: Each Director shall be familiar
with and adhere to the Company's Code of Business Practices. The Directors shall
annually acknowledge in writing that the Director has complied with the Code of
Business Practices as it applies to the Director.

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HANDLEMAN COMPANY
ANNUAL MEETING OF SHAREHOLDERS

SEPTEMBER 8, 1998

PROXY SOLICITED BY THE BOARD OF DIRECTORS OF HANDLEMAN COMPANY

David Handleman, Stephen Strome and Richard H. Cummings and each of
them, are hereby authorized to represent and vote the stock of the undersigned
at the Annual Meeting of Shareholders to be held September 8, 1998, and at any
adjournment thereof:

1. THE BOARD RECOMMENDS A VOTE FOR THE NOMINEES LISTED BELOW.

<TABLE>
<S> <C> <C>
ELECTION OF [ ] FOR all nominees listed below [ ] WITHHOLD AUTHORITY
DIRECTORS (except as marked to the contrary below) to vote for all nominees listed below

</TABLE>

John M. Barth Alan E. Schwartz

(INSTRUCTION: To withhold authority to vote for any individual nominee,
write that nominee's name in the space provided below)

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

2. THE BOARD RECOMMENDS A VOTE FOR THE HANDLEMAN COMPANY 1998 STOCK OPTION
AND INCENTIVE PLAN.

FOR [ ] or AGAINST [ ] the proposal to adopt the Handleman Company 1998
Stock Option and Incentive Plan. [ ] ABSTAIN

3. In their discretion with respect to any other matters that may properly
come before the meeting.

THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED IN ACCORDANCE WITH
THE SPECIFICATIONS MADE HEREIN. IF NO SPECIFICATIONS ARE MADE, THIS PROXY WILL
BE VOTED FOR THE ELECTION OF THE NOMINEES FOR DIRECTORS LISTED ABOVE AND FOR
THE HANDLEMAN COMPANY 1998 STOCK OPTION AND INCENTIVE PLAN.

(Continued and to be signed on other side)

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

(Continued from other side)

THE UNDERSIGNED HEREBY REVOKES ANY PROXY OR PROXIES HERETOFORE GIVEN TO
VOTE SUCH STOCK, AND HEREBY RATIFIES AND CONFIRMS ALL THAT SAID ATTORNEYS AND
PROXIES, OR THEIR SUBSTITUTES, MAY DO BY VIRTUE HEREOF. IF ONLY ONE ATTORNEY
AND PROXY SHALL BE PRESENT AND ACTING, THEN THAT ONE SHALL HAVE AND MAY
EXERCISE ALL THE POWERS OF SAID ATTORNEYS AND PROXIES.

THE UNDERSIGNED HEREBY ACKNOWLEDGES RECEIPT OF THE NOTICE OF SAID
ANNUAL MEETING OF SHAREHOLDERS, THE PROXY STATEMENT RELATING THERETO AND THE
ANNUAL REPORT FOR 1998.

Dated: 1998
--------------------,

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

(Signature(s) of Shareholders(s))
The signature(s) of
shareholder(s) should correspond
exactly with the name(s)
stenciled hereon. Joint owners
should sign individually. When
signing as attorney, executor,
administrator, trustee or
guardian, please give your full
title as such.

PLEASE PROMPTLY DATE, SIGN AND
MAIL THIS PROXY IN THE ENCLOSED
ENVELOPE.

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