PLATINUM ENTERTAINMENT INC, DEFS14A, 1997-07-08

PLATINUM ENTERTAINMENT INC
DEFS14A, 1997-07-08
DURABLE GOODS, NEC

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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

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

PLATINUM ENTERTAINMENT, INC.
- - --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)

- - --------------------------------------------------------------------------------
(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)(1) 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:

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

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PLATINUM ENTERTAINMENT, INC.
2001 BUTTERFIELD ROAD, SUITE 1400
DOWNERS GROVE, ILLINOIS 60515
(630) 769-0033

July 8, 1997

Dear Stockholder:

You are cordially invited to attend a Special Meeting of Stockholders
(the "Special Meeting") of Platinum Entertainment, Inc. (the "Company"),
which will be held on Wednesday, July 30, 1997 at 10:00 a.m., local time, at
the offices of the Company, 2001 Butterfield Road, Suite 1400, Downers Grove,
Illinois 60515.

At the Special Meeting, you will be asked to consider and vote upon a
proposal (Proposal 1) to approve the issuance and sale by the Company of
convertible preferred stock in an amount of up to $40,000,000 (the "Preferred
Stock") in a private placement (the "Private Placement") exempt from
registration under Section 4(2) of the Securities Act of 1933, as amended.
The Company intends to use the net proceeds of the Private Placement to repay
bank indebtedness incurred in connection with the recently completed
acquisition of Intersound, Inc. by the Company and for working capital and
general corporate purposes. The Preferred Stock will be convertible into
shares of the Company's common stock, par value $.001 per share (the "Common
Stock"), at a price (the "Conversion Price") which is at a premium over the
market price of the Common Stock on the date of consummation of the Private
Placement. The Conversion Price is expected to be 10% to 15% above the
market price. The Company does not intend to send supplemental materials to
stockholders if the actual terms of the Preferred Stock are consistent with
the terms described in the Proxy Statement. However, if the actual Conversion
Price falls outside such range or if the terms of the Preferred Stock vary
materially from the terms described in the attached Proxy Statement, the
Company undertakes to resolicit proxies from its stockholders for their vote
on Proposal 1. The issuance and sale of the Preferred Stock in the Private
Placement is referred to herein as the "Preferred Stock Issuance."

You will also be asked to consider and vote upon a proposal (Proposal 2)
to approve the possible issuance and sale by the Company of Common Stock to
directors and/or officers of the Company up to an amount sufficient to pay
dividends on the Preferred Stock for the first six quarterly periods
following the Preferred Stock Issuance. In order to enhance the marketability
of the Preferred Stock while complying with dividend restrictions anticipated
to be imposed by the Company's proposed senior lender, the Company may enter
into arrangements whereby, on a quarterly basis, the Company will issue and
sell Common Stock at a price per share equal to the Conversion Price.
Purchasers of such Common Stock may include one or more directors and/or
officers of the Company. The aggregate proceeds from each quarterly sale of
Common Stock could be up to an amount equal to, and would be used to fund,
the Preferred Stock dividends payable during such period. The issuance and
sale of Common Stock to directors and/or officers is referred to herein as
the "Common Stock Issuance."

THE COMPANY'S BOARD OF DIRECTORS HAS DETERMINED THAT THE PREFERRED STOCK
ISSUANCE AND THE COMMON STOCK ISSUANCE ARE IN THE BEST INTERESTS OF THE
COMPANY AND ITS STOCKHOLDERS, HAS UNANIMOUSLY APPROVED THE PREFERRED STOCK
ISSUANCE AND THE COMMON STOCK ISSUANCE AND RECOMMENDS A VOTE "FOR" PROPOSAL 1
AND PROPOSAL 2.

You should read carefully the accompanying Notice of Special Meeting of
Stockholders and the Proxy Statement for details of the Issuance and
additional related information.

Whether or not you plan to attend the Special Meeting, please complete,
sign and date the enclosed proxy card and return it promptly in the enclosed
postage-prepaid envelope. Your stock will be voted in accordance with the
instructions you have given in your proxy, or, if no instructions are given,
your executed proxy will be voted for Proposal 1 and Proposal 2 in accordance
with the recommendations of the Board of Directors. If you attend the
Special Meeting, you may vote in person if you wish, even though you
previously returned your proxy card. Your prompt cooperation will be greatly
appreciated.

Sincerely,

Steven Devick
CHAIRMAN OF THE BOARD

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PLATINUM ENTERTAINMENT, INC.
2001 BUTTERFIELD ROAD, SUITE 1400
DOWNERS GROVE, ILLINOIS 60515
(630) 769-0033

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

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON JULY 30, 1997

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

To the Stockholders of
Platinum Entertainment, Inc.:

A Special Meeting of Stockholders of Platinum Entertainment, Inc. (the
"Company") will be held at 10:00 a.m., Chicago time, on Wednesday, July 30,
1997, at the offices of the Company, 2001 Butterfield Road, Suite 1400,
Downers Grove, Illinois 60515, for the following purposes:

(1) To consider and vote upon a proposal (Proposal 1) to approve the
issuance and sale by the Company of convertible preferred stock in
an amount of up to $40,000,000 (the "Preferred Stock") in a private
placement exempt from registration under Section 4(2) of the
Securities Act of 1933, as amended (the "Private Placement"). The
Preferred Stock will be convertible into shares of the Company's
common stock, par value $.001 per share (the "Common Stock"), at a
price which is at a premium over the market price of the Common
Stock on the date of consummation of the Private Placement.

(2) To consider and vote upon a proposal (Proposal 2) to approve the
possible issuance and sale by the Company of Common Stock to
directors and/or officers of the Company. The Common Stock would be
sold at a price per share equal to the conversion price, and the
aggregate proceeds could be up to an amount equal to, and would be
used to fund, the first six quarterly dividend payments on the
Preferred Stock.

(3) To transact such other business as may properly come before the
meeting or any adjournment thereof.

The issuance and sale of the Preferred Stock in the Private Placement (the
"Preferred Stock Issuance"), the issuance and sale of the Common Stock to
directors and/or officers to fund the Preferred Stock dividends (the "Common
Stock Issuance") and related matters are more fully described in the Proxy
Statement accompanying this Notice.

The affirmative vote of a majority of all votes cast, whether in person or
by proxy, at the Special Meeting is required to approve the Preferred Stock
Issuance and the Common Stock Issuance.

The Board of Directors has fixed the close of business on June 6, 1997 as
the record date for determining stockholders entitled to notice of, and to vote
at, the meeting.

By order of the Board of Directors,

Steven Devick
CHAIRMAN OF THE BOARD
Downers Grove, Illinois

July 8, 1997

WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE COMPLETE, SIGN
AND DATE THE ENCLOSED PROXY CARD AND RETURN IT PROMPTLY IN THE ENCLOSED
POSTAGE-PREPAID ENVELOPE. YOUR STOCK WILL BE VOTED IN ACCORDANCE WITH THE
INSTRUCTIONS YOU HAVE GIVEN IN YOUR PROXY OR, IF NO INSTRUCTIONS ARE GIVEN,
YOUR EXECUTED PROXY WILL BE VOTED FOR PROPOSAL 1 AND PROPOSAL 2 IN ACCORDANCE
WITH THE RECOMMENDATIONS OF THE BOARD OF DIRECTORS CONTAINED IN THIS PROXY
STATEMENT. IF YOU ATTEND THE SPECIAL MEETING, YOU MAY VOTE IN PERSON IF YOU
WISH, EVEN THOUGH YOU PREVIOUSLY RETURNED YOUR PROXY CARD. YOUR PROMPT
COOPERATION WILL BE GREATLY APPRECIATED.

<PAGE>

PLATINUM ENTERTAINMENT, INC.
2001 BUTTERFIELD ROAD, SUITE 1400
DOWNERS GROVE, ILLINOIS 60515
(630) 769-0033

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

PROXY STATEMENT

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

The accompanying proxy is solicited by the Board of Directors (the "Board
of Directors" or "Board") of Platinum Entertainment, Inc., a Delaware
corporation (the "Company"), for use at a Special Meeting of Stockholders (the
"Special Meeting") to be held at 10:00 a.m., Chicago time, on Wednesday,
July 30, 1997, at the offices of the Company, 2001 Butterfield Road, Suite 1400,
Downers Grove, Illinois 60515, and any adjournments thereof.

At the Special Meeting, stockholders of the Company at the close of
business on June 6, 1997 will consider and vote upon a proposal (Proposal 1)
to approve the issuance and sale by the Company of convertible preferred
stock in an amount up to $40,000,000 (the "Preferred Stock") in a private
placement (the "Private Placement") exempt from registration under Section
4(2) of the Securities Act of 1933, as amended (the "Securities Act"). The
Company intends to use the net proceeds from the issuance and sale of the
Debentures in the Private Placement (the "Preferred Stock Issuance") to repay
bank indebtedness incurred in connection with the recently completed
acquisition of Intersound, Inc. ("Intersound") by the Company, and for
working capital and general corporate purposes. Effective January 1, 1997, a
wholly-owned subsidiary of the Company purchased substantially all of the
assets of Intersound for consideration of $24,000,000 in cash, $5,000,000 in
convertible promissory notes and the assumption of $10,301,000 of certain
liabilities. See "Acquisition of Intersound." On January 31, 1997, the
Company obtained from the Bank of Montreal ("BMO"), individually and as agent
for certain banks (collectively, the "Lenders") a term loan in the amount of
$25,000,000 and a revolving credit facility in the amount of $10,000,000
(collectively, the "New Credit Facility"). Borrowings under the New Credit
Facility were used to finance the cash portion of the consideration for the
acquisition of Intersound, to refinance certain bank debt incurred by
Intersound and to pay fees and expenses associated with the transaction.
Borrowings under the New Credit Facility bear interest at LIBOR plus 6% per
annum, are secured by substantially all of the assets of the Company and its
subsidiaries and mature on August 1, 1997. The New Credit Facility contains
financial and other covenants applicable to the Company and its subsidiaries.
Unpaid principal balances outstanding after August 1, 1997 will incur late
charges. See "Acquisition of Intersound -- New Credit Facility."

The Company intends to offer up to $40,000,000 of Preferred Stock in the
Private Placement, for which Donaldson, Lufkin & Jenrette Securities
Corporation and Nesbitt Burns Securities, Inc. will act as placement agents
(collectively, the "Placement Agents"). The Preferred Stock will accrue
quarterly dividends, currently expected to accrue at a rate of 8% to 10% per
annum, payable in cash out of available funds, in preference to any dividend
on any other class of capital stock of the Company. A holder of Preferred
Stock ("Preferred Stockholder") will have the option at any time to convert
each share of Preferred Stock into one share of Common Stock at the
Conversion Price (as hereinafter defined). The amount by which the
Conversion Price exceeds the last sale price of the Common Stock as reported
on the Nasdaq National Market on the date of the Private Placement (the
"Market Price") will be determined by the Board of Directors following
negotiations among the Company, the Placement Agents and the purchasers of
the Preferred Stock. The Conversion Price is currently expected to be
between 10% and 15% above the Market Price. The Company does not intend to
send supplemental materials to stockholders if the actual terms of the
Preferred Stock are consistent with the terms described herein. However, if
the actual Conversion Price falls outside such range or if the terms of the
Preferred Stock vary materially from the terms described in this Proxy
Statement, the Company undertakes to resolicit proxies from its stockholders
for their vote on Proposal 1. See "Proposal 1-- Proposal to Approve the
Issuance and Sale of the Preferred Stock."

<PAGE>

At the Special Meeting, stockholders will also be asked to consider and
vote upon a proposal (Proposal 2) to approve the possible issuance and sale
by the Company of Common Stock to directors and/or officers of the Company up
to an amount sufficient to pay dividends on the Preferred Stock for the first
six quarterly periods following the Preferred Stock Issuance. In order to
enhance the marketability of the Preferred Stock while complying with
dividend restrictions anticipated to be imposed by the Company's proposed
senior lender, the Company may enter into arrangements whereby, on a
quarterly basis, the Company will issue and sell Common Stock at a price per
share equal to the Conversion Price of the Preferred Stock on the date of the
Private Placement. Purchasers of such Common Stock may include one or more
directors and/or officers of the Company. The aggregate proceeds from each
quarterly sale of Common Stock could be up to an amount equal to, and would
be used to fund from an escrow account established by the Company to hold
such proceeds, the Preferred Stock dividends payable during such period. The
issuance and sale of Common Stock to directors and/or officers is referred to
herein as the "Common Stock Issuance." Assuming the issuance of $40,000,000
of Preferred Stock and a Conversion Price of $7.425 (which assumes the low
end of the range of Conversion Prices based on the Market Price of the Common
Stock on June 30, 1997), and a dividend rate of 10.00%, the maximum number of
shares of Common Stock issuable in the Common Stock Issuance is 808,080. The
holders of such Common Stock would not be granted registration rights and the
Company does not currently intend to register such shares. See "Proposal 2--
Proposal to Approve the Issuance and Sale of Common Stock to Fund Preferred
Stock Dividends."

Under the Delaware General Corporation Law and the Company's Amended and
Restated Certificate of Incorporation and Amended and Restated Bylaws, no
action or authorization by the Company's stockholders is necessary for the
Preferred Stock Issuance or the Common Stock Issuance. However, because
transactions in the Company's Common Stock are reported on The Nasdaq
National Market, the Company is subject to the rules of the National
Association of Securities Dealers, Inc. (the "NASD"). The NASD requires
stockholder approval for the issuance by a company, in connection with an
acquisition, of shares of its common stock (or securities convertible into or
exercisable for common stock) equal to 20% or more of the voting power of all
shares of the company. The Company anticipates that Preferred Stock in an
amount of up to $40,000,000 will be issued in the Preferred Stock Issuance.
Assuming, solely for this purpose, (i) a Market Price on the closing date of
the Private Placement of $6.75 per share (the last sale price of the Common
Stock on the Nasdaq National Market on June 30, 1997) and (ii) a Conversion
Price of $7.425 per share (i.e. 10% above the Market Price), conversion of
all of the shares of Preferred Stock would result in the issuance of
5,387,206 shares of Common Stock. Based upon the 5,171,439 shares of Common
Stock outstanding as of June 30, 1997, and without taking into account the
Common Stock Issuance, the shares of Common Stock received upon conversion
would represent approximately 51.0% of the Common Stock outstanding after
conversion. Therefore, the Company is asking its stockholders at this time
to approve the Preferred Stock Issuance.

The NASD also requires stockholder approval of any arrangement pursuant
to which more than 25,000 shares of stock may be acquired by directors or
officers. The maximum number of shares of Common Stock that may be issued in
the Common Stock Issuance would be that number which, when multiplied by the
Conversion Price, equals the dividends payable on the Preferred Stock during
the first six quarterly periods following the Preferred Stock Issuance. Again
assuming the issuance of $40,000,000 of Preferred Stock and a Conversion
Price of $7.425 per share, and assuming a dividend rate of 10% per annum,
approximately 808,080 shares of Common Stock would be required to be issued
in order to fund six quarterly dividend payments. As some or all of such
shares may be purchased by directors and/or officers of the Company, the
Company is asking its stockholders to approve the Common Stock Issuance.

On March 3, 1997, the Company signed a definitive agreement to purchase
certain music business assets of K-tel International, Inc. ("K-tel"), one of
the world's leading compilation packagers and marketers of pre-recorded
music. Under the agreement, the Company will acquire (the "K-tel
Acquisition") the stock of K-tel International (USA), Inc. and Dominion
Entertainment, Inc. (collectively, the "K-tel Subsidiaries") for an aggregate
purchase price of $35,000,000 (subject to purchase price adjustments as
described under "The Pending K-tel Acquisition"). The Company deposited
$1,750,000 in escrow which will be applied to the purchase price or paid to
K-tel in the event the transaction is not consummated under certain
circumstances, including the failure by the Company to obtain financing.
Consummation of this acquisition is subject to the obtaining of financing by
the Company, approval by the K-tel stockholders and other customary
conditions. The Company currently intends to finance the K-tel Acquisition
with long-term bank indebtedness. The Company has received a financing
proposal from a bank for a three-year credit facility in the aggregate amount
of $40,000,000 to be used for the financing of the K-tel Acquisition and
ongoing working capital purposes, although no financing commitment has yet
been obtained. The K-tel Acquisition is currently anticipated to close 120
to 180 days from the date of the purchase agreement. There can be no
assurance that the K-tel Acquisition will be consummated. See "The Pending
K-tel Acquisition." With the exception of the $1,750,000 deposited in the
earnest money escrow, which amount the Company borrowed under the New Credit
Facility, the proceeds of the Preferred Stock Issuance will not be used for
the K-tel Acquisition.

This Proxy Statement and accompanying form of proxy are first being mailed
to stockholders on or about July 8, 1997.

THIS PROXY STATEMENT DOES NOT CONSTITUTE AN OFFER TO SELL
OR THE SOLICITATION OF AN OFFER TO BUY THE PREFERRED STOCK
AND IS BEING USED SOLELY TO SOLICIT PROXIES
RELATING TO A VOTE ON THE PROPOSALS.

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

THE DATE OF THIS PROXY STATEMENT IS JULY 8, 1997

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AVAILABLE INFORMATION

The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy or information statements and other information
with the Securities and Exchange Commission (the "Commission"). Such reports,
proxy or information statements and other information can be inspected and
copied at the public reference facilities maintained by the Commission at Room
1024, 450 Fifth Street, N.W., Washington D.C. 20549, and at the following
Regional Offices of the Commission: Seven World Trade Center, Suite 1300, New
York, New York 10048; and Citicorp Center, Suite 1400, 500 West Madison Street,
Chicago, Illinois 60661. Copies of such materials can be obtained from the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. The Commission maintains a World
Wide Web site (http: //www.sec.gov.) that contains reports, proxy and
information statements and other information regarding registrants, such as the
Company, that submit electronic filings to the Commission. In addition,
reports, proxy or information statements and other information concerning the
Company may be inspected at the offices of the Nasdaq Stock Market, 1735 K
Street, N.W., Washington, D.C. 20549.

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TABLE OF CONTENTS

Page
----

PROXY STATEMENT SUMMARY. . . . . . . . . . . . . . . . . . . . . . . . . . 1

RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

THE SPECIAL MEETING. . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

FORWARD LOOKING INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . 11

PROPOSAL 1--PROPOSAL TO APPROVE THE ISSUANCE AND
SALE OF THE PREFERRED STOCK. . . . . . . . . . . . . . . . . . . . . . . . 12

PROPOSAL 2--PROPOSAL TO APPROVE THE ISSUANCE AND
SALE OF COMMON STOCK TO FUND PREFERRED STOCK DIVIDENDS . . . . . . . . . . 13

ACQUISITION OF INTERSOUND. . . . . . . . . . . . . . . . . . . . . . . . . 14

THE PENDING K-TEL ACQUISITION. . . . . . . . . . . . . . . . . . . . . . . 19

UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA. . . . . . . . . . . . . . 21

PLATINUM ENTERTAINMENT, INC.
SELECTED CONSOLIDATED FINANCIAL DATA . . . . . . . . . . . . . . . . . . . 27

INTERSOUND, INC.
SELECTED FINANCIAL DATA. . . . . . . . . . . . . . . . . . . . . . . . . . 30

K-TEL INTERNATIONAL, INC. -- MUSIC OPERATION
SELECTED FINANCIAL DATA. . . . . . . . . . . . . . . . . . . . . . . . . . 31

PLATINUM ENTERTAINMENT, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS. . . . . . . . . . . . . . . 32

INTERSOUND, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS. . . . . . . . . . . . . . . 47

BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52

PRICE RANGE OF COMMON STOCK. . . . . . . . . . . . . . . . . . . . . . . . 62

DIVIDEND POLICY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62

SECURITY OWNERSHIP OF MANAGEMENT AND PRINCIPAL STOCKHOLDERS. . . . . . . . 63

EXPERTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64

MISCELLANEOUS MATTERS. . . . . . . . . . . . . . . . . . . . . . . . . . . 65

INDEX TO FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . . . . . . F-1

<PAGE>

PROXY STATEMENT SUMMARY

THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING
ELSEWHERE IN THIS PROXY STATEMENT. AS USED IN THIS PROXY STATEMENT, EXCEPT
WHERE THE CONTEXT CLEARLY REQUIRES OTHERWISE, REFERENCES MADE TO "PLATINUM"
SHALL MEAN PLATINUM ENTERTAINMENT, INC. AND ITS SUBSIDIARIES AND THEIR
COMBINED OPERATIONS ON A HISTORICAL BASIS PRIOR TO THE ACQUISITION OF
INTERSOUND, INC.; "INTERSOUND" REFERS TO INTERSOUND, INC. AND ITS OPERATIONS
ON A HISTORICAL BASIS PRIOR TO ITS ACQUISITION BY PLATINUM AND AS A
WHOLLY-OWNED SUBSIDIARY OF THE COMPANY THEREAFTER; AND THE "COMPANY" REFERS
TO PLATINUM AND INTERSOUND ON A COMBINED BASIS AFTER CONSUMMATION OF
PLATINUM'S ACQUISITION OF INTERSOUND. STOCKHOLDERS SHOULD CAREFULLY CONSIDER
THE INFORMATION SET FORTH UNDER THE HEADING "RISK FACTORS." THIS PROXY
STATEMENT CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS (WITHIN THE MEANING OF
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995) THAT INVOLVE
SUBSTANTIAL RISKS AND UNCERTAINTIES. SEE "FORWARD LOOKING INFORMATION."

THE COMPANY

The Company is a full-service music company that produces, licenses,
acquires, markets and distributes high quality recorded music for a variety of
musical formats. Platinum has produced recorded music products in the Gospel,
Adult Contemporary, Country and Blues music formats, primarily under its CGI
Records, Light Records, River North Records and House of Blues labels. With its
acquisition of Intersound, effective January 1, 1997, the Company expanded its
artist base and music catalog within its existing music genres, added new music
genres to its repertoire, including Classical/Themed Productions and
Urban/Dance, and added Intersound to its list of labels. On March 3, 1997, the
Company signed a definitive agreement to purchase certain music business assets
of K-tel International, Inc. ("K-tel"), a leading marketer and distributor of
compilation-driven music.

Since its inception in 1991, Platinum has sought to expand its catalog of
master recordings and publishing rights through strategic and complementary
acquisitions, as well as through the signing of established artists. One of the
Company's core business activities, and an integral part of the Company's growth
strategy, is the expansion and exploitation of its music catalog. Following the
Intersound acquisition, the Company owns a music catalog with over 10,000 master
recordings. The K-tel Acquisition would provide more than 3,500 additional
master recordings to the Company's catalog.

The Company's music catalog contains master recordings of some of the
best selling Gospel music acts such as The Winans, Andrae Crouch, Walter
Hawkins, Daryl Coley and Cissy Houston. According to the Recording Industry
Association of America ("RIAA"), Gospel is the fastest growing music segment,
having increased its market share and revenues by 38% and 30%, respectively
in 1996 from 1995. In addition, the Company, through the Intersound
acquisition, expanded its Gospel roster to include artists such as Candi
Staton, the Mighty Clouds of Joy, DeLeon Richards and Vicki Winans. The
Company believes that it is currently positioned as a market leader in Gospel
music. The Company has also released music by established artists in other
music genres. These artists include The Beach Boys, Peter Cetera, The Alan
Parsons Project and Crystal Bernard. Through the Intersound acquisition, the
Company expanded its roster to include artists such as Kansas, Crystal Gayle,
The Ohio Players, Bellamy Brothers, Eddie Rabbitt, Confunkshun and The Gap
Band.

The Company's strategy for growth and expansion of its position in the
recorded music business is based on: (i) selling diversified recorded music
offerings in formats which management believes have growth potential; (ii)
expanding and exploiting its music catalog through the acquisition of master
recordings and music publishing rights from other music companies at
attractive prices; (iii) introducing records by established artists with a
history of successful releases; and (iv) leveraging its unique distribution
position through both independent distribution channels and relationships
with certain larger record companies to provide wider distribution of certain
of the Company's products. The Company believes that this strategy
distinguishes the Company from certain of its larger competitors which have
traditionally focused on the development of new artists with the potential
for mass appeal. The Company intends to remain focused on artists and
musical

<PAGE>

formats characterized by relatively low development costs and predictable unit
sales volumes. This strategy may also include licensed compilations of
previously recorded music, "Best of" albums, and tribute albums to well known
musical artists with a history of successful releases.

Consistent with the strategy of targeting independently distributed record
companies with large catalogs, Platinum has completed four acquisitions, and has
signed a definitive agreement for a fifth acquisition, since the consummation of
its initial public offering in March 1996 (the "Offering"):

- R.E.X. MUSIC, INC. -- produces, licenses and markets recorded music
primarily in the contemporary Christian format of Gospel music;
artists include Sixpence None the Richer, Whitecross, Six Feet Deep,
The Waiting and Tammy Trent.

- DOUBLE J MUSIC GROUP -- develops and acquires ownership of musical
compositions and exploits them by means of recordings and licenses;
controls the copyrights to more than 250 country songs, three of which
reached number one on the Country music charts during 1996 including
CHECK YES OR NO by George Strait.

- HOUSE OF BLUES MUSIC COMPANY (50% interest) -- develops and produces
recordings featuring Blues, Gospel and other formats on the "House of
Blues" label; artists on the House of Blues label include Cissy
Houston and The Blues Brothers with Dan Aykroyd and Jim Belushi.

- INTERSOUND -- produces, licenses, acquires, markets and distributes
recorded music in a variety of formats including Gospel, Country,
Classical/Themed Productions and Urban/Dance.

- K-TEL (Pending acquisition of certain music business assets) --
markets and distributes compilation-driven records; catalog includes
recordings by numerous classic artists such as Chubby Checker, Bobby
Sherman, Leslie Gore and the Marshall Tucker Band.

The completed acquisitions described above, together with internally
generated growth, have resulted in the Company's gross revenues growing from
approximately $19.5 million for the historical nine months ended February 29,
1996 to approximately $44.1 million for the nine months ended February 28, 1997
on the pro forma basis described herein. See "Unaudited Pro Forma Consolidated
Financial Statements."

Platinum was incorporated in Delaware in November 1991. Its principal
executive offices are at 2001 Butterfield Road, Suite 1400, Downers Grove,
Illinois 60515, and its telephone number is (630) 769-0033.

INTERSOUND ACQUISITION AND BANK OF MONTREAL FINANCING

Effective January 1, 1997, the Company acquired substantially all of the
assets of Intersound for $24,000,000 in cash, $5,000,000 in convertible
promissory notes and the assumption of $10,301,000 of liabilities for a total
purchase price of $39,301,000. The Company and its subsidiaries entered into
the New Credit Facility with Bank of Montreal ("BMO"), individually and as
agent for certain banks (collectively, the "Lenders"), in order to finance
the cash portion of the Intersound consideration, to refinance certain bank
debt incurred by Intersound and to pay fees and expenses associated with the
transaction. The New Credit Facility matures on August 1, 1997. As of
June 30, 1997, the amount outstanding under the New Credit Facility was
approximately $35,000,000. See "Intersound Acquisition and Bank of Montreal
Financing -- The New Credit Facility." The Company intends to repay the
indebtedness incurred under the New Credit Facility with the net proceeds of
the Preferred Stock Issuance.

<PAGE>

THE SPECIAL MEETING

DATE, TIME AND PLACE

The Special Meeting will be held on Wednesday, July 30, 1997 at the
offices of the Company, 2001 Butterfield Road, Suite 1400, Downers Grove,
Illinois 60515, commencing at 10:00 a.m., local time, and at any adjournments
or postponements thereof. Only holders of record of the Common Stock at the
close of business on June 6, 1997 (the "Record Date") will be entitled to
notice of, and to vote at, the Special Meeting or any adjournments thereof.
As of the Record Date, the Company had outstanding 5,171,439 shares of Common
Stock. Each of the outstanding shares of Common Stock is entitled to one
vote on all matters coming before the Special Meeting.

PURPOSE

At the Special Meeting, the stockholders of the Company will be asked to
consider and vote upon proposals to approve the Preferred Stock Issuance and
the Common Stock Issuance. The Board of Directors is not currently aware of
any business to be acted upon at the Special Meeting other than as described
herein. If, however, other matters are properly brought before the Special
Meeting, or any adjournments or postponements thereof, the persons appointed
as proxies will have discretion to vote or act thereon according to their
judgment.

VOTE REQUIRED

The affirmative vote of a majority of all votes cast at the Special
Meeting, whether in person or by proxy, is required to approve the Preferred
Stock Issuance and the Common Stock Issuance. As of the Record Date,
directors and executive officers of the Company and their affiliates may be
deemed to be beneficial owners of approximately 30.9% of the outstanding
voting shares of Common Stock. Each of the directors and executive officers
of the Company and their affiliates has informed management that he intends
to vote or direct the vote of all shares of Common Stock over which he has
voting control in favor of the Preferred Stock Issuance and the Common Stock
Issuance.

QUORUM, ABSTENTIONS AND BROKER NON-VOTES

RECOMMENDATION OF THE BOARD OF DIRECTORS

THE BOARD OF DIRECTORS OF THE COMPANY HAS UNANIMOUSLY APPROVED THE
PREFERRED STOCK ISSUANCE AND THE COMMON STOCK ISSUANCE AND RECOMMENDS THAT
STOCKHOLDERS VOTE "FOR" PROPOSAL 1 AND PROPOSAL 2.

3
<PAGE>

PLATINUM ENTERTAINMENT, INC.
SUMMARY CONSOLIDATED FINANCIAL DATA(1)

<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED FIVE MONTHS
DECEMBER 31, DECEMBER 31, ENDED
1992 1993 MAY 31, 1994
------------ ------------ ------------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Gross revenues(3). . . . . . . . . . $ 1,082 $ 5,489 $ 4,255
Returns, allowances and discounts(3) -- (590) (584)
(Allowance for) recovery of
unrecoupable artist advances . . . (89) (1,361) (433)
-------- -------- --------
Total net revenues . . . . . . . . . 993 3,538 3,238
Gross profit . . . . . . . . . . . . 403 576 490
Operating income (loss)(4) . . . . . (260) (1,766) (901)
Income (loss) from continuing
operations . . . . . . . . . . . . (267) (1,799) (928)
Loss from discontinued operations. . (23) (1,519) (755)
Net income (loss). . . . . . . . . . (290) (3,318) (1,683)

Less -- Cumulative preferred
dividends(5) . . . . . . . . . . .
Loss applicable to common shares . .

Net loss per common share:
Continuing operations. . . . . . .
Discontinued operations. . . . . .

Net loss per common share(6) . . . .

Weighted average number of
common shares outstanding(6) . . .

<CAPTION>
AS
NINE MONTHS NINE MONTHS AS ADJUSTED ADJUSTED NINE
ENDED ENDED YEAR ENDED MONTHS ENDED
YEAR ENDED YEAR ENDED FEBRUARY 29, FEBRUARY 28, MAY 31, FEBRUARY 28,
MAY 31, 1995 MAY 31, 1996 1996 1997 1996(2) 1997(2)
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
STATEMENT OF OPERATIONS DATA:
Gross revenues(3). . . . . . . . . . $ 15,866 $ 25,488 $ 19,548 $ 25,854 $ 100,346 $ 73,937
Returns, allowances and discounts(3) (3,633) (5,444) (3,426) (5,807) (23,855) (17,495)
(Allowance for) recovery of
unrecoupable artist advances . . . (1,128) (2,506) 99 (465) (2,506) (465)
-------- -------- -------- -------- --------- --------
Total net revenues . . . . . . . . . 11,105 17,538 16,221 19,582 73,985 55,977
Gross profit . . . . . . . . . . . . 4,204 4,236 6,813 7,725 33,833 26,680
Operating income (loss)(4) . . . . . (4,729) (3,937) 714 (1,528) (66) 1,503
Income (loss) from continuing
operations . . . . . . . . . . . . (4,840) (4,401) 184 (2,564) (7,254) (1,130)
Loss from discontinued operations. . (4,684) (226) -- --
Net income (loss). . . . . . . . . . (9,524) (4,627) 184 (2,564)

Less -- Cumulative preferred
dividends(5) . . . . . . . . . . . (602) (301) (4,000) (3,000)
Loss applicable to common shares . . (5,229) (117) (11,254) (4,130)

Net loss per common share:
Continuing operations. . . . . . . $ (2.12) $ (1.71) $ (0.05) $ (0.50) $ (2.22) $ (0.81)
-------- --------
-------- --------
Discontinued operations. . . . . . (2.05) (0.08) -- --
-------- -------- -------- --------
Net loss per common share(6) . . . . $ (4.17) $ (1.79) $ (0.05) $ (0.50)
-------- -------- -------- --------
-------- -------- -------- --------

Weighted average number of
common shares outstanding(6) . . . 2,284,099 2,925,987 2,334,949 5,125,124 5,063,207 5,125,124
</TABLE>

AS OF FEBRUARY 28, 1997
--------------------------------
ACTUAL AS ADJUSTED(8)
(UNAUDITED)
(DOLLARS IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents. . . . . . . . $ 139 $ 8,883
Working deficit(7) . . . . . . . . . . . (18,917) (194)
Total assets . . . . . . . . . . . . . . 62,090 121,260
Long-term obligations. . . . . . . . . . 5,000 25,000
Redeemable preferred stock . . . . . . . -- 37,600
Total stockholders' equity . . . . . . . 14,786 13,049

- - ------------------
(1) The Summary Consolidated Financial Data presented in this table is
derived from the Selected Consolidated Financial Data and the
Consolidated Financial Statements of Platinum Entertainment, Inc.
included elsewhere in this Proxy Statement. The statement of operations
data for the nine months ended February 29, 1996 and February 28, 1997,
as well as the balance sheet data as of February 28, 1997, are derived
from unaudited consolidated financial statements and include, in the
opinion of management, all adjustments (consisting only of normal
recurring adjustments) necessary to present fairly the data for the
periods and as of the dates presented. The Summary Consolidated
Financial Data should be read in conjunction with the Selected
Consolidated Financial Data, the Consolidated Financial Statements and
notes thereto of Platinum Entertainment, Inc. and the other financial
information included in this Proxy Statement. The table also includes
certain unaudited pro forma combined statement of operations data for
fiscal 1996 and the nine month period ended February 28, 1997 which (i)
gives pro forma effect to the Intersound Acquisition as if such
transaction had occurred on June 1, 1995; (ii) gives pro forma effect to
the pending K-tel Acquisition as if such transaction had occurred on
June 1, 1995; (iii) assumes the incurrence of debt required to fund the
K-tel Acquisition; (iv) reflects the Preferred Stock Issuance and the
application of a portion of the net proceeds therefrom to repay the New
Credit Facility; and (v) reflects an adjustment to eliminate the
transactions between Platinum and Intersound. See "Unaudited Pro Forma
Consolidated Financial Data" contained elsewhere in this Proxy Statement.

(2) The unaudited As Adjusted statement of operations data for fiscal 1996
and the nine month period ended February 28, 1997 (i) gives pro forma
effect to the Intersound Acquisition as if such transaction had occurred
on June 1, 1995; (ii) gives pro forma effect to the pending K-tel
Acquisition as if such transaction had occurred on June 1, 1995;
(iii) assumes the incurrence of debt required to fund the K-tel
Acquisition; (iv) reflects the Preferred Stock Issuance and the
application of a portion of the net proceeds therefrom to repay the New
Credit Facility; and (v) reflects an adjustment to eliminate the
transactions between Platinum and Intersound. As Adjusted statement of
operations data is presented through income (loss) from continuing
operations only. See "Unaudited Pro Forma Consolidated Financial
Data" contained elsewhere in this Proxy Statement.

(3) During the Company's normal course of business, discounts are extended to
customers on product sales. The gross revenues and returns, allowances and
discounts for the years ended May 31, 1995 and 1996 and the nine months
ended February 29, 1996 have been reclassified by $507,000 $712,000 and
$548,000, respectively to conform to the financial statement presentation
of the operations for the nine months ended February 28, 1997. Discounts
for the years ended December 31, 1992 and 1993, and the five months ended
May 31, 1994 were insignificant.

<PAGE>

(4) During the nine months ended February 29, 1996, the Company renegotiated
certain artist contracts to allow additional costs previously expensed by
the Company to be included in recoupable artist advances. Accordingly, the
operating income for the nine months ended February 29, 1996 includes
$289,000 resulting from the reduction of the reserves for artist advances
that had been established at May 31, 1995.
(5) Represents accrued dividends on the Series A-1 Non-Convertible Preferred
Stock. The Company has never paid a dividend on its Common Stock. See
"Dividend Policy."
(6) Net loss per common share is computed based upon the weighted average
number of common shares outstanding. Common and common equivalent shares
issued during the 12-month period prior to the March 12, 1996 Offering have
been included in the calculation as if they were outstanding for all
periods presented using the treasury stock method and the public
offering price of $13 per share. No effect has been given to common
equivalent shares issued for any other period as the effect would be
antidilutive. In addition, all convertible preferred stock and convertible
Class A common stock and Class B common stock are treated as if converted
into common shares at the date of issuance. A portion of the net proceeds
received from the Offering were used to retire indebtedness of the Company
and redeem a portion of the Series A-1 Non-Convertible Preferred Stock.
Supplemental loss per common share, adjusted to reflect the estimation of
interest expense incurred on such borrowings during fiscal 1996 and the
payment of mandatory preferred dividends, is $1.52 per common share.
(7) Working deficit includes short-term debt under the New Credit Facility of
$28,856,000 as of February 28, 1997.

(8) Adjusted to reflect (a) the acquisition and related financing of K-tel
and (b) the refinancing of the Company's short-term debt of $28,856,000
under the New Credit Facility with $40,000,000 of Preferred Stock.

<PAGE>

INTERSOUND, INC.
SUMMARY OF OPERATIONS DATA(1)

<TABLE>
<CAPTION>
EIGHT MONTHS
EIGHT MONTHS ENDED
YEAR ENDED YEAR ENDED YEAR ENDED ENDED DECEMBER DECEMBER 31,
APRIL 30, 1994 APRIL 30, 1995 APRIL 30, 1996 31, 1995 1996
-------------- -------------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
(DOLLARS IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Gross revenues . . . . . . . . . . . . $ 26,504 $ 31,620 $ 31,382 $ 21,661 $ 20,152
Returns, allowances and discounts. . . (6,655) (9,026) (8,886) (6,182) (5,864)
-------- -------- -------- -------- --------
Total net revenues . . . . . . . . . . 19,849 22,594 22,496 15,479 14,288
Gross profit . . . . . . . . . . . . . 10,081 12,580 13,215 9,050 8,771
Operating income . . . . . . . . . . . 1,675 2,191 2,311 2,067 2,385
Net income . . . . . . . . . . . . . . 1,359 1,946 1,957 1,777 2,169
</TABLE>

- - ------------------
(1) The Summary of Operations Data presented in this table is derived from the
Financial Statements of Intersound, Inc. included elsewhere in this Proxy
Statement. The statement of operations data for the eight months ended
December 31, 1995 and 1996 are derived from unaudited financial statements
and include, in the opinion of management, all adjustments (consisting
only of normal recurring adjustments) necessary to present fairly the data
for the periods presented. The Summary of Operations Data should be read
in conjunction with the Financial Statements and notes thereto of
Intersound, Inc. and other financial information included in this
Proxy Statement.

6
<PAGE>

K-TEL INTERNATIONAL, INC. -- MUSIC OPERATIONS
SUMMARY OF REVENUES AND EXPENSES DATA(1)

<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED ENDED
YEAR ENDED JUNE 30, MARCH 31, MARCH 31,
1994 1995 1996 1996 1997
--------- --------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
(DOLLARS IN THOUSANDS)
STATEMENT OF REVENUES AND EXPENSES DATA:
Gross revenues . . . . . . . . . . . . . . . $ 26,255 $ 28,742 $ 43,183 $ 31,925 $ 29,859
Returns, allowances and discounts. . . . . . (6,456) (6,497) (9,525) (7,160) (6,246)
--------- --------- --------- --------- ---------
Total net revenues . . . . . . . . . . . . . 19,799 22,245 33,658 24,765 23,613
Gross profit . . . . . . . . . . . . . . . . 8,851 9,675 16,227 12,397 11,117
Operating income . . . . . . . . . . . . . . 3,136 1,751 3,851 2,635 2,005
Net income . . . . . . . . . . . . . . . . . 2,936 1,543 3,446 2,308 1,774
</TABLE>

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

(1) The Summary of Revenues and Expenses Data presented in this table is
derived from the Statements of K-tel International, Inc. - Music Operations
included elsewhere in this Proxy Statement. The statement of revenues and
expenses data for the nine months ended March 31, 1996 and 1997 are
derived from unaudited statements and include, in the opinion of the
management of K-tel International, Inc. - Music Operations, all adjustments
(consisting only of normal recurring adjustments) necessary to present
fairly the data for the periods presented. The Summary of Revenues and
Expenses Data should be read in conjunction with the Statements and notes
thereto of K-tel International, Inc. - Music Operations included in this
Proxy Statement.

<PAGE>

RISK FACTORS

IN ADDITION TO THE OTHER INFORMATION SET FORTH IN THIS PROXY STATEMENT,
STOCKHOLDERS SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS BEFORE ACTING ON
THE PROPOSALS TO APPROVE THE PREFERRED STOCK ISSUANCE AND THE COMMON STOCK
ISSUANCE.

DILUTION OF EXISTING STOCKHOLDERS

The sale of a significant number of securities convertible into Common
Stock could cause substantial dilution to the voting power and interests of
current stockholders and, possibly, lead to a change in control of the
Company. Assuming, solely for this purpose, (i) a Market Price on the closing
date of the Private Placement of $6.75 per share (the last sale price of the
Common Stock on the Nasdaq National Market on June 30, 1997) and (ii) a
Conversion Price of $7.425 (i.e., 10% above the Market Price), conversion of
all of the Preferred Stock would result in the issuance of 5,387,206 shares
of Common Stock. Based upon the 5,171,439 shares of Common Stock outstanding
as of June 30, 1997, and without taking into account the Common Stock
Issuance, the shares of Common Stock received upon conversion would represent
approximately 51.0% of the outstanding Common Stock, the ownership interests
of directors and executive officers of the Company and their affiliates would
decrease from 30.9% to 15.1% and the ownership interests of other
stockholders would decrease from 69.1% to 33.9%. On a fully diluted basis,
assuming the exercise of currently outstanding options and warrants, the
conversion of the Preferred Stock and the conversion of currently outstanding
debt securities, Preferred Stockholders, directors and executive officers of
the Company and their affiliates, and other stockholders would own
approximately 41.5%, 22.9% and 35.6%, respectively, of the then outstanding
Common Stock. Further assuming a Preferred Stock dividend rate of 10% per
annum, and the issuance of 808,080 shares of Common Stock to directors and/or
officers in the Common Stock Issuance, the Preferred Stockholders, directors
and executive officers of the Company and their affiliates, and other
stockholders would own approximately 39.1%, 27.5% and 33.4%, respectively, of
the then outstanding Common Stock.

MARKET VALUE OF COMMON STOCK

The sale of a significant number of securities convertible into shares of
Common Stock could cause a decline in the market value of the Common Stock.

CONSEQUENCES IF THE PREFERRED STOCK ISSUANCE IS NOT APPROVED

If the Preferred Stock Issuance is not approved by the Company's
stockholders at the Special Meeting, the consequences could be materially
adverse to the Company's business, results of operations and financial
condition. First, the failure by the Company to repay the New Credit
Facility by August 1, 1997 would constitute an Event of Default under the New
Credit Facility. In addition to triggering default interest rate increases
and late charges as described under "The Intersound Acquisition -- New Credit
Facility," a default would allow BMO, in its discretion, to pursue any remedy
available to it under the New Credit Facility and applicable law. While the
Company would pursue alternative methods to refinance the New Credit
Facility, including, without limitation, obtaining longer term debt with the
same or different lenders, there can be no assurances that such financing
could be obtained on terms favorable to the Company, or at all. Furthermore,
the Company's failure to consummate the Preferred Stock Issuance would hamper
its ability to obtain long-term bank or other financing for the K-tel
Acquisition. The closing of the K-tel Acquisition is contingent on the
Company's obtaining financing, and the $1,750,000 deposited by the Company in
the earnest money escrow account pursuant to the K-tel Agreement will be
forfeited to K-tel if such financing is not obtained.

CONSEQUENCES IF THE COMMON STOCK ISSUANCE IS NOT APPROVED

If the Common Stock Issuance is not approved by the Company's
stockholders at the Special Meeting, and if the Company is unable to raise
equity from sources other than directors and/or officers to fund the first
six dividend payments on the Preferred Stock, the marketability of the
Preferred Stock and the Company's flexibility in negotiating the terms
thereof would be impaired. Under the anticipated terms of the Company's
senior debt facility, cash dividends during the first six quarters will be
prohibited unless funded by additional equity. The absence of cash dividends
could result in other Preferred Stock terms materially less favorable to the
Company than those that could be obtained if proceeds of the Common Stock
Issuance were available to fund cash payments of Preferred Stock dividends.

POTENTIAL CONFLICTS OF INTEREST

The Company intends to use the proceeds of the Preferred Stock Issuance
to repay the indebtedness incurred by the Company under the New Credit
Facility. Steven Devick, who is Chairman of the Board, a Director and Chief
Executive Officer of the Company, has personally guaranteed borrowings under
the New Credit Facility up to $12,500,000. If the Preferred Stock Issuance
is approved by stockholders and consummated, Mr. Devick's obligations under
the New Credit Facility guarantee will be discharged. Accordingly, Mr.
Devick may have interests in the Preferred Stock Issuance that are in
addition to or different from the interests of the Company's stockholders
generally.

Depending upon the market price of the Common Stock on the quarterly
purchase dates, directors and/or officers who purchase Common Stock in the
Common Stock Issuance may pay a purchase price that is discounted from the
then-market price. Accordingly, such directors and/or officers may have
interests in the Common Stock Issuance that are in addition to or different
from the interests of the Company's stockholders generally.

<PAGE>

THE SPECIAL MEETING

GENERAL

This Proxy Statement is being furnished to the Company's stockholders in
connection with the solicitation of proxies by the Board of Directors of the
Company for use at the Special Meeting to be held on Wednesday, July 30, 1997 at
the offices of the Company, 2001 Butterfield Road, Suite 1400, Downers Grove,
Illinois 60515, commencing at 10:00 a.m., local time, and at any adjournments
or postponements thereof.

MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING

At the Special Meeting, stockholders of record of the Company as of the
close of business on June 6, 1997 will consider and vote upon the Preferred
Stock Issuance and the Common Stock Issuance. The Board of Directors is not
currently aware of any business to be acted upon at the Special Meeting other
than as described herein.

RECORD DATE AND OUTSTANDING SHARES

The Board of Directors has fixed the close of business on June 6, 1997 as
the record date (the "Record Date") for the determination of stockholders
entitled to notice of, and to vote at, the Special Meeting or any adjournments
thereof. As of the Record Date, the Company had outstanding 5,171,439 shares of
Common Stock. Each of the outstanding shares of Common Stock is entitled to one
vote on all matters coming before the Special Meeting.

VOTING OF PROXIES; PROXY SOLICITATION

Steven Devick and Douglas C. Laux, the persons named as proxies on the
proxy card accompanying this Proxy Statement, were selected by the Board of
Directors of the Company to serve in such capacity. Each of Messrs. Devick
and Laux is an officer and director of the Company. The shares represented
by each executed and returned proxy will be voted in accordance with the
directions indicated thereon or, if no direction is indicated, for Proposal 1
and Proposal 2 in accordance with the recommendations of the Board of
Directors contained in this Proxy Statement. As to any other business that
may properly come before the Special Meeting, however, it is intended that
proxies, in the form enclosed, will be voted in respect thereof in accordance
with the judgment of the persons voting such proxies.

Each stockholder giving a proxy has the power to revoke it at any time
before the shares it represents are voted. Revocation of a proxy is
effective upon receipt by the Secretary of the Company of either (i) an
instrument revoking the proxy or (ii) a duly executed proxy bearing a later
date. Additionally, a stockholder may revoke a previously executed proxy by
voting in person at the Special Meeting (although attendance at the Special
Meeting will not, by itself, revoke a proxy).

If the Special Meeting is postponed or adjourned for any reason, at any
subsequent reconvening of the Special Meeting all proxies will be voted in
the same manner as such proxies would have been voted at the original
convening of the Special Meeting (except for any proxies that have
theretofore effectively been revoked or withdrawn), notwithstanding that they
may have been effectively voted on the same or any other matter at a previous
meeting.

The Company will bear the cost of soliciting proxies from its stockholders.
In addition to solicitation by mail, directors, officers and employees of the
Company may solicit proxies by telephone, telegram or otherwise. Such
directors, officers and employees of the Company will not be additionally
compensated for such solicitation, but may be reimbursed for out-of-pocket
expenses incurred in connection therewith. Brokerage firms, fiduciaries and
other custodians who forward soliciting material to the beneficial owners of
shares of Common Stock held of record by them will be reimbursed for their
reasonable expenses incurred in forwarding such material.

<PAGE>

REQUIRED VOTE; QUORUM; ABSTENTIONS AND BROKER NON-VOTES

The required quorum for the transaction of business at the Special
Meeting will be a majority of the shares of Common Stock issued and
outstanding on the Record Date. Abstentions and broker non-votes will be
included in determining the presence of a quorum. The affirmative vote of a
majority of all votes cast at the Special Meeting, whether in person or by
proxy, is required to approve the Preferred Stock Issuance and the Common
Stock Issuance. As of the Record Date, directors and executive officers of
the Company and their affiliates may be deemed to be beneficial owners of
approximately 30.9% of the outstanding voting shares of Common Stock. Each
of the directors and executive officers of the Company and their affiliates
plans to vote or direct the vote of all shares of Common Stock over which he
has voting control in favor of the Preferred Stock Issuance and the Common
Stock Issuance.

Abstentions from voting and broker nonvotes will have no effect on the
proposals to approve the Preferred Stock Issuance and the Common Stock
Issuance, since they will not represent votes cast at the Special Meeting for
the purpose of voting on such matters.

<PAGE>

FORWARD LOOKING INFORMATION

This Proxy Statement contains certain forward-looking statements (within
the meaning of the Private Securities Litigation Reform Act of 1995) that
involve substantial risks and uncertainties. When used in this Proxy
Statement, the words "anticipate," "believe," "estimate" and "expect" and
similar expressions as they relate to the Company and its management and
Intersound are intended to identify such forward-looking statements. A
number of important factors could cause the actual results, performance or
achievements of the Company for fiscal 1997 and beyond to differ materially
from those expressed in such forward-looking statements. These factors
include, without limitation, commercial success of the Company's repertoire,
charges and costs related to acquisitions, the Company's ability to
successfully integrate acquisitions, relationships with artists and
producers, attraction and retention of key personnel, general economic and
business conditions and enhanced competition and new competitors in the
recorded music industry. In addition, following the Preferred Stock Issuance
and the financing of the K-tel Acquisition, the Company will be highly
leveraged. Such leverage, and the resulting increase in the Company's debt
service obligations, could increase the Company's susceptibility to the risk
factors described above.

<PAGE>

PROPOSAL 1--PROPOSAL TO APPROVE THE ISSUANCE AND SALE OF THE PREFERRED STOCK

GENERAL

The stockholders of the Company are being asked to approve the Preferred
Stock Issuance, the proceeds from which will be used to retire the
indebtedness incurred under the New Credit Facility and for working capital
and general corporate purposes. The Company entered into the New Credit
Facility primarily to fund the cash consideration for the acquisition of
Intersound. See "Acquisition of Intersound."

The Company anticipates that up to $40,000,000 of Preferred Stock will be
sold in the Preferred Stock Issuance.

TERMS OF THE PREFERRED STOCK

The following is a summary of certain proposed terms of the Preferred
Stock. Such proposed terms are the result of discussions among the Company and
the Placement Agents. The actual terms of the Preferred Stock will be
determined by the Board of Directors following negotiations among the Company,
the Placement Agents and the prospective purchasers of the Preferred Stock, and
may vary from the estimated terms described herein.

DIVIDENDS

The Preferred Stock will accrue quarterly dividends at a rate of 8% to 10%
per annum of the purchase price paid by the Preferred Stockholder ("Stated
Value"), payable in cash out of available funds, in preference to any dividend
on any other class of capital stock.

CONVERSION

A Preferred Stockholder will have the right to convert each share of
Preferred Stock, at the option of the holder, at any time, into one share of
Common Stock at the Conversion Price. The Conversion Price is currently
expected to be between 10% and 15% above the Market Price (the "Conversion
Price"), although negotiations could result in a Conversion Price higher or
lower than the expected range. The Conversion Price will be subject to
adjustment as described under " -- Antidilution Protection." Assuming,
solely for this purpose, (i) a Market Price on the closing date of the
Private Placement of $6.75 per share (the last sale price of the Common Stock
on the Nasdaq National Market on June 30, 1997) and (ii) a Conversion Price
of $7.425 per share (i.e., 10% above the Market Price), conversion of all of
the shares of the Preferred Stock would result in the issuance of 5,387,206
shares of Common Stock. Based upon the 5,171,439 shares of Common Stock
outstanding as of June 30, 1997, and without taking into account the Common
Stock Issuance, the shares of Common Stock received upon conversion would
represent approximately 51.0% of the outstanding Common Stock, the ownership
interests of directors and executive officers of the Company and their
affiliates would decrease from 30.9% to 15.1% and the ownership interests of
other stockholders would decrease from 69.1% to 33.9%. On a fully diluted
basis, assuming the exercise of currently outstanding options and warrants,
the conversion of the Preferred Stock and the conversion of currently
outstanding debt securities, Preferred Stockholders, directors and executive
officers of the Company and their affiliates, and other stockholders would
own approximately 41.5%, 22.9% and 35.6%, respectively, of the then
outstanding Common Stock. Further assuming a Preferred Stock dividend rate of
10% per annum, and the issuance of 808,080 shares of Common Stock to
directors and/or officers in the Common Stock Issuance, the Preferred
Stockholders, directors and executive officers of the Company and their
affiliates, and other stockholders would own approximately 39.1%, 27.5% and
33.4%, respectively, of the then outstanding Common Stock.

AUTOMATIC CONVERSION TO COMMON STOCK

Subsequent to June 30, 1999, the Preferred Stock automatically will be
converted into Common Stock at the then applicable Conversion Price if the
Common Stock trades for 20 consecutive days at a price greater than or equal to
200% of the Conversion Price.

MANDATORY REDEMPTION

At the end of the seventh year, the Preferred Stock will be redeemed at the
Liquidation Preference Price, which is equal to the Stated Value, plus any
accrued but unpaid dividends.

OPTIONAL REDEMPTION

Subsequent to June 30, 1999, the Preferred Stock will be redeemable, in
whole or part, at the option of the Company at a redemption price equal to
200% of the Conversion Price.

CHANGE OF CONTROL

In the event that there is a change of control of the Company, the Company
will be obligated to offer to purchase all of the outstanding shares of the
Preferred Stock at a price equal to the greater of (a) 200% of the Stated Value
or (b) the Liquidation Preference Price. The Company is obligated to make such
offer not less than 15 days prior to the effective date of the change of control
(the "Trigger Date"). Payment for the Preferred Stock tendered pursuant to such
offer will be made on the Trigger Date.

ANTIDILUTION PROTECTION

The Conversion Price of the Preferred Stock will be subject to an
antidilution adjustment (i) in connection with any stock split or stock dividend
and (ii) subject to certain exceptions, on a price-based institutional weighted-
average basis in the event the Company issues Common Stock or Common Stock
equivalents at a purchase price per share that is less than the then current
Conversion Price.

LIQUIDATION PREFERENCE

In the event of a liquidation or winding up of the Company, the Preferred
Stockholders will be entitled to receive the Liquidation Preference Price on
each share of the Preferred Stock, prior to any distribution on any other shares
of capital stock of the Company.

VOTING RIGHTS

Each share of Preferred Stock has the right to vote on an as-converted
basis on all matters to be approved by the holders of Common Stock; however,
approval of a majority of the outstanding shares of Preferred Stock will be
required for any action which (a) alters or changes the rights, preferences
or privileges of the Preferred Stock, (b) creates any new class of shares
having a preference over or on parity with the Preferred Stock, or (c)
affects any redemption or repurchase of any capital stock of the Company
(other than upon the exercise by the Company of its repurchase rights as to
Common Stock issued to employees or others providing services upon a
termination of their employment or other service relationship with the
Company).

LIMITATION ON TRANSACTIONS WITH AFFILIATES

The Company will not directly or indirectly enter into any transaction
including, without limitation, the purchase, sale, lease or exchange of any
property or the rendering of any service, with any affiliate, except for
transactions (including any investments, loans or advances by or to any
affiliate) conducted in good faith, the terms of which are fair and reasonable
to the Company, and to the extent that such transaction is in excess of $0.5
million, it must be approved by the Board of Directors, including a majority of
the disinterested Directors.

REGISTRATION RIGHTS

DEMAND RIGHTS. If after six months from the closing date of the Private
Placement, Preferred Stockholders holding at least 50% of the Registrable
Securities (as hereinafter defined) request that the Company file a registration
statement and where the anticipated aggregate offering price, net of
underwriting discounts and commissions, would exceed $20,000,000, the Company is
obligated to use its best efforts to cause such shares to be registered.
"Registrable Securities" means all shares of Common Stock issued or issuable
upon conversion of the Preferred Stock. The Company will not be obligated to
effect more than two registrations under these demand right provisions.

REGISTRATION ON FORM S-3. In addition, holders of the Registrable
Securities will have the right to require the Company to use its best efforts to
file not more than two registration statements on Form S-3 if available (or any
equivalent successor form) if the anticipated aggregate offering price, net of
underwriting discounts and commissions, would exceed $2,500,000.

INCIDENTAL REGISTRATION. If the Company proposes to register any of its
Common Stock in connection with a public distribution, it will notify each
holder of Registrable Securities and, if so requested by such holder, will use
its best efforts to register such holder's Registrable Securities.

REGISTRATION EXPENSES. The registration expenses (exclusive of
underwriting discounts and commissions) will be borne by the Company.

BOARD REPRESENTATION

The Preferred Stockholders will have the right to designate four directors
to the Company's Board of Directors.

USE OF PROCEEDS

Assuming the Company sells $40,000,000 of Preferred Stock in the Private
Placement, the gross proceeds to be received by the Company are expected to
be used as follows: approximately $35,000,000 will be used to repay the
indebtedness incurred under the New Credit Facility, $1,800,000 will be paid to
the Placement Agents as fees for their services, approximately $600,000 will be
used to pay legal and accounting fees and other expenses incurred in connection
with the Private Placement and the remaining $2,600,000 will be used for
working capital and general corporate purposes.

DISTRIBUTION

The Company anticipates that the Preferred Stock will be sold to a
limited number of institutional investors in a transaction exempt from
registration pursuant to Section 4(2) of the Securities Act. On March 21,
1997, the Company entered into a letter agreement with Donaldson, Lufkin and
Jenrette Securities Corporation ("DLJ"), pursuant to which the Company
engaged DLJ as a placement agent for the private placement of up to
$40,000,000 of securities. The principal terms of the agreement are as
follows: As compensation for its services, and as disclosed in the proxy, DLJ
is entitled to 4 1/2% of the gross proceeds. In addition, DLJ is entitled to
reimbursement of its out-of-pocket expenses, including fees and expenses of
counsel not in excess of $75,000. If (i) the agreement terminates prior to
the consummation of such financing and (ii) (a) within 12 months after such
termination, the Company consummates the proposed or similar financing with
any party or (b) within 18 months after such termination, the Company
consummates a private placement with a party contacted by DLJ during its
engagement, DLJ will be entitled to the compensation described above. The
Company is required under the agreement to prepare and furnish to DLJ a
private placement memorandum, to represent and warrant as to the accuracy and
completeness thereof and to provide such legal opinions, certificates and
other documents at closing as DLJ may reasonably request. The agreement
contains customary disclosure and confidentiality provisions. As disclosed in
the proxy, the Company is required to indemnify DLJ and affiliates (i) for
losses arising from inaccuracies in or omissions from the offering materials
and (ii) otherwise arising from advice or services rendered by DLJ pursuant
to the agreement, except where such losses result solely from the gross
negligence or willful misconduct of the indemnified person.

For a period of 18 months from the date of the agreement, DLJ has the
exclusive right (i) to act as lead managing underwriter if the Company makes
a public offering of securities and (ii) if the Company determines to engage
a financial advisor in connection with any acquisition or disposition, to act
as the exclusive advisor.

The agreement provides that Nesbitt Burns Securities, Inc. ("Nesbitt
Burns") will serve as co-placement agent for the transaction. The Company has
not entered into any written agreement with Nesbitt Burns in connection with
the transaction. Pursuant to an expired agreement between the Company and
Nesbitt Burns, the Company paid Nesbitt Burns $50,000 for its services, but
Nesbitt Burns will not receive any further compensation from the Company in
connection with the Private Placement.

Nesbitt Burns is a subsidiary of BMO.

The Board of Directors recommends that the stockholders vote "FOR" the
Preferred Stock Issuance.

12
<PAGE>

PROPOSAL 2--PROPOSAL TO APPROVE THE ISSUANCE AND SALE OF
THE COMMON STOCK TO FUND PREFERRED STOCK DIVIDENDS

BACKGROUND OF THE PROPOSAL

The Company has proposed the Common Stock Issuance in order to maximize
its flexibility in negotiating the terms of both the Preferred Stock and the
senior bank indebtedness that is intended to finance the K-tel Acquisition.
See "The Pending K-tel Acquisition." In particular, the Common Stock Issuance
is intended to provide a mechanism for funding cash dividends without
violating restrictions anticipated to be imposed by the Company's proposed
senior lender. See "The Pending K-tel Acquisition" and "Platinum
Entertainment, Inc. Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Capital Resources" for a description of
the proposed bank credit facility. A significant number of prospective
purchasers of Preferred Stock have expressed an interest in receiving
cash dividends.

TERMS OF THE COMMON STOCK ISSUANCE

The Company may enter into an agreement with one or more persons
whereby, on a quarterly basis during the six quarters immediately following
the Preferred Stock Issuance, the Company would issue and sell Common Stock
to such person(s) at a price per share equal to the Conversion Price of the
Preferred Stock on the date of the Private Placement. Purchasers of such
Common Stock could include one or more directors and/or officers of the
Company. The holders of such Common Stock would not be granted registration
rights and the Company currently does not intend to register such shares. The
aggregate number of shares of Common Stock sold in each quarter could be up
to an amount equal to (a) the Preferred Stock dividends payable in such
quarter divided by (b) the Conversion Price. Assuming the issuance of
$40,000,000 of Preferred Stock, a Conversion Price of $7.425 (which assumes
the low end of the range of Conversion Prices based on the Market Price of
the Common Stock on June 30, 1997) and a dividend rate of 10% per annum, a
maximum of 808,080 shares of Common Stock could be issued over the
six-quarter period for total proceeds of $6.0 million. Proceeds of the
Common Stock Issuance, which would be held in an escrow account established
by the Company, would be used solely to pay Preferred Stock dividends.

The Board of Directors recommends that the stockholders vote "FOR"
the Common Stock Issuance.

<PAGE>

ACQUISITION OF INTERSOUND

BACKGROUND OF THE INTERSOUND ACQUISITION

Platinum's management was originally contacted by NationsBanc Capital
Markets, Inc. ("NationsBanc") in April 1996 regarding Platinum's interest in
acquiring Intersound. NationsBanc was engaged by the owners of Intersound to
solicit offers for the acquisition of Intersound. NationsBanc identified
Platinum as a potential acquirer of Intersound upon recognizing the significant
similarities in the business plans and musical genres of the two companies, as
well as the potential synergies which would result from the combination of the
two entities.

Management of the two companies met in both Atlanta, Georgia and Chicago,
Illinois in early July 1996 to further explore the benefits of a combination of
the two companies. The terms of a potential acquisition were discussed in mid
July 1996 subject to several contingencies, including due diligence and
financing. Initial due diligence was conducted in late July 1996 and terms of
the acquisition were negotiated in detail during August 1996. Negotiations were
suspended in late August when acquisition terms satisfactory to both parties
could not be reached.

Discussions between Platinum and Intersound resumed in October 1996 and
further due diligence was conducted during early November, resulting in the
signing of the definitive asset purchase agreement (the "Intersound Agreement")
on November 13, 1996. The acquisition of Intersound (the "Intersound
Acquisition") was effective as of January 1, 1997.

REASONS FOR THE INTERSOUND ACQUISITION

In reaching the determination to approve the Intersound Acquisition, the
Board of Directors of Platinum considered, without assigning relative weight to,
the following factors, which include all factors considered to be material:

- - - The Intersound Acquisition positions the Company as a market leader in
Gospel music.

- - - The Intersound Acquisition further broadens the Company's distribution
capabilities. Intersound has its own internal proprietary distribution
capabilities, while the Company has historically distributed its products
primarily through PolyGram Group Distribution, Inc. ("PolyGram") to the
major music retail market, and through its Platinum Christian Distribution
division (formerly Light Distribution) to Christian bookstores. The
Intersound Acquisition provides the Company with a third significant
distribution channel for its products, allowing the Company the flexibility
of selecting the distribution channel which provides the greatest sales
potential for its releases in a specific musical genre.

- - - The Intersound Acquisition is consistent with Platinum's strategy of growth
and expansion of its music catalog through acquisition of master recordings
and music publishing rights from other record companies at attractive
prices.

- - - The Intersound Acquisition adds to Platinum's management team a group of
seasoned music industry executives with a long history of identifying
marketing opportunities, controlling costs and producing strong cash flow
and earnings. The management team at Intersound will play a significant
role in and be responsible for (i) manufacturing of the Company's products
and (ii) integrating the K-tel Subsidiaries into the Company's operations,
if such acquisition is consummated. See "The Pending K-tel Acquisition."

<PAGE>

- - - The Intersound Acquisition provides the Company with certain economies of
scale which management anticipates will eliminate a number of costs in
areas of sales, marketing, promotion, administration and manufacturing.

- - - The Intersound Acquisition provides a roster of active artists and projects
which complements Platinum's strategy of developing music products with
artists who have a history of successful releases. In addition,
Intersound's classical and themed music business allows the Company to
supplement its artist driven releases with low cost promotion driven
releases, which management expects to reduce the Company's susceptibility
to the cyclical nature of the business.

THE INTERSOUND AGREEMENT

The Intersound Acquisition was effective as of January 1, 1997. The
following is a brief summary of certain provisions of the Intersound Agreement,
which was executed by Intersound and River North Studios, Inc., a wholly-owned
subsidiary of Platinum ("RNS"). RNS has since changed its name to Intersound,
Inc.

THE TRANSACTION

Pursuant to the Intersound Agreement, Intersound sold and RNS acquired
substantially all of the assets of Intersound for a total consideration of
$39,301,000 which was paid as follows: (a) $24,000,000 in cash, (b)
$5,000,000 in convertible promissory notes (the "Notes") and (c) the
assumption of certain liabilities totaling $10,301,000. The Notes mature on
January 31, 2004, bear interest at the seven-year Treasury rate (adjusted as
of each quarterly interest payment date) plus one percent per annum and are
convertible, in whole or in part, at any time prior to maturity into the
Company's Common Stock at a conversion price of $9.80 per share (subject to
adjustment as provided in the Notes.) The holders of the Notes were granted
certain registration rights with respect to the shares of Common Stock
issuable upon conversion.

In addition, RNS assumed certain liabilities of Intersound (the "Assumed
Liabilities") including the following: (a) liabilities or obligations
reflected or reserved against in Intersound's September 30, 1996 balance
sheet (the "Interim Balance Sheet"), (b) all other liabilities of Intersound
incurred in the ordinary course of business subsequent to the date of the
Interim Balance Sheet and prior to the closing of the transactions
contemplated by the Intersound Agreement (the "Closing") and accrued in
accordance with generally accepted accounting principles, excluding lawsuits
or causes of action relating directly or indirectly to tax, patent,
trademark, copyright, labor, employment, environmental and product liability,
(c) liabilities first arising after the Closing under any contract or permit
assumed by RNS pursuant to the Intersound Agreement and which obligations are
to be performed in the ordinary course of business and (d) all obligations of
Intersound, including principal, interest, premiums or other charges under
Intersound's loan agreement with NationsBanc (the "NationsBanc Loan") as
existing at the Closing or to be performed on or after the Closing. The
NationsBanc Loan was paid in full with proceeds from the New Credit Facility.

EMPLOYMENT AND CONSULTING AGREEMENTS

On February 1, 1997, the Company entered into a consulting, employment
and non-competition agreement with Don Johnson, the President of Intersound.
This agreement provides for Mr. Johnson to serve as Intersound's President
for a term of two years at an annual salary of $250,000 and to serve as a
consultant for three years beginning in February 1999 at an annual fee of
$100,000. Under the agreement, the Company also granted Mr. Johnson an
option to purchase 20,000 shares of the Company's Common Stock pursuant to
its 1995 Employee Incentive Compensation Plan.

The Company also entered into an employment agreement with Bryan Hadley,
Intersound's Executive Vice President, on February 1, 1997. This agreement
provides that Mr. Hadley serve in this capacity for a term of three years at
an annual base salary of $150,000. Under the agreement, the Company also
granted Mr. Hadley an option to purchase 20,000 shares of the Company's
Common Stock pursuant to its 1995 Employee Incentive Compensation Plan.

On February 1, 1997 the Company entered into an employment agreement
with Michael Olsen as Intersound's Vice President and General Counsel. This
agreement provides that Mr. Olsen serve in this capacity for a term of three
years at an annual base salary of $150,000. Under the agreement, the Company
also granted Mr. Olsen an option to purchase 20,000 shares of the Company's
Common Stock pursuant to its 1995 Employee Incentive Compensation Plan.

<PAGE>

INDEMNIFICATION

The Intersound Agreement provides that all representations and warranties
made therein or in any other certificate or document delivered pursuant thereto
will survive the Closing until January 31, 1998 (the "Sunset Period"). Unless a
specified period is set forth in the Intersound Agreement, all agreements and
covenants contained therein survived the Closing and will remain in effect
indefinitely.

Intersound's indemnification obligations will only apply if, and to the
extent that, the aggregate Losses (as defined below), incurred by all
indemnified parties exceed $250,000 (the "Basket Threshold"). However, the
Basket Threshold will not apply for certain losses including (i) Losses
relating to the Excluded Liabilities (as defined in the Intersound
Agreement), (ii) Losses relating to third party claims known by Intersound as
of the Closing, (iii) Losses relating to claims for brokers' or finders'
fees, (iv) Losses relating to claims by the Harry Fox Agency (except to the
extent specifically assumed by RNS), and (v) Losses relating to Intersound's
obligations to pay for its own expenses.

Following the Closing, Intersound's liability may not exceed, in the
aggregate, $1,875,000 (the "Cap"). Further, Intersound has no indemnification
obligation to satisfy any claim for Losses other than through recourse against
the $1,875,000 principal amount of Notes (or underlying Common Stock to the
extent converted) held in escrow pursuant to the Intersound Agreement.

The Sunset Period, Basket Threshold and Cap will not apply to limit
Intersound's liability in the event such Losses occur or arise, directly or
indirectly, as a result of (i) any fraudulent acts committed by Intersound or
any of its affiliates, (ii) a breach of Intersound's representations and
warranties concerning its title to, and the absence of liens on, other than
permitted liens, its properties and assets, and (iii) any claims by any third
parties relating to any audit or investigation by the Harry Fox Agency for any
period prior to the Closing Date, except to the extent specifically assumed by
RNS.

Intersound agreed to indemnify RNS and its affiliates and hold each of them
harmless from any and all liabilities, demands, claims, actions, causes of
action, assessments, losses, costs, damages, deficiencies, taxes, fines or
expenses (whether or not arising out of third party claims), including without
limitation, interest, penalties, reasonable attorneys' fees and all amounts paid
in investigation, defense or settlement of any of the foregoing (collectively,
"Losses"), with respect to: (a) any misrepresentation or breach of warranty on
the part of Intersound; (b) any nonfulfillment or breach of any covenant or
agreement on the part of Intersound; (c) any action, demand, proceeding,
investigation or claim by any third party (including any governmental body)
against or affecting RNS or its affiliates which, if successful, would give rise
to or evidence the existence of or relate to a misrepresentation or breach of
any of the representations, warranties, agreements or covenants of Intersound;
(d) any Losses incurred by RNS arising out of or relating, directly or
indirectly to the Excluded Liabilities; or (e) any broker's or finder's fees or
expenses in connection with the Intersound Agreement based on any alleged
agreement between the claimant and either Intersound or any Intersound
stockholder.

Under a separate agreement, the stockholders of Intersound, at the Closing,
agreed to indemnify RNS and its affiliates for any Losses which arise in
connection with: (a) claims made by the Harry Fox Agency (which are not
specifically accrued in the Interim Balance Sheet); (b) a breach by Intersound
of its representations and warranties in the Intersound Agreement concerning
title to Intersound's assets; (c) a breach by a stockholder of Intersound of
certain securities law representations and warranties made by such stockholder
in connection with the Intersound Acquisition; and (d) any fraudulent act
committed by a stockholder of Intersound against whom indemnification is sought.

RNS agreed to indemnify each of Intersound and its affiliates and hold each
of them harmless for any and all Losses with respect to: (a) any
misrepresentation or breach of warranty on the part of RNS; (b) any
nonfulfillment or breach of any covenant or agreement on the part of RNS;
(c) any action,

<PAGE>

demand, proceeding, investigation or claim by any third party (including any
governmental body) against or affecting Intersound or its affiliates which, if
successful, would give rise to or evidence the existence of or relate to a
misrepresentation or breach of any of the representations, warranties,
agreements or covenants of RNS; (d) any claim arising out of RNS's failure to
pay, satisfy or discharge the Assumed Liabilities; (e) any broker's or finder's
fees or expenses in connection with the Intersound Agreement based on any
alleged agreement between the claimant and RNS; or (f) any requirement of any
federal, state or local taxing authority that Intersound recognize taxable
income for any period prior to the Closing when the income of Intersound is
attributed to RNS.

EXPENSES

Except as paid prior to the date of the Intersound Agreement or otherwise
provided for in the Intersound Agreement, each of RNS and Intersound agreed to
pay their respective costs and expenses incurred in negotiating and preparing
the Intersound Agreement and carrying out the Intersound Acquisition.

AMENDMENT

The Intersound Agreement may not be amended except by a written agreement
executed by the party to be charged with the amendment.

ACCOUNTING TREATMENT

For financial reporting purposes, the Intersound Acquisition was accounted
for by the purchase method of accounting in accordance with generally accepted
accounting principles.

THE NEW CREDIT FACILITY

Assuming the Preferred Stock Issuance is consummated, approximately
$35,000,000 of the net proceeds will be used to repay the debt outstanding
under the New Credit Facility. In order to fund the cash consideration for
the Intersound acquisition, the Company and its subsidiaries entered into the
New Credit Facility with BMO, individually and as agent for Lenders, pursuant
to which the Lenders agreed to provide a term loan in the amount of
$25,000,000 and a revolving credit facility in the amount of $10,000,000.
Proceeds of the term loan, together with approximately $2,900,000 borrowed
under the revolver, were used to finance the cash portion of the Intersound
Acquisition, to refinance certain bank debt incurred by Intersound and to pay
fees and expenses associated with the transaction. In addition, on March 3,
1997, the Company borrowed $1,750,000 under the revolver to pay the deposit
relating to the acquisition of the K-tel Subsidiaries. See "The Pending
K-tel Acquisition." Since that time, the Company has borrowed approximately
$5,050,000 under the revolver for working capital and approximately $350,000
for various additional fees and expenses. Borrowings under the New Credit
Facility bear interest at LIBOR plus 6% per annum, are secured by
substantially all of the assets of the Company and its subsidiaries and
mature on August 1, 1997. Any principal not paid when due will bear interest
at the default rate of LIBOR plus 9% per annum and will trigger late charges
equal to the sum of (i) 1% of such overdue principal as of the date such
payment becomes due plus (ii) one percent of the overdue principal
outstanding one month and two months after the date payment becomes due, plus
(iii) 2% of such overdue principal outstanding on the same day of each month
thereafter. See "Risk Factors -- Consequences If The Preferred Stock
Issuance Is Not Approved."

Upon the signing of the New Credit Facility, the Company issued to BMO
warrants to purchase 258,571.95 shares of Common Stock at an exercise price
of $.01 per share. The Warrants were valued at $4.80 per share, which is the
closing market price on the day the New Credit Facility was executed
discounted by 40% due to the restricted nature and volatility of the stock,
for a total value of $1,240,000. This amount was capitalized in stockholders'
equity and the related debt discount was amortized straight-line over a
90-day period. The warrants expire on January 31, 2002 and are subject to
antidilution adjustment if, during the term of the New Credit Facility, the
Company issues shares of Common Stock and does not use the proceeds of such
issuance to pay borrowings under the New Credit Facility. The holder of the
warrants has been granted certain registration rights with respect to the
shares of Common Stock issuable upon exercise.

<PAGE>

The New Credit Facility contains financial and other covenants applicable
to the Company and its subsidiaries. Pursuant to the New Credit Facility, the
Company will be required to maintain (i) a consolidated tangible net worth not
less than negative $13,000,000, and (ii) earnings before interest, taxes,
depreciation and amortization of not less than negative $205,000 for March 1997,
$1,495,000 for April 1997 and $2,463,000 for each month thereafter. The Company
is prohibited from becoming obligated for (i) capital expenditures in excess of
$50,000 during any month or (ii) salary, general and administrative expense in
excess of $1,581,000 for March 1997 and $1,500,000 for each month thereafter. In
addition, the Company may not, so long as the New Credit Facility is
outstanding, invest in or acquire a substantial part of the assets of another
business, make loans or guarantee loans made to another business, declare or
distribute dividends, consolidate or merge with another company, sell or lease
any of its assets (except for inventory sold in the ordinary course of business)
or pay any debt that is subordinate to its debt under the New Credit Facility.
The Company is currently in compliance with all covenants under the New Credit
Facility.

During the term of the New Credit Facility, the Company must pay a
commitment fee of 0.5% per annum on the average daily unused amount of the
revolving credit facility. The Company may voluntarily prepay amounts
outstanding under the revolving credit facility and the term loan, and may be
required to make mandatory prepayment upon the occurrence of any of several
conditions, including (i) any breach of the New Credit Facility agreement, (ii)
the outstanding principal amount under the revolving credit facility falling
below $2,500,000 (which may trigger payment of the term loan), or payment of the
term loan (which may trigger payment of the revolving credit facility), or (iii)
sale of the Preferred Stock contemplated hereby.

Steven Devick, a director and officer of the Company, has personally
guaranteed borrowings under the New Credit Facility up to $12,500,000.

<PAGE>

THE PENDING K-TEL ACQUISITION

THE PENDING ACQUISITION OF K-TEL MUSIC ASSETS

On March 3, 1997, the Company entered into a definitive agreement with
K-tel International, Inc. ("K-tel") for the sale by K-tel to the Company of
certain music business assets. Under the terms of the agreement with K-tel
("K-tel Agreement"), the Company will acquire all of the issued and
outstanding capital stock of the K-tel Subsidiaries in exchange for (a)
$35,000,000 payable at closing of which $1,750,000 has been deposited in
escrow as described below, and (b) the amount of the final net tangible book
value ("Net Tangible Book Value") of the K-tel Subsidiaries (defined in the
K-tel Agreement as the net assets of the K-tel Subsidiaries less all
liabilities set forth on their unaudited balance sheets as of the closing),
excluding all assets and liabilities associated with K-tel's consumer
products business, video business and infomercial business (the "Excluded
Businesses"), K-tel's "Old Town" catalog and "Maureen" catalog, and claims on
settlement of actions against Tring, San Juan Music and Marshall Sehorn (the
"Excluded Assets"). As of March 3, 1997, the Net Tangible Book Value was
negative and if the closing had occurred on that date, the parties agreed
that the cash amount due at closing would have been reduced to $30,126,000,
of which $1,750,000 would be paid from the earnest money escrow account. If
the Net Tangible Book Value is different at closing from the preliminary
amount used to reduce the purchase price, then the purchase price will be
adjusted accordingly.

Prior to the K-tel Closing (as defined below), K-tel will transfer to
the K-tel Subsidiaries all licenses and other contracts related to its music
business, except for K-tel's music business in Eastern and Western Europe and
the former Soviet Republic, and will receive an exclusive license to use the
K-tel Subsidiaries' music catalog in these territories and a non-exclusive
license to such catalog in Africa and the Middle East. These licenses will
be royalty free except for third party amounts payable from the use of the
master recordings. The music business to be acquired by the Company pursuant
to the K-tel Agreement is referred to herein as "K-tel Music." Prior to the
closing of the acquisition of the K-tel Subsidiaries (the "K-tel Closing"),
K-tel will transfer from the K-tel Subsidiaries to itself or one of its other
subsidiaries any assets related to the Excluded Businesses and the Excluded
Assets.

The K-tel Closing is expected to occur between 120 and 180 days from the
date of the K-tel Agreement. Pursuant to the K-tel Agreement, K-tel will
retain all profits from the K-tel Subsidiaries until the K-tel Closing.
Consummation of the acquisition is subject to the obtaining of financing by
the Company, approval by K-tel's stockholders and other customary conditions,
and there can be no assurances that the K-tel Closing will occur. The Company
is currently seeking long-term bank financing for the K-tel Acquisition.
Although no commitment for such financing has been obtained, the Company has
received a financing proposal from a bank for a credit facility of up to
$40,000,000 (the "Proposed Credit Facility"). The Proposed Credit Facility
provides for a $20,000,000 revolving credit facility and a $20,000,000 term
loan facility. Interest will be charged monthly at the bank's prime rate
plus 1/2% on the revolving credit facility and prime plus 1 1/2% on the term
loan facility. There will be an unused line fee of 1/2% on the revolving
credit facility. In addition, there will be a one-time arrangement fee of
3.0% of the overall credit facility amount. If the Company refinances the
Proposed Credit Facility with borrowings from another bank, it will be
required to pay a prepayment penalty on the overall credit facility of 2.0%,
1.0% and 1.0% in years one, two, and three, respectively and 1.0% in any
subsequent renewal periods. An annual agency fee of $50,000 will be payable
to the bank upon closing of the financing and on each anniversary of the date
of closing. The Proposed Credit Facility will contain financial and other
covenants by which the Company and its subsidiaries will be bound. See
"Platinum Entertainment, Inc. Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Capital Resources." This
financing proposal is contingent on the closing of the K-tel Acquisition and
the Preferred Stock Issuance and is subject to standard, commercial loan
closing contingencies including due diligence and satisfactory loan
documentation.

THE K-TEL MUSIC BUSINESS

K-tel Music's core business is the marketing and selling of pre-recorded
music, primarily in a compilation format, which includes songs from various
artists under a similar theme. With more than 20 years of marketing experience
in the U.S. and Canada, K-tel Music has developed the resources, including
knowledgeable personnel, information systems, distribution capabilities and
media buying ability, to launch a variety of music products rapidly in the North
American markets. K-tel Music's assets include an extensive music catalog of
several thousand master recordings, including a significant number of former
"top ten" hits. Its catalog of over 3,500 owned or controlled master recordings
includes performances by classic artists such as Chubby Checker, Bobby Sherman,
Leslie Gore, The Marshall Tucker Band and hundreds of others.

<PAGE>

K-tel Music has expertise in the creation and distribution of pre-recorded
music products. These products are created using songs from K-tel Music's
catalog of music masters in addition to songs licensed from third party record
companies and publishers. These licenses are generally limited to a specific
use and require the payment of royalties based on the number of units sold.
Through its in-house business affairs department, K-tel Music administers the
catalog, clears third party song titles for use in its music products and
handles licensing arrangements and royalty payments.

Entertainment products marketed by K-tel Music consist of pre-recorded
music that is targeted to consumers in "niche" markets for which the subject
matter of the product has special appeal. Pre-recorded music is produced for
various listeners in a variety of formats, including nostalgia compilations for
different eras or artists, as well as various genres of music, such as
Christian, Country, Dance, Gospel, Jazz, Pop, Rap and Urban.

For the year ended June 30, 1996, and for the nine-month period ended
March 31, 1997 on an unaudited basis, K-tel Music recorded gross revenues
of $43.2 million and $29.9 million, respectively.

<PAGE>

UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA

Set forth below is the Unaudited Pro Forma Consolidated Statements of
Operations Data for the fiscal year ended May 31, 1996 and the nine months
ended February 28, 1997, and the Unaudited Pro Forma Consolidated Balance
Sheet Data at February 28, 1997. The Unaudited Pro Forma Consolidated
Statements of Operations Data for the fiscal year ended May 31, 1996 and the
nine months ended February 28, 1997 (i) gives pro forma effect to the
Intersound Acquisition as if such transaction had occurred on June 1, 1995;
(ii) gives pro forma effect to the pending K-tel Acquisition as if such
transaction had occurred on June 1, 1995; (iii) assumes the incurrence of
debt required to fund the K-tel Acquisition; (iv) reflects the Preferred
Stock Issuance and the application of a portion of the net proceeds therefrom
to repay the New Credit Facility; and (v) reflects an adjustment to eliminate
the transactions between Platinum and Intersound. In addition, the Unaudited
Pro Forma Consolidated Statements of Operations Data for the fiscal year
ended May 31, 1996 reflects the elimination of interest expense incurred by
Platinum on its outstanding debt and the elimination of preferred dividends
accrued on the Series A-1 Non-Convertible Preferred Stock during that period
(both the outstanding debt and Series A-1 Non-Convertible Preferred Stock
were retired with the net proceeds from the Offering), as if such retirements
had occurred on June 1, 1995. The Unaudited Pro Forma Consolidated Balance
Sheet Data at February 28, 1997 gives pro forma effect to the K-tel
Acquisition as if such transaction had occurred at February 28, 1997.

The unaudited pro forma consolidated financial data presented herein is
based on the assumptions and adjustments described in the accompanying notes.
The Unaudited Pro Forma Consolidated Statements of Operations Data do not
purport to represent what the Company's results of operations would have been
if the events described above had occurred as of the dates indicated or what
such results will be for any future periods. The unaudited pro forma
consolidated financial data is based upon assumptions and adjustments that
the Company believes are reasonable. The unaudited pro forma consolidated
financial data and the accompanying notes should be read in conjunction with
the historical financial statements of the Company, Intersound and K-tel
International, Inc.--Music Operations, including the notes thereto, which are
included elsewhere in this Proxy Statement.

<PAGE>

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS DATA
FISCAL YEAR ENDED MAY 31, 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

Pro Forma
Platinum Before
Pro Forma Refinancing
Historical Historical Intersound Offering and K-tel
Platinum Intersound (a) Adjustments (b) Adjustments (g) Acquisition
-------- -------------- --------------- --------------- -----------
<S> <C> <C> <C> <C> <C>
Gross product sales $ 17,610 $ 30,753 $ 712 (c) $ - $ 49,075
Less: Returns and allowances (4,732) (7,212) - - (11,944)
Less: Discounts - (1,674) (712) (c) - (2,386)
---------------------------------------------- ----------------------------
Net product sales 12,878 21,867 - - 34,745
Cost of product sales 8,107 9,029 - - 17,136
---------------------------------------------- ----------------------------
4,771 12,838 - - 17,609

Gross artist project revenues 5,367 - - - 5,367
Less: Allowance for unrecoupable
artist advances (2,506) - - - (2,506)
---------------------------------------------- ----------------------------
Net artist project revenues 2,861 - - - 2,861
Licensing, publishing and other revenues 1,799 629 293 - 2,721
---------------------------------------------- ----------------------------
Net artist project and other revenues 4,660 629 293 - 5,582
Cost of artist project and other revenues 5,195 252 138 - 5,585
---------------------------------------------- ----------------------------
(535) 377 155 - (3)

Gross profit 4,236 13,215 155 - 17,606

Other operating expenses:
Selling, general and administrative
expenses (j) 8,017 10,324 2 - 18,343
Depreciation and amortization 156 580 1,030 (d) - 1,766
---------------------------------------------- ----------------------------
8,173 10,904 1,032 - 20,109
---------------------------------------------- ----------------------------
Operating income (loss) (3,937) 2,311 (877) - (2,503)
Interest income 106 - - - 106
Interest expense (570) (354) (3,511) (e) 570 (3,865)
Financing costs - - (3,190) (f) - (3,190)
---------------------------------------------- ----------------------------
Income (loss) from continuing
operations before taxes (4,401) 1,957 (7,578) 570 (9,452)

Provision for income taxes - - - - -
---------------------------------------------- ----------------------------
Net income (loss) from continuing operations (4,401) 1,957 (7,578) 570 (9,452)
Less: Cumulative preferred dividends (602) - - 602 -
---------------------------------------------- ----------------------------
Income (loss) from continuing operations
applicable to common shares $ (5,003) $ 1,957 $ (7,578) $ 1,172 $ (9,452)
---------------------------------------------- ----------------------------
---------------------------------------------- ----------------------------

Net loss per common share from
continuing operations $ (1.71)

Weighted average number of common
shares outstanding (o) 2,925,987

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

Other operating data (p):
Operating income (loss) before
depreciation and amortization $ (3,781)

</TABLE>

Pro Forma
Platinum Before Pro Forma
Refinancing K-tel Historical K-tel As Adjusted
Adjustments (h) Acquisition K-tel (i) Adjustments Platinum
--------------- ----------- --------- ----------- --------
<S> <C> <C> <C> <C> <C>
Gross product sales $ - $ 49,075 $ 42,312 $ - $ 91,387
Less: Returns and allowances - (11,944) (8,907) - (20,851)
Less: Discounts - (2,386) (618) - (3,004)
-------------------------------------------------------------------- ----------
Net product sales - 34,745 32,787 - 67,532
Cost of product sales - 17,136 17,329 - 34,465
-------------------------------------------------------------------- ----------
- 17,609 15,458 - 33,067
Gross artist project revenues - 5,367 - - 5,367
Less: Allowance for unrecoupable
artist advances - (2,506) - - (2,506)
-------------------------------------------------------------------- ----------
Net artist project revenues - 2,861 - - 2,861
Licensing, publishing and other revenues - 2,721 871 - 3,592
-------------------------------------------------------------------- ----------
Net artist project and other revenues - 5,582 871 - 6,453
Cost of artist project and other revenues - 5,585 102 - 5,687
-------------------------------------------------------------------- ----------
- (3) 769 - 766

Gross profit - 17,606 16,227 - 33,833
Other operating expenses:
Selling, general and administrative
expenses (j) - 18,343 11,965 - 30,308
Depreciation and amortization - 1,766 411 1,414 (k) 3,591
-------------------------------------------------------------------- ----------
- 20,109 12,376 1,414 33,899
-------------------------------------------------------------------- ----------
Operating income (loss) - (2,503) 3,851 (1,414) (66)
Interest income - 106 17 - 123
Interest expense 3,465 (400) (212) (3,028)(l) (3,640)
Financing costs - (3,190) - (481)(m) (3,671)
-------------------------------------------------------------------- ----------
Income (loss) from continuing
operations before taxes 3,465 (5,987) 3,656 (4,923) (7,254)
Provision for income taxes - - (210) 210 (n) -
-------------------------------------------------------------------- ----------
Net income (loss) from continuing operations 3,465 (5,987) 3,446 (4,713) (7,254)
Less: Cumulative preferred dividends (4,000) (4,000) - - (4,000)
------------------------------------------------------------------- ----------
Income (loss) from continuing operations
applicable to common shares $ (535) $ (9,987) $ 3,446 $ (4,713) $ (11,254)
-------------------------------------------------------------------- ----------
-------------------------------------------------------------------- ----------

Net loss per common share from
continuing operations $ (2.22)

Weighted average number of common
shares outstanding (o) 5,063,207

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

Other operating data (p):
Operating income (loss) before
depreciation and amortization $ (737) $ 3,525

</TABLE>

<PAGE>

(a) The historical statement of operations data for Intersound represents
the results of operations for the fiscal year ended April 30, 1996. The
Intersound Acquisition has been accounted for as a purchase totaling
$39,301,000; the Company's purchase price allocation is preliminary
pending the valuation of certain intangible assets. See financial
statements and notes thereto of Intersound, Inc. contained elsewhere in
this Proxy Statement.

(b) The pro forma adjustments include the unaudited activities of the Publishing
Companies for the year ended June 30, 1996 that were acquired simultaneously
with the Intersound Acquisition and not reflected in the historical
Intersound amounts. Such adjustments increased licensing, publishing and
other revenues, cost of artist project and other revenues, and selling,
general and administrative expenses by $293,000, $138,000 and $2,000,
respectively.

(c) The gross product sales of the Company have been reclassified from the
Audited Consolidated Financial Statements of the Company for the fiscal year
ended May 31, 1996 to reflect sales discounts offered.

(d) The adjustment to depreciation and amortization consists of (i) an
increase in amortization of excess cost over net assets acquired of
Intersound, Inc. over a 25-year period ($950,000) and (ii) an increase
in amortization of music publishing rights acquired from Intersound, Inc.
over a 25-year period ($80,000), as if such purchase had occurred on
June 1, 1995.

(e) The adjustment to interest expense reflects additional interest expense
that would have been incurred had the consideration in the form of debt
related to the Intersound Acquisition been incurred on June 1, 1995
($3,865,000). The interest expense related to additional debt incurred
by the Company in connection with the Intersound Acquisition is based on
bank borrowings of $28,856,000 with an average interest rate of 12.00% per
annum and convertible debentures of $5,000,000 with an interest rate of
8.00%. In addition, the historical interest expense incurred by Intersound
($354,000) has been eliminated as such debt was paid in full upon the
closing of the Intersound Acquisition.

(f) The adjustments to financing costs reflect (i) the straight-line
amortization, over a 90-day period, of financing costs related to bank
borrowings used in consideration for the Intersound Acquisition ($1,950,000)
and (ii) the straight-line amortization, over a 90-day period, of the debt
discount related to warrants of common stock issued at time of financing
(258,571.95 warrants for $0.01 per share, closing market price on day of
closing of the Intersound Acquisition = $8.00/share, assumes a 40% discount
due to restricted nature of stock for $1,240,000), as if such financing had
occurred on June 1, 1995.

(g) The adjustment to interest expense reflects the elimination of interest
expense incurred by the Company on its then outstanding debt, which was
retired with the net proceeds from the Offering, as if such retirement had
occurred on June 1, 1995. The adjustment to cumulative preferred dividends
reflects the elimination of preferred dividends on the Series A-1
Non-Convertible Preferred Stock that was retired with the net proceeds
from the Offering.

(h) The refinancing adjustments reflect the refinancing of the New Credit
Facility with the net proceeds of the Preferred Stock Issuance ($40,000,000
less estimated issuance costs of $2,400,000) and include (i) the
elimination of interest related to the New Credit Facility ($3,865,000)
and (ii) the accrual of dividends on the Preferred Stock at an assumed rate
of 10.00% per annum ($4,000,000), as if such refinancing occurred on
June 1, 1995.

(i) The historical statement of operations data for K-tel International, Inc.--
Music Operations represents the results of operations for the fiscal year
ended June 30, 1996. The K-tel Acquisition will be accounted for as a
purchase. See the statements and notes thereto of K-tel International,
Inc.--Music Operations contained elsewhere in this Proxy Statement.

(j) The Pro Forma K-tel Adjustments do not include the elimination of
$497,000 of overhead charges to K-tel International, Inc. - Music Operations
from its parent company. These charges included an allocation of expenses
for various services related to income taxes, benefits, corporate
technology, and legal, strategic and treasury functions which would have
been provided by the Company at no incremental cost to the Company.

(k) The adjustment to depreciation and amortization reflects an increase in
amortization of excess cost over net assets acquired from K-tel
International, Inc.--Music Operations over a 25-year period ($1,414,000),
as if such purchase had occurred on June 1, 1995.

(l) The adjustment to interest expense reflects additional interest expense
that would have been incurred had consideration in the form of debt related
to the K-tel Acquisition been incurred on June 1, 1995 ($3,240,000). The
interest expense related to additional debt incurred by the Company in
connection with the K-tel Acquisition is based on bank borrowings from a
three-year term loan of $20,000,000 with an assumed interest rate of 10.00%
(prime plus 1 1/2%) per annum and bank borrowings from a three-year
revolving line of credit of $13,780,000 with an assumed interest rate of
9.00% (prime plus 1/2%) per annum. In addition, the historical interest
expense incurred by K-tel International, Inc. -- Music Operations ($212,000)
has been eliminated as such debt would have been paid in full upon the
closing of the K-tel Acquisition. The assumed interest rates are based on
the Proposed Credit Facility which provides for a three-year $20,000,000
revolving credit facility and a three-year $20,000,000 term loan.
Interest on the revolver will be prime plus 1/2% with an unused line fee
of 1/2% and interest on the term loan will be prime plus 1-1/2%. Other
terms include a one-time arrangement fee of 3% payable to the bank, an
annual agency fee of $50,000 and certain prepayment penalties. See "The
Pending K-tel Acquisition" section contained elsewhere in this Proxy
Statement for further details of the Proposed Credit Facility.

The effect on the As Adjusted Platinum loss from continuing operations
applicable to common shares of a 1/8th percent variance to the above
mentioned interest rates is $42,000.

(m) The adjustments to financing costs reflect (i) the straight-line
amortization, over a three year period, of financing costs related to the
bank borrowings used in consideration for the K-tel Acquisition ($400,000);
(ii) an unused line fee on the revolving line of credit ($31,000) and
(iii) an annual agency fee ($50,000), as if such financing had occurred on
June 1, 1995.

(n) The adjustment to eliminate income tax expense reflects the benefit of
the Company's net operating loss carryforwards.

(o) The historical weighted average number of common shares outstanding
includes common and common equivalent shares issued during the 12-month
period prior to the Offering as if they were outstanding for the fiscal
year ended May 31, 1996 using the treasury stock method and the public
offering price of $13 per share. In addition, all convertible preferred
stock and convertible Class A common stock and Class B common stock are
treated as if converted into common shares at the date of issuance.

The as adjusted weighted average number of common shares outstanding
assumes the Offering occurred on June 1, 1995.

(p) Operating income (loss) before depreciation and amortization is presented
to disclose additional information regarding the Company's financial
performance. Such other operating data is not a recognized generally
accepted accounting principles measure.

23
<PAGE>

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS DATA
NINE MONTHS ENDED FEBRUARY 28, 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
Pro Forma
Platinum Before
Pro Forma Refinancing
Historical Historical Intersound and K-tel Refinancing
Platinum Intersound (a) Adjustments (b) Acquisition Adjustments (h)
-------- ------------- --------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>

Gross product sales $ 22,422 $ 18,361 $ (425) (c) $ 40,358 $ -
Less: Returns and allowances (4,080) (4,246) - (8,326) -
Less: Discounts (1,727) (1,196) - (2,923) -
--------------------------------------- -----------------------------
Net product sales 16,615 12,919 (425) 29,109 -
Cost of product sales 9,272 5,019 (227) (c) 14,064 -
--------------------------------------- -----------------------------
7,343 7,900 (198) 15,045 -

Gross artist project revenues 2,678 - - 2,678 -
Less: Allowance for unrecoupable
artist advances (465) - - (465) -
--------------------------------------- -----------------------------
Net artist project revenues 2,213 - - 2,213 -
Licensing, publishing and other revenues 754 277 11 (c) 1,042 -

--------------------------------------- -----------------------------
Net artist project and other revenues 2,967 277 11 3,255 -
Cost of artist project and other revenues 2,585 111 41 2,737 -
--------------------------------------- -----------------------------
382 166 (30) 518 -

Gross profit 7,725 8,066 (228) 15,563 -

Other operating expenses:
Selling, general and administrative
expenses (j) 8,160 5,388 2 13,550 -
Merger and restructuring costs 612 - (612) (d) - -
Depreciation and amortization 481 371 602 (e) 1,454 -
--------------------------------------- -----------------------------
9,253 5,759 (8) 15,004 -
--------------------------------------- -----------------------------
Operating income (loss) (1,528) 2,307 (220) 559 -
Interest income 138 - - 138 -
Interest expense (308) (194) (2,397) (f) (2,899) 2,599
Financing costs (865) - 865 (g) - -
Equity loss (1) - - (1) -
--------------------------------------- -----------------------------

Income (loss) before income taxes (2,564) 2,113 (1,752) (2,203) 2,599

Provision for income taxes - - - - -
--------------------------------------- -----------------------------
Net income (loss) (2,564) 2,113 (1,752) (2,203) 2,599
Less: Preferred dividends - - - - (3,000)
Income (loss) applicable to
common shares $(2,564) $2,113 $(1,752) $(2,203) $ (401)

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

Net loss per common share $ (0.50)

Weighted average number of common
shares outstanding 5,125,124

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

Other operating data (o):
Operating income (loss) before
merger and restructuring costs,
depreciation and amortization $ (435)

Pro Forma
Platinum Before Pro Forma
K-tel Historical K-tel As Adjusted
Acquisition K-tel(i) Adjustments Platinum

Gross product sales $ 40,358 $ 29,220 $ - $ 69,578
Less: Returns and allowances (8,326) (5,702) - (14,028)
Less: Discounts (2,923) (544) - (3,467)
------------------------------------- ---------
Net product sales 29,109 22,974 - 52,083
Cost of product sales 14,064 12,407 - 26,471
------------------------------------- ---------
15,045 10,567 - 25,612

Gross artist project revenues 2,678 - - 2,678
Less: Allowance for unrecoupable
artist advances (465) - - (465)
------------------------------------- ---------
Net artist project revenues 2,213 - - 2,213
Licensing, publishing and other revenues 1,042 639 - 1,681
------------------------------------- ---------
Net artist project and other revenues 3,255 639 - 3,894
Cost of artist project and other revenues 2,737 89 - 2,826
------------------------------------- ---------
518 550 - 1,068

Gross profit 15,563 11,117 - 26,680

Other operating expenses:
Selling, general and administrative
expenses(j) 13,550 8,819 - 22,369
Merger and restructuring costs - - - -
Depreciation and amortization 1,454 293 1,061 (k) 2,808
------------------------------------- ---------
15,004 9,112 1,061 25,177
------------------------------------- ---------
Operating income (loss) 559 2,005 (1,061) 1,503
Interest income 138 21 - 159
Interest expense (300) - (2,130)(l) (2,430)
Financing costs - - (361)(m) (361)
Equity loss (1) - - (1)
------------------------------------- ---------

Income (loss) before income taxes 396 2,026 (3,552) (1,130)

Provision for income taxes - (252) 252 (n) -
------------------------------------- ---------

Net income (loss) 396 1,774 (3,300) (1,130)
Less: Preferred dividends (3,000) - - (3,000)
Income (loss) applicable to
common shares $ (2,604) $1,774 $(3,300) $(4,130)
------------------------------------- ---------
------------------------------------- ---------

Net loss per common share $ (0.81)

Weighted average number of common
shares outstanding 5,125,124

Other operating data(o):
Operating income (loss) before
merger and restructuring costs,
depreciation and amortization $ 2,013 $ 4,311

</TABLE>

<PAGE>

(a) The historical statement of operations data for Intersound represents
the unaudited results of operations from June 1, 1996 to December 31, 1996.
The operations of Intersound for the months of January and February 1997
are reflected in the historical Platinum amounts. The Intersound
Acquisition has been accounted for as a purchase totaling $39,301,000; the
Company's purchase price allocation is preliminary pending the valuation of
certain intangible assets. See financial statements and note thereto of
Intersound, Inc. contained elsewhere in this Proxy Statement.

(b) The pro forma adjustments include the unaudited activities of the Publishing
Companies for the six months ended December 31, 1996 that were acquired
simultaneously with the Intersound Acquisition and not reflected in the
historical Intersound amounts. Such adjustments increased licensing,
publishing and other revenues, cost of artist project and other revenues,
and selling, general and administrative expenses by $61,000, $41,000 and
$2,000, respectively.

(c) To eliminate transactions between Platinum and Intersound during the
nine months ended February 28, 1997 completed prior to the Intersound
Acquisition.

(d) Merger and restructuring costs represent nonrecurring charges incurred by
the Company resulting directly from the Intersound Acquisition and have
been removed for purposes of determining pro forma net loss.

(e) The adjustment to depreciation and amortization consists of (i) an
increase in amortization of excess cost over net assets acquired of
Intersound, Inc. over a 25-year period ($555,000) and (ii) an increase in
amortization of music publishing rights acquired from Intersound, Inc.
over a 25-year period ($47,000), as if such purchase had occurred on
June 1, 1995.

(f) The adjustment to interest expense reflects additional interest expense
that would have been incurred had the consideration in the form of debt
related to the Intersound Acquisition been incurred on June 1, 1995
($2,899,000). The interest expense related to additional debt
incurred by the Company in connection with the Intersound Acquisition is
based on bank borrowings of $28,856,000 with an average interest rate of
12.00% per annum and convertible debentures of $5,000,000 with an interest
rate of 8.00%. In addition, the historical interest expense incurred by
the Company and Intersound ($502,000) has been eliminated as such debt was
paid in full upon the closing of the Intersound Acquisition.

(g) The adjustment to financing costs reflects the elimination of historical
financing costs incurred by the Company on the New Credit Facility which
would have been fully amortized during the fiscal year ended May 31, 1996
had the refinancing of such debt occurred on June 1, 1995. See note (h)
for details of additional financing costs.

(h) The refinancing adjustments reflect the refinancing of the New Credit
Facility with the net proceeds of the Issuance ($40,000,000 less estimated
issuance costs of $2,400,000) and include (i) the elimination of interest
expense related to the New Credit Facility ($2,599,000) and (ii) the
accrual of dividends on the Preferred Stock at an assumed rate of 10.00%
per annum ($3,000,000), as if such refinancing occurred on June 1, 1995.

(i) The historical statement of operations data for K-tel International,
Inc.-- Music Operations represents the unaudited results of operations
from July 1, 1996 to March 31, 1997. Such nine month period is disclosed
due to the Company's June 30 fiscal calendar year. The K-tel Acquisition
will be accounted for as a purchase.

(j) The Pro Forma K-tel Adjustments do not include the elimination of
$363,000 of overhead charges to K-tel International, Inc.--Music
Operations from its parent company. These charges included an
allocation of expenses for various services related to income taxes,
benefits, corporate technology, and legal, strategic and treasury functions
which would have been provided by the Company at no incremental cost to the
Company.

(k) The adjustment to depreciation and amortization reflects an increase in
amortization of excess cost over net assets acquired of K-tel
International, Inc.--Music Operations over a 25-year period ($1,060,500),
as if such purchase had occurred on June 1, 1995.

The effect on the As Adjusted Platinum loss from continuing operations
applicable to common shares of a 1/8th percent variance to the above
mentioned interest rates is $37,000.

(m) The adjustments to financing costs reflect (i) the straight-line
amortization, over a three-year period, of financing costs related to the
bank borrowings used in consideration for the K-tel Acquisition ($300,000);
(ii) an unused line fee on the revolving line of credit ($24,000) and
(iii) an annual agency fee ($37,000), as if such financing had occurred
on June 1, 1995.

(n) The adjustment to eliminate income tax expense reflects the benefit of
the Company's net operating loss carryforwards.

(o) Operating income (loss) before merger and restructuring costs, depreciation
and amortization is presented to disclose additional information regarding
the Company's financial performance. Such other operating data is not a
recognized generally accepted accounting principles measure.

<PAGE>

UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET DATA
FEBRUARY 28, 1997
(DOLLARS IN THOUSANDS)

Pro Forma
Platinum
After Refinancing
Historical Refinancing Before K-tel Historical Pro Forma As Adjusted
Platinum Adjustments (a) Acquisition K-tel (b) Adjustments (c) Platinum
--------- --------------- ----------- --------- -------------- --------
<S> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 139 $ 8,744 $ 8,883 $ - $ - $ 8,883
Accounts receivable, net 14,819 - 14,819 9,130 - 23,949
Artist advances 2,864 - 2,864 964 - 3,828
Inventories, net 5,004 - 5,004 2,932 - 7,936
Notes receivable 142 - 142 - - 142
Other 419 - 419 260 - 679
-------------------------------------------------------------------------------------
Total current assets 23,387 8,744 32,131 13,286 - 45,417

Artist advances, net of current
amounts and allowances 3,925 - 3,925 - - 3,925
Arts and masters, net 1,148 - 1,148 - - 1,148
Property and equipment, net 1,249 - 1,249 526 - 1,775
Music publishing rights and artist
masters, net 3,773 - 3,773 - - 3,773
Excess cost over net assets acquired, net 23,702 - 23,702 - 35,350 59,052
Equity investment in joint venture 3,062 - 3,062 - - 3,062
Due from joint venture 756 - 756 - - 756
Deferred financing costs, net 911 (911) - - 1,200 1,200
Other 178 - 178 974 - 1,152
-------------------------------------------------------------------------------------
Total assets $ 62,091 $ 7,833 $ 69,924 $ 14,786 $ 36,550 $ 121,260
-------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------

Bank line of credit $ 3,856 $ (3,856) $ - $ - $ 13,780 $ 13,780
Term loan 25,000 (25,000) - - - -
Loan discount (826) 826 - - - -
Accounts payable 3,724 - 3,724 2,204 - 5,928
Accrued liabilities and other 1,710 - 1,710 888 - 2,598
Reserve for future returns 2,194 - 2,194 4,926 - 7,120
Royalties payable 6,647 - 6,647 9,538 - 16,185
-------------------------------------------------------------------------------------
Total current liabilities 42,305 (28,030) 14,275 17,556 13,780 45,611

Convertible debentures 5,000 - 5,000 - - 5,000
Debt - - - - 20,000 20,000
Redeemable preferred stock - 37,600 37,600 - - 37,600

Stockholders' equity 14,786 (1,737) 13,049 (2,770) 2,770 13,049
-------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 62,091 $ 7,833 $ 69,924 $ 14,786 $ 36,550 $ 121,260
-------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------

</TABLE>

(a) The refinancing adjustments reflect (i) the refinancing of the New Credit
Facility with the net proceeds of the Preferred Stock Issuance ($40,000,000
less estimated issuance costs of $2,400,000); and (ii) the full amortization
of deferred financing and loan discount costs ($911,000 and $826,000,
respectively) related to the New Credit Facility, all as if such refinancing
occurred on February 28, 1997.

(b) The historical balance sheet data for K-tel International, Inc.--Music
Operations represents the unaudited balances at March 31, 1997. Such data
is disclosed due to the Company's June 30 fiscal calendar year, March 31
being the close of the Company's nine-month operating period. The K-tel
Acquisition will be accounted for as a purchase. See the statements and
notes thereto of K-tel International, Inc.--Music Operations contained
elsewhere in this Proxy Statement.

(c) Pro forma adjustments reflect (i) the financing of the K-tel Acquisition
and related financing costs with the proceeds from the Proposed Credit
Facility and (ii) the excess cost over net assets acquired ($35,350,000)
related to the K-tel Acquisition, all as if the K-tel Acquisition and
related financing occurred on February 28, 1997.

The estimated purchase price of $50,136,000 is based on total cash to be
paid of $32,580,000 and liabilities to be assumed of $17,556,000. The
excess cost over net assets acquired will be allocated to music
publishing rights and music catalog pending the valuation of such
assets. Both music publishing rights and music catalog are to be
amortized over a period of 25 years.

<PAGE>

PLATINUM ENTERTAINMENT, INC.
SELECTED CONSOLIDATED FINANCIAL DATA

The following table sets forth selected consolidated statement of
operations and consolidated balance sheet data for Platinum as of the dates
and for the periods indicated. The selected consolidated financial data as
of and for the years ended December 31, 1992 and 1993, the five months ended
May 31, 1994 and the years ended May 31, 1995 and 1996 listed below have been
derived from the audited consolidated financial statements of Platinum. The
selected financial data as of and for the nine months ended February 29, 1996
and February 28, 1997 have been derived from the financial statements for
such periods which have not been audited. In the opinion of management of
Platinum, the unaudited interim financial statements have been prepared on
the same basis as Platinum's audited financial statements and include all
adjustments, consisting only of normal recurring items, necessary for a fair
presentation of the financial position and results of operations for these
periods. Operating results for the nine months ended February 28, 1997 are
not necessarily indicative of the results to be expected for the entire
fiscal year. The following data should be read in conjunction with "Platinum
Entertainment, Inc. Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the consolidated financial
statements and related notes of Platinum Entertainment, Inc. contained
elsewhere in this Proxy Statement.

<PAGE>

PLATINUM ENTERTAINMENT, INC.
SELECTED CONSOLIDATED FINANCIAL DATA

YEAR ENDED YEAR ENDED FIVE MONTHS
DECEMBER 31, DECEMBER 31, ENDED MAY 31, YEAR ENDED
1992 1993 1994 MAY 31, 1995
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Gross product sales(1) . . . . . . . . . . . . $ 197 $ 4,010 $ 3,474 $ 12,575
Less: Returns and allowances . . . . . . . . . -- (590) (584) (3,126)
Less: Discounts(1) . . . . . . . . . . . . . . -- -- -- (507)
------ -------- -------- ---------
Net product sales. . . . . . . . . . . . . . . 197 3,420 2,890 8,942
Cost of product sales. . . . . . . . . . . . . 75 1,901 1,743 4,300
------ -------- -------- ---------
122 1,519 1,147 4,642
Gross artist project revenues. . . . . . . . . 719 1,451 728 3,084
Less: (Allowance for)
recovery of unrecoupable artist advances . . (89) (1,361) (433) (1,128)
------ -------- -------- ---------
Net artist project revenues. . . . . . . . . . 630 90 295 1,956
Licensing, publishing and
other revenues . . . . . . . . . . . . . . . 166 28 53 207
------ -------- -------- ---------
Net artist project and other
revenues . . . . . . . . . . . . . . . . . . 796 118 348 2,163
Cost of artist project and
other revenues . . . . . . . . . . . . . . . 515 1,061 1,005 2,601
------ -------- -------- ---------
281 (943) (657) (438)
------ -------- -------- ---------
Gross profit . . . . . . . . . . . . . . . . . 403 576 490 4,204
Other operating expenses:
Selling, general and
administrative expenses. . . . . . . . . . . 647 2,287 1,352 8,800
Merger and restructuring costs . . . . . . . . -- -- -- --
Depreciation and amortization. . . . . . . . . 16 55 39 133
------ -------- -------- ---------
663 2,342 1,391 8,933
------ -------- -------- ---------
Operating income (loss)(2) . . . . . . . . . . (260) (1,766) (901) (4,729)
Interest income. . . . . . . . . . . . . . . . 1 -- -- 46
Interest expense . . . . . . . . . . . . . . . (8) (33) (27) (157)
Financing costs. . . . . . . . . . . . . . . . -- -- -- --
Equity loss. . . . . . . . . . . . . . . . . . -- -- -- --
------ -------- -------- ---------
Income (loss) from continuing
operations . . . . . . . . . . . . . . . . . (267) (1,799) (928) (4,840)
Discontinued operations:
Loss from operations . . . . . . . . . . . . . (23) (1,519) (755) (2,073)
Loss on disposal . . . . . . . . . . . . . . . -- -- -- (2,611)
------ -------- -------- ---------
Loss from discontinued
operations . . . . . . . . . . . . . . . . . (23) (1,519) (755) (4,684)
------ -------- -------- ---------
Net income (loss). . . . . . . . . . . . . . . $ (290) $ (3,318) $ (1,683) $ (9,524)
------ -------- -------- ---------
------ -------- -------- ---------
Less: Cumulative preferred
dividends(3)
Loss applicable to common
shares
Net loss per common share:
Continuing operations $ (2.12)
Discontinued operations (2.05)
---------
Net loss per common share(4) $ (4.17)
---------
Weighted average number of ---------
common shares outstanding(4) 2,284,090
</TABLE>

NINE MONTHS NINE MONTHS
ENDED ENDED
YEAR ENDED FEBRUARY 29, FEBRUARY 28,
MAY 31, 1996 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
STATEMENT OF OPERATIONS DATA:
Gross product sales(1) . . . . . . . . . . . . $ 18,322 $ 14,274 $ 22,422
Less: Returns and allowances . . . . . . . . . (4,732) (2,878) (4,080)
Less: Discounts(1) . . . . . . . . . . . . . . (712) (548) (1,727)
--------- --------- ---------
Net product sales. . . . . . . . . . . . . . . 12,878 10,848 16,615
Cost of product sales. . . . . . . . . . . . . 8,107 5,620 9,272
--------- --------- ---------
4,771 5,228 7,343
Gross artist project revenues. . . . . . . . . 5,368 3,858 2,678
Less: (Allowance for)
recovery of unrecoupable artist advances . . (2,507) 99 (465)
--------- --------- ---------
Net artist project revenues. . . . . . . . . . 2,861 3,957 2,213
Licensing, publishing and
other revenues . . . . . . . . . . . . . . . 1,799 1,416 754
--------- --------- ---------
Net artist project and other
revenues . . . . . . . . . . . . . . . . . . 4,660 5,373 2,996
Cost of artist project and
other revenues . . . . . . . . . . . . . . . 5,195 3,788 2,585
--------- --------- ---------
(535) 1,585 381
--------- --------- ---------
Gross profit . . . . . . . . . . . . . . . . . 4,236 6,813 7,725
Other operating expenses:
Selling, general and
administrative expenses. . . . . . . . . . . 7,961 6,007 8,160
Merger costs . . . . . . . . . . . . . . . . . -- -- 612
Depreciation and amortization. . . . . . . . . 212 92 481
--------- --------- ---------
8,173 6,099 9,253
--------- --------- ---------
Operating income (loss)(2) . . . . . . . . . . (3,937) 714 (1,528)
Interest income. . . . . . . . . . . . . . . . 106 -- 138
Interest expense . . . . . . . . . . . . . . . (570) (530) (308)
Financing costs. . . . . . . . . . . . . . . . -- -- (865)
Equity loss. . . . . . . . . . . . . . . . . . -- -- (1)
--------- --------- ---------
Income (loss) from continuing
operations . . . . . . . . . . . . . . . . . (4,401) 184 (2,564)
Discontinued operations:
Loss from operations . . . . . . . . . . . . . -- -- --
Loss on disposal . . . . . . . . . . . . . . . (226) -- --
--------- --------- ---------
Loss from discontinued
operations . . . . . . . . . . . . . . . . . (226) -- --
--------- --------- ---------
Net income (loss). . . . . . . . . . . . . . . (4,627) 184 $ (2,564)
---------
---------
Less: Cumulative preferred
dividends(3) . . . . . . . . . . . . . . . . (602) (301)
---------- ---------
Loss applicable to common
shares . . . . . . . . . . . . . . . . . . . $ (5,229) $ (117)
---------- ---------
---------- ---------
Net loss per common share:
Continuing operations. . . . . . . . . . . . . $ (1.71) $ (0.05) $ (0.50)
Discontinued operations. . . . . . . . . . . . (0.08) -- --
--------- --------- ---------
Net loss per common share(4) . . . . . . . . . $ (1.79) $ (0.05) $ (0.50)
--------- --------- ---------
--------- --------- ---------
Weighted average number of
common shares outstanding(4) . . . . . . . . 2,925,987 2,334,949 5,125,124
</TABLE>

28
<PAGE>

<TABLE>
<CAPTION>
DECEMBER 31, MAY 31, FEBRUARY 28,
----------------- ------------------------------ ------------
1992 1993 1994 1995 1996 1997
------ ------ ------ ------ ------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents. . . . . . $ 8 $ 36 $ 9 $ 87 $ 8,222 $ 139
Working capital (deficit)(5) . . . . (441) (3,349) (4,117) (9,128) 12,055 (18,917)
Total assets . . . . . . . . . . . . 2,932 4,656 5,385 6,353 19,744 62,090
Long-term debt
(including current portion). . . . -- 1,243 1,140 -- -- 5,000
Redeemable preferred stock . . . . . -- -- -- 5,423 -- --
Stockholders' equity
(net capital deficiency) . . . . . 1,700 (1,618) (3,302) (12,320) 15,215 14,786
</TABLE>

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

(1) During the Company's normal course of business, discounts are extended to
customers on product sales. The operations for the years ended May 31,
1995 and 1996 and the nine months ended February 29, 1996 have been
reclassified to conform to the financial statement presentation of the
operations for the nine months ended February 28, 1997. Discounts for
the years ended December 31, 1992 and 1993 and the five months ended
May 31, 1994 were insignificant.
(2) During the nine months ended February 29, 1996, the Company renegotiated
certain artist contracts to allow additional costs previously expensed by
the Company to be included in recoupable artist advances. Accordingly, the
operating income for the nine months ended February 29, 1996 includes
$289,000 resulting from the reduction of the reserves for artist advances
that had been established at May 31, 1995.
(3) Represents accrued dividends on the Company's Series A-1 Non-Convertible
Preferred Stock, which dividends were paid concurrent with the redemption
of such stock on March 15, 1996. The Company has never paid a dividend on
its Common Stock.
(4) Net loss per common share is computed based upon the weighted average
number of common shares outstanding. Common and common equivalent shares
issued during the twelve-month period prior to the March 12, 1996
Offering have been included in the calculation as if they were outstanding
for all periods presented using the treasury stock method and the public
offering price of $13.00 per share. No effect has been given to common
equivalent shares issued for any other period as the effect would be
antidilutive. In addition, all Series A-2 Convertible Preferred Stock,
Class A Common Stock and Class B Common Stock are treated as if converted
into common shares at the date of issuance.
A portion of the net proceeds received from the Offering were used to
retire indebtedness of the Company and redeem a portion of the Series A-1
Non-Convertible Preferred Stock. Supplemental loss per common share,
adjusted to reflect the elimination of interest expense incurred on such
borrowings during fiscal 1996 and the payment of mandatory preferred
dividends, is $1.52 per common share.
(5) Includes short-term debt for all periods indicated.

<PAGE>
INTERSOUND, INC.
SELECTED FINANCIAL DATA

The following table sets forth selected statement of operations and balance
sheet data for Intersound as of the dates and for the periods indicated. The
selected financial data as of and for the years ended April 30, 1994, 1995 and
1996 have been derived from the audited financial statements of Intersound. The
selected financial data as of and for the eight months ended December 31, 1995
and 1996 have been derived from the financial statements for such periods which
have not been audited. In the opinion of the Company's management, the
unaudited interim financial statements have been prepared on the same basis as
Intersound's audited financial statements and include all adjustments,
consisting only of normal recurring items, necessary for a fair presentation of
the financial position and results of operations for these periods. Operating
results for the eight months ended December 31, 1996 are not necessarily
indicative of the results to be expected for the entire fiscal year. The
following data should be read in conjunction with "Intersound, Inc.'s
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements and related notes of Intersound, Inc.
contained elsewhere in this Proxy Statement.

<TABLE>
<CAPTION>
EIGHT MONTHS EIGHT MONTHS
YEAR ENDED YEAR ENDED YEAR ENDED ENDED DECEMBER ENDED DECEMBER
APRIL 30, 1994 APRIL 30, 1995 APRIL 30, 1996 31, 1995 31, 1996
-------------- -------------- -------------- -------------- --------------
(UNAUDITED) (UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Gross product sales. . . . . . . . . . $ 26,041 $ 31,438 $ 30,753 $ 21,487 $ 19,835
Less: Returns and allowances . . . . . (4,999) (6,579) (7,212) (4,939) (4,604)
Less: Discounts. . . . . . . . . . . . (1,656) (2,447) (1,674) (1,243) (1,260)
-------- -------- -------- -------- --------
Net product sales. . . . . . . . . . . 19,386 22,412 21,867 15,305 13,971
Cost of product sales. . . . . . . . . 9,583 9,941 9,030 6,360 5,390
-------- -------- -------- -------- --------
9,803 12,471 12,837 8,945 8,581

Licensing revenues . . . . . . . . . . 463 182 629 174 317
Cost of licensing revenues . . . . . . 185 73 251 69 127
-------- -------- -------- -------- --------
. . . . . . . . . . . . . . . . . . . 278 109 378 105 190
-------- -------- -------- -------- --------
Gross profit . . . . . . . . . . . . . 10,081 12,580 13,215 9,050 8,771
Other Operating Expenses:
Selling, general and administrative
expenses . . . . . . . . . . . . . . 8,050 9,955 10,324 6,606 5,958
Depreciation and amortization. . . . . 356 434 580 377 428
-------- -------- -------- -------- --------
8,406 10,389 10,904 6,983 6,386
-------- -------- -------- -------- --------
Operating income . . . . . . . . . . . 1,675 2,191 2,311 2,067 2,385
Interest expense . . . . . . . . . . . (184) (245) (354) (290) (216)
-------- -------- -------- -------- --------
Income before income taxes . . . . . . 1,491 1,946 1,957 1,777 2,169
Provision for income taxes . . . . . . (132) -- -- -- --
-------- -------- -------- -------- --------
Net income . . . . . . . . . . . . . . $ 1,359 $ 1,946 $ 1,957 $ 1,777 $ 2,169
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>

APRIL 30, DECEMBER 31,
--------------------- 1996
1995 1996 (UNAUDITED)
------ ------ ------------
(DOLLARS IN THOUSANDS)
BALANCE SHEET DATA:
Cash . . . . . . . . . . . . . . . . $ 6 $ 16 $ 17
Working capital (deficit). . . . . . 300 (138) 506
Total assets . . . . . . . . . . . . 10,851 12,390 15,163
Long-term debt . . . . . . . . . . . 60 -- --
Stockholders' equity . . . . . . . . 2,470 2,652 3,666

30
<PAGE>

K-TEL INTERNATIONAL, INC. -- MUSIC OPERATION
SELECTED FINANCIAL DATA

The following table sets forth selected statement of revenues and
expenses and balance sheet data for K-tel International, Inc.--Music
Operations as of the dates and for the periods indicated. The selected
financial data as of June 30, 1995 and 1996 and for each of the three years
ended June 30, 1996 have been derived from the audited statements of K-tel
International, Inc.--Music Operations. The selected financial data as of
March 31, 1997 and for the nine months ended March 31, 1996 and 1997 are
derived from unaudited statements as of such dates and for such periods, and,
in the opinion of the management of K-tel International, Inc. -- Music
Operations, include all adjustments (consisting of only normal recurring
adjustments) necessary for a fair presentation of such data. Operating
results for the nine months ended March 31, 1997 are not necessarily
indicative of the results to be expected for the entire fiscal year. The
following data below should be read in conjunction with the statements and
notes thereto of K-tel International, Inc. -- Music Operations contained
elsewhere in this Proxy Statement.

<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
YEAR ENDED JUNE YEAR ENDED JUNE YEAR ENDED JUNE ENDED MARCH ENDED MARCH
30, 1994 30, 1995 30, 1996 31, 1996 31, 1997
--------------- --------------- --------------- -------------- --------------
(UNAUDITED) (UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF REVENUES AND EXPENSES
DATA:
Gross product sales. . . . . . . . . . . $ 25,692 $ 28,272 $ 42,312 $ 31,311 $ 29,220
Less: Returns and allowances . . . . . . (5,943) (6,004) (8,907) (6,707) (5,702)
Less: Discounts. . . . . . . . . . . . . (513) (493) (618) (453) (544)
-------- -------- -------- -------- --------
Net product sales. . . . . . . . . . . . 19,236 21,775 32,787 24,151 22,974
Cost of product sales. . . . . . . . . . 10,817 12,485 17,329 12,297 12,407
-------- -------- -------- -------- --------
8,419 9,290 15,458 11,854 10,567

Licensing revenues . . . . . . . . . . . 563 470 871 614 639
Cost of licensing revenues . . . . . . . 131 85 102 71 89
-------- -------- -------- -------- --------
432 385 769 543 550
-------- -------- -------- -------- --------
Gross profit . . . . . . . . . . . . . . 8,851 9,675 16,227 12,397 11,117
Other Operating Expenses:
Selling, general and administrative
expenses . . . . . . . . . . . . . . . . 5,316 7,508 11,965 9,469 8,819
Depreciation and amortization. . . . . . 399 416 411 293 293
-------- -------- -------- -------- --------
5,715 7,924 12,376 9,762 9,112
-------- -------- -------- -------- --------
Operating income . . . . . . . . . . . . 3,136 1,751 3,851 2,635 2,005
Interest income. . . . . . . . . . . . . 123 59 17 17 21
Interest expense . . . . . . . . . . . . (4) (85) (212) (180) --
-------- -------- -------- -------- --------
Income before income taxes . . . . . . . 3,255 1,725 3,656 2,472 2,026
Provisions for income taxes. . . . . . . (319) (182) (210) (164) (252)
-------- -------- -------- -------- --------
Net income . . . . . . . . . . . . . . . $ 2,936 $ 1,543 $ 3,446 $ 2,308 $ 1,774
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>

JUNE 30, MARCH 31,
--------------------- 1997
1995 1996 (UNAUDITED)
------ ------ ------------
BALANCE SHEET DATA:
Working deficit. . . . . . . . . . . $ (6,958) $ (5,915) $ (4,270)
Total assets . . . . . . . . . . . . 11,813 14,317 14,786

<PAGE>

PLATINUM ENTERTAINMENT, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

THE DISCUSSION BELOW CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS (AS SUCH
TERM IS DEFINED IN THE RULES PROMULGATED PURSUANT TO THE SECURITIES ACT) THAT
ARE BASED ON THE BELIEFS OF PLATINUM'S MANAGEMENT, AS WELL AS ASSUMPTIONS MADE
BY, AND INFORMATION CURRENTLY AVAILABLE TO, PLATINUM'S MANAGEMENT. THE
COMPANY'S ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS IN THE FUTURE COULD DIFFER
MATERIALLY FROM THOSE EXPRESSED IN, OR IMPLIED BY, ANY SUCH FORWARD-LOOKING
STATEMENTS. SEE "FORWARD LOOKING INFORMATION." THE OVERVIEW AND LIQUIDITY AND
CAPITAL RESOURCES SECTIONS GIVE EFFECT TO THE INTERSOUND ACQUISITION AND THE NEW
CREDIT FACILITY. THIS DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA AND ACCOMPANYING NOTES THERETO
SET FORTH ELSEWHERE IN THIS PROXY STATEMENT.

THE COMPANY ADOPTED A MAY 31 FISCAL YEAR END EFFECTIVE JUNE 1, 1994. THE
DISCUSSION BELOW COVERS THE THREE FISCAL YEARS ENDED MAY 31, 1996, 1995 AND
1994. REFERENCES HEREIN TO "FISCAL 1994" OR THE FISCAL YEAR ENDED MAY 31, 1994
REFER TO THE PRO FORMA UNAUDITED PERIOD DERIVED FROM THE AUDITED FINANCIAL
STATEMENTS FOR THE FIVE-MONTH PERIOD ENDED MAY 31, 1994 AND THE YEAR ENDED
DECEMBER 31, 1993 IN ORDER TO PRESENT A PERIOD COMPARABLE TO THE NEW FISCAL
PERIOD ADOPTED BY THE COMPANY.

OVERVIEW

The Company produces, licenses, acquires, markets and distributes high
quality recorded music for a variety of musical formats. The Company and its
wholly-owned subsidiaries currently produce music for the Gospel, Adult
Contemporary, Blues, Country, Classical/Themed Productions and Urban/Dance
formats, principally under the CGI Records, River North Records, House of Blues
and Intersound labels. The Company's products include compilations of
previously recorded music that enable the Company to exploit its catalog of
master recordings as well as new releases, typically by artists established in a
particular format.

As an integral part of the Company's growth strategy, during March 1996,
the Company completed an initial public offering (the "Offering") of 2,740,000
shares of Common Stock resulting in net proceeds of $32,127,000. See "-- Public
Offering" following.

During the nine months ended February 28, 1997, the Company acquired:
(i) substantially all of the assets of R.E.X. Music, Inc. ("R.E.X.") during
June 1996; (ii) substantially all of the assets of Double J Music Group
("Double J") during September 1996; (iii) a 50% interest in the House of
Blues Music Company ("HOB Joint Venture") during November 1996 and (iv)
substantially all of the assets of Intersound effective January 1, 1997. In
addition, the Company also signed the K-tel Agreement pursuant to which the
Company has agreed to acquire K-tel's worldwide music business assets, except
for K-tel's European music business. See "Significant Matters" below for
more details of these transactions.

The Company records revenues for music products, other than telemarketing
C.O.D. sales, when such products are shipped to retailers. In accordance with
industry practice, the Company's music products are sold on a returnable basis.
The Company's allowance for future returns is based upon its historical results
of operations, SOUNDSCAN data and the historical return experience of one of the
Company's primary distributors, PolyGram. For the nine months ended February
29, 1997 and February 29, 1996, and the fiscal years ended May 31, 1996, 1995
and 1994, the net amounts charged against gross revenues for returns and
allowances for future returns were $4,080,000, $2,878,765, $4,732,000,
$3,126,000 and $1,174,000, respectively.

<PAGE>

The Company recognizes revenues from the shipment of telemarketing C.O.D.
sales when cash is received from the customer. C.O.D. product shipments began
during the first quarter of fiscal 1995 and were discontinued in mid-February
1996, when the Company determined that C.O.D. orders would no longer be
accepted.

A significant recurring funding requirement of the Company is for artist
and repertoire ("A&R") expenses, which include recording costs and advances to
artists. The Company makes substantial payments each period for recording costs
and advances in order to maintain and enhance its artist roster. These costs
are recouped from the artists' royalties, to the extent possible, from future
album sales. Artist advances are capitalized as an asset when the current
popularity and past performance of the artist provides a sound basis for
estimating the probable future recoupment of such advances from earnings
otherwise payable to the artist.

In fiscal 1996, the Company entered into an international licensing
agreement with MCA Records, Ltd. ("MCA"). Revenues derived from the
licensing are calculated as a percentage of retail sales by the licensee net
of returns and are recognized by the Company upon notification of retail
sales net of returns by the licensee. Results of operations for the nine
months ended February 29, 1996 and the year ended May 31, 1996 include
international licensing revenues. However, no international licensing
revenues have been recorded for the first nine months of fiscal 1997 as the
Company has not been notified by MCA regarding international sales generated
during this period. Manufacturing and related costs (other than artist
royalties, which are paid by the Company) are borne by the licensee. Artist
royalties paid by the Company in connection with international sales are
recorded as costs of artist projects and other revenues and are calculated as
a percentage of net licensed proceeds.

<PAGE>

RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, certain items
derived from the Company's consolidated statements of operations as a percentage
of gross revenues:

<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
-----------------------------------------------------------------------
1994 1995 1996
(DOLLARS IN THOUSANDS,
EXCEPT PERCENTAGE AMOUNTS)
<C> <C> <C> <C> <C> <C>
Total gross revenues . . . . . . . . . $8,929 100.0% $15,866 100.0% $25,489 100.0%
Less: Returns and allowances. . . . . (1,174) (13.2) (3,126) (19.7) (4,732) (18.6)
Less: Discounts . . . . . . . . . . . -- -- (507) (3.2) (712) (2.8)
Less: (Allowance for)
recovery of unrecoupable
artist advances. . . . . . . . . . . (1,219) (13.7) (1,128) (7.1) (2,507) (9.8)
------- ------- -------
Total net revenues . . . . . . . . . . 6,536 73.1 11,105 70.0 17,538 68.8
Cost of product sales. . . . . . . . . 3,439 38.5 4,300 27.1 8,107 31.8
Cost of artist projects and other
revenues . . . . . . . . . . . . . . 1,862 20.9 2,601 16.4 5,195 20.4
------- ------- -------
Total cost of sales and services . . . 5,301 59.4 6,901 43.5 13,302 52.2
------- ------- -------
Gross Profit . . . . . . . . . . . . . 1,235 13.7 4,204 26.5 4,236 16.6

Other operating expenses:
Selling, general and
administrative expenses. . . . . . . 2,553 28.6 8,800 55.5 7,961 31.2
Merger and restructuring costs . . . . -- -- -- -- -- --
Depreciation and amortization. . . . . 88 1.0 133 0.8 212 0.8
------- ------- -------
2,641 29.6 8,933 56.3 8,173 32.0
------- ------- -------
Income (loss) from operations. . . . . (1,406) (15.9) (4,729) (29.8) (3,937) (15.4)
Interest income. . . . . . . . . . . . -- -- 46 0.3 106 0.4
Interest expense . . . . . . . . . . . (48) (0.5) (157) (1.0) (570) (2.2)
Financing costs. . . . . . . . . . . . -- -- -- -- -- --
Equity loss. . . . . . . . . . . . . . -- -- -- -- -- --
------- ------- -------
Income (loss) from continuing
operations . . . . . . . . . . . . . (1,454) (16.4) (4,840) (30.5) (4,401) (17.2)

Discontinued operations:
Loss from operations . . . . . . . . (2,050) (23.0) (2,073) (13.1) -- --
Loss on disposal . . . . . . . . . . -- -- (2,611) (16.5) (226) (0.9)
------- ------ ------- ------ ------- -----
Loss from discontinued
operations . . . . . . . . . . . . . (2,050) (23.0) (4,684) (29.6) (226) (0.9)
------- ------ ------- ------ ------- -----
Net income (loss). . . . . . . . . . . $(3,504) (39.4)% $(9,524) (60.1)% $(4,627) (18.1)%
------- ------ ------- ------ ------- -----
------- ------ ------- ------ ------- -----

<CAPTION>
NINE MONTHS ENDED
---------------------------------------------
FEBRUARY 29, 1996 FEBRUARY 28, 1997
<S> <C> <C> <C> <C>
Total gross revenues . . . . . . . . . $19,548 100% $25,854 100%
Less: Returns and allowances. . . . . (2,878) (14.7) (4,080) (15.8)
Less: Discounts . . . . . . . . . . . (548) (2.8) (1,727) (6.7)
Less: (Allowance for)
recovery of unrecoupable
artist advances. . . . . . . . . . . 99 (0.5) (465) (1.8)
------- -------
Total net revenues . . . . . . . . . . 16,221 83.0 19,582 75.7
Cost of product sales. . . . . . . . . 5,620 28.7 9,272 35.9
Cost of artist projects and other
revenues . . . . . . . . . . . . . . 3,788 19.4 2,585 10.0
------- -------
Total cost of sales and services . . . 9,408 48.1 11,857 45.9
Gross Profit . . . . . . . . . . . . . 6,813 34.9 7,725 29.8

Other operating expenses:
Selling, general and
administrative expenses. . . . . . . 6,007 30.7 8,160 31.6
Merger and restructuring costs . . . . -- -- 612 2.4
Depreciation and amortization. . . . . 92 0.5 481 1.9
------- -------
6,099 31.2 9,253 35.9
------- -------
Income (loss) from operations. . . . . 714 3.7 (1,528) (6.1)
Interest income. . . . . . . . . . . . -- -- 138 0.5
Interest expense . . . . . . . . . . . (530) (2.7) (308) (1.2)
Financing costs. . . . . . . . . . . . -- -- (865) (3.3)
Equity loss. . . . . . . . . . . . . . -- (1) --
------- -------
Income (loss) from continuing
operations . . . . . . . . . . . . . 184 1.0 (2,564) (10.1)

Discontinued operations:
Loss from operations . . . . . . . . -- -- -- --
Loss on disposal . . . . . . . . . . -- -- -- --
------- -------
Loss from discontinued
operations . . . . . . . . . . . . . -- -- --
------- -------
Net income (loss). . . . . . . . . . . $184 1.0% $(2,564) (10.1)%
------- -------
------- -------
</TABLE>

References made in the following discussion concerning the nine months
ended February 28, 1997 compared to the nine months ended February 29, 1996
include: (i) Gospel format - activity under the CGI Records, Light Records,
Lexicon Music, R.E.X. Music and Flying Tart labels, as well as Gospel activity
under the House of Blues label; (ii) Country format - activity under the River
North Nashville label; (iii) Adult Contemporary format - activity under the
River North Records label; and (iv) Blues and other format - primarily non-
Gospel activity under the House of Blues label. All activity under the
Intersound Acquisition is referenced as "Intersound" so that the effects of the
Intersound Acquisition can be understood.

<PAGE>

NINE MONTHS ENDED FEBRUARY 28, 1997 COMPARED WITH NINE MONTHS ENDED FEBRUARY 29,
1996

Gross revenues increased $6,306,000 or 32.3% to $25,854,000 for the nine
months ended February 28, 1997 compared to the nine months ended February 29,
1996; $4,219,000 or 66.9% of this increase related to the activities of
Intersound since January 1, 1997. No international licensing revenues have
been recorded for the first nine months of fiscal 1997 as the Company has not
been notified to date by MCA regarding international sales generated during
this period. Delays by MCA's distributors in reporting sales to MCA have in
turn caused MCA to breach its semi-annual reporting obligation to the
Company. International licensing revenues for the nine months ended February
29, 1996 approximated $553,000; such licensing revenues may not be indicative
of the licensing revenues earned for the current or future periods.

Gross revenues from Gospel, Country, Adult Contemporary and Blues, and
Intersound activity as a percentage of total gross revenues for the nine months
ended February 28, 1997 were 46.8%, 24.5%, 6.6%, 5.8% and 16.3% compared to
56.7%, 12.9%, 25.4%, 5.0% and 0.0% for the nine months ended February 29, 1996.

The changes in the percentages are due principally to the activities of
Intersound since January 1, 1997 as noted above, and the following significant
releases: The Beach Boys' STARS AND STRIPES, VOLUME I (which generated
approximately $3,024,000 of Country revenues for the nine months ended February
28, 1997); Crystal Bernard's THE GIRL NEXT DOOR (which generated approximately
$1,330,000 of Country revenues for the nine months ended February 28, 1997); The
Alan Parsons Project's ON AIR (which generated approximately $640,000 of Adult
Contemporary revenues for the nine months ended February 28, 1997) and National
Baptist Convention's LET'S GO TO CHURCH (which generated approximately
$3,913,000 of Gospel revenues for the nine months ended February 28, 1997).
These increases were offset in part by a decrease in telemarketing sales, which
typically generate Gospel revenues, that were discontinued due to the increased
costs of television advertising, and by the incremental revenue recognized in
the first nine months of fiscal 1996 from the release of Peter Cetera's ONE
CLEAR VOICE.

RETURNS AND ALLOWANCES

Returns and allowances increased $1,202,000 or 41.8% to $4,080,000 for the
nine months ended February 28, 1997 compared to the nine months ended February
29, 1996; $992,000 or 82.5% of this increase related to the activities of
Intersound since January 1, 1997.

Returns and allowances as a percentage of gross product sales, less
discounts, decreased to 19.7% for the nine months ended February 28, 1997 from
21.0% for the comparable period of the prior fiscal year. The decrease in the
current quarter is attributable primarily to a change in buying habits of the
Company's retail customers who have reduced initial order quantities to better
manage receivable and inventory levels.

DISCOUNTS

Discounts increased $1,179,000 or 215.1% to $1,727,000 for the nine months
ended February 28, 1997 compared to the nine months ended February 29, 1996;
$122,000 or 10.3% of this increase related to the activities of Intersound since
January 1, 1997 and $633,000 or 53.7% of this increase related to LET'S GO TO
CHURCH as discussed above.

Discounts as a percentage of gross product sales increased to 7.7% for the
nine months ended February 28, 1997 from 3.8% for the comparable period of the
prior fiscal year. The increases primarily relate to additional discounts
extended to the member churches which purchased the National Baptist
Convention's LET'S GO TO CHURCH release directly from the Company to avoid a
third-party distribution fee. The increases also relate to the increase in new
releases volume, particularly in the Country and

<PAGE>

Adult Contemporary formats, as it is industry practice to extend discounts on
new release orders, compared to reorders of previously released albums.

ALLOWANCE FOR UNRECOUPABLE ARTIST ADVANCES

The allowance for unrecoupable artist advances was $465,000 for the nine
months ended February 28, 1997, compared to a net recovery of artist advances of
$99,000 for the nine months ended February 29, 1996, respectively. The changes
were not significantly affected by the activities of Intersound since January 1,
1997. During the nine months ended February 29, 1996, the Company renegotiated
certain artist contracts to allow additional costs previously expensed by the
Company in fiscal 1995 to be included in recoupable artist advances, resulting
in the net recovery. The current period balances primarily relate to several
Gospel and Country projects released during the current periods or to be
released later in fiscal 1997.

COST OF PRODUCT SALES

Cost of product sales increased $3,652,000 or 65.0% to $9,272,000 for the
nine months ended February 28, 1997 compared to the nine months ended February
29, 1996; $650,000 or 17.8% of this increase related to the activities of
Intersound since January 1, 1997.

Cost of product sales as a percentage of gross revenues increased to 35.9%
for the nine months ended February 28, 1997 from 28.7% for the comparable period
of the prior fiscal year. The increase is primarily attributable to increased
royalty costs associated with albums released during the current periods,
featuring established artists in non-Gospel formats. Further, the reduction in
telemarketing sales negatively impacted this percentage due to the lower cost of
product sales attributable to telemarketing sales compared with other
distribution channels.

COST OF ARTIST PROJECT AND OTHER REVENUES

Cost of artist project and other revenues decreased $1,203,000 or 31.8% to
$2,585,000 for the nine months ended February 28, 1997 compared to the nine
months ended February 29, 1996.

The decrease relates primarily to the timing of project releases and the
related costs incurred to complete those projects. Significant cost of projects
released in fiscal 1997, such as albums by The Beach Boys, Crystal Bernard and
The Alan Parsons Project, were incurred in fiscal 1996. The projects in
production during the current periods are less costly relative to the projects
in production during the comparable periods of the prior fiscal year.

In addition, cost of artist project and other revenues includes the
royalties paid by the Company to artists in connection with its first
international sales through MCA which occurred during fiscal 1996. The
Company's liability for such royalties is based on MCA's retail sales of the
Company's products net of returns, and equaled approximately 10% of such net
sales. When presented as a percentage of licensing revenues received by the
Company, however, royalties were equal to approximately 50% of such revenues.
No such revenues or related costs have been recorded by the Company during the
current periods as MCA has not provided final sales data for the current
periods. Such costs approximated $380,000 for the nine months ended
February 29, 1996; such costs may not be indicative of the licensing costs owed
for the current or future periods.

GROSS PROFIT

Gross profit increased $912,000 or 13.4% to $7,725,000 for the nine months
ended February 28, 1997 compared to the nine months ended February 29, 1996; the
activities of Intersound since January 1, 1997 contributed to an increase in
such profits of $2,254,000.

<PAGE>

As a percentage of gross revenues, gross profit decreased to 29.8% for the
nine months ended February 28, 1997 from 34.9% for the comparable period of the
prior fiscal year. The decrease for the nine months ended February 28, 1997 is
attributable to a decrease in telemarketing revenues which provide higher gross
profits due to the lack of third-party distribution fees (telemarketing revenues
for the nine months ended February 28, 1997 and February 29, 1996 were $50,000
and $1,342,000, respectively), an increase in reserves for artist advances and
an increase in sales discounts offered. In addition, no international licensing
revenues have been recorded for the first nine months of fiscal 1997 as the
Company has not been notified to date by MCA regarding international sales
generated during this period. International licensing revenues typically
generate a 50% gross margin.

In addition, gross profit on product sales varies from project to project
due to differences in royalty rates and the greater profit margins achieved for
compact discs over cassettes. As a result, gross profit margins are affected in
any period by the mix of releases sold during that period.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative expenses increased $2,153,000 or 35.8%
to $8,160,000 for the nine months ended February 28, 1997 compared to the nine
months ended February 29, 1996; $1,060,000 or 49.2% of this increase related to
the activities of Intersound since January 1, 1997.

Selling, general and administrative expenses as a percentage of gross
revenues remained relatively unchanged at 31.6% for the nine months ended
February 28, 1997 from 30.7% for the comparable period of the prior fiscal year.

MERGER AND RESTRUCTURING COSTS

Nonrecurring merger and restructuring costs of $612,000 for the nine
months ended February 28, 1997 were incurred due to combining certain
operations of the Company with Intersound. The nature of the costs include
severance payments to terminated employees of the Company and costs
associated with consolidating certain offices of the Company with Intersound.
As of February 28, 1997, cash paid for such costs approximated $538,000 with
the remainder included in accrued liabilities on the face of the balance
sheet; management anticipates the accrued costs to be fully paid within the
next twelve months.

DEPRECIATION AND AMORTIZATION

Depreciation and amortization increased to $481,000 from $92,000 for the
nine months ended February 28, 1997 compared to the comparable period of the
prior fiscal year. The increase is attributable to increased amortization
related to approximately $23,600,000 of music publishing rights and excess
cost over net assets acquired resulting from the activities of Intersound
since January 1, 1997 and $1,500,000 of music publishing rights and artist
masters acquired from Double J and R.E.X. during the first nine months of
fiscal 1997. The Company's purchase price allocation for the Intersound
Acquisition is preliminary pending the valuation of certain intangible
assets. The Company does not anticipate that such valuation will have a
material impact on the Company's future results of operations.

OPERATING INCOME/LOSS

As a result of the factors described above, an operating loss of $1,528,000
was reported for the nine months ended February 28, 1997; an operating income of
$714,000 was reported for the nine months ended February 29, 1996.

INCOME TAX

No tax expense or benefit has been recorded through February 28, 1997 due
to the Company's net operating loss carryforward and related valuation allowance
at May 31, 1996, as required under generally accepted accounting principles.
Pursuant to Section 382 of the Internal Revenue Code of 1986,

<PAGE>

as amended, the Company's net operating loss carryforward of approximately
$12,523,000 at May 31, 1996, expiring in years 2007 through 2011, is subject to
annual limitations due to a change in ownership as a result of the initial
public offering in March 1996. Consequently, approximately $3,700,000 of the
loss carryforward at May 31, 1996 will be available to offset fiscal 1997
taxable income.

INTEREST INCOME

Interest income for the nine months ended February 28, 1997 totaled
$138,000 compared to no interest income for the comparable period of the prior
fiscal year. The interest income for the current period is primarily
attributable to earnings on net proceeds from the Offering.

INTEREST EXPENSE

Interest expense for the nine months ended February 28, 1997 totaled
$308,000 compared to $530,000 for the comparable period of the prior fiscal
year. See "Capital Resources" below for details of the Company's current debt
structure. All debt outstanding during the nine months ended February 29, 1996
was retired with the net proceeds received from the Offering.

FINANCING COSTS

Financing costs of $865,000 were incurred during the nine months ended
February 28, 1997 due to the funding of the Intersound Acquisition. These costs
include the warrants issued to BMO and the bank's origination fee, which are
being amortized over the 90-day term of the loan.

NET INCOME/LOSS

The net loss attributable to common shares for the nine months ended
February 28, 1997 totaled $2,564,000 compared to net income attributable to
common shares of $184,000 for the comparable period of the prior fiscal year.
The loss is attributable to the factors discussed above. In addition, no
international licensing revenues have been recorded for the nine months ended
February 28, 1997 as the Company has not been notified to date by MCA regarding
international sales generated during this period.

FISCAL YEAR ENDED MAY 31, 1996 COMPARED TO FISCAL YEAR ENDED MAY 31, 1995

Gross revenues increased $9,623,000 or 60.6% to $25,489,000 for fiscal 1996
compared to $15,866,000 for the prior fiscal year, while net revenues increased
$6,433,000 or 57.9%. Product sales increased $5,747,000 or 45.7% to $18,322,000
for fiscal 1996 compared to $12,575,000 for the prior fiscal year. This
increase primarily occurred in product sales through PGD and Platinum Christian
Distribution (formerly Light Distribution), an operating division of the
Company, which increased $3,231,000 and $1,439,000, respectively, for fiscal
1996 compared to the prior fiscal year. Gross revenues generated in the Adult
Contemporary, Gospel and Country markets increased by $4,305,000, $2,637,000 and
$1,686,000, respectively, for fiscal 1996 compared to the prior fiscal year.
The increase in Adult Contemporary revenue growth is due, in part, to the
success of Peter Cetera's ONE CLEAR VOICE album. The increase in Gospel revenue
growth is attributable to the success of a number of new releases, such as THE
LIGHT YEARS series, Witness' A SONG IN THE NIGHT and two releases from Glad, A
CAPPELLA GERSHWIN and THE A CAPPELLA PROJECT III, combined with the continued
popularity of many of the Company's older Gospel releases. The increase in
Country revenues is principally due to the release of Ronna Reeves' AFTER THE
DANCE, Steve Azar's HEARTBREAK TOWN and production of The Beach Boys' STARS AND
STRIPES, VOLUME I, which was released at the end of the first quarter of fiscal
1997. In addition, the Company released its initial three albums, ESSENTIAL
BLUES, VOLUMES I & II, and ESSENTIAL GOSPEL, under the House of Blues label
during fiscal 1996. Licensing, publishing and other revenues increased
$1,592,000 to $1,799,000 for fiscal 1996 compared to $207,000 for the prior
fiscal year. The most significant component of this increase was the result of
the Company's first licensing revenue from international sales through MCA of
$553,000. During fiscal 1996, management significantly reduced

<PAGE>

Platinum's telemarketing efforts due to the increased costs of television
advertising. The increase in other product revenues more than offset decreased
telemarketing sales, which declined $527,000 or 27.0% to $1,422,000 for fiscal
1996 compared to $1,949,000 for the prior fiscal year.

Returns and allowances increased $1,606,000 or 51.4% to $4,732,000 for
fiscal 1996 compared to $3,126,000 for the prior fiscal year. Returns and
allowances as a percentage of gross product sales, less discounts, remained
relatively unchanged at 26.9% for fiscal 1996 from 25.9% for the prior fiscal
year.

Discounts increased $205,000 or 40.4% to $712,000 for fiscal 1996 compared
to $507,000 for the prior fiscal year. Discounts as a percentage of gross
product sales remained relatively unchanged at 3.9% for fiscal 1996 from 4.0%
for the prior fiscal year.

The allowance for unrecoupable artist advances increased $1,379,000 or
122.2% to $2,507,000 for fiscal 1996 compared to $1,128,000 for the prior fiscal
year. The fiscal 1996 allowance for unrecoupable artist advances is net of
write-offs of approximately $560,000. Allowances for unrecoupable artist
advances as a percentage of gross project revenues increased to 46.7% for fiscal
1996 from 36.6% for the prior fiscal year reflecting Platinum's increased
investment in new releases. This increase resulted from several debut projects
produced during fiscal 1996 for which the related advances are fully reserved in
accordance with accounting requirements. This increase also reflects increased
investments in recently released, or soon to be released, artist projects at
May 31, 1996 which require a larger unit sales volume to recoup the related
artist advances. In addition, the reserve was increased at fiscal year-end to
reflect the continued weakness in the retail music sales market and management's
decision to significantly reduce its telemarketing sales activity as a result of
the increased cost of television advertising.

Cost of product sales increased $3,807,000 or 88.5% to $8,107,000 for
fiscal 1996 compared to $4,300,000 for the prior fiscal year, primarily as a
consequence of increased product sales. Cost of product sales as a percentage
of gross revenues increased to 31.8% for fiscal 1996 from 27.1% in the prior
fiscal year. This increase is primarily attributable to increased royalty costs
associated with albums released during fiscal 1996 featuring established artists
in non-Gospel formats. Further, the reduction in telemarketing sales negatively
impacted this percentage due to the lower cost of product sales attributable to
telemarketing sales compared with other distribution channels.

Cost of artist projects and other revenues increased $2,594,000 or 99.7% to
$5,195,000 for fiscal 1996 compared to $2,601,000 for the prior fiscal year.
These costs as a percentage of gross revenues increased to 20.4% for fiscal 1996
compared to 16.4% for the prior fiscal year. The increase reflects the
Company's increasing volume of new products and the higher costs associated with
developing projects in the Adult Contemporary and Country formats, including
projects involving Peter Cetera, Ronna Reeves, Steve Azar and The Beach Boys, as
compared to Gospel projects.

In addition, these costs included the royalties paid by Platinum to artists
in connection with its first international sales through MCA, which occurred
during fiscal 1996. Platinum's liability for such royalties is based on MCA's
retail sales of Platinum's products net of returns, and equaled approximately
10% of such net retail sales. When presented as a percentage of licensing
revenues received by Platinum, however, royalties were equal to approximately
50% of such revenues.

Gross profit increased $32,000 or 0.8% to $4,236,000 for fiscal 1996
compared to $4,204,000 for the prior fiscal year. As a percentage of gross
revenues, gross profit decreased to 16.6% for fiscal 1996 compared to 26.5% for
the prior fiscal year. This decrease relates to increased allowances on artist
advances and an increase in cost of product sales as described above. The
decrease is also attributable

<PAGE>

to increased royalty rates on non-Gospel record sales, a decrease in
telemarketing revenues which provide higher gross margins due to the lack of a
third-party distribution channel and an increase in product returns. The timing
of releases also affects gross profit. The costs of developing several recently
released, or soon to be released, projects at May 31, 1996 have the effect of
decreasing fiscal 1996 gross profit as product sales on these projects will
occur in future periods.

Selling, general and administrative expenses decreased $839,000 or 9.5% to
$7,961,000 for fiscal 1996 compared to $8,800,000 for the prior fiscal year.
Selling, general and administrative expenses as a percentage of gross revenues
decreased to 31.2% for fiscal 1996 compared to 55.5% for the prior fiscal year.
These decreases are primarily attributable to an increased revenue base as well
as new budgeting and approval procedures to control and monitor marketing,
promotion, production and other costs implemented during the second quarter of
fiscal 1996. In addition, Platinum incurred substantial one-time investments
during fiscal 1995 as described below.

Depreciation and amortization increased $79,000 to $212,000 for fiscal 1996
from $133,000 for fiscal 1995. The increase is primarily attributable to
increased depreciation from the addition of office equipment, computers,
furniture and fixtures.

As a result of the factors described above, the operating loss decreased
$792,000 or 16.7% to $3,937,000 for fiscal 1996 from $4,729,000 for the prior
fiscal year.

No tax benefit has been recorded to date through May 31, 1996 due to
Platinum's valuation allowance at May 31, 1996, as required under generally
accepted accounting principles. Pursuant to Section 382 of the Internal Revenue
Code of 1986, as amended, Platinum's net operating loss carryforward of
approximately $12,523,000, expiring in years 2007 through 2011, is subject to
annual limitations due to a change in ownership as a result of the Offering.
Consequently, approximately $3,700,000 of the loss carryforward at May 31, 1996
will be available to offset fiscal 1997 taxable income.

Interest expense increased $413,000 to $570,000 for fiscal 1996 compared to
$157,000 for the prior fiscal year. This increase is due to increased bank and
relating party financing used by Platinum to fund operations in fiscal 1996
compared to the prior fiscal year. In fiscal 1996, all outstanding debt was
retired with the net proceeds received from the Offering. Accordingly, no
interest expense was incurred following the closing of the Offering.

Net loss decreased $4,897,000 to $4,627,000 for fiscal 1996 from $9,524,000
for the prior fiscal year. The net loss for fiscal 1995 included $4,684,000
related to operations discontinued during fiscal 1995. During fiscal 1996,
Platinum experienced an additional $226,000 of costs related to the discontinued
operations in excess of estimated amounts at the measurement date. Included in
the aforementioned costs of the discontinued operations for fiscal 1996, are
$302,000 for management, administrative services and interest expense charged by
Platinum to the Studio. The improved net loss for fiscal 1996 also reflects the
success of Platinum's recent releases, the Company's first international sales
through MCA during fiscal 1996 and the effect of Platinum's efforts to reduce
expenses, which included the implementation of cost controls as discussed above.

FISCAL YEAR ENDED MAY 31, 1995 COMPARED TO PRO FORMA FISCAL YEAR ENDED MAY 31,
1994

Gross revenues increased $6,937,000 or 77.7% to $15,866,000 for fiscal 1995
compared to $8,929,000 for the prior fiscal year, while net revenues increased
$4,569,000 or 69.9%. Telemarketing sales, which began in fiscal 1995, accounted
for $1,949,000 of gross revenues. Gross product sales into the Christian
bookstore market experienced a significant increase from $758,000 in fiscal 1994
to $2,809,000 in fiscal 1995, due principally to the efforts of the newly formed
Platinum Christian

<PAGE>

Distribution (formerly Light Distribution) sales staff. In addition, fiscal
1995 was the first full year in which Platinum benefited from its distribution
agreement with PGD, which dramatically broadened the market for the Company's
products. Fiscal 1995 results also reflected Platinum's first significant sales
efforts outside of its traditional Gospel music market. On a music format
basis, the increase in gross revenues in fiscal 1995 resulted from a $910,000
increase in Adult Contemporary sales attributable to the production of Peter
Cetera's ONE CLEAR VOICE album, an increase in Gospel gross revenues of
$3,845,000 attributable to the success of new releases combined with the
continued popularity of many of Platinum's older releases and an increase in
Country gross revenues of $2,013,000 due primarily to the production and release
of albums by Holly Dunn and Steve Kolander.

Returns and allowances increased $1,952,000 or 166.3% to $3,126,000 for
fiscal 1995 compared to $1,174,000 for the prior fiscal year. Returns as a
percentage of gross product sales increased to 25.9% in fiscal 1995 from 16.3%
in the prior fiscal year. This increase was due primarily to the higher return
experience rates associated with the release of various Country artists.

Discounts for fiscal 1995 were $507,000 or 4.0% of gross product sales.
Fiscal year 1994 does not reflect discount due to the lack of readily available
financial information for that period.

The allowance for unrecoupable artist advances decreased $91,000 or 7.5% to
$1,128,000 for fiscal 1995 from $1,219,000 for the prior fiscal year.
Allowances for unrecoupable artist advances as a percentage of gross project
revenues decreased to 36.6% for fiscal 1995 from 74.4% for the prior fiscal
year. This decrease resulted from significant projects produced during fiscal
1995 with artists whose current popularity and past performance provide a sound
basis for estimating the probable future recoupment of their advances.

Cost of product sales increased $861,000 or 25.0% to $4,300,000 for fiscal
1995 from $3,439,000 for the prior fiscal year. However, these costs as a
percentage of gross revenues declined to 27.1% for fiscal 1995 from 38.5% for
the prior fiscal year. This favorable variance was due primarily to the
revenues generated by Platinum's telemarketing operations. As discussed below,
the favorable impact from telemarketing sales was offset in part by additional
selling, general and administrative costs incurred to create and support the
telemarketing sales infrastructure.

Cost of artist projects and other revenues increased $739,000 or 39.7% to
$2,601,000 for fiscal 1995 from $1,862,000 for the prior fiscal year. However,
these costs as a percentage of gross revenues decreased to 16.4% for fiscal 1995
compared to 20.9% for the prior fiscal year. The dollar increase reflected an
increase in Adult Contemporary and Country projects which were higher in cost
than Gospel projects.

Gross profit increased $2,969,000 or 240.4% to $4,204,000 for fiscal 1995
from $1,235,000 for the prior fiscal year. As a percentage of gross revenues,
gross profit increased to 26.5% for fiscal 1995 compared to 13.7% for the prior
fiscal year. This increase was partially attributable to the increase in sales
of Adult Contemporary and Country artist albums. A greater percentage of these
products were sold as compact discs than Platinum's Gospel products, generating
greater margins. In addition, these releases also commanded higher wholesale
and retail sales prices than the Gospel releases. Telemarketing sales, which
began in fiscal 1995, also generated higher gross margins due to the lack of
third-party distribution fees and lower royalties attributable to product sold
through this distribution channel.

Selling, general and administrative expenses increased $6,247,000 or 244.7%
to $8,800,000 for fiscal 1995 compared to $2,553,000 for the prior fiscal year.
Selling, general and administrative expenses as a percentage of gross revenues
increased to 55.5% for fiscal 1995 from 28.6% for the prior fiscal year. This
increase reflected an increase in expenses related to additional personnel and
facilities

<PAGE>

necessary to support the larger volume of sales. In addition, this increase in
costs and expenses reflected substantial one-time investments made by Platinum
to develop and promote its Country music label, create a telemarketing division,
establish a mail order distribution center and form its own sales force for
Platinum Christian Distribution (formerly Light Distribution) and outbound
telemarketing. These expenditures, which totaled approximately $1,100,000, were
fully expensed in fiscal 1995. The major component of these expenses was
$900,000 in advertising and promotional costs incurred to establish name
recognition for the new Country label. Fiscal 1995 also included $2,200,000 of
advertising expenses related to Platinum's new telemarketing operations.

Depreciation and amortization increased $45,000 to $133,000 for fiscal 1995
from $88,000 for fiscal 1994. The increase is primarily attributable to
increased depreciation from the addition of office equipment, computers,
furniture and fixtures.

Platinum's loss from continuing operations increased $3,386,000 or 232.9%
to $4,840,000 for fiscal 1995 compared to $1,454,000 for the prior fiscal year.
This increase was primarily the result of the one-time investments made by the
Company and fully expensed in fiscal 1995, as discussed above, and other
expenses associated with growth and entry into new markets.

The Company's net loss increased $6,020,000 or 171.8% to $9,524,000 for
fiscal 1995 compared to $3,504,000 for the prior fiscal year. The fiscal 1995
loss included an operating loss of $2,073,000 related to the Studio operations,
as compared to a loss of $2,050,000 for fiscal 1994. In addition, the fiscal
1995 net loss included a reserve of $1,238,000 for anticipated operating costs
of the Studio through the expected disposal date and a charge of $1,373,000 to
write down the Studio assets to their net realizable value. A significant
portion of the fiscal 1995 loss was also attributable to certain one-time
investments of $1,100,000 which were expensed in fiscal 1995.

RECENTLY ISSUED ACCOUNTING STANDARDS

In October 1995, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123, "Accounting for Stock-Based Compensation" ("FAS 123"). This
Statement establishes financial accounting and reporting standards for stock-
based employee compensation plans as well as transactions in which the Company
issues its equity instruments to acquire services from nonemployees. The
Statement defines a fair value based method of measuring compensation costs for
such activity, but does not require accounting compliance under this method and
allows compensation costs for such activity to be measured using the intrinsic
value based method prescribed by APB Opinion No. 25, "Accounting for Stock
Issued to Employees" ("Opinion 25"), the method currently utilized by the
Company. Entities electing to remain with the accounting method prescribed by
Opinion 25 must make pro forma disclosures of net income and earnings per share
as if the fair value based method of accounting defined in FAS 123 had been
applied. This Statement is effective for the Company's fiscal year ending
May 31, 1997. Management intends to continue accounting for stock options
pursuant to Opinion 25 and has not yet determined what impact this Statement
will have on the Company's financial disclosures.

In Feburary 1997, the FASB issued SFAS No. 128, "Earnings Per Share."
The overall objective of this Statement is to simplify the calculation of
earnings per share. This Statement is effective for the Company's fiscal
quarter ending February 28, 1998. The impact of Statement 128 is not expected
to be material to the Company's financial disclosures.

SEASONALITY

The Company's results of operations are subject to seasonal variations. In
accordance with industry practice, the Company records revenues for music
product, except those related to the telemarketing C.O.D. sales, when such
products are shipped to retailers. The Company has historically experienced a
decline in revenues and net income in its third fiscal quarter (December,
January and February) due to the fact that retailers purchase products from the
Company in the quarter ending November 30 in anticipation of holiday sales. As
a result, sales are traditionally lower during December and the post holiday
period.

<PAGE>

PUBLIC OFFERING

On March 12, 1996, Platinum sold 2,500,000 shares of Common Stock to the
public at an initial offering price of $13.00 per share. In addition, on
March 28, 1996, Platinum sold an additional 240,000 shares of Common Stock to
the public at the initial offering price, pursuant to an over-allotment option
granted the underwriters of the public offering. These sales (after payment of
underwriting discounts and commissions and a financial advisory fee) resulted in
net proceeds of $32,127,000. The net proceeds were used to: (i) retire
outstanding related party debt of $4,867,000, (ii) retire outstanding borrowings
under Platinum's line of credit of $4,980,000, (iii) retire an outstanding bank
term loan of $4,000,000, (iv) redeem a portion of Platinum's Series A-1 Non-
Convertible Preferred Stock, including settlement of unaccrued dividends, for
cash of $4,500,000 (with the remaining redemption settled with shares of Common
Stock) and (v) pay costs related to the Offering, approximating $1,170,000. The
proceeds of the Offering were also used in connection with the HOB Joint Venture
and the acquisitions of R.E.X. and Double J. See "-- Significant Matters."

SIGNIFICANT MATTERS

On June 20, 1996, the Company acquired substantially all of the assets of
R.E.X. for $480,000, which approximated the indebtedness of R.E.X. to the
Company, and the assumption of $100,000 in liabilities. Prior to the
acquisition, the Company was the primary distributor for R.E.X., which produces,
licenses and markets recorded music, primarily in the contemporary Christian
format of Gospel music, for markets primarily in the United States. R.E.X.'s
artist roster acquired by the Company includes Sixpence None the Richer,
Whitecross, Six Feet Deep, The Waiting and Tammy Trent.

On September 19, 1996, the Company acquired substantially all of the assets
of Double J for 88,000 shares of Common Stock, the assumption of approximately
$100,000 of debt and the assumption of $75,000 in liabilities. Double J
develops and acquires ownership of musical compositions and exploits those
compositions by means of recordings, performances, audio-visual works, print
publications and other licenses. The acquisition has been accounted for by the
purchase method of accounting and the purchase price of $1,081,000 approximates
the fair value of the assets acquired.

The Company and House of Blues Records, Inc. ("HOB"), formed the HOB Joint
Venture, effective November 1, 1996. The formation was executed upon the
purchase by the Company of the fifty percent (50%) interest of Private, Inc., a
subsidiary of Bertelsman Music Group, Inc. ("Seller"), in the joint venture
between Seller and HOB formed pursuant to a prior agreement. The payment for
such 50% interest was made on November 12, 1996 in the cash amount of
$3,063,000, which is deemed a cash capital contribution by the Company to the
Venture. HOB contributed to the Venture a license in HOB's trademarks, logo and
other intellectual property in consideration for their 50% interest in the
Venture. HOB is a subsidiary of House of Blues Entertainment, Inc. The
Chairman and Chief Executive Officer of House of Blues Entertainment, Inc. is
also a director of the Company.

Effective January 1, 1997, the Company purchased substantially all of the
assets of Intersound for $24,000,000 in cash, $5,000,000 in Notes and the
assumption of certain liabilities. See "Acquisition of Intersound." The
activities of Intersound since January 1, 1997 have been accounted for by the
purchase method of accounting and the purchase price of $39,301,000 approximates
the fair value of the assets acquired. The purchase value was allocated to the
acquired assets based upon their estimated respective fair market values; the
amounts allocated to music publishing rights and excess cost over net assets
acquired (goodwill) are being amortized over 25 years using the straight-line
method. The Company's purchase price allocation is preliminary pending the
valuation of certain intangible assets.

On March 3, 1997, the Company and K-tel signed the K-tel Agreement pursuant
to which the Company will acquire K-tel's worldwide music business assets,
except for K-tel's European music

<PAGE>

business, through the purchase of the stock of K-tel Subsidiaries. The purchase
price is $35 million subject to certain adjustments. Subject to satisfaction of
the closing conditions specified in the K-tel Agreement, including the Company's
obtaining financing and approval by the shareholders of K-tel, the transaction
is expected to close within 120 to 180 days after the signing of the Agreement.
Pursuant to the K-tel Agreement, the Company deposited $1,750,000 in escrow
which will be applied to the purchase price if the K-tel Acquisition is
consummated or paid to K-tel in the event the transaction is not consummated
under certain circumstances, including the failure of the Company to obtain
financing for the transaction. See "The Pending K-tel Acquisition."

LIQUIDITY

The Company's cash balances were $139,000 and $8,222,000 at February 28,
1997 and May 31, 1996, respectively. Net cash used in operating activities was
$5,758,000 for the nine months ended February 28, 1997. The uses reflect net
cash used to fund trade receivables of $2,695,000, inventories of $1,035,000,
artist advances of $2,437,000, trade payables of $746,000 and accrued
liabilities and other of $1,215,000, attributable to releases by such artists as
The Beach Boys, Crystal Bernard, The Alan Parsons Project and National Baptist
Convention and scheduled future releases including albums by Peter Cetera and a
tribute to Janis Joplin featuring established Blues artists. Net cash provided
by notes receivable of $1,057,000 results from an agreement dated May 1996,
whereby the Company sold certain video rights for $401,000 and its right to free
future studio usage for $850,000 to a minority stockholder and former officer of
the Company. The net cash provided by royalties payable arose from the current
period sales of albums in the non-Gospel format, which typically command a
higher royalty rate. Royalties are not paid to the artist until all advances
made to the artist have been recouped by the Company. Also, the Company
establishes and maintains reserves relative to royalty payments for a period of
approximately 12 months to allow for product returns activity as royalties are
not owed on returned product.

Net cash used in operating activities was $8,755,000 for continuing
operations and $1,011,000 for discontinued operations for fiscal 1996. The uses
reflect the significant increases in volume for continuing operations during the
period, including net cash used to fund trade receivables of $1,912,000 and
artist advances of $3,331,000, attributable to new releases by various artists,
including Peter Cetera, Steve Azar, Ronna Reeves and numerous Gospel artists and
increased investment in new and future releases including albums by The Beach
Boys, Crystal Bernard and a number of Gospel artists. Net cash used in
operating activities was $6,590,000 in fiscal 1995. The uses reflect the
significant increases in sales volume during the period, including an increase
in inventory to support greater product sales volume and increased investment in
releases for and subsequent to the period including albums by Peter Cetera,
Holly Dunn and a number of Gospel artists. Similarly, Platinum experienced net
cash uses from operations and investment activities of $1,543,000 during the
five-month period ended May 31, 1994. This cash deficit was fully funded with
related party and bank debt. In calendar year 1993, Platinum's net cash uses
from operating activities was $2,973,000. In addition, Platinum spent
$1,104,000 on property and equipment and acquired Lexicon Music, Inc. for
$700,000. The cash needed for these activities was obtained primarily from bank
financing.

Financing activities to fund Platinum's operations for fiscal 1996 were
funded with the net proceeds from the Offering of $32,127,000 (before
$1,170,000 in costs related to the Offering), $4,330,000 of additional
related party financing and $1,980,000 of bank debt. Such related party
indebtedness and bank debt were paid in full at the time of the Offering. Of
the net proceeds, $9,480,000 was used to retire all outstanding bank debt,
$4,867,000 was used to retire all outstanding related party debt and
$4,500,000 was used to redeem Platinum's Series A-1 Non-Convertible Preferred
Stock (see "Public Offering" above). Financing activities for the nine
months ended February 28, 1997 include $25,000,000 in short-term borrowings
under a term loan from BMO for the Intersound Acquisition; the Intersound
Acquisition was also financed with $5,000,000 in Notes and approximately
$1,500,000 in borrowings under the revolving line of credit with BMO. The
Company also borrowed approximately

<PAGE>

$1,400,000 and $900,000 under the revolving line of credit to fund financing
costs to BMO in connection with the Intersound Acquisition and Company
operations, respectively. See "Capital Resources."

Investing activities for the nine months ended February 28, 1997 include
$3,818,000 relating to the Company's investment in a joint venture with HOB.
See "Results of Operations - Significant Matters." The Company paid
approximately $31,000,000 for the Intersound Acquisition, funded with outside
financing. Approximately $100,000 was paid in connection with the Company's
purchase of Double J, with the remainder of the purchase settled with shares of
the Company's Common Stock. In addition, the Company acquired substantially all
of the assets of R.E.X. for $480,000 during June 1996. The purchase price
approximated the indebtedness of R.E.X. to the Company and cash payments
relating to this purchase during the current period were not significant.
Purchases of property and equipment of $239,000 relate primarily to office
equipment, computers and software. See "Significant Matters" above for details.
Investing activities for fiscal 1996 totaled $574,000 relating primarily to
additions of office equipment and computers and leasehold improvements.

A significant recurring funding requirement of the Company is for
repertoire expenses, which include recording costs and advances to artists. The
Company makes substantial payments each year for recording costs and advances in
order to maintain and enhance its artist roster. These costs are recouped from
artists' royalties, to the extent possible, from future album sales. Artist
advances are capitalized when the current popularity and past performance of the
artist provides a sound basis for estimating the probable future recoupment of
such advances from earnings otherwise payable to the artist.

CAPITAL RESOURCES

On January 31, 1997, the Company entered into the New Credit Facility
with BMO, individually and as agent, to provide a term loan in the amount of
$25,000,000 and a 90-day revolving credit facility in the amount of
$10,000,000. The New Credit Facility will expire on August 1, 1997.
Borrowings under the New Credit Facility bear interest at LIBOR plus 6% per
annum and are secured by substantially all of the assets of the Company. As
of June 30, 1997, no funds are available under the revolving credit facility.
The New Credit Facility contains financial and other covenants applicable to
the Company. The New Credit Facility is personally guaranteed for up to
$12,500,000 by an officer and director of the Company. The Company issued to
BMO warrants to purchase 258,571.95 shares of Common Stock at an exercise
price of $.01 per share in connection with the New Credit Facility. The
warrants expire on January 31, 2002 and are subject to antidilution
adjustment if, during the term of the New Credit Facility, the Company issues
shares of Common Stock and does not use the proceeds of such issuance to pay
borrowings under the New Credit Facility.

The Company intends to repay borrowings under the New Credit Facility
with the net proceeds of the Preferred Stock Issuance. The Preferred Stock
will accrue quarterly dividends, currently expected to accrue at a rate of 8%
to 10% per annum. A holder of Preferred Stock will have the option at any
time to convert each share of Preferred Stock into one share of Common Stock
at the Conversion Price. The amount by which the Conversion Price exceeds the
Market Price will be determined by the Board of Directors following
negotiations among the Company, the Placement Agents and the purchasers of
the Preferred Stock. The Conversion Price is currently expected to be between
10% and 15% above the Market Price.

If the Preferred Stock Issuance is not approved by the Company's
stockholders or is not consummated for any other reason, the consequences
could be materially adverse to the Company's business, results of operations
and financial position. While the Company would pursue alternative methods
to refinance the New Credit Facility, including, without limitation,
obtaining longer term debt with the same or different lenders, there can be
no assurances that such financing could be obtained on terms favorable to the
Company, or at all. The failure by the Company to repay the New Credit
Facility by August 1, 1997 would constitute an Event of Default which, in
addition to triggering default interest rate increases and late charges,
would allow BMO, in its discretion, to pursue any remedy available to it
under the New Credit Facility and applicable law, including without
limitation foreclosing on the Company's assets. Furthermore, the Company's
failure to consummate the Issuance could hamper its ability to obtain
long-term bank or other financing for the K-tel Acquisition. The closing of
the K-tel Acquisition is contingent on the Company's obtaining financing, and
the $1,750,000 deposited by the Company in the earnest money escrow account
pursuant to the K-tel Agreement will be forfeited to K-tel if such financing
is not obtained. Although no commitment for such financing has been
obtained, the Company has received a financing proposal for the Proposed
Credit Facility. The Proposed Credit Facility provides for a three-year
$20,000,000 revolving credit facility and a three-year $20,000,000 term loan
facility. The amount available under the Revolving Credit Facility will be
driven by a borrowing base formula on accounts receivable and inventory.
Interest will be charged monthly at the bank's prime rate plus 1/2%
on the revolving credit facility and prime plus 1 1/2% on the term loan
facility. There will be an unused line fee of 1/2% on the revolving credit
facility. In addition, there will be a one-time arrangement fee of 3.0% of
the overall credit facility amount. If the Company refinances the Proposed
Credit Facility with borrowings from another bank, it will be required to pay
a prepayment penalty on the overall credit facility of 2.0%, 1.0% and 1.0% in
years one, two, and three, respectively and 1.0% in any subsequent renewal
periods. An annual agency fee of $50,000 will be payable to the bank upon
closing of the financing and on each anniversary of the date of closing. This
financing proposal is contingent on the closing of the K-tel Acquisition and
the Preferred Stock Issuance and is subject to standard, commercial loan closing
contingencies including due diligence and satisfactory loan documentation.

Borrowings under the Proposed Credit Facility will be secured by the
assets of the Company and its subsidiaries. Under the terms of the Proposed
Credit Facility, the Company and its subsidiaries will be required to comply
with various financial and other covenants, including maintaining
mutually-agreed upon levels of tangible net worth, leverage ratios and debt
service coverage ratios. The Proposed Credit Facility will prohibit cash
dividends on the Preferred Stock during the first six quarters following the
Preferred Stock Issuance unless such dividends are funded with the issuance
of new equity. Thereafter, cash dividends will be permitted if certain cash
flow and other conditions are met.

Assuming the Issuance is consummated and the Company receives the
financing as proposed under the Proposed Credit Facility, the Company
believes its sources of capital will be sufficient to consummate the K-tel
Acquisition and meet its anticipated cash requirements for the next twelve
months.

In connection with the Intersound Acquisition, the Company also issued
Notes totaling $5,000,000. The Notes were issued to certain selling
shareholders of Intersound on January 31, 1997, mature on January 31, 2004
and bear interest at the seven-year Treasury rate (adjusted as of each
quarterly interest payment date) plus one percent per annum and are
convertible, in whole or in part, at any time prior to maturity into the
Company's Common Stock at a conversion price of $9.80 per share, subject to
adjustment as provided in the Notes.

<PAGE>

The Company's near and long-term capital requirements will depend on
numerous factors, including the rate at which the Company grows and acquires new
artists and products. The Company has various ongoing needs for capital,
including working capital for operations, artist advances and project
development costs and capital expenditures to maintain and expand its
operations. In addition, as part of its strategy, the Company evaluates
potential acquisitions of music catalogs, publishing rights and labels. The
Company may in the future consummate acquisitions which may require the Company
to make additional capital expenditures, and such expenditures may be
significant. Future acquisitions, as well as other ongoing capital needs, may
be funded with institutional financing, seller financing and/or additional
equity or debt offerings. The Company currently does not have any material
commitments for capital expenditures for the next twelve months.

Stockholders' equity at February 28, 1997 totaled $14,690,000 compared to
$15,215,000 at May 31, 1996. This decrease of $525,000 or 3.5% is primarily due
to net losses experienced by the Company during the nine months ended
February 28, 1997, offset by a $1,240,000 increase to additional paid-in capital
related to warrants issued in connection with the financing of the Intersound
Acquisition and a $906,000 increase to Common Stock and additional paid-in
capital related to the purchase of Double J.

Stockholders' equity at May 31, 1996 totaled $15,215,000 compared to a net
capital deficit of $12,320,000 at May 31, 1995. This change is primarily due to
the Offering offset by the net loss for the fiscal year ended May 31, 1996.

INFLATION

The impact of inflation on the Company's operating results has been
moderate in recent years, reflecting generally lower rates of inflation in the
economy. While inflation has not had a material impact on operating results,
there is no assurance that the Company's business will not be affected by
inflation in the future.

<PAGE>

INTERSOUND, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

Intersound produces, licenses, markets and distributes high quality
recorded music for a variety of musical formats. Intersound currently produces
music for Gospel, Country, Classical/Themed Productions and Urban/Dance formats.
Intersound's products include compilations and themed productions of previously
recorded music that enable Intersound to exploit its catalog of master
recordings, as well as new releases typically by artists established in a
particular format.

Intersound records revenues for music products when such products are
shipped to retailers. In accordance with industry practice, Intersound's music
products are sold on a returnable basis. Intersound's allowance for future
returns is based upon its historical results of operations.

Intersound's A&R expenses are recouped from the artists' royalties, to the
extent possible, from future album sales. Artist advances are capitalized as an
asset when the current popularity and past performance of the artist provides a
sound basis for estimating the probable future recoupment of such advances from
earnings otherwise payable to the artist. Intersound capitalizes non-recoupable
costs incurred in connection with the recording and production of recording
projects. These costs are amortized over the estimated useful life of the
individual recording projects.

<PAGE>

RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, certain items
derived from Intersound's statements of earnings as a percentage of gross
revenues:

<TABLE>
<CAPTION>
YEAR ENDED APRIL 30, EIGHT MONTHS ENDED DECEMBER 31,
------------------------------------------------------- ----------------------------------
1994 1995 1996 1995 1996
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PERCENTAGE AMOUNTS)
Total gross revenues . . . . . . . $26,504 100.0% $31,620 100.0% 31,382 100.0% $21,661 100% $20,152 100.0%
Less: Returns and allowances . . . (4,999) (18.9)% (6,579) (20.8)% (7,212) (23.0)% (4,939) (22.8)% (4,604) (22.8)%
Less: Discounts. . . . . . . . . . (1,656) (6.2)% (2,447) (7.7)% (1,674) (5.3)% (1,243) (5.7)% (1,260) (6.3)%
------- ------- ------ ------- ------
Total net revenues . . . . . . . . 19,849 74.9% 22,594 71.5% 22,496 71.7% 15,479 71.5% 14,288 70.9%
Cost of product sales. . . . . . . 9,583 36.2% 9,941 31.4% 9,030 28.8% 6,360 29.4% 5,390 26.7%
Cost of other revenues . . . . . . 185 0.7% 73 0.2% 251 0.8% 69 0.3% 127 0.6%
------- ------- ------ ------- ------
Total cost of sales
and services . . . . . . . . . . 9,768 36.9% 10,014 31.6% 9,281 29.6% 6,429 29.7% 5,517 27.3%
Gross profit . . . . . . . . . . . 10,081 38.0% 12,580 39.9% 13,215 42.1% 9,050 41.8% 8,771 43.6%
Selling, general and
administrative expenses. . . . . 8,406 31.7% 10,389 32.9% 10,904 34.7% 6,983 32.2% 6,386 31.7%
------- ------- ------ ------- ------
Income from Operations . . . . . . 1,675 6.3% 2,191 7.0% 2,311 7.4% 2,067 9.6% 2,385 11.9%
Interest expense . . . . . . . . . (184) (0.7)% (245) (0.8)% (354) (1.1)% (290) (1.3)% (216) (1.1)%
------- ------- ------ ------- ------
Income before income taxes . . . . 1,491 5.6% 1,946 6.2% 1,957 6.3% 1,777 8.3% 2,169 10.8%
Income tax benefit (expense) . . . (132) (0.5)% 0.0% 0.0% -- -- -- --
------- ------- ------ ------- ------
Net income . . . . . . . . . . . . $1,359 5.1% $1,946 6.2% 1,957 6.3% $1,777 8.3% $2,169 10.8%
------- ------- ------ ------- ------
------- ------- ------ ------- ------
</TABLE>

EIGHT MONTHS ENDED DECEMBER 31, 1996 COMPARED TO EIGHT MONTHS ENDED DECEMBER 31,
1995

Gross revenues decreased $1,509,000 or 7.0% to $20,152,000 for the eight
months ended December 31, 1996 compared to $21,661,000 for the comparable period
of the prior fiscal year. The decrease results from the timing of new releases.
Intersound released albums from Kansas and Jefferson Starship in the Adult
Contemporary format, as well as two successful Gospel releases from William
Becton and Mighty Clouds of Joy, during the eight months ended December 31,
1995. Intersound did not have such significant comparable releases during the
eight months ended December 31, 1996.

Returns and allowances decreased $335,000 or 6.8% to $4,604,000 for the
eight months ended December 31, 1996 compared to $4,939,000 for the comparable
period of the prior fiscal year. Returns and allowances as a percentage of
gross product sales, less discounts, remained relatively unchanged at 24.8% for
the eight months ended December 31, 1996 from 24.4% for the comparable period of
the prior fiscal year.

Discounts increased $17,000 or 1.4% to $1,260,000 for the eight months
ended December 31, 1996 compared to $1,243,000 for the comparable period of the
prior fiscal year. Discounts as a percentage of gross product sales remained
relatively unchanged at 6.3% for the eight months ended December 31, 1996 from
5.8% for the comparable period for the prior fiscal year.

Cost of product sales decreased $970,000 or 15.3% to $5,390,000 for the
eight months ended December 31, 1996 compared to $6,360,000 for the comparable
period of the prior fiscal year. Cost of product sales as a percentage of gross
revenues decreased to 26.7% for the eight months ended

<PAGE>

December 31, 1996 from 29.4% for the comparable period of the prior fiscal year.
The decease is primarily attributable to the decrease in product sales volume.
This percentage decrease also reflects a shift in percentages of compact disc
sales compared to cassettes. Compact disc sales, which yield higher gross
margins than cassettes, are becoming a greater percentage of sales as consumers
have upgraded their music systems. This relationship reflects industry trends
and, accordingly, Intersound primarily offers its new releases only in compact
disc format. In addition, the royalty costs associated with the albums released
during the eight months ended December 31, 1995 were higher than those typically
experienced by Intersound in its Themed Production format. Intersound also
negotiated favorable rates with certain of its vendors, the benefit of which is
reflected in lower manufacturing costs for the eight ended December 31, 1996.

Gross profits decreased $279,000 or 3.1% to $8,771,000 for the eight months
ended December 31, 1996 compared to $9,050,000 for the comparable period of the
prior fiscal year. As a percentage of gross revenues, gross profits increased
to 43.6% for the eight months ended December 31, 1996 from 41.8% for the
comparable period of the prior fiscal year. This percentage increase is
attributable to the increasing demand for compact discs versus cassettes, the
release of products with lower royalty rates during the first eight months of
fiscal 1996 versus 1995, and the negotiation of more favorable manufacturing
rates with certain of Intersound's vendors.

Selling, general and administrative expenses decreased $597,000 or 8.5% to
$6,386,000 for the eight months ended December 31, 1996 compared to $6,983,000
for the comparable period of the prior fiscal year. Selling, general and
administrative expenses as a percentage of gross revenues remained relatively
unchanged at 31.7% for the eight months ended December 31,1996 from 32.2% for
the comparable period of the prior fiscal year. The dollar decrease is primarily
attributable to a decline in marketing and promotional costs incurred compared
to the prior year's period due to a fewer significant new releases in the
current period.

As a result of the factors described above, operating income for the eight
months ended December 31, 1996 totaled $2,385,000 compared to $2,067,000 for the
comparable period of the prior fiscal year.

Interest expense decreased to $74,000 for the eight months ended December
31, 1996 from $290,000 for the comparable period of the prior fiscal year. This
decrease is due to decreased bank financing.

Net income increased to $2,169,000 for the eight months ended December 31,
1996 from $1,777,000 for the comparable period for the prior fiscal year. The
increase is primarily attributable to the decreased marketing and promotional
costs as discussed above.

FISCAL YEAR ENDED APRIL 30, 1996 COMPARED TO FISCAL YEAR ENDED APRIL 30, 1995

Gross revenues remained relatively unchanged totaling $31,382,000 for the
year ended April 30, 1996 compared to $31,620,000 for the prior fiscal year.
The flat sales were primarily attributable to the weak retail music market that
began in 1995.

Returns and allowances increased $633,000 or 9.6% to $7,212,000 for the
year ended April 30, 1996 compared to $6,579,000 for the prior fiscal year.
Returns and allowances as a percentage of gross product sales, less discounts,
increased to 24.8% for the year ended April 30, 1996 from 22.7% for the prior
fiscal year. The increase was attributable primarily to an increase In
Intersound's and the industry's historical return experience rates as a result
of the weak music retail market, which resulted in substantial retail store
consolidations.

49
<PAGE>

Discounts decreased $773,000 or 31.6% to $1,674,000 for the year ended
April 30, 1996 compared to $2,447,000 for the prior fiscal year. Discounts as a
percentage of gross product sales decreased to 5.4% for the year ended April 30,
1996 from 7.8% for the prior fiscal year. The decrease was primarily the result
of a shift to increased advertising dollars spent compared to discounts offered.

Cost of product sales decreased $911,000 or 9.2% to $9,030,000 for the year
ended April 30, 1996 compared to $9,941,000 for the prior fiscal year. Cost of
product sales as a percentage of gross revenues decreased to 28.8% for the year
ended April 30, 1996 from 31.4% for the prior fiscal year. The decrease is
primarily attributable to favorable vendor rates negotiated by Intersound
compared to the prior year.

Gross profit increased $635,000 or 5.0% to $13,215,000 for the year ended
April 30, 1996 compared to $12,580,000 for the prior fiscal year. As a
percentage of gross revenues, gross profit increased to 42.1% for the year ended
April 30, 1996 from 39.9% for the prior fiscal year. The increase was primarily
attributable to the decreased vendor rates.

Selling, general and administrative expenses increased $515,000 to 5.0%
to $10,904,000 for the year ended April 30, 1996 compared to $10,389,000 for
the prior fiscal year. Selling, general and administrative expenses as a
percentage of gross revenues increased to 34.7% for the year ended April 30,
1996 from 32.9% for the prior fiscal year. The increase was attributable to
increased marketing and promotional costs associated with Gospel, Country and
Adult Contemporary releases, which require more advertising costs than
Intersound's other formats, and higher advertising costs incurred compared to
discounts offered in the prior fiscal year. Intersound also incurred
increased operating costs relating to marketing and promotion of its Enhanced
CD division, which was discontinued subsequent to April 30, 1996 due to weak
retail acceptance.

As a result of the factors described above, operating income for the year
ended April 30, 1996 totaled $2,311,000 compared to $2,191,000 for the prior
fiscal year.

Interest expense increased to $354,000 for the year ended April 30, 1996
from $245,000 for the prior fiscal year. This increase was due to increased
bank financing used by Intersound.

Net income increased to $1,957,000 for the year ended April 30, 1996 from
$1,946,000 for the prior fiscal year. The increase was primarily attributable
to decreased vendor rates.

FISCAL YEAR ENDED APRIL 30, 1995 COMPARED TO FISCAL YEAR ENDED APRIL 30, 1994

Gross revenues increased $5,116,000 or 19.3% to $31,620,000 for the year
ended April 30, 1995 compared to $26,504,000 for the prior fiscal year. The
increase was attributable to Intersound's continued expansion into the Gospel,
Country, Adult Contemporary and Urban formats which began during the last fiscal
1994. Significant releases during fiscal 1995 included William Becton, Mighty
Clouds of Joy, the Bellamy Brothers, Dan Seals, Kansas and Jefferson Starship.

Returns and allowances increased $1,580,000 or 31.6% to $6,579,000 for the
year ended April 30, 1995 compared to $4,999,000 for the prior fiscal year.
Returns and allowances as a percentage of gross products sales, less discounts,
were 22.7% for the year ended April 30, 1995 compared to 20.5% for the prior
fiscal year.

Discounts increased $791,000 or 47.8% to $2,447,000 for the year ended
April 30, 1995 compare to $1,656,000 for the prior fiscal year. Discounts as a
percentage of gross product sales

<PAGE>

increased to 7.8% for the year ended April 30, 1995 from 6.4% for the prior
fiscal year. The increase was primarily the result of increased discounts
offered compared to advertising dollars spent.

Cost of product sales increased $358,000 or 3.7% to $9,941,000 for the year
ended April 30, 1995 compared to $9,583,000 for the prior fiscal year. Cost of
product sales as a percentage of gross revenues decreased to 31.4% for the year
ended April 30, 1995 from 36.2% for the prior fiscal year. The dollar increase
was attributable to the increased product sales volumes and the percentage
decrease was attributable to favorable manufacturing rates negotiated with
certain of Intersound's vendors and a larger revenue base.

Gross profit increased $2,499,000 or 24.8% to $12,580,000 for the year
ended April 30, 1995 compared to $10,081,000 for the prior fiscal year. As a
percentage of gross revenues, gross profit increased to 39.9% for the year ended
April 30, 1995 from 38.0% for the prior fiscal year. The increase was due to a
shift in product mix from midline, particularly Themed Production product, to
frontline products with Intersound's continued expansion into Gospel, Country,
Adult Contemporary, and Urban formats. Frontline products sell at a higher
retail price and therefore yield a higher gross margin.

Selling, general and administrative expenses increased $1,983,000 or 23.6%
to $10,389,000 for the year ended April 30, 1995 compared to $8,406,000 for the
prior fiscal year. Selling, general and administrative expenses as a percentage
of gross revenues increased to 32.9% for the year ended April 30, 1995 from
31.7% for the prior fiscal year. The increase was attributable to the
additional costs incurred in developing Intersound's Gospel, Country, Adult
Contemporary and Urban formats.

As a result of the factors described above, operating income for the year
ended April 30, 1995 totaled $2,191,000 compared to $1,675,000 for the prior
fiscal year.

Interest expense increased to $245,000 for the year ended April 30, 1995
from $184,000 for the prior fiscal year. The increase was due to increased bank
financings used by Intersound.

As a result of the factors described above, net income increased to
$1,946,000 for the year ended April 30, 1995 from $1,359,000 for the prior
fiscal year.

<PAGE>

BUSINESS

OVERVIEW

The Company is a full-service music company that produces, licenses,
acquires, markets and distributes high quality recorded music for a variety of
musical formats. Platinum has produced recorded music products in the Gospel,
Adult Contemporary, Country and Blues music formats, primarily under its CGI
Records, Light Records, River North Records and House of Blues labels. With its
acquisition of Intersound, effective January 1, 1997, the Company expanded its
artist base and music catalog within its existing music genres, added new music
genres to its repertoire, including Classical/Themed Productions and
Urban/Dance, and added Intersound to its list of labels. On March 3, 1997, the
Company signed the K-tel Agreement to purchase certain music business assets of
K-tel, a leading marketer and distributor of compilation-driven music.

The Company's music catalog contains master recordings of some of the
best selling Gospel music acts such as The Winans, Andrae Crouch, Walter
Hawkins, Daryl Coley and Cissy Houston. According to the RIAA, Gospel is the
fastest growing music segment, having increased its market share and revenues
by 38% and 30%, respectively, in 1996 from 1995. In addition, the Company,
through the Intersound acquisition, expanded its Gospel roster to include
artists such as Candi Staton, the Mighty Clouds of Joy, DeLeon Richards and
Vicki Winans. The Company believes that it is currently positioned as a
market leader in Gospel music. The Company has also released music by
established artists in other music genres. These artists include The Beach
Boys, Peter Cetera, The Alan Parsons Project and Crystal Bernard. Through
the Intersound acquisition, the Company expanded its roster to include
artists such as Kansas, Crystal Gayle, The Ohio Players, Bellamy Brothers,
Eddie Rabbitt, Confunkshun and The Gap Band.

The following table lists some of the Company's key artists and owned masters in
its major musical formats.

GOSPEL ADULT CONTEMPORARY COUNTRY
- - ----------------------- ------------------------------ -------------------

Andrea Crouch The Alan Parsons Project Bellamy Brothers
Candi Staton The Beach Boys Crystal Bernard
Cissy Houston Kansas Crystal Gayle
Daryl Coley Peter Cetera Eddie Rabbit
DeLeon Richards Johnny Paycheck
The Winans Lee Greenwood
Walter Hawkins Michael Johnson
Willy Becton

<PAGE>

BLUES URBAN/DANCE CLASSICAL/THEMED
- - -------------------------------- ------------------ -------------------------
The Blues Brothers - Dan Aykroyd Cameo
and Jim Belushi Confunkshun Great Melodies of the
Classics
Essential Janis Joplin Blues Daz Band with
George Clinton Orchestral Enya
Essential Rolling Stones Blues The Gap Band Orchestral George Winston
Otis Rush Trapp w/Tupac
Shakur & Notorious Music of the Angels
B.I.G.

STRATEGY

The Company's strategy for growth and expansion of its position in the
recorded music business is based on: (i) selling diversified recorded music
offerings in formats which management believes have growth potential;
(ii) expanding and exploiting its music catalog through the acquisition of
master recordings and music publishing rights from other music companies at
attractive prices; (iii) introducing records by established artists with a
history of successful releases; and (iv) leveraging its unique distribution
position through both independent distribution channels and relationships with
certain larger record companies to provide wider distribution of certain of the
Company's products. The Company believes that this strategy distinguishes the
Company from certain of its larger competitors who have traditionally focused on
the development of new artists with the potential for mass appeal. The Company
intends to remain focused on artists and musical formats characterized by
relatively low development costs and predictable unit sales volumes. This
strategy may also include licensed compilations of previously recorded music,
"Best of" albums, and tribute albums to well known musical artists with a
history of successful releases.

MARKET FOCUS.

The Company focuses on artists and musical formats characterized by low
development costs and predictable unit sales volumes. The Company plans to
continue to broaden its musical catalog in order to expand its sales
opportunities in the Gospel, Adult Contemporary, Blues, Country,
Classical/Themed Productions and Urban/Dance markets. Because the recorded
music business is particularly dependent on changing audience tastes and the
ability to identify, attract and sign artists as well as produce compilations of
existing recorded music, the Company believes that a diversification of musical
offerings, through the identification of additional markets with growth
potential, reduces revenue volatility. The Company believes that it can obtain
market share in these markets through the identification, acquisition and
exploitation of catalog items.

COMPILATIONS.

A majority of the Company's products are compilations of previously
recorded music that enable the Company to exploit its large catalog of master
recordings. Compilations can be produced at significantly lower cost than new
artist releases and provide the Company with more predictable unit sales
volumes.

INTRODUCE ARTIST-DRIVEN RECORDS.

The Company is committed to developing high quality recorded music with
artists with a history of successful releases. The Company does not primarily
focus on developing new acts due to unpredictable sales and high development
costs. The Company believes that its strategy reduces the risks associated with
promoting and sponsoring records because of the artist's existing fan base. In
addition, the recoupment of costs associated with recording and marketing an
album is more predictable with an artist who has a history of sales because the
Company is less involved in selecting producers, recording studios and
additional musicians than would be the case with a new artist.

<PAGE>

ACQUIRE MUSIC MASTER RECORDINGS AND PUBLISHING RIGHTS.

The Company is committed to developing its music catalog, which has
historically provided a recurring source of sales for the Company. The Company
believes that its success depends significantly on its ability to invest in,
develop and market rights to its catalog of recorded music. The Company plans
to expand its catalog for exploitation (a) through acquisitions and strategic
relationships as long as it is economically feasible to do so and (b) by re-
recording songs of artists currently on its roster.

DISTRIBUTION.

The Company's distribution relationship with PolyGram has represented a
unique aspect of its operations and business strategy compared with other
independent record companies. The Company's recent acquisition of Intersound,
which possesses its own proprietary direct to retail distribution capabilities,
provides the Company with additional retail distribution channels. As the
Company more fully integrates the operations of Intersound, it plans to utilize
its PolyGram distribution relationship for certain "front line" products from
each of the two companies' libraries, which products the Company believes will
receive the best marketing leverage through that channel. "Mid-line" products,
including much of the compilation and "best of" products from each of the two
libraries, are expected to be distributed via the less expensive retail
distribution channels which have been established by Intersound. The Company's
distribution agreement with PolyGram expires in 2002.

RECENT ACQUISITIONS

Consistent with its growth strategy, the Company has completed four
acquisitions since the consummation of its Offering.

On September 19, 1996, the Company acquired substantially all of the assets
of Double J for 88,000 shares of Common Stock, the assumption of approximately
$100,000 of debt and the assumption of $75,000 in liabilities. Double J
develops and acquires ownership of musical compositions and exploits those
compositions by means of recordings, performances, audio-visual works, print
publications and other licenses. Double J controls the copyrights to more than
250 country songs, three of which reached Number One on the country music charts
during the past year.

On November 12, 1996, the Company purchased from Private, Inc., a
subsidiary of BMG, for $3,063,000 in cash, a 50% interest in the HOB Joint
Venture. The HOB Joint Venture was formed to develop and produce recordings
featuring Blues, Gospel and other music formats under the "House of Blues"
label. Artists on the House of Blues record label include Cissy Houston and
Blind Boys of Alabama, each of whom received a Grammy Award in 1997 and 1996,
respectively.

Effective January 1, 1997, a subsidiary of the Company purchased
substantially all of the assets of Intersound for a total of consideration
$39,301,000, which was paid as follows: $24,000,000 in cash, $5,000,000 in
Notes and the assumption of $10,301,000 of certain liabilities. The Notes
mature on January 31, 2004, bear interest at the seven-year Treasury rate
plus one percent per annum and are convertible at any time prior to maturity
into the Company's Common Stock, at a conversion price of $9.80 per share,
subject to adjustment as provided in the Notes. The holders of the Notes
were granted certain registration rights with respect to the shares of Common
Stock issuable upon

<PAGE>

conversion. The cash consideration for the transaction was funded with the New
Credit Facility. See "Acquisition of Intersound -- New Credit Facility."

PENDING ACQUISITION

In addition, on March 3, 1997, the Company entered into the K-tel
Agreement with K-tel for the sale to the Company of K-tel's worldwide music
business, with the exception of K-tel's European music business, through the
purchase of all of the capital stock of the K-tel Subsidiaries. The closing
of the acquisition of the K-tel Subsidiaries, which the Company expects to
occur four to six months after the date of the K-tel Agreement, is subject to
the securing of financing by the Company, approval by the stockholders of
K-tel and other customary conditions. See "The Pending K-tel Acquisition."

MARKETS

GOSPEL.

The Company owns a catalog of master recordings of some of the best selling
Gospel music acts of all time. These acts include The Winans, Andrae Crouch,
Walter Hawkins and Daryl Coley. A significant portion of this catalog was
acquired by the Company in 1993 from Lexicon Music, Inc. Consistent with its
belief that Gospel music sales are artist-driven rather than "hit" driven, the
Company has acquired, and continues to pursue the acquisition of, master
recordings of established Gospel artists who have a history of stable base
sales. In addition, the Company has signed established artists, typically
artists with a ministry, for modest advances to produce new recordings. The
Company also has an exclusive contract with the National Baptist Convention USA,
Inc., which has 8.5 million members, to record live gospel music on behalf of
the religious denomination for commercial distribution. The first recording
produced under this Agreement, LET'S GO TO CHURCH, generated approximately $3.8
million in gross revenues for the three months ended February 28, 1997.
Intersound also has a leadership position in Gospel music. During 1995,
Intersound released Gospel artist William Becton's BROKEN album, which achieved
number one status in the BILLBOARD Gospel rankings. With its acquisition of
Intersound, the Company increased its catalog of Gospel recordings and expanded
its artist roster to include artists such as Candi Staton, the Mighty Clouds of
Joy, DeLeon Richards and Vicki Winans.

ADULT CONTEMPORARY.

In 1993, the Company expanded its music offerings to include Adult
Contemporary music with the signing of Peter Cetera, formerly the lead singer of
the rock group Chicago and an established solo artist. Mr. Cetera's first album
by the Company was released in July 1995 and was titled ONE CLEAR VOICE. His
next album, which, in addition to new songs, includes re-recordings of some of
Chicago's former No. 1 hits, is scheduled for release in May of 1997.

In addition, the Company has relationships with other established Adult
Contemporary artists including The Alan Parsons Project and Kansas. These
artists, along with Peter Cetera, not only provide the Company with the
ability to produce and market artist-driven records with more predictable
sales, but also, based on the artists' past sales and established fan base,
have the potential to produce a record that charts in the "top ten." The
Company believes that its association with these artists will increase its
ability to sign other established artists. According to R&R magazine, the
Company's River North label was the tenth largest adult contemporary label
for 1996.

BLUES.

The Company produces and markets compilations of Blues recordings,
primarily with music licensed from other companies and signs established
artists. The Company has successfully produced and marketed compilations of
Blues recordings featuring a variety of artists titled ESSENTIAL BLUES, VOLUME
I, ESSENTIAL BLUES, VOLUME II, ESSENTIAL WOMEN IN BLUES and ESSENTIAL SOUTHERN
ROCK, which are the

<PAGE>

products of the HOB Joint Venture. Each of the Company's Blues releases have
charted in the Top 15 on the Blues Chart published by BILLBOARD magazine.
During fiscal 1997, the Company plans to release additional compilation albums
under its LIVING IN THE HOUSE OF BLUES series and a tribute album to Janis
Joplin. The Company also plans to release new recordings by The Blues Brothers
and Otis Rush.

COUNTRY.

During the Company's fiscal year ended May 31, 1995, the Company
established its Country music operations in Nashville, Tennessee. Consistent
with the Company's objectives for its music operations, the Company has signed
established Country artists as well as up and coming artists. During fiscal
1997, the Company released THE GIRL NEXT DOOR, the debut album by Crystal
Bernard (a songwriter and actress who currently stars on NBC's WINGS and the
co-host of the upcoming 32nd Annual Academy of Country Music Awards). Holly
Dunn and Ronna Reeves have both been installed on the Country Music Foundation's
Walkway of Stars. Double J's composition CHECK YES OR NO, recorded by George
Strait, was voted Song of the Year by the Academy of Country Music and by BMI
during 1996. The Beach Boys' August 1996 release for the Company features
established artists, such as Willie Nelson and Lorrie Morgan, backed by The
Beach Boys and performing songs originally recorded by The Beach Boys.

Intersound has developed a "Classic Country" concept focusing on "Latest
and Greatest" releases for classic country acts. The addition of Intersound
expanded the Company's artist roster to include country acts such as The Bellamy
Brothers, Exile, Dan Seals, Crystal Gayle and Eddie Rabbitt.

Through the Intersound Acquisition, the Company has added the following
music genres to its current repertoire:

CLASSICAL/THEMED PRODUCTIONS.

Through the Intersound Acquisition, the Company acquired one of the
industry's leading creators of classical and theme-based products, which are
recordings arranged around a specific theme and often targeted to a specific
demographic audience. Intersound develops themed products through new
recordings and by using its existing catalog to release titles in a new format.
Intersound's theme-based products range from the music of Hollywood and Broadway
to recordings with established artists like Peter Nero, Doc Severinsen, and
Dizzy Gillespie. Intersound also creates classical music releases based on
concepts such as "Opera for Orchestra" or a collection of certain works of
Beethoven. Other themed music releases produced and marketed by the Company
include "Best of" decades or genre music, music for various party themes, music
from favorite TV shows and holiday music with Christmas or other holiday
selections. Intersound has significant experience in developing packaging and
promoting themed products. These theme-based releases have been highly
successful, with six releases having been certified gold by the RIAA in 1995.

URBAN/DANCE MUSIC.

Intersound's Urban music division focuses on several specialty niches
including classic rhythm and blues ("R&B"), dance and bass music. In classic
R&B, Intersound employs an experienced staff that is well versed in radio and
other promotions for this musical genre. Management believes that Intersound
can increase its classic R&B offerings by signing and producing new recordings
from artists such as Cameo, Confunkshun and The Gap Band. Intersound also
focuses on "Ol' School" format, which is R&B music from the '60s, '70s and early
'80s. Ol' School has been enjoying a rebirth among urban listeners. The
Company believes that releases in these genres will leverage Intersound's
distribution capabilities, taking advantage of its radio and store presence in
the African-American independent market. The Company recently entered into an
agreement with rap artist Trapp to release his album STOP THE GUNFIGHT,

<PAGE>

which includes two tracks featuring the late rap artists Tupac Shakur and
Notorious B.I.G. This album was released in late April 1997.

DISTRIBUTION, SALES AND PROMOTION

The Company distributes its products through a multi-channel system
comprised of (i) PolyGram domestically, (ii) MCA internationally, (iii) Platinum
Christian Distribution division to the Christian retail market and (iv) under
the Intersound label through Intersound's direct sales force. See "--
Intersound Distribution and Promotion." The Company has had an exclusive
domestic retail distribution agreement with PolyGram since 1993. The Company's
Christian distribution company, Platinum Christian Distribution, distributes the
Company's Christian music products as well as recorded music for artists
affiliated with other record companies. The following table sets forth the
percentage of gross product sales by distribution channel:

PERCENTAGE OF TOTAL GROSS PRODUCT SALES
BY DISTRIBUTION CHANNEL

NINE MONTHS
ENDED
FEBRUARY 28,
1997 FISCAL 1996
------------ -----------
(1) PolyGram . . . . . . . . . . . . . . . . . . . . 50.9% 58.2%

(2) Platinum Christian Distribution (to Christian
bookstores). . . . . . . . . . . . . . . . . . . 11.8 23.2

(3) Intersound . . . . . . . . . . . . . . . . . . . 17.5 0.0

(4) Record Clubs/Direct Sales. . . . . . . . . . . . 19.6 10.8

(5) Telemarketing. . . . . . . . . . . . . . . . . . 0.2 7.8

During fiscal 1996, Company management significantly reduced the Company's
telemarketing efforts due to the increased costs of television advertising.

The Company believes that the diversity of its distribution channels, which
was established through substantial investment in fiscal 1995 and 1996 and which
the Company plans to continue to pursue, will help the Company absorb shifts in
audience taste and the economy, and provide the foundation for the Company's
expansion into and exploitation of additional markets.

THIRD PARTIES

In May of 1993, the Company entered into an exclusive distribution
agreement (the "Distribution Agreement") with PolyGram, the largest distributor
of recorded music in the world. Under the Distribution Agreement, PolyGram was
appointed the exclusive distributor for the Company's records throughout the
United States. PolyGram does not distribute releases on the Intersound label.
In addition, the Company has retained the right to distribute its records
through key-outlet sales, licenses or sales to record clubs, sales through
Christian bookstore channels and other third party licenses of master
recordings. The services provided by PolyGram include billing and collecting
from customers, distributing promotional copies of records, coordinating and
placing advertisements and undertaking retail marketing and inventory control
activities. The Company is solely responsible for all costs of production and
manufacture of the records including packaging, advertisement, freight and
insurance and is obliged to deliver to PolyGram sufficient records to ensure
adequate stock for distribution. For its services, PolyGram is entitled to a
distribution fee based on sales volume of 16-18% of the gross billings for all
records distributed under the agreement, less reserves set aside against returns
and credits, and a monthly

<PAGE>

fee of 2% of the aggregate credit price for copies of returned records. Fees
owed by the Company to PolyGram are secured by all Company products in
PolyGram's possession. The terms of the distribution agreement, initially three
years, was extended to December 31, 2002.

PolyGram owns and distributes labels such as Motown Records, A&M Records,
Mercury Records and others. The Company is one of the few record companies not
owned by PolyGram whose products are distributed by PolyGram. The Company's
relationship with PolyGram has provided, and is expected to continue to provide,
the Company with access to distribution channels not readily available to other
independent recorded music companies.

International distribution of the Company's products is handled principally
by MCA. Under the terms of the agreement with MCA, MCA has the right to sell
the Company's records worldwide, excluding the United States and Canada. MCA is
responsible for all manufacturing and related costs (other than artist
royalties, which are paid by the Company). The Company receives a royalty from
MCA based on retail sales net of returns ranging from 15% to 20.57% of the
suggested retail list price. The agreement with MCA expired on March 31, 1997
and by mutual agreement has been extended on a month-to-month basis.

PLATINUM CHRISTIAN DISTRIBUTION

Platinum Christian Distribution, an operating division of the Company,
distributes the Company's Christian music products, as well as recorded music
for artists affiliated with other labels, including Mercury, Motown and PolyGram
into the Christian Bookstore market. Platinum Christian Distribution also
distributes Christmas albums for artists including The Statler Brothers, Donna
Summer and Kathy Mattea.

INTERSOUND DISTRIBUTION AND PROMOTION

Intersound sells its products through a salaried direct sales force.
Customer contact is made by the Intersound sales department which is organized
to cover specific regions of the country and Canada. In addition to the sales
operation at the Roswell, Georgia facility, Intersound has regional sales
offices located throughout the United States and Canada. Additionally,
Intersound has sales personnel that cover certain specialty retail sectors,
international customers and record club and catalog customers. Intersound's in-
house sales personnel typically provide additional sales coverage to smaller
chains and independent retail stores. In the international area, Intersound
sells products through overseas distributors. Intersound currently maintains
relationships with ten distributors worldwide. Additionally, Intersound
licenses recordings from its catalog that is included in recordings produced
overseas. These sales are typically transacted title by title, and are
sometimes done in a theme grouping. Intersound has licensing relationships with
various companies in Europe, Asia, Australia and South America. Other key sales
personnel, located primarily at the Roswell, Georgia facility, play a sales
support and retail marketing role. The principal function of these individuals
is to support Intersound's marketing efforts with its large retail customers.

LIBRARY

The Company owns the copyrights to over 10,000 master recordings. By
combining selections from its library with licensed rights to certain master
recordings and compositions obtained from third parties, including most major
labels, the Company has been successful in creating compilation products. In
addition, with the addition of the Intersound library, the Company will be able
to create more themed products. See "-- Intellectual Property -- Licensing."

<PAGE>

RELATIONSHIP WITH ARTISTS

CONTRACT TERMS

The Company seeks to contract with its artists on an exclusive basis for
the marketing of their recordings in return for a royalty based on the net sales
of the recording. The Company generally seeks to obtain rights on a worldwide
basis. A typical contract with an artist may provide for a number of albums to
be delivered, with advances against royalties being paid upon delivery of each
album, although advances are often made prior to recording. The Company
generally has an option to take each album that the artist is contracted to
deliver, exercisable within an agreed period of time, usually a few months
following delivery of the previous album. Normally, if an option is not
exercised, the artist has no obligation to deliver additional albums.
Provisions in contracts with established artists vary considerably, and may, for
example, require the Company to release a fixed number of albums and/or contain
an option exercisable by the Company covering more than one album. The Company
seeks to obtain rights to exploit product delivered by the artist for the life
of the product's copyright. Under the contracts, advances are normally
recoupable against royalties paid to the artist. The Company also seeks to
recoup a portion of certain marketing and tour support costs, if any, against
artist royalties.

RECORDING

Contracts either provide for the artists to deliver completed recordings or
for the Company to undertake the recording with the artist. If the recording
costs are advanced by the Company, they are added to the advances paid to the
artist and recouped against royalties payable to the artist. The Company's
staff is involved in selecting producers, recording studios, any additional
musicians needed and songs to be recorded, as well as supervising the output of
recording sessions, although for experienced artists, such involvement may be
less.

OPTION PROGRAM

The Company has granted and intends to continue to grant stock options to
certain artists ("Artist Options") as an inducement to sign with the Company.
The Company expects that these stock options will have vesting schedules tied to
the achievement of identified sales and other performance milestones. The
Company will evaluate the use of options on a case by case basis based on its
assessment of the cost of making cash advances to the artist, the sales
potential of the artist and the financial impact of granting such options.
Under current industry practice, cash advances to an artist are recouped from
royalties payable to the artist from record sales. Because the Artist Options
would not be subject to recoupment, the Company believes that such options will
provide a valuable method of attracting, signing and retaining artists while
maintaining appropriate economic incentives for the artists. In addition, the
corresponding reduction in cash advances should positively impact the Company's
cash flow.

PRODUCTION AND MANUFACTURING

The Company is a full service record company with an art department that
provides design and finished film for print-ready manufacturing of record cover
design.

The Company's finished music products have historically been
manufactured by wholly-owned subsidiaries of PolyGram. However, through the
Intersound Acquisition, the Company has found more cost effective
manufacturing sources, and intends to coordinate all of its manufacturing
through the Roswell, Georgia facilities. The Company does not believe that
termination of the manufacturing arrangements with the PolyGram subsidiaries
will have any material adverse impact on its distribution arrangements with
PolyGram nor the Company's business or results of operations.

<PAGE>

INTELLECTUAL PROPERTY

The Company's recorded music business, like that of other companies
involved in recorded music, primarily rests on ownership or control and
exploitation of musical works and sound recordings. The Company's music
products are protected under applicable domestic and international copyright
laws. In addition, the Company has ownership rights to over 10,000 master
recordings.

Although circumstances vary from case to case, rights and royalties
relating to a particular recording typically operate as follows: When a
recording is made, copyright in that recording vests either in the recording
artist (and is licensed to the recording company) or in the record company
itself, depending on the terms of the agreement between them. Similarly, when a
musical composition is written, copyright in the composition vests either in the
writer (and is licensed to music publishing company) or in the publishing
company itself. Artists generally record songs that are controlled by music
publishers. The rights to reproduce such songs on soundcarriers are obtained by
the Company from music publishers or collection societies on their behalf. The
manufacture and sale of a soundcarrier results in royalties being payable by the
record company to the publishing company at industry agreed or statutory rates
for the use of the composition (and the publishing company in turn pays a
royalty to the writer) and by the record company to the recording artist for the
use of the recording. The Company operates in an industry in which revenues are
adversely affected by the unauthorized reproduction of recordings for commercial
sale, commonly referred to as "piracy," and by home taping for personal use.

LICENSING

The Company is engaged in licensing activity involving both the acquisition
of rights to certain master recordings and compositions for its own projects and
the granting of rights to third parties in the master recordings and
compositions it owns. The Company typically obtains an ownership or co-
ownership interest in all newly-recorded compositions appearing on albums
released by the Company that are written by the artists performing the
compositions. The rights to use all other compositions appearing on albums or
audiovisual works are obtained from the publishers of those compositions under
agreements that, for albums, are called mechanical licenses, which are often
issued through a central agency, and for audiovisual works are called
synchronization licenses. The mechanical license fee is customarily indexed to
a statutory rate established under the United States Copyright Act, which
currently is 6.95 cents for a performance of up to five minutes and higher for
performances of greater length. Although fees for synchronization licenses vary
from set fees to percentages of sales price, the fee often corresponds to the
statutory rate for mechanical licenses. The Company typically issues its own
mechanical and synchronization licenses to third parties when compositions from
its own catalog are used by others. The availability and terms of such cross-
licensing arrangements are generally made possible by existing industry
practices based on reciprocity.

Performance rights in compositions owned by the Company are enforced under
agreements the Company has with the performing rights organizations, American
Society of Composers, Authors and Publishers ("ASCAP"), Broadcast Music, Inc.
("BMI") and SESAC, Inc., which licenses commercial users of music such as radio
and television broadcasters, restaurants and retailers and disburses collected
fees based upon the frequency and type of performances they identify. Print
publishing rights in compositions owned by the Company are either directly
licensed by the Company to third party users or are enforced through an agency
called Christian Copyright Licensing International, which issues print licenses
to churches and other organizations and collects and disburses the fees.

The Company will also, in selected instances, obtain under license
agreements the right to use master recordings owned by others, either in
original album form or for compilation projects. Although the terms of such
agreements vary, they are typically for a period of three to five years and
involve the

<PAGE>

payment of a royalty in the range of five to eight cents for the use of
individual masters and between 16% and 20% of suggested retail price for
complete original albums. The company typically licenses to others only the
right to use individual masters for compilation projects under terms similar to
those under which the Company obtains master license rights. Should such
industry practices change, there can be no assurance that the Company will be
able to obtain licenses from third parties on terms satisfactory to The Company,
and the Company's business, particularly with respect to compilation products,
could be materially adversely affected.

COMPETITION

The business success of the Company depends, among other things, on the
skill and creativity of the employees of the Company and on their relationships
with artists. The Company faces intense competition for discretionary consumer
spending from numerous other record companies and other forms of entertainment
offered by film companies, video companies and others. The Company competes
directly with other record companies, including the six major international
recorded music companies, which distribute Gospel, Blues, Adult Contemporary,
Country, Rock, Classical and Urban music, as well as other record and music
publishing companies for signing established and new artists and songwriters and
acquiring music catalogs. Many of the Company's competitors have significantly
longer operating histories, greater financial resources and larger music
catalogs than the Company. The Company's ability to compete successfully will
be largely dependent upon its ability to build upon and maintain its reputation
for quality music products and to introduce music products which are accepted by
consumers.

EMPLOYEES

As of June 30, 1997, Platinum employed 139 employees, of whom 47 were
located in the Company's Downers Grove, Illinois facilities, 77 were located in
the Company's Roswell, Georgia facilities, and 15 were located in Nashville,
Tennessee. Of such employees, 81 were engaged in marketing, sales and related
customer services, 30 were engaged in administration and accounting, 10 were
engaged in legal, royalty and publishing services and 18 were engaged in
production.

None of the Company's employees is represented by a labor union. The
Company has not experienced any work stoppage and considers relations with its
employees to be good.

FACILITIES

The Company is headquartered in Downers Grove, Illinois. It currently
leases its 11,200 square foot office facility, which lease expires February 1,
1999. This facility houses the executive office offices of the Company, as well
as the management, accounting and sales staff. The Company also leases a
facility in Roswell, Georgia which houses the warehouse and distribution
centers, production studios, art departments and marketing and promotion
operations. This facility contains 59,334 square feet in total and has a lease
term expiring December 31, 1999. The Company also leases sales offices in
Minneapolis, MN, Dallas, TX, Ontario, Nashville, TN, Hartford, CT and Annapolis,
MD. In addition, the Company sub-leases 4,267 square feet of office space in
Nashville, Tennessee, pursuant to a lease expiring November 17, 1997, that
houses the promotional staff of River North Records, the staff of Double J and
the administrative and telephone sales staff of the Platinum Christian
Distribution; a 3,300 square foot warehouse, located in Downers Grove, Illinois,
that houses the mail order distribution operations of the Company. Finally, the
Company leases 6,142 square feet of additional space in Nashville, Tennessee,
pursuant to a lease expiring November 17, 1997. This space is currently being
sub-leased to a third party.

The Company believes that its facilities are in good condition and adequate
for its current operations.

<PAGE>

PRICE RANGE OF COMMON STOCK

The Company's Common Stock trades on the Nasdaq National Market under the
symbol "PTET." The following table sets forth the high and low closing prices
for each fiscal quarter since the Company's initial public offering on March 12,
1996, as reported by Nasdaq. Such quotations reflect inter-dealer prices
without markup, markdown or commissions and may not necessarily represent actual
transactions.

PRICE RANGE OF COMMON STOCK
---------------------------
HIGH LOW

Fiscal Year Ended May 31, 1996:
4th Quarter (from March 12, 1996 to May 31, 1996*) . $17 3/4 $11 1/2
Fiscal Year Ended May 31, 1997:
1st Quarter. . . . . . . . . . . . . . . . . . . . . $19 1/4 $13 3/4
2nd Quarter. . . . . . . . . . . . . . . . . . . . . 16 1/4 8 1/2
3rd Quarter. . . . . . . . . . . . . . . . . . . . . 8 1/2 6
4th Quarter. . . . . . . . . . . . . . . . . . . . . 7 5
Fiscal Year Ending May 31, 1998:
1st Quarter through July 3, 1997. . . . . . . . . . 7 5 5/8

__________________

* Prior to March 12, 1996, there was no established public trading market for
the Common Stock.

At June 30, 1997, there were approximately 63 stockholders of record and
5,171,439 shares of Common Stock outstanding.

DIVIDEND POLICY

The Company has not paid dividends on its Common Stock, and the Board of
Directors intends to continue a policy of retaining earnings to finance its
growth and for general corporate purposes. The Company does not anticipate
paying any dividends in the foreseeable future.

<PAGE>

SECURITY OWNERSHIP OF MANAGEMENT AND PRINCIPAL STOCKHOLDERS

The following table sets forth, as of June 30, 1997, certain information with
respect to the beneficial ownership of the Company's Common Stock by (i) each
person known by the Company to own beneficially more than 5% of the outstanding
shares of Common Stock, (ii) each Company director, (iii) each of the Named
Executive Officers and (iv) all Company executive officers and directors as a
group.

AMOUNT AND NATURE OF PERCENT OF
NAME AND ADDRESS BENEFICIAL OWNERSHIP(1) CLASS
- - ------------------------------------------- ----------------------- ----------
Steven Devick (2). . . . . . . . . . . . . 1,045,617 17.5%
Frontenac VI Limited Partnership (3) . . . 644,522 12.5
Goldman Sachs & Co. (4). . . . . . . . . . 602,306 11.7
Andrew J. Filipowski (5) . . . . . . . . . 554,934 10.7
The Vanguard Explorer Fund, Inc. (6) . . . 400,000 7.8
Wellington Management Company LLP (7). . . 400,000 7.8
T. Rowe Price Associates, Inc. (8) . . . . 350,000 6.7
Wells Fargo Bank, N.A. (9) . . . . . . . . 342,000 6.6
Craig Duchossois (10). . . . . . . . . . . 161,667 3.1
Thomas R. Leavens (11) . . . . . . . . . . 53,333 1.0
Douglas C. Laux (12) . . . . . . . . . . . 52,200 *
Paul L. Humenansky (10). . . . . . . . . . 17,667 *
Michael P. Cullinane (10). . . . . . . . . 17,667 *
Rodney L. Goldstein (13) . . . . . . . . . 7,667 *
Isaac Tigrett (14) . . . . . . . . . . . . 6,333 *
Don Johnson. . . . . . . . . . . . . . . . -- --
Thomas J. Salentine. . . . . . . . . . . . -- --
All Executive Officers and Directors as
a Group
(9 persons)(2)(5)(10)(11)(12)(13)(14). . . 2,561,607 41.9
__________________

* Less than one percent

(1) Unless otherwise indicated below, the persons in the above table have sole
voting and investment power with respect to all shares shown as
beneficially owned by them.
(2) Includes 803,078 shares underlying stock options that are currently
exercisable. The address of Mr. Devick is c/o Platinum Entertainment,
Inc., 2001 Butterfield Road, Downers Grove, Illinois 60515.
(3) The address of Frontenac VI Limited Partnership is c/o Frontenac Company,
135 South LaSalle Street, Suite 3800, Chicago, Illinois 60604.
(4) Based on a 13G dated February 10, 1997, Goldman Sachs & Co., The Goldman
Sachs Group, L.P. and Goldman Sachs Equity Portfolios, Inc. on behalf of
GS Small Cap Equity Fund share voting and dispositive power with respect
to an aggregate of 602,306 shares of Common Stock. The address for the
foregoing reporting persons is 85 Broad Street, New York, NY 10004.
(5) Includes 99,067 shares held by Platinum Venture Partners. Mr. Filipowski
is the President, Chief Executive Officer and a stockholder of the general
partner of Platinum Venture Partners and in such capacities may be deemed
to have voting and investment power with respect to shares held by this
entity. Mr. Filipowski disclaims beneficial ownership of such shares. The
address of Mr. Filipowski is c/o PLATINUM technology, inc., 1815 South
Meyers Road, Oakbrook Terrace, Illinois 60181. Includes 7,667 shares
underlying stock options that are currently exercisable.
(6) Based on a 13G dated February 10, 1997, Vanguard Explorer Fund, Inc.
("Vanguard") has sole voting power, and shared dispositive power, with
respect to 400,000 shares of Common Stock. The address for Vanguard is
P.O. Box 2600, Valley Forge, Pennsylvania 19482.
(7) Based on a 13G dated January 24, 1997, Wellington Management Company,
LLP ("WMC"), in its capacity as investment adviser, shares dispositive
power with respect to 400,000 shares of Common Stock owned of record by
its clients. The address for WMC is 75 State Street, Boston,
Massachusetts, 02109.
(8) Based on a 13G dated February 14, 1997. These securities are owned by
various individual and institutional investors which T. Rowe Price
Associates, Inc. ("Price Associates") serves as investment adviser with
power to direct investments and/or sole power to vote the securities.
For purposes of the reporting requirements of the Securities Exchange
Act of 1934, Price Associates is deemed to be a beneficial owner of such
securities; however, Price Associates expressly disclaims that it is, in
fact, the beneficial owner of such securities. The address for T. Rowe
Price is 100 E. Pratt Street, Baltimore, Maryland 21202.
(9) Based on a 13G dated February 14, 1997, Wells Fargo Bank, N.A. ("Wells
Fargo") has sole voting power with respect to 316,000 of the 342,000
shares listed in the table, and has shared dispositive power with
respect to all shares. The address for Wells Fargo is 464 California
Street, San Francisco, California 94163.
(10) Includes 11,667 shares underlying stock options that are currently
exercisable.
(11) Such 53,333 shares consist of shares underlying stock options that are
currently exercisable.
(12) Includes 52,100 shares underlying stock options that are currently
exercisable.
(13) Includes 7,667 shares underlying stock options that are currently
exercisable. Excludes 644,522 shares held by Frontenac VI Limited
Partnership. Mr. Goldstein is a general partner of Frontenac Company, the
general partner of Frontenac VI Limited Partnership, and in such capacity
shares voting and investment power with respect to shares held by this
entity.
(14) Such 6,333 shares underlie options that are currently exercisable.

<PAGE>

EXPERTS

The consolidated financial statements of Platinum Entertainment, Inc. as of
May 31, 1996 and 1995, and for the years ended May 31, 1996 and 1995, the
five month period ended May 31, 1994 and the year ended December 31, 1993
appearing in this Proxy Statement have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon appearing
elsewhere in the Proxy Statement, and are included in reliance upon the
report given upon the authority of such firm as experts in accounting and
auditing.

The financial statements of Intersound, Inc. as of April 30, 1995 and 1996,
and for the three years ended April 30, 1994, 1995 and 1996 appearing in this
Proxy Statement have been audited by Ernst & Young LLP, independent auditors,
as set forth in their report thereon appearing elsewhere in the Proxy
Statement, and are included in reliance upon the report given upon the
authority of such firm as experts in accounting and auditing.

The statements of K-tel International - Music Operations as of June 30, 1995
and 1996, and for each of the three years ended June 30, 1996 included in
this Proxy Statement have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their report with respect thereto and
are included herein in reliance upon the authority of said firm as experts in
giving said report.

<PAGE>

MISCELLANEOUS MATTERS

PROPOSALS OF STOCKHOLDERS

Proposals of stockholders intended to be considered at the 1997 Annual
Meeting of Stockholders must be received by the Secretary of the Company not
less than 120 days nor more than 150 days prior to September 13, 1997.

ADDITIONAL INFORMATION

The Company will furnish, without charge, a copy of its Annual Report on
Form 10-K for its fiscal year ended May 31, 1996, as filed with the Commission,
upon the written request of any person who is a stockholder as of the Record
Date. Requests for such materials should be directed to Platinum Entertainment,
Inc., 2001 Butterfield Road, Suite 1400, Downers Grove, Illinois 60515,
Attention: Douglas C. Laux.

<PAGE>

INDEX TO FINANCIAL STATEMENTS

PAGE
----
PLATINUM ENTERTAINMENT, INC. AND SUBSIDIARIES
Consolidated Balance Sheet as of February 28, 1997 (Unaudited)... F-3
Consolidated Statements of Operations for the Nine Months Ended
February 28, 1997 and February 29, 1996 (Unaudited).............. F-5
Consolidated Statements of Cash Flows for the Nine Months Ended
February 28, 1997 and February 29, 1996 (Unaudited).............. F-6
Notes to Unaudited Consolidated Financial Statements............. F-7
Report of Independent Auditors................................... F-10
Consolidated Balance Sheets as of May 31, 1996 and May 31, 1995.. F-11
Consolidated Statements of Operations for the Years Ended
May 31, 1996 and 1995, the Five Months Ended May 31, 1994
and the Year Ended December 31, 1993........................... F-13
Consolidated Statements of Stockholders' Equity (Net Capital
Deficiency)for the Year Ended December 31, 1993, the
Five Months Ended May 31, 1994 and the Years Ended May 31, 1995
and 1996....................................................... F-14
Consolidated Statements of Cash Flows for the Years Ended
May 31, 1996 and 1995, the Five Months Ended May 31, 1994
and the Year Ended December 31, 1993........................... F-15
Notes to Consolidated Financial Statements....................... F-17

INTERSOUND, INC.
Report of Independent Auditors................................... F-32
Balance Sheets as of April 30, 1995, April 30, 1996 and
(Unaudited) December 31, 1996.................................... F-33
Statements of Income for the Years Ended April 30, 1994, 1995
and 1996 and for the (Unaudited) Eight Months Ended December 31,
1995 and 1996.................................................... F-35
Statements of Stockholders' Equity for the Years Ended April 30,
1994, 1995 and 1996 and for the (Unaudited) Eight Months Ended
December 31, 1996................................................ F-36
Statements of Cash Flows for the Years Ended April 30, 1994,
1995 and 1996 and for the (Unaudited) Eight Months Ended
December 31, 1995 and 1996....................................... F-37
Notes to Financial Statements.................................... F-38

F-1

<PAGE>

K-TEL INTERNATIONAL, INC. -- MUSIC OPERATIONS PAGE
----
Report of Independent Public Accountants......................... F-43
Statements of Net Liabilities as of June 30, 1995 and 1996 and
(Unaudited) March 31, 1997....................................... F-44
Statements of Revenues and Expenses for the Years Ended June 30,
1994, 1995 and 1996 and the (Unaudited) Six Months Ended
March 31, 1996 and 1997.......................................... F-45
Statements of Cash Flows for the Years Ended June 30, 1994, 1995
and 1996 and the (Unaudited) Six Months Ended March 31,
1996 and 1997.................................................... F-46
Notes to Statements.............................................. F-47

F-2

<PAGE>

PLATINUM ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEET

FEBRUARY 28,
1997
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 139,462
Accounts receivable, less allowances of $3,528,155........ 14,819,276
Artist advances........................................... 2,863,565
Inventories, less allowance of $350,228................... 5,003,922
Notes receivable.......................................... 141,603
Other..................................................... 419,499
------------
Total current assets...................................... 23,387,327

Artist advances, net of current amounts, less allowance
of $8,312,230............................................ 3,924,954
Arts and masters, less accumulated amortization of
$40,042.................................................. 1,148,472
Property and equipment, net............................... 1,248,506
Music publishing rights and artist masters,
less accumulated amortization of $168,912................ 3,772,726
Equity investment in joint venture........................ 3,061,815
Due from joint venture.................................... 756,160
Excess cost over net assets acquired, less
accumulated amortization of $148,184..................... 23,702,067
Deferred financing costs, less accumulated amortization
of $452,062.............................................. 910,519
Other..................................................... 177,999
------------

Total assets.............................................. $ 62,090,545
------------
------------

See accompanying notes to financial statements

F-3

<PAGE>

PLATINUM ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEET

FEBRUARY 28,
1997
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving line of credit.................................. $ 3,855,727
Term loan, less loan discount of $826,396................. 24,173,604
Accounts payable.......................................... 3,723,539
Accrued liabilities and other............................. 1,710,361
Reserve for future returns................................ 2,194,273
Royalties payable......................................... 6,647,308
------------
Total current liabilites.................................. 42,304,812

Convertible debentures........................................ 5,000,000
------------
Total liabilities............................................. 47,304,812

Stockholders' equity:
Preferred stock:
Preferred stock ($.001 par value); 10,000,000 shares
authorized, no shares issued and outstanding.............. --
Common stock:
Common stock ($.001 par value); 40,000,000 shares
authorized, 5,171,439 shares issued and outstanding....... 5,151
Additional paid-in capital.................................... 37,390,027
Accumulated deficit........................................... (22,609,445)
------------
Stockholders' equity.......................................... 14,785,733
------------
Total liabilities and stockholders' equity.................... $ 62,090,545
------------
------------

See accompanying notes to financial statements

F-4

<PAGE>

PLATINUM ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS

NINE MONTHS NINE MONTHS
ENDED ENDED
FEBRUARY 28, FEBRUARY 29,
1997 1996
(UNAUDITED) (UNAUDITED)
Gross product sales....................... $ 22,421,886 $ 14,274,175
Less: Returns and allowances............. (4,079,759) (2,878,765)
Less: Discounts.......................... (1,727,035) (547,806)
------------- ------------
Net product sales......................... 16,615,092 10,847,604
Cost of product sales..................... 9,271,566 5,619,480
------------- ------------
7,343,526 5,228,124

Gross artist project revenues............. 2,677,995 3,858,312
Less: (Allowance for) recovery of
unrecoupable artist advances............. (465,418) 99,290
------------- ------------
Net artist project revenues............... 2,212,577 3,957,602
Licensing, publishing and other revenues.. 753,878 1,415,606
------------- ------------
Net artist project and other revenues..... 2,966,455 5,373,208
Cost of artist project and other revenues. 2,585,041 3,788,374
------------- ------------
381,414 1,584,834
------------- ------------
Gross profit.............................. 7,724,940 6,812,958
Other operating expenses:
Selling, general and administrative
expenses................................. 8,160,066 6,007,267
Merger and restructuring costs............ 611,472 --
Depreciation and amortization............. 481,382 91,831
------------- ------------
9,252,920 6,099,098
------------- ------------
Operating income (loss)................... (1,527,980) 713,860
Interest income........................... 138,817 402
Interest expense.......................... (308,024) (530,242)
Financing costs........................... (865,187) --
Equity loss............................... (1,368) --
------------- ------------
Income (loss) from operations before
income taxes............................. (2,563,742) 184,020
Provision for income taxes................ -- --
------------- ------------
Net income (loss)......................... $ (2,563,742) 184,020
-------------
-------------
Less: Cumulative preferred dividends..... (301,250)
------------
Loss applicable to common shares.......... $ (117,230)
------------

------------
Net loss per common share................. $ (0.50) $ (0.05)
------------- ------------
------------- ------------

Weighted average number of common shares
outstanding.............................. 5,125,124 2,334,949
------------- ------------
------------- ------------

See accompanying notes to financial statements

F-5

<PAGE>

PLATINUM ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

NINE MONTHS NINE MONTHS
ENDED ENDED
FEBRUARY 28, FEBRUARY 29,
1997 1996
(UNAUDITED) (UNAUDITED)
OPERATING ACTIVITIES
Net income (loss)......................... $ (2,563,742) $ 184,020
Adjustments to reconcile net income (loss)
to net cash used in continuing operating
activities:
Provision for (recovery of) doubtful
accounts............................. (204,955) -
Charge for (recovery of) future
returns............................... (394,801) (193,000)
Charge for (recovery of) co-op
advertising.......................... (153,330) -
Charge for (recovery of)
unrecoupable artist balances......... 380,788 (99,290)
Depreciation and amortization......... 481,760 91,831
Amortization of loan discount......... 403,993 -
Changes in operating assets and
liabilities:
Accounts receivable ................... (2,695,445) (2,196,675)
Inventories............................ (1,034,895) (466,359)
Notes receivable ...................... 1,056,457 42,324
Artist advances........................ (2,437,399) (3,225,810)
Arts and masters....................... (124,585) -
Accounts payable....................... (745,738) (25,109)
Accrued liabilities and other.......... (1,215,245) 454,569
Royalties payable...................... 3,532,274 1,312,253
Other.................................. (43,599) (397,157)
----------- -----------
Net cash used in continuing operating
activities............................... (5,758,462) (4,518,403)
Discontinued operations:
Change in net liabilities................ - (1,184,628)
----------- -----------
Net cash used in
discontinued operating activities........ - (1,184,628)
----------- -----------
Net cash used in operating activities.. (5,758,462) (5,703,031)

INVESTING ACTIVITIES
Investment in joint venture................ (3,817,975) -
Purchases of property and equipment........ (238,948) (49,840)
Prepaid acquisition costs.................. (46,833) -
Acquisitions of businesses, net of cash
acquired................................. (31,165,700) -
----------- -----------
Net cash used in investing activities...... (35,269,456) (49,840)

FINANCING ACTIVITIES
Net proceeds from related parties.......... - 4,209,974
Net proceed from revolving line of credit.. 3,855,727 1,980,000
Proceeds from bank term loan............... 25,000,000 -
Proceeds from convertible debt............. 5,000,000 -
Payment of bank term loan.................. - (500,000)
Deferred financing cost, net............... (910,520) -
----------- -----------
Net cash provided by financing activities.. 32,945,207 5,689,974
----------- -----------
Net decrease in cash....................... (8,082,711) (62,897)
Cash, beginning of period.................. 8,222,173 87,368
----------- -----------
Cash, end of period........................ $ 139,462 $ 24,471
----------- -----------
----------- -----------

See accompanying notes to financial statements

F-6

<PAGE>

PLATINUM ENTERTAINMENT, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

The financial statements included herein are unaudited and have been
prepared in accordance with generally accepted accounting principles for interim
financial reporting and Securities and Exchange Commission regulations. In the
opinion of management, the financial statements reflect all adjustments (of a
normal and recurring nature) which are necessary to present fairly the financial
position, results of operations and cash flows for the interim periods
presented. These financial statements should be read in conjunction with the
audited consolidated financial statements and notes thereto for the fiscal year
ended May 31, 1996 of Platinum Entertainment, Inc. ("Company") included in the
Annual Report on Form 10-K. The interim results presented are not necessarily
indicative of the results that may be expected for the year ending May 31, 1997.

2. NET LOSS PER COMMON SHARE

Net loss per common share is computed based upon the weighted average
number of common shares outstanding. Common and common equivalent shares issued
during the 12-month period prior to the March 12, 1996 public offering have been
included in the calculation for the three and nine months ended February 29,
1996 as if they were outstanding for those periods using the treasury stock
method and the public offering price of $13 per share. In addition, all
convertible preferred stock and convertible Class A common stock and Class B
common stock are treated as if converted into common shares at the date of
issuance.

3. ACQUISITIONS

On June 20, 1996, the Company acquired substantially all of the assets of
R.E.X. Music, Inc. ("REX") for $480,000, which approximated the indebtedness of
REX to the Company (which primarily arose prior to May 31, 1996) and $100,000 in
accrued liabilities. REX produces, licenses and markets recorded music,
primarily in the Gospel format. The acquisition has been accounted for by the
purchase method of accounting and the purchase price of $580,000 approximates
the fair value of the assets acquired. The assets acquired include accounts
receivable, artist advances, inventory, copyrights and artist contracts. The
value allocated to music publishing rights and artist masters totaled $440,000
and is being amortized over 15 years using the straight-line method.

On September 19, 1996, the Company acquired substantially all of the assets
of Double J Music Group ("Double J") for 88,000 shares of common stock of the
Company and the assumption of approximately $100,000 of debt and $75,000 of
accrued liabilities. Double J develops and acquires ownership of musical
compositions and exploits those compositions by means of recordings,
performances, audio-visual works, print publications and other licenses. The
acquisition has been accounted for by the purchase method of accounting and the
purchase price of $1,081,000 approximates the fair value of the assets
acquired. The purchase value was primarily allocated to music publishing rights
and is being amortized over 15 years using the straight-line method.

Effective January 1, 1997, the Company purchased substantially all of the
assets of Intersound, Inc. ("Intersound" or the "Intersound Acquisition") for
consideration of $24,000,000 in cash, $5,000,000 in convertible promissory notes
and the assumption of certain liabilities. See Notes 5 and 6 below for details
of the financing. Intersound produces, licenses, markets and distributes
recorded music for the Gospel, Adult Contemporary, Country, Classical/Themed
Productions and Urban/Dance formats. The Intersound Acquisition has been
accounted for by the purchase method of accounting and the purchase

F-7

<PAGE>

PLATINUM ENTERTAINMENT, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

3. ACQUISITIONS (CONTINUED)

price of $36,000,000 approximates the fair value of the assets acquired. The
purchase value was allocated to the acquired assets based upon their
estimated respective fair market values; the amounts allocated to music
publishing rights ($2,000,000) and excess cost over net assets acquired
(goodwill) ($23,850,000) are being amortized over 25 years using the
straight-line method.

4. JOINT VENTURE

The Company and House of Blues Records, Inc. ("HOB") formed the House of
Blues Music Company, a joint venture between HOB and the Company ("Venture"),
effective November 1, 1996 upon the purchase by the Company of a fifty percent
(50%) interest from Private, Inc., a subsidiary of Bertelsman Music Group, Inc.
("Seller"), in the joint venture between Seller and HOB formed pursuant to a
prior agreement. The payment for such 50% interest was made on November 12,
1996 in the cash amount of $3,063,000, which is deemed a cash capital
contribution by the Company to the Venture. HOB contributed to the Venture a
license in HOB's trademarks, logo and other intellectual property in
consideration for its 50% interest in the Venture. HOB is a subsidiary of House
of Blues Entertainment, Inc. The Chairman and Chief Executive Officer of House
of Blues Entertainment, Inc. is also a director of the Company.

The Venture develops and produces recordings and related film and video
properties featuring Blues, Gospel and other music. The Venture, exclusively
through the Company, manufactures, distributes, performs, exhibits and sells
sound recordings and related audiovisual works under the "House of Blues" label.
The Company distributes the Venture's products through its normal distribution
channels for a fee to the Venture.

The Company has agreed to fund the operations of the Venture. Such funding
is deemed a cash contribution by the Company to the Venture. All income and
gain of the Venture is allocated fifty percent (50%) to HOB and fifty percent
(50%) to the Company. Any loss of the Venture is allocated among the parties
pro rata based upon the sum of their relative cash capital contributions and
their outstanding loans to the Venture; thereafter, income or gains of the
Venture will be allocated to the parties pro rata based upon their relative
share of the losses previously allocated until each party has been allocated
income and gain equal to the losses previously allocated to them. All capital
distributions will be allocated 100% to the Company until it recovers its
original investment plus all other amounts expended to fund the operations of
the Venture, except for certain tax distributions. After the Company recovers
one hundred percent (100%) of its original investment plus all other amounts
expended to fund the operations of the Venture, distributions will be allocated
fifty percent (50%) to HOB and fifty percent (50%) to the Company.

The Company records the activity of the Venture under the equity method of
accounting for investments in joint ventures.

5. DEBT

Convertible debentures were issued to certain selling shareholders of
Intersound on January 31, 1997, mature on January 31, 2004 and bear interest at
the seven-year Treasury rate plus one percent per annum (7.48% at February 28,
1997) and are convertible, in whole or in part, at any time prior to maturity
into the Company's Common Stock at a conversion price of $9.80 per share,
subject to adjustment as provided in the notes.

F-8

<PAGE>

PLATINUM ENTERTAINMENT, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

5. DEBT (CONTINUED)

On January 31, 1997, the Company entered into a Credit Agreement with Bank
of Montreal ("BMO"), individually and as agent, to provide a 90-day term loan in
the amount of $25,000,000 and a 90-day revolving credit facility in the amount
of $10,000,000 (of which $6,144,000 is available at February 28, 1997) (the
"Credit Agreement"). Borrowings under the Credit Agreement bear interest at
LIBOR plus 6% per annum (11.4375% at February 28, 1997) and are secured by
substantially all of the assets of the Company. The Credit Agreement contains
financial and other covenants applicable to the Company. The Credit Agreement
is personally guaranteed for $12,500,000 by an officer and director of the
Company. See Note 6 below for financing fees related to the Credit Agreement.

6. WARRANT

The Company issued to BMO a warrant to purchase 258,571.95 shares of Common
Stock at an exercise price of $.01 per share in connection with the Credit
Agreement. The value of the warrants amounted to $1,239,594, the balance of
which is included in additional paid-in capital at February 28, 1997. The
warrant expires on January 31, 2002 and is subject to antidilution adjustment
if, during the term of the Credit Agreement, the Company issues shares of Common
Stock and does not use the proceeds of such issuance to pay borrowings under the
Credit Agreement.

7. RECLASSIFICATIONS

Certain amounts in the three and nine months ended February 29, 1996
consolidated statements of operations have been reclassified to conform with the
three and nine months ended February 28, 1997 presentation.

8. SUBSEQUENT EVENT

On March 3, 1997, the Company and K-tel International, Inc. ("K-tel")
signed a purchase and sale agreement (the "Agreement") pursuant to which the
Company will acquire K-tel's worldwide music business assets, except for K-tel's
European music business, through the purchase of the stock of K-tel
International (USA), Inc. ("K-tel (USA)") and Dominion Entertainment, Inc.
("Dominion"), both wholly-owned subsidiaries of K-tel. The purchase price is
$35 million subject to certain adjustments. Subject to satisfaction of the
closing conditions specified in the Agreement, including the Company's obtaining
financing for the acquisition and approval of K-tel's shareholders, the
transaction is expected to close within 120 to 180 days after the signing of the
Agreement.

Pursuant to the Agreement, the Company deposited $1,750,000 in escrow which
will be applied to the purchase price or paid to K-tel in the event the
transaction is not consummated under certain circumstances, including the
failure of the Company to obtain financing for the transaction.

F-9

<PAGE>

Report of Independent Auditors

Board of Directors and Stockholders
Platinum Entertainment, Inc. and Subsidiaries

We have audited the consolidated balance sheets of Platinum Entertainment, Inc.
and Subsidiaries as of May 31, 1996 and 1995, and the related consolidated
statements of operations, stockholders' equity (net capital deficiency) and cash
flows for the years ended May 31, 1996 and 1995, the five-month period ended
May 31, 1994 and the year ended December 31, 1993. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.

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

Since the date of completion of our audit of the accompanying financial
statements and initial issuance of our report thereon dated August 14, 1996,
the Company, in conjunction with an acquisition as discussed in Note 2 and
Note 17, obtained a term loan in the amount of $25,000,000 and a revolving
credit facility in the amount of $10,000,000, (New Credit Facility) all of
which was outstanding at June 16, 1997. The New Credit Facility expires on
August 1, 1997. The failure to repay the New Credit Facility would
constitute an event of default under the New Credit Facility and would allow
the lender to pursue any remedy available to it under the New Credit Facility
and applicable law. Note 2 discusses management's plans to address this
issue.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Platinum
Entertainment, Inc. and Subsidiaries at May 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for the years
ended May 31, 1996 and 1995, the five-month period ended May 31, 1994 and the
year ended December 31, 1993, in conformity with generally accepted accounting
principles.

/s/ ERNST & YOUNG LLP

Chicago, Illinois
August 14, 1996
except for Note 2 and Note 17, as to which
the date is June 16, 1997

F-10

<PAGE>

PLATINUM ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

MAY 31
1996 1995
-------------------------

ASSETS

Current assets:

Cash and cash equivalents $ 8,222,173 $ 87,368

Accounts receivable, less allowances of $1,033,433
and $775,293, respectively 3,302,803 1,649,327

Artist advances 1,581,390 753,421

Inventories 1,538,108 1,451,685

Notes receivable 1,467,007 65,300

Other 472,457 115,415
-------------------------
Total current assets 16,583,938 4,122,516

Artist advances, net of current amounts, less
allowances of $4,942,021 and $3,010,141,
respectively 2,093,224 1,522,513

Property and equipment, net 698,251 234,848

Music publishing rights, less accumulated amortization
of $90,443 and $61,111, respectively 349,557 378,889

Other 18,568 94,220
-------------------------
Total Assets $19,743,538 $6,352,986
-------------------------
-------------------------

SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.

F-11

<PAGE>
MAY 31
1996 1995
----------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
(NET CAPITAL DEFICIENCY)

Current liabilities:

Revolving line of credit $ - $3,000,000

Bank term loan - 4,500,000

Accounts payable 997,378 1,819,173

Accrued liabilities and other 2,104,015 870,110

Due to related parties - 537,000

Royalties payable 1,427,588 1,286,859

Net liabilities of discontinued operations - 1,237,379
----------- ------------
Total current liabilities 4,528,981 13,250,521

Redeemable preferred stock:

Series A-1 preferred stock ($.001 par value -
$6,025,000 liquidation preference); no shares
authorized, issued and outstanding at May 31,
1996 and 18,257,576 shares authorized, issued
and outstanding at May 31, 1995 - 5,422,500

Stockholders' equity (net capital deficiency):

Preferred stock:
Series A-2 convertible preferred stock
($.001 par value); no shares authorized, issued
and outstanding at May 31, 1996 and 18,257,576 shares
authorized, issued and outstanding at May 31, 1995 - 18,258

Preferred stock ($.001 par value); 10,000,000 shares
authorized, no shares issued and outstanding at
May 31, 1996 and 13,484,848 shares authorized,
no shares issued and outstanding at May 31, 1995 - -

Common stock:

Class A convertible common stock ($.001 par value);
no shares authorized, issued and outstanding
at May 31, 1996 and 240,000 shares authorized,
issued and outstanding at May 31, 1995 - 240

Class B convertible common stock ($.001 par value):
no shares authorized, issued and outstanding at
May 31, 1996 and 1,080,000 shares authorized,
issued and outstanding at May 31, 1995 - 1,080

Common stock ($.001 par value): 40,000,000 shares
authorized, 5,063,207 issued and outstanding at
May 31, 1996 and 2,480,000 shares authorized,
49,960 issued and outstanding at May 31, 1995 5,063 50

Additional paid-in capital 35,253,724 2,475,431

Accumulated deficit (20,044,230) (14,815,094)
-------------------------
Stockholders' equity (net capital deficiency) 15,214,557 (12,320,035)
-------------------------
Total liabilities and stockholders' equity
(net capital deficiency) $19,743,538 $ 6,352,986
-------------------------
-------------------------

SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.

F-12
<PAGE>
<TABLE>
<CAPTION>

Platinum Entertainment, Inc. and Subsidiaries
Consolidated Statements of Operations

YEAR ENDED YEAR ENDED FIVE MONTHS ENDED
MAY 31, MAY 31, MAY 31, YEAR ENDED
1996 1995 1994 DECEMBER 31,1993
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gross product sales $17,610,121 $12,068,358 $3,474,456 $ 4,009,801

Less: Returns and allowances (4,732,158) (3,125,918) (584,105) (590,010)
------------------------------------------------------------------
Net product sales 12,877,963 8,942,440 2,890,351 3,419,791

Cost of product sales 8,106,499 4,299,721 1,743,228 1,900,874
------------------------------------------------------------------
4,771,464 4,642,719 1,147,123 1,518,917
Gross artist project revenues 5,367,368 3,083,934 727,691 1,450,535

Less: Allowance for unrecoupable artist
advances (2,506,576) (1,127,718) (433,060) (1,360,483)
------------------------------------------------------------------
Net artist project revenues 2,860,792 1,956,216 294,631 90,052

Licensing, publishing and other revenue 1,798,775 206,570 52,472 28,265
------------------------------------------------------------------
Net artist project and other revenues 4,659,567 2,162,786 347,103 118,317

Cost of artist project and other revenues 5,195,344 2,601,146 1,004,552 1,061,378
------------------------------------------------------------------
(535,777) (438,360) (657,449) (943,060)
------------------------------------------------------------------
Gross profit 4,235,687 4,204,359 489,674 575,856

Selling, general and administrative expenses 8,172,595 8,933,240 1,391,057 2,341,017
------------------------------------------------------------------
Operating loss (3,936,908) (4,728,881) (901,383) (1,765,161)

Interest income 106,447 45,792 - -

Interest expense (570,131) (156,562) (27,685) (33,196)
------------------------------------------------------------------
Loss from continuing operations (4,400,592) (4,839,651) (929,068) (1,798,357)
Discontinued operations:

Loss from operations - (2,073,306) (754,621) (1,519,656)

Estimated loss on disposal (226,044) (2,610,514) -- --
------------------------------------------------------------------
Loss from discontinued operations (226,044) (4,683,820) (754,621) (1,519,656)
------------------------------------------------------------------
Net loss (4,626,636) $(9,523,471) $(1,683,689) $(3,318,013)
-------------------------------------------------
-------------------------------------------------
Less: Cumulative preferred dividends (602,500)
-----------
Loss applicable to common shares $(5,229,136)
-----------
-----------
Net loss per common share:

Continuing operations $ (1.71) $ (2.12)

Discontinued operations (0.08) (2.05)
------------------------------
$ (1.79) $ (4.17)
------------------------------
------------------------------
Weighted average number of common shares
outstanding 2,925,987 2,284,090
------------------------------
------------------------------
</TABLE>

SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.

F-13
<PAGE>

Platinum Entertainment, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity (Net Capital Deficiency)

PREFERRED STOCK COMMON STOCK
----------------- ------------
STOCKHOLDERS'
ADDITIONAL EQUITY
SERIES NO CLASS CLASS NO PAID-IN (NET CAPITAL
A-2 SERIES A B CLASS CAPITAL DEFICIT DEFICIENCY)
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1992 $ - $ - $240 $1,200 $ 40$ 1,988,520 $ (289,921) $ 1,700,079

Net loss for the year ended December 31, 1993 - - - - - - (3,318,013) (3,318,013)
--------------------------------------------------------------------------------
Balance at December 31, 1993 - - 240 1,200 40 1,988,520 (3,607,934) (1,617,934)

Net loss for the five months ended
May 31, 1994 - - - - - - (1,683,689) (1,683,689)
--------------------------------------------------------------------------------
Balance at May 31, 1994 - - 240 1,200 40 1,988,520 (5,291,623) (3,301,623)

Proceeds from issuance of preferred stock, net
($.69 per share) 18,258 - - - - 486,801 - 505,059

Surrender of common stock - - - (120) - 120 - -

Net loss for the year ended May 31, 1995 - - - - - - (9,523,471) (9,523,471)

Other - - - - 10 (10) - -
--------------------------------------------------------------------------------
Balance at May 31, 1995 18,258 - 240 1,080 50 2,475,431 (14,815,094) (12,320,035)

Conversion into common stock (18,258) - (240) (1,080) 2,050 17,528 - -

Initial public offering, net ($11.30 per share) - - - - 2,740 30,953,450 - 30,956,190

Exercise of stock options - - - - 22 55,478 - 55,500

Conversion of Series A-1 redeemable preferred
stock - - - - 117 1,524,883 - 1,525,000

Dividends on Series A-1 redeemable preferred
stock - - - - - - (602,500) (602,500)

Founders bonus - - - - 65 (65) - -

Shares issued in lieu of compensation - - - - 19 227,019 - 227,038

Net loss for the year ended May 31, 1996 - - - - - - (4,626,636) (4,626,636)
--------------------------------------------------------------------------------
Balance at May 31, 1996 $ - $ - $ - $ - $5,063$35,253,724 $(20,044,230) $15,214,557
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.

</TABLE>

F-14

<PAGE>

<TABLE>
<CAPTION>
Platinum Entertainment, Inc. and Subsidiaries
Consolidated Statements of Cash Flows

FIVE MONTHS
YEAR ENDED YEAR ENDED ENDED YEAR ENDED
MAY 31, MAY 31, MAY 31, DECEMBER 31,
1996 1995 1994 1993
------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (4,626,636) $(9,523,471) $(1,683,689) $(3,318,013)
Adjustments to reconcile net loss to net cash
used in continuing operating activities:
Provision for (recovery of) doubtful accounts 28,219 (9,998) (2,968) 43,446
Charge for future returns 147,000 513,000 - 140,000
Charge for unrecoupable artist advances 1,931,880 1,127,718 433,060 1,444,482
Charge for distribution fees 82,921 91,813 - -
Charge for slow-moving inventory 100,000 - - -
Depreciation and amortization 155,801 133,482 39,035 54,586
Common stock issued in lieu of compensation 227,038 - - -
Changes in operating assets and liabilities:
Accounts receivable (1,911,616) (179,178) (717,539) (1,277,160)
Royalties receivable - - - 123,387
Inventories (186,423) (892,076) (44,330) (402,946)
Notes receivable (1,401,707) (22,976) - -
Artist advances (3,330,560) (3,197,322) (639,390) (810,863)
Accounts payable (821,795) 1,122,733 442,230 142,395
Accrued liabilities and other 1,233,905 668,663 128,004 31,265
Due to related parties - - - (329,141)
Royalties payable 140,729 557,173 326,242 391,758
Other (523,451) (129,107) (47,778) 144,537

------------------------------------------------------------
Net cash used in continuing operating activities (8,754,695) (9,739,546) (1,767,123) (3,622,267)
Discontinued operations:
Depreciation and amortization - 539,354 249,388 649,473
Estimated loss on disposal 226,044 2,610,514 - -
Change in net liabilities (1,237,379) - - -
------------------------------------------------------------
Net cash provided by (used in)
discontinued operating activities (1,011,335) 3,149,868 249,388 649,473
------------------------------------------------------------
Net cash used in operating activities (9,766,030) (6,589,678) (1,517,735) (2,972,794)

INVESTING ACTIVITIES
Purchases of property and equipment (573,855) (237,749) (25,613) (1,104,452)
Asset purchase of Lexicon Music, Inc. - - - (700,000)
------------------------------------------------------------
Net cash used in investing activities (573,855) (237,749) (25,613) (1,804,452)

</TABLE>

F-15

<PAGE>

Platinum Entertainment, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (continued)

FIVE MONTHS
YEAR ENDED YEAR ENDED ENDED YEAR ENDED
MAY 31, MAY 31, MAY 31, DECEMBER 31,
1996 1995 1994 1993
----------------------------------------------------------
<S> <C> <C> <C> <C>
FINANCING ACTIVITIES

Net proceeds from (payment of) related parties $ (537,000) $ 537,000 $ 943,819 $ 210,000

Payment of note payable to related party - (943,819) (300,000) -

Net proceeds from (payment of) revolving line
of credit (3,000,000) 3,000,000 - 4,000,000

Net proceeds from bank term loan - 4,500,000 - -

Payment of bank term loan (4,500,000) (4,000,000) - (646,833)

Net proceeds from long-term debt - - - 1,400,000

Payment of long-term debt - (1,139,889) (102,784) (157,327)

Net proceeds from initial public offering 30,956,190 - - -

Net proceeds from exercise of stock options 55,500 - - -

Net proceeds from issuance of preferred stock - 4,952,559 975,000 -

Redemption of preferred stock (4,500,000) - - -
---------------------------------------------------------
Net cash provided by financing activities 18,474,690 6,905,851 1,516,035 4,805,840
---------------------------------------------------------
Net increase (decrease) in cash 8,134,805 78,424 (27,313) 28,594

Cash and cash equivalents, beginning of period 87,368 8,944 36,257 7,663
---------------------------------------------------------
Cash and cash equivalents, end of period $ 8,222,173 $ 87,368 $ 8,944 $ 36,257
---------------------------------------------------------
---------------------------------------------------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.

</TABLE>

F-16

<PAGE>

Platinum Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements

1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

Platinum Entertainment, Inc. (the Company) produces, licenses, acquires, markets
and distributes high-quality recorded music for a variety of musical formats for
markets principally in the United States. The Company and its wholly owned
subsidiaries currently produce music in the Gospel, Adult Contemporary, Country
and Blues formats. The Company's activities are primarily in the Gospel and
Adult Contemporary formats. Net revenues, net accounts receivable and net
artist advances generated by these formats as a percentage of total net
revenues, net accounts receivable and net artist advances, respectively, are as
follows:

YEAR ENDED YEAR ENDED FIVE MONTHS ENDED YEAR ENDED
MAY 31, 1996 MAY 31, 1995 MAY 31, 1994 DECEMBER 31, 1993
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
NET REVENUES:
Gospel 55% 82% 87% 95%
Adult Contemporary 25 8 4 1
Country 13 8 8 -
Blues and other 7 2 1 4

MAY 31, MAY 31,
1996 1995
----------- ----------
<S> <C> <C>
NET ACCOUNTS RECEIVABLE:

Gospel 67% 82%
Adult Contemporary 24 2
Blues and other 9 -
Country - 16

NET ARTIST ADVANCES:
Country 39% 11%
Adult Contemporary 37 37
Gospel 21 50
Blues and other 3 2

</TABLE>

2. INTERSOUND ACQUISITION AND REFINANCING OF NEW CREDIT FACILITY

Effective January 1, 1997, the Company acquired substantially all of the
assets of Intersound, Inc. (Intersound) for $24,000,000 in cash, $5,000,000
in convertible promissory notes and the assumption of certain liabilities.
The Company entered into a credit facility (New Credit Facility) with the
Bank of Montreal (BMO), individually and as agent for certain banks, in order
to finance the cash portion of the consideration, to refinance certain bank
debt incurred by Intersound, and to pay fees and expenses associated with the
transaction. The New Credit Facility also includes a revolving line of
credit in the amount of $10,000,000, all of which was outstanding on June 16,
1997. The New Credit Facility originally matured on June 15, 1997. On June
12, 1997, the Company obtained an extension of the maturity date to August 1,
1997.

The Company intends to issue up to $40,000,000 in aggregate principal amount
of preferred stock (Issuance) in a private placement in order to repay the
New Credit Facility. The Issuance is contingent upon approval by the
Company's stockholders. If the Issuance is not approved, the consequences
could be materially adverse to the Company's business, results of operations,
and financial position. While the Company would pursue alternative methods
to refinance the New Credit Facility, there are no assurances that such
financing could be obtained on terms favorable to the Company, or at all. In
addition, the Company's failure to consummate the Issuance could hamper its
ability to obtain long-term bank or other financing for the K-tel acquisition
(Note 17).

F-17
<PAGE>

Platinum Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts and transactions of
the Company and its wholly owned subsidiaries, River North Studios, Inc.; River
North Records, Inc.; CGI Records, Inc.; Lexicon Music, Inc.; Light Records,
Inc.; The Recording Experience, Inc.; Just Mike Music, Inc., Peg Publishing,
Inc. and Royce Publishing, Inc. Significant intercompany accounts and
transactions have been eliminated in consolidation.

CASH EQUIVALENTS

The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.

PROPERTY AND EQUIPMENT

Property and equipment are carried at cost, less accumulated depreciation.
Depreciation is computed using accelerated methods over the estimated useful
lives of the assets (five to seven years).

ADVANCES

In accordance with FASB Statement No. 50, "Financial Reporting in the Record and
Music Industry," advances to artists and producers are capitalized as an asset
when the current popularity and past performance of the artist or producer
provides a sound basis for estimating the probable future recoupment of such
advances from earnings otherwise payable to the artist or producer. Any portion
of such advances not deemed to be recoupable from future royalties is reserved
at the balance sheet date. All other significant advances which do not meet the
above criteria are fully reserved when paid.

INVENTORIES

Inventories are valued at the lower of cost or market determined on the first
in, first out (FIFO) method of accounting. Inventories consist primarily of
finished goods.

ADVERTISING

Promotional costs are capitalized for unreleased projects and expensed when the
related product is released. All other advertising and promotional costs are
expensed when incurred.

MUSIC PUBLISHING RIGHTS

Music publishing rights are amortized over 15 years using the straight-line
method.

F-18

<PAGE>

Platinum Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

REVENUE RECOGNITION

Net product sales, other than telemarketing C.O.D. sales, represent revenues
derived from sales of records, net of actual returns and reserves for estimated
future returns. Telemarketing C.O.D. sales are recognized upon receipt of cash
from the customer.

Artist project revenues represent revenues derived from the production and
promotion of artist records, net of reserves for estimated unrecoupable costs.

Revenues derived from the licensing of recording masters are recognized upon
notification of retail sales by the licensee. Retail sales, net of returns,
reported to the Company by the licensee, were approximately $3,409,000 for the
year ended May 31, 1996.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company's financial instruments consist of cash equivalents, trade accounts
receivable, notes receivable and trade accounts payable. The fair value of the
Company's financial instruments approximates the carrying value of the
instruments.

INCOME TAXES

Deferred income taxes are calculated based on the differences between the bases
of assets and liabilities for financial statement and income tax return
purposes, primarily related to reserves against trade accounts receivable and
artist advances, at the enacted tax rates at which the resulting taxes are
expected to be paid.

F-19

<PAGE>

Platinum Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

STOCK OPTIONS

In October 1995, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 123, "Accounting for Stock-Based Compensation" ("FAS 123"). This Statement
establishes financial accounting and reporting standards for stock-based
employee compensation plans as well as transactions in which the Company issues
its equity instruments to acquire services from nonemployees. The Statement
defines a fair value based method of measuring compensation costs for such
activity, but does not require accounting compliance under this method and
allows compensation costs for such activity to be measured using the intrinsic
value-based method prescribed by APB Opinion No. 25, "Accounting for Stock
Issued to Employees," ("Opinion 25") the method currently utilized by the
Company. Entities electing to remain with the accounting for Opinion 25 must
make pro forma disclosures of net income and earnings per share as if the fair
value based method of accounting defined in FAS 123 had been applied. This
Statement is effective for the Company's fiscal year ending May 31, 1997.
Management intends to continue accounting for stock options pursuant to Opinion
25 and has not yet determined what impact this Statement will have on the
Company's financial disclosures.

NET LOSS PER COMMON SHARE

Net loss per common share is computed based upon the weighted average number of
common shares outstanding. Common and common equivalent shares issued during
the 12-month period prior to the March 12, 1996 public offering have been
included in the calculation as if they were outstanding for all periods
presented using the treasury stock method and the public offering price of $13
per share. No effect has been given to common equivalent shares issued for any
other period as the effect would be antidilutive. In addition, all convertible
preferred stock and convertible Class A common stock and Class B common stock
are treated as if converted into common shares at the date of issuance.

A portion of the net proceeds received from the Offering were used to retire
indebtedness of the Company and redeem a portion of Series A-1 Nonconvertible
Preferred Stock. Supplemental loss per common share, adjusted to reflect the
elimination of interest expense incurred on such borrowings during fiscal 1996
and the payment of mandatory preferred dividends, is $1.52 per common share.

RECLASSIFICATIONS

Certain amounts in the year ended May 31, 1995, the five months ended May 31,
1994 and the year ended December 31, 1993 consolidated financial statements have
been reclassified to conform with the year ended May 31, 1996 presentation.

F-20

<PAGE>

Platinum Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements

4. DISCONTINUED OPERATIONS

On April 18, 1995, the Board of Directors approved a plan to sell the studio
operations of River North Studios, Inc. (RNS). As part of such plan, the
Company sold RNS to a company which is owned 80% by a minority stockholder of
the Company. As consideration, the Company, under a five-year agreement, was
entitled to use the recording studio for an amount of recording time, as defined
in the agreement, at no charge. However, as management could not estimate
future usage of the recording studio, the sale was recorded with no dollar value
assigned to this consideration. This agreement was subsequently terminated.

In fiscal 1995, the Company recorded a charge to write down the assets of RNS to
their estimated net realizable value, which were determined to be zero, and to
accrue for operating losses through the expected disposal date in January 1996
($1,373,135 and $1,237,379, respectively). Included in the estimate for the
operating losses through the expected disposal date are rent and utilities costs
to be incurred subsequent to the disposal date that will not be assumed by the
buyer.

No income tax benefits have been allocated to RNS losses because there are no
realizable taxable benefits available to allocate to the discontinued
operations. RNS losses are included in the Company's net operating loss
carryforwards disclosed in Note 10.

Revenues of RNS are as follows:
Year ended May 31, 1996 $ 183,000
Year ended May 31, 1995 345,000
Five months ended May 31, 1994 165,000
Year ended December 31, 1993 495,000

The accumulated deficit of RNS is as follows:
May 31, 1996 $7,141,000
May 31, 1995 6,958,000

For the year ended May 31, 1996, the Company charged the discontinued operations
approximately $302,000 for management and administrative services and additional
interest cost. The additional interest cost is the interest incurred by the
Company for using its revolving line of credit to fund the working capital
requirements of the discontinued operations. Such allocations were not
applicable for the year ended May 31, 1995 and the five-month period ended May
31, 1994. In the year ended December 31, 1993, charges for such services were
paid to a related party (see Note 11).

The fiscal year ended May 31, 1996 net loss includes $226,000 related to
operating costs in excess of amounts estimated at the measurement date.

F-21

<PAGE>

Platinum Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements

5. DISTRIBUTION AGREEMENT

The Company has an exclusive domestic distribution agreement (Agreement) with
PolyGram Group Distribution, Inc. (PGD). The term of the Agreement was extended
during the current year through December 31, 2000, unless extended or terminated
under certain provisions of the Agreement. The Agreement appoints PGD exclusive
distributor of the Company's products through normal retail channels, which
excludes certain methods of distribution as defined. The distribution services
rendered by PGD include billing and collecting from customers, bearing bad
debts, distributing promotional items, advertising, undertaking retail marketing
and inventory control activities and processing returns. Distribution fees paid
by the Company for various distribution services provided by PGD include 18% of
net sales generated by PGD and an additional 2% of the credit price for all
product returns. The payment of all such fees owed to PGD by the Company is
secured by all of the Company's inventories in PGD's possession awaiting
distribution. Such inventories are $901,000 and $427,000 at May 31, 1996 and
1995, respectively.

GROSS SALES NET SALES
----------- ---------
Product sales generated through PGD are as follows:
Year ended May 31, 1996 $9,969,000 $7,226,000
Year ended May 31, 1995 6,944,000 4,926,000
Five months ended May 31, 1994 2,908,000 2,368,000
Year ended December 31, 1993 2,822,000 2,791,000

Accounts receivable include the following net
amounts due from PGD:
May 31, 1996 $1,326,000
May 31, 1995 1,885,000

F-22

<PAGE>

Platinum Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements

6. VALUATION AND QUALIFYING ACCOUNTS

Activity of the Company's valuation and qualifying accounts is as follows:

ADDITIONS
------------------------
BALANCE AT
BEGINNING CHARGED TO CHARGED TO BALANCE
OF COSTS AND OTHER AT END
PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended May 31, 1996:
Reserves and allowances
deducted from asset accounts:
Reserve for future returns... $ 653,000 $ - $ 572,393(1) $ 425,393(2) $ 800,000
Reserve for distribution
fees........................ 91,813 82,921 - - 174,734
Allowance for doubtful
accounts.................... 30,480 43,271 - 15,052(3) 58,699
Reserve for unrecoupable
artist advances............. 3,010,141 - 3,066,920(4) 1,135,040(5) 4,942,021
Allowance for slow-moving
inventory................... - 100,000 - - 100,000
-----------------------------------------------------------------------
$3,785,434 $226,192 $3,639,313 $1,575,485 $6,075,454
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Year ended May 31, 1995:
Reserves and allowances
deducted from asset accounts:
Reserve for future returns.... $ 140,000 $ - $ 513,000(1) $ - $ 653,000
Reserve for distribution fees. - 91,813 - - 91,813
Allowance for doubtful
accounts..................... 40,478 - - 9,998(3) 30,480
Reserve for unrecoupable
artist advances.............. 1,882,423 - 1,127,718(4) - 3,010,141
-----------------------------------------------------------------------
$2,062,901 $91,813 $1,640,718 $ 9,998 $3,785,434
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Five months ended May 31,
1994:
Reserves and allowances
deducted from asset accounts:
Reserve for future returns.... $ 140,000 $ - $ - $ - $ 140,000
Allowance for doubtful
accounts..................... 43,446 - - 2,968(3) 40,478
Reserve for unrecoupable
artist advances.............. 1,449,363 - 433,060(4) - 1,882,423
-----------------------------------------------------------------------
$1,632,809 $ - $ 433,060 $ 2,968 $2,062,901

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

</TABLE>

F-23

<PAGE>

Platinum Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements

6. VALUATION AND QUALIFYING ACCOUNTS (CONTINUED)

<S> <C> <C> <C> <C> <C>
Year ended December 31, 1993:
Reserves and allowances deducted
from asset accounts:
Reserve for future returns.............. $ - $ - $ 140,000(1) $ - $ 140,000
Allowance for doubtful accounts......... - 43,446 - - 43,446
Reserve for unrecoupable artist advances 88,880 - 1,360,483(4) - 1,449,363
----------------------------------------------------------------------
$88,880 $43,446 $1,500,483 $ - $1,632,809
----------------------------------------------------------------------
----------------------------------------------------------------------

</TABLE>

(1) Estimated future sales returns, charged against gross product sales.
(2) Actual sales returns, charges against reserve for future returns.
(3) Write-offs, net of recoveries.
(4) Estimated unrecoupable artist advances, charged against gross artist
project revenues.
(5) Recoupment of reserved advances and write-offs.

7. PROPERTY AND EQUIPMENT

Property and equipment consists of the following:
MAY 31
1996 1995
-------------------

Audio equipment $ 11,432 $ 11,432
Office equipment and computers 498,509 239,986
Furniture and fixtures 267,473 82,701
Leasehold improvements 149,609 19,049
Automobile 5,000 5,000
-------------------
932,023 358,168
Less: Accumulated depreciation 233,772 123,320
-------------------
Net property and equipment $ 698,251 $234,848
-------------------
-------------------

During fiscal 1996, the Company purchased $421,000 of office equipment,
furniture and fixtures, and leasehold improvements from a company that is wholly
owned by a director, officer and shareholder of the Company.

F-24

<PAGE>

Platinum Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements

8. ADVERTISING

Advertising expenses are as follows:

Year ended May 31, 1996 $1,968,000
Year ended May 31, 1995 3,664,000
Five months ended May 31, 1994 271,000
Year ended December 31, 1993 195,000

9. DEBT

Subsequent to the offering, the Company retired all of its then-outstanding bank
debt, consisting of borrowings against a line of credit totaling $4,980,000 and
a term loan of $4,000,000, with net proceeds from the offering.

Interest expense and cash paid for interest are as follows:

<TABLE>
<CAPTION>
EXPENSE RELATING TO
DISCONTINUED CASH PAID
TOTAL EXPENSE OPERATIONS FOR INTEREST
------------------------------------------------
<S> <C> <C> <C>
Year ended May 31, 1996 $891,000 $333,000 $1,022,000
Year ended May 31, 1995 597,000 447,000 516,000
Five months ended May 31, 1994 173,000 145,000 139,000
Year ended December 31, 1993 247,000 214,000 227,000

</TABLE>

F-25

<PAGE>

Platinum Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements

10. INCOME TAXES

Significant components of deferred income taxes consist of the following:

MAY 31
1996 1995
------------------------------
<S> <C> <C>
Net operating loss carryforwards $4,741,000 $3,653,000
Reserve for unrecoupable artist advances 1,878,000 1,144,000
Reserve for future returns and doubtful
accounts receivable 326,000 254,000
Liabilities of discontinued operations - 470,000
Other 368,000 57,000
------------------------------
7,313,000 5,578,000
Less: Valuation allowance 7,313,000 5,578,000
------------------------------
$ - $ -
------------------------------
------------------------------

</TABLE>

No tax benefit has been recognized in the accompanying statement of operations
due to the valuation allowance. The valuation allowance increased $1,735,000
and $3,604,000 during the years ended May 31, 1996 and 1995, respectively, due
principally to net operating loss carryforwards and differences between the book
and tax accounting treatment of the reserve for unrecoupable artist advances.

Pursuant to Section 382 of the Internal Revenue Code of 1986, as amended, the
Company's net operating loss carryforward of approximately $12,523,000, expiring
in years 2007 through 2011, is subject to annual limitations due to a change in
ownership as a result of the initial public offering. Accordingly,
approximately $11,521,000 of the net operating loss carryforward is subject to
an annual limitation of approximately $2,200,000.

F-26

<PAGE>

Platinum Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements

11. RELATED PARTY TRANSACTIONS

During the fiscal 1996, the Company retired all of its outstanding related party
debt with net proceeds from the initial public offering. Principal and interest
payments to related parties during the current fiscal year totaled $4,867,000
and $202,000, respectively. Interest expense incurred due to related parties
approximated interest paid to related parties.

Under an agreement dated May 1996, the Company sold certain audio-visual rights
for $401,000 and its right to free future studio usage for $850,000 to a
minority stockholder and former officer of the Company, who previously acquired
the Studio assets (see Note 4). The $401,000 is reflected in licensing,
publishing and other revenues in the accompanying statements of operations. The
$850,000 is being amortized to offset cost of artist projects over a
twenty-seven month period. As a result, the note receivable balance at May 31,
1996 includes $1,058,000 relating to these transactions.

Prior to May 31, 1994, the Company incurred operating expenses relating to sales
personnel, management and accounting services which were provided by an
affiliated company. Subsequently, these costs are incurred by the Company and
its personnel. Such costs are as follows:

Year ended May 31, 1996 $ -
Year ended May 31, 1995 -
Five months ended May 31, 1994 156,000
Year ended December 31, 1993 400,000

The Company has two joint venture agreements with subsidiaries of House of Blues
under which the Company produces, markets and distributes compilations of Blues
and Gospel recordings on the House of Blues record label. The Chairman and
Chief Executive Officer of House of Blues is a member of the Company's Board of
Directors. The Company is required to pay royalties to House of Blues based
upon the net profits of each project. No such royalties have been incurred as
of May 31, 1996.