PLATINUM ENTERTAINMENT INC, 10-K405, 1998-05-20

PLATINUM ENTERTAINMENT INC
10-K405, 1998-05-20
DURABLE GOODS, NEC

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

( ) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

(X) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from June 1 to December 31, 1997

Commission File Number 0-27852

PLATINUM ENTERTAINMENT, INC.
(Exact name of registrant as specified in its charter)

Delaware 36-3802328
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

2001 Butterfield Road
Downers Grove, Illinois 60515
(Address of principal executive offices, including zip code)

(630) 769-0033
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.001 per share
(Title of Class)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes (X) No ( )

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. ( )

The aggregate market value of the registrant's voting stock held by
non-affiliates of the registrant (based upon the per share closing sale price of
$9.938 on May 18, 1998, and for the purpose of this calculation only, the
assumption that all of the registrant's directors and executive officers are
affiliates) was approximately $25,596,000.

The number of shares outstanding of the registrant's Common Stock, par
value $.001, as of May 18, 1998 was 5,275,040.

DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference
into this report:
None.

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PART I

ITEM 1. BUSINESS.

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. The Company has produced recorded music products in the Adult
Contemporary, Gospel, Country and Blues music formats, primarily under its River
North Records, CGI Records and House of Blues Music Co. labels. With its
January 1997 acquisition of Intersound, Inc. ("Intersound"), the Company
expanded its artist base and music catalog within existing genres, added new
music genres to its repertoire, including Urban/Dance and Classical/Themed
Productions, and added Intersound to its labels.

Since its inception in 1991, the Company 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 and
new artists. Among 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. The Company currently owns or controls a music catalog
with more than 12,000 master recordings of Blues, Pop, Classical, Gospel,
Country, New Age and Urban/Dance music titles. The Company is also targeting
the producers of film and video projects as potential licensees of the
Company's owned and controlled recordings. In addition, the Company is
entering the growing market for music titles in the DVD format with 12
initial DVD releases scheduled in 1998 on the Company's Concert @ Home DVD
label. DVD, which stands for "digital versatile disc," represents the latest
evolution in the playback of recorded music at home. DVD offers more than
seven times the storage capacity of a compact disc, as well as many options
for audio and video interactivity.

In 1997, the Company released music by established artists in various
music genres, including the Beach Boys, Peter Cetera, John Denver and Crystal
Bernard, as well as the Blues Brothers, Taj Mahal and Luther Allison.
Through the acquisition of Intersound, the Company expanded its roster to
include George Clinton, The Ohio Players, Cameo, The Gap Band, Crystal Gayle,
the Bellamy Brothers and Eddie Rabbitt. With Top 10 albums by William
Becton, James Hall and Vickie Winans (BILLBOARD's Top Gospel Album chart),
the Company believes it is currently positioned as a market leader in Gospel.
According to the Recording Industry Association of America ("RIAA"), Gospel
is the fastest growing music segment, having increased its market share by
38% in 1996 and by 30% in 1995. The Company's music catalog also contains
master recordings by best selling Gospel music acts such as The Winans,
Andrae Crouch and Walter Hawkins. Through its acquisition of Intersound, the
Company expanded its Gospel roster to include Vickie Winans and the Mighty
Clouds of Joy, each of whom earned Grammy Award and Stellar Award nominations
in 1997.

The Company has also enjoyed success in the Classical market as well.
BILLBOARD named Intersound the No. 2 Top Budget Classical Label in 1997,
with nine charted albums, including the No. 1 Budget Classical Album of the
Year, ROMANCE AND ROSES. Billboard also recognized the Taliesin Orchestra
as the No. 7 Top Classical Crossover Artist and Taliesin's ORNICO FLOW: THE
MUSIC OF ENYA as the No. 8 Top Classical Crossover Album.

The Company also recently announced its plans to develop and operate an
innovative Web-based entertainment emporium that will allow consumers to
digitally download titles from the Company's entire music catalog to personal
computers, enabling them to create customized CDs in their own homes. In
addition, the service will provide standard mail order delivery of almost
500,000 commercially available titles and customized CDs compiled from any of
the Company's many music selections.

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STRATEGY

The Company's strategy for growth in the recorded music business is
based on: (i) selling diversified recorded music offerings in markets and
formats which are characterized by relatively low development costs and
predictable sales and which management believes have potential to increase in
popularity among consumers; (ii) introducing records by established artists
with a history of successful releases; (iii) expanding and exploiting its
music catalog through the acquisition of master recordings and music
publishing rights from other music companies at attractive prices; 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. In addition, the Company intends to expand and exploit its catalog
in connection with its plan to become an early leader in the emerging DVD
format.

In May 1998, the Company announced that it has partnered with PLATINUM
TECHNOLOGY, INC. (Nasdaq: PLAT), to develop and operate an innovative
Web-based entertainment emporium that will allow customers to digitally
download titles from the Company's music catalog to personal computers,
enabling them to create customized CDs in their own homes. In addition, the
new service will provide standard mail order delivery of almost 500,000
commercially available titles and customized CDs compiled from any of the
Company's titles.

DIVERSE MUSICAL MARKETS AND FORMATS

The Company focuses on artists and musical markets and formats
characterized by relatively 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, the Company believes that a diversification of musical
offerings, through the identification of markets with the potential to
increase in popularity among consumers, reduces revenue volatility. A
significant portion of the Company's products is 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 predictable unit sales volumes.
The Company also believes that it can increase market share through the
identification, acquisition and exploitation of catalog items. In addition,
the Company believes that it will be able to utilize and expand its catalog
through the DVD market and the Internet.

INTRODUCE ARTIST-DRIVEN RECORDS

The Company is committed to developing high quality recorded music with
artists who have 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.

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ACQUIRE 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 future success will depend to a significant degree 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 previous hit songs of artists currently on its
roster and other artists not on the Company's roster for sale via the
Company's web site.

DISTRIBUTION

The Company's distribution relationship with PolyGram Group
Distribution, Inc. ("PolyGram") has represented a distinguishing aspect of
its operations and business strategy compared with other independent record
companies. The Company's independent distribution channel, Intersound
Distribution, distributes certain of the Company's products as well as
certain products of third parties under various distribution arrangements.
The Company utilizes its PolyGram distribution relationship for certain
"front line" releases. "Mid-line" releases, including much of the compilation
and "best of" products from the Company's library, are distributed via the
less expensive retail distribution channels which have been established by
Intersound Distribution. The choice of distribution channels for a release
is determined by the Company's assessment of which channel provides the
greatest sales volume and profitability opportunities and, in certain
situations, by agreement with the particular artist. The Company's
distribution agreement with PolyGram is effective until December 31, 2002.
The Company also plans to offer its entire library of musical recordings on
the Internet for digital downloading via the Web, along with new releases
from its artist roster and other commercially available music titles.

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 Highway Q.C.s, the group from which Soul artists Sam Cooke
and Lou Rawls emerged. Consistent with its belief that Gospel music sales are
artist-driven, rather than "hit" driven, the Company has acquired, and continues
to pursue, master recordings by established Gospel artists who have a history of
stable base sales. A successful example of this strategy is the strong sales of
the compilation, TODAY'S GOSPEL MUSIC, with net sales in excess of 100,000 units
since its July 1997 release. In addition, the Company has produced new
recordings by established artists, typically with a ministry, for modest
advances. With its acquisition of Intersound, the Company increased its catalog
of Gospel recordings and expanded its artist roster to include artists such as
William Becton, Mighty Clouds of Joy, Vicki Winans, James Hall & Worship &
Praise and Candi Staton, who was nominated for a NCAAP Phoenix Award as Best
Female Gospel Soloist in 1997. Other artists on the Company's CGI Records label
have been recognized with prestigious Stellar Award nominations, including the
Christianaires, B. Chase Williams and ShaBach with Lisa Page. Scheduled 1998
releases on the Company's CGI Records Label include albums by Candi Staton,
Terri Carroll, Witness, Walt Whitman, Dallas Fort Worth Mass Choir and GMWA Mass
Choir.

ADULT CONTEMPORARY

The Company established its presence in the Adult Contemporary market in
1993, by signing Peter Cetera, formerly the lead singer of the rock group
Chicago and an established solo artist, to the Company's River North Records
label. Mr. Cetera's first album for the Company, ONE CLEAR VOICE, was released
in July 1995 and followed up in May 1997 by YOU'RE THE INSPIRATION (A
COLLECTION), an album that includes both new songs and re-recordings of some of
Chicago's former Number One hits. By the end of 1997 these two recordings had
net shipments in excess of 500,000 units. YOU'RE THE INSPIRATION has generated
three hit singles, including the Top Five DO YOU LOVE ME THAT MUCH.

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The Company's relationships with Peter Cetera and other Adult
Contemporary artists, such as the Beach Boys, Kansas, Juice Newton and The
Atlanta Rhythm Section, allow the Company to produce and market artist-driven
records that have both predictable sales and the potential to chart in the
Top Ten. According to Radio & Records Magazine, the company's River North
Records label was the 10th largest adult contemporary label in 1996.
Signings to the Company's River North Records label in 1998 already include
such established acts as singer Dionne Warwick, The Band and dance pop
sensation Taylor Dayne. Releases scheduled for 1998 on the Company's River
North Records label include ALWAYS NEVER THE SAME by Kansas, THE TROUBLE WITH
ANGELS by Juice Newton, DAY 14 by Ronna and albums by Crystal Bernard, Dionne
Warwick, The Beach Boys, The Band and Taylor Dayne.

BLUES

The Company produces and markets original recordings by established
artists, including the Blues Brothers, Luther Allison, Taj Mahal, Phoebe Snow
and JGB (formerly the Jerry Garcia Band), as well as Blues compilations that
include music licensed from other companies. Many of the Company's releases
have charted in the Top 15 on the Blues Chart published by BILLBOARD,
including PAINT IT, BLUE, a collection of songs by the Rolling Stones,
performed by celebrated Blues artists, and BLUES BROTHERS AND FRIENDS, LIVE
FROM CHICAGO'S HOUSE OF BLUES. The Company has also successfully produced
and marketed compilations of Blues recordings featuring a variety of artists
titled ESSENTIAL BLUES, VOL. I AND VOL. II, ESSENTIAL WOMEN IN BLUES, and
various other compilation albums which are products of the Company's joint
venture with the internationally known House of Blues Records, Inc., which
has several music venues and restaurants in the United States. Scheduled
compilations to be released through the House of Blues label in 1998 include
DEFIANCE BLUES, BAR-B-QUE BLUES and HOUSE RENT PARTY and scheduled albums
include releases by Blues greats Larry McCray, Otis Rush and Angela Strehli.

COUNTRY

The Company established its Country music operations in Nashville in 1995,
originally targeting established and up and coming Country artists, the latter
of which are heavily dependent on costly radio promotion for their sales. By
the end of 1997 the Company had shifted its Country music strategy to focus
principally on signing artists with an established fan base, thereby
significantly reducing radio promotion expenses.

With the acquisition of Intersound the Company was able to expand on its
focus on predictable sales with Intersound's "Classic Country" concept, which
produces "Latest and Greatest" releases for Classic Country acts. The
addition of Intersound also expanded the Company's artist roster to include
Country acts such as The Bellamy Brothers, Eddie Rabbitt, Crystal Gayle, Dan
Seals, The Gatlin Brothers, Earl Thomas Conley, and Jo-El Sonnier, who was
nominated for a Grammy Award for Best Cajun Album. The Company's artist
roster also features Holly Dunn, a member of the Country Music Foundation's
Walkway of Stars. Releases scheduled on the Company's Intersound Country
label for 1998 include studio albums by Becky Hobbs, Ronnie McDowell and T.
Graham Brown, a Latest and Greatest album by Billy Joe Royal and an anthology
box set of Crystal Gayle's greatest hits.

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CLASSICAL/THEMED PRODUCTIONS

Through the acquisition of Intersound, the Company gained one of the
industry's leading creators of Classical and Theme-based products-recordings
arranged around a specific theme and often targeted to a specific demographic
audience. The Company develops themed products through new recordings and by
using its catalog to release existing titles in a new format. The Company's
Theme-based products range from the music of Hollywood and Broadway to
recordings by such established artists as Dizzy Gillespie, Al Hirt, Doc
Severinsen and Ferrante & Teicher. The Company also creates multi-disc packages
based on such concepts as "Bach and Bagels" and "Classics for Kids." Other
Themed music releases produced and marketed by the Company include "Best of"
packages featuring select composers and music genres; religious and ethnic
selections; music for various party themes; and Christmas and various other
holiday selections. Six Theme-based releases on the Intersound label were
certified gold by the RIAA in 1995. During 1997, the Company had two albums
simultaneously ranked No. 1 in BILLBOARD - ROMANCE AND ROSES, on
BILLBOARD'S Classical Budget chart, and ORNICO FLOW: THE MUSIC OF ENYA, by The
Taliesin Orchestra, on the Classical Crossover chart. ROMANCE AND ROSES was the
year's best-selling Classical Budget recording, and two other releases on the
Company's Intersound label, NUTCRACKER CHRISTMAS and BEATLES'S GREATEST HITS,
were among BILLBOARD's Top Five best-sellers in the Classical Budget market in
1997. Releases scheduled for 1998 on the Company's Intersound label include,
albums by the Taliesin Orchestra, MUSIC OF ENYA VOL. II, and The Royal
Philharmonic.

URBAN/DANCE MUSIC

The Company's Urban music division focuses on several specialty niches,
including Classic Rhythm and Blues (R&B), Funk, Soul, Dance, Electronica,
Bass and Hip-Hop. In Classic R&B, the Company employs an experienced staff
that is well-versed in radio and other promotions for this musical genre.
During 1997, the Company released STOP THE GUNFIGHT by the Rap artist and
nonviolence advocate known as Trapp, which includes two tracks featuring the
late Tupac Shakur and Notorious B.I.G. The album STOP THE GUNFIGHT debuted
at No. 2 on BILLBOARD'S Heatseekers chart. In 1998, the Company plans to
expand its Classic R&B catalog with new recordings from established artists
such as George Clinton and the P-Funk All-Stars, Lakeside and the Dazz Band,
and to release several new Rap albums. In addition, on April 15, 1998, the
Company entered into a joint venture agreement between the Company and Divine
Records, Inc., pursuant to which the Company plans to release debut albums by
Urban newcomers Champain, Christopher Williams, DSA and PUMLA. BOOTY MIX 3:
WIGGLE PATROL was released in 1998 as a follow-up to BOOTY MIX 2: THE NEXT
BOUNCE, a BILLBOARD Top 200 Best Selling Album. The Company also plans to
release several titles in the growing Electronica music genre on its
Intersound label in 1998.

DVD

The Company's Concert @ Home DVD label presents the best in contemporary
music events, as well as classic performances from the world's most popular
entertainers. The superior digital video quality and surround sound of DVD
create a "front row seat" environment, plus a level of interactivity never
before available in home video. The technology of DVD allows for tremendous
programming flexibility, including multiple audio tracks, multiple camera
angles, foreign language tracks and parental control. The Company's initial
release of DVDs, scheduled for June 1998, includes the following 12 titles:
The Beach Boys' NASHVILLE SOUNDS, Roger Daltrey's A CELEBRATION: THE MUSIC OF
PETE TOWNSHEND AND THE WHO, Harry Chapin's THE BOOK OF CHAPIN (Soundstage),
Phoebe Snow with David Bromberg (SOUNDSTAGE), Luther Allison's LIVE IN
PARADISE, Walter Trout's LIVE & KICKIN', George Clinton's LIVE AT THE HOUSE
OF BLUES AT THE ATLANTA OLYMPICS, Various Artists' ESSENTIAL GOSPEL- LIVE AT
THE HOUSE OF BLUES, George Winston's FORBIDDEN FOREST, Cyberlin's THE
SEASONS, and the first two DVDs in a series of classical compositions by
various artists set to African wildlife footage--CLASSICAL SPECTACULAR and
CLASSICAL FIREWORKS.

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DISTRIBUTION, SALES AND PROMOTION

The Company currently distributes its products domestically through a
multi-channel system comprised of (i) PolyGram; (ii) Platinum Christian
Distribution division to the Christian retail market; and (iii) Intersound
Distribution. PolyGram currently distributes releases on the Company's River
North Records, CGI Records and House of Blues labels. 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 Company distributes many of its
products through its proprietary distribution system, Intersound
Distribution, through its direct sales force. The Company also provides
distribution for third parties through its multiple channel distribution
system. In addition, the Company plans to distribute its products and other
commercially available titles via the Internet beginning in September 1998.
The Company primarily distributes internationally by means of licensing
arrangements. The Company plans, however, to distribute its future releases
internationally by means of distribution arrangements on a territory by
territory basis. The Company believes that utilizing such means of
international distribution will allow the Company to exploit its existing
international licensing relationships, electronic media and overseas
manufacturing to increase its revenues derived from international
distribution. The following table sets forth, for each period shown, the
percentage of gross product sales by distribution channel:

PERCENTAGE OF TOTAL GROSS PRODUCT SALES
BY DISTRIBUTION CHANNEL

SEVEN MONTHS
ENDED
DECEMBER 31 TWELVE MONTHS ENDED MAY 31
-------------------- ---------------------------
1997 1996 1997 1996 1995
<S> <C> <C> <C> <C> <C>
(1) PolyGram 36.9% 75.2% 46.9% 58.2% 57.6%
(2) Intersound 60.4% - 32.8% - -
(3) Platinum Christian Distribution
(to Christian bookstores) 2.5% 18.1% 9.1% 23.2% 23.2%
(4) Record Clubs/Direct Sales 0.2% 6.7% 11.2% 10.8% 3.0%
(5) Telemarketing - - - 7.8% 16.2%
(6) Internet - - - - -

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During the twelve months ended May 31,1996, 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 the twelve month
periods ended May 31, 1995 and 1996 and the acquisition of Intersound in
January 31, 1997, 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 additional markets. The
Company's unique diversity of distribution channels has also allowed the
Company to begin distributing products for third parties pursuant to
distribution agreements, which the Company's believes will contribute
significantly to offsetting the fixed costs of maintaining its proprietary
distribution system.

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POLYGRAM DISTRIBUTION

In May 1993, the Company entered 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 certain of the Company's records throughout the
United States. PolyGram currently distributes releases on the Company's River
North Records, CGI Records and House of Blues labels. 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. For its services, PolyGram is
entitled to a distribution fee based on sales volume to secular accounts of
15-18% of the net sales for all records distributed under the agreement, less
reserves set aside against returns and credits. For sales to stores in the
Christian bookstore market, the distribution fee is 12% of net sales. Fees owed
by the Company to PolyGram are secured by all Company products in PolyGram's
possession. The distribution agreement is effective until 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 the Company with access to distribution
channels not readily available to other independent recorded music companies.

The Company has historically distributed internationally by means of
licensing arrangements. The first of these arrangements began during the twelve
months ended May 31, 1996 with MCA Records, Ltd. ("MCA"). The Company has
terminated its arrangement with MCA and entered into international licensing
arrangements on a country-by-country basis. Revenues derived from the licensing
of recording masters 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. The Company plans, however, to
distribute its future releases internationally by means of distribution
arrangements on a territory by territory basis. The Company believes that
utilizing such means of international distribution will allow the Company to
exploit its existing international licensing relationships, electronic media and
overseas manufacturing to increase its revenues derived from international
distribution.

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

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INTERNET DISTRIBUTION

In May 1998, the Company announced its partnership with PLATINUM
TECHNOLOGY, INC. (Nasdaq: PLAT) to develop and operate a web site on the
Internet. The web site, which is scheduled for launch in September 1998,
will provide consumers three different ways to purchase music titles from the
Company: (i) by digitally downloading titles from the Company's library of
music titles to personal computers (ii) by standard mail order delivery of
almost 500,000 commercially available music titles, and (iii) by customizing
CDs compiled from any of the music selections in the Company's music catalog.
This new digitally encrypted entertainment service, including online
sampling and easy downloading of music selections, live broadcasts of
artists' works, artist interviews, chat sessions and interactive liner notes,
will take advantage of the search, selectivity and immediate capabilities of
the Internet, enabling consumers to create a unique, individualized
entertainment experience in the comfort of their own home.

PLATINUM TECHNOLOGY will provide significant consulting services
including e-commerce, Web host infrastructure, system management, and design
services along with digital compression, encryption and delivery techniques
needed to support the in-home service. The Company will offer its entire
library of 12,000 master recordings for digital downloading via the Web,
along with new releases from its roster of artists and other commercially
available titles.

DISTRIBUTION FOR THIRD PARTIES

The Company also utilizes its distribution channels to facilitate
distribution for third parties. In November 1997, the Company entered into a
distribution agreement with RUF Records, GmbH, a German record company and
producer of high quality records by Blues artists, pursuant to which the
Company was appointed exclusive distributor for RUF's records throughout the
United States. The initial term of this agreement is effective until November
1, 2000. RUF records are released on the House of Blues label and
distributed through PolyGram. RUF records currently distributed by the
Company pursuant to this distribution agreement include releases by Taj
Mahal, Luther Allison, AJ Croce and Walter Trout.

On April 27, 1998, the Company signed Georgia-based Ichiban Records to a
distribution agreement pursuant to which the Company will be the exclusive
distributor of Ichiban products for all retail stores, direct response sales,
bookstores and record clubs in the United States and Canada. This agreement
will also allow the Company to add hundreds of Ichiban's classic and
contemporary R&B, Blues, Rap, Jazz and Soul recordings to its new web site
currently in development over the Internet. Ichiban's products are
distributed through Intersound Distribution. The agreement is for a two year
term. Current artists on Ichiban's roster include M.C. Breed, Ashford &
Simpson with Maya Angelou, Vernon Garrett, The Fleshtones, Jimmy Dawkins,
Millie Jackson, Francine Reed and others.

The Company also distributes records for Tyscot Records pursuant to a
distribution agreement, effective through May 1999. Tyscot releases include
albums by Gospel artists such as Deitrick Haddon, Rodnie Bryant, Deliverance,
and Phebe Hines. Tyscot products are distributed by the Company through
PolyGram.

LIBRARY

The Company owns or controls the copyrights to over 12,000 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, such as ESSENTIAL BLUES, VOL I AND II and GOSPEL'S
GREATEST HITS, VOL I, II AND III. The addition of the Intersound library has
significantly enhanced the Company's ability to create more compilation and
Themed products from its own catalog.

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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 recordings. 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. For experienced artists, such involvement may be minimal.

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 manufactures its finished music products through third party
arrangements. The Company coordinates all of its manufacturing of finished
music products through its Roswell, Georgia facilities.

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 owns or controls the copyrights to over 12,000
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

10
<PAGE>

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 7.1cents 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 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 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.

11
<PAGE>

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, Classical/Themed Productions and Urban/Dance 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 May 12, 1998, the Company employed 142 employees, of whom 46 were
located in the Company's Downers Grove, Illinois facilities, 87 were located in
the Company's Roswell, Georgia facilities, and 9 were located in Nashville,
Tennessee. Of such employees, 79 were engaged in marketing, sales and related
customer services, 32 were engaged in administration and accounting, 11 were
engaged in legal, royalty and publishing services and 20 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.

SAFE HARBOR PROVISION

This Report 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 Report, the words
"anticipate," "believe," "estimate" and "expect" and similar expressions as
they relate to the Company or its management are intended to identify such
forward-looking statements. A number of important factors could cause the
Company's actual results, performance or achievements for the twelve months
ended December 31, 1998 and beyond to differ materially from those expressed
in such forward-looking statements. Reference is made to the Company's prior
filings with the Securities and Exchange Commission, in particular the "Risk
Factors" section of the Company's Prospectus dated March 12, 1996, for a
discussion of certain of such factors. These factors include, without
limitation, commercial success of the Company's repertoire, charges and costs
related to 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.

ITEM 2. FACILITIES.

The Company is headquartered in Downers Grove, Illinois. It currently
leases its 12,250 square foot office facility, which lease expires April 30,
2003. This facility houses the executive 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,
Scarborough, Ontario and Wellesley, MA under various leases expiring from June
1998 to March 1999. In addition, the Company leases 3,200 square feet of office
space in Nashville, Tennessee, pursuant to a lease expiring October 31, 2000,
that houses the promotional staff of River North Records, the staff of
Intersound Country and the staff of Double J and a 3,300 square foot warehouse,
located in Downers Grove, Illinois, that houses the mail order distribution
operations of the Company.

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

12
<PAGE>

ITEM 3. LEGAL PROCEEDINGS.

During March 1997, the Company and K-tel International, Inc. ("K-tel")
signed a purchase and sale agreement (the "K-tel Agreement") pursuant to
which the Company agreed to acquire K-tel's worldwide music business assets,
except for K-tel's European and former Soviet Union music business, through
the purchase of the stock of K-tel International (USA), Inc. and Dominion
Music, Inc., both wholly-owned subsidiaries of K-tel (the "K-tel
Acquisition"). The Company deposited $1,750,000 in escrow in accordance with
the K-tel Agreement. During September 1997, the Company terminated the K-tel
Agreement alleging that K-tel materially breached the K-tel Agreement. On
September 12, 1997, K-tel filed a Complaint against the Company for
declaratory judgment in the District Court of Hennepin County, Fourth
Judicial District, State of Minnesota, seeking the escrowed funds. K-tel
subsequently filed an Amended Complaint on October 2, 1997, seeking the
escrowed funds as well as unspecified damages for the Company's alleged
breach of the K-tel Agreement, breach of a related confidentiality agreement,
fraud, defamation and promissory estoppel. On October 6, 1997, the Company
removed K-tel's state court action to the United States District Court for
the District of Minnesota, Fourth Division and counterclaimed for declaratory
and other relief on December 10, 1997. The Company is seeking $1,750,000 in
escrowed funds and another $1,750,000 in contractually agreed "reimbursement"
because K-tel has materially breached the K-tel Agreement. In the
alternative, Platinum is seeking rescission of the Purchase Agreement and
return of the escrowed funds because K-tel fraudulently induced it to enter
into the Purchase Agreement. Platinum has moved to dismiss K-tel's fraud,
defamation and promissory estoppel claims. A hearing on this motion occurred
on May 19, 1998, and no decision has been rendered. The parties have
exchanged documents, responded to interrogatories and have begun to take
depositions. Platinum intends to vigorously defend the lawsuit and prosecute
its counterclaims against K-tel. The Company reserved the full escrowed
amount during the seven months ended December 31, 1997.

During November 1997, JCSHO, Inc., a Minnesota corporation, formerly known
as Intersound, Inc. ("JCSHO"), filed a complaint against the Company in the
District Court of Minnesota, Fourth Division. JCSHO alleges breach of contract
by the Company with regard to the convertible subordinated debentures in the
aggregate principal amount of $5,000,000 (the "Convertible Subordinated
Debentures") issued by the Company to JCSHO in connection with the Intersound
Acquisition. JCSHO alleges that the Company is in default on its obligations
under the Convertible Subordinated Debentures due to failure to make certain
payments under the Convertible Subordinated Debentures at a defined default
interest rate. JCSHO is seeking damages in the amount of $5,000,000 and costs,
disbursements and attorney's fees. The Company believes that JCSHO's
allegations are without merit and intends to vigorously defend this litigation.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

(a) An Annual Meeting of Stockholders was held on December 12, 1997.

(b) 1. The Stockholders voted to elect two Class II directors to serve
until the Annual Meeting of Stockholders in 2000, as provided in
the By-Laws of the Company with the following votes:

Michael P. Cullinane
For Withheld Against
--- -------- -------
3,128,507 -- --

Andrew J. Filipowski
For Withheld Against
--- -------- -------
3,128,507 -- --

2. The Stockholders also voted to approve the issuance and sale by
the Company of 22,500 shares of convertible preferred stock
together with warrants to purchase an aggregate of 4,050,000
shares of the Company's Common Stock, par value $0.001 per share.

For Withheld Against
--- -------- -------
3,128,107 -- 500

3. The Stockholders also voted to approve an amendment to the
Platinum Entertainment, Inc. 1995 Directors' Stock Option Plan.

For Withheld Against
--- -------- -------
2,363,801 -- 764,706

13
<PAGE>

4. The Stockholders also voted to adopt the Platinum Entertainment,
Inc. 1997 Employee Stock Purchase Plan.

For Withheld Against
--- -------- -------
3,128,107 -- 500

5. The Stockholders also voted to ratify the appointment by the
Board of Directors of Ernst & Young LLP as the independent
auditors of the Company's financial statements for the fiscal
year ending May 31, 1998.

For Withheld Against
--- -------- -------
3,128,507 -- --

14
<PAGE>

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

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

<TABLE>
<CAPTION>
Price Range of Common Stock
---------------------------
High Low
<S> <C> <C>
Fiscal Year Ended May 31, 1996*:
Fourth Quarter $17.750 $ 11.500
Fiscal Year Ended May 31, 1997:
First Quarter $19.250 $ 13.750
Second Quarter 16.250 8.500
Third Quarter 8.500 6.000
Fourth Quarter 7.000 5.000
Seven Months Ended December 31, 1997**:
Three Months Ended August 31, 1997 $ 7.250 $ 5.375
Three Months Ended November 30, 1997 8.500 4.875
One Month Ended December 31, 1997 6.750 5.000
Fiscal Year Ended December 31, 1998:
First Quarter $ 7.438 $ 5.375
Second Quarter (through May 18, 1998) 13.750 6.750

</TABLE>

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

* Prior to March 12, 1996, there was no established public trading market for
the Common Stock.
** Effective February 1998, the Company changed its fiscal year from May 31 to
December 31.

At May 18, 1998, there were approximately 75 stockholders of record and
5,275,040 shares of Common Stock outstanding.

15
<PAGE>

ITEM 6. SELECTED FINANCIAL DATA.

The following table sets forth selected consolidated statement of
operations and consolidated balance sheet data for the Company as of the
dates and for the periods indicated. Effective December 31, 1997, the
Company changed its fiscal year from May 31 to a calendar year. The selected
consolidated financial data as of and for the seven months ended December 31,
1997, the twelve months ended May 31, 1997, 1996 and 1995, the five months
ended May 31, 1994 and the twelve months ended December 31, 1993 listed below
have been derived from the audited consolidated financial statements of the
Company. The selected consolidated financial data for the unaudited seven
months ended December 31, 1996 was prepared in accordance with generally
accepted accounting principles; in the opinion of management, the financial
statements reflect all adjustments (of a normal and recurring nature) which
are necessary to present fairly the results of operations shown. The
following data should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
consolidated financial statements and related notes included elsewhere herein.

SEVEN MONTHS ENDED
DECEMBER 31 TWELVE MONTHS ENDED MAY 31
---------------------------- --------------------------------------------
1997 1996 1997 1996 1995
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:

Gross revenues $ 35,294 $ 12,878 $ 38,757 $ 20,121 $ 12,782
Returns, allowances and discounts (1) (13,639) (3,147) (13,031) (5,444) (3,633)
---------------------------- --------------------------------------------
Total net revenues (1) 21,655 9,731 25,726 14,677 9,149
Gross profit (1) 4,871 3,506 11,707 4,236 4,204
Merger, restructuring and one-time costs (2) 3,100 6 2,231 - -
Operating loss (1) (11,607) (2,394) (4,638) (3,937) (4,729)
Interest and other financing costs (4,202) (7) (4,918) (570) (157)
Loss from continuing operations (1) (16,446) (2,265) (9,354) (4,401) (4,840)
Loss from discontinued operations - - - (226) (4,684)
Net loss (1) (16,446) (2,265) (9,354) (4,627) (9,524)
Less - Cumulative preferred dividends (3) - - - (602) -
Loss applicable to common shares (1) $ (16,446) $ (2,265) $ (9,354) $ (5,229) $ (9,524)

Basic and diluted loss per common share:
Loss from continuing operations (1) $ (3.14) $ (0.44) $ (1.82) $ (1.71) $ (2.12)
Loss from discontinued operations - - - (0.08) (2.05)
---------------------------- --------------------------------------------
Net loss (1)(4) $ (3.14) $ (0.44) $ (1.82) $ (1.79) $ (4.17)
---------------------------- --------------------------------------------
---------------------------- --------------------------------------------

Weighted average number of common
shares outstanding (4) 5,232,030 5,112,066 5,136,830 2,925,987 2,284,090

FIVE MONTHS TWELVE MONTHS
ENDED ENDED
MAY 31 DECEMBER 31
1994 1993
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Gross revenues $ 3,527 $ 4,038
Returns, allowances and discounts (1) (584) (590)
------------------------
Total net revenues (1) 2,943 3,448
Gross profit (1) 490 576
Merger, restructuring and one-time costs (2) - -
Operating loss (1) (901) (1,766)
Interest and other financing costs (27) (33)
Loss from continuing operations (1) (928) (1,799)
Loss from discontinued operations (755) (1,519)
Net loss (1) (1,683) (3,318)
Less - Cumulative preferred dividends (3) - -
Loss applicable to common shares (1) $ (1,683) $ (3,318)

</TABLE>

MAY 31
DECEMBER 31 ------------------------------------------- DECEMBER 31
BALANCE SHEET DATA: 1997 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 11 $ 53 $ 8,222 $ 87 $ 9 $ 36
Working capital (deficit) (5) 531 (23,673) 12,O55 (9,128) (4,117) (3,349)
Total assets (1) 57,457 62,304 20,544 6,353 5,385 4,656
Long-term obligations (including current portion) 25,000 5,000 - - 1,140 1,243
Redeemable preferred stock - - - 5,423 - -
Total stockholders' equity (net capital deficiency)(1) 12,375 7,866 15,215 (12,320) (3,302) (1,618)
- ----------------------------------------------------------------- ---------------------------------

</TABLE>

(1) During January 1997, the Company purchased substantially all of the
assets of Intersound for consideration of $24,000,000 in cash,
$5,000,000 in convertible subordinated debentures and the assumption of
certain liabilities. Intersound produces, licenses, markets and
distributes recorded music for Urban/Dance, Gospel, Classical/Themed
Productions and other genres. The acquisition has been accounted for by
the purchase method of accounting and the purchase price of
approximately $41,000,000, including assumed liabilities, exceeds the
fair value of the assets acquired by $6,098,000 which represents
goodwill. The purchase value was allocated to the acquired assets based
upon their estimated respective fair market values. The amounts
allocated to music catalog, music publishing rights and goodwill are
being amortized over 25 years using the straight-line method.

The Company determined the purchase price allocation, as disclosed in
the balance sheet at May 31, 1997, based on available information at
that time. However, during the seven months ended December 31, 1997,
the Company ascertained that the purchase value allocated certain
purchased assets exceeded their fair market values by approximately
$1,150,000. In addition, further liabilities of approximately
$2,350,000, which the Company believes relate to returned products that
had been sold prior to the Company's purchase of Intersound, were
identified. Had these matters been identified by the Company at the
time of purchase or shortly thereafter, such valuations would have been
recorded through purchase accounting, resulting in no subsequent income
statement impact. As these matters were not identified at the time of
purchase or shortly thereafter, the Company is required to reflect these
amounts in its results of operations for the seven months ended December
31, 1997, resulting in a nonrecurring charge to current operations of
$3,500,000. This amount is included in the current period returns and
allowances ($2,350,000) and cost of sales and services ($1,150,000).

<PAGE>

(2) As a result of the acquisitions completed by the Company during the
twelve months ended May 31, 1997, the Company incurred significant costs
to merge and restructure its business with the acquired companies. Such
merger and restructuring costs include severance costs, relocation
costs, lease commitment write-offs, warehouse closing costs and other
related costs. Such costs approximated $251,000 and $1,700,000 during
the seven months ended December 31, 1997 and the twelve months ended
May 31, 1997, respectively. The restructuring was substantially
completed at December 31, 1997. Such restructuring resulted in shifts
in the selling and promotion efforts of the Company's Country label and
in-house sales department and a shift in third-party fulfillment of
Platinum Christian Distribution. One-time costs for the twelve months
ended May 31, 1997 include write-offs of artist advances of
approximately $600,000 in areas for which the Company has chosen to
redirect its resources. These costs are classified as merger,
restructuring and one-time costs and are included in the Company's
operating losses.

In addition, during March 1997, the Company and K-tel signed the K-tel
Agreement pursuant to which the K-tel Acquisition was to be completed.
The Company deposited $1,750,000 in escrow in accordance with the K-tel
Agreement. During September 1997, the Company terminated the K-tel
Agreement alleging that K-tel materially breached the K-tel Agreement.
Both the Company and K-tel have filed claim to the escrowed amounts.
The outcome of such claims is uncertain. Accordingly, the Company
reserved the full escrowed amount during the seven months ended December
31, 1997. In addition, approximately $1,100,000 of legal, accounting,
and other incremental costs associated with the K-tel Acquisition were
expensed by the Company during the seven months ended December 31, 1997.
These costs are classified as merger, restructuring and one-time costs
and are included in the Company's operating loss.

(3) Represents accrued dividends on the Company's Series A-1 Redeemable
Non-Convertible Preferred Stock, which dividends were paid concurrent with
the redemption of the stock during March 1996. The Company has never paid
a dividend on its Common Stock.

(4) Basic loss per common share is based upon the net loss applicable to
common shares after preferred dividend requirements and upon the
weighted average of common shares outstanding during the period.
Diluted loss per common share adjusts for the effect of convertible
securities, stock options and warrants only in the periods presented in
which such effect would have been dilutive. The total of such securities
at December 31, 1997 is 14,790,000. Such effect was not dilutive in any
of the periods presented herein.

(5) Includes short-term debt for all periods indicated.

17
<PAGE>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.

The information in this section should be read together with the
consolidated financial statements and notes thereto that are included
elsewhere herein.

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. The Company has produced recorded music products in the
Adult Contemporary, Gospel, Country and Blues music formats, primarily under
its River North Records, CGI Records and House of Blues Music Co. labels.
With its January 1997, acquisition of Intersound, the Company expanded its
artist base and music catalog within existing genres, and added new music
genres to its repertoire, including Urban/Dance and Classical/Themed
Productions.

Effective December 31, 1997, the Company changed its fiscal year from
May 31 to a calendar year. This change in fiscal year makes the Company's
year comparable with other public companies in the industry. This change in
fiscal year also conforms the Company's fiscal periods to the quarterly and
semi-annual periods for which the Company reports its royalties to its
recording artists and publishers as well as the annual term of the
distribution agreement with PolyGram.

As an integral part of the Company's growth strategy, the Company
completed several acquisitions during the twelve months ended May 31, 1997,
acquiring: (i) substantially all of the assets of REX during June 1996; (ii)
substantially all of the assets of Double J during September 1996; (iii) a
50% interest in the HOB Joint Venture during November 1996 and (iv)
substantially all of the assets of Intersound effective January 1997. See
"Significant Matters" below for more details of these transactions.

The Company determined the purchase price allocation for Intersound, as
disclosed in the balance sheet at May 31, 1997, based on available
information at that time. However, during the seven months ended December
31, 1997, the Company ascertained that the purchase value allocated certain
purchased assets exceeded their fair market values by approximately
$1,150,000. In addition, further liabilities of approximately $2,350,000,
which the Company believes relate to returned products that had been sold
prior to the Company's purchase of Intersound, were identified. Had these
matters been identified by the Company at the time of purchase or shortly
thereafter, such valuations would have been recorded through purchase
accounting, resulting in no subsequent income statement impact. As these
matters were not identified at the time of purchase or shortly thereafter,
the Company is required to reflect these amounts in its results of operations
for the seven months ended December 31, 1997, resulting in a nonrecurring
charge to current operations of $3,500,000. This amount is included in the
current period returns and allowances ($2,350,000) and cost of sales and
services ($1,150,000). The Company recorded a portion of these adjustments
through purchase accounting during the three month periods ended August 31
and November 30, 1997. The impact of subsequently recording these and
certain other adjustments through the Company's results of operations during
the month of December 1997 is currently being evaluated by management in
order to determine the effect on the previously reported quarterly results of
operations.

As a result of the acquisitions discussed above, the Company incurred
significant costs to merge and restructure its business with the acquired
companies. Such merger and restructuring costs include severance costs,
relocation costs, lease commitment write-offs, warehouse closing costs and
other related costs. Such costs approximated $251,000 and $1,700,000 during
the seven months ended December 31, 1997 and the twelve months ended May 31,
1997, respectively. The restructuring was substantially completed at
December 31, 1997. Such restructuring resulted in shifts in the selling and
promotion efforts of the Company's Country label and in-house sales
department and a shift in third-party fulfillment of Platinum Christian
Distribution. In addition, one-time costs for the twelve months ended May
31, 1997 include write-offs of artist advances of approximately $600,000 in
areas for which the Company has chosen to redirect its resources. These costs
are classified as merger, restructuring and one-time costs and are included
in the Company's operating losses.

18
<PAGE>

tel materially breached the K-tel Agreement. Both the Company and K-tel have
filed claim to the escrowed amounts. The outcome of such claims is
uncertain. See Item 3.-"Legal Proceedings." Accordingly, the Company
reserved the full escrowed amount during the seven months ended December 31,
1997. In addition, approximately $1,100,000 of legal, accounting, and other
incremental costs associated with the K-tel Acquisition were expensed by the
Company during the seven months ended December 31, 1997. These costs are
classified as merger, restructuring and one-time costs and are included in
the Company's operating loss.

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 returns, SOUNDSCAN data and the return rate of the Company's
third-party distributor, PolyGram. The Company terminated its relationship
with Riverside Book and Bible House, Inc. ("Riverside") for fulfillment of
Platinum Christian Distribution, effective August 1997. The acquisitions
enabled Platinum Christian Distribution fulfillment to be handled through the
recently acquired Intersound internal distribution system and the increased
volume allowed the Company to negotiate Christian Bookstore Market
distribution through its third-party secular market distributor, PolyGram.
As a result, the Company experienced unusually high returns of product
through the Riverside distribution channels as customers were allowed a
limited time to return products before returns were no longer accepted from
previous Riverside sales. In addition, the Company ceased relations with
certain customers who consistently failed to pay on a timely basis, prompting
an unusually high returns experience from these customers. Accordingly, the
Company's returns experience was 30% for the twelve months ended May 31,
1997, compared to 25% and 20% for the seven months ended December 31, 1997
and 1996, respectively, and 27% and 26% for the twelve months ended May 31,
1996 and 1995, respectively. As discussed above, the Company recorded
approximately $2,350,000 relating to returns of product that the Company
believes had been sold by Intersound prior to the Company's purchase.
Accordingly, the Company's returns experience was 35% for the seven months
ended December 31, 1997. It is the Company's policy to inventory all returned
product and resell such product at market value.

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.

The Company primarily distributes internationally by means of licensing
arrangements. The first of these arrangements began during the twelve months
ended May 31, 1996 with MCA. The Company subsequently terminated this
arrangement and has entered international licensing arrangements on a
country-by-country basis. Revenues derived from the licensing of recorded
masters 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.

19
<PAGE>

RESULTS OF OPERATIONS

The following table sets forth, as a percentage of gross revenues, certain
items that are included in the Company's statements of operations for the
periods reflected below. Operating results for any period are not necessarily
indicative of results for any future periods.

SEVEN MONTHS ENDED DECEMBER 31
----------------------------------------
1997 1996
----------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Total gross revenues . . . . $35,294 100.0% $12,878 100.0%

Less: Returns and allowances (11,351) -32.2% (2,326) -18.1%
Less: Discounts . . . . . . . (2,288) -6.5% (821) -6.4%
-------- --------
Total net revenues . . . . . 21,655 61.3% 9,731 75.5%
Cost of sales and services . 16,784 47.6% 6,225 48.3%
-------- --------
Gross profit . . . . . . . . 4,871 13.7% 3,506 27.2%

Other operating expense:
Selling, general and
administrative expenses . . 12,316 34.9% 5,695 44.2%
Merger, restructuring and
one-time costs . . . . . . 3,100 8.8% 6 --
Depreciation and amortization 1,062 3.0% 199 1.5%
-------- --------
Operating loss . . . . . . . (11,607) -33.0% (2,394) -18.5%
Interest income . . . . . . . 49 0.1% 136 1.1%
Interest expense . . . . . . (2,944) -8.3% (7) -0.1%
Other financing costs . . . . (1,258) -3.6% - -
Equity gain (loss) . . . . . (686) -1.9% - -
-------- --------
Loss from continuing
operations . . . . . . . . (16,446) -46.7% (2,265) -17.5%
Discontinued operations:
Loss from operations . . . - - - -
Loss on disposal . . . . . - - - -
-------- --------
Loss from discontinued
operations . . . . . . . . - - - -
-------- --------
Net loss . . . . . . . . . . ($16,446) -46.7% ($2,265) -17.5%
-------- --------
-------- --------

TWELVE MONTHS ENDED MAY 31
----------------------------------------------------------------
1997 1996 1995
----------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Total gross revenues . . . . $38,757 100.0% $20,121 100.0% $12,782 100.0%

Less: Returns and allowances (10,568) -27.3% (4,732) -23.5% (3,126) -24.5%
Less: Discounts . . . . . . . (2,463) -6.4% (712) -3.5% (507) -4.0%
-------- -------- --------
Total net revenues . . . . . 25,726 66.4% 14,677 73.0% 9,149 71.5%
Cost of sales and services . 14,019 36.2% 10,441 51.9% 4,945 38.7%
-------- -------- --------
Gross profit . . . . . . . . 11,707 29.9% 4,236 21.1% 4,204 32.8%

Other operating expense:
Selling, general and
administrative expenses . . 13,141 33.9% 8,017 39.8% 8,800 68.8%
Merger, restructuring and
one-time costs . . . . . . 2,231 5.8% - - - -
Depreciation and amortization 973 2.5% 156 0.8% 133 1.0%
-------- -------- --------
Operating loss . . . . . . . (4,638) -12.0% (3,937) -19.5% (4,729) -37.0%
Interest income . . . . . . . 154 0.4% 106 0.5% 46 0.4%
Interest expense . . . . . . (1,385) -3.6% (570) -2.8% (157) -1.2%
Other financing costs . . . . (3,533) -9.1% - - - -
Equity gain (loss) . . . . . 48 0.1% - - - -
-------- -------- --------
Loss from continuing
operations . . . . . . . . (9,354) -24.1% (4,401) -21.8% (4,840) -37.8%
Discontinued operations:
Loss from operations . . . - - - - (2,073) -16.2%
Loss on disposal . . . . . - - (226) -1.1% (2,611) -20.4%
-------- -------- --------
Loss from discontinued
operations . . . . . . . . - - (226) -1.1% (4,684) -36.6%
-------- -------- --------
Net loss . . . . . . . . . . ($9,354) -24.1% ($4,627) -22.9% ($9,524) -74.4%
-------- -------- --------
-------- -------- --------

</TABLE>

References made in the following discussion 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; (iv) Blues format - Blues activity under the House of Blues
label and (v) all activity from the Intersound Acquisition is referenced
"Intersound" so that the effects of the Intersound Acquisition can more
clearly be understood. Intersound activity includes music in the
Classical/Themed Productions, Urban/Dance and Country genres. See "Overview."

20
<PAGE>

SEVEN MONTHS ENDED DECEMBER 31, 1997 COMPARED TO SEVEN MONTHS ENDED DECEMBER 31,
1996

Gross revenues increased $22,416,000 or 174.1% to $35,294,000 for the
seven months ended December 31, 1997 compared to the seven months ended
December 31, 1996; the seven months ended December 31, 1996 did not include
the activities of Intersound, which represents $21,060,000 or 94.0% of this
increase. Gross revenues generated from various genres as a percentage of
total gross revenues is as follows:

<TABLE>
<CAPTION>
Seven Months Ended
December 31
-------------------
1997 1996
<S> <C> <C>
Gospel 17.8% 47.0%
Country 1.0% 36.1%
Adult Contemporary 13.3% 10.2%
Blues 8.2% 6.7%
Intersound 59.7% --

</TABLE>

Gross revenue generated from Gospel increased slightly, while gross
revenue generated from Adult Contemporary, Blues and Intersound increased
approximately $3,400,000, $2,000,000 and $21,100,000, respectively,
offsetting an approximate $4,300,000 decline in Country revenues. The
changes in percentages are due principally to the activities of Intersound as
noted above. Significant contributions to revenues for the current period
include William Becton's HEART OF A LOVE SONG (Gospel), John Denver's A
CELEBRATION OF LIFE and the continued success of Peter Cetera's YOU'RE THE
INSPIRATION (A COLLECTION) (Adult Contemporary), PAINT IT, BLUE - a tribute
to the Rolling Stones by various Blues artists (Blues) and BOOTLEG BOOTY, a
compilation of various Urban artists, George Clinton's LIVE . . . AND
KICKIN', Eddie Rabbitt's BEATIN' THE ODDS, and numerous Christmas releases
(Intersound). These increases were offset by decreased activity in Country
releases whose sales are largely determined by the success of obtaining
country radio airplay. Radio-driven country releases during the seven months
ended December 31, 1996 included The Beach Boys' STARS AND STRIPES, VOL. I
and Crystal Bernard's THE GIRL NEXT DOOR. The Company has shifted its
Country music strategy to principally sign artists with an established fan
base, thereby significantly reducing radio promotion expenses.

Returns and allowances increased $9,025,000 or 388.0% to $11,351,000 for
the seven months ended December 31, 1997 compared to the seven months ended
December 31, 1996; the seven months ended December 31, 1996 did not include
the activities of Intersound, which represents $7,844,000 or 86.9% of this
increase. Returns and allowances as a percentage of gross product sales, less
discounts, increased to 35.3% for the seven months ended December 31, 1997
from 20.1% for the seven months ended December 31, 1996. As discussed in the
"Overview," the Company ascertained additional product returns of $2,350,000
which the Company believes relate to Intersound prior to the Intersound
Acquisition. As these returns were not ascertained at the time of purchase
or shortly thereafter, the Company is required to reflect this amount in its
results of operations. Had these returns been identified by the Company at
the time of purchase or shortly thereafter, such amount would have been
recorded through purchase accounting, resulting in no subsequent income
statement impact. Excluding these returns, returns and allowances as a
percentage of gross product sales, less discounts, for the seven months ended
December 31, 1997 are 25.6%. Management attributes this current period
increase in returns to the effects of the acquisitions completed during the
twelve months ended May 31, 1997 and the termination of relationships with
certain slow-paying customers as discussed above in "Overview."

Discounts increased $1,467,000 or 178.7% to $2,288,000 for the seven
months ended December 31, 1997 compared to the seven months ended December
31, 1996; the seven months ended December 31, 1996 did not include the
activities of Intersound, which represents $1,181,000 or 80.5% of this
increase.

21
<PAGE>

Discounts as a percentage of gross product sales remained unchanged at 6.6% for
both the seven months ended December 31, 1997 and 1996.

Cost of sales and services increased $10,559,000 or 169.6% to
$16,784,000 for the seven months ended December 31, 1997 compared to the
seven months ended December 31, 1996; the seven months ended December 31,
1996 did not include the activities of Intersound, which represents
$7,124,000 or 67.5% of this increase. Cost of sales and services as a
percentage of gross revenues decreased to 47.6% for the seven months ended
December 31, 1997 from 48.3% for the seven months ended December 31, 1996. As
discussed in the "Overview," the Company ascertained that the purchase value
allocated certain assets purchased from Intersound exceeded their fair market
values, as disclosed in balance sheet at May 31, 1997. The Company
specifically ascertained certain unrecoupable artist advances ($750,000) and
obsolete inventory ($400,000), which, when recorded, affects cost of sales
and services. As these write-downs were not ascertained at the time of
purchase or shortly thereafter, the Company is required to reflect these
amounts in its results of operations. Had these write-downs been ascertained
by the Company at the time of purchase or shortly thereafter, such amounts
would have been recorded through purchase accounting, resulting in no
subsequent income statement impact. Excluding these write-downs, cost of
sales and services as a percentage of gross revenues for the seven months
ended December 31, 1997 is 44.3%. The decreased current period costs are
primarily a result of the lower cost of product sales associated with
direct-to-retail activity, which is generally subject to lower royalty costs
and does not incur a third-party distribution fee. In addition, the Company
is experiencing manufacturing cost savings due to volume discounts as a
result of the acquisitions completed during the twelve months ended May 31,
1997.

Gross profit increased $1,365,000 or 38.9% to $4,871,000 for the seven
months ended December 31, 1997 compared to the seven months ended December
31, 1996; the seven months ended December 31, 1996 did not include the
activities of Intersound, which represents the majority of this increase. As
discussed in the "Overview" above, gross profit includes $3,500,000 of costs
and expenses that related to Intersound prior to the Company's purchase. Had
these matters been ascertained by the Company at the time of purchase or
shortly thereafter, such adjustments would have been recorded through
purchase accounting, resulting in no subsequent income statement impact. As
these matters were not ascertained at the time of purchase or shortly
thereafter, the Company is required to reflect these amounts in its results
of operations. Excluding these adjustments, gross profit increased
$4,865,000 or 138.8%. The current period increase is attributable to the
Intersound activity due to lower associated royalty costs and the absence of
third-party distribution fees, offset by increased sales through distributed
labels such as House of Blues, which yields a lower gross margin, and the
increased returns and allowances as discussed above. As a percentage of gross
revenues, gross profit decreased to 23.7% for the seven months ended December
31, 1997 from 27.2% for the seven months ended December 31, 1996.

Selling, general and administrative expenses increased $6,352,000 or
111.5% to $12,047,000 for the seven months ended December 31, 1997 compared
to the seven months ended December 31, 1996; the seven months ended December
31, 1996 did not include the activities of Intersound, which represents
$5,211,000 or 82.0% of this increase. Selling, general and administrative
expenses as a percentage of gross revenues decreased to 34.1% for the seven
months ended December 31, 1997 from 44.2% for the seven months ended December
31, 1996 primarily due to an increased revenue base.

See "Overview" above for details of nonrecurring merger, restructuring
and one-time costs of $3,100,000.

Depreciation and amortization increased to $1,200,000 for the seven
months ended December 31, 1997 from $199,000 for the seven months ended
December 31, 1996. The increase relates primarily to amortization expense
resulting from music catalog, music publishing rights and goodwill recorded
from the acquisitions completed during the twelve months ended May 31, 1997.

As a result of the factors described above, an operating loss of
$11,607,000 was experienced in the seven months ended December 31, 1997
compared to an operating loss of $2,394,000 in the seven

22
<PAGE>

months ended December 31, 1996. As discussed in the "Overview" above,
operating loss includes $3,500,000 of costs and expenses that related to
Intersound prior to the Company's purchase. Had these matters been
ascertained by the Company at the time of purchase or shortly thereafter,
such adjustments would have been recorded through purchase accounting,
resulting in no subsequent income statement impact. As these matters were
not ascertained at the time of purchase or shortly thereafter, the Company is
required to reflect these amounts in its results of operations. Excluding
these adjustments, the Company experienced an operating loss of $8,107,000
during the current period. $3,100,000 of this current period increase is due
to nonrecurring merger, restructuring and one-time costs as discussed above.

No tax expense or benefit had been recorded through December 31, 1997
due to the Company's net operating loss carryforward and related valuation
allowance, as required under generally accepted accounting principles.
Pursuant to Section 382 of the Internal Revenue Code of 1986, as amended, the
Company's net operating loss carryforward of approximately $33,158,000 at May
31, 1997 (the Company has not yet obtained permission to change its fiscal
year to December 31 for tax purposes), expiring in years 2007 through 2012,
is subject to annual limitations due to a change in ownership as a result of
the IPO in March 1996. Accordingly, approximately $12,349,000 of the net
operating loss carryforward is subject to an annual limitation of
approximately $2,200,000.

Interest expense for the seven months ended December 31, 1997 totaled
$2,944,000 compared to $7,000 for the seven months ended December 31, 1996.
See "Capital Resources" below for details of the Company's current debt
structure.

Other financing costs of $1,258,000 were incurred during the seven
months ended December 31, 1997 due to the funding of the Intersound
Acquisition. See "Capital Resources" below for details of the Company's
current debt structure.

The net loss for the seven months ended December 31, 1997 totaled
$16,446,000 compared to $2,265,000 for the seven months ended December 31,
1996. As discussed in the "Overview" above, net loss includes $3,500,000 of
costs and expenses that related to Intersound prior to the Company's
purchase. Had these matters been ascertained by the Company at the time of
purchase or shortly thereafter, such adjustments would have been recorded
through purchase accounting, resulting in no subsequent income statement
impact. As these matters were not ascertained at the time of purchase or
shortly thereafter, the Company is required to reflect these amounts in its
results of operations. Excluding these adjustments, the Company experienced
a net loss of $12,946,000 during the current period. The current period
increase relates primarily to financing, merger, restructuring and one-time
costs of $4,359,000 and interest expense of $2,944,000 related to the
Intersound Acquisition, as well as a $1,001,000 increase in depreciation and
amortization related to the acquisitions completed during the twelve months
ended May 31, 1997.

23
<PAGE>

TWELVE MONTHS ENDED MAY 31, 1997 COMPARED TO TWELVE MONTHS ENDED MAY 31, 1996

Gross revenues increased $18,636,000 or 92.6% to $38,757,000 for the twelve
months ended May 31, 1997 compared to the twelve months ended May 31, 1996;
$12,671,000 or 68.0% of this increase related to the activities of Intersound
since January 1, 1997. Gross revenues generated from various genres as a
percentage of total gross revenues is as follows:

Twelve Months Ended
May 31
----------------------
1997 1996
<S> <C> <C>
Gospel 36.3% 66.0%
Country 13.7% 9.4%
Adult Contemporary 7.9% 19.3%
Blues 9.4% 5.3%
Intersound 32.7% --

</TABLE>

Gross revenues generated from Gospel, Country, Blues and Intersound
activity increased for the twelve months ended May 31, 1997 compared to the
twelve months ended May 31, 1996 by approximately $800,000, $3,400,000,
$2,600,000 and $12,700,000, respectively, offset by a decrease in Adult
Contemporary revenues of approximately $800,000. The changes in percentages are
due principally to the activities of Intersound since January 1, 1997.
Significant contributions to revenues for the twelve months ended May 31, 1997
include National Baptist Convention's LET'S GO TO CHURCH (Gospel), The Beach
Boys' STARS AND STRIPES, VOLUME I (Country), The Blues Brothers' LIVE FROM
CHICAGO'S HOUSE OF BLUES and the current year release of seven Blues
compilations compared to two during the prior twelve months, (Blues) and BOOTY
MIX 2: THE NEXT BOUNCE, Trapp's STOP THE GUNFIGHT, ROMANCE & ROSES and The
Taliesin Orchestra's ORINOCO FLOW: THE MUSIC OF ENYA (Intersound). These
increases were offset by decreased activity in Adult Contemporary due to the
first quarter release of Peter Cetera's ONE CLEAR VOICE in the twelve months
ended May 31, 1996 compared to the fourth quarter release of his A COLLECTION
during the twelve months ended May 31, 1997. In addition, revenues increased
despite the fact telemarketing activities were discontinued by the Company
during the twelve months ended May 31, 1996. Such revenues were approximately
$1,400,000 for that period.

Returns and allowances increased $5,836,000 or 123.3% to $10,568,000 for
the twelve months ended May 31, 1997 compared to the twelve months ended May 31,
1996; $3,173,000 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, increased to 30.2% for the twelve months ended May 31, 1997 from
26.9% for the twelve months ended May 31, 1996. Management attributes the
increase in returns for the twelve months ended May 31, 1997 to the effects of
the acquisitions completed during that period as discussed above.

Discounts increased $1,751,000 or 245.9% to $2,463,000 for the twelve
months ended May 31, 1997 compared to the twelve months ended May 31, 1996;
$381,000 or 21.8% of this increase related to the activities of Intersound since
January 1, 1997. Discounts as a percentage of gross product sales increased to
6.6% for the twelve months ended May 31, 1997 from 3.9% for the twelve months
ended May 31, 1996. The increase relates to the Company's more aggressive
utilization of discount plans with retailers and the increase in new releases
volume for which it is industry practice to extend discounts for new release
orders, compared to reorders of previously released albums. Also, additional
discounts were extended to the member churches which purchased the National
Baptist Convention's LET'S GO TO CHURCH release directly from the Company. The
additional discounts allowed were more than offset by third-party distribution
fee savings.

24
<PAGE>

Cost of sales and services increased $3,578,000 or 34.3% to $14,019,000 for
the twelve months ended May 31, 1997 compared to the twelve months ended May 31,
1996; $2,733,000 or 76.4% of this increase related to the activities of
Intersound since January 1, 1997. Cost of sales and services as a percentage of
gross revenues decreased to 36.2% for the twelve months ended May 31, 1997 from
51.9% for the twelve months ended May 31, 1996. The Company has been
experiencing increased cost of product sales primarily attributable to increased
royalty costs associated with albums featuring established artists in non-Gospel
formats and the reduction in telemarketing sales has negatively impacted margins
due to the lower cost of product sales attributable to telemarketing sales
compared with other distribution channels. However, these increased costs have
been offset by the lower cost of product sales associated with Intersound
activity, which is generally subject to lower royalty costs and does not incur a
third-party distribution fee. In addition, significant costs of projects
released in the twelve months ended May 31, 1997, such as albums by The Beach
Boys and Crystal Bernard, were incurred in the twelve months ended May 31, 1996.
The projects in production during the twelve months ended May 31, 1997 are less
costly relative to the projects in production during the prior year.

Gross profit increased $7,471,000 or 176.4% to $11,707,000 for the twelve
months ended May 31, 1997 compared to the twelve months ended May 31, 1996;
$6,385,000 or 85.5% of this increase related to the activities of Intersound
since January 1, 1997. As a percentage of gross revenues, gross profit
increased to 29.9% for the twelve months ended May 31, 1997 from 21.1% for the
twelve months ended May 31, 1996. The increase is attributable both to the
Intersound activity since January 1, 1997 which experiences lower associated
royalty costs and the lack of a third-party distribution fee and that artist
projects during the twelve months ended May 31, 1997 required less allowances
for unrecoupability than during the twelve months ended May 31, 1996.

Selling, general and administrative expenses increased $5,124,000 or 63.9%
to $13,141,000 for the twelve months ended May 31, 1997 compared to the twelve
months ended May 31, 1996; $3,039,000 or 59.3% of this increase related to the
activities of Intersound since January 1, 1997. Selling general and
administrative expenses as a percentage of gross revenues decreased to 33.9% for
the twelve months ended May 31, 1997 from 39.8% for the twelve months ended May
31, 1996 primarily due to an increased revenue base.

See "Overview" above for details of nonrecurring merger, restructuring and
one-time costs of $2,231,000.

Depreciation and amortization increased to $973,000 for the twelve months
ended May 31, 1997 from $156,000 for the twelve months ended May 31, 1996. The
increase relates primarily to amortization expense resulting from music catalog,
music publishing rights and goodwill recorded from the acquisitions completed
during the twelve months ended May 31, 1997.

As a result of the factors described above, an operating loss of $4,638,000
was experienced in the twelve months ended May 31, 1997 compared to an operating
loss of $3,937,000 in the twelve months ended May 31, 1996.

No tax expense or benefit had been recorded through May 31, 1997 due to the
Company's net operating loss carryforward and related valuation allowance, as
required under generally accepted accounting principles. Pursuant to Section
382 of the Internal Revenue Code of 1986, as amended, the Company's net
operating loss carryforward of approximately $22,601,000 at May 31, 1997,
expiring in years 2007 through 2012, is subject to annual limitations due to a
change in ownership as a result of the IPO in March 1996. Accordingly,
approximately $12,349,000 of the net operating loss carryforward is subject to
an annual limitation of approximately $2,200,000.

25
<PAGE>

Interest expense for the twelve months ended May 31, 1997 totaled
$1,385,000 compared to $570,000 for the twelve months ended May 31, 1996. See
"Capital Resources" below for details of the Company's current debt structures.

Other financing costs of $3,533,000 were incurred during the twelve months
ended May 31, 1997 due to the funding of the Intersound Acquisition. These
costs include amortization of debt discount relating to the warrants issued Bank
of Montreal ("BMO") and BMO's financing fees charged the Company during the
twelve months ended May 31, 1997.

The net loss from continuing operations for the twelve months ended May 31,
1997 totaled $9,354,000 compared to $4,401,000 for the twelve months ended May
31, 1996. The increase relates primarily to financing, merger, restructuring
and one-time costs of $5,764,000 and interest expense of $1,385,000 related to
the Intersound Acquisition, as well as a $761,000 increase in depreciation and
amortization related to the acquisitions completed during the twelve months
ended May 31, 1997.

TWELVE MONTHS ENDED MAY 31, 1996 COMPARED TO TWELVE MONTHS ENDED MAY 31, 1995

Gross revenues increased $7,339,000 or 57.4% to $20,121,000 for the twelve
months ended May 31, 1996 compared to $12,782,000 for the prior twelve months,
while net revenues increased $5,528,000 or 60.4%. Gross revenues generated in
the Adult Contemporary, Gospel and Country markets increased by $3,583,000,
$2,128,000 and $885,000, respectively, for the twelve months ended May 31, 1996
compared to the prior twelve months. 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 and Witness' A SONG IN THE
NIGHT, 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 and Steve Azar's HEARTBREAK TOWN. In
addition, the Company released its initial three albums, ESSENTIAL BLUES, VOLUME
I AND II, and ESSENTIAL GOSPEL, under the House of Blues label during the twelve
months ended May 31, 1996. Licensing, publishing and other revenues increased
$1,592,000 to $1,799,000 for the twelve months ended May 31, 1996 compared to
$207,000 for the prior twelve months. 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 the twelve months ended May
31, 1996, management significantly reduced the Company's telemarketing efforts
due to the increased costs of television advertising. The increase in other
product revenues more than offsets decreased telemarketing sales, which declined
$527,000 or 27.0% to $1,422,000 for the twelve months ended May 31, 1996
compared to $1,949,000 for the prior twelve months.

Returns and allowances increased $1,606,000 or 51.4% to $4,732,000 for the
twelve months ended May 31, 1996 compared to $3,126,000 for the twelve months
ended May 31, 1995. Returns and allowances as a percentage of gross product
sales, less discounts, remained relatively unchanged at 26.9% for the twelve
months ended May 31, 1996 from 25.9% for the twelve months ended May 31, 1995.

Discounts increased $205,000 or 40.4% to $712,000 for the twelve months
ended May 31, 1996 compared to $507,000 for the twelve months ended May 31,
1995. Discounts as a percentage of gross product sales remained relatively
unchanged at 3.9% for the twelve months ended May 31, 1996 from 4.0% for the
twelve months ended May 31, 1995.

Cost of sales and services increased $5,496,000 or 111.1% to $10,441,000
for the twelve months ended May 31, 1996 compared to $4,945,000 for the twelve
months ended May 31, 1995, primarily as a consequence of increased product
sales. Cost of sales and services as a percentage of gross revenues increased
to 51.9% for the twelve months ended May 31, 1996 from 38.7% in the twelve
months ended May 31, 1995. This increase is primarily attributable to increased
royalty costs associated with albums released during the twelve months ended May
31, 1996 featuring established artists in non-Gospel formats. Further, the
reduction in telemarketing sales negatively impacted this percentage due to the
lower cost of

26
<PAGE>

product sales attributable to telemarketing sales compared with other
distribution channels. The increase also 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 include the royalties paid by the Company to
artists in connection with its first international sales through MCA which
occurred during the twelve months ended May 31, 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 retail sales. When
presented as a percentage of licensing revenues received by the Company,
however, royalties were equal to approximately 50% of such revenues.

Gross profit increased $32,000 or 0.8% to $4,236,000 for the twelve months
ended May 31, 1996 compared to $4,204,000 for the twelve months ended May 31,
1995. As a percentage of gross revenues, gross profit decreased to 21.1% for
the twelve months ended May 31, 1996 compared to 32.8% for the twelve months
ended May 31, 1995. 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 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 the twelve months ended May 31, 1996
gross profit as product sales on these projects will occur in future periods.

Selling, general and administrative expenses decreased $783,000 or 8.9% to
$8,017,000 for the twelve months ended May 31, 1996 compared to $8,800,000 for
the twelve months ended May 31, 1995. Selling, general and administrative
expenses as a percentage of gross revenues decreased to 39.8% for the twelve
months ended May 31, 1996 compared to 68.8% for the twelve months ended May 31,
1995. 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
fiscal quarter of the twelve months ended May 31, 1996.

Depreciation and amortization increased $23,000 to $156,000 for the twelve
months ended May 31, 1996 from $133,000 for the twelve months ended May 31,
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 the twelve months ended May 31, 1996 from
$4,729,000 for the twelve months ended May 31, 1995.

No tax benefit had been recorded to date through May 31, 1996 due to the
Company'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, 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 IPO.
Consequently, approximately $3,700,000 of the loss carryforward at May 31, 1996
will be available to offset the twelve months ended May 31, 1997 taxable income.

Interest expense increased $413,000 to $570,000 for the twelve months ended
May 31, 1996 compared to $157,000 for the twelve months ended May 31, 1995.
This increase is due to increased bank and related party financing used by the
Company to fund operations in the twelve months ended May 31, 1996 compared to
the twelve months ended May 31, 1995. In the twelve months ended May 31, 1996,
all outstanding debt was retired with the net proceeds received from the IPO.
Accordingly, no interest expense was incurred following the closing of the IPO.

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Net loss decreased $4,897,000 to $4,627,000 for the twelve months ended May
31, 1996 from $9,524,000 for the twelve months ended May 31, 1995. The net loss
for the twelve months ended May 31, 1995 included $4,684,000 related to the
discontinuance of the Company's River North recording studio ("the Studio").
During the twelve months ended May 31, 1995, the Company decided to discontinue
this business and disposed of the Studio operations in conjunction with the
Company's IPO during March 1996. During the twelve months ended May 31, 1996,
the Company 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 the
twelve months ended May 31, 1996, are $302,000 for management, administrative
services and interest expense charged by the Company to the Studio. The reduced
net loss for the twelve months ended May 31, 1996 also reflects the success of
the Company's recent releases, the Company's first international sales through
MCA during the twelve months ended May 31, 1996 and the effect of management's
efforts to reduce expense, which included the implementation of cost controls as
discussed above.

RECENTLY ISSUED ACCOUNTING STANDARDS

Statement of Financial Accounting Standards ("SFAS") No. 130, REPORTING
COMPREHENSIVE INCOME, establishes standards for reporting and display of
comprehensive income (i.e., foreign currency translation gains/losses and
unrealized gains/losses on securities) and its components in a full set of
general-purpose financial statements. This Statement requires that an
enterprise (a) classify items of other comprehensive income by their nature
in a financial statement and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of a statement of financial position. This
Statement is effective for the Company's fiscal year ending December 31,
1998. The impact of SFAS 130 will not be material to the Company's financial
disclosures.

SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION, establishes standards for the way that public business enterprises
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. Operating
segments are components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance. This Statement is effective for the Company's fiscal year ending
December 31, 1998. The impact of SFAS 131 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 when such products are shipped to retailers. The Company has
historically experienced a decline in revenues and operating income during
December, January and February due to the fact that retailers purchase
products from the Company prior to December 1 in anticipation of holiday
sales. As a result, sales are traditionally lower during December and the
post holiday period. The acquisition of Intersound mitigates to some extent
the seasonality of this period due to its history of new releases during
January and February.

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PUBLIC OFFERING

During March 1996, the Company sold 2,740,000 shares of Common Stock to the
public at an initial offering price of $13.00 per share. 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; (ii) retire outstanding borrowings under
the Company's line of credit; (iii) retire an outstanding bank term loan; (iv)
redeem a portion of the Company's Series A-1 Non-Convertible Preferred Stock,
including settlement of unaccrued dividends, for cash (with the remaining
redemption settled with shares of Common Stock) and (v) pay costs related to
the IPO. The net proceeds of the IPO were also used in connection with the HOB
Joint Venture and the acquisitions of REX and Double J. See "Significant
Matters."

SIGNIFICANT MATTERS

During June 1996, the Company acquired substantially all of the assets of
REX. REX produces, licenses and markets recorded music, primarily in the Gospel
genre. 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, music publishing rights and artist contracts. The value
allocated to music publishing rights and artist contracts totaled $440,000 and
is being amortized over 15 years using the straight-line method.

During September, 1996, the Company acquired substantially all of the
assets of Double J. 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 $952,000 approximates the fair value of the assets acquired.
The purchase value was primarily allocated to music publishing rights and is
being amortized over 25 years using the straight-line method.

During November 1996, the Company and House of Blues Records, Inc. ("HOB"),
formed the HOB Joint Venture. 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 in the cash amount of approximately $3,100,000, 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.

During January 1997, the Company purchased substantially all of the assets
of Intersound for consideration of $24,000,000 in cash, $5,000,000 in
convertible subordinated debentures and the assumption of certain liabilities.
Intersound produces, licenses, markets and distributes recorded music for
Urban/Dance, Gospel, Classical/Themed Productions and other genres. The
Acquisition has been accounted for by the purchase method of accounting and the
purchase price of approximately $41,000,000 including assumed liabilities,
exceeds the fair value of the assets acquired by $6,098,000, which represents
goodwill. The purchase value was allocated to the acquired assets based upon
their estimated respective fair market values. The amounts allocated to music
catalog, music publishing rights and goodwill are being amortized over 25 years
using the straight-line method.

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purchase accounting, resulting in no subsequent income statement impact. As
these matters were not identified at the time of purchase or shortly
thereafter, the Company is required to reflect these amounts in its results
of operations for the seven months ended December 31, 1997, resulting in a
nonrecurring charge to current operations of $3,500,000. This amount is
included in the current period returns and allowances ($2,350,000) and cost
of sales and services ($1,150,000).

During March 1997, the Company and K-tel signed the K-tel Agreement
pursuant to which the K-tel Acquisition was to be completed. The Company
deposited $1,750,000 in escrow in accordance with the K-tel Agreement. During
September 1997, the Company terminated the K-tel Agreement alleging that K-tel
materially breached the K-tel Agreement. Both the Company and K-tel have filed
claim to the escrowed amounts. The outcome of such claims is uncertain. See
Item 3.-"Legal Proceedings." Accordingly, the Company reserved the full
escrowed amount during the seven months ended December 31, 1997. In addition,
approximately $1,100,000 of legal, accounting, and other incremental costs
associated with the K-tel Acquisition were expensed by the Company during the
seven months ended December 31, 1997. These costs are classified as merger,
restructuring and one-time costs and are included in the Company's operating
loss.

During December 1997, the Company issued preferred equity securities with
warrants for gross proceeds of $22,500,000 to an investor group consisting of
MAC Music LLC, SK-Palladin Partners, LP and Platinum Venture Partners II, LP.
MAC Music LLC is a joint venture between Alpine Equity Partners, L.P. and
Maroley Media Group LLC. Maroley is a private equity firm , led by Robert
Morgado, focusing on global media and entertainment investments. Morgado is the
former Chairman and Chief Executive Officer of the Warner Music Group.
SK-Palladin Partners, LP is a partnership controlled by Sidney Kimmel, Chairman
and CEO of Jones Apparel Group, and Mark J. Schwartz, President and CEO of
Palladin Capital, Inc. Platinum Venture Partners II, L.P. is a partnership
including several of Platinum Entertainment's directors and officers. See
"Capital Resources."

LIQUIDITY

The Company's cash balances were $11,000 and $53,000 at December 31 and May
31, 1997, respectively. Net cash used in operating activities was $6,335,000
for the seven months ended December 31, 1997. The uses reflect net cash used to
fund trade receivables, inventories and artist advances, attributable to
releases by such artists as John Denver, Peter Cetera and William Becton, and
numerous scheduled future releases by such artists as Ronna, Jim Belushi and
Roger Daltrey. The net cash provided by royalties payable arose primarily 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 18 to 24 months to allow for product returns activity as
royalties are not owed on returned product. In addition, the Company fully
reserved the escrowed monies per the K-tel Agreement. See "Significant
Matters."

Net cash provided by financing activities for the seven months ended
December 31, 1997 was $6,409,000. Such activities include the refinancing of
the Company's line of credit and short-term loan with BMO with the net proceeds
from the sale of preferred stock with warrants and a new line of credit and
three year term loan with BMO. See "Capital Resources." In addition, the
Company sold shares of its Common Stock to a director of the Company for
proceeds of $500,000.

Investing activities for the seven months ended December 31, 1997 totaled
$116,000 relating primarily to additions of office equipment and computers and
leasehold improvements

Net cash used in operating activities was $10,573,000 for the twelve months
ended May 31, 1997. The uses reflect net cash used to fund trade receivables of
$2,753,000, inventories of $1,447,000, artist advances of $2,149,000, trade
payables of $431,000 and accrued liabilities and other of $591,000, attributable
to releases by such artists as The Beach Boys, Crystal Bernard, Peter Cetera and
National Baptist Convention and scheduled future releases including numerous
Gospel albums, including William Becton and Vickie Winans. Net cash provided by
notes receivable of $1,148,000 results from an

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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 primarily from the twelve months ended May 31, 1997
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 18
to 24 months to allow for product returns activity as royalties are not owed on
returned product.

Net cash used in investing activities for the twelve months ended May 31,
1997 was $29,146,000. Such activities include $3,063,000 relating to the
Company's investment in the HOB Joint Venture. The Company paid approximately
$24,000,000 for the Intersound Acquisition, funded with outside financing which
is further described below. Approximately $100,000 was paid in connection with
the Company's purchase of Double J, with the remainder of the purchase price
paid in shares of the Company's common stock. In addition, the Company acquired
substantially all of the assets of REX for $480,000 during June 1996. The
purchase price approximated the indebtedness of REX to the Company and cash
payments relating to this purchase during the current period were not
significant. During the fourth fiscal quarter, the Company paid $1,750,000 to
an escrow account related to the purchase of K-tel. See "Significant Matters"
above. Purchases of equipment and leasehold improvements of $307,000 relate
primarily to office equipment, computers and software.

Net cash provided by financing activities for the twelve months ended May
31, 1997 was $31,550,000. Such activities include $25,000,000 in short-term
borrowings from BMO for the Intersound Acquisition; such Acquisition was also
financed with $5,000,000 in convertible debentures and approximately $1,500,000
in borrowings under the revolving line of credit with BMO. The Company also
borrowed approximately $1,400,000 and $7,000,000 under the revolving line of
credit to fund financing costs to BMO in connection with the Acquisition and
Company operations, respectively.

Net cash used in operating activities was $8,755,000 for continuing
operations and $1,011,000 for discontinued operations for the twelve months
ended May 31, 1996. The uses reflect the significant increases in volume for
continuing operations during the period, including net cash used to fund trade
receivables of $1,927,000 and artist advances of $4,466,000, 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 the twelve
months ended May 31, 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.

Financing activities to fund the Company's operations for the twelve months
ended May 31, 1996 were funded with the net proceeds from the IPO of $32,127,000
(before $1,170,000 in costs related to the IPO), $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 IPO. 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 the Company's Series A-1 Non-Convertible Preferred Stock (see "Public
Offering" above).

Investing activities for the twelve months ended May 31, 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 A&R
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 the
artists' royalties, to the extent possible, from future album sales. Artist
advances are capitalized when the

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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.

As a result of the seasonal nature of the business, an advance made in
connection with the recently announced distribution agreement with Ichiban
Records, scheduled term payments on the Company's bank debt, the funding of
future releases and the acquisition of additional catalogs, the Company
expects to fully utilize its available line of credit by the end of the second
quarter of 1998. While management believes that available cash will be
sufficient to meet the Company's capital requirements, there can be no
assurances. Historically, the Company has funded its operations and other
activities from a variety of capital sources. Failure to obtain capital on
terms favorable to the Company, or at all, could have a material adverse
effect on the Company's business, results of operations and financial
condition. See "Capital Resources."

CAPITAL RESOURCES

Pursuant to an Investment Agreement dated October 12, 1997, as amended,
on December 12, 1997 the Company issued and sold to certain parties (the
"Purchasers"), for aggregate gross consideration of $20,000,000, 20,000
shares of Series B Convertible Preferred Stock ("Series B Preferred Stock")
and warrants to purchase 3,600,000 shares of Common Stock ("Purchaser
Warrants"). The Company also issued and sold to Platinum Venture Partners II
LP, for aggregate gross consideration of $2,500,000, 2,500 shares of Series
C Convertible Preferred Stock ("Series C Preferred Stock") and warrants to
purchase 450,000 shares of Common Stock (the "Affiliate Warrants"). The
Series B Preferred Stock and the Series C Preferred Stock are collectively
referred to as the "Preferred Stock." The values of the Series B and Series C
Preferred Stocks are approximately $17,938,000 and $2,242,000, respectively.
The values of the Purchaser and Affiliate Warrants are $2,062,000 and
$258,000, respectively. These amounts, net of associated costs of
approximately $2,045,000, are reflected in additional paid-in capital on the
balance sheet.

The Preferred Stock accrues dividends compounded at an annual rate of 12.0%
for the first year, 14.0% for the second year, 16.0% for the third year, 18.0%
for the fourth and fifth years and 20% at all times thereafter, of the purchase
price of the Preferred Stock, in preference to any dividends on any other class
of capital stock. The Preferred Stock will be redeemable by the Company at any
time at a price equal to the purchase price paid by the Purchasers thereof plus
accrued and unpaid dividends. The Preferred Stock will be convertible,
commencing two years from the date of issue, into shares of Common Stock at the
lesser of $5.9375 or the average of the daily closing price per share of Common
Stock for 30 consecutive trading days following the public release by the
Company of its consolidated earnings statement for the 1998 fiscal year;
provided that if shares of Common Stock are not then traded on any national
securities exchange or quoted on the Nasdaq Stock Market or a similar service,
the closing price for the foregoing purpose shall be deemed to be the fair value
of a share of Common Stock as determined in good faith by the Board of
Directors. If the Board of Directors is unable to determine fair market value
or if the holders of a majority of the outstanding shares of the Preferred Stock
disagree with the Board's determination, then fair market value will be
determined by an independent financial expert.

The number of shares of Common Stock which may be received upon exercise of
the Purchaser Warrants will be increased by an amount equal to 12.0% of the
shares initially underlying the Purchaser Warrants on each anniversary of the
original date of issuance of the Series B Preferred Stock, so long as any Series
B Preferred Stock remains outstanding. The Common Stock underlying the
Purchaser and Affiliate Warrants may be purchased at an exercise price per share
of the lesser of $6.25 and 82.5% of the average of the daily closing price per
share of Common Stock for the 30 consecutive trading days following the public
release by the Company of its consolidated earnings statement for the 1998
fiscal year; provided that if shares of Common Stock are not then traded on any
national securities exchange or quoted on the Nasdaq Stock Market or a similar
service, the closing price for the foregoing purpose shall be deemed to be the
fair value of a share of Common Stock as determined in good faith by the Board
of Directors. If the Board of Directors is unable to determine fair market
value or if the holders of a majority of the outstanding shares of the Preferred
Stock disagree with the Board's determination, then fair market value will be
determined by an independent financial expert.

On December 12, 1998, the Company issued a warrant to purchase 50,000
shares of Common Stock in connection with the consummation of Preferred Stock
with Warrants Issuance (the "Harnick Warrants"). The exercise price of the
Harnick Warrants is $6.25. The Harnick Warrant expires December 12, 2007.

Convertible debentures in the aggregate principal amount of $5,000,000 that
were issued to Intersound in connection with the Intersound Acquisition on
January 31, 1997, mature on January 31, 2004 and bear interest at the seven-year
Treasury rate plus one percent per annum (6.75% at December 31, 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 debentures.

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On January 31, 1997, the Company entered a Credit Agreement with 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
(the "Original Credit Facility"). The Original Credit Facility was extended
through December 31, 1997 and was refinanced on December 12, 1997 as discussed
below. Financing costs associated with the Original Credit Facility from
January 31, 1997 through December 31, 1997 approximated 9% of the total
facility. The interest incurred on the Original Credit Facility was initially
LIBOR plus 6% and was increased to LIBOR plus 9% effective August 1, 1997.

On December 12, 1997, the Company refinanced the Original Credit Facility
with the net proceeds from the Preferred Stock with Warrants Issuance and an
amended credit agreement with BMO (the "Amended Credit Facility"). Under the
terms of the Amended Credit Facility, the Company has $20,000,000 in bank debt
with a three year term, due in quarterly installments beginning June 1, 1998,
bearing interest at the bank's base rate plus 1.0% per annum, and a $10,000,000
available revolving line of credit, due in three years and bearing interest at
the bank's base rate plus 1/2 of 1.0% per annum. The Company had drawn $800,000
against the available line of credit as of December 31, 1997. Borrowings under
the revolving line of credit are limited to the Borrowing Base, as defined,
which is based upon eligible accounts receivable and inventory. The Amended
Credit Facility contains certain financial covenants and is secured by
substantially all of the Company's assets. Effective March 31, 1998, the
Amended Credit Facility was amended to appoint Harris Trust and Savings Bank as
the lender. All other terms remained substantially unchanged.

The Company issued to BMO a warrant to purchase approximately 259,000
shares of Common Stock at an exercise price of $.01 per share in connection
with the BMO Credit Facility. The value of the warrants amounted to
$1,240,000, which is included in additional paid-in capital. The warrants
expire on January 31, 2002.

Subsequent to the IPO in the twelve months ended May 31, 1996, 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 IPO.

The Company's near and long-term capital requirements depend on numerous
factors, including the rate at which the Company grows and acquires new artists
and products. The Company has various on-going 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 on-going 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. However, the Company is currently
engaged in a review of accounting and operating software packages to achieve
further economies of scale. The selection, acquisition and implementation of
this software, along with the related consulting services, is expected to cost
between $600,000 and $800,000.

Stockholders' equity at December 31, 1997 totaled $12,875,000 compared
to $7,866,000 at May 31, 1997. This net increase of $4,989,000 is primarily
due to the sale of preferred stock with warrants as discussed above, offset
by net losses experienced by the Company during the seven months ended
December 31, 1997. As discussed in the "Overview" above, stockholders' equity
includes $3,500,000 of costs and expenses that related to Intersound prior to
the Company's purchase. Had these matters been identified by the Company at
the time of purchase or shortly thereafter, such adjustments would have been
recorded through purchase accounting, resulting in no stockholders' equity
impact. As these matters were not identified at the time of purchase or
shortly thereafter, the Company is required to reflect these amounts in its
results of operations, thus impacting

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stockholders' equity. Excluding these adjustments, the Company's stockholders'
equity would have been $16,375,000 at December 31, 1997.

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.

SAFE HARBOR PROVISION

This Report 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 Report, the words
"anticipate," "believe," "estimate" and "expect" and similar expressions as
they relate to the Company or its management are intended to identify such
forward-looking statements. A number of important factors could cause the
Company's actual results, performance or achievements for the twelve months
ended December 31, 1998 and beyond to differ materially from those expressed
in such forward-looking statements. Reference is made to the Company's prior
filings with the Securities and Exchange Commission, in particular the "Risk
Factors" section of the Company's Prospectus dated March 12, 1996, for a
discussion of such factors. These factors include, without limitation,
commercial success of the Company's repertoire, charges and costs related to
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.

YEAR 2000 TECHNOLOGY PREPAREDNESS

The Company is currently working to resolve the potential impact of the
year 2000 on the processing of time-sensitive information by its computerized
information systems. Year 2000 issues may arise if computer programs have been
written using two digits (rather than four) to define the applicable year. In
such cases, programs that have time-sensitive logic may recognize a date using
"00" as the year 1900 rather than the year 2000, which could result in
miscalculations or system failures. Management is in the process of completing
a review of significant software and equipment used in the Company's operations
and, to the extent practicable, in the operations of its key business partners,
in order to determine if any year 2000 risks exist that may be material to the
Company as a whole. This process includes an assessment of year 2000 risks and
the identification of practical remediation measures that could be taken on a
timely basis to alter, validate or replace time-sensitive software and
equipment. Management has already begun implementing certain of these measures
and intends to complete its remediation efforts prior to any anticipated
material impact on its computerized information systems. Costs of addressing
potential problems have not been material to date and, based on preliminary
information, are not currently expected to have a material adverse impact of the
Company's financial position, results of operations or cash flows in future
periods. However, if the Company or its significant customers or vendors are
unable to resolve such processing issues in a timely manner, it could result in
a material adverse effect. Accordingly, management plans to devote the
resources it concludes are appropriate to resolve all significant year 2000
issues in a timely manner.

34
<PAGE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

Board of Directors and Stockholders
Platinum Entertainment, Inc.

We have audited the consolidated balance sheets of Platinum Entertainment,
Inc. as of December 31, 1997 and May 31, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity (net capital
deficiency) and cash flows for the seven month period ended December 31, 1997
and each of the three years in the period ended May 31, 1997. 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 presentation. We believe that our audits provide a reasonable
basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Platinum
Entertainment, Inc. at December 31, 1997 and at May 31, 1997 and 1996, and
the consolidated results of its operations and its cash flows for the seven
month period ended December 31, 1997 and for each of the three years in the
period ended May 31, 1997 in conformity with generally accepted accounting
principles.

/s/ ERNST & YOUNG LLP

Chicago, Illinois
May 20, 1998

35
<PAGE>

PLATINUM ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)

MAY 31
DECEMBER 31 -------------------------
1997 1997 1996
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 11 $ 53 $ 8,222
Cash in escrow, less reserves of
$1,750 and $-, respectively - 1,750 -
Accounts receivable, less allowances of
$3,912, $3,291 and $233, respectively 15,147 15,034 4,103
Artist advances 2,510 2,444 1,581
Inventories, less allowances of $590, $350
and $100, respectively 4,997 5,416 1,538
Notes receivable 50 50 1,467
Other 898 1,018 473
--------------------------------------------
Total current assets 23,613 25,765 17,384
Artist advances, net of current amounts, less
allowances of $12,936, $9,745 and $4,942, respectively - 2,297 2,093
Equipment and leasehold improvements, net 1,079 1,185 698
Music catalog, less accumulated amortization of $784
and $327, respectively 18,820 19,277 -
Music publishing rights, less accumulated amortization
of $308, $203 and $90, respectively 3,519 3,624 350
Goodwill, less accumulated amortization of $244
and $97, respectively 5,854 6,001 -
Deferred financing costs, net 631 - -
Equity investment in joint venture 2,468 3,154 -
Other 1,473 1,001 19
--------------------------------------------
Total assets $ 57,457 $ 62,304 $ 20,544
-------------------------------------------
--------------------------------------------

</TABLE>

See accompanying notes to financial statements.

36
<PAGE>

PLATINUM ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)

MAY 31
DECEMBER 31 ------------------------------
1997 1997 1996
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving line of credit $ 800 $ 9,706 $ -
Current portion of bank debt 3,000 - -
Term loan - 25,000
Accounts payable 4,256 4,038 997
Accrued liabilities and other 3,423 2,521 2,104
Reserve for future returns 6,301 2,660 800
Royalties payable 5,302 5,513 1,428
----------------------------------------------
Total current liabilities 23,082 49,438 5,329

Bank debt, less current portion 17,000 - -
Convertible subordinated debentures 5,000 5,000 -
----------------------------------------------
Total liabilities 45,082 54,438 5,329

Stockholders' equity:
Preferred Stock:
Preferred Stock ($.001 par value); 10,000,000 shares authorized,
no shares issued and outstanding - - -
Series B Convertible Preferred Stock ($.001 par value);
20,000 shares authorized, issued and outstanding December 31,
1997, no shares authorized, issued and outstanding May 31,
1997 and May 31, 1996, respectively - - -
Series C Convertible Preferred Stock ($.001 par value);
2,500 shares authorized, issued and outstanding December 31,
1997, no shares authorized, issued and outstanding May 31,
1997 and May 31, 1996, respectively - - -
Common Stock:
Common Stock ($.001 par value); 40,000,000 shares authorized,
5,275,040, 5,171,439 and 5,063,207 shares issued and outstanding
December 31, 1997, May 31, 1997 and May 31, 1996, respectively 5 5 5
Additional paid-in capital 58,216 37,261 35,254
Accumulated deficit (45,846) (29,400) (20,044)
----------------------------------------------
Stockholders' equity 12,375 7,866 15,215
----------------------------------------------
Total liabilities and stockholders' equity $ 57,457 $ 62,304 $ 20,544
----------------------------------------------
----------------------------------------------

</TABLE>

See accompanying notes to financial statements.

37
<PAGE>

PLATINUM ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

SEVEN MONTHS ENDED
DECEMBER 31 TWELVE MONTHS ENDED MAY 31
----------------------- ------------------------------------
1997 1996 1997 1996 1995
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Gross product sales $ 34,485 $12,393 $37,502 $18,322 $12,575
Less: Returns and allowances (11,351) (2,326) (10,568) (4,732) (3,126)
Less: Discounts (2,288) (821) (2,463) (712) (507)
----------------------- --------------------------------------
Not product sales 20,846 9,246 24,471 12,878 8,942
Licensing, publishing and other revenues 809 485 1,255 1,799 207
----------------------- --------------------------------------
Net sales 21,655 9,731 25,726 14,677 9,149

Cost of sales and services 16,784 6,225 14,019 10,441 4,945
----------------------- --------------------------------------

Gross profit 4,871 3,506 11,707 4,236 4,204

Other operating expenses:
Selling, general and administrative 12,316 5,695 13,141 8,017 8,800
Merger, restructuring and one-time costs 3,100 6 2,231 - -
Depreciation and amortization 1,062 199 973 156 133
----------------------- --------------------------------------
16,478 5,900 16,345 8,173 8,933
----------------------- --------------------------------------
Operating income (loss) (11,607) (2,394) (4,638) (3,937) (4,729)
Interest income 49 136 154 106 46
Interest expense (2,944) (7) (1,385) (570) (157)
Other financing costs (1,258) - (3,533) - -
Equity gain (loss) (686) - 48 - -
----------------------- --------------------------------------
Loss from continuing operations (16,446) (2,265) (9,354) (4,401) (4,840)
Discontinued operations:
Loss from operations - - - - (2,073)
Loss on disposal - - - (226) (2,611)
----------------------- --------------------------------------
Loss from discontinued operations - - - (226) (4,694)
----------------------- --------------------------------------
Net loss (16,446) (2,265) (9,354) (4,627) (9,524)
Less: Cumulative preferred dividends - - - (602) -
----------------------- --------------------------------------

Loss applicable to common shares $(16,446) $(2,265) $(9,354) $(5,229) $(9,524)
----------------------- --------------------------------------
----------------------- --------------------------------------

Basic and diluted loss per common share:
Loss from continuing operations $(3.14) $(0.44) $(1.82) $(1.71) $(2.12)
Loss from discontinued operations - - - (0.08) (2.05)
----------------------- --------------------------------------
Net loss $(3.14) $(0.44) $(1.82) $(1.79) $(4.17)
----------------------- --------------------------------------
----------------------- --------------------------------------

Weighted average number of common shares outstanding 5,232,030 5,112,066 5,136,830 2,925,987 2,284,090

</TABLE>

See accompanying notes to financial statements.

38
<PAGE>

PLATINUM ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

PREFERRED STOCK
-------------------------------------------------
SERIES A-2 NO SERIES SERIES B SERIES C
<S> <C> <C> <C> <C>
Balance at May 31, 1994 $ - $ - $ - $ -
Proceeds from issuance of Preferred Stock, net ($.69 per share) 18 - - -
Net loss for the year ended May 31, 1995 - - - -
Other - - - -
-------------------------------------------------
Balance at May 31, 1995 18 - - -
Conversion into Common Stock (18) - - -
Initial public offering, net ($11.30 per share) - - - -
Exercise of stock options - - - -
Conversion of Series A-1 Redeemable Preferred Stock - - - -
Dividends on Series A-1 Redeemable Preferred Stock - - - -
Founders' bonus - - - -
Shares issued in lieu of compensation - - - -
Net loss for the year ended May 31, 1996 - - - -
-------------------------------------------------
Balance at May 31, 1996 - - - -
Issuance of Common Stock for business acquisition - - - -
Issuance of stock warrants for financing costs - - - -
Net loss for the year ended May 31, 1997 - - - -
Other - - - -
-------------------------------------------------
Balance at May 31, 1997 - - - -
Proceeds from issuance of Common Stock, ($4.88 per share) - - - -
Proceeds from issuance of Preferred Stock with warrants, net - - - -
Net loss for the seven months ended December 31, 1997 - - - -
-------------------------------------------------
Balance at December 31, 1997 $ - $ - $ - $ -
-------------------------------------------------
-------------------------------------------------

COMMON STOCK
----------------------------------------------
CLASS A CLASS B NO CLASS
-------------------
SHARES AMOUNT
<S> <C> <C> <C> <C>
Balance at May 31, 1994 $ - $ 1 40 $ -
Proceeds from issuance of Preferred Stock, net ($.69 per share) - - - -
Net loss for the year ended May 31, 1995 - - - -
Other - - 10 -
----------------------------------------------
Balance at May 31, 1995 - 1 50 -
Conversion into Common Stock - (1) 2,050 2
Initial public offering, net ($11.30 per share) - - 2,740 3
Exercise of stock options - - 22 -
Conversion of Series A-1 Redeemable Preferred Stock - - 117 -
Dividends on Series A-1 Redeemable Preferred Stock - - - -
Founders' bonus - - 65 -
Shares issued in lieu of compensation - - 19 -
Net loss for the year ended May 31, 1996 - - - -
----------------------------------------------
Balance at May 31, 1996 - - 5,063 5
Issuance of Common Stock for business acquisition - - 88 -
Issuance of stock warrants for financing costs - - - -
Net loss for the year ended May 31, 1997 - - - -
Other - - 20 -
----------------------------------------------
Balance at May 31, 1997 - - 5,171 5
Proceeds from issuance of Common Stock, ($4.88 per share) - - 103 -
Proceeds from issuance of Preferred Stock with warrants, net - - - -
Net loss for the seven months ended December 31, 1997 - - - -
----------------------------------------------
Balance at December 31, 1997 $ - $ - 5,274 $ 5
----------------------------------------------
----------------------------------------------

STOCKHOLDERS'
ADDITIONAL EQUITY
PAID-IN (NET CAPITAL
CAPITAL DEFICIT DEFICIENCY)
<S> <C> <C> <C>
Balance at May 31, 1994 $ 1,989 $ (5,292) $ (3,302)
Proceeds from issuance of Preferred Stock, net ($.69 per share) 487 - 505
Net loss for the year ended May 31, 1995 - (9,523) (9,523)
Other - - -
------------------------------------
Balance at May 31, 1995 2,476 (14,815) (12,320)
Conversion into Common Stock 17 - -
Initial public offering, net ($11.30 per share) 30,953 - 30,956
Exercise of stock options 56 - 56
Conversion of Series A-1 Redeemable Preferred Stock 1,525 - 1,525
Dividends on Series A-1 Redeemable Preferred Stock - (602) (602)
Founders' bonus - - -
Shares issued in lieu of compensation 227 - 227
Net loss for the year ended May 31, 1996 - (4,627) (4,627)
------------------------------------
Balance at May 31, 1996 35,254 (20,044) 15,215
Issuance of Common Stock for business acquisition 777 - 777
Issuance of stock warrants for financing costs 1,240 - 1,240
Net loss for the year ended May 31, 1997 - (9,354) (9,354)
Other (10) (2) (12)
------------------------------------
Balance at May 31, 1997 37,261 (29,400) 7,866
Proceeds from issuance of Common Stock, ($4.88 per share) 500 - 500
Proceeds from issuance of Preferred Stock with warrants, net 20,455 - 20,455
Net loss for the seven months ended December 31, 1997 - (16,446) (16,446)
------------------------------------
Balance at December 31, 1997 $ 58,216 $ (45,846) $ 12,375
------------------------------------
------------------------------------
</TABLE>

See accompanying notes to financial statements.

39
<PAGE>

PLATINUM ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)

SEVEN MONTHS ENDED
DECEMBER 31 TWELVE MONTHS ENDED MAY 31
---------------------- ---------------------------------
1997 1996 1997 1996 1995
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (16,446) $ (2,265) $ (9,354) $ (4,627) $ (9,523)
Adjustments to reconcile net loss to net cash used in
continuing operating activities:
Provision for doubtful accounts 688 - 300 43 -
Charge to provision for future returns 4,246 - 277 572 513
Charge to provision for co-op advertising 362 - 79 83 92
Charge to provision for slow-moving inventory 500 - - 100 -
Charge to provision for unrecoupable artist balances 3,136 308 2,039 3,067 1,128
Depreciation and amortization 1,062 199 973 156 133
Common Stock issued in lieu of compensation - - - 227 -
Amortization of loan discount - - 1,240 - -
Deferred financing costs 9 - - - -
Equity (gain) loss from joint venture 686 - (48) - -
Write-off of one-time costs 2,525 - - - -
Changes in operating assets and liabilities:
Accounts receivable (1,152) (1,115) (2,753) (1,927) (189)
Inventories (81) (737) (1,447) (186) (892)
Notes receivable - 1,025 1,148 (1,402) (23)
Artist advances (906) (2,301) (2,149) (4,466) (3,197)
Accounts payable 218 (5) (431) (822) 1,122
Accrued liabilities and other 902 (1,145) (591) 1,234 668
Reserve for future returns (605) (43) (1,044) (425) -
Royalties payable (211) 2,228 1,405 141 557
Other (1,268) (895) (217) (523) (129)
---------------------- ---------------------------------
Net cash used in continuing operating activities (6,335) (4,746) (10,573) (8,755) (9,740)
Discontinued operations:
Depreciation and amortization - - - - 539
Loss on disposal - - - 226 2,611
Change in net liabilities - - - (1,237) -
---------------------- ---------------------------------
Net cash used in discontinued operating activities - - - (1,011) 3,150
---------------------- ---------------------------------
Net cash used in operating activities (6,335) (4,746) (10,573) (9,766) (6,590)

INVESTING ACTIVITIES
Acquisitions of businesses, net of cash acquired - (100) (24,026) - -
Prepaid acquisition costs - (124) - - -
Investment in joint venture - (3,063) (3,063) - -
Cash in escrow - - (1,750) - -
Purchases of equipment and leasehold improvements (116) (171) (307) (574) (238)
---------------------- ---------------------------------
Net cash used in investing activities (116) (3,458) (29,146) (574) (238)

FINANCING ACTIVITIES
Net proceeds from (payment of) related parties - - - (537) 537
Payment of note payable to related party - - - - (944)
Net proceeds from (payment of) revolving lines of credit (8,906) - 7,106 (3,000) 3,000
Net proceeds from bank term loans 20,000 - 25,000 - 4,500
Payment of bank term loans (25,000) - - (4,500) (4,000)
Payment of long-term debt - - - - (1,140)
Net proceeds from initial public offering - - - 30,956 -
Net proceeds from exercise of stock options - - - 56 -
Net proceeds from issuance of Redeemable Preferred Stock - - - - 4,953
Redemption of Redeemable Preferred Stock - - - (4,500) -
Proceeds from sale of Common Stock 500 - - - -
Net proceeds from sale of preferred stock with warrants 20,455 - - - -
Deferred financing costs (640) - (556) - -
---------------------- ---------------------------------
Net cash provided by financing activities 6,409 - 31,550 18,475 6,906
---------------------- ---------------------------------

Net Increase (decrease) in cash (42) (8,204) (8,169) 8,135 78
Cash and cash equivalents, beginning of period 53 8,222 8,222 87 9
---------------------- ---------------------------------
Cash and cash equivalents, end of period $ 11 $ 18 $ 53 $ 8,222 $ 87
---------------------- ---------------------------------
---------------------- ---------------------------------

</TABLE>

See accompanying notes to financial statements.

40
<PAGE>

PLATINUM ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

1. DESCRIPTION OF BUSINESS

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. The Company has produced recorded music products in the Adult
Contemporary, Gospel, Country and Blues music formats, primarily under its River
North Records, CGI Records and House of Blues Music Co. labels. With its
January 1, 1997, acquisition of Intersound, Inc. ("Intersound"), the Company
expanded its artist base and music catalog within existing genres, and added new
music genres to its repertoire, including Urban/Dance and Classical/Themed
Productions. The Company's products are distributed through PolyGram Group
Distribution, Inc. ("PolyGram") and two operating divisions of the Company,
Platinum Christian Distribution and Intersound Distribution.

The Company's total gross product sales by distribution channel as a
percentage of total gross products sales are as follows:

SEVEN MONTHS ENDED
DECEMBER 31 TWELVE MONTHS ENDED MAY 31
------------------ --------------------------
1997 1996 1997 1996 1995
<S> <C> <C> <C> <C> <C>
PolyGram 36.9% 75.2% 46.9% 58.2% 57.6%
Intersound 60.4% - 32.8% - -
Platinum Christian Distribution
(to Christian bookstores) 2.5% 18.1% 9.1% 23.2% 23.2%
Record Clubs/Direct Sales 0.2% 6.7% 11.2% 10.8% 3.0%
Telemarketing - - - 7.8% 16.2%

</TABLE>

Accounts receivable resulting from product sales through PolyGram are secured
by a distribution agreement (see Note 6). Gross accounts receivable resulting
from product sales outside of this distribution agreement are unsecured and
approximate $14,960, $14,298 and $3,010 at December 31, 1997, May 31, 1997
and May 31, 1996, respectively, exclusive of reserves and allowances for
future returns, co-op advertising and doubtful accounts (see Note 7).

2. CHANGE IN FISCAL YEAR

On February 26, 1998, the Board of Directors of the Company resolved by
unanimous consent to change the Company's fiscal year, formerly May 31, to a
calendar year, effective December 31, 1997. This change in fiscal year makes
the Company's year comparable with other public companies in the industry.
This change in fiscal year also conforms the Company's fiscal periods to the
quarterly and semi-annual periods for which the Company reports its royalties
to its recording artists and publishers as well as the annual term of the
distribution agreement with PolyGram.

41
<PAGE>

Pro forma results of operations for the change in fiscal year, as if the change
in fiscal year had occurred at January 1, 1996, are as follows:

TWELVE MONTHS ENDED
DECEMBER 31
------------------------
1997 1996
(UNAUDITED)
<S> <C> <C>
Gross revenues $ 60,560 $ 21,157
Net revenues 37,650 15,048
Gross profit 13,074 2,733
Operating loss (13,848) (6,430)
Net loss from continuing operations (23,533) (6,417)

Basic and diluted loss per common share from
continuing operations $ (4.52) $ (1.41)

</TABLE>

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: Intersound, Inc. (formerly 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.

EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are carried at cost, less accumulated
depreciation. Depreciation is computed using accelerated methods over the
estimated useful lives of the assets (5 to 7 years).

ARTIST ADVANCES
In accordance with Statement of Financial Accounting Standards ("SFAS") 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 time the
advance is made. All other advances which do not meet the above criteria are
reserved when incurred.

INVENTORIES
Inventories are valued at the lower of cost, determined on the first-in,
first-out method of accounting, or market. Inventories consist primarily of
finished compact discs and cassette tapes.

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

42
<PAGE>

promotional expenses were $2,776, $1,031, $3,270, $1,968 and $3,664 for the
seven months ended December 31, 1997 and 1996 and the twelve months ended May
31, 1997, 1996 and 1995, respectively.

MUSIC CATALOG AND MUSIC PUBLISHING RIGHTS
Music catalog and music publishing rights represent the value allocated to
master recordings and copyrights recorded through the purchase method of
accounting as a result of the Company's historical acquisitions. Such costs
are amortized using the straight-line method over the estimated period to be
benefited which ranges from 15-25 years. The Company assesses the
recoverability of such assets by determining whether the carrying value of
the net assets over their remaining lives can be recovered through projected
undiscounted future cash flows.

GOODWILL
Goodwill, which represents the excess cost of purchase price over the fair value
of identifiable net assets acquired from Intersound, Inc. ("Intersound"), is
amortized over the expected period to be benefited of 25 years.

REVENUE RECOGNITION
Net product sales represent revenues derived from sales of records, net of
actual returns, discounts and reserves for estimated future returns. Revenues
derived from the licensing of recorded masters 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. Publishing
revenues are recognized by the Company on a cash basis.

SEGMENT REPORTING
Statement of Financial Accounting Standards ("SFAS") No. 131, DISCLOSURES
ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION, establishes
standards for the way that public business enterprises report information
about operating segments in annual financial statements and requires that
those enterprises report selected information about operating segments in
interim financial reports issued to shareholders. Operating segments are
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker
in deciding how to allocate resources and in assessing performance. This
Statement is effective for the Company's fiscal year ending December 31,
1998. The impact of SFAS 131 is not expected to be material to the Company's
financial disclosures.

COMPREHENSIVE INCOME
SFAS No. 130, REPORTING COMPREHENSIVE INCOME, establishes standards for
reporting and display of comprehensive income (i.e., foreign currency
translation gains/losses and unrealized gains/losses on securities) and its
components in a full set of general-purpose financial statements. This
Statement requires that an enterprise (a) classify items of other comprehensive
income by their nature in a financial statement and (b) display the accumulated
balance of other comprehensive income separately from retained earnings and
additional paid-in capital in the equity section of a statement of financial
position. This Statement is effective for the Company's fiscal year ending
December 31, 1998. The impact of SFAS 130 will not be material to the Company's
financial disclosures.

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, trade accounts payable, revolving line of credit,
term loan and convertible subordinated debentures. The fair value of the
Company's financial instruments approximates the carrying value of the
instruments.

43
<PAGE>

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 the reserves for doubtful accounts receivable,
unrecoupable artist advances and future returns, at the enacted tax rates at
which the resulting taxes are expected to be paid. See Note 9 for further
details.

STOCK-BASED COMPENSATION
SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, encourages, but does not
require, companies to record compensation cost for stock-based employee
compensation plans at fair value. The Company has chosen to continue to account
for stock-based compensation using the intrinsic value method as prescribed in
Accounting Principles Board ("APB") Opinion No. 25, ACCOUNTING FOR STOCK ISSUED
TO EMPLOYEES, and related Interpretations, under which no compensation cost
related to stock options has been recognized as the exercise price of each
option at the date of grant was equal to the fair value of the underlying Common
Stock.

BASIC AND DILUTED LOSS PER COMMON SHARE
Effective December 31, 1997, the Company adopted SFAS No. 128, EARNINGS PER
SHARE, which established simplified standards for computing and presenting
earnings per share information. The adoption of SFAS No. 128 did not have
any effect on the Company's financial statements.

Basic loss per common share is based upon the net loss applicable to common
shares after preferred dividend requirements and upon the weighted average of
common shares outstanding during the period. Diluted loss per common share
adjusts for the effect of convertible securities, stock options and warrants
only in the periods presented in which such effect would have been dilutive.
The total of such securities at December 31, 1997 is 14,790,000. Such effect
was not dilutive in any of the periods presented herein.

RECLASSIFICATIONS
Certain amounts in the twelve months ended May 31, 1997, 1996 and 1995
consolidated financial statements have been reclassified to conform with the
seven months ended December 31, 1997 presentation.

4. ACQUISITIONS

During June 1996, the Company acquired substantially all of the assets of R.E.X.
Music, Inc. ("REX") for $480, which approximated the indebtedness of REX to the
Company (which primarily arose during fiscal 1996) and $100 in accrued
liabilities. REX produces, licenses and markets recorded music, primarily in
the Gospel genre. The acquisition has been accounted for by the purchase method
of accounting and the purchase price of $580 approximates the fair value of the
assets acquired. The assets acquired include accounts receivable, artist
advances, inventory, music publishing rights and artist contracts. The value

44
<PAGE>

allocated to music publishing rights and artist contracts totaled $440 and is
being amortized over 15 years using the straight-line method.

During September 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 of debt and $75 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 $952 approximates the fair value of the assets acquired. The purchase value
was primarily allocated to music publishing rights and is being amortized over
25 years using the straight-line method.

During January 1997, the Company purchased substantially all of the assets of
Intersound for consideration of $24,000 in cash, $5,000 in convertible
subordinated debentures and the assumption of certain liabilities. Intersound
produces, licenses, markets and distributes recorded music for Urban/Dance,
Gospel, Classical/Themed Productions and other genres. The acquisition has been
accounted for by the purchase method of accounting and the purchase price of
approximately $41,000, including assumed liabilities, exceeds the fair value of
the assets acquired by $6,098, which represents goodwill. The purchase value was
allocated to the acquired assets based upon their estimated respective fair
market values. The amounts allocated to music catalog, music publishing rights
and goodwill are being amortized over 25 years using the straight-line method.

The Company determined the purchase price allocation, as disclosed in the
balance sheet at May 31, 1997, based on available information at that time.
However, during the seven months ended December 31, 1997, the Company
ascertained that the purchase value allocated certain purchased assets
exceeded their fair market values by approximately $1,150. In addition,
further liabilities of approximately $2,350, which the Company believes
relate to returned products that had been sold prior to the Company's
purchase of Intersound, were identified. Had these matters been identified
by the Company at the time of purchase or shortly thereafter, such valuations
would have been recorded through purchase accounting, resulting in no
subsequent income statement impact. As these matters were not identified at
the time of purchase or shortly thereafter, the Company is required to
reflect these amounts in results of operations for the seven months ended
December 31, 1997, resulting in a nonrecurring charge to current operations
of $3,500. This amount is included in the current period returns and
allowances ($2,350) and cost of sales and services ($1,150).

Pro forma results of operations for the acquisitions, as if the acquisitions had
occurred at June 1, 1995, for the twelve months ended May 31 are as follows:

TWELVE MONTHS ENDED
MAY 31
-----------------------
1997 1996
(UNAUDITED)
<S> <C> <C>
Gross revenues $ 61,332 $ 57,163
Net revenues 43,859 40,327
Gross profit 20,898 17,606
Operating loss (2,959) (2,503)
Net loss from continuing operations (9,858) (10,022)

Basic and diluted loss per common share from
continuing operations $ (1.92) $ (3.63)

</TABLE>

45
<PAGE>

5. 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. The Company invested approximately $3,100 for a 50%
interest in 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.

The Venture develops and produces recordings and related film and video
properties featuring primarily Blues and Gospel 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 recorded gross revenues and
gross profit from the distribution of Venture products of $3,038, $3,404 and
$82, $368 for the seven months ended December 31, 1997 and the twelve months
ended May 31, 1997, respectively

The Company records the activity of the Venture under the equity method of
accounting for investments in joint ventures. Earnings and distributions of the
Venture are allocated to the Company and HOB in accordance with the Venture
agreement. The Company recorded a loss of $686 and a gain of $48 representing
its share of the loss and profits in the Venture for the seven months ended
December 31, 1997 and the twelve months ended May 31, 1997, respectively.

6. DISTRIBUTION AGREEMENT

The Company has an exclusive domestic distribution agreement with PolyGram
("PolyGram Agreement"). The term of the PolyGram Agreement is through
December 31, 2002, unless extended or terminated under certain provisions of
the PolyGram Agreement. The PolyGram Agreement appoints PolyGram exclusive
distributor of certain of the Company's products through normal retail channels,
which excludes certain methods of distribution as defined. The distribution
services rendered by PolyGram include billing and collecting from customers,
bearing bad debts, distributing promotional items, advertising, inventory
control activities and processing returns. Distribution fees paid by the
Company for such services provided by PolyGram to secular accounts include
15-18% of net sales generated by PolyGram. For sales to stores in the
Christian bookstore market, the distribution fee is 12% of net sales. The
payment of all such fees owed to PolyGram by the Company is secured by all of
the Company's inventories in PolyGram's possession awaiting distribution.
Inventories held by PolyGram are $681, $843 and $901 at December 31, 1997 and
May 31, 1997 and 1996, respectively. Accounts receivable due from PolyGram
are $4,099, $4,027 and $1,326 at December 31, 1997 and May 31, 1997 and 1996,
respectively. Gross product sales distributed through PolyGram were $13,580,
$9,322, $17,605, $9,969 and $6,944 for the seven months ended December 31,
1997 and 1996 and the twelve months ended May 31, 1997, 1996 and 1995,
respectively.

46
<PAGE>

7. VALUATION AND QUALIFYING ACCOUNTS

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

ADDITIONS
---------
BALANCE AT CHARGED TO CHARGED TO BALANCE
BEGINNING OF COSTS AND OTHER AT END
PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
------ -------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C>
SEVEN MONTHS ENDED DECEMBER 31, 1997

Reserve for future returns $ 2,660 $ - $ 4,246 (1) $ 605 (3) $ 6,301
Allowance for doubtful accounts 2,725 688 20 673 (4) 2,760
Reserve for unrecoupable artist advances 9,745 3,136 55 - 12,936
Allowance for slow-moving inventory 350 500 - 260 (5) 590

TWELVE MONTHS ENDED MAY 31, 1997

Reserve for future returns $ 800 $ - $ 2,904 (1) $1,044 (3) $ 2,660
Allowance for doubtful accounts 58 300 2,414 (2) 47 (4) 2,725
Reserve for unrecoupable artist advances 4,942 2,039 3,089 (2) 325 (6) 9,745
Allowance for slow-moving inventory 100 - 250 (2) - 350

TWELVE MONTHS ENDED MAY 31, 1996

Reserve for future returns $ 653 $ - $ 572 (1) $ 425 (3) $ 800
Allowance for doubtful accounts 30 43 - 15 (4) 58
Reserve for unrecoupable artist advances 3,010 3,067 - 1,135 (6) 4,942
Allowance for slow-moving inventory - 100 - - 100

TWELVE MONTHS ENDED MAY 31, 1995

Reserve for future returns $ 140 $ - $ 513 (1) $ - $ 653
Allowance for doubtful accounts 40 - - 10 (4) 30
Reserve for unrecoupable artist advances 1,882 1,128 - - 3,010

</TABLE>

(1) Gross margin impact of estimated future sales returns, charged against
gross product sales. Seven months ended December 31, 1997 amount
includes $2,350 related to returns of product sold by Intersound prior
to the Company's purchase. See Note 4. Twelve months ended May 31, 1997
amount includes $2,627 related to acquisitions accounted for under the
purchase method of accounting.
(2) Relates to acquisitions accounted for under the purchase method of
accounting.
(3) Gross margin impact of actual sales returns, charged against reserve for
future returns.
(4) Write-offs, net of recoveries.
(5) Recoveries of reserved product.
(6) Recoupment of reserved advances and write-offs.

47
<PAGE>

8. EQUIPMENT AND LEASEHOLD IMPROVEMENTS

Equipment and leasehold improvements consist of the following:

MAY 31
DECEMBER 31 -------------------
1997 1997 1996
<S> <C> <C> <C>
Office equipment and computers $1,126 $1,041 $ 499
Furniture and fixtures 308 306 267
Leasehold improvements 222 217 150
Audio equipment 158 157 11
Warehouse equipment 67 44 -
Autos 5 5 5
-------- ------------------
1,886 1,770 932
Less: Accumulated depreciation 807 585 234
-------- ------------------
Equipment and leasehold improvements, net $1,079 $1,185 $ 698
-------- ------------------
-------- ------------------

</TABLE>

During the twelve months ended May 31, 1996, the Company purchased $421 of
office equipment, furniture and fixtures, and leasehold improvements from a
company that is wholly owned by a director, officer and stockholder of the
Company.

9. DEBT

Convertible debentures in the aggregate principal amount of $5,000 that were
issued to Intersound in connection with the Intersound Acquisition on January
31, 1997, mature on January 31, 2004 and bear interest at the seven-year
Treasury rate plus one percent per annum (6.75% at December 31, 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 debentures.

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 and a 90-day revolving credit facility in the amount of
$10,000 (the "Original Credit Facility"). The Original Credit Facility was
extended through December 31, 1997 and was refinanced on December 12, 1997 as
discussed below. Financing costs associated with the Original Credit Facility
from January 31, 1997 through December 31, 1997 approximated 10% of the total
facility. The interest incurred on the Original Credit Facility was
initially LIBOR plus 6% and was increased to LIBOR plus 9% effective August
1, 1997.

On December 12, 1997, the Company refinanced the Original Credit Facility with
the net proceeds from the Preferred Stock with Warrants Issuance and an amended
credit agreement with BMO (the "Amended Credit Facility"). Under the terms of
the Amended Credit Facility, the Company has $20,000 in bank debt with a three
year term, due in quarterly installments beginning June 1, 1998, bearing
interest at the bank's base rate plus 1.0% per annum (9.5% at December 31,
1997), and a $10,000 available revolving line of credit, due in three years and
bearing interest at the bank's base rate plus 1/2 of 1.0% per annum (9.0% at
December 31, 1997). The Company had drawn $800 against the available line of
credit as of December 31, 1997. Borrowings under the revolving line of credit
are limited to the Borrowing Base, as defined, which is based upon eligible
accounts receivable and inventory. The Amended Credit Facility contains certain
financial covenants and is secured by substantially all of the Company's assets.
Effective March 31, 1998, the Amended Credit Facility was amended to appoint
Harris Trust and Savings Bank as the lender. All other terms remained
substantially unchanged.

48
<PAGE>

Subsequent to the IPO during the twelve months ended May 31, 1996, the
Company retired all of its then-outstanding bank debt, consisting of
borrowings against a line of credit totaling $4,980 and a term loan of
$4,000, with net proceeds from the IPO.

Interest expense and cash paid for interest are as follows:

SEVEN MONTHS ENDED TWELVE MONTHS ENDED
DECEMBER 31 MAY 31
------------------ ---------------------------
1997 1996 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Interest expense, total $2,944 $7 $ 1,385 $ 891 $597
Interest expense relating to discontinued operations - - - 333 447
Cash paid for interest 3,233 7 985 1,022 516

</TABLE>

Other financing costs totaled $1,258 for the seven months ended December 31,
1997 and include extension fees for the BMO Credit Facility. Other financing
costs totaled $3,533 for the twelve months ended May 31, 1997 and include
amortization of $1,240 for the loan discount related to the warrants issued to
BMO and $2,293 for initial closing and a subsequent extension of the BMO Credit
Facility.

10. INCOME TAXES

Significant components of deferred income taxes consist of the following:

MAY 31
DECEMBER 31 ---------------------
1997 1997 1996
<S> <C> <C> <C>
Net operating loss carryforwards $12,600 $ 9,840 $ 4,741
Reserve for unrecoupable artist advances 3,723 2,510 1,878
Allowance for doubtful accounts 353 202 22
Reserve for future returns 1,396 12 304
Other (1,133) (1,853) 368
-------- ---------------------
16,939 10,711 7,313
Less: Valuation allowance 16,939 10,711 7,313
-------- ---------------------
Net deferred income tax asset $ - $ - $ -
-------- ---------------------
-------- ---------------------

</TABLE>

The valuation allowance increased $6,228, $3,398 and $1,735 during the seven
months ended December 31, 1997 and the twelve months ended May 31, 1997 and
1996, respectively, due principally to net operating loss carryforwards and
differences between the book and tax accounting treatment of the reserve for
unrecoupable artist advances. No taxes have been paid for the periods
indicated.

Pursuant to Section 382 of the Internal Revenue Code of 1986, as amended, the
Company's net operating loss carryforward of approximately $33,158, expiring in
years 2007 through 2012, is subject to annual limitations due to a change in
ownership as a result of the IPO. Accordingly, approximately $12,349 of the net
operating loss carryforward is subject to an annual limitation of approximately
$2,200.

11. MERGER, RESTRUCTURING AND ONE-TIME COSTS

As a result of the acquisitions discussed in Note 4, the Company incurred
significant costs to merge and restructure its business with the acquired
companies. Such merger and restructuring costs include severance costs,
relocation costs, lease commitment write-offs, warehouse closing costs and other
related costs. Such costs approximated $251 and $1,700 during the seven months
ended December 31, 1997 and

49
<PAGE>

the twelve months ended May 31, 1997,respectively, relating primarily to
severance costs and a distribution termination fee. The restructuring was
substantially completed at December 31, 1997. Such restructuring resulted in
shifts in the selling and promotion efforts of the Company's Country label and
in-house sales department and a shift in third-party fulfillment of Platinum
Christian Distribution. In addition, one-time costs for the twelve months ended
May 31, 1997 include write-offs of artist advances of approximately $600 in
areas for which the Company has chosen to redirect its resources. These costs
are classified as merger, restructuring and one-time costs and are included in
the Company's operating losses. See Note 18 for further discussion of
one-time costs.

12. RELATED PARTY TRANSACTIONS

During the twelve months ended May 31, 1996, the Company retired all of its
outstanding related party debt with net proceeds from the IPO. Principal and
interest payments to related parties during this period totaled $4,867 and $202,
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 and its right to free future studio usage for $850 to a minority
stockholder and former officer of the Company (see Note 13). The $401 is
reflected in licensing, publishing and other revenues in the accompanying twelve
months ended May 31, 1996 statement of operations. The $850 was credited to
deferred revenues and is being amortized to offset cost of artist projects over
a 27-month period. As a result, the notes receivable balance at May 31, 1996
includes $1,058 relating to these transactions.

The Company entered into Consulting Agreements, each dated as of
December 12, 1997, between the Company and each of MAC Music LLC and Palladin
Capital Group, Inc. The Company has paid each consulting group a one-time
fee of $200 for its services. Each consulting group has agreed to render
consulting services to the Company in connection with (i) management and
strategic planning, (ii) the identification of financing, acquisition,
divestiture, joint venture and licensing opportunities for the Company and
(iii) other matters relating to the day-to-day business and operations of the
Company, or any of its subsidiaries or affiliated companies, as the Chief
Executive Officer or the Board of Directors of the Company may from time to
time reasonably request. The term of each agreement is for five years.

See also Notes 8, 14 and 15.

13. LEASES

Future minimum rental payments due under noncancelable operating leases having
an initial term of more than one year as of December 31, 1997, are $722, $672,
$312, $262 and $263 for the twelve months ended December 31, 1998, 1999, 2000,
2001 and 2002, respectively.

Rent expense is as follows:

SEVEN MONTHS ENDED TWELVE MONTHS ENDED
DECEMBER 31 MAY 31
------------------ ---------------------------
1997 1996 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Rent expense, total $ 435 $ 239 $ 547 $ 619 $ 583
Rent expense relating to discontinued operations - - - 340 309

</TABLE>

50
<PAGE>

14. DISCONTINUED OPERATIONS

During the twelve months ended May 31, 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 during the twelve months ended May 31,
1996 to a company which is owned 80% by a minority stockholder and former
officer 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.

The Company recorded a charge during the twelve months ended May 31, 1995 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 disposal
date ($1,373 and $1,237, respectively). Included in the operating losses
through the disposal date are rent and utility costs that were incurred
subsequent to the disposal date that were not assumed by the buyer. The twelve
months ended May 31, 1996 net loss includes $226 related to operating costs,
including charges for management, administration and interest, in excess of
amounts estimated at the measurement date.

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.

Gross revenues of RNS were $183 and $345 for the twelve months ended May 31,
1996 and 1995, respectively. During the twelve months ended May 31, 1996, the
Company charged the discontinued operations approximately $302 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 twelve months ended
May 31, 1995.

15. STOCK AND WARRANTS

The proceeds from issuance of Redeemable Preferred Stock during the twelve
months ended May 31, 1995 of $4,953 are net of issuance costs of $97 and
proceeds of $975 received prior to the twelve months ended May 31, 1995 by the
Company for such issuance.

The issuance of 1,515,152 shares of Series A-1 Preferred Stock and 1,515,152
shares of Series A-2 Preferred Stock during the twelve months ended May 31, 1995
for total proceeds of $500 was to a related party.

During March 1996, the Company sold a total of 2,740,000 shares of Common Stock
in an IPO for $13 per share, resulting (after payment of underwriting discounts
and commissions and a financial advisory fee) in net proceeds of $32,127. The
net proceeds were used to: (i) retire outstanding related party debt of
$4,867; (ii) retire outstanding borrowings under the Company's bank line of
credit of $4,980; (iii) retire an outstanding term loan of $4,000; (iv) redeem
a portion of the Company's Series A-1 Non-Convertible Preferred Stock for cash
of $4,500 (along with stock issuance discussed below which, together, included
$602 of cumulative preferred dividends) and (v) pay costs related to the public
sale, approximating $1,170. The remaining net proceeds were used for working
capital and other general corporate purposes, including acquisitions.

Immediately prior to the IPO, a one-for-twenty-five reverse split of the
Company's Common Stock, Class A Common Stock and Class B Common Stock occurred
(par value of the shares restated to $.001). Simultaneous with the closing of
the IPO, each share of the Company's Class A Common Stock and Class

51
<PAGE>

B Common Stock then outstanding converted into one share of Common Stock, each
share of Series A-2 Convertible Preferred Stock then outstanding converted into
one-twenty-fifth of one share of Common Stock and 22,200 shares of Common Stock
were issued to certain stockholders exercising options (having an exercise price
of $2.50 per share). Subsequent to the IPO, 117,305 shares of Common Stock were
issued in connection with the redemption of the Company's Series A-1
Non-Convertible Stock and 65,000 shares of Common Stock were issued to certain
of the Company's founders.

At December 31, 1997, the following unissued shares of common stock have been
reserved for future issuance:

<TABLE>
<CAPTION>
<S> <C>
Stock option plans 5,622,000
Stock purchase plan 499,000
Convertible subordinated debentures 510,000
Convertible preferred stock 3,800,000
Warrants 4,359,000
-------------

14,790,000
-------------
-------------
</TABLE>

The Company has not paid dividends on its shares of Common Stock to date.

Pursuant to an Investment Agreement dated October 12, 1997, as amended, on
December 12, 1997 the Company issued and sold to certain parties (the
"Purchasers"), for aggregate gross consideration of $20,000, 20,000 shares of
Series B Convertible Preferred Stock ("Series B Preferred Stock") and
warrants to purchase 3,600,000 shares of Common Stock ("Purchaser Warrants").
The Company also issued and sold to a certain affiliate of the Company, for
aggregate gross consideration of $2,500, 2,500 shares of Series C
Convertible Preferred Stock ("Series C Preferred Stock") and warrants to
purchase 450,000 shares of Common Stock (the "Affiliate Warrants"). The
Series B Preferred Stock and the Series C Preferred Stock are collectively
referred to as the "Preferred Stock." The values of the Series B and Series
C Preferred Stocks are approximately $17,938 and $2,242, respectively. The
values of the Purchaser and Affiliate Warrants are $2,062 and $258,
respectively. These amounts, net of associated costs of approximately
$2,045, are reflected in additional paid-in capital on the balance sheet.

The Preferred Stock accrues dividends compounded at an annual rate of 12.0% for
the first year, 14.0% for the second year, 16.0% for the third year, 18.0% for
the fourth and fifth years and 20% at all times thereafter, of the purchase
price of the Preferred Stock, in preference to any dividends on any other class
of capital stock. The Preferred Stock will be redeemable by the Company at any
time at a price equal to the purchase price paid by the Purchasers thereof plus
accrued and unpaid dividends. The Preferred Stock will be convertible,
commencing two years from the date of issue, into shares of Common Stock at the
lesser of $5.9375 or the average of the daily closing price per share of Common
Stock for 30 consecutive trading days following the public release by the
Company of its consolidated earnings statement for the 1998 fiscal year;
provided that if shares of Common Stock are not then traded on any national
securities exchange or quoted on the Nasdaq Stock Market or a similar service,
the closing price for the foregoing purpose shall be deemed to be the fair value
of a share of Common Stock as determined in good faith by the Board of
Directors. If the Board of Directors is unable to determine fair market value
or if the holders of a majority of the outstanding shares of the Preferred Stock
disagree with the Board's determination, then fair market value will be
determined by an independent financial expert.

52
<PAGE>

each anniversary of the original date of issuance of the Series B Preferred
Stock, so long as any Series B Preferred Stock remains outstanding. The Common
Stock underlying the Purchaser and Affiliate Warrants may be purchased at an
exercise price per share of the lesser of $6.25 and 82.5% of the average of the
daily closing price per share of Common Stock for the 30 consecutive trading
days following the public release by the Company of its consolidated earnings
statement for the 1998 fiscal year; provided that if shares of Common Stock are
not then traded on any national securities exchange or quoted on the Nasdaq
Stock Market or a similar service, the closing price for the foregoing purpose
shall be deemed to be the fair value of a share of Common Stock as determined in
good faith by the Board of Directors. If the Board of Directors is unable to
determine fair market value or if the holders of a majority of the outstanding
shares of the Preferred Stock disagree with the Board's determination, then fair
market value will be determined by an independent financial expert.

In January 1997, the Company issued to BMO a warrant to purchase approximately
259,000 shares of Common Stock at an exercise price of $.01 per share in
connection with the BMO Credit Facility. The value of the warrants amounted to
$1,240, the balance of which is included in additional paid-in capital. The
warrants expire on January 31, 2002 and are subject to antidilution adjustment
if, during the term of the BMO Credit Facility, the Company issues shares of
Common Stock and does not use the proceeds of such issuance to pay borrowings
under the BMO Credit Facility.

16. RETIREMENT PLAN

Employees of the Company are eligible to participate in a defined-contribution
benefit plan ("Plan") upon completing six months of service and attaining age
21. The Company may make a matching contribution and an additional
discretionary contribution as defined by the Plan. No Company contributions
were made during the seven months ended December 31, 1997 and 1996 or the twelve
months ended May 31, 1997, 1996 and 1995, respectively.

17. STOCK-BASED COMPENSATION

Under the Platinum Entertainment, Inc. 1993 Stock Option Plan ("1993 Plan"),
incentive and nonqualified stock options may be granted to eligible participants
entitling them to purchase shares of Common Stock at an option price determined
by a committee appointed by the Board of Directors (Committee) to administer the
1993 Plan. The option period is 10 years and 15 years from the date of grant
for incentive stock options and nonqualified stock options, respectively. The
exercise price for incentive options may not be less than fair market value on
the date the option is granted (110% of fair market value in the case of a
greater than 10% stockholder), and at no time shall any one participant hold
options exercisable for more than 30% of the total Common Stock reserved for
issuance under the 1993 Plan. The Company has reserved 144,000 shares of Common
Stock for issuance under the 1993 Plan, of which 22,200 shares have been issued.
The exercisability of the options is subject to determination by the Committee.

Under the Platinum Entertainment, Inc. 1995 Directors' Stock Option Plan
("Directors' Plan"), nonqualified stock options may be granted to directors of
the Company who are not employees entitling them to purchase shares of Common
Stock at an option price equal to the fair market value on the date of grant.
The Company has reserved 500,000 shares of Common Stock for issuance under the
Directors' Plan. The exercisability of the options is subject to determination
by the Committee.

Under the Platinum Entertainment, Inc. 1995 Employee Incentive Compensation Plan
("Incentive Plan"), incentive awards in the form of stock options, stock
appreciation rights, deferred stock or other such awards may be granted as
determined by the Committee. The Company has reserved 5,000,000 shares of
Common Stock for issuance under the Incentive Plan. The eligibility of
participants is at the discretion of the Committee and may include
non-employees. The option price and exercisability are determined by the
Committee provided that the option price per share is not less than the fair
value per share on the date the option is granted, and that no option is
exercisable more than 10 years from the date of grant, except in the

53
<PAGE>

case of incentive stock options for a greater than 10% stockholder, in which
case the option period cannot exceed five years.

A summary of the activity of the Company's stock option plans is as follows:

TWELVE MONTHS ENDED MAY 31,
SEVEN MONTHS ENDED -------------------------------
DECEMBER 31, 1997 1997
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding - beginning of year 1,624,844 $ 7.25 937,800 $ 9.56
Granted 604,000 5.50 952,478 6.16
Exercised - - - -
Forfeited (54,866) 8.54 (265,434) 11.47
-------------------------------------------------------------
Outstanding - end of year 2,173,978 $ 6.38 1,624,844 $ 7.25
-------------------------------------------------------------
-------------------------------------------------------------

Exercisable at end of year 1,054,047 $ 6.50 1,063,645 $ 6.80

Weighted average fair value of
options granted during the year $ 4.13 $ 4.27

TWELVE MONTHS ENDED MAY 31,
---------------------------------------------------------
1996 1995
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE
---------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding - beginning of year 399,100 $ 6.16 142,800 $ 2.40
Granted 560,900 11.70 256,300 8.25
Exercised (22,200) 2.50 - -
Forfeited - - - -
-------------------------------------------------------
Outstanding - end of year 937,800 $ 9.56 399,100 $ 6.16
-------------------------------------------------------
-------------------------------------------------------

Exercisable at end of year 355,567 $ 6.26 366,567 $ 5.97

Weighted average fair value of
options granted during the year $ 8.03

</TABLE>

Other information regarding options as of December 31, 1997 is as follows:

WEIGHTED WEIGHTED
AVERAGE AVERAGE
OPTIONS OPTIONS EXERCISE CONTRACTUAL
OUTSTANDING EXERCISABLE PRICE LIFE
- ------------------------------------------------------------------
<S> <C> <C> <C>
40,000 40,000 $ 0.25 5.8 years
65,800 65,800 2.50 5.0 years
1,927,578 901,380 6.20 9.1 years
140,600 46,867 12.36 8.4 years
-------------------------
2,173,978 1,054,047
-------------------------
-------------------------

</TABLE>

In February 1997, 200,000 options which originally had an exercise price of
$11.625 were canceled and replaced with 200,000 options with an exercise price
of $6.25, representing the market price of the Common Stock on the date the
cancellation and new grant occurred. In addition, approximately 395,000 options
which originally vested in three equal annual increments beginning in April 1997
were fully vested as of February 1997.

In June 1997, 39,000 options which originally had an exercise price of $8.25
were canceled and replaced with 39,000 options with an exercise price of $6.00,
representing the market price of the Common Stock on the date the cancellation
and new grant occurred. In addition, 117,300 options which originally had an
exercise price of $11.625 were canceled and replaced with 117,300 options with
an exercise price of $6.00, representing the market price of the Common Stock on
the date the cancellation and new grant occurred.

54
<PAGE>

Pursuant to SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION ("SFAS No.
123"), the Company is required to disclose the pro forma effects on net loss
and basic and diluted earnings per share as if the Company had elected to use
the fair value approach to account for all its stock-based compensation
plans. If compensation cost for the Company's plans had been determined
consistent with the fair value approach set forth in SFAS No. 123, the
Company's pro forma net loss and pro forma basic and diluted loss per share
for the fiscal years ended would be increased as follows:

SEVEN MONTHS ENDED TWELVE MONTHS ENDED MAY 31
DECEMBER 31 --------------------------
1997 1997 1996
<S> <C> <C> <C>
Net loss applicable to common shares $ (16,446) $ (9,354) $ (5,229)
Pro forma net loss (17,769) (13,839) (5,501)
Basic and diluted loss per share (3.14) (1.82) (1.79)
Pro forma basic and diluted loss per share (3.40) (2.69) (1.88)

</TABLE>

The fair value of each option grant is estimated on the date of the grant using
the Black-Scholes option valuation model with the following assumptions:

<TABLE>
<CAPTION>
SEVEN MONTHS ENDED TWELVE MONTHS ENDED MAY 31
DECEMBER 31 --------------------------
1997 1997 1996
<S> <C> <C> <C>
Expected dividend yield 0% 0% 0%
Expected stock price volatility 0.68 0.59 0.59
Risk-free interest rate 5.73% 6.54% 6.54%
Weighted-average expected life of options 9 years 8 years 8 years

</TABLE>

Option valuation models require the input of highly subjective assumptions.
Because the Company's stock options have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate in management's
opinion, the existing model does not necessarily provide a reliable single
measure of the fair value of its stock options.

During December 1997, the Company's stockholders approved the 1997 Employee
Stock Purchase Plan ("Stock Purchase Plan"), effective June 1, 1997. Under
the Stock Purchase Plan, employees are granted the opportunity to purchase
the Company's common stock at 85% of the closing price of the Company's
common stock on the Nasdaq National Market on the date of grant or exercise,
whichever is lower. The first offering under the Plan commenced on June 1,
1997 and concluded on November 30, 1997. Subsequent offerings begin on
December 1 and June 1 of each year and conclude on November 30 and May 31,
respectively. A total of 500,000 shares of common stock have been reserved
under this plan. During the seven months ended December 31, 1997, 637 shares
were issued under the Stock Purchase Plan.

18. TERMINATION OF THE K-TEL AGREEMENT

55
<PAGE>

subsidiaries of K-tel (the "K-tel Acquisition"). The Company deposited $1,750
in escrow in accordance with the K-tel Agreement. During September 1997, the
Company terminated the K-tel Agreement alleging that K-tel materially breached
the K-tel Agreement. Both the Company and K-tel have filed claim to the escrowed
amounts. The outcome of such claims is uncertain. Accordingly, the Company
reserved the full escrowed amount during the seven months ended December 31,
1997. In addition, approximately $1,100 of legal, accounting, and other
incremental costs associated with the K-tel Acquisition were expensed by the
Company during the seven months ended December 31, 1997. These costs are
classified as merger, restructuring and one-time costs and are included in the
Company's operating loss.

19. LITIGATION

During November 1997, JCSHO, Inc., a Minnesota corporation, formerly known as
Intersound, Inc. ("JCSHO"), filed a complaint against the Company in the
District Court of Minnesota, Fourth Division. JCSHO alleges breach of contract
by the Company with regard to the convertible subordinated debentures in the
aggregate principal amount of $5,000 (the "Convertible Subordinated Debentures")
made payable to JCSHO in connection with the Intersound Acquisition. JCSHO
alleges that the Company is in default on its obligations under the Convertible
Subordinated Debentures due to failure to make certain payments under the
Convertible Subordinated Debentures at a defined default interest rate. JCSHO
is seeking damages in the amount of $5,000 and costs, disbursements and
attorney's fees. The Company believes that JCSHO's allegations are without
merit and intends to vigorously defend this litigation.

The Company is a party in various lawsuits which have arisen in the normal
course of business. In the opinion of management, the ultimate outcome of
these lawsuits will not have a material impact on the Company's financial
position or results of operations.

<PAGE>

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

None.

56
<PAGE>

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

DIRECTORS

The following persons served as directors of the Company during the seven
months ended December 31, 1997 and will continue to serve as directors until
their terms of office expire (as indicated below) or until their successors are
elected and qualified.

NAME AGE POSITION WITH COMPANY SERVED TERM
AS EXPIRES
DIRECTOR
SINCE
- ------------------------------ --- ----------------------------------------
<S> <C> <C> <C> <C>
Steven Devick (1)............. 46 Chairman of the Board, Chief Executive 1992 1998
Officer and President

Douglas C. Laux(2)............ 45 Chief Financial Officer, Secretary and 1995 1999
Director

Michael P. Cullinane(1)(2).... 48 Director 1992 1997

Craig Duchossois(1)(2)........ 53 Director 1994 1998

Andrew J. Filipowski(1)....... 47 Director 1992 1997

Rodney L. Goldstein(1)........ 46 Director 1994 1998

Carl D. Harnick(2)............ 63 Director 1997 2000

Paul L. Humenansky(2)......... 40 Director 1992 1999

Robert A. Morgado(1).......... 60 Director 1997 1998

Mark J. Schwartz(1)........... 40 Director 1997 1999

Christopher M. Unrath(2)...... 31 Director 1997 1999
</TABLE>

- ------------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.

Steven Devick is a co-founder of the Company and has served as its Chairman
of the Board and Chief Executive Officer since January 1992. On January 1,
1996, Mr. Devick assumed the additional office of President. Mr. Devick is also
a director of PLATINUM TECHNOLOGY, INC. (Nasdaq: PLAT), a publicly-held software
company not affiliated with the Company ("PTI"), and an officer and director of
several privately-held companies. See "Compensation Committee Interlocks and
Insider Participation."

Douglas C. Laux has served the Company as Chief Financial Officer and as a
Director since September 1995 and as Secretary since February 1996. From
October 1986 until he joined the Company, Mr. Laux was a partner in the
accounting firm of Ernst & Young LLP.

Michael P. Cullinane has been a Director of the Company since March 1992.
Mr. Cullinane jointed PTI in 1988 as Senior Vice President and Chief Financial
Officer. He has also served as PTI's Treasurer since 1989, as its Executive
Vice President since 1994 and as a Director since 1989. See "Compensation
Committee Interlocks and Insider Participation."

Craig Duchossois has been a Director of the Company since April 1994. Mr.
Duchossois has been President and Chief Executive Officer of Duchossois
Industries, Inc., a privately-held diversified manufacturing and service
organization since 1986. Mr. Duchossois also serves as Chairman of the Board of
Directors of a privately-held company.

57
<PAGE>

Andrew J. Filipowski is a co-founder of the Company and has served as a
Director since January 1992. Mr. Filipowski is also a co-founder of PTI and has
been Chairman of the Board of Directors, President and Chief Executive Officer
of PTI since its formation in April 1987. Mr. Filipowski serves as a director
of System Software Associates (Nasdaq: SSAX), a publicly-held company, and as a
director of several privately-held companies. See "Compensation Committee
Interlocks and Insider Participation."

Rodney L. Goldstein has been a Director of the Company since June 1994.
Since 1981, Mr. Goldstein has been the managing partner of Frontenac Company
("Frontenac"). Mr. Goldstein currently serves on the boards of a number of
privately-held companies.

Carl D. Harnick has been a Director of the Company since April 1998. Mr.
Harnick is a consultant for Alpine Equity Partners, L.P, a service he has
provided since October 1997. Mr. Harnick was previously a partner of the
accounting firm Ernst & Young LLP where he provided auditing and other
accounting services to clients in the entertainment and venture capital
industries.

Paul L. Humenansky has been a Director of the Company since March 1992.
Mr. Humenansky is a founder and director of PTI and was appointed Chief
Operations Officer of PTI in January 1993. Mr. Humenansky also served as PTI's
Executive Vice President, Product Development from 1987 until 1992. Mr.
Humenansky also serves on the boards of two privately-held companies.

Robert A. Morgado has been a Director of the Company since December 1997.
Mr. Morgado is the Chairman, of Maroley Media Group LLC, a private equity firm
he founded in 1995. Maroley Media focuses on global media and entertainment
investments. In 1982, Mr. Morgado joined Warner Communications, Inc. In January
1990, with the creation of Time Warner Inc., he became the Chairman and Chief
Executive Officer of the Warner Music Group a position he held until June 1995.
Mr. Morgado serves as a director of Activision, a publicly-held company,
(Nasdaq: ATVI), and serves on the boards of several privately-held companies.

Mark J. Schwartz has been a Director of the Company since December 1997.
Mr. Schwartz is the President and Chief Executive Officer of Palladin Capital
Group, Inc., a position he has held since August 1997. Mr. Schwartz previously
served as the President, since March 1997, and a Managing Director, since April
1994, of Rosecliff, Inc. Mr. Schwartz was a member of the Investment Banking
Division of Merrill Lynch & Co. from August 1985 to March 1994. Mr. Schwarz is
also an officer and a director of a number of privately-held companies.

Christopher M. Unrath has been a Director of the Company since December
1997. Mr. Unrath has been a principal of Palladin Capital Group, Inc. since
January 1998. From 1993 to the end of 1997, Mr. Unrath was an executive of
Ardshiel Inc., a private equity investment firm located in New York, NY. Mr.
Unrath is also a director of two privately-held companies.

DIRECTORS COMPENSATION

The Company's non-employee Directors do not receive any cash
compensation for their services; however, the Company reimburses such
Directors for travel expenses incurred in connection with their activities on
behalf of the Company. Each of Messrs. Cullinane, Duchossois, and Humenansky
has been granted 20,000 shares, respectively, and Messrs. Filipowski,
Duchossois and Goldstein has been granted 4,000 shares, respectively, of
Common Stock pursuant to the Company's 1995 Directors' Stock Option Plan (the
"Directors' Plan). Each of Messrs. Filipowski, Humenansky, Cullinane,
Duchossois and Goldstein has been granted options to purchase 19,000 shares
of Common Stock pursuant to the Company's 1995 Employee Incentive
Compensation Plan.

MEETINGS

During the seven months ended December 31, 1997, the Board of Directors
held five formal meetings. Each current Director attended at least 75% of the
aggregate number of such meetings held during his term of office.

58
<PAGE>

COMMITTEES OF THE BOARD OF DIRECTORS

The Board of Directors has established an Audit Committee and a
Compensation Committee. The Audit Committee currently consists of Messrs.
Cullinane, Duchossois, Harnick, Humenansky, Laux and Unrath. The Compensation
Committee currently consists of Messrs. Devick, Duchossois, Filipowski,
Goldstein, Morgado and Schwartz. The Board of Directors may establish such
other committees as deemed necessary and appropriate from time to time,
including, but not limited to, an Executive Committee. The Company does not
have a nominating committee.

The Audit Committee makes recommendations concerning the engagement of
independent public accountants, reviews with the independent public accountants
the plans and results of the audit engagement, approves professional services
provided by the independent public accountants, reviews the independence of
public accounts, considers the range of audit and non-audit fees and reviews the
adequacy of the Company's internal accounting controls. The Audit Committee did
not hold any formal meetings during the seven months ended December 31, 1997.

The Compensation Committee determines the compensation of the Company's
executive officers and the members of the Compensation Committee who are not
employees of the Company make determinations as to the grant of options to
purchase shares of the Company's stock under the Company's stock option plans.
The Compensation Committee did not hold any formal meetings during the seven
months ended December 31, 1997.

EXECUTIVE OFFICERS

Set forth below is a table identifying executive officers of the Company who are
not identified in the tables entitled "Directors and Executive Officers of the
Registrant -- Directors."

<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------ --- --------------------------------------
<S> <C> <C>
Thomas R. Leavens........... 50 Chief Operating Officer and General
Counsel

Lynne Hoffman Engel......... 45 Executive Vice President-Sales and
Marketing

Bryan Hadley................ 33 Executive Vice President-Intersound
Distribution

</TABLE>

Mr. Leavens has been the General Counsel and Chief Operating Officer of the
Company since September 1992. From December 1986 until he joined the Company,
Mr. Leavens was a partner in the law firm McBride, Baker & Coles.

Ms. Hoffman-Engel joined the Company as its Senior Vice President-Sales and
Marketing in June 1996. In September 1997, Ms. Hoffman-Engel was promoted to
Executive Vice Present-Sales and Marketing. Prior to joining in the Company,
from 1993 to 1996 Ms. Hoffman-Engel served as Senior Vice President-Sales and
Marketing-Classics and Jazz for PolyGram and from 1987 to 1993 as Vice President
for London Records, a PolyGram label.

Mr. Hadley is the Executive Vice President of Intersound Distribution.
Prior to the Company's purchase of the assets of Intersound, Inc., Mr. Hadley
worked for Intersound, Inc. since it was founded in 1983. Mr. Hadley served
as national and regional sales manager for Intersound, Inc. where he held
sales and promotional positions.

The Board of Directors elects officers annually and such officers serve at
the discretion of the Board. Each of Messrs. Devick, Laux, Leavens and
Hoffman-Engel however, have an employment agreement with the Company. See
"Executive Compensation -- Employment Agreements." There are no family
relationships among any of the directors or officers of the Company.

59
<PAGE>

SECTION 16(a) COMPLIANCE

Section 16 of the Securities Exchange Act of 1934, as amended (the "1934
Act"), requires the Company's officers and directors and persons who own greater
than 10% of a registered class of the Company's equity securities to file
reports of ownership and changes in ownership with the Securities and Exchange
Commission (the "Commission") and The Nasdaq Stock Market. Based solely on a
review of the forms it has received and on written representations from certain
reporting persons that no such forms were required for them, the Company
believes that, during the seven month ended December 31, 1997 all Section 16
filing requirements applicable to its officers, directors and greater than 10%
beneficial owners were complied with by such persons, except that Mr. Duchossois
inadvertently failed to timely report a purchase of shares of Common Stock of
the Company on Form 4 and Messrs. Laux and Leavens inadvertently failed to
timely file a Form 5. Such filings have since been completed.

60
<PAGE>

ITEM 11. EXECUTIVE COMPENSATION.

The following table provides information concerning the annual and
long-term compensation for services rendered to the Company during the seven
months ended December 31, 1997 and the twelve month periods ended May 31,
1997 and 1996 to its chief executive officer and the four most highly
compensated executive officers of the Company whose total annual salary and
bonus exceeded $100,000 during such period (each, a "Named Executive
Officer").

SUMMARY COMPENSATION TABLE

LONG TERM
ANNUAL COMPENSATION COMPENSATION
------------------------- AWARDS
NAME AND PRINCIPAL POSITION PERIOD SALARY ($) BONUS ($) SECURITIES ALL OTHER
UNDERLYING COMPENSATION
OPTIONS (#) ($)

- -------------------------------------------------------------------------------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Steven Devick 06/01/97-12/31/97 $ 357,384 (1) $ 156,250 401,734 $ -
President and Chief Executive 06/01/96-05/31/97 570,263 - 200,000 (2) -
Officer 268,044
06/01/95-05/31/96 275,000 (3) - 200,000 -

Douglas C. Laux 06/01/97-12/31/97 $ 146,775 $ 62,500 125,000 $ 1,545
Chief Financial Officer and 39,000 (5)
Secretary (4) 117,300 (6)
06/01/96-05/31/97 252,911 - 125,000 1,425
06/01/95-05/31/96 139,055 - 156,300 1,345

Thomas R. Leavens 06/01/97-12/31/97 $ 134,615 $ 50,000 75,000 $ -
Chief Operating Officer and 06/01/96-05/31/97 200,483 - 55,000 -
General Counsel 06/01/95-05/31/96 161,198 - 40,000 -

Lynne Hoffman-Engel 06/01/97-12/31/97 $ 134,615 $ - 20,000 $ -
Executive Vice President - Sales and 06/01/96-05/31/97 245,192 25,000 20,000 -
Marketing(7) 06/01/95-05/31/96 - - - -

Bryan Hadley 06/01/97-12/31/97 $ 96,635 $ - 20,000 $ -
Executive Vice President - Intersound 06/01/96-05/31/97 56,287 - - -
Distribution(8) 06/01/95-05/31/96 - - - -

</TABLE>

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

(1) Included in this amount is an aggregate $27,985 which has been added to Mr.
Devick's gross salary and then deducted from his salary to cover monthly
automobile lease payments made by the Company on his behalf.
(2) Options to purchase 200,000 shares of Common Stock granted during April
1996 were cancelled and replaced with options to purchase 200,000 shares of
Common Stock during February 1997 in connection with a repricing
transaction.
(3) Of this amount $227,038 was paid in shares of Common Stock, valued based on
the closing price of the Common Stock on the Nasdaq National Market on May
14, 1996.
(4) Mr. Laux joined the Company on September 11, 1995.
(5) Options to purchase 39,000 shares of Common Stock granted during September
1995 were cancelled and replaced with options to purchase 39,000 shares of
Common Stock during June 1997 in connection with a repricing transaction.
See "Compensation Committee Report on Repricing of Options."
(6) Options to purchase 117,300 shares of Common Stock granted during April
1996 were cancelled and replaced with options to purchase 117,300 shares of
Common Stock during June 1997 in connection with a repricing transaction.
See "Compensation Committee Report on Repricing of Options."
(7) Lynne Hoffman-Engel joined the Company on July 1, 1996.

61
<PAGE>

(8) Bryan Hadley joined the Company on February 1, 1997.

OPTION GRANTS IN LAST FISCAL YEAR -- The following table provides
information on grants of stock options during the seven months ended
December 31, 1997 to the Named Executive Officers. No stock appreciation
rights were granted to the Named Executive Officers during the seven months
ended December 31, 1997.

INDIVIDUAL GRANTS
- ----------------------------------------------------------------------------
PERCENT OF POTENTIAL REALIZATION VALUE
NUMBER OF TOTAL AT ASSUMED ANNUAL RATES
SECURITIES OPTIONS OF STOCK PRICE
UNDERLYING GRANTED TO APPRECIATION FOR OPTION
OPTIONS EMPLOYEES EXERCISE OR TERM (2)
GRANTED IN CURRENT BASE PRICE EXPIRATION ----------------------------
NAME (#)(1) PERIOD ($/SH) DATE 5%($) 10%($)
- ---- ------ ------ ------ ---- ----- ------
<S> <C> <C> <C> <C> <C> <C>
Steven Devick 126,734 45.2% $ 6.00 06/02/07 $ 478,214 $ 1,211,888
137,500 (3) $ 6.00 06/02/07 $ 518,838 $ 1,314,838
137,500 (4) $ 5.00 12/15/07 $ 910,579 $ 2,307,586
Douglas C. Laux 39,000 (5) 31.6% $ 6.00 07/25/05 $ 111,725 $ 267,600
117,300 (6) $ 6.00 04/29/06 $ 206,054 $ 679,136
62,500 (3) $ 6.00 06/02/07 $ 235,835 $ 597,653
62,500 (4) $ 5.00 12/15/07 $ 196,530 $ 498,045
Thomas R. Leavens 37,500 (3) 8.4% $ 6.00 06/02/07 $ 141,501 $ 358,592
37,500 (4) $ 5.00 12/15/07 $ 117,918 $ 298,827
Lynne Hoffman-Engel 20,000 (4) 2.2% $ 5.00 12/15/07 $ 62,889 $ 159,374
Bryan Hadley 20,000 (4) 2.2% $ 5.00 12/15/07 $ 75,467 $ 191,249

</TABLE>

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

(1) Each of these options was granted pursuant to the Employee Incentive
Compensation Plan and is subject to the terms of such plan. All options
were granted at an exercise price equal to the fair market value of the
Company's Common Stock on the date of grant as determined by the
Compensation Committee of the Board of Directors of the Company.
(2) In accordance with the rules of the Securities and Exchange Commission (the
"Commission"), shown are the hypothetical gains or "option spreads" that
would exist for the respective options. These gains are based on assumed
rates of annual compounded stock price appreciation of 5% and 10% from the
date the option was granted over the full option term of ten years. The 5%
and 10% assumed rates of appreciation are mandated by the rules of the
Commission and do not represent the Company's estimate or projection for
future increases in the price of its Common Stock.
(3) This option becomes exercisable in three annual increments beginning June
2, 1998.
(4) This option becomes exercisable in three annual increments beginning
December 15, 1998.
(5) Options to purchase 39,000 shares of Common Stock granted during September
1995 were cancelled and replaced with options to purchase 39,000 shares of
Common Stock during June 1997 in connection with a repricing transaction.
See "Compensation Committee Report on Repricing of Options." This option
becomes exercisable in three annual increments beginning on July 25, 1996.
(6) Options to purchase 117,300 shares of Common Stock granted during September
1995 were cancelled and replaced with options to purchase 117,300 shares of
Common Stock during June 1997 in connection with a repricing transaction.
See "Compensation Committee Report on Repricing of Options." This option
becomes exercisable in three annual increments beginning on April 29, 1997.

62
<PAGE>

OPTION VALUES -- The following table sets forth for the Named Executive
Officers information concerning the value of unexercised stock options at
December 31, 1997. No stock options were exercised during the seven months
ended December 31, 1997.

NUMBER OF SHARES UNDERLYING VALUE OF UNEXERCISED IN-THE-MONEY
UNEXERCISED OPTIONS AT 12/31/97 (#) OPTIONS AT 12/31/97 (1)($)
----------------------------------- ---------------------------------
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ------------------------- ----------------------------------- ---------------------------------
<S> <C> <C>
Steven Devick............ 803,078/137,500 296,084/343,750
Douglas C. Laux.......... 65,100/341,200 48,825/318,400(2)
Thomas R. Leavens........ 53,333/156,666 170,000/135,000
Lynne Hoffman-Engel...... --/40,000 --/50,000
Bryan Hadley............. --/20,000 --/15,000(3)
</TABLE>

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

(1) The value per option is calculated by subtracting the exercise price from
the closing price of the Common Stock on the Nasdaq National Market on
December 31, 1997 of $6.75 per share.
(2) Upon exercise of certain of these options (exercisable for 39,000 shares of
Common Stock at an exercise price of $6.00 per share), Mr. Laux will
receive a cash bonus equal to the exercise price.
(3) Upon exercise of these options, Mr. Hadley will receive a cash bonus
equal to the product of (i) the number of shares purchased (not to
exceed 10,000 shares) and (ii) the difference between $8.25 and the
closing price of the Common Stock on the exercise date; provided that in
no event shall such difference exceed $6.00.

EMPLOYMENT AGREEMENTS

On June 1, 1997, the Company entered into a three-year employment agreement
with Steven Devick, for the position of Chief Executive Officer of the Company.
Unless terminated or not renewed by the Company or Mr. Devick, the term of the
agreement will continue after the initial three-year term on a year-to-year
basis. The agreement provides for an annual base salary of $625,000 plus bonus
compensation determined by the Compensation Committee of the Board of Directors.
Mr. Devick's employment agreement also provides for continuation of his salary,
bonus and fringe benefits for three years following termination of employment if
Mr. Devick (i) is terminated by the Company without cause, (ii) terminates his
employment for Good Reason (as defined below) or (iii) is notified by the
Company of its intent not to extend the agreement beyond its initial term. So
long as Mr. Devick does not engage in conduct giving rise to the right to
terminate employment for cause, Good Reason includes (i) the failure to elect
the executive to the office previously held, the removal of the executive from
his position or the assignment to the executive of any additional duties or
responsibilities or a reduction in executive duties or responsibilities which,
in either case, are inconsistent with those customarily associated with such
position; (ii) a relocation by the Company of the executive's place of
employment beyond a specified area; (iii) material breach by the Company of the
agreement; (iv) a purported termination of executive's employment in
contravention of the notice provisions of the agreement and (v) the occurrence
of a change in control of the Company.

On June 1, 1997, the Company entered into an employment agreement with
Douglas C. Laux, for the position of Chief Financial Officer, and Thomas R.
Leavens, for the position of General Counsel. Each of the agreements is for a
three-year term, subject to renewal on a year-to-year basis unless terminated
or not renewed by the Company or the executive. The agreements provide for
annual salaries of $300,000 for Mr. Laux and $250,000 for Mr. Leavens, plus
bonus compensation determined by the Compensation Committee of the Board of
Directors. The employment agreements contain severance provisions
substantially identical to those contained in Mr. Devick's agreement except
that the severance periods for Messrs. Laux and Leavens extend until the
later of (i) the end of the term of the employment agreement and (ii) the
first anniversary of the date of executive's termination.

63
<PAGE>

On December 12, 1997, Messrs. Devick, Laux and Leavens' employment
agreements were amended to amend the definition of Change of Control such that a
Change in Control would not be deemed to have occurred upon or as a result of
(i) the issuance of Series B Preferred Stock of the Company or warrants to
purchase Common Stock of the Company in connection with the Investment Agreement
dated October 12, 1997 and amended by letter amendments dated October 28, 1997,
October 30, 1997 and November 26, 1997 (the "Investment Agreement"), between the
Company and the purchasers named therein (the "Purchasers"), (ii) upon the
acquisition of any shares of Common Stock of the Company pursuant to the
Investment Agreement, (iii) upon the exercise of any of the rights and
privileges granted to each of the Purchasers pursuant to the Investment
Agreement, (iv) upon the exercise of any rights and privileges granted to the
holders of the Series B Preferred Stock pursuant to the Certificate of
Designations creating the terms of the Series B Preferred Stock, or (v)
otherwise as a result of the equity ownership or designation of directors by the
Purchasers or their affiliates, employees, partners or members.

In addition, under a previous employment agreement with the Company, Mr.
Laux was granted options to purchase 39,000 shares of Common Stock at an
exercise price of $6.00 per share of Common Stock, with options for 13,000
shares becoming exercisable on each of July 25, 1996, 1997, and 1998. Such
agreement further provides that upon the exercise by Mr. Laux of any such
options, he will be entitled to receive a cash bonus equal to the exercise
price.

The Company entered into an employment agreement on July 1, 1996 with Lynne
Hoffman-Engel pursuant to which Ms. Hoffman-Engel became Senior Vice
President--Sales and Marketing of the Company. In September 1997, she was
promoted to Executive Vice President--Sales and Marketing. The term of Ms.
Hoffman-Engel's employment is for a period of three years and four months. The
agreement provides for an annual base salary of $250,000 plus a bonus in the
amount of $25,000 and further incentive compensation (determined and based on an
annual basis) for achieving sales results that meet performance goals
established from time to time by the Company. Under the agreement, the Company
also granted Ms. Hoffman-Engel an option to purchase 20,000 shares of Common
Stock pursuant to the Company's 1995 Employee Compensation Plan.

Mr. Hadley has an employment agreement with the Company dated February
1, 1997, and amended November 19, 1997, pursuant to which he became the
Executive Vice President of Intersound Distribution. The term of Mr.
Hadley's employment is for a period of three years. The agreement provides
for an annual base salary of $225,000. Under the agreement, the Company also
granted Mr. Hadley an option to purchase 20,000 shares of Common Stock
("Purchase Option") pursuant to the Company's 1995 Employee Compensation
Plan. Upon exercise of the Purchase Option, Mr. Hadley will receive a cash
bonus equal to the product (i) of the number of shares purchased (not to
exceed 10,000 shares) and (ii) the difference between $8.25 and the closing
price of the Common Stock on the exercise date; provided that in no event
shall such difference exceed $6.00.

No other Named Executive Officer has an employment agreement with the
Company.

64
<PAGE>

COMPENSATION COMMITTEE REPORT ON REPRICING OF OPTIONS

The Compensation Committee and the Board of Directors approved and ratified
the repricing of certain options to purchase Common Stock for Mr. Laux during
the seven months ended December 31, 1997.

The Board of Directors approved and ratified the repricing by the Company
of the exercise price of certain options to purchase Common Stock granted to Mr.
Laux in consideration of financial assistance provided by Mr. Laux to the
Company, under the Employee Compensation Plan, effective as of June 2, 1997, at
the fair market value of the Company's Common Stock on June 2, 1997, as
determined by the Compensation Committee.

The following table provides information on repricing of stock options
granted to Mr. Laux during the seven months ended December 31, 1997.

- -------------------------------------------------------------------------------------------------
NUMBER OF MARKET EXERCISE NEW EXPIRATION
NAME DATE OF SECURITIES PRICE OF PRICE AT EXERCISE DATE OF
---- REPRICING UNDERLYING STOCK AT TIME OF PRICE OPTION AT
--------- OPTIONS TIME OF REPRICING ($) DATE OF
REPRICED REPRICING ($) --- REPRICING
(#) ($) --- ---------
--- ---
<S> <C> <C> <C> <C> <C> <C>
Douglas Laux........... 6/2/97 39,000 6.00 8.25 6.00 7/25/05
6/2/97 117,300 6.00 11.625 6.00 4/29/06
</TABLE>

COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION

The Compensation Committee of the Board of Directors sets and administers
the policies that govern the annual and long-term compensation of executive
officers of the Company. The non-employee members of the Compensation Committee
(the "Incentive Plan Committee"), based in part on recommendations by Mr.
Devick, make all decisions concerning awards of stock options under the
Company's stock option plans, except the non-discretionary plan for non-employee
directors. Mr. Devick does not participate in the Compensation Committee's
determinations with respect to his own compensation.

COMPENSATION POLICIES TOWARD EXECUTIVE OFFICERS

The Compensation Committee aims to provide competitive levels of
compensation that relate compensation with the Company's annual and long-term
performance goals, reward above average corporate performance, recognize
individual initiative and achievements, and assist the Company in attracting and
retaining qualified executives. The Compensation Committee attempts to achieve
these objectives through a combination of base salary, stock options, and cash
bonus awards. In making its determination, the Compensation Committee utilizes
outside information to obtain compensation information concerning comparable
companies in the entertainment industry.

BASE SALARIES

The base salaries for Messrs. Devick, Laux, Leavens and Hadley and Ms.
Hoffman-Engel for the seven months ended December 31, 1997 were governed by the
terms of their respective employment agreements with the Company. See
"Executive Compensation - Employment Agreements." In establishing the terms of
the new employment agreements for these officers, the Compensation Committee
discussed and considered the significant contributions made to the Company by
these key officers, including the signing of new artists to the Company's
labels, sales accomplishments, contributions to the Company's acquisition of
capital financing, the importance of such contributions to the Company, and the
compensation packages of other executive officers in the record industry.

65
<PAGE>

INCENTIVE STOCK OPTIONS

Stock options are granted to executive officers and other employees of the
Company as a means of providing long-term incentives. The Compensation
Committee believes that stock options encourage increased performance by the
Company's employees, including its officers, and align the interests of the
Company's employees with the interests of the Company's stockholders. Stock
options were granted to Messrs. Devick, Laux, and Leavens and Ms. Hoffman-Engel
utilizing the same criteria as were used for setting base salaries. During the
seven months ended December 31, 1997, the Company repriced certain stock options
held by Mr. Laux in consideration for financial services provided by Mr. Laux to
the Company, and not as compensation for Mr. Laux's services. See "Certain
Relationships and Related Transactions" and "Compensation Committee Report on
Repricing of Options."

CASH BONUS AWARDS

The Compensation Committee considers on an annual basis whether to pay cash
bonuses to some or all of the Company's employees, including the Company's
executive officers. Messrs. Devick, Laux and Leavens were awarded cash bonuses
during the seven month period ended December 31, 1997. Bonuses were granted
based on superior performance and the successful completion of the private
placement and equity financing consummated on December 12, 1997 as determined by
the Compensation Committee.

CHIEF EXECUTIVE OFFICER COMPENSATION

The base salary for Mr. Devick for the seven month period ended December
31, 1997, was governed by the term of his employment agreement dated June 1,
1997. Pursuant to such agreement, Mr. Devick's annual base salary was set at
$625,000 plus an annual bonus subject to the terms of the agreement. See
"Executive Compensation--Employment Agreements." During the seven month period
ended December 31, 1997, Mr. Devick was awarded a cash bonus and granted certain
stock options to recognize fully his contributions, including the successful
completion of the private placement and equity financing consummated on December
12, 1997, and to provide him with sufficient incentives to continue his efforts
as Chief Executive Officer.

COMPLIANCE WITH SECTION 162(m)

The Compensation Committee currently intends for all compensation paid to
the Named Executive Officers to be tax deductible to the Company pursuant to
Section 162(m) ("Section 162(m)") of the Code. Section 162(m) provides that
compensation paid to the Named Executive Officers in excess of $1,000,000 cannot
be deducted by the Company for Federal income tax purposes unless, in general,
such compensation is performance based, is established by a committee of outside
directors and is objective and the plan or agreement providing for such
performance-based compensation has been approved in advance by stockholders.
Consistent with this intention, the Company submitted the Incentive Plan for
stockholder approval in 1996, and the Compensation Committee made all stock
option awards to the Named Executive Officers for 1995 through 1997 pursuant to
the Incentive Plan. In the future, however, the Board may determine to adopt a
compensation program that does not satisfy the conditions of Section 162(m) if
in the Board's judgment, after considering the additional costs of not
satisfying 162(m), such program is appropriate.

COMPENSATION COMMITTEE

Steven Devick
Michael P. Cullinane
Craig Duchossois
Andrew J. Filipowski
Rodney L. Goldstein
Robert A. Morgado
Mark J. Schwartz

66
<PAGE>

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

Messrs. Devick, Cullinane, Duchossois, Filipowski, Goldstein, Morgado and
Schwartz are the members of the Company's Compensation Committee. Mr. Devick
serves on the Compensation Committee of PTI, of which Mr. Filipowski is Chairman
and Chief Executive Officer and Mr. Cullinane is Executive Vice President, Chief
Financial Officer and Treasurer.

PERFORMANCE GRAPH

[GRAPH]

Research Data Group

Platinum Entmt Inc (PTET)

CUMULATIVE TOTAL RETURN
------------------------------------------------------------------------------
3/12/96 5/31/96 8/31/96 11/30/96 2/28/97 5/31/97 8/31/97 11/30/97 12/31/97
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>

Platinum Entmt Inc PTET 100 129 115 65 46 43 43 50 52
PEER GROUP 100 98 88 91 90 102 113 123 127
NASDAQ STOCK MARKET (U.S.) 100 116 107 121 122 131 149 151 148

</TABLE>

67
<PAGE>

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

The following table sets forth, as of May 18, 1998, 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.

NAME AND ADDRESS AMOUNT AND NATURE OF PERCENT
BENEFICIAL OWNERSHIP(1) OF
CLASS
- ------------------------------------------------------- ----------------------- -------
<S> <C> <C>
MAC MUSIC LLC(2) . . . . . . . . . . . . . . . . . . . 1,800,000 25.4
SK-PALLADIN PARTNERS, L.P.(3). . . . . . . . . . . . . 1,800,000 25.4
STEVEN DEVICK (4). . . . . . . . . . . . . . . . . . . 1,101,867 18.0
ANDREW J. FILIPOWSKI (5) . . . . . . . . . . . . . . . 960,017 16.9
GOLDMAN SACHS & CO. (6). . . . . . . . . . . . . . . . 762,300 14.5
FRONTENAC VI LIMITED PARTNERSHIP(7). . . . . . . . . . 644,522 12.2
CRAIG DUCHOSSOIS (8) . . . . . . . . . . . . . . . . . 273,000 5.2
DOUGLAS C. LAUX (9). . . . . . . . . . . . . . . . . . 145,967 2.7
THOMAS R. LEAVENS (10) . . . . . . . . . . . . . . . . 84,999 1.6
CARL D. HARNICK(11). . . . . . . . . . . . . . . . . . 50,000 *
PAUL L. HUMENANSKY (8) . . . . . . . . . . . . . . . . 29,000 *
MICHAEL P. CULLINANE (8) . . . . . . . . . . . . . . . 29,000 *
RODNEY L. GOLDSTEIN (12) . . . . . . . . . . . . . . . 19,000 *
LYNNE HOFFMAN-ENGEL(13). . . . . . . . . . . . . . . . 6,667 *
BRYAN HADLEY (13). . . . . . . . . . . . . . . . . . . - -
ROBERT A. MORGADO (2). . . . . . . . . . . . . . . . . - -
MARK J. SCHWARTZ (2) . . . . . . . . . . . . . . . . . - -
CHRISTOPHER M. UNRATH. . . . . . . . . . . . . . . . . - -

ALL EXECUTIVE OFFICERS AND DIRECTORS AS A GROUP
(14 PERSONS)(2)(4)(5)(7)(8)(9)(10)(11)(12)(13) . . . . 2,699,517 39.0
</TABLE>

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

* Less than one percent

68
<PAGE>

(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) MAC Music LLC ("MAC") shares voting and investment power with respect to
1,800,000 shares of Common Stock underlying a warrant to purchase Common
Stock issued by the Company to MAC which is currently exercisable. Alpine
Equity Partners, L.P. ("AEP, LP") and Maroley Media Group, L.L.C.
("Maroley") are the managing members of MAC. Alpine Equity Partners, L.L.C.
("AEP, LLC") is the general partner of AEP, LP. The executive officers of
AEP, LLC (the "AEP Executive Officers") are Oded Aboodi, Chairman,
President and Chief Executive Officer, Richard D. Goldstein, Executive Vice
President and Senior Managing Director, Bruce M. Greenwald, Executive Vice
President and Senior Managing Director and Lisa A. Hook, Senior Vice
President and Managing Director. Messrs. Aboodi, Goldstein, Greenwald, and
Ms. Hook, by virtue of their respective capacities as Chairman, Executive
Vice President, Executive Vice President and Senior Vice President of AEP,
LLC collectively have the ability to direct the investment and voting
decisions of AEP, LLC and as such they may be deemed to have shared
investment and voting discretion with respect to securities beneficially
owned by AEP, LLC through AEP, LP. Accordingly, AEP, LP, AEP, LLC and
Messrs. Aboodi, Goldstein and Greenwald, and Ms. Hook in their capacities
as the AEP Executive Officers of AEP, LLC, each may be deemed a beneficial
owner of the Common Stock beneficially owned by MAC. The principal
business and principal offices of MAC, AEP, LP, AEP, LLC, Messrs. Aboodi,
Goldstein and Greenwald, and Ms. Hook is 1285 Avenue of the Americas, 21st
Floor, New York, New York 10019. Mr. Morgado is the Chairman of Maroley.
Mr. Morgado, by virtue of his capacity as a managing member of Maroley, has
the ability to direct the investment and voting decisions of Maroley and as
such Mr. Morgado may be deemed to have shared investment and voting
discretion with respect to securities beneficially owned by Maroley.
Accordingly, Maroley and Mr. Morgado each may be deemed a beneficial owner
of Common Stock beneficially owned by MAC. The address of the principal
business and principal offices of Maroley and Mr. Morgado is 70 East 55th
Street, 26th Floor, New York, New York 10022.
(3) SK-Palladin Partners, L.P ("Palladin") shares voting and investment power
with respect to 1,800,000 shares of Common Stock underlying a warrant to
purchase Common Stock issued by the Company to Palladin which is currently
exercisable. SK-Palladin Holdings, L.P. ("Palladin Holdings") is the
general partner of SK-Palladin Partners, L.P. ("Palladin"). SK-Palladin
Gen Par, Inc. ("Palladin Gen Par") is the general partner of Palladin
Holdings. Mr. Schwartz is the sole executive officer of Palladin Gen Par
in his capacity as Chief Executive Officer, President, Secretary and
Treasurer. Schwartz, in his capacity as the sole executive officer and
controlling stockholder of Palladin Gen Par has discretion to direct the
investment and voting decisions of Palladin Gen Par and as such Mr.
Schwartz may be deemed to have shared investment and voting discretion with
respect to securities beneficially owned by Palladin Gen Par through
Palladin Holdings and Palladin. Accordingly, Palladin Holdings, Palladin
Gen Par and Mr. Schwartz in his capacity as the executive officer and
controlling stockholder of Palladin Gen Par, each may be deemed a
beneficial owner of the Common Stock owned by Palladin. The principal
business and principal offices of Palladin, Palladin Holdings, Palladin Gen
Par and Mr. Schwartz is 1285 Avenue of the Americas, 21st floor, New York,
New York 10019.
(4) Includes 56,250 shares of Common Stock underlying a warrant to purchase
Common Stock held in the name of Platinum Venture Partners II, L.P. ("PVP
II") which is currently exercisable. Mr. Devick is an executive officer of
the general partner of PVP II and in such capacity may be deemed a
beneficial owner with respect to shares held by PVP II. Also 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.

69
<PAGE>

(5) Includes 99,067 shares held by Platinum Venture Partners I, L.P. ("PVP
I"). Mr. Filipowski the President, Chief Executive Officer and a
stockholder of the general partner of PVP I, and in such capacities may be
deemed to have voting and investment power with respect to shares held by
PVP I. Mr. Filipowski disclaims beneficial ownership of such shares. Also
includes 56,250 shares of Common Stock underlying a warrant to purchase
Common Stock held in the name of PVP II, which is currently exercisable.
Mr. Filipowski is the President and Chief Executive Officer, a sole
director, and a stockholder of the general partner of PVP II and in such
capacities may be deemed the beneficial owner with respect to shares held
by PVP II. Also includes 337,500 shares of Common Stock underlying a
warrant to purchase Common Stock held in the name of PVP II, which is
currently exercisable. Mr. Filipowski disclaims beneficial ownership of
such shares. Also includes 19,000 shares underlying stock options that are
currently exercisable. The address of Mr. Filipowski is c/o PLATINUM
technology, inc., 1815 South Meyers Road, Oakbrook Terrace, Illinois 60181.
(6) Based on Amendment No. 2 to Form 13G dated May 10, Goldman Sachs & Co.,
The Goldman Sachs Group, L.P. and Goldman Sachs Trust on behalf of
Goldman Sachs Small Cap Value Fund share voting and investment power
with respect to an aggregate of 762,300 shares of Common Stock. The
address for the foregoing reporting persons is 85 Broad Street, New
York, NY 10004.
(7) The address of Frontenac VI Limited Partnership is c/o Frontenac Company,
135 South LaSalle Street, Suite 3800, Chicago, Illinois 60603
(8) Includes 23,000 shares underlying stock options that are currently
exercisable.
(9) Includes 145,867 shares underlying stock options that are currently
exercisable.
(10) Such 84,999 shares consist of shares underlying stock options that are
currently exercisable
(11) Includes 50,000 shares of Common Stock underlying a warrant to purchase
Common Stock issued to Mr. Harnick by the Company which is currently
exercisable.
(12) Includes 19,000 shares underlying stock options that are currently
exercisable. Excludes 644,522shares held by Frontenac VI Limited
Partnership ("Frontenac VI LP"). 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 Frontenac VI LP.
(13) Such 6,667 shares underlie options that are currently exercisable.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

<PAGE>

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.

1. All financial statement schedules are omitted because such schedules
are not required or the information required has been presented in the
financial statements included in this filing.
2. The following exhibits are filed with this Report or incorporated by
reference as set forth below.

Exhibit
Number
- ------
<S> <C>
3.1 Third Amended and Restated Certificate of Incorporation of the
Registrant, as amended, is herein incorporated by reference to the
Form 10-Q for the quarterly period ended November 30, 1997 filed
with the Commission on January 14, 1998 ("November 30, 1997 10-Q").
3.2 Amended and Restated By-laws of the Registrant, as amended, is
herein incorporated by reference to the November 30, 1997 10-Q.
4.1 Warrant to Purchase 315,000 Shares of Common Stock of the
Registrant issued to Platinum Venture Partners II, L.P., as
nominee, dated December 12, 1997, is herein incorporated by
reference to the November 30, 1997 10-Q.
4.2 Warrant to Purchase 135,000 Shares of Common Stock of the
Registrant issued to Platinum Venture Partners II, L.P., as
nominee, dated December 12, 1997, is herein incorporated by
reference to the November 30, 1997 10-Q.
4.3 Warrant to Purchase 1,800,000 Shares of Common Stock of the
Registrant issued to SK-Palladin Partners, LP, dated December 12,
1997, is herein incorporated by reference to the November 30, 1997
10-Q.
4.4 Warrant to Purchase 1,800,000 Shares of Common Stock of the
Registrant issued to MAC Music LLC, dated December 12, 1997, is
herein incorporated by reference to the November 30, 1997 10-Q.
4.5 Warrant to Purchase 50,000 Shares of Common Stock of the Registrant
issued to Carl D. Harnick, dated December 12, 1997, is herein
incorporated by reference to the November 30, 1997 10-Q.
4.6 Registration Rights Agreement, dated December 12, 1997, between the
Registrant and Platinum Venture Partners I, L.P and Platinum
Venture Partners II, L.P. , is herein incorporated by reference to
the November 30, 1997 10-Q.
4.7 Registration Rights Agreement, dated December 12, 1997, between the
Registrant and Carl D. Harnick, is herein incorporated by reference
to the November 30, 1997 10-Q.
10.1 Fourth Amendment to Amended and Restated Credit Agreement dated as
of August 29, 1997 among Platinum Entertainment, Inc., Bank of
Montreal, individually and as Agent, PPM America Special
Investments Fund L.P. and FC CBO Limited and the Guarantors'
Consent attached thereto, is herein incorporated by reference to
the Form 10-Q for the quarterly period ended August 31, 1997 filed
with the Commission on October 14, 1997 ("August 31, 1997 10-Q").
10.2 Employment Agreement dated June 1, 1997 between the Company and
Steven Devick, is herein incorporated by reference to the August
31, 1997 10-Q.
10.3 Employment Agreement dated June 1, 1997 between the Company and
Douglas C. Laux, is herein incorporated by reference to the August
31, 1997 10-Q.
10.4 Employment Agreement dated June 1, 1997 between the Company and
Thomas R. Leavens, is herein incorporated by reference to the
August 31, 1997 10-Q.

71
<PAGE>

10.5 Employment Agreement dated June 1, 1997 between the Company and
Lynne Hoffman-Engel, is herein incorporated by reference to the
August 31, 1997 10-Q.
10.6 Investment Agreement dated October 12, 1997 among the Company, MAC
Music LLC and SK-Palladin Partners, is herein incorporated by
reference to the August 31, 1997 10-Q.
10.7 Platinum Entertainment, Inc. 1997 Employee Stock Purchase Plan,
effective June 1, 1997, is herein incorporated by reference to the
1997 Annual Meeting of Stockholders Proxy Statement filed with the
Commission December 2, 1997 (the "1997 Annual Meeting of
Stockholders Proxy Statement").
10.8 Platinum Entertainment, Inc. 1995 Directors' Stock Option Plan, as
amended and restated as of October 1, 1997, is herein incorporated
by reference to the 1997 Annual Meeting of Stockholders Proxy
Statement.
10.9 Amendment to the Investment Agreement dated October 28, 1997, is
herein incorporated by reference to the 1997 Annual Meeting of
Stockholders Proxy Statement.
10.10 Amendment to the Investment Agreement dated October 30, 1997, is
herein incorporated by reference to the 1997 Annual Meeting of
Stockholders Proxy Statement.
10.11 Amendment to the Investment Agreement dated November 26, 1997, is
herein incorporated by reference to the 1997 Annual Meeting of
Stockholders Proxy Statement.
10.11 Stock and Warrant Purchase Agreement, dated December 12, 1997
between the Registrant and Platinum Venture Partners II, L.P., as
nominee, is herein incorporated by reference to the November 30,
1997 10-Q.
10.12 Amendment No. 1 dated as of December 12, 1997 to Employment
Agreement between the Registrant and Steven Devick dated June 1,
1997, is herein incorporated by reference to the November 30, 1997
10-Q.
10.13 Amendment No. 1 dated as of December 12, 1997 to Employment
Agreement between the Registrant and Douglas C. Laux dated June 1,
1997, is herein incorporated by reference to the November 30, 1997
10-Q.
10.14 Amendment No. 1 dated as of December 12, 1997 to Employment
Agreement between the Registrant and Thomas R. Leavens dated June
1, 1997, is herein incorporated by reference to the November 30,
1997 10-Q.
10.15 Credit Agreement, dated as December 12, 1997, among the Registrant,
Intersound, Inc. and the Banks who are or may become parties
thereto, and exhibits and schedules thereto, is herein incorporated
by reference to the November 30, 1997 10-Q.
10.16 Term Credit Note, dated December 12, 1997, issued by the Registrant
in the principal amount of $20,000,000, is herein incorporated by
reference to the November 30, 1997 10-Q.
10.17 Revolving Credit Note, dated December 12, 1997, issued by the
Registrant in the principal amount of $10,000,000, is herein
incorporated by reference to the November 30, 1997 10-Q.
10.18 Security Agreement, dated December 12, 1997, among the Registrant,
its subsidiaries and Bank of Montreal and the Banks who are or may
become parties thereto, and schedules thereto, is herein
incorporated by reference to the November 30, 1997 10-Q.
10.19 Security Agreement re: Intellectual Property, dated as of December
12, 1997, among the Registrant, its subsidiaries and the Bank of
Montreal and the Banks who are or may become parties thereto, and
schedules thereto, is herein incorporated by reference to the
November 30, 1997 10-Q.
10.20 Pledge Agreement, dated December 12, 1997, among the Registrant,
its subsidiaries and the Bank of Montreal and the Banks who are or
may become parties thereto, is herein incorporated by reference to
the November 30, 1997 10-Q.

72
<PAGE>

27. Financial Data Schedule.
</TABLE>

B. Form 8-K.

On December 15, 1997, a Form 8-K was filed by the Registrant announcing the
sale of $22,500,000 of preferred equity and the refinancing of bank debt.

73
<PAGE>

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
Platinum Entertainment, Inc. has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized, on this 20th day of May,
1998.
PLATINUM ENTERTAINMENT, INC.

By: /s/ Steven Devick
--------------------------------
Steven Devick
CHAIRMAN OF THE BOARD, PRESIDENT
AND CHIEF EXECUTIVE OFFICER

Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons in the capacities
indicated on May 20, 1998.

SIGNATURE TITLE
--------- -----

/s/ Steven Devick Chairman of the Board, President and Chief
---------------------------- Executive Officer (principal executive
Steven Devick officer)

/s/ Douglas C. Laux Chief Financial Officer (principal financial
---------------------------- and accounting officer) and Director
Douglas C. Laux

/s/ Michael P. Cullinane Director
----------------------------
Michael P. Cullinane

Director
----------------------------
Craig Duchossois

/s/ Andrew J. Filipowski Director
----------------------------
Andrew J. Filipowski

Director
----------------------------
Rodney L. Goldstein

Director
----------------------------
Carl D. Harnick

/s/ Paul L. Humenansky Director
----------------------------
Paul L. Humenansky

/s/ Robert A. Morgado Director
----------------------------
Robert A. Morgado

Director
----------------------------
Mark J. Schwartz

Director
----------------------------
Christopher M. Unrath

<PAGE>

AMENDMENT NO. 1
EMPLOYMENT AGREEMENT

On this 19th day of November 1997, the Employment Agreement by and
between River North Studios, Inc., a Delaware corporation and wholly owned
subsidiary of Platinum Entertainment, Inc. ("Intersound") and Bryan Hadley,
Executive Vice President, is hereby amended effective as of November 25, 1997
as follows:

1. In Paragraph 2(a) replace the first sentence with the following: "Your
employment will be for a term of three (3) years, beginning February 1,
1997 (the "Term"), at the annual base salary of $225,000.00, less
withholding, which will be paid in accordance with Intersound's regular
payroll policies."

In witness whereof, this amendment has been duly signed this 19th day of
November 1997.

/s/ STEVE DEVICK
------------------------
Steve Devick, Supervisor

Accepted and Agreed:

/s/ BRYAN HADLEY
- ----------------
Bryan Hadley

<PAGE>

February 1, 1997

Bryan Hadley
- -----------------
- -----------------
Dear Bryan:

The following are the terms of your employment by River North Studios,
Inc. ("Intersound"), a Delaware corporation and wholly-owned subsidiary of
Platinum, Entertainment, Inc. ("Platinum") as Executive Vice President.

1. You shall exercise all of the executive and administrative
responsibilities of Executive Vice President, subject to the by-laws of
Intersound and the supervision of the President of Intersound. You also
agree to perform such other duties and services as may be entrusted to you by
the Chief Executive Officer and the Board of Directors of Platinum that are
consistent with your position and title and shall report to the President of
Intersound. You agree to discharge your responsibilities diligently, in good
faith, and to the best of your abilities and to at all times give Intersound
and Platinum full information and truthful explanation of all matters
relative to your employment responsibilities. You shall devote all of your
during ordinary business hours to the interests and business of Intersound
and shall not, except as otherwise agreed to by the Board of Directors, work
with or receive any compensation or consideration from any other party for
services performed or to be performed by you.

2. (a) Your employment will be for a term of three (3) years,
beginning February 1, 1997 (the "Term"), at the annual base salary of
$150,000.00, less withholding, which will be paid in accordance with
Intersound's regular payroll policies. In addition, during the term of your
employment, you and your family will be entitled to participate in
Intersound's regular health and dental insurance plan under Intersound's
policies with respect to such plans. During each annual period of your
employment you shall be entitled to three (3) weeks of vacation, and five (5)
personal leave days. You shall also be eligible to participate in the
401(K), life insurance, and all other benefit plans of Intersound under
Intersound's policies with respect to such plans for its employees. You
shall also be reimbursed for reasonable expenses incurred by you for
promoting the business of Intersound and in performance of your duties
hereunder in accordance with Intersound's expense policies. You will be
issued a company credit card and long distance telephone charge card.

<PAGE>

(b) In the event Platinum makes an additional acquisition of a
company that is of substantially the same size and type as Intersound, Inc.,
a Minnesota corporation, and consolidates such acquisition with Intersound
such that the responsibilities described hereunder are expanded to include
responsibility for the combined companies, the parties agree to negotiate in
good faith an increase in the salary provided herein that is fair and
reasonable under all the circumstances.

3. (a) In further consideration of your services hereunder, Platinum
agrees to grant to you an option (the "Purchase Option") to purchase an
aggregate of Twenty Thousand (20,000) shares of Platinum's common stock at a
purchase price established pursuant to the 1995 Employee Incentive
Compensation Plan, as amended in 1996, at the next grant date as approved by
the Board of Directors of shareholders of Platinum (the "Grant Date"). The
Purchase Option shall be exercisable with respect to a portion of the shares
subject to the Purchase Option over the course of the option period as
follows: up to and including one-third (1/3) of the shares subject to the
Purchase Option shall be exercisable on and after the first anniversary of
the Grant Date; up to and including two thirds (2/3) of the shares subject to
the Purchase Option shall be exercisable on and after the second anniversary
of the Grant Date; and up to and including one hundred percent (100%) of the
shares subject to the Purchase Option shall be exercisable on and after the
third anniversary of the Grant Date. The Purchase Option shall be subject to
the provisions of a separate stock option agreement, in the form of other
Platinum employee stock options, to be entered between Platinum and you, as
well as the terms of Platinum's Stock Option Plan existing as of the Grant
Date.

(b) In further consideration of your services hereunder, Platinum
agrees to pay to you a bonus at the time of the exercise, if any, of the
Purchase Option (the "Option Bonus"). The amount of the Option Bonus shall
be equal to the product of multiplying the number of shares purchased by
exercise of the Purchase Option (up to the aggregate amount of the first
10,000 shares so purchased only) by the difference between the closing share
price of Platinum's common stock as of the date of the public announcement of
the acquisition by a subsidiary of Platinum of substantially all of the
assets of Intersound, Inc., a Minnesota corporation, and the share price of
such stock as of the date of exercise of the Purchase Option, provided that in
no event shall the top price for purposes of computing the Option Bonus
exceed the share price as of the Grant Date.

4. Unless otherwise mutually extended, this agreement shall terminate
on February 1, 2000, or the first to occur of the following:

(a) Your death.

(b) Your absence or inability to render the services required
hereunder by reason of a state of physical or mental

<PAGE>

incapacity for more than a period of two (2) consecutive months and upon
thirty (30) days prior written notice by Intersound to you of an intent to
terminate because of such absence or inability.

(c) Your malfeasance or misperformance of your obligations under
this agreement, or your dishonest, fraudulent or criminal act.

5. You agree that, during the term of this agreement and at all times
thereafter, you will maintain the confidentiality of all Confidential
Information regarding Intersound and Platinum, and their respective
subsidiaries, affiliates, successors, and assigns (hereinafter collectively
the "Protected Entities") that you have, or will have received or had access
to as an employee, officer or director and that you will not make any
disclosure thereof to anyone else except as to matters that have been the
subject of public announcement or disclosure, is generally available to the
public from sources not subject to confidentiality agreements with Intersound
or Platinum, or except as required by law. Intersound or Platinum, or except
as required by law. "Confidential Information" shall mean any information
relating to the business or affairs of the Protected Entities, including but
not limited to information relating to plans, developments, financial
statements, customer identities, potential customers, employees, suppliers,
servicing methods, equipment, programs, strategies and information, analyses,
profit margins, inventions, improvements, copyrightable work, or other
proprietary information used by the Protected Entities in connection with
their businesses.

6. This agreement (a) represents the entire agreement between you and
Intersound; (b) is not to be amended, supplemented, varied or discharged
except by an instrument in writing; (c) may be executed in counterparts, each
of which shall be deemed an original; and (d) shall be interpreted in
accordance with and in all respects governed by the laws of the State of
Illinois. If any provision of this agreement is declared void, or otherwise
unenforceable, such provision shall be deemed to have been severed from this
agreement, which shall otherwise remain in full force and effect.

If the foregoing correctly states our agreement, please so confirm by
signing below where indicated.

River North Studios, Inc.

By: /s/ Thomas R. Leavens
------------------------------

Accepted and Agreed:

/s/ Bryan Hadley
- --------------------
Bryan Hadley

<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF OPERATIONS FOR PLATINUM
ENTERTAINMENT, INC. AND THE ACCOMPANYING NOTES THERETO FOR THE PERIOD INDICATED
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 7-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JUN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 11
<SECURITIES> 0
<RECEIVABLES> 19,059
<ALLOWANCES> (3,912)
<INVENTORY> 5,587
<CURRENT-ASSETS> 23,613
<PP&E> 1,886
<DEPRECIATION> (807)
<TOTAL-ASSETS> 57,457
<CURRENT-LIABILITIES> 23,082
<BONDS> 22,000
0
0
<COMMON> 5
<OTHER-SE> 12,370
<TOTAL-LIABILITY-AND-EQUITY> 57,457
<SALES> 34,485
<TOTAL-REVENUES> 35,294
<CGS> 16,388
<TOTAL-COSTS> 16,784
<OTHER-EXPENSES> 16,478<F1>
<LOSS-PROVISION> 688
<INTEREST-EXPENSE> (4,202)
<INCOME-PRETAX> (16,446)
<INCOME-TAX> 0
<INCOME-CONTINUING> (16,446)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (16,446)
<EPS-PRIMARY> (3.14)
<EPS-DILUTED> (3.14)
<FN>
<F1>Includes $3,100 of merger, restructuring and one-time costs.
</FN>

</TABLE>