<PAGE>

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

                                     FORM 10-K
                   FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
             SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
                                     (MARK ONE)

 /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934
                    FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
                                         OR
 /  /     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934
      For the transition period from                    to
                                     ------------------    -------------------

                          COMMISSION FILE NUMBER 000-22207

                                GUITAR CENTER, INC.
                 (Exact name of registrant as specified in charter)

           DELAWARE                                           95-4600862
(State or other jurisdiction of                            (I.R.S. Employer
 incorporation or organization)                          Identification Number)

           5155 CLARETON DRIVE                                    
        AGOURA HILLS, CALIFORNIA                                  91301
(Address of principal executive offices)                        (Zip Code)





        Registrant's telephone number, including area code:  (818) 735-8800

                Securities registered pursuant to 12(b) of the Act:
                                        NONE
                Securities registered pursuant to 12(g) of the Act:
                            COMMON STOCK, $.01 PAR VALUE
                                  (Title of Class)

     Check 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 amendment to this
Form 10-K. /X/

     As of March 9, 1998, the aggregate market value of voting stock held by
nonaffiliates of the Company was approximately $254,600,000 (based upon the last
reported sales price of the Common Stock on such date as reported by the Nasdaq
National Market).  Shares of Common Stock held by each executive officer,
director, holders of greater than 10% of the outstanding Common Stock of the
Registrant and persons or entities known to the Registrant to be affiliates of
the foregoing have been excluded in that such persons may be deemed to be
affiliates.  This assumption regarding affiliate status is not necessarily a
conclusive determination for other purposes.


<PAGE>

     Check 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
at least the past 90 days.
YES [X] NO [  ].

     As of March 9, 1998, there were 19,360,392 shares of Common Stock, par
value $.01 per share, outstanding.

Portions of the Proxy Statement for the annual stockholders' meeting to be
held on May 6, 1998 are incorporated by reference into Part III.

                       The Exhibit Index appears on page S-2.


                                       2


<PAGE>

                                       PART I

Item 1.      BUSINESS

Company History

     Guitar Center, Inc. (collectively with its subsidiary, "Guitar Center" or
the "Company") was founded in 1964 in Hollywood, California.  In 1972, the
Company opened its second store in San Francisco to capitalize on the emerging
San Francisco rock 'n roll scene.  By this time, Guitar Center's inventory had
been expanded to include drums, keyboards, accessories and pro audio and
recording equipment.  Throughout the 1980s, Guitar Center expanded by opening
nine stores in five major markets including Chicago, Dallas and Minneapolis.
Since 1990, the Company has continued its new store expansion and has focused on
building the infrastructure necessary to manage the Company's strategically
planned growth.  Current executive officers and key managers have been with the
Company for an average of 13 years and two of such executive officers (Mr. Larry
Thomas, the Company's President and Chief Executive Officer, and Mr. Marty
Albertson, the Company's Executive Vice President and Chief Operating Officer)
effectively assumed full operating control in 1992.  Since then, management has
focused on developing and realizing its long-term goal of expanding its position
as the leading music products retailer throughout the United States.

     Guitar Center's flagship Hollywood store currently is one of the nation's
largest and best-known retail stores of its kind with approximately 30,600
square feet of retail space.  The Hollywood store features one of the largest
used and vintage guitar collections in the United States, attracting buyers and
collectors from around the world.  In front of the Hollywood store is the Rock
Walk which memorializes over 70 famous musicians and music pioneers.  The Rock
Walk attracts several tour buses daily and has helped to create international
recognition of the Guitar Center name.

     The Company is a Delaware corporation with its principal executive offices
located at 5155 Clareton Drive, Agoura Hills, California 91301, and its
telephone number is (818) 735-8800.

INITIAL PUBLIC OFFERING

     On March 19, 1997, the Company completed an initial public offering (the
"Offering") of the Company's common stock, $.01 par value ("Common Stock"),
pursuant to which it sold 6,750,000 shares of Common Stock and received
approximately $94.4 million in net cash proceeds (before deducting expenses
associated with the Offering).  On April 15, 1997, the Company sold an
additional 1,012,500 shares of Common Stock in the Offering and received an
additional $14.1 million in net cash proceeds from the underwriters' exercise in
full of their over-allotment option.  Upon consummation of the Offering, all of
the outstanding shares of the Company's 8% Junior Preferred Stock, $.01 par
value ("Junior Preferred Stock"), were automatically converted into shares of
Common Stock at a ratio of 6.667 shares of Common Stock for each share of Junior
Preferred Stock (the "Junior Preferred Stock Conversion").  No accrued and
unpaid dividends were paid on any shares of Junior Preferred Stock.
Approximately $23.0 million of the net proceeds from the Offering were used to
redeem, at a premium of 3%, all of the outstanding shares of the Company's 14%
Senior Preferred Stock, $.01 par value ("Senior Preferred Stock").  As a result,
the Company incurred a charge to dividends in the first quarter of 1997 of $7.7
million for the difference between the financial statement value of the Senior
Preferred Stock and the face amount thereof, plus premium.  Approximately $9.7
million of the net proceeds from the Offering were used to repay all amounts
under the Company's prior credit facility.  In addition, the Company used
approximately $18.4 million to redeem approximately 1,317,000 shares of Common
Stock from management (the "Management Tax Redemption").  Approximately $37.9
million of the net proceeds from the Offering were used to redeem, at a premium
of 10%, an aggregate of approximately $33.3 million principal amount of the
Company's 11% Senior Notes due 2006 (the "Senior Notes") and to pay all accrued
and unpaid interest with respect to the Senior Notes called for redemption.  The
balance of the net proceeds was retained for general corporate purposes, which
included the acquisition of two musical instrument stores in the Atlanta,
Georgia market in April 1997.  See Notes 1 and 4 to Consolidated Financial
Statements.


                                       3

<PAGE>

BUSINESS

     As of December 31, 1997, Guitar Center operated 36 stores in 19 major U.S.
markets, including, among others, areas in or near Los Angeles, San Francisco,
Chicago, Miami, Houston, Dallas, Detroit, Boston, Minneapolis, Seattle, Phoenix,
Atlanta and Cleveland.  From fiscal 1993 through fiscal 1997, the Company's net
sales and operating income before deferred compensation expense grew at compound
annual growth rates of 32.1% and 38.6% respectively.  This growth was
principally the result of strong and consistent comparable store sales growth,
averaging 14.9% per year over such five-year period, and the opening of 21 new
stores.  Comparable store sales (stores opened for at least 14 months) for
fiscal 1995, 1996 and 1997 were $157.5 million, $187.7 million and
$236.5 million, respectively.

     Guitar Center offers a unique retail concept in the music products
industry, combining an interactive, hands-on shopping experience with superior
customer service and a broad selection of brand name, high-quality products at
guaranteed low prices.  The Company creates an entertaining and exciting
atmosphere in its stores with bold and dramatic merchandise presentations,
highlighted by bright, multi-colored lighting, high ceilings, music and videos.
Management believes approximately 80% of the Company's sales are to professional
and aspiring musicians who generally view the purchase of music products as a
career necessity.  These sophisticated customers rely upon the Company's
knowledgeable and highly trained salespeople to answer technical questions and
to assist in product demonstrations.

     The Guitar Center prototype store generally ranges in size from 12,000 to
15,000 square feet (as compared to a typical music products retail store which
averages approximately 3,200 square feet) and is designed to encourage customers
to hold and play instruments.  Each store carries an average of 7,000 core SKUs,
which management believes is significantly greater than a typical music products
retail store, and is organized into five departments, each focused on one
product category.  These departments cater to a musician's specific product
needs and are staffed by specialized salespeople, many of whom are practicing
musicians.  Management believes this retail concept differentiates the Company
from its competitors and encourages repeat business.

     Guitar Center stores historically have generated strong and stable
operating results.  All of the Company's stores, after being open for at least
twelve months, have had positive store-level operating income in each of the
past five fiscal years.

     The following summarizes certain key operating statistics of a Guitar
Center store and is based upon the 28 stores operated by the Company for the
full year ended December 31, 1997:

<TABLE>
<CAPTION>
       <S>                                                   <C>
       Average 1997 net sales per square foot                $        649
       Average 1997 net sales per store                         9,198,000
       Average 1997 store-level operating income (1)            1,315,000
       Average 1997 store-level operating income margin (1)         14.3%
</TABLE>
----------------------
(1)  Store-level operating income includes individual store revenue and
     expenses plus allocated rebates, cash discounts and purchasing department
     salaries (based upon individual store sales).

     The Company's growth strategy is to continue to increase its presence in
its existing markets and to open new stores in strategically selected markets.
The Company will continue to pursue its strategy of clustering stores in major
markets to take advantage of operating and advertising efficiencies and to build
awareness of the Guitar Center name in new markets.  The Company opened a total
of eight stores in fiscal 1997, two of which the Company acquired in Atlanta in
April 1997, and presently expects to open approximately ten stores in fiscal
1998 and twelve stores in fiscal 1999. The Company has committed substantial
resources to building a corporate infrastructure and management information
systems that it believes can support the Company's needs, including its
expansion plans, for the foreseeable future.


                                       4

<PAGE>

     For fiscal years ended December 31, 1995, 1996 and 1997, the Company had
net income (loss) of $10.9 million, ($72.4) million and $16.3 million
respectively.  The results for fiscal 1997 reflect an extraordinary charge of
$4.4 million, net of tax benefit of $1.7 million, related to the extinguishment
of long-term debt.  The results for fiscal 1996 reflect $11.6 million for
transaction costs and financing fees incurred in connection with a
recapitalization pursuant to which the ownership of the Company transferred from
a sole stockholder to members of management and certain investors (the
"Recapitalization") and non-recurring deferred compensation expense of
$71.8 million, substantially all of which related to the Recapitalization.  See
Note 1 to Consolidated Financial Statements.

INDUSTRY OVERVIEW

     The United States retail market for music products in 1996 was estimated in
a study by MUSIC USA magazine to be approximately $5.6 billion in net sales,
representing a five year compound annual growth rate of 7.5%.  The broadly
defined music products market, according to the National Association of Music
Merchants ("NAMM"), includes retail sales of string and fretted instruments,
sound reinforcement and recording equipment, drums, keyboards, print music,
pianos, organs, and school band and orchestral instruments.  Products currently
offered by Guitar Center include categories of products which account for
approximately $4.0 billion of this market, representing a five-year compound
annual growth rate of 8.9%.  The music products market as currently defined by
NAMM, however, does not include the significant used and vintage product
markets, or the computer software or apparel market in which the Company
actively participates.

     The industry is highly fragmented with the nation's leading five music
products retailers, as measured by the number of stores operated by such
retailers (I.E, the Company, Sam Ash Music Corp, Brook Mays/C&S/H&H, Schmitt
Music Company and Musicians Friend, Inc.), accounting for approximately 9.0% of
the industry's estimated $5.6 billion in net sales in 1996.  Furthermore, 90% of
the industry's estimated 8,400 retailers operate only one or two stores.  A
typical music products store averages approximately 3,200 square feet and
generates an average of approximately $0.6 million in annual net sales.  In
contrast, a Guitar Center store generally averages between 12,000 and 15,000
square feet and in 1997 generated an average of approximately $8.6 million in
annual net sales for stores open the full year (excluding the Company's
Hollywood store).

     Over the past ten years, technological advances in the industry have
resulted in dramatic changes to the nature of music-related products.
Manufacturers have combined computers and microprocessor technologies with
musical equipment to create a new generation of products capable of high grade
sound processing and reproduction.  Products featuring this technology are
available in a variety of forms and have broad applications across most of the
Company's music product categories.  Most importantly, rapid technological
advances have resulted in the continued introduction of higher quality products
offered at lower prices.  For example, today an individual consumer can more
affordably create a home recording studio which interacts with personal
computers and is capable of producing high-quality digital recordings.  Until
recently, this type of powerful sound processing capability was prohibitively
expensive and was typically purchased only by professional sound recording
studios.

BUSINESS STRATEGY

     Management's goal is to continue to expand Guitar Center's position as the
leading music products retailer throughout the United States.  The principal
elements of the Company's business strategy are as follows:

          EXPANSION STRATEGY.  Guitar Center's expansion strategy is to continue
     to increase its market share in existing markets and to penetrate
     strategically selected markets.  The Company opened a total of eight stores
     in 1997 (two of which it acquired) and seven stores in fiscal 1996, and
     currently anticipates opening approximately ten stores in fiscal 1998 and
     twelve stores in fiscal 1999.  In preparation for this expansion,
     management has dedicated a substantial amount of its resources over the
     past several years to building the infrastructure necessary to support a
     large national chain.  In addition, the Company believes it has developed a
     methodology for targeting prospective store sites which includes analyzing
     demographic and psychographic characteristics of a potential store
     location.  See "-- Site Selection."  Management also believes there may be
     attractive opportunities to expand by selectively acquiring

                                       5
<PAGE>

     existing music products retailers.

          EXTENSIVE SELECTION OF MERCHANDISE.  Guitar Center offers an extensive
     selection of brand name music products complemented by lesser known, hard
     to find items and unique, vintage equipment.  The average 7,000 core SKUs
     offered through each Guitar Center store provide a breadth and depth of
     in-stock items which management believes is not available from traditional
     music products retailers.

          HIGHLY INTERACTIVE, MUSICIAN-FRIENDLY STORE CONCEPT.  The purchase of
     musical instruments is a highly personal decision for musicians.
     Management therefore believes that a large part of the Company's success is
     attributable to its creative instrument presentations and colorful,
     interactive displays which encourage the customer to hold and play
     instruments as well as to participate in product demonstrations.  Each
     store also provides private sound-controlled rooms to enhance a customer's
     listening experience while testing various instruments.

          EXCEPTIONAL CUSTOMER SERVICE.  Exceptional customer service is
     fundamental to the Company's operating strategy.  Accordingly, the Company
     conducts extensive training programs for its salespeople, who specialize in
     one of the Company's five product categories.  Many of the Company's
     salespeople are also musicians.  With the advances in technology and
     continuous new product introductions in the music products industry,
     customers increasingly rely on qualified salespeople to offer expert advice
     and assist in product demonstrations.  Management believes that its
     emphasis on training and customer service distinguishes the Company within
     the industry and is a critical part of Guitar Center's success.

          INNOVATIVE PROMOTIONAL AND MARKETING PROGRAMS.  Guitar Center sponsors
     innovative promotional and marketing events which include in-store
     demonstrations, famous artist appearances and weekend themed sales events
     designed to create significant store traffic and exposure.  In addition,
     the Company's special grand opening activities in new markets are designed
     to generate consumer awareness for each new store.  Management believes
     these events help the Company to build a loyal customer base and to
     encourage repeat business.  Since its inception, the Company has compiled a
     unique, proprietary database containing information on more than 1.5
     million customers.  This database enables Guitar Center to advertise to
     select target customers based on historical buying patterns.  The Company
     believes the typical music products retailer does not have the resources to
     support large-scale promotional events or an extensive advertising program.

          GUARANTEED LOW PRICES.  Guitar Center endeavors to be the low price
     leader in each of its markets, as underscored by its 30-day low price
     guarantee.  The Company's size permits it to take advantage of volume
     discounts for large orders and other vendor supported programs.  Although
     prices are usually determined on a regional basis, store managers are
     trained and authorized to adjust prices in response to local market
     conditions.

          EXPERIENCED AND MOTIVATED MANAGEMENT TEAM.  The executive officers and
     key managers have an average of 13 years with the Company.  In addition,
     executive officers and key managers beneficially own approximately 20.9% of
     the Company's outstanding Common Stock.

MERCHANDISING

     Guitar Center's merchandising concept differentiates the Company from most
of its competitors.  The Company creates an entertaining and exciting atmosphere
in its stores with bold and dramatic merchandise presentations, highlighted by
bright, multi-colored lighting, high ceilings, music and videos.  The Company
offers its merchandise at guaranteed low prices and utilizes aggressive
marketing and advertising to attract new customers and maintain existing
customer loyalty.  The principal elements of the Company's merchandising
philosophy are as follows:

     EXTENSIVE SELECTION OF MERCHANDISE.  The Company seeks to maintain a broad
customer appeal by offering high-quality merchandise at multiple price points to
serve musicians ranging from the casual hobbyist to


                                       6

<PAGE>

the serious professional performer.  Guitar Center offers five primary
product categories:  guitars, amplifiers, percussion instruments, keyboards,
and pro audio and recording equipment.

          GUITARS.  The Company believes that Guitar Center's electric, acoustic
     and bass guitar selections are among the deepest and broadest in the
     industry.  Each store features for sale 300 to 500 guitars on the "guitar
     wall" and also displays many autographed instruments from world-renowned
     musicians.  Major manufacturers, including Fender, Gibson, Taylor, Martin,
     PRS, Yamaha, Ovation and Ibanez, are well represented in popular models and
     colors.  The Company believes it has one of the largest selections of
     custom, one-of-a-kind and used/vintage guitars of any retailer.  Prices
     range from $175 for entry-level guitars to over $50,000 for special vintage
     guitars.  In addition, the Company has recently expanded its line of string
     instruments to include banjos, mandolins and dobros, among others.  The
     Company also offers an extensive selection of guitar sound processing units
     and products which allow the guitar to interface with a personal computer.
     The introduction of such equipment has enabled the Company to serve
     crossover demand from the traditional guitarist into new computer-related
     sound products.

          AMPLIFIERS.  The Company offers an extensive selection of electric
     acoustic and bass guitar amplifiers and in addition carries a broad
     selection of boutique and vintage amplifiers with prices ranging from $50
     to $5,000.  Guitar Center represents most manufacturers, including
     Marshall, Fender, Crate, Ampeg and Roland.

          PERCUSSION INSTRUMENTS.  The Company believes that Guitar Center is
     one of the largest retailers of percussion products in the United States.
     The Company's offerings range from basic drum kits to free standing African
     congos and bongos and other rhythmic and electronic percussion products
     with prices ranging from $10 to $10,000.  The Company also has a large
     selection of vintage and used percussion instruments.  Name brands include
     Drum Workshop, Remo, Sabian, Pearl, Yamaha, Premier, Tama and Zildjian.
     The Company carries an extensive selection of digital drum kits and hand
     held digital drum units.  The digital units produce a variety of high
     quality life-like drum sounds and have broad appeal to musicians.

          KEYBOARDS.  Guitar Center carries a wide selection of keyboard
     products and computer peripheral and software packages with prices ranging
     from $150 to $5,000.  The Company offers an extensive selection of software
     for the professional, hobbyist, studio engineer and the post production
     market enthusiast.  The product line covers a broad range of manufacturers
     including Roland, Korg, Emu, Yamaha and Ensoniq.  The Company also
     maintains a broad selection of computer related accessories, including
     sound cards, sound libraries and composition, sequence and recording
     software.

          PRO AUDIO AND RECORDING EQUIPMENT.  Guitar Center's pro audio and
     recording equipment division offers products ranging in price from $100 to
     $25,000 for musicians at every level, from the casual hobbyist to the
     professional recording engineer.  Guitar Center's products range from
     recording tape to state-of-the-art digital recorders.  The Company believes
     it also carries one of the largest pro audio assortment of professional
     stage audio equipment for small traveling bands, private clubs and large
     touring professional bands.  The Company's major brand name manufacturers
     include JBL, Panasonic, Sony, Mackie, Tascam, Yamaha, Roland and Alesis.

     BROAD USED MERCHANDISE SELECTION.  Guitar Center offers an extensive
selection of used merchandise, the majority of which derives from instruments
traded in or sold to Guitar Center by customers.  The Company believes that its
trade-in policy assists in attracting sales by providing musicians an
alternative form of payment and the convenience of selling an old instrument and
purchasing a new one at a single location.  Used products are bought and priced
to sell by store managers who are well trained and knowledgeable in the used
musical instrument market.

     GUARANTEED LOW PRICES.  Guitar Center endeavors to be the price leader in
each of the markets it serves. The Company is one of the leading retailers in
each of its product categories and its size permits it to take advantage of
volume discounts for large orders and other vendor supported programs.  To
maintain this strategy


                                       7

<PAGE>

of guaranteed low prices, the Company routinely monitors prices in each of
its markets to assure that its prices remain competitive. Although prices are
typically determined on a regional basis, store managers are trained and
authorized to adjust prices in response to local market conditions. The
Company underscores its low price guarantee by providing a cash refund of the
price difference if an identical item is advertised by a competitor at a
lower price within thirty days of the customer's purchase.

     DIRECT MARKETING, ADVERTISING AND PROMOTION.  The Company's advertising and
promotion strategy is designed to enhance the Guitar Center name and increase
consumer awareness and loyalty.  The advertising and promotional campaigns are
developed around "events" designed to attract significant store traffic and
exposure.  Guitar Center regularly plans large promotional events including the
Green Tag Sale in March, the Anniversary Sale in August, the Blues Fest in
October and the Guitar-a-thon in December.  The Company believes that its
special events have a broad reach as many of them have occurred annually during
the past twenty years.  These events are often coordinated with product
demonstrations, interactive displays, clinics and in-store artist appearances.

     As Guitar Center enters new markets, it initiates an advertising program,
including mail and radio promotions and other special grand opening activities
designed to accelerate sales volume for each new store.  Radio advertising plays
a significant part in the Company's store-opening campaign to generate
excitement and create customer awareness.

     Guitar Center maintains a unique and proprietary database containing
information on over 1.5 million customers.  The Company believes that this
database assists in generating repeat business by targeting customers based on
their purchasing history and by permitting Guitar Center to establish and
maintain personal relationships with its customers.

CUSTOMER SERVICE

     Exceptional customer service is fundamental to the Company's operating
strategy.  With the rapid changes in technology and continuous new product
introductions, customers depend on salespeople to offer expert advice and to
assist with product demonstrations.  Guitar Center believes that its well
trained and highly knowledgeable salesforce differentiates it from its
competitors and is critical to maintaining customer confidence and loyalty.  The
Company's employees are typically musicians who are selected and trained to
understand the needs of their customers.  Salespeople specialize in one of the
Company's five product categories and begin training on their first day of
employment.  Sales and management training programs are implemented on an
ongoing basis to maintain and continually improve the level of customer service
and sales support in the stores.  Based on examination results, an employee is
given a rating which determines his or her salary and level of responsibility.
Guitar Center believes that its employee testing program impresses upon its
salespeople a sense of professionalism and reduces employee turnover by
providing salespeople with the opportunity to increase their salary by advancing
through the certification program.  The Company believes that due to its
emphasis on training, it is able to attract and retain well-qualified, highly
motivated salespeople committed to providing superior customer service.  In
addition, each salesperson in the keyboards and pro audio and recording
departments is certified by a technical advisory board after satisfactory
completion of an extensive training program.

     The Company's customer base consists of (i) the professional or aspiring
musician who makes or hopes to make a living through music and (ii) the amateur
musician or hobbyist who views music as recreation.  Management estimates that
professional and aspiring musicians, who view the purchase of musical products
as a career necessity, represent approximately 65% of the Company's customer
base, and account for approximately 80% of the Company's sales.  These customers
make frequent visits to a store and develop relationships with the salesforce.
Guitar Center generates repeat business and is successful in utilizing its
unique and proprietary database to market selectively to these customers based
on past buying patterns.  In addition, Guitar Center services touring
professionals, providing customized products for musical artists.


                                       8

<PAGE>

STORE OPERATIONS

     To facilitate its strategy of accelerated but controlled growth, Guitar
Center has centralized many key aspects of its operations, including the
development of policies and procedures, accounting systems, training programs,
store layouts, purchasing and replenishment, advertising and pricing.  Such
centralization effectively utilizes the experience and resources of the
Company's headquarters staff to establish a high level of consistency throughout
all of the Guitar Center stores.

     The Company's store operations are led by its Chief Operating Officer and
seven regional store managers with each regional manager responsible for
approximately five to eight stores.  Store management is comprised of a store
manager, a sales manager, an operations manager, two assistant store managers
and five department managers.  Each store also has a warehouse manager and a
sales staff that ranges from 20 to 40 employees.

     The Company ensures that store managers are well-trained and experienced
individuals who will maintain the Guitar Center store concept and philosophy.
Each manager completes an extensive training program which instills the values
of operating as a business owner, and only experienced store employees are
promoted to the position of store manager.  As a result of this strategy, the
average tenure of the store managers is approximately seven years.  The Company
seeks to encourage responsiveness and entrepreneurship at each store by
providing store managers with a relatively high degree of autonomy relating to
operations, personnel and merchandising.  Managers play an integral role in the
selection and presentation of merchandise, as well as the promotion of the
Guitar Center reputation.

     The Company views its employees as long-term members of the Guitar Center
team.  The Company encourages employee development by providing the salesforce
with extensive training and the opportunity to increase both compensation and
responsibility level through increased product knowledge and performance.  The
Company's aggressive growth strategy provides employees with the opportunity to
move into operations, sales and store management positions, which management
believes is not available at most other music retailers.  As the Company opens
new stores, key in-store management positions are primarily filled by the
qualified and experienced employees from existing stores.  By adopting a
"promotion from within" strategy, Guitar Center maintains a well trained, loyal,
and enthusiastic salesforce that is motivated by the Company's strong
opportunities for advancement.  Both Larry Thomas and Marty Albertson, the
Company's Chief Executive Officer and Chief Operating Officer, respectively,
began their careers as salespersons at Guitar Center.

PURCHASING, DISTRIBUTION AND INVENTORY CONTROL

     PURCHASING.  Guitar Center believes it has excellent relationships with its
vendors and, as one of the industry's largest volume purchasers, is able to
receive prompt order fulfillment and access to its vendors' premium products.
The Company maintains a centralized buying group comprised of merchandise
managers, buyers and planners.  Merchandise managers and buyers are responsible
for the selection and development of product assortments and the negotiation of
prices and terms.  The Company uses a proprietary merchandise replenishment
system which automatically analyzes and forecasts sales trends for each SKU
using various statistical models, supporting the buyers by predicting each
store's merchandise requirements.  This has resulted in limited "out of stock"
positions.

     The Company's business and its expansion plans are dependent to a
significant degree upon its vendors.  As it believes is customary in the
industry, the Company does not have any long-term supply contracts with its
vendors.  See "-- Risks Related to the Business -- Dependence on Suppliers."

     DISTRIBUTION.  Guitar Center products are typically shipped direct from the
manufacturer to individual stores, minimizing handling costs and reducing
freight expense.  Management continues to evaluate the cost effectiveness of
operating a distribution center in comparison to a direct shipment program,
although, at this time, it believes it can implement its growth strategy without
a central distribution center.


                                       9

<PAGE>

     INVENTORY CONTROL.  Management has invested significant time and resources
in its inventory control systems and believes it has one of the most
sophisticated systems in the music products retail industry.  Management
believes the vast majority of music product retailers do not use a computerized
inventory management system.  Guitar Center performs cycle inventory counts
daily, both to measure shrinkage and to update the perpetual inventory on a
store-by-store basis.  The Company's shrinkage level has historically been very
low which management attributes to its highly sophisticated system controls and
strong corporate culture.

SITE SELECTION

     The Company believes it has developed a unique and, what historically
has been, a highly effective selection criteria to identify prospective store
sites. In evaluating the suitability of a particular location, the Company
concentrates on the demographics of its target customer as well as traffic
patterns and specific site characteristics such as visibility, accessibility,
traffic volume, shopping patterns and availability of adequate parking.
Stores are typically located in free-standing locations to maximize their
outside exposure and signage.  Due to the fact that the Company's vendors
drop ship merchandise directly to the stores, the Company's expansion plans
are dependent more on the characteristics of the individual store site than
any logistical constraints that would be imposed by a central distribution
facility.  See "-- Store Locations."

MANAGEMENT INFORMATION SYSTEMS

     Guitar Center has invested significant resources in management information
systems that provide real-time information both by store and by SKU.  The
systems have been designed to integrate all major aspects of the Company's
business including sales, gross margins, inventory levels, purchase order
management, automated replenishment and merchandise planning.  Guitar Center's
highly sophisticated management information systems provide the Company with the
ability to monitor all critical aspects of store activity on a real-time basis.
Guitar Center's system capabilities include inter-store transactions, vendor
analysis, serial number tracking, inventory analysis and commission sales
reporting.  Guitar Center believes that the systems it has developed will enable
the Company to continue to improve customer service and operational efficiency
and support the Company's needs for the immediately foreseeable future.

COMPETITION

     The retail market for musical instruments is highly fragmented with the
nation's leading five music product retailers accounting for approximately 9.0%
of the industry's net sales in 1996.  The Company's largest competitor, Sam Ash,
operates ten stores in the New York City area, two stores in the South Florida
area, and has reported plans to open three stores in the Southern California
market.  Additionally, Music and Recording Superstores ("MARS") operates two
stores in the Atlanta market, three stores in the Texas market, and two stores
in the Florida market (in addition to the acquired ACE Music chain) and has
announced plans to have open approximately 50 stores in the future. The Company
currently has no stores in the New York City area, although, the Company has
signed leases to open three stores and anticipates opening one additional store
in the New York and New Jersey areas in 1998.  The Company competes with many
different types of retail stores, primarily specialty retailers and music
product catalogue retailers.

     Guitar Center believes that the ability to compete successfully in its
markets is determined by several factors, including breadth and quality of
product selection, pricing, effective merchandise presentation, customer
service, store location and proprietary database marketing programs.  Customer
satisfaction is paramount to Guitar Center's operating strategy and the Company
believes that providing knowledgeable and friendly customer service gives it a
competitive advantage.  The store environment is designed to be an entertaining
and exciting environment in which to shop.  In an effort to exceed customer
expectations, Guitar Center stores provide a number of services not generally
offered by most competitors, including the ability to hold and use merchandise,
product demonstrations and extensive product selection.  Salespeople are highly
trained and specialize in one of the Company's five product areas.  Salespeople
are certified by an outside technical advisory board, based on extensive
training and product knowledge testing.  The Company believes that this
certification process has increased the professionalism of its employees while
reducing turnover.  Customers are encouraged to help


                                       10

<PAGE>

themselves to the displayed instruments or to seek the assistance of the
professional salespeople.

     Certain factors, however, could materially and adversely affect the
Company's ability to compete successfully in its markets, including, among
others, the expansion by the Company into new markets in which its competitors
are already established, competitors' expansion into markets in which the
Company is currently operating, the adoption by competitors of innovative store
formats and retail sales methods or the entry into the Company's market by
competitors with substantial financial or other resources.  See "-- Risks
Related to the Business -- Aggressive Growth Strategy; and Competition."

EMPLOYEES

     As of December 31, 1997, Guitar Center employed approximately 1,372 people,
of whom approximately 686 were hourly employees and approximately 686 were
salaried.  To date, the Company has been able to recruit qualified personnel to
manage or staff its stores.  None of the Company's employees are covered by a
collective bargaining agreement.  Management believes that the Company enjoys
good employee relations.

SERVICE MARKS

     The Company has registered the GUITAR CENTER and ROCK WALK service marks
with the United States Patent and Trademark Office.  The Company believes that
these service marks have become important components in its merchandising and
marketing strategy.  The loss of the GUITAR CENTER service mark could have a
material adverse effect on the Company's business.

RISKS RELATED TO THE BUSINESS

     AGGRESSIVE GROWTH STRATEGY.  The Company intends to pursue an aggressive
growth strategy by opening additional stores in new and existing markets.
The Company, which operated 36 stores as of December 31, 1997, opened eight
stores (two of which were acquired) in fiscal 1997 and seven stores in fiscal
1996 and presently expects to open approximately ten stores in fiscal 1998
and twelve stores in fiscal 1999, which represents significant increases in
the number of stores previously opened and operated by the Company.  Although
historically the Company has opened new stores and expanded or relocated
existing stores, prior to 1996 the Company had not opened more than four new
stores for any twelve-month period for the prior three fiscal years.  See "--
Store Locations." The Company's expansion plan is dependent upon a number of
factors, including the identification of suitable sites, the negotiation of
acceptable leases for such sites, the hiring, training and retention of
skilled personnel, the availability of adequate management and financial
resources, the adaptation of its distribution and other operational and
management information systems to such sites, the ability and willingness of
the Company's vendors to supply its needs on a timely basis and other
factors, some of which are beyond the control of the Company.  There can be
no assurance that the Company will be successful in opening such new stores
on schedule, if at all, that such newly opened stores will achieve sales and
profitability levels comparable to existing stores, if they are profitable at
all, or that the Company will improve its overall market position and
profitability as a result therefrom.

     The Company's expansion strategy includes clustering stores in each of its
markets which has, in certain instances, resulted in some transfer of sales from
existing stores to new locations.  There can be no assurance that the opening of
one or more new stores in a market area containing an existing store or stores
will not reduce the sales and profitability level of any of the stores in such
market area.  In addition, the Company's expansion into new markets has in
certain circumstances presented competitive and merchandising challenges that
are different from those currently encountered by the Company in its existing
markets.  These challenges include the effective management of stores that are
in distant locations and the incurrence of significant start-up costs, including
costs related to promotions and advertising.  Although the Company is
continually evaluating the adequacy of its existing systems and procedures,
including store management, financial controls and management information
systems in connection with the Company's planned expansion, there can be no
assurance that the Company will adequately anticipate all of the changing
demands which its expanding operations will impose on such systems.  The failure
by the Company to identify and respond to such demands may have an adverse
effect on the


                                       11

<PAGE>

Company's results of operations, financial condition, business and
prospects.

     The Company also believes that there may be attractive opportunities to
expand by selectively acquiring existing music product retailers.  The Company
regularly considers and evaluates potential acquisition candidates in new and
existing market areas, and is currently evaluating several such opportunities.
Any such transactions may involve the payment by the Company of cash or
securities (including equity securities), or a combination of the foregoing.  As
of the date of this Report, the Company had no existing agreements or
commitments to effect any such acquisition.  Accordingly, there can be no
assurance that the Company will be able to identify suitable acquisition
candidates available for sale at reasonable prices or consummate any acquisition
or that any current negotiations will result in an acquisition.  Further,
acquisitions may involve a number of special risks, including diversion of
management's attention, the inability to integrate successfully any acquired
business, the incurrence of legal liabilities and unanticipated events or
circumstances, some or all of which could have a material adverse effect on the
Company's results of operations, financial condition, business and prospects.

     DEPENDENCE ON SUPPLIERS.  The Company's business and its expansion plans
are dependent to a significant degree upon its suppliers.  As it believes is
customary in the industry, the Company does not have any long-term supply
contracts with its suppliers.  The loss of certain key vendors or the failure to
establish and maintain relationships with brand name vendors could have a
material adverse effect on the Company's business.  The Company believes it
currently has adequate supply sources; however, there can be no assurance,
especially given the Company's expansion plans, that the Company will be able to
acquire sufficient quantities and an appropriate mix of such merchandise at
acceptable prices or at all.  Specifically, the establishment of additional
stores in existing markets and the penetration of new markets is dependent to a
significant extent on the willingness and ability of vendors to supply those
additional retail stores, of which there can be no assurance.  As the Company
continues to expand, the unwillingness or inability of a supplier to supply some
or all of its merchandise to the Company in one or more markets could have a
material adverse effect on the Company's results of operations, financial
condition, business and prospects.

     COMPETITION.  The retail market for musical instruments is fragmented and
highly competitive.  The Company competes with many different types of retailers
who sell many or most of the items sold by the Company, including other
specialty retailers and catalogue retailers.  The Company and other large format
music products retailers will compete in additional markets as these Companies
execute their announced growth plans.  The Company's expansion into new markets
in which its competitors are already established, competitors' expansion into
markets in which the Company is currently operating, the adoption by competitors
of innovative store formats and retail sales methods or the entry into the
Company's markets by competitors with substantial financial or other resources
may have a material adverse effect on the Company's results of operations,
financial condition, business and prospects.  See "-- Competition."

     FLUCTUATIONS IN COMPARABLE STORE SALES RESULTS.  Historically, the
Company's sales growth has resulted in large part from comparable store sales
growth.  There can be no assurance that such growth will continue.  A variety of
factors affect the Company's comparable store sales results including, among
others, competition, economic conditions, consumer trends, retail sales, music
trends, changes in the Company's merchandise mix, distribution of products,
transfer of sales to new locations, timing of promotional events and the
Company's ability to execute its business strategy efficiently, including its
strategy of clustering stores in certain markets.  The Company's quarterly
comparable store sales (net sales for comparable periods, excluding net sales
attributable to stores not open for 14 months) results have fluctuated
significantly in the past.  The Company's comparable store sales growth was
14.5%, 9.3%, 7.6% and 10.1% in the first, second, third and fourth quarters of
fiscal 1996, respectively, and 13.6%, 12.5%, 13.6% and 10.7% in the first,
second, third and fourth quarters of fiscal 1997, respectively.  The Company
does not expect comparable store sales to continue to increase at historical
rates, and there can be no assurance that comparable store sales will not
decrease in the future.  As is the case with many specialty retailers, the
Company's comparable store sales results could cause the price of the Common
Stock to fluctuate substantially.  See "Item 7.  Management's Discussion and
Analysis of Financial Condition and Results of Operations."


12

<PAGE>

     DEPENDENCE ON KEY PERSONNEL.  The Company believes that its continued
success depends to a significant extent on the services of Larry Thomas, its
President and Chief Executive Officer, and Marty Albertson, its Executive Vice
President and Chief Operating Officer, as well as on its ability to attract and
retain additional key personnel with the skills and expertise necessary to
manage its existing business and effectuate its planned growth.  The loss or
unavailability of the services of one or both of these individuals or other key
personnel could have a material adverse effect on the Company.  In June 1996, in
connection with the Recapitalization, the Company entered into a five-year
employment agreement with each of Messrs. Thomas and Albertson.  The Company
currently carries key man insurance on the lives of Messrs. Thomas and Albertson
in the amounts of $5.0 million and $3.5 million, respectively.  Historically,
when filling its senior operations, sales and store management positions, the
Company has generally followed a policy of "promotion from within."  The success
of the Company's growth strategy will also depend on its ability to promote
existing well-trained store personnel to senior management and to retain such
employees, as well as on its ability to attract and retain new employees who
have the skill and expertise to manage the Company's business.  Any inability to
hire, retain and promote such personnel could have a material adverse effect on
the Company's results of operations, financial condition, business and
prospects.  See "-- Customer Service."

     CONCENTRATION OF OPERATIONS IN CALIFORNIA.  As of December 31, 1997, 13 of
the Company's stores were located in California and generated 52.8% and 43.8% of
the Company's net sales for fiscal 1996 and 1997, respectively.  Although the
Company has opened stores in other areas in the United States, a significant
percentage of the Company's net sales is likely to remain concentrated in
California for the foreseeable future.  Consequently, the Company's results of
operations and financial condition are heavily dependent upon general consumer
trends and other general economic conditions in California and are subject to
other regional risks, including the risk of seismic activity.  The Company does
maintain earthquake insurance.  See "Item 2.  Properties."

     IMPACT OF ECONOMIC CONDITIONS ON INDUSTRY RESULTS; CHANGING CONSUMER
PREFERENCES.  The Company's business is sensitive to consumer spending patterns,
which in turn are subject to, among other things, prevailing economic
conditions.  There can be no assurance that consumer spending will not be
affected by economic conditions, thereby impacting the Company's growth, net
sales and profitability.  A deterioration in economic conditions in one or more
of the markets in which the Company's stores are concentrated could have a
material adverse effect on the Company's results of operations, business and
prospects.  Although the Company attempts to stay abreast of consumer
preferences for musical products and accessories historically offered for sale
by the Company, any sustained failure by the Company to identify and respond to
such trends would have a material adverse effect on the Company's results of
operations, financial condition, business and prospects.

     LIMITED HISTORY OF TRADING ON NASDAQ NATIONAL MARKET; VOLATILITY OF STOCK
PRICE.  The Company's Common Stock began trading on the Nasdaq National Market
on March 14, 1997.  The market price of the shares of Common Stock could be
subject to significant fluctuations in response to the Company's operating
results and other factors, including announcements by competitors.  In addition,
the stock market in recent years has experienced significant price and volume
fluctuations that often have been unrelated or disproportionate to the operating
performance of particular companies.  These fluctuations, as well as a shortfall
in sales or earnings compared to public market analysts' expectations, changes
in analysts' recommendations or projections, and general economic and market
conditions, may adversely affect the market price of the Common Stock.

     FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS.  This Report contains
certain forward-looking statements, relating to, among other things, future
results of operations, growth plans, sales, gross margin and expense trends,
capital requirements and general industry and business conditions applicable to
the Company.  These forward-looking statements are based largely on the
Company's current expectations and are subject to a number of risks and
uncertainties.  Actual results could differ materially from these
forward-looking statements.  In addition to the other risks described elsewhere
in this section, important factors to consider in evaluating such
forward-looking statements include changes in external competitive market
factors, changes in the Company's business strategy or an inability to execute
its strategy due to unanticipated changes in the music products industry or the
economy in general, the emergence of new or growing specialty retailers of music
products and various other competitive factors that may prevent the Company from
competing successfully in existing or future


                                       13

<PAGE>

markets.  In light of these risks and uncertainties, there can be no
assurance that the forward-looking statements contained in this Report will
in fact be realized.  See "Item 7.  Management's Discussion and Analysis of
Financial Condition and Results of Operation."

          ITEM 2.   PROPERTIES

     Guitar Center leases all but five of its stores and presently intends to
lease all new locations.  The terms of the store leases are generally for 10
years and typically allow the Company to renew for two additional five-year
terms.  Most of the leases require the Company to pay property tax, utilities,
normal repairs, common area maintenance and insurance expenses.

     Guitar Center leases its corporate offices of approximately 20,000 square
feet, which are located at 5155 Clareton Drive, Agoura Hills, California 91301.
Due to the Company's expansion, which has included the hiring of new corporate
and administrative personnel, the Company is currently evaluating whether to
lease additional space in a nearby location.  The Company believes that
sufficient additional space is available on reasonable terms.


                                       14


<PAGE>

STORE LOCATIONS

     The table below sets forth certain information concerning Guitar Center
stores:

<TABLE>
<CAPTION>

                                  Gross                                                                   Gross
                         Year    Square                                                       Year       Square
Store                   Opened    Feet        Status                  Store                  Opened       Feet        Status
-----------------------------------------------------                 ------------------------------------------------------
<S>                     <C>      <C>          <C>                     <C>                    <C>         <C>          <C>
ARIZONA                                                               MASSACHUSETTS
  Phoenix                 1997    13,900       Lease                    Boston                 1994       12,600       Lease
  Tempe                   1997    12,500       Lease                    Danvers                1996       14,600       Lease
SOUTHERN CALIFORNIA                                                     Natick                 1997       15,500       Lease
  Hollywood               1964    30,600         Own                  MICHIGAN
  San Diego               1973    13,500         Own                    Detroit                1994       10,100       Lease
  Fountain Valley         1980    13,700       Lease                    Southfield             1996       13,600       Lease
  Sherman Oaks            1982    18,600       Lease                  MINNESOTA
  Covina                  1985    15,400       Lease                    Twin Cities            1988        9,500       Lease
  Lawndale                1985    15,700       Lease                    Edina                  1997       15,400       Lease
  San Bernardino          1993     9,500       Lease                  MISSOURI
  Brea                    1995    14,900       Lease                    N. St. Louis (4)       1998       15,000       Lease
  San Marcos              1996    14,900       Lease                  NEW JERSEY
NORTHERN CALIFORNIA                                                     Springfield (4)        1998       20,000       Lease
  San Francisco           1972    11,900       Lease                  NEW YORK
  San Jose                1978    14,200         Own                    Carle Place (4)        1998       22,800       Lease
  El Cerrito (1)          1983    21,300       Lease                    Commack (4)            1998       16,000       Lease
  Pleasant Hill           1996    11,300       Lease                  OHIO
COLORADO                                                                Cleveland              1997       15,800       Lease
 Denver                   1998    16,800       Lease                    Mayfield Heights       1997       15,400       Lease
FLORIDA                                                               TEXAS
  North Miami area        1996    22,300       Lease                    Dallas                 1989       12,700       Lease
  South Miami area        1996    14,700       Lease                    Arlington              1991        9,700       Lease
GEORGIA                                                                 South Houston          1993       14,700       Lease
  Atlanta                 1997    25,000         Own                    North Houston          1994       10,300       Lease
  Smyrna (2)              1997     8,000       Lease                  WASHINGTON
ILLINOIS                                                                Seattle                1997       20,800       Lease
  South Chicago           1979    11,300       Lease
  North Chicago           1981    10,400       Lease
  Central Chicago (3)     1988     8,700         Own
  Villa Park              1996    15,000       Lease

</TABLE>
-------------------------

(1)       Of the 21,300 square feet, approximately 10,000 square feet
          consist of a basement and warehouse space.
(2)       The Company presently expects to relocate its Smyrna location to a
          19,000 square foot leased location in Marietta, Georgia.
(3)       In March 1998, The Company relocated its Central Chicago location to a
          20,600 square foot leased facility located nearby.
(4)       The Company has signed leases for these locations and presently
          expects each to be open in 1998.


                                       15

<PAGE>

ITEM 3.   LEGAL PROCEEDINGS

     The Company is not a party to any material legal proceedings and is not
aware of any pending or threatened litigation that, if decided adversely to the
Company, could reasonably be expected to have a material adverse effect on the
Company's financial condition.

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

     No matters were submitted to a vote of security holders during the fiscal
quarter ended December 31, 1997.

                                    PART II

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

MARKET INFORMATION

     The Company effected its initial public offering on March 14, 1997 at a
price of $15.00 per share.  The Company's Common Stock is quoted on the Nasdaq
National Market under the symbol "GTRC." The following table sets forth the high
and low closing sale prices for the Common Stock for the calendar quarters
indicated:

<TABLE>
<CAPTION>

1997                                HIGH                  LOW
----                                ----                  ---
<S>                                 <C>                   <C>
First Quarter beginning March 14    $18-1/8               $15-1/4
Second Quarter                       19-1/8                13-1/2
Third Quarter                        27                    15-3/4
Fourth Quarter                       24-1/2                17-7/8
</TABLE>


     As of March 9, 1998, there were 123 stockholders of record, excluding the
number of beneficial owners whose shares were held in street name.  The Company
believes that the number of beneficial holders is significantly in excess of
such amount.

DIVIDEND POLICY

     The Company currently intends to retain any earnings to provide funds
for the operation and expansion of its business and for the servicing and
repayment of indebtedness and does not intend to pay cash dividends on the
Common Stock in the foreseeable future.  Under the terms of the indenture
governing Senior Notes, the Company is not permitted to pay any dividends on
the Common Stock unless certain financial ratio tests and other conditions
are satisfied.  In addition, the Company's bank facility with Wells Fargo
Bank, N.A. (the "1997 Credit Facility") contains certain covenants which,
among other things, limit the payment of cash dividends on the capital stock
of the Company.  See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."  Any determination to pay cash dividends on the Common Stock in
the future will be at the sole discretion of the Company's Board of Directors.

                                       16

<PAGE>

ITEM 6.   SELECTED FINANCIAL DATA

     The selected financial data for the fiscal years ended December 31, 1993,
1994, 1995, 1996, and 1997 has been derived from the audited financial
statements of the Company.  The selected PRO FORMA financial data set forth
below is not necessarily indicative of the results that would have been achieved
or that may be achieved in the future.  The selected historical and PRO FORMA
financial data should be read in conjunction with "Item 7.  Management's
Discussion and Analysis of Financial Condition and Results of Operations, and
the financial statements of the Company and the notes thereto included elsewhere
herein.

<TABLE>
<CAPTION>

                                                                       FISCAL YEAR ENDED DECEMBER 31,
                                                                       ------------------------------

                                                       1993           1994           1995           1996           1997
                                                       ----           ----           ----           ----           ----
                                                    (in thousands, except per share and store and inventory operating data)
<S>                                                 <C>               <C>            <C>            <C>            <C>
INCOME STATEMENT DATA:
Net sales                                               $97,305       $129,039       $170,671       $213,294       $296,655
Cost of goods sold (1)                                   68,527         92,275        123,415        153,222        214,345
                                                        -------       --------       --------       --------       --------
       Gross profit                                     $28,778       $ 36,764       $ 47,256        $60,072        $82,310
Selling, general and administrative expenses             21,889         26,143         32,664         41,345         56,915
Deferred compensation expense (2)                         1,390          1,259          3,087         71,760             --
                                                        -------       --------       --------       --------       --------
Operating income (loss)                                 $ 5,499       $  9,362       $ 11,505       $(53,033)      $ 25,395
                                                        -------       --------       --------       --------       --------
Other (expense) income
       Interest expense, net                               (271)          (252)          (368)       (12,169)        (8,928)
       Transaction expense and other                         23             45             65         (7,068)          (220)
                                                        -------       --------       --------       --------       --------
                                                        $  (248)      $   (207)      $   (303)      $(19,237)      $ (9,148)
                                                        -------       --------       --------       --------       --------
Income (loss) before provision for income
taxes and extraordinary loss                              5,251          9,155         11,202        (72,270)        16,247
Provision for income taxes (benefit)                        146            326            345            139         (2,833)
                                                        -------       --------       --------       --------       --------
Income (loss) before extraordinary loss                 $ 5,105       $  8,829       $ 10,857       $(72,409)      $ 19,080
                                                        -------       --------       --------       --------       --------
                                                        -------       --------       --------       --------       --------
Extraordinary loss on early extinguishment of
    debt, net of tax $1,679                                  --             --             --             --         (2,739)
                                                                                                                   --------
Net income                                                   --             --             --             --       $ 16,341
                                                                                                                   --------
                                                                                                                   --------
Net Income per share (diluted)                               --             --             --             --       $   0.79
                                                                                                                   --------
                                                                                                                   --------
Weighted average shares outstanding (3)                      --             --             --             --         20,602
                                                                                                                   --------
                                                                                                                   --------
PRO FORMA FOR INCOME TAX PROVISION (4):
Historical income (loss) before provision for
     income taxes                                       $ 5,251       $  9,155       $ 11,202       $(72,270)
Pro forma provision for income taxes                      2,856          4,478          6,144             --
                                                        -------       --------       --------       --------
Pro forma net income (loss)                             $ 2,395       $  4,677       $  5,058       $(72,270)
                                                        -------       --------       --------       --------
                                                        -------       --------       --------       --------
Pro forma net income (loss) per common share
    (diluted)                                                                        $   0.25       $  (3.54)
                                                                                     --------       --------
                                                                                     --------       --------
Weighted average common shares
     outstanding (3) (5)                                                               20,420         20,420
                                                                                     --------       --------
                                                                                     --------       --------
OPERATING DATA:
Net sales per gross square foot (6)                     $   478       $    546       $    661       $    707       $    649
Net sales growth                                          13.7%          32.6%          32.3%          25.0%          39.1%
Increase in comparable store sales (7)                    11.4%          17.3%          23.4%          10.2%          12.4%
Stores open at end of period                                 17             20             21             28             36
Inventory turns                                             3.1x           3.4x           3.7x           3.4x           3.0x
Ratio of Earnings to Fixed Charges (8)                      9.1x          11.6x          11.7x             --           2.6x
Capital expenditures                                   $  2,618       $  3,277       $  3,432     $    6,133        $ 9,650
BALANCE SHEET DATA:
Net working capital                                     $10,243        $11,468       $  6,002      $  27,436       $ 61,611
Property, plant and equipment, net                       10,066         11,642         13,276         14,966         22,809
Total assets                                             37,602         46,900         49,618         74,849        132,624
Total long term and revolving debt (including
     current debt)                                        3,400            825             --        103,536         66,667
Senior preferred stock                                       --             --             --         15,186             --
Junior preferred stock                                       --             --             --        138,610             --
Stockholders' equity (deficit)                           18,484         23,424         19,763        (68,815)        28,776

</TABLE>

                       FOOTNOTES APPEAR ON FOLLOWING PAGE.


                                       17

<PAGE>

FOOTNOTES TO TABLE ON PREVIOUS PAGE.)

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

(1) Cost of goods sold includes buying and occupancy costs.

(2) For the fiscal year 1996, the Company recorded a non-recurring deferred
    compensation expense of $71.8 million, of which $69.9 million related to
    the cancellation and exchange of management stock options pursuant to the
    Recapitalization and $1.9 million related to a non-cash charge resulting
    from the grant of stock options to management by certain investors.  See
    Note 1 to the Consoidated Financial Statements.

(3) Weighted average shares represents shares calculated on a diluted basis.

(4) Pro forma provision for income taxes reflects the estimated statutory
    provision for income taxes assuming the Company was a "C" corporation.

(5) Weighted average shares outstanding assumes that:  (i) the Common Stock sold
    in the Offering, the Common Stock issued pursuant to the Junior Preferred
    Stock Conversion and the Common Stock issuable upon the exercise of all of
    the Company's outstanding warrants and other common stock equivalents were
    outstanding during each of the periods presented, and (ii) the Common Stock
    redeemed in connection with the Offering was not outstanding during any of
    the periods presented.  See Notes 1 and 10 to Notes to Consolidated
    Financial Statements.

(6) Net sales per gross square foot does not include new stores opened during
    the reporting period.

(7) Compares net sales for the comparable periods, excluding net sales
    attributable to stores not open for 14 months.

(8) For the purpose of calculating the ratio of earnings to fixed charges,
    "earnings" represents income before provision for income taxes and fixed
    charges.  "Fixed charges" consist of interest expense, amortization of debt
    financing costs, and one third of lease expense, which management believes
    is representative of the interest components of lease expense.  Earnings
    were insufficient to cover fixed charges by $72.3 million for the year
    ended December 31, 1996.


                                       18

<PAGE>

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

          GENERAL

          As of December 31, 1997, the Company had 36 stores operating in 19
major markets.  From 1993 to 1997, Guitar Center's net sales and operating
income before deferred compensation expense grew at compound annual growth rates
of 32.1% and 38.6%, respectively, principally due to comparable store sales
growth averaging 14.9% per year and the opening of new stores.  Guitar Center
achieved comparable store net sales growth of 23.4%, 10.2% and 12.4% for the
fiscal years ended December 31, 1995, 1996 and 1997, respectively. These
increases were primarily attributable to increases in unit sales rather than
increases in prices or changes in product mix.  Management believes such volume
increases are the result of the continued success of the Company's
implementation of its business strategy, continued strong growth in the music
products industry and increasing consumer awareness of the Guitar Center name.
The Company does not expect comparable store sales to continue to increase at
historical rates.

          The Company opened eight stores (two of which were acquired) in fiscal
1997 and seven stores in fiscal 1996 and presently expects to open approximately
ten stores in fiscal 1998 and twelve stores in 1999.  In preparation for these
additional stores, management has dedicated a substantial amount of resources
over the past several years to building the infrastructure necessary to support
a large, national chain.  For example, the Company spent $2.9 million from
January 1, 1993 to December 31, 1995 on system upgrades to support the storewide
integration of a state-of-the-art management information system.  The Company
has also established centralized operating and financial controls and has
implemented an extensive training program to ensure a high level of customer
service in its stores.  Management believes that the infrastructure is in place
to support its needs for the immediately foreseeable future, including its
present expansion plans as described herein.

          Guitar Center's expansion strategy includes opening additional stores
in certain of its existing markets and entering new markets.  As part of its
store expansion strategy, the Company opened five stores during a 14-month
period from October 1993 through November 1994.  Additionally, the Company
opened one store in December 1995, seven stores in 1996, and eight stores in
1997.  The Company will continue to pursue its strategy of clustering stores in
major markets to take advantage of operating and advertising efficiencies and to
build awareness of the Guitar Center name in new markets.  In some markets where
the Company has pursued its clustering strategy, there has been some transfer of
sales from certain existing stores to new locations.  Generally, however, mature
stores have demonstrated net sales growth rates consistent with the Company
average.  As the Company enters new markets, management expects that it will
initially incur higher administrative and advertising costs per store than it
currently experiences in established markets.

          The following table sets forth certain historical income statement
data as a percentage of net sales:
<TABLE>
<CAPTION>
                                                                     FISCAL YEAR ENDED
                                                                        DECEMBER 31,
                                                          ------------------------------------------
                                                             1995          1996             1997
                                                             ----          ----             ----
<S>                                                         <C>           <C>               <C>
Net sales                                                    100.0%        100.0%           100.0%
Gross profit                                                  27.7          28.2             27.7
Selling, general and administrative expenses                  19.2          19.4             19.2
                                                             ------        ------           ------
Operating income before deferred compensation expense          8.5           8.8              8.5
Deferred compensation expense                                  1.8          33.7               --
                                                             ------        ------           ------
Operating income (loss)                                        6.7         (24.9)             8.5
Interest expense, net                                          0.1           5.7              3.0
Transaction expenses and other                                  --           3.3              0.1 
                                                             ------        ------           ------
Income (loss) before income taxes                              6.6         (33.9)             5.4
Income taxes (benefit)                                         0.2            --             (1.0)
                                                             ------        ------           ------
Income (loss) before extraordinary loss                        6.4%        (33.9)%            6.4%
                                                             ------        ------           ------
</TABLE>
                                       19

<PAGE>

FISCAL 1997 COMPARED TO FISCAL 1996

          Net sales for the year ended December 31, 1997 increased 39.1% to
$296.7 million from $213.3 million in fiscal 1996.  This growth was attributable
to an increase of $57.3 million in new store net sales, accounting for 68.7% of
such increase.  In addition, comparable store net sales increased 12.4% or
$26.1 million, accounting for 31.3% of such increase.  The increase in
comparable net store sales was primarily attributable to increases in unit sales
rather than increases in prices or changes in the mix of sales between the
product categories.  Such volume increases were primarily the result of the
continued success of the Company's implementation of its business strategy,
continued strong growth in the music products industry and increasing consumer
awareness of Guitar Center stores.

          Gross profit for fiscal 1997 compared to fiscal 1996 increased 37.0%
to $82.3 million from $60.1 million in fiscal 1996.  Gross profit as a
percentage of net sales ("gross margin") for fiscal 1997 decreased to 27.7% from
28.2% in fiscal 1996.  The decrease in gross profit percentage reflects the
impact of operating fifteen stores opened since January 1, 1996 (out of the
total store base of 36 stores), which typically experience lower gross profits
than mature stores due to the leveraging of occupancy costs.  Comparatively,
1996 included the results of eight stores opened since January 1, 1995 (out of
the total store base of 28 stores).  In addition, there was an increase in the
mix of sales of high technology products, which historically produce lower
margins than low technology products.

          Selling, general and administrative expenses for fiscal 1997 increased
37.7% to $56.9 million from $41.3 million in fiscal 1996.  As a percentage of
net sales, selling, general and administrative expenses for fiscal 1997
decreased to 19.2% from 19.4% in fiscal 1996. During fiscal 1997, eight new
stores commenced operation and were open an average of eight months.  The change
in percentage of sales reflects the relatively fixed nature of certain general
and administrative expenses and the effect of the increase in sales volume.

          In 1997, the Company had no deferred compensation expense, as such
programs were terminated during 1996.  In 1996, the deferred compensation
expense resulted from a $69.9 million charge related to the purchase and
exchange of management stock options and the cancellation of the Company's prior
stock option program and a $1.9 million non-cash charge related to stock options
granted by certain investors to certain members of management.

          The operating income for fiscal 1997 was $25.4 million compared to an
operating loss of $53.0 million in fiscal 1996.  Operating income before
deferred compensation expense increased 35.6% to $25.4 million from
$18.7 million over the comparable period.  As a percentage of net sales,
operating income before deferred compensation expense for fiscal 1997 decreased
to 8.5% from 8.8% in the prior year, primarily due to the reduction in gross
profit discussed above.

          Interest expense, net for fiscal 1997 decreased to $8.9 million from
$12.2 million in fiscal 1996. In 1997, the interest expense consisted
principally of interest on the Senior Notes.  In 1997, the Company redeemed, at
a premium, $33.3 million principal amount of the Senior Notes.  The interest
expense in 1996 was attributable to the write-off of financing fees of
$4.7 million and interest of $7.5 million on outstanding borrowings during the
seven months following the Recapitalization.

          In the second quarter of 1997, an extraordinary charge to operations
of $4.4 million, net of tax benefit of $1.7 million, was incurred equal to the
premium paid on the Notes plus the write-off of one-third of the unamortized
deferred financing fees.

          Nonrecurring transaction expenses of $0.8 million related to the
Recapitalization were expensed in fiscal 1997.

          Income tax benefit in 1997 was recorded due to the reduction of the
valuation reserve on the Company's deferred tax asset, net of certain
alternative minimum tax and state taxes.  In 1996, no income taxes were recorded
due to the loss incurred.


                                       20

<PAGE>

          Net income (loss) for fiscal 1997 increased to $16.3 million from 
($72.4) million in fiscal 1996.

FISCAL 1996 COMPARED TO FISCAL 1995

          Net sales for the year ended December 31, 1996 increased 25.0% to
$213.3 million from $170.7 million in fiscal 1995.  This growth was attributable
to an increase of $25.6 million in new store net sales, accounting for 60.1% of
such increase.  In addition, comparable store net sales increased 10.2%, or
$17.0 million, accounting for 39.9% of such increase.  The increase in
comparable net store sales was primarily attributable to increases in unit sales
rather than increases in prices or changes in the mix of sales between the
product categories.  Such volume increases were primarily the result of the
continued success of the Company's implementation of its business strategy,
continued strong growth in the music products industry and increasing consumer
awareness of Guitar Center stores.

          Gross profit for fiscal 1996 compared to fiscal 1995 increased 27.1%
to $60.1 million from $47.3 million in fiscal 1995.  Gross profit as a
percentage of net sales ("gross margin") for fiscal 1996 increased to 28.2% from
27.7% in fiscal 1995.  This increase in gross margin was primarily the result of
the introduction and sales of higher margin high-technology pro audio and
recording equipment.

          Selling, general and administrative expenses for fiscal 1996 increased
26.6% to $41.3 million from $32.7 million in fiscal 1995.  As a percentage of
net sales, selling, general and administrative expenses for fiscal 1996
increased to 19.4% from 19.2% in fiscal 1995.  This change reflects an increase
in the number of store employees in anticipation of continued comparable store
sales growth, as well as the incremental cost of staffing newly opened stores
prior to sales reaching mature levels.  During fiscal 1996, seven new stores
commenced operation and were open an average of four and a half months.  In
addition, the increase reflects increases in corporate personnel and management
information systems expenses associated with the Company's continuing expansion.

          Deferred compensation expense for fiscal 1996 increased to
$71.8 million from $3.1 million in fiscal 1995.  The deferred compensation
expense resulted from a $69.9 million charge related to the purchase and
exchange of management stock options and the cancellation of the Company's prior
stock option program and a $1.9 million non-cash charge related to stock options
granted by the Investors to certain members of management. These expenses are
non-recurring.  The Company has not, and will not, incur any obligation in
connection with such grant of options by the Investors.

          The operating loss for fiscal 1996 was $53.0 million compared to
operating income of $11.5 million in fiscal 1995.  Operating income before
deferred compensation expense increased 28.1% to $18.7 million from
$14.6 million over the comparable period.  As a percentage of net sales,
operating income before deferred compensation expense for fiscal 1996 increased
to 8.8% from 8.5% in the prior year.

          Interest expense, net for fiscal 1996 increased to $12.2 million from
$0.4 million in fiscal 1995.  This increase was attributable to the write-off of
financing fees of $4.7 million and interest of $7.5 million on outstanding
borrowings during the seven months following the Recapitalization.

          Nonrecurring transaction expenses of $6.9 million related to the
Recapitalization were expensed in fiscal 1996.

          Net income (loss) for fiscal 1996 decreased to ($72.4) million from
$10.9 million in fiscal 1995.

LIQUIDITY AND CAPITAL RESOURCES

          On March 19, 1997, the Company completed the Offering pursuant to
which it sold 6,750,000 shares of


                                       21

<PAGE>

Common Stock and received approximately $94.4 million in net cash proceeds
(before deducting expenses associated with the Offering).  On April 15, 1997,
the Company sold an additional 1,012,500 shares of Common Stock in the
Offering and received an additional $14.1 million in net cash proceeds from
the underwriter's exercise in full of their over-allotment option.
Approximately $22.9 million of the net proceeds from the Offering was used to
redeem, at a premium, all of the Senior Preferred Stock.  As a result, a
charge to dividends was incurred by the Company in the first quarter of 1997
for the difference between the financial statement value of the Senior
Preferred Stock and the face amount thereof, plus the premium paid on the
Senior Preferred Stock.  Approximately $9.7 million of the net proceeds from
the Offering were used to repay all amounts outstanding under the prior
credit facility.  In addition, approximately $18.4 million of the net
proceeds from the Offering were used to redeem approximately 1,317,000 shares
of Common Stock from certain members of management.  Immediately following
the closing of the Offering, the Company called for redemption an aggregate
of $33.3 million principal amount of Senior Notes.  The Company used
approximately $37.9 million of the net proceeds from the Offering to redeem
such Senior Notes, at a premium, on April 19, 1997 and to pay all accrued and
unpaid interest with respect to the Senior Notes called for redemption.
Accordingly, the Company recorded an extraordinary charge to operations equal
to the premium paid on the Senior Notes called for redemption plus the
write-off of one-third of the unamortized deferred financing fees associated
with the issuance of such Senior Notes.

          Guitar Center's need for liquidity will arise primarily from interest
payable on its indebtedness and the funding of the Company's capital expenditure
and working capital requirements.  The Company has historically financed its
operations through internally generated funds and borrowings under its credit
facilities.  The Company has no mandatory payments of principal on the Senior
Notes prior to their final maturity in 2006.  As of December 31, 1997, the
Company had no amounts outstanding under its 1997 Credit Facility, and had
available borrowings of approximately $40 million.  The interest rate under the
1997 Credit Facility as of the date of this Report was 8.50% on prime rate based
borrowings and 7.18% on Eurodollar rate based borrowings.  The agreement
underlying the 1997 Credit Facility expires July 1, 2004 and includes certain
restrictive covenants which, among other things, require the Company to maintain
certain financial ratios.  The Company was in compliance with respect to all
such requirements as of December 31, 1997.

          For fiscal 1997 and 1996, cash used in operating activities was $2.4
million and $44.9 million respectively. Cash used in investing activites during
fiscal 1997 totaled $19.1 million, relating principally to the acquisition of
two musical instruments stores in Atlanta, Georgia ($10.3 million) and the
construction costs of opening new stores ($9.6 million).  In 1996, capital
expenditures totaled $6.1 million relating to the opening of new stores,
management information systems and store remodels.  Cash provided by financing
activities in fiscal 1997 totaled $29.2 million, which consisted principally of
proceeds from the Offering of $107.0 million, net of the redemption of the
Senior Preferred Stock of ($23.0 million), redemption of Common Stock ($18.4
million), redemption of Senior Notes ($33.3 million) and repayment of all
amounts outstanding under the prior credit facility ($3.5 million).  Cash
provided by financing activities was $49.3 million for fiscal 1996, which
includes the effects of the Recapitalization.

          The Company presently expects to spend approximately $12.0 million in
capital expenditures in 1998.

          The Company intends to pursue an aggressive growth strategy by opening
additional stores in new and existing markets.  The Company operated 36  stores
as of December 31, 1997, eight of which were opened during 1997, and seven of
which were opened during fiscal 1996, and presently expects to open
approximately ten and twelve stores in each of fiscal 1998 and 1999,
respectively.

          The Company believes that there may be attractive opportunities to
expand by selectively acquiring existing music product retailers.  The Company
regularly considers and evaluates potential acquisition candidates in new and
existing market areas, and is currently evaluating several such opportunities.
Any such transactions may involve the payment by the Company of cash or
securities (including equity securities), or a combination of the foregoing.  As
of the date of this report, the Company had no existing agreements or
commitments to effect any such acquisition.  There can be no assurance that the
Company will be able to identify suitable acquisition candidates available for
sale at reasonable prices or consummate any acquisition or that any current
negotiations

                                       22
<PAGE>

will result in an acquisition.  See "Item 1.  Business -- Risks Related to
the Business -- Aggressive Growth Strategy."

          Management believes that the Company has adequate capital resources
and liquidity to meet its borrowing obligations, fund all required capital
expenditures and pursue its business strategy for at least the next twelve
months, including its present plans for expansion as described elsewhere
herein. The Company's capital resources and liquidity are expected to be
provided by the Company's cash flow from operations and borrowings under the
1997 Credit Facility.  Depending on market conditions, the Company may also
incur additional indebtedness or issue equity securities.  There can no
assurance that such additional capital, if and when required, will be
available on terms acceptable to the Company, if at all.

INCOME TAXES

          The Company operated as an "S" corporation for all reported periods
prior to the closing of the Recapitalization on June 5, 1996.  Accordingly,
federal taxes were paid at the stockholder level and the Company paid minimal
state income taxes.  Upon consummation of the Recapitalization, the Company
eliminated its "S" corporation status and, accordingly, became subject to
federal, state and local income taxes.

          As a result of the $72.4 million loss incurred in fiscal 1996, the
Company has a tax net operating loss carryforward for federal income tax
purposes aggregating $61.8 million, which will expire if unused in 2011.  As of
December 31, 1997, the Company had reserved $19.8 of the related deferred tax
asset of $24.8 million.

SEASONALITY

          The Company's results are not highly seasonal, although, as with most
retailers, sales in the fourth quarter are typically higher than in other
quarters.

YEAR 2000

          The Year 2000 problem is the result of computer programs being written
using two digits rather than four to define the applicable year.  In January
1997, the Company developed a plan to deal with the Year 2000 problem to make
its systems Year 2000 compliant.  The plan has been assigned to a senior vice
president of the Company and provides for the conversion efforts to be completed
by the end of 1998.  The plan includes modifying, upgrading, or replacing its
internal computer software applications and information systems.  The Company
does not expect that the cost of its year 2000 compliance program will be
material to its business, results of operations or financial condition.
Although the impact on the Company caused by the failure of the Company's
significant suppliers to achieve year 2000 compliance in a timely manner or
effective matter is uncertain, the Company's business and results of operations
could be materially adversely affected by such failure.

INFLATION

          The Company believes that the relatively moderate rates of inflation
experienced in recent years have not had a significant impact on its nets sales
or profitability.

EFFECT OF FUTURE ACCOUNTING STATEMENTS

          AICPA Proposed Statement of Position (SOP), "REPORTING ON THE COSTS OF
START UP ACTIVITIES," will require that costs incurred during a start-up
activity (including organization costs) be expensed as incurred.  Anticipated
release of the SOP is in the second quarter of 1998.  The SOP will be effective
for financial statements issued for fiscal years beginning after December 15,
1998.


                                       23

<PAGE>

FORWARD-LOOKING STATEMENTS

          This Report contains certain forward-looking statements relating to,
among other things, future results of operations, growth plans, sales, gross
margin and expense trends, Year 2000 conversion, capital requirements and
general industry and business conditions applicable to the Company.  These
forward-looking statements are based largely on the Company's current
expectations and are subject to a number of risks and uncertainties.  Actual
results could differ materially from these forward-looking statements.
Important factors to consider in evaluating such forward-looking statements
include changes in external competitive market factors, change in the Company's
business strategy or an inability to execute its strategy due to unanticipated
changes in the music products industry or the economy in general, the emergence
of new or growing specialty retailers of music products and various competitive
factors that may prevent the Company from competing successfully in existing or
future markets.  In light of these risks and uncertainties, many of which are
described in greater detail in "Item 1.  Business -- Risks Related to the
Business," there can be no assurance that the forward-looking statements
contained in this Report will in fact be realized.

ITEM 8.        FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

          See the index included at "Item 14.  Exhibits, Financial Statement
Schedules and Reports on Form 10-K."

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

          In connection with the Recapitalization, Ernst & Young LLP was
replaced on July 24, 1996 by KPMG Peat Marwick LLP as the Company's independent
certified public accountants.  The decision to change accountants was approved
by the Company's Board of Directors.  The reports of Ernst & Young LLP on the
Company's financial statements for the past two fiscal years did not contain an
adverse opinion or a disclaimer of opinion and were not qualified or modified as
to uncertainty, audit scope or accounting principles.  In connection with the
audits of the Company's financial statements for each of the two fiscal years
ended December 31, 1995, and the subsequent interim period ended June 30, 1996,
there were no disagreements with Ernst & Young LLP on any matters of accounting
principles or practices, financial statement disclosure or auditing scope and
procedures which, if not resolved to the satisfaction of Ernst & Young LLP,
would have caused Ernst & Young LLP to make reference to the matter in their
report.


                                   PART III

ITEM 10.  DIRECTORS AND OFFICERS OF THE REGISTRANT

          The information required by this item is incorporated by reference to
the Company's definitive Proxy Statement filed pursuant to Regulation 14A under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), in
connection with the Company's annual meeting of stockholders.

ITEM 11.  EXECUTIVE COMPENSATION

          The information required by this item is incorporated by reference to
the Company's definitive Proxy Statement filed pursuant to Regulation 14A under
the Exchange Act in connection with the Company's annual meeting of
stockholders.


                                       24

<PAGE>

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

          The information required by this item is incorporated by reference to
the Company's definitive Proxy Statement filed pursuant to Regulation 14A under
the Exchange Act in connection with the Company's annual meeting of
stockholders.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

          The information required by this item is incorporated by reference to
the Company's  definitive Proxy Statement filed pursuant to Regulation 14A under
the Exchange Act in connection with the Company's annual meeting of
stockholders.

                                      PART IV

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

(a)       Documents filed as part of this Report:

          1.   The following financial statements for the Company are included
               as part of this Report:

               Index to Financial Statements                          Page F-1

          2.   The following financial statement schedule for the Company is
               included as part of this Report:

               Schedule II -- Valuation and Qualifying Accounts       Page II-1

               All other schedules have been omitted since the required
               information is not present in amounts sufficient to require
               submission of the schedules, or because the information required
               is included in the financial statements.

(b)       No reports on Form 8-K were filed during the quarter ended December
          31, 1997.

(c)       Those Exhibits, and the Index thereto, required to be filed by Item
          601 of Regulation S-K are attached hereto.  Certain management
          contracts and other compensation plans or arrangements required to be
          filed are identified on the attached Index with an asterisk (*).


                                       25

<PAGE>

                                INDEX TO EXHIBITS
EXHIBIT
NUMBER    DESCRIPTION
------    -----------
3.1       The Company's Restated Certificate of Incorporation (Incorporated by
          reference to Exhibit 3.5 of the Company's Registration Statement on
          Form S-1 (Registration No. 333-20931))

3.2       The Company's Amended and Restated Bylaws (Incorporated by reference
          to Exhibit 3.7 of the Company's Registration Statement on Form S-1
          (Registration No. 333-20931))

4.1       Indenture dated as of July 2, 1996 by and between the Company and U.S.
          Trust Company of California as trustee (Incorporated by reference to
          Exhibit 4.1 of the Company's Registration Statement on Form S-1
          (Registration No. 333-10491))

4.2       Form of Restricted Stock Agreements dated as of May 1, 1996 between
          the Company and certain members of management (Incorporated by
          reference to Exhibit 4.2 of the Company's Registration Statement on
          Form S-1 (Registration No. 333-10491))

4.3       Warrants (1-4) dated June 5, 1996 for the purchase of shares of Common
          Stock and Junior Preferred Stock issued to certain investors
          (Incorporated by reference to Exhibit 4.3 of the Company's
          Registration Statement on Form S-1 (Registration No. 333-10491))

4.4       Form of Stock Certificate (Incorporated by reference to Exhibit 4.4 of
          the Company's Registration Statement on Form S-1 (Registration No.
          333-20931))

10.1      Recapitalization Agreement dated May 1, 1996 by and among the Company
          and the stockholders named therein (Incorporated by reference to
          Exhibit 10.1 of the Company's Registration Statement on Form S-1
          (Registration No. 333-10491)

10.2      Registration Rights Agreement dated June 5, 1996 among the Company and
          the stockholders named therein (Incorporated by reference to Exhibit
          10.2 of the Company's Registration Statement on Form S-1 (Registration
          No. 333-10491))

10.3      Tax Indemnification Agreement dated as of May 1, 1996 by and among the
          Company, Ray Scherr, and the individuals identified on the signature
          pages thereto (Incorporated by reference to Exhibit 10.3 of the
          Company's Registration Statement on Form S-1 (Registration No.
          333-10491)

10.4*     Employment Agreement dated June 5, 1996 between the Company and
          Lawrence Thomas (Incorporated by reference to Exhibit 10.5 of the
          Company's Registration Statement on Form S-1 (Registration No.
          333-10491))

10.5*     The Company's Amended and Restated 1996 Performance Stock Option Plan
          (Incorporated by reference to Exhibit 10.5 of the Company's
          Registration Statement on Form S-1 (Registration No. 333-20931))

10.6*     Employment Agreement dated June 5, 1996 between the Company and Marty
          Albertson (Incorporated by reference to Exhibit 10.6 of the Company's
          Registration Statement on Form S-1 (Registration No. 333-10491))

10.7*     Employment Agreement dated June 5, 1996 between the Company and Bruce
          Ross, as amended (Incorporated by reference to Exhibit 10.7 of the
          Company's Registration Statement on Form S-1 (Registration No.
          333-20931))

10.8*     Employment Agreement dated June 5, 1996 between the Company and
          Raymond Scherr (Incorporated by reference to Exhibit 10.8 of the
          Company's Registration Statement on Form S-1 (Registration No.
          333-10491))

10.9*     Employment Agreement dated June 5, 1996 between the Company and Barry
          Soosman, as amended (Incorporated by reference to Exhibit 10.9 of the
          Company's Registration Statement


                                       26

<PAGE>

          on Form S-1 (Registration No. 333-20931))

10.10     Securities Purchase Agreement dated June 5, 1996 by and among the
          Company and the parties named therein (Incorporated by reference to
          Exhibit 10.10 of the Company's Registration Statement on Form S-1
          (Registration No. 333-10491))

10.11*    Form of Indemnification Agreement between the Company and each of its
          directors and executive officers (Incorporated by reference to Exhibit
          10.11 of the Company's Registration Statement on Form S-1
          (Registration No. 333-20931))

10.12     Credit Agreement dated August 14, 1997 between the Company and Wells
          Fargo Bank, N.A. (Incorporated by reference to Exhibit 10.36 of the
          Company's Quarterly Report on Form 10-Q for the quarter ended
          September 30, 1997

10.15     Registration Rights Agreement dated July 2, 1996 by and among the
          Company, Chase Securities Inc. and Donaldson, Lufkin & Jenrette
          Securities Corporation (Incorporated by reference to Exhibit 10.15 of
          the Company's Registration Statement on Form S-1 (Registration No.
          333-10491))

10.16*    Management Stock Option Agreement dated June 5, 1996 by and between
          the Company and Lawrence Thomas (Incorporated by reference to Exhibit
          10.16 of the Company's Registration Statement on Form S-1
          (Registration No. 333-10491))

10.17*    Management Stock Option Agreement dated June 5, 1996 by and between
          the Company and Marty Albertson (Incorporated by reference to Exhibit
          10.17 of the Company's Registration Statement on Form S-1
          (Registration No. 333-10491))

10.18     Registration Agreement dated June 5, 1996 among the Company and the
          parties named therein (Incorporated by reference to Exhibit 10.11
          contained in Registration Statement on Form S-1 (File No. 333-10491))

10.19     Stockholders Agreement dated June 5, 1996 among the Company, and the
          investors listed therein (Incorporated by reference to Exhibit 10.19
          of the Company's Registration Statement on Form S-1 (Registration No.
          333-10491))

10.20*    Amendment No. 1 to Amended and Restated 1996 Performance Stock Option
          Plan (Incorporated by reference to Exhibit 10.24 of the Company's
          Registration Statement on Form S-1 (Registration No. 333-20931))

10.21*    Form of Employee Stock Purchase Plan Agreement (Incorporated by
          reference to Exhibit 10.25 of the Company's Registration Statement on
          Form S-1 (Registration No. 333-20931))

10.22*    1997 Equity Participation Plan (Incorporated by reference to Exhibit
          10.26 of the Company's Registration Statement on Form S-1
          (Registration No. 333-20931))

10.23     Stockholders Consent dated as of January 24, 1997 by and among the
          Company and certain of its stockholders (Incorporated by reference to
          Exhibit 10.27 of the Company's Registration Statement on Form S-1
          (Registration No. 333-20931))

10.24*    Modification to Amended and Restated 1996 Performance Stock Option
          Plan (Incorporated by reference to Exhibit 10.28 of the Company's
          Registration Statement on Form S-1 (Registration No. 333-20931))

10.25*    Management Stock Repurchase Agreement (Incorporated by reference to
          Exhibit 10.29 of the Company's Registration Statement on Form S-1
          (Registration No. 333-20931))

10.26*    Amendment No. 2 to the Amended and Restated 1996 Performance Stock
          Option Plan (Incorporated by reference to Exhibit 10.30 of the
          Company's Registration Statement on Form S-1 (Registration No.
          333-20931))


                                       27

<PAGE>

10.27*    Amendment No. 1 to Management Stock Option Agreement dated as of
          October 15, 1996 between the Company and Larry Thomas (Incorporated by
          reference to Exhibit 10.21 contained in Registration Statement on
          Form S-1 (File No. 333-10491))

10.28*    Amendment No. 1 to Management Stock Option Agreement dated as of
          October 15, 1996  between the Company and Marty Albertson
          (Incorporated by reference to Exhibit 10.22 contained in Registration
          Statement on Form S-1 (File No. 333-10491))

11.1      Calculation of Earnings (loss) per Common Stockholders

12.1      Ratio of Earnings to Fixed Charges

24.1      Power of Attorney (included on page S-1)

27.1      Financial Data Schedule

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

*Management contract or other compensation plan or arrangement.


                                       28

<PAGE>

                                     SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this Report to
be signed on its behalf by the undersigned, thereunto duly authorized as of this
9th day of March, 1998.

                                   GUITAR CENTER, INC.

                                   /s/     LARRY THOMAS
                                   -----------------------------------------

                                        Larry Thomas
                                        President and Chief Executive Officer

     KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Larry Thomas, Marty Albertson and Bruce
Ross, as his attorneys-in-fact, each with the power of substitution, for him in
any and all capacities, to sign any amendment to this Report on Form 10-K, and
to file the same, with exhibits thereto and other documents in connection
therewith with the Securities and Exchange Commission, hereby ratifying and
confirming all that each of said attorneys-in-fact, or his substitute or
substitutes may do or cause to be done by virtue hereof.

     Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this Report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.


               NAME                          TITLE                          DATE
               ----                          -----                          ----
       /s/ LARRY THOMAS          President, Chief Executive        March 9, 1998
       -------------------
       Larry Thomas              Officer and Director
                                 (Principal Executive Officer)

       /s/ BRUCE ROSS            Executive Vice President, Chief   March 9, 1998
       -------------------
       Bruce Ross                Financial Officer and
                                 Secretary (Principal
                                 Financial and Accounting
                                 Officer)
       /s/ MARTY ALBERTSON       Executive Vice President,         March 9, 1998
       -------------------
       Marty Albertson           Chief Operating Officer and
                                 Director

       /s/ PETER STARRETT        Director                          March 9, 1998
       -------------------
       Peter Starrett

       /s/ HARVEY KIBEL          Director                          March 9, 1998
       -------------------
       Harvey Kibel

       /s/ DAVID FERGUSON        Director                          March 9, 1998
       -------------------
       David Ferguson

       /s/ JEFFREY WALKER        Director                          March 9, 1998
       -------------------
       Jeffrey Walker

       /s/ MICHAEL LAZARUS       Director                          March 9, 1998
       -------------------
       Michael Lazarus

       /s/ STEVEN BURGE          Director                          March 9, 1998
       -------------------
       Steven Burge


                                       29

<PAGE>

                                 GUITAR CENTER, INC.

                            INDEX TO FINANCIAL STATEMENTS

Report of Independent Auditors (KPMG Peat Marwick LLP)                  F-2
Report of Independent Auditors (Ernst & Young LLP)                      F-3
Consolidated Balance Sheets as of December 31, 1996 and 1997            F-4
Consolidated Statements of Operations for the years ended
  December 31, 1995, 1996 and 1997                                      F-5
Consolidated Statements of Stockholders' Equity (Deficit) for
  the years ended December 31, 1995, 1996 and 1997                      F-6
Consolidated Statements of Cash Flows for the years
  ended December 31, 1995, 1996 and 1997                                F-7
Notes to Consolidated Financial Statements                              F-8

                                                                        Schedule
Financial Statement Schedule:
     Valuation and Qualifying Accounts                                  II-1


                                       30

<PAGE>

                            REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders
Guitar Center, Inc. and Subsidiary:

     We have audited the accompanying consolidated balance sheets of Guitar
Center, Inc. and subsidiary as of December 31, 1997 and 1996 and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows for the years then ended.  In connection with our audits of the
consolidated financial statements, we also have audited the consolidated
financial statement schedule as listed in the accompanying index.  These
consolidated financial statements and the consolidated financial statement
schedule are the responsibility of the Company's management.  Our responsibility
is to express an opinion on these consolidated financial statements and the
consolidated financial statement schedule based on our audits.

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

     In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Guitar
Center, Inc. and subsidiary as of December 31, 1997 and 1996 and the results of
its operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.  Also, in our opinion, the related
consolidated financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, present fairly, in all
material respects, the information set forth therein.

                                       KPMG PEAT MARWICK LLP

Los Angeles, California
February 11, 1998


                                       31

<PAGE>

                            REPORT OF INDEPENDENT AUDITORS


The Board of Directors and Stockholder
Guitar Center, Inc.

     We have audited the accompanying consolidated statement of operations,
stockholders' equity, and cash flows for the year ended December 31, 1995.
These consolidated financial statements are the responsibility of the Company's
management.  Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.

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

     In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of its operations and its
cash flows for the year ended December 31, 1995 in conformity with generally
accepted accounting principles.

                                    ERNST & YOUNG LLP

Los Angeles, California
March 6, 1996


                                       32

<PAGE>

                      GUITAR CENTER, INC. AND SUBSIDIARY
                         CONSOLIDATED BALANCE SHEETS
                 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                     DECEMBER 31,
                                                                  1996          1997
                                                                ----------------------
<S>                                                            <C>          <C>
ASSETS
Current assets:
 Cash and cash equivalents                                      $      47    $   7,755
 Accounts receivable, less allowance for
  doubtful accounts of $150 (1996) and
  $150 (1997)                                                       4,062        7,896
 Merchandise inventories                                           49,705       78,898
 Prepaid expenses and other current assets                          1,388        3,118
 Employee notes                                                        67          108
                                                                ----------------------
Total current assets                                               55,269       97,775
Property and equipment, net                                        14,966       22,809
Goodwill, net of accumulated amortization of
 $167 (1996) and $279 (1997)                                          432        4,094
Other assets                                                        4,182        7,946
                                                                ----------------------
                                                                $  74,849    $ 132,624
                                                                ----------------------
                                                                ----------------------

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
 Accounts payable                                               $  14,005    $  16,863
 Accrued expenses                                                   7,891       15,731
 Merchandise advances                                               2,401        3,570
 Revolving line of credit                                           3,536           --
                                                                ----------------------
Total current liabilities                                          27,833       36,164
Other long-term liabilities                                           645        1,017
Long-term debt                                                    100,000       66,667
Senior preferred stock, aggregate liquidation
 preference of $21,602; authorized
 4,250,000 shares, issued and outstanding 800,000
 shares at December 31, 1996
 and 0 at December 31, 1997                                        15,186           --
Stockholders' equity (deficit):
 Junior preferred stock, aggregate liquidation
  preference of $144,959 at December 31, 1996                     138,610           --
 Common stock, $0.01 par value, authorized 55,000,000
  shares; issued and outstanding 3,622,804 and
  19,338,073 at December 31, 1996 and 1997, respectively               36          193
 Warrants                                                           6,500        6,500
 Additional paid in capital                                        (6,966)     220,514
 Accumulated deficit                                             (206,995)    (198,431)
                                                                ----------------------
Total stockholders' equity (deficit)                              (68,815)      28,776
                                                                ----------------------
                                                                $  74,849    $ 132,624
                                                                ----------------------
                                                                ----------------------
</TABLE>
               SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

                                       33
<PAGE>

                       GUITAR CENTER, INC. AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                         YEAR  ENDED DECEMBER 31,
                                                                  1995               1996          1997
                                                                ---------------------------------------------
<S>                                                              <C>                <C>            <C>
Net sales                                                         $  170,671         $  213,294    $  296,655
Cost of goods sold, buying and occupancy                             123,415            153,222       214,345
                                                                  ----------         ----------    ----------
Gross profit                                                          47,256             60,072        82,310
Selling, general and administrative expenses                          32,664             41,345        56,915
Deferred compensation expense                                          3,087             71,760            --
                                                                  ----------         ----------    ----------
Operating income (loss)                                               11,505            (53,033)       25,395
Interest expense, net                                                   (368)           (12,169)       (8,928)
Transaction expenses                                                      --             (6,942)         (755)
Other income (expenses)                                                   65               (126)          535
                                                                  ----------         ----------    ----------
Income (loss) before income taxes and extraordinary loss              11,202            (72,270)       16,247
Income taxes (benefit)                                                   345                139        (2,833)
                                                                  ----------         ----------    ----------
Income (loss) before extraordinary loss                               10,857            (72,409)       19,080
Extraordinary loss on early extinguishment of debt, net of tax
 benefit of $1,679                                                        --                 --        (2,739)
                                                                  ----------         ----------    ----------
Net income (loss)                                                 $   10,857          $ (72,409)    $  16,341

Income (loss) available to common stockholders (1995 and 1996
data is unaudited pro forma data):
 Income (loss) before taxes                                       $   11,202          $ (72,270)           --
 Pro forma income tax benefit                                          6,144                 --            --
                                                                  ----------         ----------    ----------
 Net income (loss)                                                     5,058            (72,270)           --
 Senior and junior preferred stock dividends                             --               7,951         7,747
                                                                  ----------         ----------    ----------
 Net income (loss) available to common stockholders               $    5,058          $ (80,221)    $   8,594
                                                                  ----------         ----------    ----------
                                                                  ----------         ----------    ----------
 Net income (loss) per common share
   Basic                                                          $     0.26          $   (4.15)    $    0.44
                                                                  ----------         ----------    ----------
                                                                  ----------         ----------    ----------
   Diluted                                                        $     0.25          $   (3.93)    $    0.42
                                                                  ----------         ----------    ----------
                                                                  ----------         ----------    ----------
 Weighted average shares outstanding
   Basic                                                              19,329             19,329        19,331
                                                                  ----------         ----------    ----------
                                                                  ----------         ----------    ----------
   Diluted                                                            20,420             20,420        20,602
                                                                  ----------         ----------    ----------
                                                                  ----------         ----------    ----------
</TABLE>

                   SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

                                       34
<PAGE>

                        GUITAR CENTER, INC. AND SUBSIDIARY
                  CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                   JUNIOR                                      ADDITIONAL    RETAINED
                                                  PREFERRED       COMMON                        PAID IN      EARNINGS
                                                    STOCK         STOCK         WARRANTS        CAPITAL      (DEFICIT)       TOTAL
                                               -----------------------------------------------------------------------------------
                                                                                   (IN THOUSANDS)
<S>                                           <C>           <C>              <C>             <C>           <C>          <C>
Balance at December 31, 1994                    $      --    $    4,987       $       --      $     --      $   18,437   $   23,424
     Net income                                        --            --               --            --          10,857       10,857
     Distributions to stockholder                      --            --               --            --         (14,518)     (14,518)
                                                ---------    ----------       ----------      --------      ----------   ----------
Balance at December 31, 1995                           --         4,987               --            --          14,776       19,763
     S Corporation cash distributions                  --            --               --            --         (28,057)     (28,057)
     S Corporation non-cash distributions              --            --               --            --          (1,753)      (1,753)
     Redemption of prior sole stockholder
         interest                                  19,800        (4,787)              --            --        (128,115)    (113,102)
     Reclassification of prior
         S Corporation deficit                         --            --               --       (10,249)         10,249           --
     Issuance of equity to management              49,500           500               --            --              --       50,000
     Issuance of equity to new investors           69,300           700               --            --              --       70,000
     Issuance of warrants                              --            --            6,500            --              --        6,500
     Options granted to management by
         investor group                                --            --               --         1,918              --        1,918
     Reclassification of excess of par
         value                                         --        (1,364)              --         1,364              --           --
     Sale of equity to management                      10            --               --             1              --           11
     Net loss                                          --            --               --            --         (72,409)     (72,409)
     Undeclared dividend on senior
         preferred stock                               --            --               --            --          (1,602)      (1,602)
     Accretion of senior preferred stock               --            --               --            --             (84)         (84)
                                                ---------    ----------       ----------      --------      ----------   ----------
Balance at December 31, 1996                      138,610            36            6,500        (6,966)       (206,995)     (68,815)
     Sale of equity to management                     307            --               --             3              --          310
     Conversion of junior preferred stock        (138,917)           93               --       138,824              --           --
     Offering of common stock                          --            77               --       106,959              --      107,036
     Repurchase of management common
         stock                                         --           (13)              --       (18,404)             --      (18,417)
     Senior preferred dividends paid                   --            --               --            --          (7,747)      (7,747)
     Accretion of senior preferred stock               --            --               --            --             (30)         (30)
     Exercise of employee stock options                --            --               --            98              --           98
     Net income                                        --            --               --            --          16,341       16,341
                                                ---------    ----------       ----------      --------      ----------   ----------
Balance at December 31, 1997                    $      --    $      193       $    6,500      $220,514      $ (198,431)  $   28,776
                                                ---------    ----------       ----------      --------      ----------   ----------
                                                ---------    ----------       ----------      --------      ----------   ----------
</TABLE>
            SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

                                       35
<PAGE>

                          GUITAR CENTER, INC. AND SUBSIDIARY
                        CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                          YEAR  ENDED DECEMBER 31,
                                                                                   1995              1996             1997
                                                                             ------------------------------------------------
<S>                                                                           <C>                <C>              <C>
OPERATING ACTIVITIES
Net income (loss)                                                              $  10,857          $ (72,409)       $  16,341
Adjustments to reconcile net income (loss) to net cash provided by
 (used in) operating activities:
      Depreciation and amortization                                                1,802              2,161            3,148
      Deferred compensation--repurchase of options                                    --             49,510               --
      Investor options to management                                                  --              1,918               --
      Change in deferred tax asset                                                    --                 --           (5,000)
      (Gain) loss on sale of fixed assets                                             (4)               112             (535)
      Amortization of deferred financing fees                                         --                215            1,363
      Changes in operating assets and liabilities:
         Accounts receivable                                                        (513)            (1,859)          (3,834)
         Merchandise Inventories                                                  (2,487)           (18,424)         (23,093)
         Prepaid expenses                                                           (317)              (698)          (1,840)
         Other assets                                                               (154)              (511)            (178)
         Accounts payable                                                          2,208              1,392            2,858
         Accrued liabilities                                                       1,452                830            6,840
         Deferred compensation                                                     3,087             (7,908)              --
         Merchandise advances                                                        490                391            1,169
         Other long-term liabilities                                                 (33)               382              372
                                                                               ---------          ---------        ---------
Net cash provided by (used in) operating activities                               16,388            (44,898)          (2,389)
INVESTING ACTIVITIES
Acquisition of Rhythm City, net of cash acquired                                      --                 --          (10,300)
Proceeds from sale of assets                                                          15                433              893
Purchases of property and equipment                                               (3,432)            (6,133)          (9,650)
Employee notes                                                                       (42)                15              (41)
                                                                               ---------          ---------        ---------
Net cash used in investing activities                                             (3,459)            (5,685)         (19,098)
FINANCING ACTIVITIES
Principal repayments of long-term debt                                              (825)                --               --
Proceeds from issuance of long-term debt                                              --            100,000               --
Net change in revolving debt facility                                                 --              3,536           (3,536)
Distribution of prior shareholder interest                                            --           (113,102)              --
Deferred financing fees paid                                                          --             (3,585)              --
Issuance of common stock                                                              --              1,200               --
Issuance of junior preferred stock                                                    --             69,300               --
Issuance of senior preferred stock                                                    --             13,500               --
Issuance of warrants                                                                  --              6,500               --
Distributions to prior sole shareholder                                          (14,518)           (28,057)              --
Redemption of Senior Notes                                                            --                 --          (33,333)
Proceeds from sale of stock to management                                             --                 --              310
Proceeds from initial public offering                                                 --                 --          107,036
Proceeds from exercise of stock options                                               --                 --               98
Redemption of senior preferred stock                                                  --                 --          (22,963)
Redemption of management stock                                                        --                 --          (18,417)
                                                                               ---------          ---------        ---------
Net cash provided by (used in) financing activities                              (15,343)            49,292           29,195
                                                                               ---------          ---------        ---------
Net increase (decrease) in cash and cash equivalents                              (2,414)            (1,291)           7,708
Cash and cash equivalents at beginning of year                                     3,752              1,338               47
                                                                               ---------          ---------        ---------
Cash and cash equivalents at end of year                                       $   1,338          $      47        $   7,755
                                                                               ---------          ---------        ---------
                                                                               ---------          ---------        ---------
</TABLE>

                                       36
<PAGE>

                       GUITAR CENTER, INC. AND SUBSIDIARY
               CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
                                 (IN THOUSANDS)

Supplemental disclosure of cash flow information
      Cash paid during the year for:

<TABLE>
<CAPTION>
         <S>                                                 <C>         <C>           <C>
         Interest                                            $  357      $11,890       $  8,319
                                                             ------      -------       --------
                                                             ------      -------       --------
         Income taxes                                        $  346      $   139       $    514
                                                             ------      -------       --------
                                                             ------      -------       --------
</TABLE>

SUPPLEMENTAL SCHEDULE OF NONCASH ACTIVITIES

  In 1996, the Company entered into two sale leaseback transactions with its
former sole stockholder aggregating $1,753,000.

  In 1997, the Company purchased all of the capital stock of Rhythm City, Inc.
for $10.3 million.  In conjunction with the acquisition, no liabilities were
assumed.

  In 1997, the Company converted $138.9 million of Junior Preferred Stock to
Common Stock.


             SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

                                       37
<PAGE>

                      GUITAR CENTER, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               DECEMBER 31, 1997

1.   Nature of Business and Significant Accounting Policies

     NATURE OF BUSINESS

     Guitar Center, Inc. and subsidiary ("Guitar Center" or the "Company")
operates a chain of retail stores which sell high quality musical instruments
primarily guitars, keyboard, percussion and pro-audio equipment.  At
December 31, 1997, the Company operated 36 stores in major cities throughout the
United States with approximately 36% of the stores located in California.

     The financial statements give effect to the reincorporation of the Company
from a California to a Delaware corporation on October 11, 1996 and a 2.582-to-1
stock split effectuated on January 15, 1997.

     PRINCIPLES OF CONSOLIDATION

     The consolidated financial statements include the financial statements of
Guitar Center, Inc. and its wholly-owned subsidiary.  All significant
intercompany balances and transactions have been eliminated in consolidation.

     OFFERING

     On March 19, 1997, the Company completed an initial public offering (the
"Offering") of the Company's common stock, $.01 par value ("Common Stock"),
pursuant to which it sold 6,750,000 shares of Common Stock and received
approximately $94.4 million in net cash proceeds (before deducting expenses
associated with the Offering).  On April 15, 1997, the Company sold an
additional 1,012,500 shares of Common Stock in the Offering and received an
additional $14.1 million in net cash proceeds from the underwriters' exercise in
full of their over-allotment option.  Upon consummation of the Offering, all of
the outstanding shares of the Company's 8% Junior Preferred Stock, $.01 par
value ("Junior Preferred Stock"), were automatically converted into shares of
Common Stock at a ratio of 6.667 shares of Common Stock for each share of Junior
Preferred Stock (the "Junior Preferred Stock Conversion").  No accrued and
unpaid dividends were paid on any shares of Junior Preferred Stock.
Approximately $23.0 million of the net proceeds from the Offering were used to
redeem, at a premium of 3%, all of the outstanding shares of the Company's 14%
Senior Preferred Stock, $.01 par value ("Senior Preferred Stock").  As a result,
the Company incurred a charge to dividends in the first quarter of 1997 of $7.7
million for the difference between the financial statement value of the Senior
Preferred Stock and the face amount thereof, plus premium.  Approximately $9.7
million of the net proceeds from the Offering were used to repay all amounts
under the Company's prior credit facility.  In addition, the Company used
approximately $18.4 million to redeem approximately 1,317,000 shares of Common
Stock from management (the "Management Tax Redemption"). Approximately $37.9
million of the net proceeds from the Offering were used to redeem, at a premium
of 10%, an aggregate of approximately $33.3 million principal amount of the
Company's 11% Senior Notes and to pay all accrued and unpaid interest with
respect to the Senior Notes called for redemption.  The balance of the net
proceeds was retained for general corporate purposes, which included the
acquisition of two musical instrument stores in the Atlanta, Georgia market in
April 1997.

     RECAPITALIZATION

     On June 5, 1996, Guitar Center consummated a series of transactions to
effect the recapitalization of the Company (the "Recapitalization").  Members of
management purchased 1,291,000 shares of the Company's Common Stock for
$0.5 million cash and received 495,000 shares of Junior Preferred Stock in
exchange for the cancellation of outstanding options exercisable for Common
Stock.  The Company's former sole stockholder received 198,000 shares of Junior
Preferred Stock in exchange for Common Stock.  New investors purchased
1,807,400 shares of Common Stock and 693,000 shares of Junior Preferred Stock
for $70.0 million cash, and 800,000 shares of Senior Preferred Stock and
Warrants for an aggregate $20.0 million cash.  The Warrants are exchangeable for
676,590 shares of Common Stock.  The Company repurchased shares of Common Stock
from the

                                       38
<PAGE>

former sole stockholder for $113.1 million cash, and canceled certain options
for Common Stock held by management in exchange for $27.9 million cash. For
financial statement purposes, the Company recorded a charge to operations in
the amount of $69.9 million (net of $7.9 million which the Company had
previously accrued) related to the cancellation and exchange of the
management stock options.

     In part to fund the Recapitalization transaction and to repay the
$35.9 million outstanding under its then existing credit facility, the Company
borrowed $100 million under an increasing rate bridge facility (the "Bridge
Facility").  The Bridge Facility was repaid on July 2, 1996 with the proceeds of
the Company's 11% Senior Notes due 2006 ("Senior Notes") and cash on hand.

     In connection with the Recapitalization, the Company incurred transaction
costs and financing fees of approximately $11.6 million, which consists of
$6.9 million of sellers transaction costs and $4.7 million in fees paid to
finance the Bridge Facility.  These amounts have been charged to transaction
expenses and interest expense, net, respectively, in the 1996 statement of
operations.

     INVENTORIES

     Inventories, including used merchandise and vintage guitars, are valued at
the lower of cost or market using the first-in, first-out (FIFO) method.

     PROPERTY AND EQUIPMENT

     Property and equipment are recorded at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets;
generally five years for furniture and fixtures, computer equipment and
vehicles, 15 years for buildings and 15 years or the life of the lease,
whichever is less, for leasehold improvements.  Maintenance and repair costs are
expensed as they are incurred, while renewals and betterments are capitalized.

     STORE PREOPENING COSTS

     Effective January 1, 1996, the Company elected to capitalize certain
preopening costs and amortize the balance over 12 months.  Previously,
preopening costs were charged to expense as incurred.  The change was not
material to any previous periods presented.

     ADVERTISING COSTS

     The Company expenses the costs of advertising as incurred.  Advertising
expense included in the statements of operations for the years ended
December 31, 1995, 1996 and 1997, is $4,128,000, $5,717,000 and $7,527,000,
respectively.

     MERCHANDISE ADVANCES

     Merchandise advances represent primarily layaway deposits which are
recorded as a liability pending consummation of the sale when the full purchase
price is received from the customer and outstanding gift certificates which are
recorded as a liability until redemption by the customer.

     REVENUE RECOGNITION

     Revenue is recognized at the time of sale, net of a provision for estimated
returns.

     INCOME TAXES

     In connection with the Recapitalization, the Company terminated its S
Corporation election and converted to a C Corporation for income tax
purposes. The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109").
Under the asset and liability method

                                       39
<PAGE>

of SFAS 109, deferred income tax assets and liabilities are recognized for
the future tax consequences attributable to differences between financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases.  Deferred tax assets and liabilities are measured using
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled.  Under SFAS
109, the effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.

     In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized.  The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible.  Management considers the
scheduled reversals of deferred tax liabilities, projected future taxable
income, and tax planning strategies in making this assessment.  Management
determined that a substantial valuation allowance was necessary as of
December 31, 1996 and 1997 due to the increased leverage of the Company on that
date and its effect on future taxable income.

     Prior to the Recapitalization, the Company had elected to be taxed as an S
corporation.  This election generally requires the individual stockholder rather
than the Company to pay federal income taxes on the Company's earnings.

     California, and certain other states in which the Company does business,
impose a minimum tax on Subchapter S Corporation income, which is reflected as
income taxes on the statements of operations.

     GOODWILL

     Goodwill represents the excess of the purchase price over the fair value of
the net assets acquired resulting from business combinations are being amortized
on a straight-line basis over 30 years.

     RENT EXPENSE

     The Company leases certain store locations under operating leases that
provide for annual payments that increase over the life of the leases.  The
aggregate of the minimum annual payments are expensed on a straight-line basis
over the term of the related lease without consideration of renewal option
periods.  The amount by which straight-line rent expense exceeds actual lease
payment requirements in the early years of the leases is accrued as deferred
minimum rent and reduced in later years when the actual cash payment
requirements exceed the straight-line expense.

     CONCENTRATION OF CREDIT RISK

     The Company's deposits are with various high quality financial
institutions.  Customer purchases are transacted using generally cash or credit
cards.  In certain instances, the Company grants credit for larger purchases,
generally to professional musicians, under normal trade terms.  Trade accounts
receivable were approximately $409,000 and $677,000 at December 31, 1996 and
1997, respectively.  Credit losses have historically been within management's
expectations.

     USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS

     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period.  Actual results could differ from those estimates.

     CASH AND CASH EQUIVALENTS

     For the purposes of balance sheet classification and the statement of cash
flows, the Company considers all

                                       40

<PAGE>

highly liquid investments that are both readily convertible into cash and
mature within 90 days of their date of purchase to be cash equivalents.

     IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF

     The Company adopted the provisions of SFAS No. 121, ACCOUNTING FOR THE
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, on
January 1, 1996.  This Statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable.  Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset.  If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets.  Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell.  Adoption of this Statement did not have a material impact on the
Company's financial position, results of operations or liquidity.

     STOCK OPTION PLANS

     Prior to January 1, 1996, the Company accounted for its stock option plan
in accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related interpretations.
As such, compensation expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price.  On
January 1, 1996, the Company adopted SFAS No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION, which permits entities to recognize as expense over the vesting
period the fair value of all stock-based awards on the date of grant.
Alternatively, SFAS No. 123 also allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net income and pro forma
earnings per share disclosures for employee stock option grants made in 1995 and
future years as if the fair-value-based method defined in SFAS No. 123 had been
applied.  The Company has elected to continue to apply the provisions of APB
Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123.

     EARNINGS PER SHARE

     The Financial Accounting Standards Board issued Statement No. 128,
"Earnings per share" ("SFAS 128"), in March 1997 and effective for fiscal years
ending after December 15, 1997.  The Company adopted SFAS 128 in 1997.  SFAS 128
introduces and requires the presentation of "Basic" earnings per share which
represents net earnings available to common stockholders divided by the weighted
average shares outstanding excluding all common stock equivalents.  A dual
presentation of "Diluted" earnings per share reflecting the dilutive effects of
all common stock equivalents, is also required.  The Diluted presentation is
similar to the current presentation of fully diluted earnings per share.

     The reconciliations of Basic to Diluted Weighted Average Shares are as
follows:

<TABLE>
<CAPTION>
                                           1995         1996        1997
                                         ---------------------------------
                                                  (IN THOUSANDS)
<S>                                      <C>           <C>        <C>
Basic shares                              19,329       19,329      19,331
Common stock equivalents                   1,091        1,091       1,271
                                          ------       ------      ------
Diluted shares                            20,420       20,420      20,602
                                          ------       ------      ------
                                          ------       ------      ------
</TABLE>

     Net income (loss) available to common stockholders is the same for diluted
and basic per share data.  Per share data for 1996 includes the impact of
options issued within one year of the initial public offering in accordance with
the rules of the Securities and Exchange Commission.

     FAIR VALUE OF FINANCIAL INSTRUMENTS

     The carrying amount of the Company's financial instruments, which
principally include cash, accounts receivable, accounts payable and accrued
expenses, approximates fair value due to the relatively short maturity of

                                       41
<PAGE>

such instruments.

     The fair value of the Company's short-term instruments reflects the fair
value based upon current rates available to the Company for similar debt.  As of
December 31, 1997 the fair value of the Company's long term debt instrument is
$74.7 million, based on quoted market prices.

     YEAR 2000

     In January 1997, the Company developed a plan to deal with the Year 2000
problem to make its systems Year 2000 compliant.  The plan provides for the
conversion efforts to be completed by the end of 1998.  The Year 2000 problem is
the result of computer programs being written using two digits rather than four
to define the applicable year.

2.    INVENTORIES
     The major classes of inventories are as follows:

<TABLE>
<CAPTION>
                                                     DECEMBER 31,
                                                  1996          1997
                                              -----------------------
                                                   (IN THOUSANDS)
<S>                                          <C>            <C>
Major goods                                   $  32,758     $  52,820
Associated accessories                            9,057        14,361
Vintage guitars                                   2,569         3,667
Used merchandise                                  2,439         3,450
General accessories                               2,882         4,600
                                              ---------     ---------
                                              $  49,705     $  78,898
                                              ---------     ---------
                                              ---------     ---------
</TABLE>

     Major goods includes the major product lines including stringed
merchandise, percussion, keyboards and pro-audio equipment.  Associated
accessories are comprised of accessories to major goods.  General accessories
includes other merchandise such as apparel, cables and books.

3.   PROPERTY AND EQUIPMENT

Property and equipment consists of the following:

<TABLE>
<CAPTION>
                                                    DECEMBER 31,
                                                 1996           1997
                                              -----------------------
                                                  (IN THOUSANDS)
<S>                                          <C>            <C>
Land                                          $   2,283     $   2,590
Buildings                                         7,693         8,793
Transportation equipment                            467           481
Furniture and fixtures                            8,161        11,206
Leasehold improvements                            6,440        10,360
Construction in progress                            185         2,062
                                              ---------     ---------
                                                 25,229        35,492
Less accumulated depreciation                    10,263        12,683
                                              ---------     ---------
                                              $  14,966     $  22,809
                                              ---------     ---------
                                              ---------     ---------
</TABLE>

                                       42
<PAGE>

4.   DEBT

     In connection with the Recapitalization, the Company borrowed $100 million
under the Bridge Facility.  Financing fees of $4.7 million were paid and charged
to the statement of operations during June 1996.  On July 2, 1996, the Bridge
Facility was repaid with the proceeds from the sale of Senior Notes and cash on
hand.  The Senior Notes are unsecured and pay interest at 11% on a semi-annual
basis.

     Immediately following the Offering, the Company called for redemption, at a
premium of 10%, an aggregate of $33.3 million principal amount of the Senior
Notes.  On April 19, 1997, the Company used $37.9 million of the net proceeds
from the Offering to redeem such Senior Notes (the "Senior Note Redemption"),
including payment of all accrued and unpaid interest with respect to the Senior
Notes called for redemption.  Accordingly, an extraordinary charge to operations
of $4.4 million, net of tax of $1.7 million (or $0.14 and $0.13 per basic and
diluted share, respectively), was incurred in the second quarter of 1997 equal
to the premium paid on the Senior Notes plus the write off of one-third of the
unamortized deferrred financing fees.

     The Senior Notes are not entitled to the benefit of a sinking fund. The
Senior Notes may be redeemed, in whole or in part, at the option of the Company,
at any time after July 1, 2001 at prices declining from 105.5% to 100.0% of the
principal amount redeemed, plus accrued and unpaid interest.   The holders of
the Senior Notes have the right to require the Company to repurchase their
Senior Notes at 101% of the principal amount thereof, plus accrued and unpaid
interest, upon the occurrence of a change of control, as defined.  The Senior
Notes mature 2006.

     In the third quarter of 1997, the Company terminated its prior credit
facility (the "1996 Facility) and entered into a new $40 million secured
revolving line of credit (the "1997 Credit Facility") which is available through
July 1, 2004.  The 1997 Credit Facility provides for revolving credit or term
loan borrowings up to $40 million in the aggregate.  The Facility is secured by
inventory and receivables, as defined.  A fee of 0.25% is assessed on the unused
portion of the facility.  Borrowings under the 1997 Credit Facility bear
interest at either the prime rate or at LIBOR plus 1.5%, at the Company's
option, with interest due monthly.  At December 31, 1997, the Company did not
have any outstanding borrowings under the 1997 Credit Facility and $170,000
outstanding on standby letters of credit.  The Company had available borrowings
under the line of credit of approximately $39.8 million at December 31, 1997.

     In June 1996, the Company entered into the 1996 Facility , which was later
repaid with the proceeds from the Offering and was terminated.  At December 31,
1996, the Company had $3.5 million outstanding under the revolving line of
credit and $300,000 outstanding on standby letters of credit.

     Under the terms of the 1997 Credit Facility and the Senior Notes, the
Company is subject to various financial and other covenants.  The Company was in
compliance with such covenants at December 31, 1997.

5.   LEASE COMMITMENTS AND RELATED PARTY TRANSACTIONS

     The Company leases its office and most of its retail store facilities under
various operating leases which expire at varying dates through June 2012.
Generally, the agreements contain provisions which require the Company to pay
for normal repairs and maintenance, property taxes and insurance.

     Through October 17, 1995, the Company leased from its Profit Sharing Plan
two properties at a total monthly rental of $19,988.  On October 17, 1995, the
leases with the Company were cancelled for fees totaling $227,000.  One of the
properties was then purchased by the Company for $500,000, a price determined by
an independent fiduciary.  The other property was re-leased by the Company
through 2005 from a then related party at a monthly rental of $8,250.  The
Company leases three additional properties through 2006 from a then related
party at monthly rentals aggregating $34,400.  The total rent expense recorded
for related party leases totaled $292,000, $364,000 and $413,000 in 1995, 1996
and 1997, respectively.

                                       43
<PAGE>

     The total minimum rental commitment at December 31, 1997, under operating
leases, is as follows:

<TABLE>
<CAPTION>
YEAR  ENDED DECEMBER 31                                      AMOUNT
-----------------------                                  --------------
                                                         (in thousands)
<S>                                                      <C>
1998                                                            $ 4,823
1999                                                              4,971
2000                                                              5,012
2001                                                              5,046
2002                                                              5,079
Thereafter                                                       21,287
</TABLE>

     The total rental expense included in the statements of operations for the
years ended December 31, 1995, 1996 and 1997 is $1,985,000, $2,856,000 and
$4,269,000, respectively.

6.   PROFIT SHARING PLAN

     The Company has a Profit Sharing Plan (the "Plan") which covers
substantially all employees who meet a minimum employment requirement.  The
Company's board of directors can elect to contribute up to 15% of the
participants' compensation for any plan year, subject to a maximum of $30,000
per participant.  During the Plan years ended October 31, 1995, 1996 and 1997,
the Company declared total contributions of $1,272,000, $654,000 and $894,000,
respectively, which is included in accrued liabilities.  In 1997, $193,000
of assets, included in the Plan, which had been forfeited by terminated
employees, was reallocated to participants.

7.   STOCK OPTION PLANS

     1996 PERFORMANCE STOCK OPTION PLAN

     In June 1996, the Company adopted the 1996 Performance Stock Option Plan
(as amended, the "1996 Plan"), which provides for the granting of options to
officers and key employees.  The options were granted with an exercise price
equal to the fair market value ($10.89 per share) of the underlying stock at the
date of grant and generally vest ratably over three years.  Upon the
consummation of the Offering, no further options may be granted under the 1996
Plan.

     MANAGEMENT STOCK OPTION AGREEMENTS

     In June 1996, the Company granted options to certain officers to purchase
795,969 shares at an exercise price of $10.89 per share.  Under the term of the
option agreements, the conditions for full accelerated vesting occurred during
1997.  No additional options are available for grant under this plan.

     1997 EQUITY PARTICIPATION PLAN

     In January 1997, the Company and its stockholders adopted the 1997 Equity
Participation Plan (the "1997 Plan").  Under the 1997 Plan, the Company may
grant options to purchase up to 875,000 shares of Common Stock, $.01 par value
("Common Stock"); PROVIDED, HOWEVER, that grants to any one individual may not
exceed 150,000 shares of Common Stock in any calendar year. Options granted
under the 1997 Plan must have an exercise price equal to the fair market value
of the underlying Common Stock at the date of grant and vest ratably over
various terms.  As of December 31, 1997, 30,000 options had been granted under
the 1997 Plan.

     OTHER OPTION ARRANGEMENTS

     In December 1996, the Company's institutional investors granted options to
certain officers and key managers of the Company to purchase shares held by such
investors at a purchase price of $4.33 per share.  The Company is not a party to
this agreement and has not, and will not, incur any obligation in connection
with such

                                       44
<PAGE>

options.  Under generally accepted accounting principles, the Company
recorded a charge in fiscal 1996 to the statement of operations in the amount
of $1.9 million, with a corresponding increase to additional paid in capital.

     The Company applies APB Opinion No. 25 in accounting for its plans.  Had 
the Company determined compensation cost based upon the fair value at the 
grant date for its stock options under SFAS No. 123 using the Black Scholes 
option pricing model, net income (loss) per share after deduction for 
preferred stock dividends of $7,951,000 and $7,747,000 in 1996 and 1997, 
respectively, including the following weighted average assumptions used in 
these calculations, would have been as follows:

<TABLE>
<CAPTION>
                                                            DECEMBER 31,
                                                   ---------------------------
                                                        1996            1997
                                                   -----------      ----------
                                                         ($ IN THOUSANDS)
<S>                                               <C>              <C>
Pro forma net income (loss)                        $   (73,200)     $   14,695
Pro forma net income (loss) per share (diluted)    $     (3.97)     $     0.34

Risk free interest rate                                    7.0 %           6.2 %
Expected lives                                            10.0            10.0
Expected volatility                                         -- %          28.0 %
Expected dividends                                          --              --
</TABLE>

Pro forma net loss reflects only options granted in 1996 and 1997.  Therefore,
the full impact of calculating compensation cost for stock options under SFAS
No. 123 is not reflected in the pro forma net income amounts presented above
because compensation cost is reflected over the options' vesting period of 3 to
10 years and compensation cost for options granted prior to January 1, 1996 is
not considered.

     Stock option activity during the periods indicated is as follows:

<TABLE>
<CAPTION>
                                                         WEIGHTED AVERAGE
                                          NO. OF SHARES   EXERCISE PRICE
                                          -------------------------------
<S>                                        <C>              <C>
Balance at December 31, 1995                         --        $      --
   Granted                                    1,509,807            10.89
   Exercised                                         --               --
   Forfeited                                         --               --
   Expired                                           --               --
                                              ---------        ---------
Balance at December 31, 1996                  1,509,807            10.89
   Granted                                       30,000            18.50
   Exercised                                     (8,994)           10.89
   Forfeited                                     (7,096)           10.89
   Expired                                           --               --
                                              ---------        ---------
Balance at December 31, 1997                  1,523,717        $   11.04
                                              ---------        ---------
                                              ---------        ---------
</TABLE>

     At December 31, 1997, the outstanding stock options had an exercise price
ranging from $10.89 to $18.50 per share and a remaining contractual life of 9-10
years.

     At December 31, 1997, the number of stock options exercisable was 975,486
and had a weighted average exercise price of $10.89.

     On February 26, 1998, the Company granted 748,782 stock options under the
1997 Plan at an exercise price of $20.75 per share.

                                       45
<PAGE>

     TERMINATED PLAN

     Prior to the Recapitalization, the Company had granted to certain members
of management options to purchase 81,407,400 shares of common stock of the
Company at prices ranging from $.0005 to $0.11 per share.  Upon consummation of
the Recapitalization, these options were exchanged for cash and securities with
management and canceled.  For financial statement purposes, the Company recorded
a charge of approximately $69.9 million (net of the $7.9 million previously
accrued as deferred compensation) in the statement of operations.

8.   INCOME TAXES

     Total income tax (benefit) for the year ended December 31, 1997 consists
of:

<TABLE>
<CAPTION>
                                                                 1997
                                                               -------
<S>                                <C>          <C>            <C>
Income before extraordinary item                               $(2,833)
Extraordinary item                                              (1,679)
                                                               --------
                                                               $(4,512)
                                                               --------
                                                               --------

                                   CURRENT      DEFERRED        TOTAL
                                   -----------------------------------
Federal                            $   280      $(4,320)      $(4,040)
State                                  208         (680)         (472)
                                   -------      --------      --------
                                   $   488      $ 5,000)      $ 4,512)
                                   -------      --------      --------
                                   -------      --------      --------
</TABLE>

     The pro forma unaudited income tax adjustments presented represent income
taxes which would have been reported had the Company been subject to Federal and
State income taxes as a C Corporation.  The historical pro forma provisions for
income taxes were as follows:

<TABLE>
<CAPTION>
                                                            1995     1996
                                                         ------------------
                                                           (IN THOUSANDS)
<S>                                                     <C>         <C>
Historical income taxes                                   $    345   $  139
                                                          --------   ------
Pro forma adjustments (unaudited):
     Federal                                                 5,001       --
     State                                                     798     (139)
                                                          --------   ------
          Total pro forma adjustments                        5,799     (139)
                                                          --------   ------
          Total pro forma provision for income taxes       $ 6,144   $   --
                                                          --------   ------
                                                          --------   ------
</TABLE>

     Pro forma income tax expense for 1995 and 1996 and actual income tax
benefit for 1997 differs from the statutory tax rate of 35% as applied to
earnings before income taxes and extraordinary item, as follows:

<TABLE>
<CAPTION>
                                                            1995         1996          1997
                                                            ----         ----          ----
                                                                    (IN THOUSANDS)
<S>                                                     <C>          <C>           <C>
Expected income tax expense (benefit)                    $  3,921     $ (25,295)    $   5,686
State income taxes, net of federal benefit                    743        (3,650)          651
Non deductible deferred compensation                        1,080            --            --
Non deductible transaction costs                               --         3,281            --
Change in valuation allowance                                  --            --        (5,000)
Utilization of net carryforward                                --            --        (4,373)
Benefit not recorded due to net carry forward position         --        25,379            --
Other                                                         400           285            203
                                                         --------      --------      ---------
                                                         $  6,144      $     --      $  (2,833)
                                                         --------      --------      ---------
                                                         --------      --------      ---------
</TABLE>

                                       46
<PAGE>

     The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities are presented below:

<TABLE>
<CAPTION>
                                                            1996           1997
                                                            ----           ----
                                                               (IN THOUSANDS)
<S>                                                    <C>             <C>
Deferred tax assets:
     Federal net operating loss carryforward            $  22,483       $  21,635
     State net operating loss carryforwards                 1,622             618
     Deferred compensation                                    772              --
     Accrued liabilities                                      648           1,477
     Inventory reserves                                       336           1,946
                                                        ---------       ---------
Total gross deferred tax assets                            25,861          25,677
                                                        ---------       ---------
Deferred tax liabilities
     Depreciation                                             140             521
     Other                                                    342             321
                                                        ---------       ---------
Total gross deferred liabilities                              482             842
                                                        ---------       ---------
Deferred tax assets net of deferred tax
 liabilities                                               25,379          24,835
                                                        ---------       ---------
Less valuation allowance                                   25,379          19,835
                                                        ---------       ---------
Net deferred tax assets                                 $      --       $   5,000
                                                        ---------       ---------
                                                        ---------       ---------
</TABLE>

     In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized.  The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible.  Management considers
scheduled reversal of deferred tax liabilities, projected future taxable income
and tax planning strategies in making this assessment.  Based upon the level of
historical taxable income and projections of future taxable income over the
periods which the deferred tax assets are deductible, management believes it is
more likely than not that the Company will realize the benefits of these
deductible differences, net of the existing valuation allowance at December 31,
1997.  The amount of the deferred tax asset considered realizable, however,
could be reduced in the near term if estimates of future taxable income during
the carryforward period are reduced.   In order to fully realize the deferred
tax asset, the Company will need to generate future taxable income of
approximately $61.8 million prior to the expiration of the net operating loss
carry forwards in 2011.

     In connection with the Recapitalization, the Company entered into a tax
indemnification agreement with its former sole stockholder pursuant to which the
Company has agreed to indemnify such stockholder for any loss, damage, or
liability and all expenses incurred, suffered, sustained or required to be paid
by such stockholder in the event that certain specified aspects of the
Recapitalization are not treated for tax purposes in the manner contemplated by
the Recapitalization and related transactions.

9.   ACCRUED EXPENSES

<TABLE>
<CAPTION>
                                                   DECEMBER 31,
                                                   ------------
                                                1996          1997
                                                ----          ----
                                                 (IN THOUSANDS)
<S>                                         <C>           <C>
Wages, salaries and benefits                 $  2,161      $  3,693
Sales tax payable                               2,011         3,124
Accrued interest                                   70         3,691
Other                                           3,649         5,223
                                             --------      --------
                                             $  7,891      $ 15,731
                                             --------      --------
                                             --------      --------
</TABLE>

                                       47
<PAGE>

10.  PREFERRED STOCK

     REDEEMABLE SENIOR PREFERRED STOCK AND WARRANTS

     In 1996 in connection with the Recapitalization, the Company issued 800,000
shares of Senior Preferred Stock with an initial aggregate liquidation value of
$20.0 million.

     In 1997, approximately $23.0 million of the net proceeds from the Offering
were used to redeem, at a premium of 3%, all of the outstanding shares of the
Senior Preferred Stock.  As a result, the Company incurred a charge to dividends
in the first quarter of 1997 of $7.7 million for the difference between the
financial statement value of the Senior Preferred Stock and the face amount
thereof, plus premium.

     Dividends on the Senior Preferred Stock accrued at a rate of 14%.  Such
dividends were payable quarterly on each of March 15, June 15, September 15 and
December 15, beginning June 15, 1996.  The Senior Preferred stock was
mandatorily redeemable on June 15, 2008 at a redemption price equal to the
aggregate liquidation value plus all accrued and unpaid cash dividends.

     In connection with the issuance of the Senior Preferred Stock the holders
received detachable warrants (in addition to the Senior Preferred Stock) for the
aggregate $20.0 million paid.  The warrants are exchangeable for 676,590 shares
of Common Stock and expire on June 5, 2006.

     The market value of the warrants at issuance was deemed to be $6.5 million
with the Senior Preferred Stock valued at $13.5 million.  The Warrants are
exercisable at a price of $0.01 per share.  The Senior Preferred stock accreted
to its redemption value ($20.0 million) using the effective interest method
through its mandatory redemption date of June 15, 2008.

     JUNIOR PREFERRED STOCK

     In connection with the Recapitalization in 1996, 1,386,000 shares of Junior
Preferred Stock were issued.  Each outstanding share of Junior Preferred Stock
had a liquidation preference of $100.00.  Dividends accrued at a rate of 8% per
annum on the sum of the liquidation preference plus accumulated but unpaid
dividends thereon.

     Upon consummation of the Offering, all of the outstanding shares of the
Junior Preferred Stock were automatically converted into shares of Common Stock
at a ratio of 6.667 shares of Common Stock for each share of Junior Preferred
Stock.  No accrued and unpaid dividends were paid on any shares of Junior
Preferred Stock.

11.  SALE-LEASEBACK TRANSACTIONS

     On February 15, 1996, the Company entered into two sale-leaseback
transactions with a then related party-in-interest. The combined sale amount for
the two properties was $1,753,000 resulting in a $4,000 net gain for the
Company.  The two properties are leased back from the then related
party-in-interest through 2006 for a combined monthly rental of $16,000.

12.  ACQUISITION

     On April 16, 1997, the Company acquired Rhythm City, Inc. ("Rhythm City"),
the operator of two musical instrument retail stores in the Atlanta, Georgia
market.  Purchase consideration consisted of cash of $10.3 million, subject to
adjustment based on the actual level of working capital on such date and other
matters.  The Company accounted for the acquisition using the purchase method
and will amortize the resulting goodwill over thirty years.  The purchase price
included the acquisition of the building and improvements of the flagship Rhythm
City store in Atlanta.  All of the debt and other liabilities of Rhythm City
were either repaid or assumed by the sellers prior to closing.

                                       48
<PAGE>

13.  LEGAL

     The Company is not a party to any material legal proceedings and is not
aware of any pending or threatened litigation that, if decided adversely to the
Company, would have a material adverse effect on the Company's financial
condition or results of operations.

14.  PRO FORMA DATA (UNAUDITED)

     Prior to June 5, 1996, the Company elected to be treated as an S
Corporation for federal and state income tax purposes.  Pro forma information
has been provided to reflect the estimated statutory provision for income taxes
assuming the Company has been taxed as a C corporation.  See note 8.

     Pro forma net earnings per share has been computed by dividing pro forma
net earnings (loss) by the weighted average number of shares outstanding during
the period.  The pro forma net earnings (loss) per share gives effect to:  (i)
the issuance of Common Stock sold in the Offering, the issuance of Common Stock
upon the conversion of all outstanding shares of Junior Preferred Stock in
connection with the Offering, the issuance of Common Stock upon the exercise of
outstanding warrants and common stock equivalents and (ii) the redemption of
Common Stock from certain members of the Company's management upon consummation
of the Offering.

15.  QUARTERLY FINANCIAL DATA (UNAUDITED)

<TABLE>
<CAPTION>
                                                           FISCAL 1997
                                                           -----------
                                               (In thousands, except per share data)

                                  FIRST         SECOND        THIRD           FOURTH        TOTAL
                                  -----         ------        -----           ------        -----
<S>                               <C>           <C>           <C>             <C>           <C>
Net sales                         $  59,809     $  69,627     $  75,948       $  91,271     $  296,655
Gross profit                      $  16,224     $  19,010     $  20,797       $  26,279     $   82,310
Net income (loss)                 $  (6,821)    $    (531)    $   3,289       $  12,657     $    8,594
Net income (loss) per share
(diluted)                         $   (0.05)    $   (0.03)    $    0.16       $    0.61     $     0.42


                                                           FISCAL 1996
                                                           -----------
                                               (In thousands, except per share data)

                                  FIRST         SECOND        THIRD           FOURTH        TOTAL
                                  -----         ------        -----           ------        -----

Net sales                         $  43,343     $  47,705     $  54,361       $  67,885     $  213,294
Gross profit                      $  12,782     $  13,017     $  15,273       $  19,000     $   60,072
Pro forma net income (loss)       $   2,334     $ (77,929)    $  (2,831)      $  (1,795)    $  (80,221)
Pro forma net income (loss)
 per share (diluted)              $    0.11     $   (3.82)    $   (0.14)      $   (0.09)    $    (3.93)
</TABLE>

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<PAGE>

                                                                     SCHEDULE II
                        GUITAR CENTER, INC. AND SUBSIDIARY
                        VALUATION AND QUALIFYING ACCOUNTS
                       YEARS ENDED DECEMBER 31, 1996 AND 1997
                              (AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                 BALANCE AT      ADDITIONS     DEDUCTIONS                 BALANCE
                                                  BEGINNING      CHARGED TO       FROM                    AT END
                                                   OF YEAR       OPERATIONS     ALLOWANCE       OTHER     OF YEAR
                                                   -------       ----------     ---------       -----     -------
<S>                                              <C>            <C>            <C>              <C>       <C>
    December 31, 1996
     Allowance for doubtful receivables               $200              --          $(50)          --        $150
     Allowance for obsolescence & damaged goods       $100            $500            --           --        $600

December 31, 1997
     Allowance for doubtful receivables               $150              --            --           --        $150
     Allowance for obsolescence & damaged goods       $600              --            --           --        $600
</TABLE>


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