<PAGE>

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

                                      FORM 10-Q

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

                   For the quarterly period ended February 28, 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 0-27852

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

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

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

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


Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.

                                    Yes   X    No
                                        -----     -----


Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:

5,171,439 Shares of Common Stock, par value $.001 per share, at April 11, 1997
<PAGE>

                             PLATINUM ENTERTAINMENT, INC.
                                      FORM 10-Q
                   FOR THE QUARTERLY PERIOD ENDED FEBRUARY 28, 1997
                                  TABLE OF CONTENTS



                                                                          Page
                                                                          ----
                            Part I - FINANCIAL INFORMATION

Item 1.  Consolidated Balance Sheets as of February 28, 1997 (Unaudited)
         and May 31, 1996 .  . . . . . . . . . . . . . . . . . . . . . .  3-4

         Consolidated Statements of Operations for the three and nine
         months ended February 28, 1997 and February 29, 1996
         (Unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . .  5

         Consolidated Statements of Cash Flows for the nine months
         ended February 28, 1997 and February 29, 1996 (Unaudited) . . .  6

         Notes to Unaudited Consolidated Financial Statements. . . . . .  7-9

Item 2.  Management's Discussion and Analysis of Financial Condition
         and Results of Operations . . . . . . . . . . . . . . . . . . .  10-18


                             Part II - OTHER INFORMATION

Item 6.  Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . .  19-20

Signatures   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  20

Exhibits
<PAGE>
Part I - FINANCIAL INFORMATION

Item 1. Financial Statements.

                          PLATINUM ENTERTAINMENT, INC. AND SUBSIDIARIES
                                    CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
 

                                                         FEBRUARY 28,       MAY 31,
                                                             1997            1996
                                                          (UNAUDITED)


<S>                                                     <C>            <C>
ASSETS
Current assets:
    Cash and cash equivalents. . . . . . . . . .        $     139,462  $   8,222,173
    Accounts receivable, less allowances of
     $3,528,155 and $1,033,433, respectively . .           14,819,276      3,302,803
    Artist advances. . . . . . . . . . . . . . .            2,863,565      1,581,390
    Inventories, less allowances of $350,228
     and $100,000, respectively. . . . . . . . .            5,003,922      1,538,108
    Notes receivable . . . . . . . . . . . . . .              141,603      1,467,007
    Other. . . . . . . . . . . . . . . . . . . .              419,499        472,457
                                                        -------------  -------------
    Total current assets . . . . . . . . . . . .           23,387,327     16,583,938

Artist advances, net of current amounts, less
  allowances of $8,312,230 and
  $4,942,021,  respectively. . . . . . . . . . .            3,924,954      2,093,224
Arts and masters, less accumulated amortization
  of $2,623,490 and $  -, respectively . . . . .            1,148,472           -
Property and equipment, net. . . . . . . . . . .            1,248,506        698,251
Music publishing rights and artist masters,
  less accumulated amortization of
  $168,912 and $90,443, respectively . . . . . .            3,772,726        349,557
Equity investment in joint venture . . . . . . .            3,061,815           -
Due from joint venture . . . . . . . . . . . . .              756,160           -
Excess cost over net assets acquired, less
  accumulated amortization of $148,184
  and $  -, respectively . . . . . . . . . . . .           23,702,067           -
Deferred financing costs, less accumulated
  amortization of $452,062 and $  -, respectively             910,519           -
Other. . . . . . . . . . . . . . . . . . . . . .              177,999         18,568
                                                        -------------  -------------
Total assets . . . . . . . . . . . . . . . . . .        $  62,090,545  $  19,743,538
                                                        -------------  -------------
                                                        -------------  -------------

</TABLE>
 
                    See accompanying notes to financial statements

                                          3
<PAGE>

                          PLATINUM ENTERTAINMENT, INC. AND SUBSIDIARIES
                                    CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
 
                                                                        February 28,      May 31,
                                                                            1997           1996
                                                                        (Unaudited)
<S>                                                                    <C>            <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
    Revolving line of credit . . . . . . . . . . . . . . . . . . . .   $   3,855,727  $        -
    Term loan, less loan discount of $826,396 and $  -,
    respectively . . . . . . . . . . . . . . . . . . . . . . . . . .      24,173,604           -
    Accounts payable . . . . . . . . . . . . . . . . . . . . . . . .       3,723,540        997,378
    Accrued liabilities and other  . . . . . . . . . . . . . . . . .       1,710,361      2,104,015
    Reserve for future returns . . . . . . . . . . . . . . . . . . .       2,194,273           -
    Royalties payable. . . . . . . . . . . . . . . . . . . . . . . .       6,647,308      1,427,588
                                                                       -------------  -------------
    Total current liabilities. . . . . . . . . . . . . . . . . . . .      42,304,812      4,528,981

Convertible debentures . . . . . . . . . . . . . . . . . . . . . . .       5,000,000           -
                                                                       -------------  -------------
Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . . .      47,304,812      4,528,981


Stockholders' equity:
Preferred stock:
   Preferred stock ($.001 par value); 10,000,000 shares authorized,
    no shares issued and outstanding at February 28, 1997
    and at May 31, 1996. . . . . . . . . . . . . . . . . . . . . . .            -              -
Common stock:
   Common stock ($.001 par value); 40,000,000 shares authorized,
    5,171,439 shares issued and outstanding at February 28,
    1997 and 5,063,207 shares issued and outstanding at
    May 31, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . .           5,151          5,063
 Additional paid-in capital. . . . . . . . . . . . . . . . . . . . .      37,390,027     35,253,724
 Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . .     (22,609,445)   (20,044,230)
                                                                       -------------  -------------
 Stockholders' equity. . . . . . . . . . . . . . . . . . . . . . . .      14,785,733     15,214,557
                                                                       -------------  -------------
Total liabilities and stockholders' equity . . . . . . . . . . . . .   $  62,090,545  $  19,743,538
                                                                       -------------  -------------
                                                                       -------------  -------------

</TABLE>
 

                    See accompnaying notes to financial statements

                                          4
<PAGE>

                          PLATINUM ENTERTAINMENT, INC. AND SUBSIDIARIES
                             CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
 
                                                   THREE          THREE          NINE           NINE
                                               MONTHS ENDED   MONTHS ENDED   MONTHS ENDED   MONTHS ENDED
                                               FEBRUARY 28,    FEBRUARY 29,   FEBRUARY 28,   FEBRUARY 29,
                                                   1997           1996           1997           1996
                                                (UNAUDITED)    (UNAUDITED)    (UNAUDITED)    (UNAUDITED)

<S>                                            <C>            <C>            <C>            <C>
Gross product sales. . . . . . . . . . . . .   $ 10,812,681   $  3,903,964   $ 22,421,886   $ 14,274,175
Less: Returns and allowances . . . . . . . .     (1,808,385)    (1,211,345)    (4,079,759)    (2,878,765)
Less: Discounts. . . . . . . . . . . . . . .       (963,661)      (114,653)    (1,727,035)      (547,806)
                                               ------------   ------------   ------------   ------------
Net product sales  . . . . . . . . . . . . .      8,040,635      2,577,966     16,615,092     10,847,604
Cost of product sales  . . . . . . . . . . .      3,851,890      1,581,016      9,271,566      5,619,480
                                               ------------   ------------   ------------   ------------
                                                  4,188,745        996,950      7,343,526      5,228,124

Gross artist project revenues  . . . . . . .        566,885      1,319,140      2,677,995      3,858,312
Less: (Allowance for) recovery of
  unrecoupable artist advances . . . . . . .       (143,459)       (83,365)      (465,418)        99,290
                                               ------------   ------------   ------------   ------------
Net artist project revenues  . . . . . . . .        423,426      1,235,775      2,212,577      3,957,602
Licensing, publishing and other revenues . .        334,471        637,513        753,878      1,415,606
                                               ------------   ------------   ------------   ------------
Net artist project and other revenues  . . .        757,897      1,873,288      2,966,455      5,373,208
Cost of artist project and
  other revenues . . . . . . . . . . . . . .        461,865        826,400      2,585,041      3,788,374
                                               ------------   ------------   ------------   ------------
                                                    296,032      1,046,888        381,414      1,584,834
                                               ------------   ------------   ------------   ------------
Gross profit . . . . . . . . . . . . . . . .      4,484,777      2,043,838      7,724,940      6,812,958
Other operating expenses:
Selling, general and
  administrative expenses  . . . . . . . . .      3,416,680      2,020,008      8,160,066      6,007,267
Merger and restructuing costs. . . . . . . .        608,472            -          611,472            -
Depreciation and amortization. . . . . . . .        315,291         30,501        481,382         91,831
                                               ------------   ------------   ------------   ------------
                                                  4,340,443      2,050,509      9,252,920      6,099,098
                                               ------------   ------------   ------------   ------------
Operating income (loss)  . . . . . . . . . .        144,334         (6,671)    (1,527,980)       713,860
Interest income  . . . . . . . . . . . . . .         12,532            -          138,817            402
Interest expense . . . . . . . . . . . . . .       (302,918)      (227,573)      (308,024)      (530,242)
Financing costs  . . . . . . . . . . . . . .       (865,187)           -         (865,187)           -
Equity loss  . . . . . . . . . . . . . . . .         (1,368)           -           (1,368)           -
                                               ------------   ------------   ------------   ------------
Income (loss) from
  operations before income
  taxes  . . . . . . . . . . . . . . . . . .     (1,012,607)      (234,244)    (2,563,742)       184,020
Provision for income taxes . . . . . . . . .            -              -              -              -
                                               ------------   ------------   ------------   ------------
Net income (loss)  . . . . . . . . . . . . .   $ (1,012,607)  $   (234,244)  $ (2,563,742)       184,020
                                               ------------   ------------   ------------
                                               ------------   ------------   ------------
Less - Cumulative preferred
  dividends  . . . . . . . . . . . . . . . .                                                    (301,250)
                                                                                            ------------
                                                                                            ------------
Loss applicable to common
  shares . . . . . . . . . . . . . . . . . .                                                $   (117,230)
                                                                                            ------------
                                                                                            ------------

Net loss per common share  . . . . . . . . .   $      (0.20)  $      (0.10)  $      (0.50)  $      (0.05)
                                               ------------   ------------   ------------   ------------
                                               ------------   ------------   ------------   ------------

Weighted average number of common
  shares outstanding . . . . . . . . . . . .      5,171,439      2,334,949      5,125,124      2,334,949
                                               ------------   ------------   ------------   ------------
                                               ------------   ------------   ------------   ------------

</TABLE>
 

                    See acompanying notes to financial statements

                                          5
<PAGE>

                    PLATINUM ENTERTAINMENT, INC. AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>

                                                        NINE           NINE
                                                    MONTHS ENDED   MONTHS ENDED
                                                    FEBRUARY 28,   FEBRUARY 29,
                                                        1997           1996
                                                     (UNAUDITED)    (UNAUDITED)
<S>                                                 <C>            <C>
OPERATING ACTIVITIES
Net income (loss). . . . . . . . . . . . . . . .    $ (2,563,742)  $    184,020
Adjustments to reconcile net income (loss) to net
  cash used in continuing operating activities:
    Provision for (recovery of) doubtful
     accounts. . . . . . . . . . . . . . . . . .        (204,955)             -
    Charge for (recovery of) future returns. . .        (394,801)      (193,000)
    Charge for (recovery of) co-op advertising .        (153,330)             -
    Charge for (recovery of) unrecoupable
     artist balances . . . . . . . . . . . . . .         380,788        (99,290)
    Depreciation and amortization. . . . . . . .         481,760         91,831
    Amortization of loan discount. . . . . . . .         403,993              -
Changes in operating assets and liabilities:
  Accounts receivable. . . . . . . . . . . . . .      (2,695,445)    (2,196,675)
  Inventories. . . . . . . . . . . . . . . . . .      (1,034,895)      (466,359)
  Notes receivable . . . . . . . . . . . . . . .       1,056,457         42,324
  Artist advances. . . . . . . . . . . . . . . .      (2,437,397)    (3,225,810)
  Arts and masters . . . . . . . . . . . . . . .        (124,585)             -
  Accounts payable . . . . . . . . . . . . . . .        (745,738)       (25,109)
  Accrued liabilities and other. . . . . . . . .      (1,215,245)       454,569
  Royalties payable. . . . . . . . . . . . . . .       3,532,275      1,312,253
  Other. . . . . . . . . . . . . . . . . . . . .         (43,600)      (397,157)
                                                    ------------   ------------
Net cash used in continuing operating
  activities . . . . . . . . . . . . . . . . . .      (5,758,462)    (4,518,403)
Discontinued operations:
  Change in net liabilities. . . . . . . . . . .               -     (1,184,628)
                                                    ------------   ------------
Net cash used in
  discontinued operating activities. . . . . . .               -     (1,184,628)
                                                    ------------   ------------
    Net cash used in operating activities. . . .      (5,758,462)    (5,703,031)

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

FINANCING ACTIVITIES
Net proceeds from related parties. . . . . . . .               -      4,209,974
Net proceed from revolving
  line of credit . . . . . . . . . . . . . . . .       3,855,727      1,980,000
Proceeds from bank term loan . . . . . . . . . .      25,000,000              -
Proceeds from convertible debt . . . . . . . . .       5,000,000              -
Payment of bank term loan. . . . . . . . . . . .               -       (500,000)
Deferred financing cost, net . . . . . . . . . .        (910,520)             -
                                                    ------------   ------------
Net cash provided by financing activities. . . .      32,945,207      5,689,974
                                                    ------------   ------------
Net decrease in cash . . . . . . . . . . . . . .      (8,082,713)       (62,897)
Cash, beginning of period. . . . . . . . . . . .       8,222,173         87,368
                                                    ------------   ------------
Cash, end of period. . . . . . . . . . . . . . .    $    139,460   $     24,471
                                                    ------------   ------------
                                                    ------------   ------------

</TABLE>
 
                    See accompanying notes to financial statements

                                          6
<PAGE>

                    PLATINUM ENTERTAINMENT, INC. AND SUBSIDIARIES
                 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATMENTS




1.  BASIS OF PRESENTATION

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

2.  NET LOSS PER COMMON SHARE

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

3.  ACQUISITIONS

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

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

    Effective January 1, 1997, the Company purchased substantially all of the 
assets of Intersound, Inc. ("Intersound" or the "Intersound Acquisition") for 
consideration of $24,000,000 in cash, $5,000,000 in convertible promissory 
notes and the assumption of certain liabilities.  See Notes 5 and 6 below for 
details of the financing.  Intersound produces, licenses, markets and 
distributes recorded music for the Gospel, Adult Contemporary, Country, 
Urban, Dance, Classical and Themed Productions formats.  The Intersound 
Acquisition has been accounted for by the purchase method of accounting and 
the purchase price of $36,000,000

                                          7
<PAGE>

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


4.  JOINT VENTURE

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

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

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

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

5.  DEBT

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

    On January 31, 1997, the Company entered into a Credit Agreement with 
Bank of Montreal ("BOM"), individually and as agent, to provide a 90-day term 
loan in the amount of $25,000,000 and a 90-day revolving credit facility in 
the amount of $10,000,000 (of which $6,144,000 is available at February 28, 
1997) (the "Credit Agreement"). Borrowings under the Credit Agreement bear 
interest at LIBOR plus 6% per annum (11.4375% at February 28, 1997) and are 
secured by substantially all of the assets of the Company.  The Credit

                                          8
<PAGE>

Agreement contains financial and other covenants applicable to the Company.  
The Credit Agreement is personally guaranteed for $12,500,000 by an officer 
and director of the Company.  See Note 6 below for financing fees related to 
the Credit Agreement.

6.  WARRANT

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

7.  RECLASSIFICATIONS

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

8.  SUBSEQUENT EVENT

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

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


                                          9
<PAGE>

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

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

OVERVIEW

    The Company significantly increased its operations during the three 
months ended February 28, 1997 through the activities of Intersound, which is 
included in the Company's results of operations, since January 1, 1997. 
Intersound is one of the largest independent record companies in the United 
States.  Intersound's music divisions focus on most major music formats, 
including Gospel, Adult Contemporary, Country, Urban, Dance, Classical and 
Themed Productions, all of which are released under the "Intersound" label. 
Products are distributed through Intersound's own proprietary distribution 
system, enabling Intersound to maintain control over the marketing and 
promotion of its products, selling and fulfilling its orders on a direct 
basis. Intersound's more notable artists under contract include Kansas, the 
Bellamy Brothers, Crystal Gayle, The Ohio Players, Gap Band, William Becton 
and The Mighty Clouds of Joy.  See "Significant Matters" below for more 
details.

    In addition to the Intersound Acquisition, operations for the three months
ended February 28, 1997 include the release of LET'S GO TO CHURCH, a live Gospel
album by National Baptist Convention USA, Inc., which has 8.5 million members.
Gross revenues generated during the three and nine months ended February 28,
1997 from this release totaled $3,830,000 and $3,913,000, respectively; the
majority of this activity was product sales direct to member churches which
resulted in higher gross margins due to the lack of a third-party distribution
fee.

    The Company also signed a definitive agreement with K-tel on March 3, 1997
by which the Company will acquire K-tel's worldwide music business assets,
except for K-tel's European music business.  K-tel is one of the largest
independent record companies in the United States and is also one of the world's
leading compilation packagers and marketers of pre-recorded music.  K-tel's
catalog of over 3,500 owned or controlled recordings includes performances by
classic artists such as Chubby Checker, Bobby Sherman, Leslie Gore, Percy
Sledge, Lee Greenwood and hundreds of others.  See "Significant Matters" below
for details of the agreement.

    The Company records revenues for music products, other than telemarketing
C.O.D. sales, when such products are shipped to retailers.  In accordance with
industry practice, the Company's music products are sold on a returnable basis.
The Company's allowance for future returns is based upon its historical results
of operations, SOUNDSCAN data and the historical returns experience of the
Company's primary distributor, PolyGram Group Distribution, Inc.

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

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

    The Company has an international licensing agreement with MCA Records, Ltd.
("MCA").  Revenues derived from the licensing are calculated as a percentage of
retail sales by the licensee net of returns and are recognized by the Company
upon notification of retail sales net of returns by the licensee.


                                          10
<PAGE>

Results of operations for the three and nine months ended February 29, 1996
include international licensing revenues; however, no international licensing
revenues have been recorded for the first nine months of fiscal 1997 as the
Company has not been notified for such period by MCA regarding international
sales generated during this period.  Manufacturing and related costs (other than
artist royalties, which are paid by the Company) are borne by the licensee.
Artist royalties paid by the Company in connection with international sales are
recorded as costs of artist project and other revenues and are calculated as a
percentage of net licensed proceeds.

RESULTS OF OPERATIONS

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


<TABLE>
<CAPTION>
 
                                       THREE                    THREE                   NINE                     NINE
                                   MONTHS ENDED             MONTHS ENDED            MONTHS ENDED             MONTHS ENDED
                                    FEBRUARY 28,             FEBRUARY 29,            FEBRUARY 28,             FEBRUARY 29,
                                        1997                    1996                    1997                     1996
<S>                                <C>           <C>       <C>            <C>       <C>            <C>       <C>            <C>
Total gross revenues. . . . . . .  $ 11,714,000  100.0%     $  5,861,000  100.0%     $ 25,854,000  100.0%     $ 19,548,000  100.0%

Less: Returns and allowances. . .    (1,808,000)  15.4%       (1,211,000)  20.7%       (4,080,000)  15.8%       (2,878,000)  14.7%
Less: Discounts . . . . . . . . .      (964,000)   8.2%         (115,000)   2.0%       (1,727,000)   6.7%         (548,000)   2.8%
Less: (Allowance for)
  recovery of unrecoupable
  artist advances . . . . . . . .      (143,000)   1.2%          (83,000)   1.4%         (465,000)   1.8%           99,000   -0.5%
                                   ------------             ------------             ------------             ------------

Total net revenues. . . . . . . .     8,799,000   75.2%        4,452,000   75.9%       19,582,000   75.7%       16,221,000   83.0%
Cost of product sales . . . . . .     3,852,000   32.9%        1,581,000   27.0%        9,272,000   35.9%        5,620,000   28.7%
Cost of artist project and
  other revenues. . . . . . . . .       462,000    3.9%          826,000   14.1%        2,585,000   10.0%        3,788,000   19.4%
                                   ------------             ------------             ------------             ------------
Total cost of sales and
  services. . . . . . . . . . . .     4,314,000   36.8%        2,407,000   41.1%       11,857,000   45.9%        9,408,000   48.1%
                                   ------------             ------------             ------------             ------------
Gross profit. . . . . . . . . . .     4,485,000   38.4%        2,045,000   34.8%        7,725,000   29.8%        6,813,000   34.9%

Other operating expenses:
Selling, general and
  administrative expenses . . . .     3,417,000   29.2%        2,020,000   34.5%        8,160,000   31.6%        6,007,000   30.7%
Merger and restructuring costs. .       609,000    5.2%              --      --           612,000    2.4%              --      --
Depreciation and amortization . .       315,000    2.7%           31,000    0.5%          481,000    1.9%           92,000    0.5%
                                   ------------             ------------             ------------             ------------
                                      4,341,000   37.1%        2,051,000   35.0%        9,253,000   35.9%        6,099,000   31.2%
                                   ------------             ------------             ------------             ------------
Operating income (loss) . . . . .       144,000    1.3%           (6,000)  -0.2%       (1,528,000)  -6.1%          714,000    3.7%
Interest income . . . . . . . . .        12,000    0.1%              --      --           138,000    0.5%              --      --
Interest expense. . . . . . . . .      (303,000)  -2.6%         (228,000)  -3.9%         (308,000)  -1.2%         (530,000)  -2.7%
Financing costs . . . . . . . . .      (865,000)  -7.4%              --      --          (865,000)  -3.3%              --      --
Equity loss . . . . . . . . . . .        (1,000)    --               --      --            (1,000)    --               --      --
                                   ------------             ------------             ------------             ------------
Net income (loss) applicable
  to common shares. . . . . . . .  $ (1,013,000)   8.6%     $   (234,000)  -4.1%     $ (2,564,000) -10.1%     $    184,000    1.0%
                                   ------------             ------------             ------------             ------------
                                   ------------             ------------             ------------             ------------


</TABLE>


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

GROSS REVENUES

    Gross revenues increased $5,853,000 or 99.9% to $11,714,000 for the three
months ended February 28, 1997 compared to the three months ended February 29,
1996; $4,219,000 or 72.1% of this increase related to the activities of
Intersound since January 1, 1997. Gross revenues increased $6,306,000 or 32.3%
to $25,854,000 for the nine months ended February 28, 1997 compared to the nine
months ended February 29, 1996; $4,219,000 or 66.9% of this increase related to
the activities of Intersound since January 1, 1997.  No international licensing
revenues have been recorded for the first nine months of fiscal


                                          11
<PAGE>

1997 as the Company has not been notified to date by MCA regarding international
sales generated during this period.  International licensing revenues for the
three and nine months ended February 29, 1996 approximated $119,000 and
$759,000, respectively; such licensing revenues may not be indicative of the
licensing revenues earned for the current or future periods.

    Gross revenues generated from Gospel, Country, Adult Contemporary, Blues
and other, and Intersound activity as a percentage of total gross revenues for
the three months ended February 28, 1997 were 50.1%, 6.9%, 2.8%, 4.2% and 36.0%
compared to 61.4%, 23.1%, 10.8%, 4.7% and 0.0% for the three months ended
February 29, 1996. Gross revenues from Gospel, Country, Adult Contemporary,
Blues and other, and Intersound activity as a percentage of total gross revenues
for the nine months ended February 28, 1997 were 46.8%, 24.5%, 6.6%, 5.8% and
16.3% compared to 56.7%, 12.9%, 25.4%, 5.0% and 0.0% for the nine months ended
February 29, 1996.

    The changes in the percentages are due principally to the activities of 
Intersound since January 1, 1997 as noted above, and the following 
significant releases: The Beach Boys' STARS AND STRIPES, VOLUME I (which 
generated approximately $3,024,000 of Country revenues for the nine months 
ended February 28, 1997, primarily prior to the current fiscal quarter); 
Crystal Bernard's THE GIRL NEXT DOOR (which generated approximately $309,000 
and $1,330,000 of Country revenues for the three and nine months ended 
February 28, 1997); Alan Parsons' ON AIR (which generated approximately 
$59,000 and $640,000 of Adult Contemporary revenues for the three and nine 
months ended February 28, 1997) and National Baptist Convention's LET'S GO TO 
CHURCH (which generated approximately $3,830,000 and $3,913,000 of Gospel 
revenues for the three and nine months ended February 28, 1997).  These 
increases were offset in part by a decrease in telemarketing sales, which 
typically generate Gospel revenues, that were discontinued due to the 
increased costs of television advertising, and by the incremental revenue 
recognized in the first nine months of fiscal 1996 from the release of Peter 
Cetera's ONE CLEAR VOICE.

RETURNS AND ALLOWANCES

    Returns and allowances increased a net of $597,000 or 49.3% to $1,808,000 
for the three months ended February 28, 1997 compared to the three months 
ended February 29, 1996; $992,000 of this net increase related to the 
activities of Intersound since January 1, 1997, offset by a decrease of 
$395,000 from the Company's remaining operations. Returns and allowances 
increased $1,202,000 or 41.8% to $4,080,000 for the nine months ended 
February 28, 1997 compared to the nine months ended February 29, 1996; 
$992,000 or 82.5% of this increase related to the activities of Intersound 
since January 1, 1997.

      Returns and allowances as a percentage of gross product sales, less 
discounts, decreased to 18.4% for the three months ended February 28, 1997 
from 32.0% for the three months ended February 29, 1996 and decreased to 
19.7% for the nine months ended February 28, 1997 from 21.0% for the 
comparable period of the prior fiscal year.  The decrease in the current 
quarter is attributable primarily to a change in buying habits of the 
Company's retail customers which have reduced initial order quantities to 
better manage receivable and inventory levels.

DISCOUNTS

    Discounts increased $849,000 or 738.3% to $964,000 for the three months 
ended February 28, 1997 compared to the three months ended February 29, 1996; 
$122,000 or 14.4% of this increase related to the activities of Intersound 
since January 1, 1997 and $633,000 or 74.6% of this increase related to the 
Company's arrangement with the National Baptist Convention USA, Inc. and the 
sales of LET'S GO TO CHURCH directly to local churches.  Discounts increased 
$1,179,000 or 215.1% to $1,727,000 for the nine months ended February 28, 
1997 compared to the nine months ended February 29, 1996; $122,000 or 10.3% 
of this increase related to the activities of Intersound since January 1, 
1997 and $633,000 or 53.7% of this increase related to LET'S GO TO CHURCH as 
discussed above.

                                          12
<PAGE>

     Discounts as a percentage of gross product sales increased to 8.9% for the
three months ended February 28, 1997 from 2.9% for the three months ended
February 29, 1996 and to 7.7% for the nine months ended February 28, 1997 from
3.8% for the comparable period of the prior fiscal year.  The increases relate
primarily to the increase in new releases volume, particularly in the Country
and Adult Contemporary formats, as it is industry practice to extend discounts
on new release orders, compared to reorders of previously released albums.
Also, additional discounts were extended to the member churches which purchased
the National Baptist Convention's LET'S GO TO CHURCH release directly from the
Company to avoid a third-party distribution fee.

ALLOWANCE FOR UNRECOUPABLE ARTIST ADVANCES

    The allowances for unrecoupable artist advances were $143,000 and $465,000
for the three and nine months ended February 28, 1997, respectively, compared to
$83,000 and a net recovery of artist advances of $99,000 for the three and nine
months ended February 29, 1996, respectively.  The changes were not
significantly affected by the activities of Intersound since January 1, 1997.
During the nine months ended February 29, 1996, the Company renegotiated certain
artist contracts to allow additional costs previously expensed by the Company in
fiscal 1995 to be included in recoupable artist advances, resulting in the net
recovery.  The current period balances primarily relate to several Gospel and
Country projects released during the current periods or to be released later in
fiscal 1997.

COST OF PRODUCT SALES

    Cost of product sales increased $2,271,000 or 143.6% to $3,852,000 for the
three months ended February 28, 1997 compared to the three months ended February
29, 1996; $650,000 or 28.6% of this increase related to the activities of
Intersound since January 1, 1997.  Cost of product sales increased $3,652,000 or
65.0% to $9,272,000 for the nine months ended February 28, 1997 compared to the
nine months ended February 29, 1996; $650,000 or 17.8% of this increase related
to the activities of Intersound since January 1, 1997.

    Cost of product sales as a percentage of gross revenues increased to 32.9%
for the three months ended February 28, 1997 from 27.0% for the three months
ended February 29, 1996, and to 35.9% for the nine months ended February 28,
1997 from 28.7% for the comparable period of the prior fiscal year.  The
increase is primarily attributable to increased royalty costs associated with
albums released during the current periods, featuring established artists in
non-Gospel formats.  Further, the reduction in telemarketing sales negatively
impacted this percentage due to the lower cost of product sales attributable to
telemarketing sales compared with other distribution channels.

COST OF ARTIST PROJECT AND OTHER REVENUES

    Cost of artist project and other revenues decreased $364,000 or 44.1%, net
of increases, to $462,000 for the three months ended February 28, 1997 compared
to the three months ended February 29, 1996; the activities of Intersound since
January 1, 1997 contributed $200,000 to the increase in such costs. Cost of
artist project and other revenues decreased $1,203,000 or 31.8% to $2,585,000
for the nine months ended February 28, 1997 compared to the nine months ended
February 29, 1996.

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

    In addition, cost of artist project and other revenues includes the
royalties paid by the Company to artists in connection with its first
international sales through MCA which occurred during fiscal 1996.  The
Company's liability for such royalties is based on MCA's retail sales of the
Company's products net of


                                          13
<PAGE>

returns, and equaled approximately 10% of such net sales.  When presented as a
percentage of licensing revenues received by the Company, however, royalties
were equal to approximately 50% of such revenues.  No such activity has been
recorded by the Company during the current periods as MCA has not provided final
sales data for the current periods.  Such costs approximated $60,000 and
$380,000 for the three and nine months ended February 29, 1996, respectively;
such costs may not be indicative of the licensing costs owed for the current or
future periods.

GROSS PROFIT

    Gross profit increased $2,440,000 or 119.3% to $4,485,000 for the three
months ended February 28, 1997 compared to the three months ended February 29,
1996; $2,254,000 or 92.4% of this increase related to the activities of
Intersound since January 1, 1997. Gross profit increased $912,000 or 13.4% to
$7,725,000 for the nine months ended February 28, 1997 compared to the nine
months ended February 29, 1996; the  activities of Intersound since January 1,
1997 contributed to an increase in such profits of $2,254,000.

    As a percentage of gross revenues, gross profit increased to 38.4% for the
three months ended February 28, 1997 from 34.8% for the three months ended
February 29, 1996, and decreased to 29.8% for the nine months ended February 28,
1997 from 34.9% for the comparable period of the prior fiscal year.  The
increase for the three months ended February 28, 1997 is attributable to the
National Baptist Convention release and the inclusion of Intersound activity,
both of which contribute higher gross profits due to the lack of third-party
distribution fees.  The decrease for the nine months ended February 28, 1997 is
attributable to a decrease in telemarketing revenues which provide higher gross
profits due to the lack of third-party distribution fees (telemarketing revenues
for the nine months ended February 28, 1997 and February 29, 1996 were $50,000
and $1,342,000, respectively), an increase in reserves for artist advances and
an increase in sales discounts offered.  In addition, no international licensing
revenues have been recorded for the first nine months of fiscal 1997 as the
Company has not been notified to date by MCA regarding international sales
generated during this period.  International licensing revenues typically
generate a 50% gross margin.

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

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

    Selling, general and administrative expenses increased $1,397,000 or 69.2%
to $3,417,000 for the three months ended February 28, 1997 compared to the three
months ended February 29, 1996; $1,060,000 or 75.9% of this increase related to
the activities of Intersound since January 1, 1997.  Selling, general and
administrative expenses increased $2,153,000 or 35.8% to $8,160,000 for the nine
months ended February 28, 1997 compared to the nine months ended February 29,
1996; $1,060,000 or 49.2% of this increase related to the activities of
Intersound since January 1, 1997.

    Selling, general and administrative expenses as a percentage of gross
revenues decreased to 29.2% for the three months ended February 28, 1997 from
34.5% for the three months ended February 29, 1996, and remained relatively
unchanged at 31.6% for the nine months ended February 28, 1997 from 30.7%
for the comparable period of the prior fiscal year.  The decrease for the three
months ended February 28, 1997 is primarily attributable to the reduction of the
Company's Country radio promotional staff and a larger revenue base compared to
fixed overhead costs.

MERGER AND RESTRUCTURING COSTS

    Nonrecurring merger and restructuring costs of $609,000 and $612,000 for
the three and nine months ended February 28, 1997 were incurred due to the
Intersound Acquisition.  The nature of the costs


                                          14
<PAGE>

include severance payments to terminated employees and costs associated with
consolidating the offices of the Company and Intersound.  As of February 28,
1997, cash paid for such costs approximated $538,000 with the remainder included
in accrued liabilities on the face of the balance sheet; management anticipates
the accrued costs to be fully paid within the next twelve months.

DEPRECIATION AND AMORTIZATION

    Depreciation and amortization increased to $315,000 from $31,000 for the
three months ended February 28, 1997 and increased to $481,000 from $92,000 for
the nine months ended February 28, 1997 compared to comparable periods of the
prior fiscal year.  The increases are attributable to increased amortization
related to the approximate $23,600,000 of music publishing rights and excess
cost over net assets acquired resulting from the activities of Intersound since
January 1, 1997 and $1,500,000 of music publishing rights and artist contracts
acquired from Double J and REX during the first nine months of fiscal 1997.

OPERATING INCOME/LOSS

    As a result of the factors described above, operating income of $144,000 
and an operating loss of $1,528,000 were experienced for the three and nine 
months ended February 28, 1997, respectively; an operating loss of $6,000 and 
operating income of $714,000 were experienced for the three and nine months 
ended February 29, 1996, respectively.

INCOME TAX

    No tax expense or benefit has been recorded  through February 28, 1997 
due to the Company's net operating loss carryforward and related valuation 
allowance at May 31, 1996, as required under generally accepted accounting 
principles.  Pursuant to Section 382 of the Internal Revenue Code of 1986, as 
amended,  the Company's net operating loss carryforward of approximately 
$12,523,000 at May 31, 1996, expiring in years 2007 through 2011, is subject 
to annual limitations due to a change in ownership as a result of the initial 
public offering in March 1996.  Consequently, approximately $3,700,000 of the 
loss carryforward at May 31, 1996 will be available to offset fiscal 1997 
taxable income.

INTEREST INCOME

    Interest income for the three and nine months ended February 28, 1997
totaled $12,000 and $138,000 compared to no interest income for the comparable
periods of the prior fiscal year.  The interest income for the current periods
is primarily attributable to earnings on net proceeds remaining in such periods
from the initial public offering.

INTEREST EXPENSE

    Interest expense for the three and nine months ended February 28, 1997 
totaled $303,000 and $308,000 compared to $228,000 and $530,000 for the 
comparable periods of the prior fiscal year.  See "Capital Resources" below 
for details of the Company's current debt structure.  All debt outstanding 
during the three and nine months ended February 29, 1996 was retired with the 
net proceeds received from the initial public offering.

FINANCING COSTS

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


                                          15
<PAGE>

NET INCOME/LOSS

    The net loss attributable to common shares for the three and nine months
ended February 28, 1997 totaled $1,013,000 and $2,564,000 compared to net loss
attributable to common shares of $234,000 and net income attributable to common
shares of $184,000 for the comparable periods of the prior fiscal year.  The
loss is attributable to the factors discussed above.  In addition, no
international licensing revenues have been recorded for the nine months ended
February 28, 1997 as the Company has not been notified to date by MCA regarding
international sales generated during this period.

SIGNIFICANT MATTERS

    Effective January 1, 1997, the Company purchased substantially all of the
assets of Intersound for consideration of $24,000,000 in cash, $5,000,000 in
convertible promissory notes and the assumption of certain liabilities.  See
"Capital Resources" below for further details.  The activities of
Intersound since January 1, 1997 has been accounted for by the purchase method
of accounting and the purchase price of $36,000,000 approximates the fair value
of the assets acquired. The purchase value was allocated to the acquired assets
based upon their estimated respective fair market values; the amounts allocated
to music publishing rights and excess cost over net assets acquired (goodwill)
are being amortized over 25 years using the straight-line method.

    On March 3, 1997, the Company and K-tel signed a purchase and sale 
agreement (the "Agreement") pursuant to which the Company will acquire 
K-tel's worldwide music business assets, except for K-tel's European music 
business, through the purchase of the stock of K-tel (USA) and Dominion, both 
wholly-owned subsidiaries of K-tel.  The purchase price is $35 million 
subject to certain adjustments.  Subject to satisfaction of the closing 
conditions specified in the Agreement, including the Company's obtaining 
financing for the activities of Intersound since January 1, 1997 and the 
approval of K-tel's shareholders, the transaction is expected to close within 
120 to 180 days after the signing of the Agreement.

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

RECENTLY ISSUED ACCOUNTING STANDARDS

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

SEASONALITY

    The Company's results of operations are subject to seasonal variations.  In
accordance with industry practice, the Company records revenues for music
product, except those related to the telemarketing C.O.D. sales, when such
products are shipped to retailers.  The Company has historically


                                          16
<PAGE>

experienced a decline in revenues and net income in its third fiscal quarter
(December, January and February) due to the fact that retailers purchase
products from the Company in the quarter ending November 30 in anticipation of
holiday sales.  As a result, sales are traditionally lower during December and
the post holiday period.

LIQUIDITY

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

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

    Financing activities for the nine months ended February 28, 1997 includes
$25,000,000 in short-term borrowings from BOM for the Intersound Acquisition;
such Acquisition was also financed with $5,000,000 in convertible debentures and
approximately $1,500,000 in borrowings under the revolving line of credit with
BOM.  The Company also borrowed approximately $1,400,000 and $900,000 under the
revolving line of credit to fund financing costs to BOM in connection with the
Acquisition and Company operations, respectively.  See "Capital Resources."

CAPITAL RESOURCES

    On January 31, 1997, the Company entered into the Credit Agreement with 
BOM, individually and as agent, to provide a 90-day term loan in the amount 
of $25,000,000 and a 90-day revolving credit facility in the amount of 
$10,000,000. Borrowings under the Credit Agreement bear interest at LIBOR 
plus 6% per annum (11.4375% at February 28, 1997) and are secured by 
substantially all of the assets of the Company.  At February 28, 1997, the 
Company had approximately $6,100,000 available under the revolving credit 
facility.  The Credit Agreement contains financial and other covenants 
applicable to the Company.  The Credit Agreement is personally guaranteed for 
up to $12,500,000 by an officer and director of the Company. The Company 
issued to BMO a warrant to purchase 258,571.95 shares of Common Stock at an 
exercise price of $.01 per share in connection with the Credit Agreement.  
The warrant expires on January 31, 2002 and is subject to antidilution 
adjustment if, during the term of the Credit Agreement, the Company issues 
shares of Common Stock and does not use the proceeds of such issuance to pay 
borrowings under the Credit Agreement.  The Company is in the process of 
seeking long-term financing.

                                          17
<PAGE>

    In connection with the Intersound Acquisition, the Company also issued
convertible debentures totaling $5,000,000.  The convertible debentures were
issued to certain selling shareholders of Intersound on January 31,
1997, mature on January 31, 2004 and bear interest at the seven-year Treasury
rate plus one percent per annum (7.48% at February 28, 1997) and are
convertible, in whole or in part, at any time prior to maturity into the
Company's Common Stock at a conversion price of $9.80 per share, subject to
adjustment as provided in the notes.

    The Company's near and long-term capital requirements will depend on
numerous factors, including the rate at which the Company grows and acquires new
artists and products.  The Company has various ongoing needs for capital,
including working capital for operations, artist advances and project
development costs and capital expenditures to maintain and expand its
operations.  In addition, as part of its strategy, the Company evaluates
potential acquisitions of music catalogs, publishing rights and labels.  The
Company may in the future consummate acquisitions which may require the Company
to make additional capital expenditures, and such expenditures may be
significant.  Future acquisitions, as well as other ongoing capital needs, may
be funded with institutional financing, seller financing and/or additional
equity or debt offerings.

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

INFLATION

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

SAFE HARBOR PROVISION

    This Report contains certain forward-looking statements (within the 
meaning of the Private Securities Litigation Reform Act of 1995) that involve 
substantial risks and uncertainties.  When used in this Report, the words 
"anticipate," "believe," "estimate" and "expect" and similar expressions as 
they relate to the Company or its management are intended to identify such 
forward-looking statements.  A number of important factors could cause the 
Company's actual results, performance or achievements for fiscal 1997 and 
beyond to differ materially from those expressed in such  forward-looking 
statements. These factors include, without limitation, commercial success of 
the Company's repertoire, charges and costs related to acquisitions, the 
results of financing efforts, relationships with artists and producers, 
attraction and retention of key personnel, general economic and business 
conditions and enhanced competition and new competitors in the recorded music 
industry.

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<PAGE>

PART II - OTHER INFORMATION

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K.

A.  Exhibits.

         4.1       Registration Rights Agreement, dated as of January 31, 1997,
                   between Registrant and Intersound, Inc. is herein
                   incorporated by reference to the Registrant's Form 8-K 
                   filed with the Commission on February 18, 1997 pursuant to
                   Section 13 of the Securities Exchange Act of 1934 (the 
                   "8-K").

         4.2       Convertible Promissory Note, dated January 31, 1997, issued
                   by the Registrant in the principal amount of $3,125,000 is
                   herein incorporated by reference to the 8-K.

         4.3       Convertible Promissory Note, dated January 31, 1997, issued
                   by the Registrant in the principal amount of $1,875,000 is
                   herein incorporated by reference to the 8-K.

         4.4       Warrant to Purchase Shares of Common Stock of the
                   Registrant, dated January 31, 1997 is herein incorporated by
                   reference to the 8-K.

         10.1      First Amendment to Asset Purchase Agreement, dated January
                   31, 1997, between River North Studios, Inc. and Intersound,
                   Inc. is herein incorporated by reference to the 8-K.

         10.2      Employment Agreement of Don Johnson, dated February 1, 1997
                   is herein incorporated by reference to the 8-K.

         10.3      Credit Agreement, dated as of January 31, 1997, among the
                   Registrant, Bank of Montreal and the Banks who are or may
                   become parties thereto is herein incorporated by reference
                   to the 8-K.

         10.4      Security Agreement, dated as of January 31, 1997, among the
                   Registrant, Bank of Montreal and the Banks who are or may
                   become parties thereto is herein incorporated by reference
                   to the 8-K.

         10.5      Security Agreement re:  Intellectual Property, dated as of
                   January 31, 1997, among the Registrant, its subsidiaries and
                   Bank of Montreal is herein incorporated by reference to the
                   8-K.

         10.6      Pledge Agreement, dated as of January 31, 1997, between the
                   Registrant and Bank of Montreal is herein incorporated by
                   reference to the 8-K.


                                          19
<PAGE>

         10.7      Guaranty, dated as of January 31, 1997, made by Steven
                   Devick is herein incorporated by reference to the
                   8-K.

         10.8      Term Credit Note, dated January 31, 1997, issued by the
                   Registrant in the principal amount of $25,000,000 is herein
                   incorporated by reference to the 8-K.

         10.9      Revolving Credit Note, dated January 31, 1997, issued by the
                   Registrant in the principal amount of $10,000,000 is herein
                   incorporated by reference to the 8-K.

         10.10     Purchase and Sale Agreement, dated March 3, 1997, between
                   Platinum Entertainment, Inc. and K-tel International, Inc.

         10.11     Earnest Money Escrow Agreement, dated March 3, 1997, among
                   Platinum Entertainment, Inc., K-tel Entertainment, Inc. and
                   Midwest Trust Services, Inc.

         10.12     Voting Agreement, dated March 3, 1997, among Platinum 
                   Entertainment, Inc., Mr. Philip Kives and K-5 Leisure
                   Products, Inc. and National Development Ltd.

         27.       Financial Data Schedule.


B.  Form 8-K.

         On February 18, 1997, a Form 8-K was filed by the Company reporting the
         purchase of substantially all of the assets of Intersound, Inc. for
         consideration of $24,000,000 in cash, $5,000,000 in convertible
         promissory notes and the assumption of certain liabilities. As of the
         date of filing of the Current Report on Form 8-K, it was impracticable
         for the Registrant to provide the financial statements required by
         Item 7(a) of Form 8-K.  In accordance with Item 7(a)(4) of Form 8-K, 
         such financial statements shall be filed by amendment as soon as
         practicable and in no event later than 60 days after the filing date
         of the Report on Form 8-K.


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, Platinum
Entertainment, Inc. has duly caused this Report to be signed on its behalf by
the undersigned, thereunto duly authorized, on this 11th day of March, 1997.

                             PLATINUM ENTERTAINMENT, INC.



                             By:  /s/ STEVEN DEVICK
                                  ---------------------------------------
                                  Steven Devick
                                  Chairman of the Board, President and Chief
                                  Executive Officer


                             By:  /s/ DOUGLAS C. LAUX
                                  ---------------------------------------
                                  Douglas C. Laux
                                  Chief Financial Officer
                                  (Principal Financial and Accounting Officer)


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