<PAGE>

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

   
                                      FORM 10-Q/A

                   Amendment No. 2 to Quarterly Report on 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 August 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 000-27852
    
                                           
                             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:
                                           

   
6,040,166 Shares of Common Stock, par value $.001 per share, at August 14, 
1998
    


<PAGE>

   
The Registrant hereby amends Items 1. and 2. of the Form 10-Q/A Amendment No. 
1 filed November 25, 1997 in order to revise certain financial information 
for the three months ended August 31, 1997 and to make corresponding 
revisions to Management's Discussion and Analysis of Financial Condition and 
Results of Operations.

                             PLATINUM ENTERTAINMENT, INC.
                              FORM 10-Q/A AMENDMENT NO. 2
                    FOR THE QUARTERLY PERIOD ENDED AUGUST 31, 1997
                                  TABLE OF CONTENTS

                                                                         Page 
                                                                         -----

                            Part I - FINANCIAL INFORMATION

Item 1.  Consolidated Balance Sheets as of August 31, 1997 (Unaudited)
         and May 31, 1997. . . . . . . . . . . . . . . . . . . . . . .    3 

         Consolidated Statements of Operations for the three months
         ended August 31, 1997 and 1996 (Unaudited). . . . . . . . . .    5   

         Consolidated Statements of Cash Flows for the three months
         ended August 31, 1997 and 1996 (Unaudited). . . . . . . . . .    6   

         Notes to Unaudited Consolidation Financial Statements . . . .    7 

Item 2.  Management's Discussion and Analysis of Financial Condition
         and Results of Operations . . . . . . . . . . . . . . . . . .    9

                             Part II - OTHER INFORMATION

Item 6.  Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . .    17  

Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    18  

Exhibits

    

                                          2

<PAGE>

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.


PLATINUM ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS

(DOLLARS IN THOUSANDS)

   
                                                         AUGUST 31     MAY 31
                                                            1997        1997  

                                                         (UNAUDITED)
ASSETS
Current assets:
   Cash                                                   $       8  $      53 
   Cash in escrow                                             1,750      1,750
   Accounts receivable, less allowances of
    $2,982 and $3,291, respectively                          13,778     15,034
   Artist advances                                            2,705      2,444
   Inventories, less allowances of $705
    and $350, respectively                                    5,685      5,416
   Notes receivable                                              50         50
   Other                                                        264      1,018
                                                         ----------------------
Total current assets                                         24,240     25,765

Artist advances, net of current amounts, less
   allowances of $9,886 and $9,745, respectively              3,442      2,297
Equipment and leasehold improvements, net                     1,123      1,185
Music catalog, less accumulated amortization of 
   $523 and $327, respectively                               19,081     19,277
Music publishing rights, less accumulated amortization
   of $255 and $203, respectively                             3,572      3,624
Goodwill, less accumulated amortization of $184 and
   $97, respectively                                          5,914      6,001
Equity investment in joint venture                            3,169      3,154
Other                                                         1,100      1,001
                                                          ---------------------
Total assets                                             $   61,641  $  62,304 
                                                          ---------------------
                                                          ---------------------
    

                                          3

                    See accompanying notes to financial statements

<PAGE>

PLATINUM ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

   
                                                           AUGUST 31   MAY 31 
                                                             1997       1997  
                                                         (UNAUDITED)
   LIABILITIES AND STOCKHOLDERS' EQUITY 
   Current liabilities: 
      Revolving line of credit                            $  10,000  $   9,706
      Term loan                                              25,000     25,000
      Accounts payable                                        6,150      4,038
      Accrued liabilities and other                           1,997      2,521
      Reserve for future returns                              2,710      2,660
      Royalties payable                                       5,866      5,513
                                                          ---------------------
   Total current liabilities                                 51,723     49,438

   Convertible subordinated debentures                        5,000      5,000


   Stockholders' equity:
   Preferred Stock: 
      Preferred Stock ($.001 par value); 10,000,000 shares
      authorized, no shares issued and outstanding
      at August 31 and May 31, 1997, respectively               -          -  
   Common Stock:
      Common Stock ($.001 par value); 40,000,000 shares
      authorized, 5,184,474 shares issued and outstanding
      at August 31, 1997 and 5,171,439 shares issued and
      outstanding at May 31, 1997, respectively                   5          5
   Additional paid-in capital                                37,261     37,261
   Accumulated deficit                                      (32,348)   (29,400)
                                                          ---------------------
   Stockholders' equity                                       4,918      7,866
                                                          ---------------------
   Total liabilities and stockholders' equity             $  61,641  $  62,304
                                                          ---------------------
                                                          ---------------------
    


                                          4

                    See accompanying notes to financial statements

<PAGE>

PLATINUM ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)


   
                                                        QUARTER ENDED AUGUST 31
                                                        -----------------------
                                                            1997       1996   
                                                                (UNAUDITED)

     Gross product sales                                 $  11,478    $  5,647
     Less: Returns and allowances                           (3,572)     (1,073)
     Less: Discounts                                          (604)       (444)
                                                        -----------------------
     Net product sales                                       7,302       4,130
     Cost of product sales                                   3,926       2,416
                                                        -----------------------
                                                             3,376       1,714

     Gross artist project revenues                           1,290       1,180
     Less:  Allowance for unrecoupable artist advances        (143)       (150)
                                                        -----------------------
     Net artist project revenues                             1,147       1,030
     Licensing, publishing and other revenues                  669         141
                                                        -----------------------
     Net artist project and other revenues                   1,816       1,171
     Cost of artist project and other revenues               1,222       1,229
                                                        -----------------------
                                                               594         (58)
                                                        -----------------------
     Gross profit                                            3,970       1,656
     Other operating expenses:
       Selling, general and administrative                   3,964       2,304
       Merger, restructuring and one-time costs                846        -   
       Depreciation and amortization                           485          70
                                                        -----------------------
                                                             5,295       2,374
                                                        -----------------------
     Operating loss                                         (1,325)       (718)
     Interest income                                            21          90
     Interest expense                                       (1,209)         (3)
     Other financing costs                                    (450)       -   
     Equity gain                                                15        -   
                                                        -----------------------
     Net loss                                            $  (2,948)  $    (631)
                                                        -----------------------
                                                        -----------------------
     Per common share                                    $   (0.57)  $   (0.12)
    

     Weighted average number of common 
     shares outstanding                                  5,174,734   5,063,204


                                          5

                    See accompanying notes to financial statements

<PAGE>

PLATINUM ENTERTAINMENT,INC.
CONSOLIDATION STATEMENTS OF CASH FLOWS

(DOLLARS IN THOUSANDS)

   
                                                        QUARTER ENDED AUGUST 31
                                                        -----------------------
                                                              1997        1996
                                                                 (UNAUDITED)

OPERATING ACTIVITIES
Net loss                                                 $  (2,948)  $    (631)
Adjustments to reconcile net loss to net cash used in
 operating activities:
     Charge to provision for future returns                    400          10
     Charge to provision for co-op advertising                  91         -  
     Charge to provision for unrecoupable artist balances      141         150
     Charge to provision for slow-moving inventory             400         -
     Depreciation and amortization                             485          70
     Equity gain from joint venture                            (15)        -  
Changes in operating assets and liabilities:
     Accounts receivable                                     1,165      (1,704)
     Inventories                                              (669)       (782)
     Notes receivable                                          -           878
     Artist advances                                        (1,547)     (1,228)
     Accounts payable                                        2,112         154
     Accrued liabilities and other                            (524)       (581)
     Reserve for future returns                               (350)        -  
     Royalties payable                                         353         841
     Other                                                    (175)       (199)
                                                        -----------------------
Net cash used in operating activities                       (1,081)     (3,022)

INVESTING ACTIVITIES
Write-off of acquisition costs                                 775         -
Purchases of equipment and leasehold improvements              (33)        (90)
                                                        -----------------------
Net cash provided by (used in) investing activities            742         (90)

FINANCING ACTIVITIES
Proceeds from revolving line of credit                         294         -  
Related party borrowings                                       850         -
Related party payments                                        (850)        -
                                                        -----------------------
Net cash provided by financing activities                      294         -  
                                                        -----------------------

Net decrease in cash                                           (45)     (3,112)
Cash, beginning of quarter                                      53       8,222
                                                        -----------------------
Cash, end of quarter                                     $       8   $   5,110
                                                        -----------------------
                                                        -----------------------
    

                                          6

                    See accompanying notes to financial statements

<PAGE>

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


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 
("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, 1997 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, 1998.

2.   NET LOSS PER COMMON SHARE

     Net loss per common share is computed based upon the weighted average
number of common shares outstanding.
     
3.   DEBT

     Convertible debentures in the aggregate principal amount of $5,000 that
were issued to Intersound in connection with the Intersound Acquisition on
January 31, 1997, mature on January 31, 2004 and bear interest at the seven-year
Treasury rate plus one percent per annum (6.98% at August 31, 1997) and are
convertible, in whole or in part, at any time prior to maturity into the
Company's Common Stock at a conversion price of $9.80 per share, subject to
adjustment as provided in the debentures.

     On January 31, 1997, the Company entered a Credit Agreement with Bank of 
Montreal ("BMO"), individually and as agent, to provide a 90-day term loan in 
the amount of $25,000 and a 90-day revolving credit facility in the amount of 
$10,000 (the "Existing Credit Facility").  The Existing Credit Facility was 
extended through October 31, 1997.  Financing costs associated with the 
Existing Credit Facility from January 31, 1997 through August 31, 1997 
approximate 8% of the total facility.  The interest incurred on the Existing 
Credit Facility was originally LIBOR plus 6% and was increased to LIBOR plus 
9% effective August 1, 1997.  The Existing Credit Facility is secured by 
substantially all of the Company's assets. As of the date of this filing, no 
additional funds are available under the revolving credit facility.  The 
Existing Credit Facility contains financial and other covenants applicable to 
the Company.  The Existing Credit Facility is personally guaranteed for up to 
$12,500 by an officer and director of the Company.

     The Company has obtained a commitment from a bank to provide a $30,000 
credit facility (the "Proposed Credit Facility").  The closing of the 
Proposed Credit Facility is subject to negotiation of definitive 
documentation, including customary closing conditions, and is contingent upon 
the Company raising at least $10,000 in equity.  Under the terms of the 
Proposed Credit Facility, the Company will have available a three year 
$20,000 term loan, due in quarterly installments and bearing interest at the 
bank's base rate plus 1.0% per annum, and a $10,000 revolving line of credit, 
due in three years and bearing interest at the bank's base rate plus 1/2 of 
1.0% per annum.  Borrowings under the revolving line of credit are limited to 
the Borrowing Base, which is based upon eligible accounts receivable and 
inventory, as defined.  The Proposed Credit Facility will be secured by 
substantially all of the Company's assets.

                                          7

<PAGE>

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


4.   PREFERRED STOCK

     The Company has entered into an Investment Agreement dated October 12, 
1997 with certain parties (the "Purchasers") whereby the Company has agreed 
to issue and sell to the Purchasers, and the Purchasers have agreed to 
purchase from the Company, for aggregate consideration of $20,000, 20,000 
shares of Preferred Stock and Warrants to purchase 3,600,000 shares of Common 
Stock (collectively, the "Preferred Stock with Warrants Issuance"). The 
closing of the Preferred Stock with Warrants Issuance is subject to a number 
of closing conditions, including without limitation (i) approval by the 
Company's stockholders of the Preferred Stock with Warrants Issuance, (ii) 
execution of the Proposed Credit Facility, (iii) satisfactory completion by 
the Purchasers of their due diligence review of the Company and (iv) other 
customary closing conditions.  The Preferred Stock will accrue dividends 
quarterly at an annual rate of 12.0% for the first year, 14.0% for the second 
year, 16.0% for the third year, 18.0% for the fourth and fifth years and 20% 
at all times thereafter, of the purchase price paid by the Purchasers, in 
preference to any dividends on any other class of capital stock. The 
Preferred Stock will be redeemable by the Company at any time at a price 
equal to the purchase price paid by the Purchasers thereof plus accrued and 
unpaid dividends.  The Preferred Stock will be convertible, commencing two 
years from the date of issue, into shares of Common Stock at a price per 
share of $6.60. The Common Stock underlying the Warrants may be purchased at 
an exercise price per share of $6.60.

     The Company intends to repay the Existing Credit Facility with the net 
proceeds from the Preferred Stock with Warrants Issuance and the Proposed 
Credit Facility, or a combination of such.  The Company has obtained a 
commitment from a bank to provide the Proposed Credit Facility, contingent 
upon the Company raising at least $10,000 in equity.  If the Preferred Stock 
with Warrants Issuance, the Proposed Credit Facility or other method of 
refinancing does not occur, the consequences would be materially adverse to 
the Company's business, results of operations and financial position. While 
the Company would pursue alternative methods to refinance the Existing Credit 
Facility, there are no assurances that such financing could be obtained on 
terms favorable to the Company, or at all.

     On July 30, 1997, the Company's stockholders approved the issuance of up 
to $40,000 of convertible preferred stock on the terms described in the proxy 
statement mailed to stockholders on July 8, 1997.  At the time of such 
proposal, the Company intended to use the proceeds of such issuance to repay 
the Existing Credit Facility and to obtain a bank credit facility in the 
amount of $40,000 to finance the then-contemplated acquisition by the Company 
of the music business of K-tel (as hereinafter defined).  Since such time, 
the Company has terminated its agreement with K-tel, as described in the 
Company's Current Report on Form 8-K filed with the Commission on 
September 10, 1997.  The Board of Directors has determined, in light of the 
Company's revised financing requirements, that the Preferred Stock with 
Warrants Issuance is in the best interests of the Company and its 
stockholders.  Accordingly, the Board does not currently intend to complete 
the $40,000 preferred stock issuance on the terms previously approved and is 
soliciting stockholder approval of the Preferred Stock with Warrants Issuance.

5.   MERGER, RESTRUCTURING AND ONE-TIME COSTS

     As a result of the acquisitions completed by the Company during fiscal 
1997, the Company incurred significant costs to merge and restructure its 
business with the acquired companies. Such merger and restructuring cost 
include severance costs, relocation costs, lease commitment write-offs, 
warehouse closing costs and other related costs. Such costs approximated 
$1,650 for fiscal 1997, of which $315 and $240 were accrued at May 31 and 
August 31, 1997, respectively, relating primarily to severance costs and a 
distribution termination fee. The restructuring is expected to be completed 
by the end of the second quarter of fiscal 1998. Such restructuring resulted 
in shifts in the selling and promotion efforts of the Company's Country label 
and in-house sales department and a shift in third-party fulfillment of 
Platinum Christian Distribution. In addition, one-time costs for the three 
months ended August 31, 1997 include $775 of legal, accounting, and other 
incremental costs incurred by the Company associated with the Acquisition of 
K-tel. Such transaction was terminated by the Company. See "Subsequent Event" 
below.

6.   RECLASSIFICATIONS

     Certain amounts in the three months ended August 31, 1996 consolidated
statements of operations have been reclassified to conform with the three months
ended August 31, 1997 presentation.

7.   SUBSEQUENT EVENT

     On March 3, 1997, the Company and K-tel International, Inc. ("K-tel") 
signed a purchase and sale agreement (the "K-tel Agreement") pursuant to 
which the Company agreed to acquire K-tel's worldwide music business assets, 
except for K-tel's European and former Soviet Union music business, through 
the purchase of the stock of K-tel International (USA), Inc. and Dominion 
Music, Inc., both wholly-owned subsidiaries of K-tel ("the K-tel 
Acquisition").  The Company deposited $1,750 in escrow in accordance with the 
K-tel Agreement which is included in current assets at August 31, 1997.  On 
September 10, 1997, the Company terminated the K-tel Agreement due to K-tel's 
breaches of the K-tel Agreement. Both the Company and K-tel have filed claim 
to the escrowed amount. The outcome of such claims is uncertain.

     See also Note 4.


                                          8

<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 this filing.

OVERVIEW

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

   
          During January  1997, the Company acquired substantially all of the 
assets of Intersound, Inc. ("Intersound").  The Company determined the 
purchase price allocation for Intersound, as disclosed in the balance sheet 
at May 31, 1997, based on available information at that time.  However, 
during the seven months ended December 31, 1997, the Company determined that 
the purchase value allocated certain purchased assets exceeded their fair 
market values by approximately $1,150,000.  In addition, further liabilities 
of approximately $2,350,000, which the Company believes relate to returned 
products that had been sold prior to the Company's purchase of Intersound, 
were identified.  Had these matters been identified by the Company at the 
time of purchase or shortly thereafter, such valuations would have been 
recorded through purchase accounting, resulting in no subsequent income 
statement impact.  As these matters were not identified at the time of 
purchase or shortly thereafter, the Company is required to reflect these 
amounts in its results of operations, resulting in a nonrecurring charge to 
operations of $3,500,000 for the seven months ended December 31, 1997. The 
Company recorded the portion of these adjustments identified herein during 
the three month period ended August 31, 1997 (a $400,000 increase to 
provision for returns and allowances and a $400,000 increase to provision for 
slow-moving inventory).
    

          In connection with the Intersound Acquisition, the Company obtained a
credit facility totaling $35,000,000 which matures in full on October 31, 1997
("Existing Credit Facility").  The Company intends to repay the Existing Credit
Facility with the net proceeds of the Preferred Stock with Warrants Issuance and
the Proposed Credit Facility - as hereinafter defined - see "Capital Resources"
below.

          As a result of the acquisitions completed by the Company during 
fiscal 1997, the Company incurred significant costs to merge and restructure 
its business with the acquired companies.  Such merger and restructuring 
costs include severance costs, relocation costs, lease commitment write-offs, 
warehouse closing costs and other related costs.  Such costs approximated 
$1,650,000 for fiscal 1997, of which $240,000 was accrued at August 31, 
1997, relating primarily to severance costs and a distribution termination 
fee. The restructuring is expected to be completed by the end of the second 
quarter of fiscal 1998. Such restructuring resulted in shifts in the selling 
and promotion efforts of the Company's Country label and in-house sales 
department and a shift in third-party fulfillment of Platinum Christian 
Distribution. In addition, one-time costs for the three months ended August 31,
1997 include $775,000 of legal, accounting, and other incremental costs 
incurred by the Company associated with the Acquisition of K-tel. Such 
transaction was terminated by the Company. See "Significant Matters" below.

          The Company records revenues for music products when such products 
are shipped to retailers.  In accordance with industry practice, the 
Company's music products are sold on a returnable basis.  The Company's 
allowance for future returns is based upon its historical returns, SOUNDSCAN 
data and the return rate of the Company's primary distributor, PolyGram Group 
Distribution, Inc. ("PGD"). 

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

          The Company primarily distributes internationally by means of
licensing arrangements.  The first of these arrangements began during fiscal
1996 with MCA Records, Ltd. ("MCA").  The Company terminated this arrangement
during the current fiscal quarter and has entered international licensing
arrangements on a country-by-country basis.  Revenues derived from the licensing
of recorded masters are calculated as a percentage of retail sales by the
licensee net of returns and are recognized by the Company upon notification of
retail sales net of returns by the licensee.


                                          9

<PAGE>

RESULTS OF OPERATIONS

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


<TABLE>
<CAPTION>
   

                                                   QUARTER ENDED AUGUST 31
                                    ------------------------------------------------------
                                      1997                            1996   
                                    ------------------------------------------------------
                                                   (DOLLARS IN THOUSANDS)

<S>                                       <C>         <C>                 <C>          <C>
Total gross revenues . . . . . . .    $13,437      100.0%              $6,968       100.0%

Less:  Returns and allowances. . .     (3,572)     -26.6%              (1,073)      -15.4%
Less:  Discounts . . . . . . . . .       (604)      -4.5%                (444)       -6.4%
Less: Allowances for
  unrecoupable
  artist advances. . . . . . . . .       (143)      -1.1%                (150)       -2.2%
                                      ---------                       ---------

Total net revenues . . . . . . . .      9,118       67.8%               5,301        76.0%
Cost of product sales. . . . . . .      3,926       29.2%               2,416        34.7%
Cost of artist projects
  and other revenues . . . . . . .      1,222        9.1%               1,229        17.6%
                                      ---------                       ---------
Total cost of sales and
  services . . . . . . . . . . . .      5,148       38.3%               3,645        52.3%
                                      ---------                       ---------
Gross profit . . . . . . . . . . .      3,970       29.5%               1,656        23.7%

Other operating expenses:
Selling, general and
  administrative expenses. . . . .      3,964       29.5%               2,304        33.1%
Merger, restructuring and
  one-time costs . . . . . . . . .        846        6.3%                  -            - 
Depreciation and amortization. . .        485        3.6%                  70         1.0%
                                      ---------                       ---------
Operating loss . . . . . . . . . .     (1,325)      -9.9%                (718)      -10.4%
Interest income. . . . . . . . . .         21        0.2%                  90         1.3%
Interest expense . . . . . . . . .     (1,209)      -9.0%                  (3)          - 
Other financing costs. . . . . . .       (450)      -3.3%                  -            - 
Equity gain. . . . . . . . . . . .         15        0.1%                  -            - 
                                      ---------                       ---------
Net loss . . . . . . . . . . . . .    ($2,948)     -21.9%               ($631)       -9.1%
                                      ---------                       ---------
                                      ---------                       ---------
    
</TABLE>

                                      10

<PAGE>

GROSS REVENUES

    Gross revenues increased $6,469,000 or 92.8% to $13,437,000 for the
current fiscal quarter compared to the comparable period of the prior fiscal
year. The increase related to increased revenues in all genres with the 
exception of Country, for which the Company experienced a decrease in 
incremental revenues recognized in the first quarter of the prior fiscal year 
from the release of The Beach Boys' STARS AND STRIPES, VOLUME I. Significant 
contributions to revenues in the current fiscal quarter include Vickie 
Winan's LIVE IN DETROIT and a compilation by various artists entitled TODAY'S 
GOSPEL MUSIC SAMPLER (CGI Records), The Taliesin Orchestra's ORINOCO FLOW: 
THE MUSIC OF ENYA and numerous compilation releases (Intersound Classical), 
Peter Cetera's YOU'RE THE INSPIRATION (A COLLECTION), including the single 
YOU'RE THE INSPIRATION with AZ Yet (River North Records), The Blues Brothers' 
LIVE FROM CHICAGO'S HOUSE OF BLUES and several compilations by various 
artists (House of Blues), and Urban compilations by various artists 
BOOTY MIX 2: THE NEXT BOUNCE and BOOTLEG BOOTY (Intersound Urban).

RETURNS AND ALLOWANCES

   
    Returns and allowances increased $2,499,000 or 232.9% to $3,572,000 for 
the current fiscal quarter compared to the comparable period of the prior 
fiscal year. Returns and allowances as a percentage of gross product sales, 
less discounts, increased to 32.8% for the current fiscal quarter from 20.6% 
for the comparable period of the prior fiscal year.  As discussed in the 
"Overview" above, the Company ascertained additional product returns of 
$400,000 which the Company believes relate to Intersound prior to the 
Intersound Acquisition. Had these returns been identified by the Company at 
the time of purchase or shortly thereafter, such amount would have been 
recorded through purchase accounting, resulting in no subsequent income 
statement impact.  As these returns were not ascertained at the time of 
purchase or shortly thereafter, the Company is required to reflect this 
amount in its results of operations. Excluding these returns, returns and 
allowances as a percentage of gross product sales, less discounts, for the 
three months ended August 31, 1997 is 29.2%. The current period increase is 
primarily due to increased activity in the Company's direct-to-retail system 
which historically has experienced higher returns than the Company's 
third-party distributor.
    

DISCOUNTS

    Discounts increased $160,000 or 36.0% to $604,000 for the current fiscal 
quarter compared to the comparable period of the prior fiscal year.  
Discounts as a percentage of gross product sales decreased to 5.3% for the 
current fiscal quarter from 7.9% for the comparable period of the prior 
fiscal year. The decrease relates to the Company's more aggressive 
utilization of discount plans with retailers through third-party distribution 
channels compared to the Company's direct-to-retail system.

ALLOWANCE FOR UNRECOUPABLE ARTIST ADVANCES

    The allowance for unrecoupable artist advances remained relatively
unchanged at $143,000 for the current fiscal quarter compared to $150,000 for
the comparable period of the prior fiscal year. The allowance for
unrecoupable artist advances as a percentage of artist project costs remained
relatively unchanged at 11.1% for the current fiscal quarter compared to 12.7%
for the comparable period of the prior fiscal year.


                                          11

<PAGE>

COST OF PRODUCT SALES

   
    Cost of product sales increased $1,510,000 or 62.5% to $3,926,000 for the 
current fiscal quarter compared to the comparable period of the prior fiscal 
year. Cost of product sales as a percentage of net product sales decreased to 
53.8% for the current fiscal quarter from 58.5% for the comparable period of 
the prior fiscal year.  As discussed in the "Overview" above, the Company 
ascertained that the purchase value allocated certain assets purchased from 
Intersound exceeded their fair market values, as disclosed in its balance 
sheet at May 31, 1997.  The Company specifically ascertained certain obsolete 
inventory ($400,000), which, when recorded, affects cost of product sales. 
Had this write-down been ascertained by the Company at the time of purchase 
or shortly thereafter, such amount would have been recorded through purchase 
accounting, resulting in no subsequent income statement impact. As this 
write-down was not ascertained at the time of purchase or shortly thereafter, 
the Company is required to reflect these amounts in its results of 
operations.  Excluding this write-down, cost of product sales as a percentage 
of net product sales for the three months ended August 31, 1997 is 44.9%. The 
current period decreased costs are primarily a result of the lower cost of 
product sales associated with direct to retail activity, which is generally 
subject to lower royalty costs and does not incur a third-party distribution 
fee.  In addition, the Company is experiencing manufacturing cost savings due 
to volume discounts as a result of the acquisitions completed during fiscal 
1997.
    

COST OF ARTIST PROJECT AND OTHER REVENUES

    Cost of artist project and other revenues remained relatively unchanged at
$1,222,000 for the current fiscal quarter compared to $1,229,000 for the
comparable period of the prior fiscal.  Cost of artist project and other 
revenues as a percentage of gross revenues decreased to 9.1% for the current 
fiscal quarter from 17.6% for the comparable period of the prior fiscal year 
primarily due to an increased revenue base and management's implementation of 
cost controls.

GROSS PROFIT

   
    Gross profit increased $2,314,000 or 139.7% to $3,970,000 for the current 
fiscal quarter compared to the comparable period of the prior fiscal year. As 
a percentage of gross revenues, gross profit increased to 29.5% for the 
current fiscal quarter from 23.7% for the comparable period of the prior 
fiscal year.  As discussed in the "Overview" above, gross profit includes 
$800,000 of costs and expenses that the Company believes relate to Intersound 
prior to the Company's purchase.  Had these matters been ascertained by the 
Company at the time of purchase or shortly thereafter, such adjustments would 
have been recorded through purchase accounting, resulting in no subsequent 
income statement impact.  As these matters were not ascertained at the time 
of purchase or shortly thereafter, the Company is required to reflect these 
amounts in its results of operations.  Excluding these adjustments, gross 
profit increased $3,114,000 or 188.0%. The current period increase is 
primarily a result of the lower cost of product sales associated with direct 
to retail activity, which is generally subject to lower royalty costs and 
does not incur a third-party distribution fee.  In addition, the Company is 
experiencing manufacturing cost savings due to volume discounts as a result 
of the acquisitions completed during fiscal 1997.
    

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

    Selling, general and administrative expenses increased $1,660,000 or 
72.0% to $3,964,000 for the current fiscal period compared to the comparable 
period of the prior fiscal year.  Selling general and administrative expenses 
as a percentage of gross revenues decreased to 29.5% for the current fiscal 
quarter from 33.1% for the comparable period of the prior fiscal year.  The 
percentage decrease relates to synergies realized from the acquisitions 
completed during fiscal 1997 and an increased revenue base.

MERGER, RESTRUCTURING AND ONE-TIME COSTS


    See "Overview" above for details of nonrecurring merger, restructuring and
one-time costs of $846,000.


DEPRECIATION AND AMORTIZATION

    Depreciation and amortization increased to $485,000 for the current 
fiscal quarter from $70,000 for the comparable period of the prior fiscal 
year.  The increase relates primarily to amortization expense resulting from 
approximately $30,000,000 of music catalog, music publishing rights and 
goodwill assets recorded from the acquisitions completed during fiscal 1997.

                                          12
<PAGE>

OPERATING LOSS

   
    As a result of the factors described above, an operating loss of 
$1,325,000 was experienced in the current fiscal quarter compared to $718,000 
in the comparable period of the prior fiscal year. As discussed in the 
"Overview" above, operating loss includes $800,000 of costs and expenses that 
the Company believes relate to Intersound prior to the Company's purchase.  
Had these matters been ascertained by the Company at the time of purchase or 
shortly thereafter, such adjustments would have been recorded through 
purchase accounting, resulting in no subsequent income statement impact.  As 
these matters were not ascertained at the time of purchase or shortly 
thereafter, the Company is required to reflect these amounts in its results 
of operations.  Excluding these adjustments, the Company experienced an 
operating loss of $525,000.  The current period operating loss includes 
$846,000 of nonrecurring merger, restructuring and one-time costs as 
discussed above.
    

INCOME TAXES

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

INTEREST EXPENSE

    Interest expense for the current fiscal quarter totaled $1,209,000 compared
to $3,000 for the comparable period of the prior fiscal year.  See "Capital
Resources" below for details of the Company's current debt structures.

OTHER FINANCING COSTS

    Other financing costs of $450,000 were incurred during the current fiscal 
quarter due to the funding of the Intersound Acquisition.  These costs 
represent extension fees on the Existing Credit Facility.  See "Capital 
Resources" below for details of the Company's current debt structures.

NET LOSS

   
     The net loss for the current fiscal quarter totaled $2,948,000 compared 
to $631,000 for the comparable period of the prior fiscal year.  As discussed 
in the "Overview" above, net loss includes $800,000 of costs and expenses 
that the Company believes relate to Intersound prior to the Company's 
purchase.  Had these matters been ascertained by the Company at the time of 
purchase or shortly thereafter, such adjustments would have been recorded 
through purchase accounting, resulting in no subsequent income statement 
impact.  As these matters were not ascertained at the time of purchase or 
shortly thereafter, the Company is required to reflect these amounts in its 
results of operations.  Excluding these adjustments, the Company experienced 
a net loss of $2,148,000 for the current fiscal quarter. The current period 
increase relates primarily to nonrecurring financing, merger, restructuring 
and one-time costs of $1,451,000 and interest expense of $1,209,000 related 
to the Intersound Acquisition, as well as a $415,000 increase in depreciation 
and amortization related to the acquisitions completed during fiscal 1997, 
offset by the increase in gross profit as discussed above.
    

RECENTLY ISSUED ACCOUNTING STANDARDS

     Statement of Financial Accounting Standards ("SFAS") No. 128, EARNINGS PER
SHARE, establishes standards for computing and presenting earnings per share
("EPS") and simplifies the standards for computing EPS currently found in
Accounting Principles Standards Board ("APB") Opinion No. 15, EARNINGS PER
SHARE.  Common stock equivalents under APB Opinion No. 15, with the exception of
contingently issuable shares (shares issuable for little or no cash
consideration), are no longer included in the calculation of primary or basic
EPS.  Under SFAS No. 128, contingently issuable shares are included in the
calculation of diluted EPS.  This Statement is effective for the Company's
fiscal quarter ending February 28, 1998.  The impact of SFAS 128 will not be
material to the Company's financial disclosures.

    SFAS No. 129, DISCLOSURE OF INFORMATION ABOUT CAPITAL STRUCTURE,
establishes standards for disclosing information about an entity's capital
structure.  This Statement requires disclosure of the pertinent rights and
privileges of various securities outstanding (stock, options, warrants,
preferred stock, debt and participation rights) including dividend and
liquidation preferences, participant rights, call prices and dates, conversion
or exercise prices and redemption requirements.  This Statement is effective for
the


                                          13
<PAGE>

Company's fiscal year ending May 31, 1998. The impact of SFAS 129 is not
expected to materially change the Company's financial disclosures.

SEASONALITY

    The Company's results of operations are subject to seasonal variations.  In
accordance with industry practice, the Company records revenues for music
product when such products are shipped to retailers.  The Company has
historically experienced a decline in revenues and operating income 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.  However, the acquisition of
Intersound will help mitigate the seasonality of the third fiscal quarter in the
future due to its history of new releases during January and February.

SIGNIFICANT MATTERS

    On March 3, 1997, the Company and K-tel International, Inc. ("K-tel") 
signed a purchase and sale agreement (the "K-tel Agreement") pursuant to 
which the Company agreed to acquire K-tel's worldwide music business assets, 
except for K-tel's European and former Soviet Union music business, through 
the purchase of the stock of K-tel International (USA), Inc. and Dominion 
Music, Inc., both wholly-owned subsidiaries of K-tel (the K-tel 
Acquisition").  The Company deposited $1,750,000 in escrow in accordance with 
the K-tel Agreement which is included in current assets at August 31, 1997.  
On September 10, 1997, the Company terminated the K-tel Agreement due to 
K-tel's breaches of the K-tel Agreement. Both the Company and K-tel have 
filed claim to the escrowed amount.  The outcome of such claims is uncertain.

LIQUIDITY

    The Company's cash balances were $8,000 and $53,000 at August 31 and May 
31, 1997, respectively.  Net cash used in operating activities was $1,081,000
for the current fiscal quarter.  The uses reflect net cash used to fund 
inventories of $669,000, artist advances of $1,547,000 and accrued 
liabilities and other of $524,000, attributable to releases by such artists 
as Peter Cetera, The Bellamy Brothers, several Urban and Blues compilations, 
and scheduled future releases including numerous Gospel albums, such as 
William Becton and Cissy Houston. The net uses were offset by accounts 
receivable and accounts payable funding of $1,165,000 and $2,112,000, 
respectively.  The net cash provided by royalties payable arose primarily 
from the current period sales of albums in the non-Gospel format, which 
typically command a higher royalty rate.  Royalties are not paid to the 
artist until all advances made to the artist have been recouped by the 
Company.  Also, the Company establishes and maintains reserves relative to 
royalty payments for a period of approximately 18 to 24 months to allow for 
product returns activity as royalties are not owed on returned product.

    Net cash used in investing activities for the current fiscal quarter was 
$33,000 relating to purchases of equipment and leasehold improvements. In 
addition, $775,000 of legal, accounting and other incremental costs 
previously incurred by the Company associated with the K-tel Acquisition were 
written-off during the current fiscal quarter. See "Overview" and 
"Significant Matters" above.

   
    Net cash provided by financing activities for the current fiscal quarter 
was $294,000 in borrowings under the revolving line of credit under the 
Existing Credit Facility.  Borrowings from the Existing Credit Facility are 
due in full on October 31, 1997, at which time the Company intends to 
refinance the borrowings either with the net proceeds from an equity offering 
or other bank financing, or a combination of such.  See "Capital Resources" 
below for details of this refinancing.  The Company must secure additional 
equity and/or debt financing to refinance the Existing Credit Facility when 
it matures and to fund its operations.  While the Company believes it will be 
able to secure such financing, there is no assurance it will be obtained on 
terms acceptable to the Company, if at all. In addition, during the current 
fiscal quarter, the Company borrowed $600,000 from Steven Devick, an officer 
and director of the Company, and $250,000 from a party unrelated to the 
Company, which such unrelated loan was guaranteed by Mr. Devick and Douglas 
C. Laux, an officer and director of the Company.  Such loans bore interest of 
10.0% per annum and were paid in full prior to the end of the quarter.
    

    A significant recurring funding requirement of the Company is for A&R
expenses, which include recording costs and advances to artists.  The Company
makes substantial payments each period for


                                          14
<PAGE>

recording costs and advances in order to maintain and enhance its artist roster.
These costs are recouped from the artists' royalties, to the extent possible,
from future album sales.  Artist advances are capitalized when the current
popularity and past performance of the artist provides a sound basis for
estimating the probable future recoupment of such advances from earnings
otherwise payable to the artist.

CAPITAL RESOURCES

    Convertible debentures in the aggregate principal amount of $5,000,000 that
were issued to Intersound in connection with the Intersound Acquisition on
January 31, 1997, mature on January 31, 2004 and bear interest at the seven-year
Treasury rate plus one percent per annum (6.98% at August 31, 1997) and are
convertible, in whole or in part, at any time prior to maturity into the
Company's Common Stock at a conversion price of $9.80 per share, subject to
adjustment as provided in the debentures.

    On January 31, 1997, the Company entered a Credit Agreement with Bank of 
Montreal ("BMO"), individually and as agent, to provide a 90-day term loan in 
the amount of $25,000,000 and a 90-day revolving credit facility in the 
amount of $10,000,000 (the "Existing Credit Facility").  The Existing Credit 
Facility was extended through October 31, 1997.  Financing costs associated 
with the Existing Credit Facility from January 31, 1997 through August 31, 
1997 approximate 8% of the total facility.  The interest incurred on the 
Existing Credit Facility was originally LIBOR plus 6% and was increased to 
LIBOR plus 9% effective August 1, 1997.  The Existing Credit Facility is 
secured by substantially all of the Company's assets.  In addition, the 
Company issued warrants to BMO as discussed below.  As of the date of this 
filing, no additional funds are available under the revolving credit 
facility.  The Existing Credit Facility contains financial and other 
covenants applicable to the Company.  The Existing Credit Facility is 
personally guaranteed for up to $12,500,000 by an officer and director of the 
Company.

    The Company has obtained a commitment from a bank to provide a 
$30,000,000 credit facility (the "Proposed Credit Facility").  The closing of 
the Proposed Credit Facility is subject to negotiation of definitive 
documentation, including customary closing conditions, and is contingent upon 
the Company raising at least $10,000,000 in equity.  Under the terms of the 
Proposed Credit Facility, the Company will have available a three year 
$20,000,000 term loan, due in quarterly installments and bearing interest at 
the bank's base rate plus 1.0% per annum, and a $10,000,000 revolving line of 
credit, due in three years and bearing interest at the bank's base rate plus 
1/2 of 1.0% per annum.  Borrowings under the revolving line of credit are 
limited to the Borrowing Base, which is based upon eligible accounts 
receivable and inventory, as defined.  The Proposed Credit Facility will be 
secured by substantially all of the Company's assets.

    The Company has entered into an Investment Agreement with certain parties 
(the "Purchasers") whereby the Company has agreed to issue and sell to the 
Purchasers, and the Purchasers have agreed to purchase from the Company, for 
aggregate consideration of $20,000,000, 20,000 shares of Preferred Stock and 
Warrants to purchase 3,600,000 shares of Common Stock. The closing of the 
Preferred Stock with Warrants Issuance is subject to a number of closing 
conditions, including without limitation (i) approval by the Company's 
Stockholders of the Preferred Stock with Warrants Issuance, (ii) execution of 
the Proposed Credit Facility, (iii) satisfactory completion by the Purchasers 
of their due diligence review of the Company and (iv) other customary closing 
conditions.  The Preferred Stock will accrue dividends quarterly at an annual 
rate of 12.0% for the first year, 14.0% for the second year, 16.0% for the 
third year, 18.0% for fourth and fifth years and 20% at all times thereafter, 
of the purchase price paid by the Purchasers, in preference to any dividends 
on any other class of capital stock.  The Preferred Stock will be redeemable 
by the Company at any time at a price equal to the purchase price paid by the 
Purchasers thereof plus accrued and unpaid dividends.  The Preferred Stock 
will be convertible beginning two years from the date of issue, into shares 
of Common Stock at a price per share of $6.60.  The Common Stock underlying 
the Warrants may be purchased at an exercise price of $6.60 per share.

    The Company intends to repay the Existing Credit Facility with the net 
proceeds from the Preferred Stock with Warrants Issuance and the Proposed 
Credit Facility, or a combination of such.  If the Preferred Stock with 
Warrants Issuance, the Proposed Credit Facility or other

                                          15
<PAGE>

method of refinancing does not occur, the consequences would be materially
adverse to the Company's business, results of operations and financial position.
While the Company would pursue alternative methods to refinance the Existing
Credit Facility, there are no assurances that such financing could be obtained
on terms favorable to the Company, or at all.

    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 
Existing Credit Facility.  The value attributed to the warrants amounted to 
$1,240,000, the balance of which is included in additional paid-in capital.  
The warrants expire on January 31, 2002 and are subject to antidilution 
adjustment if, during the term of the Existing Credit Facility, the Company 
issues shares of Common Stock and does not use the proceeds of such issuance 
to pay borrowings under the Existing Credit Facility.

    On July 30, 1997, the Company's stockholders approved the issuance of up 
to $40,000,000 of convertible preferred stock on the terms described in the 
proxy statement mailed to stockholders on July 8, 1997.  At the time of such 
proposal, the Company intended to use the proceeds of such issuance to repay 
the Existing Credit Facility and to obtain a bank credit facility in the 
amount of $40,000,000 to finance the then-contemplated acquisition by the 
Company of the music business of K-tel.  Since such time, the Company has 
terminated its agreement with K-tel.  See "--Significant Matters."  The Board 
of Directors has determined, in light of the Company's revised financing 
requirements, that the Preferred Stock with Warrants Issuance is in the best 
interests of the Company and its stockholders.  Accordingly, the Board does 
not currently intend to complete the $40,000,000 preferred stock issuance on 
the terms previously approved and is soliciting stockholder approval of the 
Preferred Stock with Warrants Issuance.


    The Company intends to upgrade its current computer systems prior to the 
end of fiscal 1998. While the Company has no material purchase commitments to 
date, estimated expenditures are $500,000 to $750,000.

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

   
    Stockholders' equity at August 31, 1997 totaled $4,918,000 compared to 
$7,866,000 at May 31, 1997.  As discussed in the "Overview" above, 
stockholders' equity includes $800,000 of costs and expenses that the Company 
believes relate to Intersound prior to the Company's purchase.  Had these 
matters been ascertained by the Company at the time of purchase or shortly 
thereafter, such adjustments would have been recorded through purchase 
accounting, resulting in no stockholders' equity impact.  As these matters 
were not ascertained at the time of purchase or shortly thereafter, the 
Company is required to reflect these amounts in its results of operations, 
thus impacting stockholders' equity.  Excluding these adjustments, the 
Company's stockholders' equity would have been $5,718,000 at August 31, 1997. 
This current period decrease of $2,148,000 or 27.3% is due to current period 
net losses experienced by the Company during the current fiscal quarter.
    

INFLATION

    The impact of inflation on the Company's operating results has been
moderate in recent periods, 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 filing 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 filing, 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 1998 and beyond
to differ materially from those expressed in such forward-looking statements.
These factors


                                          16
<PAGE>

include, without limitation, commercial success of the Company's repertoire,
charges and costs related to acquisitions, relationships with artists and
producers, attraction and retention of key personnel, general economic and
business conditions and enhanced competition and new competitors in the recorded
music industry.  In addition, the Company intends to refinance its current
credit facility when it becomes due in full on October 31, 1997.  If such
refinancing does not occur, the consequences could be materially adverse to the
Company's business, results of operations and financial position.  There are no
assurances that such refinancing could be obtained on terms favorable to the
Company, or at all.

    The Company has consolidated indebtedness that is substantial in relation
to its stockholders' equity.  As of August 31, 1997, the Company had outstanding
approximately $40 million of total debt and approximately $5 million of
stockholders' equity.

    The Company's indebtedness has several important consequences, including
but not limited to the following:  (i)  a substantial portion of the Company's
cash flow from operations must be dedicated to debt service requirements
(principal and interest) on its indebtedness and will not be available for other
purposes; (ii)  the Company's ability to obtain additional financing in the
future for working capital, capital expenditures, acquisitions or for general
corporate purposes may be impaired; (iii)  the Company's leverage may increase
its vulnerability to economic downturns and limit its ability to withstand
competitive pressures and (iv)  the Company's ability to capitalize on
significant business opportunities may be limited.

    The Company's ability to satisfy its existing debt obligations will depend
in the near term on its ability to sell additional equity and obtain long-term
financing to replace its current debt, and its ability to satisfy both existing
and future debt obligations will depend on its future operating performance,
which will be affected by prevailing economic conditions and financial, business
and other factors, certain of which are beyond the Company's control.  If the
Company is unable to service its indebtedness, it will be forced to adopt an
alternative strategy that may include actions such as reducing or delaying
capital expenditures, selling assets or restructuring its indebtedness.  There
can be no assurance that any of these strategies could be effected on
satisfactory terms, if at all.  In addition, there can be no assurance that the
Company will not increase its leverage to meet capital requirements in the
future - see "Liquidity and Capital Resources" above.

PART II - OTHER INFORMATION

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

A. Exhibits.


    10.1* Fourth Amendment to Amended and Restated Credit Agreement dated 
          August 29, 1997 among Platinum Entertainment, Inc., Bank of 
          Montreal, individually and as Agent, PPM America Special 
          Investments Fund L.P. and FC CBO Limited and the Guarantors' 
          Consent attached thereto.

    10.2* Employment Agreement dated June 1, 1997 between the Company and
          Steven Devick.

    10.3* Employment Agreement dated June 1, 1997 between the Company and
          Douglas C. Laux.

    10.4* Employment Agreement dated June 1, 1997 between the Company and
          Thomas R. Leavens.

    10.5* Employment Agreement dated July 1, 1996 between the Company and
          Lynne Hoffman-Engel.

    10.6* Investment Agreement dated October 12, 1997 among the Company, MAC 
          Music LLC and SK-Palladin Partners, LP is herein incorporated by 
          reference to the Proxy Statement for the 1997 Annual Meeting of 
          Stockholders.

    27.   Financial Data Schedule.

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

   
*  Previously filed.
    

                                          17
<PAGE>

SIGNATURES


   
Pursuant to the requirements of the Securities Exchange Act of 1934, Platinum 
Entertainment, Inc. has duly caused this Amendment No. 2 to this Report to be 
signed on its behalf by the undersigned, thereunto duly authorized, on this 
14th day of August, 1998.
    

                                  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)


                                          18