<PAGE>   1
                                  EXHIBIT 10.5

                                SERVICE AGREEMENT

         THIS AGREEMENT made this 31st day of July, 1998, and effective August
1, 1998, by and between RADIO MANAGEMENT, L.L.C., a Minnesota limited liability
company (hereinafter "RMLLC"), and CHILDREN'S BROADCASTING CORPORATION, a
Minnesota Corporation (hereinafter "CBC").

         WHEREAS, RMLLC engages in business of providing administrative, general
and legal services for companies and CBC engages primarily in television
commercial production; and
         WHEREAS, CBC intends to retain RMLLC to provide administrative, general
and legal services for its television commercial production operations and in
connection with the wrapping up of its radio station interests according to the
terms and provisions set forth herein.
         NOW, THEREFORE, based upon the mutual premises contained herein, and
other good and valuable consideration, the parties hereby agree as follows:

1. SERVICES. During the term hereof, RMLLC shall perform general and
administrative services for CBC, including, but not limited to, payroll
services, general accounting services, general legal services and such other
services as the parties may mutually agree to from time to time.

2. COMPENSATION. In consideration for the services performed by RMLLC hereunder,
CBC shall pay RMLLC Seventy-five Thousand and no/100 Dollars ($75,000.00) per
month payable within thirty (30) days from the end of each calendar month. The
compensation paid to RMLLC hereunder shall not include any fees or expenses for
accounting, legal or other services performed for CBC by third parties.

<PAGE>   2


3. QUARTERLY REVIEW. The parties agree that they will review the services
provided by RMLLC hereunder and the compensation set forth herein at the end of
each calendar quarter during the term hereof, and at such time the services and
compensation may be adjusted upon the mutual agreement of the parties.

4. EXPENSES. In addition to the compensation set forth in Section 2 above, CBC
shall pay all reasonable and necessary expenses incurred by RMLLC in connection
with the services performed hereunder, including, but not limited to, travel and
lodging expenses and ay other expenses directly attributable to the services
performed by RMLLC hereunder. RMLLC shall bill CBC on a monthly basis for such
expenses and CBC shall pay the same within thirty (30) days from the date CBC
receives any such invoice.

5. INDEPENDENT CONTRACTOR. The parties hereby acknowledge that (i) RMLLC, while
performing services hereunder, at all times acting as an independent contractor
and not as an employee of CBC; (ii) RMLLC shall be solely responsible for all
federal, state and local income taxes, employment taxes, self-employment taxes,
workers' compensation insurance premiums and any and all other similar payments
RMLLC is required to make as a result of the services RMLLC performs hereunder.
CBC shall approve the engagement of any officer of RMLLC who shall pursuant to
such engagement also serve as an officer of CBC, and CBC shall affirm and agree
to the terms of such engagement.

6. LIMITATIONS ON LIABILITY. CBC hereby agrees that in no event shall RMLLC be
liable to CBC for any indirect, special or consequential damages or lost profits
arising out of or in any way related to the Agreement or the performance of
services hereunder or any breach thereof and that RMLLC's liability to CBC
hereunder, if any, shall in no even exceed the total compensation paid to RMLLC
hereunder.

7. TERM. This Agreement shall remain in effect for a period of one (1) year from
the date hereof; provided, however, the term of the Agreement shall
automatically renew for successive one (1) year periods unless terminated by
either party, by written notice delivered to the other party, within sixty (60)
days from the end of the then current term.

8. TERMINATION.  Notwithstanding Section 7 above, the Agreement shall terminate
upon the occurrence of any of the following events:

   a.     by RMLLC if CBC is more than sixty (60) days delinquent in its payment
          of compensation  or expenses  pursuant to the Sections 2 or 3 above;

   b.     by either party if the other party is in default under any provision
          hereunder and such default is not cured within sixty (60) days after
          notice thereof is given to the defaulting party;


<PAGE>   3

   c.     by either party if the other party becomes insolvent or seeks
          protection, voluntarily or involuntarily, under any bankruptcy law; or

   d.     upon the mutual agreement of both parties.

   A termination of this Agreement pursuant to this Section 8 or Section 7
   above shall not relieve CBC of its obligation to pay RMLLC compensation or
   expenses for any services rendered or expenses incurred prior to the date of
   termination.

9. GOVERNING LAW.  This Agreement shall be construed and enforced in accordance
   with the laws of the State of Minnesota.

   IN WITNESS WHEREOF, the parties hereto have executed the Agreement as
of the day and year first above written.

                                            RADIO MANAGEMENT, L.L.C.

                                            BY:   /s/ James G. Gilbertson
                                            ITS:  /s/ Chief Operating Officer



                                            CHILDREN'S BROADCASTING CORPORATION

                                            BY:   /s/ Patrick Grinde
                                            ITS:  /s/ Chief Financial Officer