July 23, 1997




                            THE CHASE MANHATTAN BANK
                                 270 Park Avenue
                          New York, New York 10017-2070

                                  July 23, 1997


Alliance Entertainment Corp.
110 East 59th Street, 18th Floor
New York, New York 10022

Attention:  Chief Financial Officer

                                Letter Agreement

Gentlemen:

     This has reference to (i) the Revolving Credit and Guaranty Agreement dated
as of July 17, 1997 (the  "Agreement")  among  Alliance  Entertainment  Corp. as
Borrower,  the Guarantors  named therein who are parties  thereto as of the date
hereof and The Chase  Manhattan Bank, as Agent and as Bank and (ii) the Security
and Pledge Agreement referred to therein. All terms used herein that are defined
in the Agreement shall have the same meanings herein.

     The Borrower has advised that it is not, at the present time,  intending to
cause the Red Ant  Entities  to  commence  Chapter  11  proceedings  and that it
desires to make  intercompany  advances to such  entities  using the proceeds of
certain Loans in an aggregate amount not to exceed $1,250,000. The Agent and the
Banks have agreed to permit such  financing on the condition each of the Red Ant
Entities become party to the Agreement and the Security and Pledge Agreement.

     In connection  with the foregoing,  the Borrower has requested that certain
provisions of the Agreement be modified as set forth  herein.  Accordingly,  the
Borrower, the Guarantors, the Agent and the Bank hereby agree as follows:

     (i) Section 3.5 is hereby amended by deleting the  parenthetical  appearing
therein in its entirety and by inserting in lieu thereof the following:

     "(other  than  in the  case  of the  Foreign  Subsidiaries  and the Red Ant
Entities)";

     (ii)  Notwithstanding  the  provisions of Sections 5.2, 6.2 and 6.10 of the
Agreement,  the  Borrower  shall be permitted to sell the assets or stock of the
Red Ant Entities in  accordance  with the  provision of Section  6.12(ii) of the
Agreement;

     (iii)  Section 5.9 is hereby  amended by adding the  parenthetical  "(other
than the Red Ant Entities)"  after the defined term "Guarantor" in each instance
where such defined term appears; <PAGE>

     (iv) Section 6.11 of the  Agreement  is hereby  amended by deleting  clause
(vi) in its entirety and by inserting in lieu thereof the following:

     "(vi) advances to the Red Ant Entities (whether or not the Red Ant Entities
shall have filed petitions  under Chapter 11 of the Bankruptcy  Code) during the
period (the "Period") commencing on the date of this Amendment Letter and ending
thirty (30) days  thereafter in an amount not to exceed the amounts set forth in
the cash flow budget for the Red Ant Entities previously delivered to the Agent,
or in an aggregate amount not to exceed $1,250,000."

     (v) Schedule 3.5 to the Credit Agreement and Schedules 1, 3, 5 and 6 to the
Security and Pledge  Agreement are hereby  amended in their entirety in the form
of Exhibit A and Exhibit B hereto, respectively.

     (vi) By their execution  hereof,  each of the Red Ant Entities shall become
party  to  the  Agreement  and  the  Pledge  and  Security  Agreement  upon  the
effectiveness of this Letter Agreement.

     Notwithstanding  anything to the contrary in Section 5.14 of the  Agreement
or elsewhere,  upon their execution  hereof the Red Ant Entities shall be deemed
to be Guarantors  under the  Agreement for all purposes  under the Agreement and
under all other Documents.

     This Letter  Agreement shall not become effective until (i) the Agent shall
have received  counterparts hereof executed by the Agent, the Bank, the Borrower
and the Guarantors,  (ii) the Bankruptcy  Court shall have approved the terms of
this Letter Agreement by entry of an order satisfactory in form and substance to
the  Agent in its sole  discretion,(iii)  the  Agent  shall  have  received  the
Borrower's  budget for the Red Ant Entities for the Period and such budget shall
be  satisfactory  in form and substance to the Agent in its sole  discretion and
(iv) the Agent shall have received evidence  satisfactory to it that the Red Ant
Entities  shall have  satisfied  each of the  conditions  precedent set forth in
Section  4.1 of the  Agreement  applicable  to it  (other  than the entry of the
Interim Order or any other order of the Bankruptcy Court).

     This Letter  Agreement shall be limited  precisely as written and shall not
be deemed to be a consent granted  pursuant to, or a waiver or modification  of,
any other  term or  condition  of the  Agreement  or any of the  instruments  or
agreements  referred to therein or to  prejudice  any right or rights  which the
Agent or the Bank may now have or may have in the future under or in  connection
with the Agreement or any of the instruments or agreements referred to therein.

             This Letter Agreement may be executed in any number of counterparts
and by the different parties hereto in separate counterparts, each of which when
so executed  and  delivered  shall be deemed to be an original  and all of which
when taken together shall constitute but one and the same letter.

<PAGE>
     This Letter Agreement shall be construed in accordance with and governed by
the laws of the State of New York.


                                          Very truly yours,

                                          THE CHASE MANHATTAN BANK,
                                          Individually and as Agent

                                      By:
                                           ---------------------------
                                            Title:
AGREED AND ACCEPTED:

ALLIANCE ENTERTAINMENT CORP.

By:
   ----------------------
   Title:

GUARANTORS:

CONCORD RECORDS, INC.
INDEPENDENT NATIONAL DISTRIBUTORS, INC.
AEC ONE STOP GROUP, INC.
PASSPORT MUSIC DISTRIBUTION, INC.
FL ACQUISITION CORP.
ALLIANCE VENTURES, INC.
EXECUSOFT, INC.
AEC ACQUISITION CORP.
CASTLE COMMUNICATIONS (U.S.), INC.
PASSPORT MUSIC WORLDWIDE, INC.
AEC AMERICAS, INC.
AE LAND CORP.
ONE WAY RECORDS, INC.
MATRIX SOFTWARE, INC.

By:
   -----------------------------
   Title:

RED ANT BOX, INC.
RED ANT HOLDINGS, INC.
BLACK ANT MUSIC, INC.
ARMY ANT MUSIC, INC.
VELVET ANT MUSIC, INC.

By:
   -------------------------
   Title:


RED ANT LLC
By:      Red Ant Box, Inc., its managing member


By:
    --------------------------
    Title: