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  JUNE  30,  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 1-13054

                           ALLIANCE ENTERTAINMENT CORP.
              (Exact name of registrant as specified in its charter)


     Delaware                                             13-3645913
(State or other jurisdiction of             (I.R.S. Employer Identification No.)
 incorporation or organization)


  110 East 59th Street, New York, New York                  10022
(Address of principal executive offices)                  (Zip Code)


                                (212) 935-6662
              ( Registrant's telephone number, including area code)

     Indicate by check mark whether the  registrant (1) has filed all reports 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 by check mark whether the  registrant  has filed all documents and
reports  required  to be  filed by  Section  12,  13 or 15(d) of the  Securities
Exchange Act of 1934 subsequent to the  distribution of securities  under a plan
confirmed by Court. Yes X No _____

     As of July 31,  1997,  the number of shares  outstanding  of the  Company's
common stock was 44,990,205

     "THIS  DOCUMENT IS A COPY OF THE FORM 10-Q FOR THE  QUARTERLY  PERIOD ENDED
JUNE 30, 1997 FILED ON AUGUST 15, 1997 PURSUANT TO A RULE 201 TEMPORARY HARDSHIP
EXEMPTION."

<PAGE>

ALLIANCE ENTERTAINMENT CORP.


PART I--FINANCIAL INFORMATION
                                    Page No.

Item 1.  Financial Statements

                  Consolidated Balance Sheets                                3

                  Consolidated Statements of Operations                      4

                  Consolidated Statement of Stockholder's  Equity (Deficit)  5

                  Consolidated Statements of Cash Flows                      6

                  Notes to Consolidated Financial Statements                 7


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

PART II--OTHER INFORMATION

Item 1.  Legal Proceedings

Item 3.  Defaults Upon Senior Securities

Item 6.  Exhibits and Reports on Form 8-K

<PAGE>
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
                               ALLIANCE ENTERTAINMENT CORP. AND SUBSIDIARIES
                                        CONSOLIDATED BALANCE SHEETS
                                                (Unaudited)
                                 (Amounts in Thousands, Except Share Data)

<TABLE>
<CAPTION>
                                                                       December 31,       June 30,
                                                                           1996             1997
                                                                    ----------------- ---------------
                            ASSETS
<S>                                                                 <C>               <C>
CURRENT ASSETS
     Cash and cash equivalents                                      $          8,669  $        5,537
     Accounts receivable, less allowance for
     doubtful
        accounts                                                             173,619         111,521
     Inventory                                                               164,380         122,926
     Advances and other prepaid expenses                                      22,739          26,165
     Refundable income taxes                                                  11,260             789
     Deferred income taxes                                                     5,798           1,640
                                                                    ----------------- ---------------
            Total current assets                                             386,465         268,578
                                                                    ----------------- ---------------
INVESTMENTS, at cost                                                           1,100           1,510
PROPERTY AND EQUIPMENT                                                        33,793          35,371
COPYRIGHTS, less accumulated amortization                                     62,917          59,605
COST IN EXCESS OF NET ASSETS OF BUSINESSES ACQUIRED,
     less accumulated amortization                                            93,727          84,593
COVENANTS NOT TO COMPETE, less accumulated
     amortization                                                              8,366           7,256
DEFERRED INCOME TAXES                                                          9,798           9,666
OTHER ASSETS, less accumulated amortization                                   16,916          21,096
                                                                      ---------------    ------------
TOTAL ASSETS                                                        $        613,082  $      487,675
                                                                    =================    ============
               LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
     Notes payable                                                  $         72,671  $       88,164
     Current maturities of long-term debt                                      8,305           8,777
     Current obligations under capital leases                                    582             482
     Accounts payable and accrued expenses                                   267,187         206,049
     Income taxes payable                                                        826             105
                                                                    ----------------- ---------------
            Total current liabilities                                        349,571         303,577
                                                                    ----------------- ---------------
LONG-TERM DEBT                                                               236,215         234,189
OBLIGATIONS UNDER CAPITAL LEASES                                               1,133           1,099
DEFERRED INCOME TAXES                                                          9,109           8,633
MINORITY INTEREST                                                           -                    701
COMMITMENTS
STOCKHOLDERS' EQUITY (DEFICIT)
     Series A convertible preferred stock, $.01
     par value,
        886,240 shares authorized, shares issued
        and
        outstanding 422,500 ( $45,485 liquidation preference)                      4               4
     Series B convertible preferred stock, $.01
     par value,
        300,000 shares authorized, shares issued
        and
        outstanding  57,500 ( $5,933 liquidation                                   1               1
        preference)
     Common stock, $.0001 par  value, 100,000,000
        shares authorized, shares issued and
        outstanding
        1996 44,764,853; 1997 44,990,205                                           4               4
     Additional paid-in capital                                              146,665         146,965
     Employee notes for stock purchases                                         (67)            (67)
     Accumulated deficit                                                   (131,286)       (208,802)
     Foreign currency translation adjustment                                   1,733           1,371
                                                                    ----------------- ---------------
            Total stockholders' equity (deficit)                              17,054        (60,524)
                                                                    ----------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)                $        613,082  $      487,675
                                                                    ================= ===============
 The  accompanying  notes  are an  integral part of these financial statements.
</TABLE>
<PAGE>

                                ALLIANCE ENTERTAINMENT CORP. AND SUBSIDIARIES
                                    CONSOLIDATED STATEMENTS OF OPERATIONS
                                                 (Unaudited)
                                  (Amounts in Thousands, Except Share Data)
<TABLE>
<CAPTION>
<S>                                               <C>          <C>              <C>           <C>
                                                          Three Months                   Six Months
                                                             Ended                         Ended
                                                           June 30,                       June 30,
                                                  ----------------------------  -----------------------------
                                                      1996           1997            1996           1997
                                                  ------------ ---------------  ------------- ---------------

Net sales                                         $   163,168  $      108,973   $    339,356  $      235,295

Cost of sales                                         142,072          94,594        285,466         199,763
                                                  ------------ ---------------  ------------- ---------------

            Gross profit                               21,096          14,379         53,890          35,532

Selling, general and administrative expenses           35,388          33,780         66,129          65,316
Restructuring and asset impairment charges                922          18,336          1,350          18,336
Amortization of intangible assets                       2,906           3,950          5,754           7,868
                                                  ------------ ---------------  ------------- ---------------

                                                       39,216          56,066         73,233          91,520
                                                  ------------ ---------------  ------------- ---------------

                                                     (18,120)        (41,687)       (19,343)        (55,988)
                                                  ------------ ---------------  ------------- ---------------

Other income (expense)
     Amortization of deferred financing costs           (467)           (659)          (936)         (1,174)
     Other income (expense) - net                       (977)           (815)          (773)         (1,966)
     Interest expense                                 (8,585)         (7,180)       (16,841)        (15,193)
                                                  ------------ ---------------  ------------- ---------------
                                                     (10,029)         (8,654)       (18,550)        (18,333)
                                                  ------------ ---------------  ------------- ---------------

        Loss before income taxes                     (28,149)        (50,341)       (37,893)        (74,321)

Provision (benefit) for income taxes                  (6,252)          4,085        (11,368)          3,195 
                                                  ------------ ---------------  ------------- ---------------

        Net loss                                  $  (21,897)  $     (54,426)   $   (26,525)  $     (77,516)
                                                  ============ ===============  ============= ===============

Loss per common share                             $     (.59)  $       (1.21)   $      (.72)  $       (1.73)
                                                  ============ ===============  ============= ===============

Weighted average number of shares of
     common stock outstanding                     36,996,375      44,990,205     36,797,213      44,879,397
                                                  ============ ===============  ============= ===============

            The  accompanying  notes  are an  integral  part of these  financial
            statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                             ALLIANCE ENTERTAINMENT CORP. AND SUBSIDIARIES
                        CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
                                                     (Unaudited)
                                       (Amounts in Thousands, Except Share Data)

<S>                              <C>          <C>          <C>        <C>        <C>          <C>           <C>

                                         Capital Stock Issued                      Employee                   Foreign
                                 ------------------------------------  Additional  Notes for                  Currency
                                    Series A    Series B     Common     Paid-In      Stock      Accumulated  Translation
                                     Preferred  Preferred     Stock     Capital    Purchases     Deficit     Adjustment
                                       Stock     Stock
                                 ------------------------  ---------- ---------- ------------ ------------  ------------

Balance at December 31, 1996     $         4  $        1   $       4  $ 146,665  $      (67)  $ (131,286)   $     1,733

   Issuance of 225,352 shares
   of common stock for
      adjustment to purchase           -           -               -        366        -            -            -
      price of subsidiary
   Adjustment for costs
   incurred in connection with
      issuance of preferred            -           -            -          (66)        -            -            -
      stock
   Net loss                            -           -            -          -           -         (77,516)        -
   Translation adjustment              -           -            -          -           -            -             (362)
                                 ------------ -----------  ---------- ---------- ------------ ------------  ------------

Balance at June 30, 1997          $        4  $        1   $       4  $ 146,965  $      (67)  $ (208,802)   $     1,371    
                                 ============ ===========  ========== ========== ============ ============  ============



       The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                               ALLIANCE ENTERTAINMENT CORP. AND SUBSIDIARIES
                                   CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                (Unaudited)
                                          (Amounts In Thousands)
<S>                                                                 <C>               <C>
                                                                            Six Months Ended
                                                                                 June 30,
                                                                    ---------------------------------
                                                                           1996             1997
                                                                    ----------------- ---------------
Cash Flows From Operating Activities
     Net loss                                                       $       (26,525)  $     (77,516)

     Adjustments to reconcile net loss to net cash used in operating activities:
        Depreciation and amortization                                          9,671          12,209
        Restructuring and asset impairment charges                             1,982          18,336
        Other non cash charges                                                10,097          -
     Change in assets and liabilities:
        Decrease in accounts receivable                                       37,211          62,016
        Decrease in inventory                                                 17,376          41,453
        Increase in prepaid expenses and other                               (4,050)         (4,565)
        Increase in deferred income taxes                                    (3,927)           3,813
        Decrease in accounts payable and
            accrued expenses                                                (40,223)        (62,349)
        (Increase) decrease in income taxes                                  (8,477)           9,750
        receivables
                                                                    ----------------- ---------------

        Net cash provided by (used in) operating                             (6,865)           3,147
        activities
                                                                    ----------------- ---------------

Cash Flows From Investing Activities

     Purchase of property and equipment, net                                 (3,097)         (4,246)
     (Increase) decrease in copyrights                                       (4,052)           1,095
     Increase in other assets                                                  (417)         (5,533)
     Purchase of businesses including costs,
        net of cash acquired                                                     225           (262)
                                                                    ----------------- ---------------

        Net cash used in investing activities                                (7,341)         (8,946)
                                                                    ----------------- ---------------

Cash Flows From Financing Activities

     Decrease in excess of outstanding
        checks over bank balance                                                 824         (8,545)
     Proceeds from issuance of  stock                                          2,901            (66)
     Proceeds from borrowings                                                145,740         123,520
     Payments on borrowings                                                (142,195)       (110,662)        
     Payments for financing costs                                               (29)         (1,218)
                                                                    ----------------- ---------------
                                                                                                            
        Net cash provided by financing activities                              7,241           3,029
                                                                    ----------------- ---------------

Effect of foreign currency translation                                            52           (362)
Net decrease in cash and cash equivalents                                    (6,913)         (3,132)

Cash and cash equivalents
     Beginning of period                                                      12,852           8,669
                                                                    ----------------- ---------------

     End of period                                                  $          5,939  $        5,537
                                                                    ================= ===============

            The  accompanying  notes  are an  integral  part of these  financial
            statements.
</TABLE>
<PAGE>


ALLIANCE ENTERTAINMENT CORP.  AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Unaudited Interim Financial Information

     The  unaudited  balance  sheet  as of  June  30,  1997  and  the  unaudited
statements of operations,  cash flows and stockholders' equity (deficit) for the
three  month  and six  month  periods  ended  June 30,  1996  and 1997  (interim
financial  information),  have  generally been prepared on the same basis as the
audited  financial  statements.  In the  opinion  of the  Company,  the  interim
financial  information  includes  all  adjustments,  consisting  of only  normal
recurring  adjustments,  necessary  for a fair  statement  of the results of the
interim periods.

     Certain  information and footnote disclosure normally included in financial
statements prepared in accordance with generally accepted accounting  principles
have been  condensed  or omitted  from the interim  financial  information.  The
results of operations  for the three months and six months' ended June 30, 1997,
may not be indicative  of the operating  results for the full year or any future
interim period.

     Certain amounts have been  reclassified to conform with the presentation in
the current period.

Restructuring and Other Charges

     During the six months' ended June 30, 1997,  approximately $8.0 million was
paid and charged against a liability  established by the Company at December 31,
1996 for restructuring  and other  non-recurring  charges.  As of June 30, 1997,
approximately $12.0 million remains to be paid in future periods.

Reorganization under Chapter 11; Pre-Petition Credit Agreement

     On  June  30,  1997,  Alliance   Entertainment  Corp.  ("Alliance"  or  the
"Company") failed to make the full  amortization  payment of $1.5 million on its
senior  secured  credit  facility  (the  "Pre-petition  Credit  Agreement")  and
additionally  failed to satisfy a financial covenant requiring the Company raise
$35 million of equity prior to July 1, 1997 and as a result was in default under
the  provisions of its  Pre-petition  Credit  Agreement.  Under the terms of its
Pre-petition  Credit Agreement,  and as a result of the existing  defaults,  the
Company's banks had the right to accelerate the maturity of  approximately  $187
million of outstanding indebtedness.

     Additionally,  as a result of the defaults  under the  Pre-petition  Credit
Agreement,  the Company was blocked from making a July 15, 1997 interest payment
due and payable on the  Company's  $125  million of 11.25%  Senior  Subordinated
Notes due 2005.

     On July 14, 1997, as a result of the defaults under the Pre-petition Credit
Agreement,  the pending  payment  default on the Company's  Senior  Subordinated
Notes and an overall  inability  to operate  the  Company's  business  under the
existing  liquidity  restraints,  the Company and  fourteen of its  wholly-owned
subsidiaries  filed voluntarily under Chapter 11 of the Bankruptcy Code in order
to facilitate  the  reorganization  of the  Company's  core  businesses  and the
restructuring  of the  Company's  long-term  debt,  revolving  credit  and trade
obligations.  The Company  continues to operate with its existing  directors and
officers as a debtor-in-possession subject to the Bankruptcy Court's supervision
and orders.  Excluded  from the filing were certain  businesses in the Company's
Proprietary  Products  Group,  including:  Castle  Communications  plc  (and its
related  affiliates);  The St.  Clair  Entertainment  Group,  Inc.;  and Red Ant
Entertainment LLC ("Red Ant")(and its related  affiliates).  The filing was made
in the U.S. District Court for the Southern District of New York in Manhattan.

<PAGE>

     The filing of the petition under Chapter 11 of the Bankruptcy Code resulted
in the  occurrence  of an Event of Default  under the  Company's:  (i) Indenture
relating  to  its  11.25%  Senior  Subordinated  Notes  due  2005;  (ii)  Credit
Agreement;  (iii)  6%  Exchangeable  Notes;  and  (iv)  Mortgage  Bond  for  its
distribution facility in Coral Springs, Florida.

     Pursuant to the  provisions of the  Bankruptcy  Code,  all of the Company's
liabilities,  as of July 14, 1997, were automatically  stayed upon the Company's
filing of its petition for reorganization. In addition, absent approval from the
Bankruptcy  Court,  the  Company is  prohibited  from  paying  any  pre-petition
obligations.  In hearings  held on July 14 and 16, 1997,  the  Bankruptcy  Court
approved the  Company's  request for payment of certain  pre-petition  wages and
benefits, use of the Company's cash management system and retention of legal and
financial professionals.

     Alliance  intends to  present a plan of  reorganization  to the  Bankruptcy
Court to reorganize  the Company's core business and  restructure  the Company's
long-term debt, revolving credit and trade obligations.  Under provisions of the
Bankruptcy  Code, the Company has the exclusive right to file a plan at any time
during the 120 day period  following  July 14,  1997,  which time  period may be
extended by the Bankruptcy Court at the Company's request.

     In the event that a plan of  reorganization  is approved by the  Bankruptcy
Court,  continuation of the business after reorganization will be dependent upon
the  success  of  future  operations  and the  Company's  ability  to  meet  its
obligations as they become due. In the event that such a plan of  reorganization
is  not  approved  by the  Bankruptcy  Court  and a  Restructuring  Plan  is not
consummated,  the ability of the Company to continue as a going concern  depends
on the success of future  operations  and the ability of the Company to generate
sufficient cash from operations and financing sources to meet its obligations as
they  become due and to  finance  its  operations.  The  accompanying  financial
statements  have  been  prepared  on a going  concern  basis,  which,  except as
disclosed,  contemplates  continuity of  operations,  realization  of assets and
discharge of liabilities in the ordinary course of business.  As a result of the
Chapter 11 filing,  the Company may have to sell or otherwise  dispose of assets
and discharge or settle  liabilities  for amounts other than those  reflected in
the financial  statements.  Further,  a plan of reorganization  could materially
change the amounts currently recorded in the financial statements. The financial
statements  do not give  effect  to all  adjustments  to the  carrying  value of
assets, or amounts and  classification of liabilities that might be necessary as
a consequence of the proceeding.  The appropriateness of using the going concern
basis  is  dependent  upon,  among  other  things,  confirmation  of a  plan  of
reorganization,  success  of  future  operations  and the  ability  to  generate
sufficient cash from operations and financing sources to meet obligations.

     In addition, valuation methods used in Chapter 11 reorganization cases vary
depending  on the  purpose for which they are  prepared  and used and are rarely
based on  generally  accepted  accounting  principles,  the  basis on which  the
accompanying  financial  statements  are prepared.  Accordingly,  the values set
forth in the accompanying  financial  statements are not likely to be indicative
of the  values  presented  to or  used by the  Bankruptcy  Court.  As a  result,
valuations of the Company based on the accompanying  financial statements may be
significantly  higher than  valuations  used by the Company in  determining  the
amounts  to be  received,  if any,  by each class of  creditors  under a plan of
reorganization. 
<PAGE>

DIP Financing

     In connection with the Company's  Chapter 11 filing,  on July 16, 1997, the
Company  entered  into a  Revolving  Credit  and  Guaranty  Agreement  (the "DIP
Financing  Agreement")  with Chase Manhattan Bank providing for a maximum of $50
million of  debtor-in-possession  ("DIP")  financing  subject to approval by the
Bankruptcy  Court.  The DIP  Financing  Agreement  is  intended  to address  the
Company's   immediate  working  capital  needs  and  to  support  the  Company's
operations  during its Chapter 11  proceedings.  On July 16, 1997, the Honorable
Burton R.  Lifland  approved  on an interim  basis use of $20 million of the $50
million DIP financing. The Company's use of the remaining $30 million of the DIP
financing was approved by the Court at a hearing held on August 13, 1997.

     The DIP  Financing  Agreement  provides  for  borrowings  under a revolving
credit  and a letter of  credit  facility.  Loans  under  the  revolving  credit
facility bear interest at either the Alternate  Base Rate (as defined in the DIP
Financing  Agreement) plus 1.5% or at the Adjusted LIBOR Rate (as defined in the
DIP Financing  Agreement) plus 2.75%.  Loans under the letter of credit facility
bear  interest  at the  Alternate  Base  Rate  plus  1.5%.  The terms of the DIP
Financing Agreement contain certain restrictive covenants including: limitations
on the incurrence of additional guarantees, liens and indebtedness;  limitations
on the sale of assets and the making of capital expenditures.  The DIP Financing
Agreement also requires that the Company meet certain  minimum  earnings  before
taxes and other expenses (as defined) through the end of 1998.

     Under the DIP Financing  Agreement,  Chase  Manhattan Bank has been given a
perfected  first priority lien on all property and assets of the Company and its
subsidiaries. The banks who are parties to the Pre-Petition Credit Agreement, as
well as other secured  creditors of the Company,  have been granted  replacement
liens  on the  Company's  assets  (junior  to the  lien  granted  under  the DIP
Financing  Agreement)  to  adequately  protect such  creditors'  secured  claims
against the Company prior to its Chapter 11 filing.

     The DIP  Financing  Agreement  expires on January 31, 1999, or earlier upon
the  occurrence  of  certain  events,   including  confirmation  of  a  plan  of
reorganization  by the  Bankruptcy  Court,  a sale of  substantially  all of the
assets of the  Company,  or  failure by the  Company  to  receive a final  order
confirming a plan of reorganization.

Sale of Red Ant Subsidiary

     On July 23, 1997, the Company and Chase Manhattan amended the DIP Financing
Agreement  to  provide  up to  $1.25  million  of  funding  for  Red Ant and its
affiliated entities on a non-bankruptcy  basis to facilitate the solicitation of
bids from third parties to purchase  Alliance's  interests in Red Ant. On August
6, 1997,  the  Company  filed a motion to be heard on August 13,  1997,  seeking
court  approval of the sale of 90% of the Company's  interest in Red Ant and its
affiliates to Cypress Ventures,  Inc. an affiliate of Wasserstein  Perella & Co.
("CVI"),  for  aggregate  cash  consideration  of  $625,000  with an  additional
commitment  from CVI to provide new working  capital for Red Ant (in the form of
mezzanine  indebtedness senior in priority to the equity interest holders of Red
Ant) up to an amount of approximately $19 million with $3 million to be provided
upon consummation of the sale to CVI.

     On August 13, 1997,  following a hearing before the Bankruptcy  Court,  the
Company  withdrew its motion  seeking  approval of the sale primarily due to the
continuing  objection of the Company's Official Committee of Unsecured Creditors
that the consideration to be paid for Red Ant by CVI was inadequate. In light of
the  withdrawal of the motion to approve the sale of Red Ant to CVI, the Company
believes  that  it is  likely  that  it  will  be  necessary  for Red Ant and it
affiliates to file to seek protection  under the Bankruptcy Code on an expedited
basis unless an acceptable offer for Red Ant is received by the Company prior to
such filing.

     The Company  has taken a non-cash  charge of $18.3  million  related to the
write-off  of the  goodwill  and  its  underlying  investment  on  its Red Ant
subsidiary.
<PAGE>

Income Taxes

     Based upon current  operations of the Company and other factors,  an income
tax benefit was not  recorded  for the Company  and its  fourteen  wholly  owned
subsidiaries  which filed under  Chapter 11 for the three  months and six months
ended June 30, 1997. The Company  anticipates that pre-tax losses, if any, which
may be realized during the fiscal year ending December 31, 1997, will not result
in the recording of any additional tax benefit by the Company.  Further, any net
operating  loss carry  forwards prior to, and subsequent to the filing date, may
be  severely  reduced by the  bankruptcy  case.  Accordingly,  the  Company  has
increased its valuation allowance against deferred tax assets by $5.0 million.

New Accounting Pronouncements

     In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, Earnings per Share (FAS 128). FAS 128
specifies  new  standards  designed to improve the EPS  information  provided in
financial  statements  by  simplifying  the existing  computational  guidelines,
revising the disclosure  requirements,  and increasing the  comparability of EPS
data on an  international  basis.  Some of the changes  made to simplify the EPS
computations  include:  (a)  eliminating  the  presentation  of primary  EPS and
replacing it with basic EPS,  with the  principal  difference  being that common
stock equivalents are not considered in computing basic EPS, (b) eliminating the
modified treasury stock method and the three percent materiality provision,  and
(c) revising the  contingent  share  provisions  and the  supplemental  EPS data
requirements.  FAS 128 also  makes a number of changes  to  existing  disclosure
requirements.  FAS 128 is effective for financial  statements issued for periods
ending after December 15, 1997,  including interim periods. The Company does not
believe the implementation of FAS 128 will have a significant impact on reported
results of operations. 
<PAGE>

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

Recent Events

Reorganization Under Chapter 11

     On  June  30,  1997,  Alliance   Entertainment  Corp.  ("Alliance"  or  the
"Company") failed to make the full  amortization  payment of $1.5 million on its
senior  secured  credit  facility  (the  "Pre-petition  Credit  Agreement")  and
additionally  failed to satisfy a financial covenant requiring the Company raise
$35 million of equity prior to July 1, 1997 and as a result was in default under
the  provisions  of its  Pre-petition  Credit  Agreement  and as a result of the
existing  defaults.  Under the terms of its Pre-petition  Credit Agreement,  the
Company's  banks had a right to accelerate  the maturity of  approximately  $187
million of outstanding indebtedness.

     Additionally,  the default under the  Pre-petition  Credit  Agreement  also
resulted in the Company's inability to make a July 15, 1997 interest payment due
and payable on the Company's  $125 million of 11.25% Senior  Subordinated  Notes
due 2005.

     On July 14, 1997, as a result of the defaults under the Pre-petition Credit
Agreement,  the pending  payment  default on the Company's  Senior  Subordinated
Notes and an overall  inability  to operate  the  Company's  business  under the
existing  liquidity  restraints,  the Company and  fourteen of its  wholly-owned
subsidiaries  filed voluntarily under Chapter 11 of the Bankruptcy Code in order
to facilitate  the  reorganization  of the  Company's  core  businesses  and the
restructuring  of the  Company's  long-term  debt,  revolving  credit  and trade
obligations.  The Company  continues to operate with its existing  directors and
officers as a debtor-in-possession subject to the Bankruptcy Court's supervision
and orders.  Excluded  from the filing were certain  businesses in the Company's
Proprietary  Products  Group,  including:  Castle  Communications  plc  (and its
related  affiliates);  The St.  Clair  Entertainment  Group,  Inc.;  and Red Ant
Entertainment LLC ("Red Ant") (and its related affiliates).  The filing was made
in the U.S. District Court for the Southern District of New York in Manhattan.

     Pursuant to the  provisions of the  Bankruptcy  Code,  all of the Company's
liabilities as of July 14, 1997,  were  automatically  stayed upon the Company's
filing of its petition for reorganization. In addition, absent approval from the
Bankruptcy  Court,  the  Company is  prohibited  from  paying  any  pre-petition
obligations.  In hearings  held on July 14 and 16, 1997,  the  Bankruptcy  Court
approved the  Company's  request for payment of certain  pre-petition  wages and
benefits, use of the Company's cash management system and retention of legal and
financial professionals.

     Alliance  intends to  present a plan of  reorganization  to the  Bankruptcy
Court to reorganize  the Company's core business and  restructure  the Company's
long-term debt, revolving credit and trade obligations.  Under provisions of the
Bankruptcy  Code, the Company has the exclusive right to file a plan at any time
during the 120 day period  following  July 14,  1997,  which time  period may be
extended by the Bankruptcy Court at the Company's request.

     Following  the  Company's  July 14,  1997,  announcement  that it had filed
voluntarily  to reorganize  under  Chapter 11, the New York Stock  Exchange (the
"NYSE")  permanently  halted trading in the Company's Common Stock and indicated
its intention to apply to the Securities  and Exchange  Commission to delist the
Company's securities as a consequence of the Company's Chapter 11 filing and the
fact that the Company no longer met the  criteria for  continued  listing on the
NYSE. On July 17, 1997,  the Company  received an official  notice from the NYSE
concerning  the  proposed  delisting.  The  Company's  Common Stock is currently
trading in the over-the-counter  market under the symbol AETTQ.  Notwithstanding
the action by the NYSE,  the Company  intends to remain  current with respect to
its reporting obligations under the Securities Exchange Act of 1934.
<PAGE>

DIP Financing

     In connection with the Company's  Chapter 11 filing,  on July 16 1997, the
Company  entered  into a  Revolving  Credit  and  Guaranty  Agreement  (the "DIP
Financing  Agreement")  with Chase Manhattan Bank providing for a maximum of $50
million of  debtor-in-possession  ("DIP")  financing  subject to approval by the
Bankruptcy  Court.  The DIP  Financing  Agreement  is  intended  to address  the
Company's   immediate  working  capital  needs  and  to  support  the  Company's
operations  during its Chapter 11  proceedings.  On July 16, 1997, the Honorable
Burton R.  Lifland  approved  on an interim  basis use of $20 million of the $50
million DIP financing. The Company's use of the remaining $30 million of the DIP
financing was approved by the Court at a hearing held on August 13, 1997.

Sale of Red Ant Subsidiary

     On July 23, 1997, the Company and Chase Manhattan amended the DIP Financing
Agreement  to  provide  up to  $1.25  million  of  funding  for  Red Ant and its
affiliated entities on a non-bankruptcy  basis to facilitate the solicitation of
bids from third parties to purchase  Alliance's  interests in Red Ant. On August
6, 1997,  the  Company  filed a motion to be heard on August 13,  1997,  seeking
Court  approval of the sale of 90% of the Company's  interest in Red Ant and its
affiliates to Cypress Ventures,  Inc. an affiliate of Wasserstein  Perella & Co.
("CVI"),  for  aggregate  cash  consideration  of  $625,000  with an  additional
commitment  from CVI to provide new working  capital for Red Ant (in the form of
mezzanine  indebtedness senior in priority to the equity interest holders of Red
Ant) up to an amount of approximately $19 million with $3 million to be provided
upon consummation of the sale to CVI.

     On August 13, 1997,  following a hearing before the Bankruptcy  Court,  the
Company  withdrew its motion  seeking  approval of the sale primarily due to the
continuing  objection of the Company's Official Committee of Unsecured Creditors
that the consideration to be paid for Red Ant by CVI was inadequate. In light of
the  withdrawal of the motion to approve the sale of Red Ant to CVI, the Company
believes  that  it is  likely  that  it  will  be  necessary  for Red Ant and it
affiliates to file to seek protection  under the Bankruptcy Code on an expedited
basis unless an acceptable offer for Red Ant is received by the Company prior to
such filing.

     The Company  has taken a non-cash  charge of $18.3  million  related to the
write-off  of the  goodwill  and  its  underlying  investment  on  its Red Ant
subsidiary.

Overview of the Company's Operations Prior to Chapter 11 Filing

     Alliance  Entertainment  Corp.  is a  fully  integrated  independent  music
company which creates,  markets and distributes  its proprietary  content rights
consisting of both new artist and catalog  product in several  genres.  Prior to
the Company's Chapter 11 filing,  the Company was also the largest domestic full
service  distributor  of  pre-recorded  music  and  music  related  products  to
traditional  as well as through  emerging  retail  channels.  As a result of the
circumstances leading to the Company's Chapter 11 filing and the effects of such
filing  on the  business  of the  Company,  there can be no  assurance  that the
Company shall be able to operate its businesses on terms and conditions  similar
to those prior to the Company's Chapter 11 filing.

     Prior  to the  Company's  Chapter  11  filing,  the  Company's  proprietary
Products  Group  consisted of three primary  labels:  Red Ant,  Concord Jazz and
Castle Communications.  Each of these labels specializes in particular genres of
music and releases  records under a number of label imprints.  Red Ant commenced
operations  in 1996 and  released  its first full length  projects in the second
quarter of 1997. Red Ant specializes in new product primarily in the alternative
rock  and  urban  genres,  with  particular  focus  on  the  identification  and
development of new talent.  Concord Jazz is a label  specializing in traditional
and  contemporary  jazz by well-known  jazz artists such as Mel Torme,  Rosemary
Clooney, Chick Corea and Maynard Ferguson.  Castle Communications is primarily a
catalog and re-issue label which specializes in exploiting  proprietary  content
rights to 1960's and 1970's British rock groups such as The Kinks,  Iron Maiden,
Black Sabbath, and the Small Faces. Castle Communications  together with The St.
Clair Entertainment Group (the Company's  wholly-owned  Canadian subsidiary) are
also  engaged in the creation of budget  product  utilizing  both the  Company's
proprietary products and rights licensed from others.
<PAGE>

     The Company's  distribution  operation is conducted through two groups: the
One Stop Group  specializing in the wholesale  distribution of substantially all
available  pre-recorded music product (i.e.,  pre-recorded music manufactured by
the six major music companies:  Sony Music, Time Warner,  Polygram, MCA, EMI and
BMG (the "Major Labels")),  as well as music  manufactured by independent labels
("Independent Labels"), and the Independent  Distribution Group (specializing in
the marketing,  promotion and distribution of pre-recorded music manufactured by
certain  Independent  Labels,  including the  Proprietary  Products Group, on an
exclusive and regional basis).

Results of Operations

     The following  discussion and analysis  should be read in conjunction  with
the unaudited financial statements of the Company and the notes thereto included
elsewhere in this report.

     The following  table sets forth,  for the three months and six months ended
June 30, certain operating data as a percentage of net sales.
<TABLE>
<CAPTION>
<S>                                                            <C>           <C>          <C>         <C>

                                                                 Three Months Ended      Six Months Ended
                                                                     June 30                   June 30
                                                               1996          1997         1996        1997
Net Sales                                                      100%          100%         100%        100%
Gross Profit                                                   12.9          13.2         15.9        15.1
Selling, General & Administrative Expenses                     21.7          31.0         19.5        27.8
Restructuring and Asset Impairment Charges                       .5          16.8           .4         7.8
Amortization of Intangible Assets                               1.8           3.6          1.7         3.3
Other income (expense) primarily                               (6.1)         (7.9)        (5.5)       (7.8)
interest expense

Provision (benefit)for income tax                              (3.8)          3.8         (3.4)        1.4 
Net Loss                                                      (13.4)        (50.0)        (7.8)      (32.9)
</TABLE>

     Cost of sales and selling,  general & administrative expenses for the three
months ended June 30, 1996 include  Restructuring  Charges of $11.0  million and
$5.6  million,  respectively.  See  "Management's  Discussion  and  Analysis  of
Financial  Condition  and Results of  Operations-  Results of Operations - Three
Months Ended June 30, 1997 vs. Three Months Ended June 30, 1996. "

     Cost of sales and selling,  general &  administrative  expenses for the six
months ended June 30, 1996 include  Restructuring  Charges of $11.0  million and
$8.0 million ($2.9 million of which reflects  non-recurring  expenses related to
the   termination  of  the  proposed   merger  of  the  Company  and  Metromedia
International  Group,  Inc.),  respectively.  See  "Management's  Discussion and
Analysis  of  Financial  Condition  and  Results  of  Operations  -  Results  of
Operations - Six Months Ended June 30, 1997 vs. Six Months Ended June 30, 1996."
<PAGE>

     The following  table sets forth,  for the three months and six months ended
June 30, 1997, certain operating data by business segment,  excluding  corporate
related expenses and assets.
<TABLE>
<CAPTION>
<S>                                           <C>                <C>                <C>                 <C>

                                                    Three Months Ended                      Six Months Ended
                                                       June 30, 1997                         June 30, 1997
                                                      (in thousands)                         (in thousands)

                                                                 Proprietary                            Proprietary
                                              Distribution        Products          Distribution         Products
Net Sales                                       $93,129             15,468            $207,552            $26,904
Depreciation & Amortization                       563               1,910              1,235               3,883
Operating Loss                                  (10,210)           (6,536)            (13,698)            (11,756)
Capital Expenditures                              287                294               1,224                378
Identifiable Assets                               ---                ---              242,097             122,143
</TABLE>

Three Months Ended June 30, 1997 vs.  Three Months Ended June 30, 1996

     Net sales decreased from $163.2 million for the three months ended June 30,
1996 to $109.0  million for the three months ended June 30, 1997, or 33.2%.  Net
sales  attributable to the Company's  distribution  segment for the three months
ended June 30, 1997 were approximately  $93.1 million compared to $147.1 million
for the three months ended June 30, 1996. During the three months ended June 30,
1997, sales in the Company's  distribution  segment were negatively impacted by:
(i) an  increase  in the number of unfilled  orders due to  inventory  shortages
resulting  from a reduction  of vendor  credit  with  certain  suppliers  as the
Company was unable to maintain current payments to its vendors; (ii) the loss of
certain customers due to the financial  uncertainty  surrounding the Company and
also resulting from the inability of the Company to fill customer orders;  (iii)
the divestiture of the Company's Brazilian operations; and (iv) the continuation
of limited budgets  allocated to the purchase of deep catalog product by certain
of the Company's customers.  Net sales attributable to the Company's proprietary
product  segment for the three  months  ended June 30,  1997 were  approximately
$15.5  million,  compared to  approximately  $15.9  million for the three months
ended June 30, 1996.  Net sales in this  segment were lower than the  comparable
period in 1996 due in part to the  elimination of sales from the Company's video
business  that were  discontinued  in the  fourth  quarter of 1996 and a reduced
number of product  releases  during the three months ended June 30, 1997, due to
the timing of release schedules.  These items were partially offset by the first
shipments of new release  product from the  Company's  Red Ant  subsidiary.  The
Company's  business is seasonal with the smallest  percentage of sales typically
occurring  in the first  quarter  and the  largest  percentage  of annual  sales
typically occurring in the fourth quarter.

     The  Company's  gross margin  increased to 13.2% for the three months ended
June 30, 1997,  from 12.9% for the three  months  ended June 30,  1996.  For the
three months ended June 30, 1997, the gross margin of the  distribution  segment
was 9.2%,  compared  to 9.4% for the  three  months  ended  June 30,  1996.  The
reduction in gross margin for the distribution segment was primarily related to:
(i) the Company's inability to take advantage of discount buying and advertising
programs offered by vendors due to working capital constraints; (ii) the loss of
prompt payment  discounts  with certain of the Company's  vendors as the Company
was  unable to  maintain  current  in its  payments;  (iii) the sale of  certain
accessories  and other  non-music  products  at below  cost to reduce  overstock
positions  and  increase  working  capital.  These  items  more than  offset the
Restructuring  Charges in cost of sales  totaling $11.0 million or 7.5% of sales
for the three months  ended June 30,  1996.  For the three months ended June 30,
1997, the gross margin of the proprietary products segment was 35.5% compared to
44.5% for the three months ended June 30,  1996.  The decrease in the  Company's
gross margin for the proprietary  product segment resulted from a lower level of
licensing  revenue  for the  quarter,  which  typically  carries a higher  gross
margin, versus the sale of finished goods. 
<PAGE>

     Selling, general and administrative expenses decreased in dollar terms from
$36.3 million,  or 22.2% of net sales, for the three months ended June 30, 1996,
(including  Restructuring  Charges  during the period of $5.6  million) to $33.8
million,  or 31.0% of net sales,  for the three months ended June 30, 1997.  The
Company's selling,  general and administrative  expenses increased on an overall
basis in the period  (excluding the  Restructure  Charges)  primarily due to the
inclusion of the  operations of Red Ant for a full three  months.  This increase
was partially offset by cost reductions relating to the closure of the Company's
Bethel,  Connecticut  facility and the  divestiture  of the Company's  Brazilian
operations.

     Net  loss for the  three  months  ended  June 30,  1996 was  $21.9  million
compared to a net loss in the three months ended June 30, 1997 of $54.4  million
primarily due to the results of operations  discussed above and asset impairment
charges  totaling $18.3 million in connection with the write off of the goodwill
and its underlying investment in the Red Ant subsidiary .

Six Months Ended June 30, 1997 vs.  Six Months Ended June 30, 1996.

     Net sales  decreased  from $339.4 million for the six months ended June 30,
1996 to $235.3  million for the six months  ended June 30, 1997,  or 30.1%.  Net
sales  attributable  to the  Company's  distribution  segment for the six months
ended June 30, 1997 were approximately $207.6 million compared to $304.2 million
for the six months  ended June 30,  1996.  During the six months  ended June 30,
1997, the Company's distribution segment, experienced lower than anticipated net
sales to its customers in part due to: (i) an increase in the number of unfilled
orders due to inventory  shortages  resulting  from a reduction of vendor credit
with certain suppliers as the Company was unable to maintain current payments to
its vendors; (ii) the loss of certain customers due to the financial uncertainty
surrounding  the Company and also resulting from the inability of the Company to
fill orders;  (iii) the divestiture of the Company's Brazilian  operations;  and
(iv) the  continuation  of limited  budgets  allocated  to the  purchase of deep
catalog product by certain of the Company's customers. Net sales attributable to
the Company's proprietary product segment for the six months ended June 30, 1997
were approximately  $26.9 million,  compared to $34.9 million for the six months
ended  June 30,  1996.  Net sales for the  period  in the  proprietary  products
segment  were  impacted by the  elimination  of sales from the  Company's  video
business  that were  discontinued  in the  fourth  quarter of 1996 and a reduced
number of product releases during the six months ended June 30, 1997, due to the
timing of release  schedules.  These  items were  partially  offset by the first
shipments of new release  product from the  Company's  Red Ant  subsidiary.  The
Company's  business is seasonal with the smallest  percentage of sales typically
occurring  in the first  quarter  and the  largest  percentage  of annual  sales
typically occurring in the fourth quarter.

     The Company's  gross margin  decreased  from 15.9% for the six months ended
June 30, 1996,  to 15.1% for the six months ended June 30, 1997.  Excluding  the
impact of the Restructuring Charges in cost of sales, the Company's gross margin
would have been 19.1% for the six months ended June 30, 1996. For the six months
ended June 30,  1997,  the gross margin of the  distribution  segment was 11.4%,
compared to 12.8% for the six months ended June 30, 1996. Prior to the impact of
the Restructuring  Charges, gross margins for this segment would have been 16.4%
for the six months  ended June 30, 1996.  The  reduction in the gross margin for
the distribution  segment was primarily related to: (i) the Company's  inability
to take advantage of discount buying and advertising programs offered by vendors
due to working capital  constraints;  (ii) the loss of prompt payment  discounts
with  certain of the  Company's  vendors as the  Company  was unable to maintain
current  in its  payments;  (iii)  the sale of  certain  accessories  and  other
non-music  products at below cost to reduce  overstock  positions  and  increase
working capital. For the six months ended June 30, 1997, the gross margin of the
proprietary  products  segment  was 41.7%  compared  to 42.5% for the six months
ended June 30, 1996.

     Selling, general and administrative expenses decreased in dollar terms from
$67.5  million,  or 19.5% of net sales,  for the six months ended June 30, 1996,
(including  Restructuring Charges of $8.0 million) to $65.3 million, or 27.8% of
net  sales,  for the six months  ended June 30,  1997.  The  Company's  selling,
general and administrative  expenses increased on an overall basis in the period
(excluding  the  impact  of  the  Restructuring  Charges)  primarily  due to the
inclusion of the operations of Red Ant for a full six months.  This increase was
partially  offset by cost  reductions  relating to the closure of the  Company's
Bethel,  Connecticut  facility and the  divestiture  of the Company's  Brazilian
operations. 
<PAGE>

     Net loss for the six months ended June 30, 1996 was $26.5 million  compared
to a net loss in the six months ended June 30, 1997 of $77.5  million  primarily
due to the results of operations  discussed above and asset  impairment  charges
totaling $18.3 million in connection  with the write off of the goodwill and its
underlying  investment  in the  Red  Ant  subsidiary.

Liquidity and Capital Resources

Cash Provided From Operations

     Cash provided by operations for the six months ended June 30, 1997 was $3.1
million  compared to cash used in  operations of $6.9 million for the six months
ended June 30,  1996.  Accounts  receivable  for the period  decreased  by $62.0
million or 35.8%,  primarily as a result of the Company's  decrease in net sales
during the six months ended June 30, 1997,  and the  collection  of  receivables
with  respect to seasonal  dating  programs  offered by the  Company  during the
fourth quarter of 1996.  Inventory for the period  decreased by $41.5 million or
25.2% as a result of: (i) the  Company's  decrease  in net sales  during the six
months  ended June 30, 1997;  (ii) an on-going  inventory  reduction  initiative
implemented as part of the Consolidation Plan and (iii) the Company's attempt to
improve liquidity by increasing product returns to vendors. Accounts payable and
accrued expenses decreased by $62.3 million or 23.3%,  primarily as a result of:
(i) the  Company's  decrease in net sales  during the six months  ended June 30,
1997, (ii) payments with respect to seasonal dating programs  offered by certain
vendors  during the fourth  quarter  of 1996,  and (iii) the  payment of accrued
charges.

Cash Used in Investing Activities

     During  the  six  months  ended  June  30,  1997,  the  Company's   capital
expenditures  were $4.2 million  primarily  related to the  modernization of the
Company's  Coral  Springs,  Florida  facility  and the  acquisition  of computer
hardware  to enable the  execution  of the  Consolidation  Plan.  The  Company's
investments in copyrights  decreased at June 30, 1997 by $1.1 million  primarily
due to a foreign currency translation adjustment by its UK subsidiary.

Cash Provided from Financing Activities

     In connection with the Company's  Chapter 11 filing,  on July 16, 1997, the
Company  entered  into a  Revolving  Credit  and  Guaranty  Agreement  (the "DIP
Financing  Agreement")  with Chase Manhattan Bank providing for a maximum of $50
million of  debtor-in-possession  ("DIP")  financing  subject to approval by the
Bankruptcy  Court.  The DIP  Financing  Agreement  is  intended  to address  the
Company's   immediate  working  capital  needs  and  to  support  the  Company's
operations  during its Chapter 11  proceedings.  On July 16, 1997, the Honorable
Burton R.  Lifland  approved  on an interim  basis use of $20 million of the $50
million DIP financing. The Company's use of the remaining $30 million of the DIP
financing was approved by the Court at a hearing held on August 13, 1997.

     The DIP  Financing  Agreement  provides  for  borrowings  under a revolving
credit  and a letter of  credit  facility.  Loans  under  the  revolving  credit
facility bear interest at either the Alternate  Base Rate (as defined in the DIP
Financing  Agreement) plus 1.5% or at the Adjusted LIBOR Rate (as defined in the
DIP Financing  Agreement) plus 2.75%.  Loans under the letter of credit facility
bear  interest  at the  Alternate  Base  Rate  plus  1.5%.  The terms of the DIP
Financing Agreement contain certain restrictive covenants including: limitations
on the incurrence of additional guarantees, liens and indebtedness;  limitations
or the sale of assets and the making of capital expenditures.  The DIP Financing
Agreement also requires that the Company meet certain  minimum  earnings  before
taxes and other expenses through the end of 1998.

     Under the DIP Financing  Agreement,  Chase  Manhattan Bank has been given a
perfected  first priority lien on all property and assets of the Company and its
subsidiaries. The banks who are parties to the Pre-Petition Credit Agreement, as
well as other secured  creditors of the Company,  have been granted  replacement
liens  on the  Company's  assets  (junior  to the  lien  granted  under  the DIP
Financing  Agreement)  to  adequately  protect such  creditors'  secured  claims
against the Company prior to its Chapter 11 filing.

     The DIP Financing Agreement expires on January 31, 1999 or earlier upon the
occurrence of certain events, including confirmation of a plan of reorganization
by the  Bankruptcy  Court,  a sale of  substantially  all of the  assets  of the
Company, or failure by the Company to receive a final order confirming a plan of
reorganization. 
<PAGE>

Forward-Looking Statements

     Forward-looking  statements  herein are made  pursuant  to the safe  harbor
provisions  of the  Private  Securities  Litigation  Reform  Act of 1996.  These
forward-looking  statements  can  generally  be  identified  as such because the
context of the  statement  will  include  words such as the Company  "believes,"
"expects," "anticipates," or words of similar import. Similarly, statements that
describe  the  Company's  future  plans,  objectives,  estimates  or  goals  are
forward-looking statements. There are certain important factors that could cause
results  to  differ  materially  from  those   anticipated  by   forward-looking
statements  made  herein.  Investors  are  cautioned  that  all  forward-looking
statements  involve risks and uncertainty.  In addition to the factors discussed
above,  among the factors that could cause actual  results to differ  materially
are the following: sufficient working capital to operate the Company's business,
availability of new release product,  pricing strategies of competitors,  public
demand for various styles of recorded music,  product returns from customers and
overall economic conditions.

New Accounting Pronouncements

     In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, Earnings Per Share (FAS 128). FAS 128
specifies  new  standards  designed to improve the EPS  information  provided in
financial  statements  by  simplifying  the existing  computational  guidelines,
revising the disclosure  requirements,  and increasing the  comparability of EPS
data on an  international  basis.  Some of the changes  made to simplify the EPS
computations  include:  (a)  eliminating  the  presentation  of primary  EPS and
replacing it with basic EPS,  with the  principal  difference  being that common
stock equivalents are not considered in computing basic EPS, (b) eliminating the
modified treasury stock method and the three percent materiality provision,  and
(c) revising the  contingent  share  provisions  and the  supplemental  EPS data
requirements.  FAS 128 also  makes a number of changes  to  existing  disclosure
requirements.  FAS 128 is effective for financial  statements issued for periods
ending after December 15, 1997,  including interim periods.  The Company has not
yet determined the impact of the implementation of FAS 128. The Company does not
believe the implementation of FAS 128 will have a significant impact on reported
results of operations. 
<PAGE>

PART II - OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

     On July 14, 1997, the Company and fourteen of its wholly-owned subsidiaries
filed voluntarily under Chapter 11 of the Bankruptcy Code in order to facilitate
the reorganization of the Company's core businesses and the restructuring of the
Company's  long-term debt,  revolving credit and trade obligations.  The Company
continues  to  operate   with  its   existing   directors   and   officers,   as
debtor-in-possession  subject to the Bankruptcy Court's  supervision and orders.
Excluded from the filing were certain  businesses  in the Company's  Proprietary
Products Group  including (and its related  affiliates):  Castle  Communications
plc; The St. Clair Entertainment Group, Inc.; and Red Ant Entertainment LLC. The
filing was made in the U.S. District Court for the Southern District of New York
in Manhattan.

Item 3. DEFAULTS UPON SENIOR SECURITIES

     The filing of the petition under Chapter 11 of the Bankruptcy Code resulted
in the  occurrence  of an Event of Default  under the  Company's:  (i) Indenture
relating  to  its  11.25%  Senior  Subordinated  Notes  due  2005;  (ii)  Credit
Agreement;  (iii)  6%  Exchangeable  Notes;  and  (iv)  Mortgage  Bond  for  its
distribution facility in Coral Springs,  Florida. The Company has entered into a
Revolving Credit and Guaranty  Agreement with Chase Manhattan for  approximately
$50 million in DIP financing of which has been approved by the Bankruptcy Court.
Under the terms of the  Pre-petition  Credit  Agreement the Company's  banks had
been  permitted  to  accelerate  the maturity of  approximately  $187 million of
outstanding  indebtedness  prior to  commencement  of the  Company's  Chapter 11
proceeding. See Notes to the Consolidated Financial Statements.

Item 6. EXHIBITS AND REPORTS ON FORM 8-K

                  (a)      Exhibits

     2.1  Merger  Agreement  dated  December  20,  1995 by and among  Metromedia
          International   Group,   Inc.,   Alliance   Merger  Corp.  and  the
          Registrant. (Incorporated  by reference  from Exhibit 1 filed in the
          Registrant's  Form 8-K dated December 21, 1995 (File No. 0-20182).)

     2.2  Termination and Release  Agreement dated April 29,  1996.(Incorporated
          by reference from Exhibit 1 filed in the  Registrant's  Form 8-K dated
          April 29, 1996 (File No. 1-13054).)

     3.1  Certificate of  Incorporation,  as amended. (Incorporated by reference
          from  Exhibit  3.1 filed in the  Registrant's  Amendment  No. 1 to
          Registration Statement on Form S-4 filed September 22, 1995.
          (Registration No. 33-95386.)

     3.2  Revised and Restated By-Laws. (Incorporation by reference from Exhibit
          3.2 filed in the Registrant's Form 10-Q for the period ended September
          30, 1996. (File No. 1-13054).)

     3.3  Certificate of  Designations.  (Incorporated by reference from Exhibit
          4.11(A) filed in the Registrant's Form 8-K dated July 16, 1996.
          (File No. 1-13054).)

     3.4  Certificate of  Designations. (Incorporated  by reference from Exhibit
          3.4 filed in the  Registrant's  Form 10-Q for the period  ended March
          31,  1997. (File No. 1-13054).)

     4.1  Restated  Stockholders'  Agreement  dated  as of  November  30,  1993.
          (Incorporated   by  reference  from  Exhibit  4.1  filed  in  the
          Registrant's Registration  Statement on Form S-3 dated September
          22,1995.  (Registration No. 33-97280).)
<PAGE>

     4.2  Amendment to Restated Stockholders'Agreement dated as of May 18, 1995.
          (Incorporated  by reference from Exhibit 4.2 filed in the Registrant's
          Registration   Statement  on  Form  S-3  dated   September   22,  1995
          (Registration No. 33-97280).)

     4.3  Indenture  dated  July  25,1995  among  the  Company,  the  Subsidiary
          Guarantors and Bankers Trust  Company,  as trustee.  (Incorporated  by
          reference  from  Exhibit  4.1 filed in the  Registrant's  Registration
          Statement on Form S-4 filed August 3, 1995. (Registration No.
          33-95386).)

    4.4   First  Supplemental  Indenture  dated July 26, 1995 among the Company,
          the  Subsidiary  Guarantors  and Bankers  Trust  Company,  as trustee.
          (Incorporated  by reference from Exhibit 4.2 filed in the Registrant's
          Amendment No. 1 to Registration  Statement on Form S-4 filed September
          22, 1996 (Registration No. 33-95386).)

    4.5   Registration  Rights  Agreement dated July 25, 1995 among the Company,
          the Subsidiary Guarantors and the Initial Purchasers. (Incorporated by
          reference  from  Exhibit  4.3 filed in the  Registrant's  Registration
          Statement on Form S-4 filed August 3, 1995(Registration No.33-95386).)

    4.6   Purchase  Agreement dated July 18, 1995 among the Company,  the
          Guarantors and the Initial  Purchasers.(Incorporated  by reference
          from Exhibit 4.4 filed in the Registrant's  Registration  Statement
          on Form S-4 filed August 3. 1995 (Registration No. 33-95386).)

    4.7   Second  Supplemental  Indenture  dated  September  6,  1995  among the
          Company,  the  Subsidiary  Guarantors  and Bankers Trust  Company,  as
          trustee.  (Incorporated  by  reference  from  Exhibit 4.5 filed in the
          Registrant's  Amendment  No. 1 to  Registration  Statement on Form S-4
          filed September 22, 1995 (Registration No. 33-95386).)

     4.8  Purchase Agreement made as of May 18, 1995, between AEC Americas Inc.,
          and Bain  Capital  Fund IV L.P.,  Bain  Capital  Fund IV-B L.P.,  BCIP
          Associates and BCIP Trust Associates,  L.P. (Incorporated by reference
          from  Exhibit 4.5 filed in the  Registrant's  Form 10-Q for the period
          ended June 30, 1995 (File No.1-13054).)

     4.9  Parent  Covenant  Agreement  dated as of May 18, 1995,  by and between
          Alliance  Entertainment  Corp.,  AEC Americas,  Inc., and Bain Capital
          Fund IV L.P.,  Bain Capital Fund IV-B L.P.,  BCIP  Associates and BCIP
          Trust  Associates,  L.P.  (Incorporated  by reference from Exhibit 4.6
          filed in the Registrant's Form 10-Q for the period ended June 30,
          1995 (File No. 1-13054).)

     4.10 Third  Supplemental  Indenture  dated  February  26,  1996,  among the
          Company,  the  Subsidiary  Guarantors  and  Bankers  Trust  Company as
          Trustee.  (Incorporated  by  reference  from Exhibit 4.10 filed in the
          Registrant's  Form 10-Q for the period  ended March 31, 1996 (File No.
          1-13054).)

     4.11 Preferred Stock Purchase  Agreement  dated July 16, 1996,  between the
          Company,  BT Capital  Partners,  Inc. and BCI Growth IV, L.P.
          (Incorporated  by reference  from Exhibit 4.11 filed in the
          Registrant's  Form 8-K dated July 16, 1996. (File No. 1-13054).)

     4.12 Voting  Agreement  dated as of August 15, 1996,  among Joseph  Bianco,
          John Friedman,  Peter Kaufmann,  Elliot Newman,  Robert Marx, Alvin
          Teller, Bain Capital, Inc., BT Capital Partners Inc., U.S. Equity
          Partners, L.P., U.S. Equity Partners (Offshore) L.P. and Wasserstein
          & Co., Inc.  (Incorporated by reference from  Exhibit 1 (E) filed in
          the  Registrant's Form 8-K dated  August 15, 1996 (File No. 1-13054).)
<PAGE>

     10.1 Incentive  Stock Option Plan for  Executives  of Jerry  Bassin,  Inc.
          (Incorporated  by  reference  from  Exhibit  10.1 filed as part of the
          Proxy and Prospectus  in  connection  with the Special  Meeting  held
          on November 30, 1993 (File No. 33-68816).)

     10.2 1992 Non-Qualified Stock Option Plan.  (Incorporated by reference from
          Exhibit 10.2 filed as part of the Proxy and  Prospectus  in connection
          with the Special Meeting held on November 30, 1993(File No.33-68816).)

     10.3 1993 Stock Option Plan.  (Incorporated  by reference from Exhibit 10.3
          filed as part of the Proxy and Prospectus in connection with the
          Special Meeting held on November 30, 1993 (File No. 33-68816).)

     10.4 1993 Stock Option  Incentive  Plan.  (Incorporated  by reference  from
          Exhibit 10.4 filed as part of the Proxy and  Prospectus in  connection
          with the Special Meeting held on November 30, 1993
          (File No. 33-68816).)

     10.5 Amendment and Restated  Employment  Agreement  dated as of August 15,
          1996, between the Company and Joseph J. Bianco.  (Incorporated by
          reference from Exhibit 10.5 filed in the Registrant's  Form 10-Q for
          the period ended September 30, 1996 (File No. 1-13054).)

     10.6 Amended and Restated Employment Agreement dated as of August 15, 1996,
          between the Company and Anil K. Narang.  (Incorporated by reference
          from Exhibit 10.6 filed in the Registrant's Form 10-Q for the period
          ended September 30, 1996 (File No. 1-13054).)

     10.7 Employment Agreement dated as of November 1, 1995, between the Company
          and Timothy J. Dahltorp. (Incorporated by reference from Exhibit 10.7
          filed with the  Registrant's  Form 10-K for the year  ended  December
          31,  1996  (File No. 1-13054).)

     10.8 Amended and Restated Employment Agreement dated as of August 15, 1996
          between  the Company and Elliot B. Newman. (Incorporated by reference
          from Exhibit 10.8 filed in the Registrant's  Form 10-Q for the period
          ended September 30, 1996 (File No. 1-13054).)

     10.9 Employment Agreement dated as of September 5, 1995 between the Company
          and David H.  Schlang.  (Incorporated  by reference  from Exhibit 10.9
          filed with the Registrant's  Form 10-K for the year ended December 31,
          1996 (File No.1-13054).)

     10.10 Revolving  Credit and Guaranty  Agreement  dated as of July 17, 1997,
           among the Company, the Guarantors,  the Chase Manhattan Bank and each
           of the other Financial Institutions from time to time party thereto.*

     10.11 Letter  Agreement dated as of July 23, 1997,  among the Company,  the
           Guarantors,  the Chase Manhattan Bank and each of the other Financial
           Institutions from time to time party thereto.*

     10.12 Second Amendment to Revolving Credit and Guaranty  Agreement dated as
           of July  25,1997,  among  the  Company,  the  Guarantors,  the  Chase
           Manhattan Bank and each of the other Financial Institutions from time
           to time party thereto.*

     10.16 Form of Employment  Agreement  dated as of March 14, 1994 between the
           Registrant  and Eric S. Weisman.  (Incorporated  by reference from
           Exhibit 10.28 filed in the  Registrant's  Form 10-K for the year
           ended December 31, 1993 (File No. 1-13054).)
<PAGE>

     10.17 Form of 1994 Long-Term Incentive and Share Award Plan.  (Incorporated
           by reference from Exhibit 10.29 filed in the Registrant's Form 10-K
           for the year ended December 31, 1993 (File No. 1-13054).)

     10.18 Form of Amendment  to the 1994  Long-Term  Incentive  and Share Award
           Plan.  (Incorporated  by reference  from  Exhibit  10.18 filed in the
           Registrant's Form 10-K for the year ended December 31, 1995 (File No.
           1-13054).)

     10.22 Merger  Agreement dated as of February 4, 1994 between the Registrant
           and Airlie, Inc.  (Incorporated by reference from Exhibit 10.35 filed
           in the Registrant's Form 8-K dated February 4, 1994 (File No.
           1-13054).)

     10.23 Extention  Agreement  to  Employment  Agreement  dated July  31,1996,
           between the Company and Eric Weisman. (Incorporated by reference from
           Exhibit  10.23  filed  with the  Registrant's  Form 10-K for the year
           ended December 31, 1996 (File No. 1-13054).)

     10.25 Offer  Document dated July 28, 1994 from AEC Holdings (UK) Limited to
           the  Shareholders  of Castle and press  release  issued in the United
           Kingdom in  connection  therewith.  (Incorporated  by reference  from
           Exhibit 10.41 filed in the  Registrant's  Form 10-Q for the quarterly
           period ended June 30, 1994 (File No. 1-13054).)

     10.26 Lease  between  the  Registrant  and  The  Northwestern  Mutual  Life
           Insurance  Company dated  January 12, 1996,  relating to the premises
           located at 15050  Shoemaker  Avenue,  Santa Fe  Springs,  California.
           (Incorporated   by  reference   from  Exhibit   10.45  filed  in  the
           Registrant's  Form 10-K for the fiscal year ended  December  3l, 1994
           (File No. 1-13054).)

     10.27 Third Amended and Restated Credit  Agreement and Guaranty dated as of
           July 25, 1995 among the Company,  the  Guarantors,  the Banks and The
           Chase Manhattan Bank, N.A., as Agent. (Incorporated by reference from
           Exhibit  10.50 filed in the  Registrant's  Registration  Statement on
           Form S-4 filed August 3, 1995 (Registration No.
           33-95386).)

     10.28 Merger  Agreement  dated as of September 1, 1995  relating to One Way
           Records, Inc.  (Incorporated by reference from Exhibit 10.51 filed in
           the  Registrant's  Amendment No. 1 to Registration  Statement on Form
           S-4 filed September 22, 1995 (Registration No.
           33-95386).)

     10.29 Merger  Agreement  dated as of September 1, 1995  relating to Deja Vu
           Music,  Inc.  (Incorporated  by reference from Exhibit 10.52 filed in
           the  Registrant's  Amendment No. 1 to Registration  Statement on Form
           S-4 filed September 22, 1995 (Registration No.
           33-95386).)

     10.30 Management  Consulting  Agreement  dated  as of May 10,  1995,  among
           Alliance  Entertainment  and  Bain  Capital,  Inc.  (Incorporated  by
           reference from Exhibit 10.51 filed in the Registrant's  Form 10-Q for
           the period ended June 30, 1995 (File No. 1-13054).)

     10.31 Merger Agreement by and between the Company,  INDI Acquisition  Corp.
           and INDI Holdings  Inc.,  dated July 17, 1995.  (Incorporated  by
           reference from Exhibit 2.3 filed in the  Registrant's  Form 10-Q for
           the period  ended June 30, 1995 (File No. 1-13054).)

     10.33 Quota  Purchase  Agreement  dated  October 11, 1995,  relating to the
           acquisition  of  Distribuidora  de Discos E Fitas Canta  Brasil Ltda.
           (Incorporated   by  reference   from  Exhibit   10.33  filed  in  the
           Registrant's Form 10-Q for the period ended March 31, 1996.
           (File No. 1-13054).)
<PAGE>

     10.34  Distribution  Agreement dated June 21, 1996, between the Company and
            EMI-Capitol  Music Group.  (Incorporated by reference from Exhibit 2
            in the Registrant's Form 8-K dated June 21, 1996.
            (File No. 1-13054).)

     10.35 Letter of Intent  dated July 1, 1996,  between the Company and Matrix
           Software,  Inc.  (Incorporated  by reference from Exhibit 10.35 filed
           with the  Registrant's  Form 10-Q for the period  ended June 30, 1996
           (File No. 1-13054).)

     10.36 First  Amendment to Third Amended and Restated  Credit  Agreement and
           Guaranty  dated as of  September  30, 1995,  among the  Company,  AEC
           Holdings  (UK)  Limited,  the  Guarantors,  the  Banks  and The Chase
           Manhattan  Bank,  N.A.,  as Agent.  (Incorporated  by reference  from
           Exhibit  10.36 filed with the  Registrant's  Form 10-Q for the period
           ended June 30, 1996 (File No. 1-13054).)

     10.37 Second  Amendment to Third Amended and Restated Credit  Agreement and
           Guaranty  dated as of  December  31,  1995,  among the  company,  AEC
           Holdings  (UK)  Limited,  the  Guarantors,  the  Banks  and The Chase
           Manhattan  Bank,  N.A.,  as Agent.  (Incorporated  by reference  from
           Exhibit  10.37 filed with the  Registrant's  Form 10-Q for the period
           ended June 30, 1996 (File No. 1-13054).)

     10.38 Third  Amendment to Third Amended and Restated  Credit  Agreement and
           Guaranty dated as of June 30, 1996,  among the Company,  AEC Holdings
           (UK) Limited, Castle Communication Limited, the Guarantors, the Banks
           and  The  Chase  Manhattan  Bank,  N.A.,  as  Agent.(Incorporated  by
           reference  from Exhibit 10.38 filed with the  Registrant's  Form 10-Q
           for the period ended June 30, 1996 (File No. 1-13054).)

     10.39 Stock  Acquisition and Merger  Agreement dated as of August 15, 1996,
           by and among the Company,  Alvin N. Teller,  Wasserstein & Co. Inc.,
           U.S. Equity Partners L.P. and others. (Incorporated by reference from
           Exhibit 1 filed with the Registrant's Form 8-K dated August 15, 1996
          (File No. 1-13054).)

     10.40 The 1994 Long Term Incentive and Share Award Plan.  (Incorporated  by
           reference from the Registrant's Registration Statement on Form S-8
           filed on June 10, 1994. (File No. 33-80134).)

     10.41 Amendment No. 1 to the 1994 Long Term Incentive and Share Award Plan.
           (Incorporated by reference from the Registrant's Registration
           Statement on Form S-8 filed on September 5, 1995.
           (File No. 33-96592).)

     10.42 Employment  Agreement dated as of August 15, 1996,  between Alliance
           Entertainment Corp. and Alvin N. Teller. (Incorporated by reference
           from Exhibit 10.42 filed with the  Registrant's  Form 10-Q for the
           period ended September 30, 1996. (File No. 1-13054).)
<PAGE>

     10.43 Stock Option Agreement between Alliance Entertainment Corp. and Alvin
           N. Teller dated August 15, 1996.  (Incorporated  by reference from
           Exhibit 10.43 filed with the  Registrant's  Form 10-Q for the period
           ended September 30, 1996.(File No. 1-13054).)

     10.44 Engagement Letter Agreement among the Company and Wasserstein Perella
           & Co., Inc. dated as of August 15, 1996. (Incorporated by reference
           from Exhibit 10.44 filed with the  Registrant's  Form 10-Q for the
           period ended September 30, 1996. (File No. 1-13054).)

     10.45 Right of First Refusal  Agreement dated as of August 15, 1996, by and
           among Alvin N. Teller,  Joe Bianco and Anil Narang.  (Incorporated
           by reference from Exhibit  10.45 filed with the  Registrant's  Form
           10-Q for the period ended September 30, 1996. (File No. 1-13054).)

     10.46 Fourth  Amendment to Third Amended and Restated Credit  Agreement and
           Guaranty  among  the  Company,  AEC  Holdings  (UK)  Limited,  Castle
           Communications  Limited,  The  Guarantors,  the Banks,  and The Chase
           Manhattan  Bank,  N.A.,  as Agent.  (Incorporated  by reference  from
           Exhibit  10.46 filed with the  Registrant's  Form 10-Q for the period
           ended September 30, 1996. (File No. 1-13054).)

     10.47 Purchase  Agreement among  Wasserstein & Co. Inc.,  Cypress Ventures,
           Inc., and BT Capital Partners, Inc.dated December 20, 1996, including
           exhibits thereto. (Incorporated by reference from Exhibit 10.47 filed
           with the Registrant's Form 8-K dated December 20, 1996.
           (File No. 1-13054).)

     10.48 Settlement  Agreement dated as of March 10, 1997, among the Company,
           David H. Schlang,  Jack Rosenbloom and Peter Hyman.  (Incorporated
           by reference from  Exhibit  10.48 filed in the  Registrant's
           Form 10-Q for the period  ended March 31, 1997. (File No. 1-13054).)

     11.1  Statement Re: Computation of Earnings (Loss) per Share. (Incorporated
           by reference  from Exhibit  11.1 filed with the  Registrant's  Form
           10-K for the year ended December 31, 1996. (File No. 1-13054).)

     27.1  Financial Data Schedule.*

*Filed herewith
<PAGE>

(b)      Reports on Form 8-K

     The  Company  filed a Current  Report on Form 8-K dated July 14,  1997,  to
announce  that on July 14,  1997,  the  Company  filed a  voluntary  petition to
reorganize under Chapter 11 of the Bankruptcy Code. See "Management's Discussion
and Analysis - Reorganization Under Chapter 11."

     The  Company  filed a Current  Report on Form 8-K dated July 16,  1997,  to
announce that on that date the Bankruptcy Court approved on an interim basis use
of $20 million of  debtor-in-possession  financing  under a loan  agreement with
Chase Manhattan Bank. See "Management's  Discussion and Analysis - Liquidity and
Capital Resources - Cash Provided From Financing Activities."

<PAGE>

                                 SIGNATURES

     Pursuant to the  requirements  of the Securities  Exchange Act of 1934, the
registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized.

                                        ALLIANCE ENTERTAINMENT CORP.



                                    By: /s/ Timothy Dahltorp
                                       ------------------------------
                                        Timothy Dahltorp
                                        Executive Vice President,
                                        Chief Financial Officer and Treasurer

Date: August 14, 1997