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 MARCH 31, 1997
                                             or
[   ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES 
EXCHANGE  ACT  OF  1934  FOR  THE  TRANSITION  PERIOD  FROM
                                      TO
------------------------------------        -----------------------------------


                         Commission File Number 1-1354

                          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 _____

As of May 7, 1997, the number of shares outstanding of the Company's common 
stock was  44,990,205





<PAGE>




<TABLE>
<CAPTION>


ALLIANCE ENTERTAINMENT CORP.


PART I--FINANCIAL INFORMATION                                                                 Page No.
<S>                                                                                           <C>
                                                                                               

Item 1.  Financial Statements

               Consolidated Balance Sheets                                                         4

               Consolidated Statements of Operations                                               5

               Consolidated Statement of Stockholder's  Equity  (Deficit)                          6

               Consolidated Statements of Cash Flows                                               7

               Notes to Consolidated Financial Statements                                          8


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

PART II--OTHER INFORMATION

Item 2.  Change In Securities                                                                     16

Item 6.  Exhibits and Reports on Form 8-K                                                         16

</TABLE>

<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,      March 31,
                                                                       1996            1997
                                                                ----------------- ---------------
<S>                                                             <C>               <C>  
      ASSETS
CURRENT ASSETS
    Cash and cash equivalents                                   $          8,669  $        7,222
    Accounts receivable, less allowance for
    doubtful
     accounts                                                            173,619         118,712
    Inventory                                                            164,380         144,328
    Advances and other prepaid expenses                                   22,739          30,016
    Refundable income taxes                                               11,260          10,677
    Deferred income taxes                                                  5,798           6,640
                                                                ----------------- ---------------
      Total current assets                                               386,465         317,595
                                                                ----------------- ---------------
INVESTMENTS, at cost                                                       1,100           1,073
PROPERTY AND EQUIPMENT                                                    33,793          34,835
COPYRIGHTS, less accumulated amortization                                 62,917          60,759
COST IN EXCESS OF NET ASSETS OF BUSINESSES ACQUIRED,
    less accumulated amortization                                         93,727          94,276
COVENANTS NOT TO COMPETE, less accumulated
    amortization                                                           8,366           7,811
DEFERRED INCOME TAXES                                                      9,798           9,254
OTHER ASSETS, less accumulated amortization                               16,916          16,110
                                                                  ---------------   -------------
                                                             
TOTAL ASSETS                                                    $        613,082  $      541,713
                                                                ================= ===============

CURRENT LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
    Notes payable                                               $         72,671  $       89,688
    Current maturities of long-term debt                                   8,305           9,476
    Current obligations under capital leases                                 582             522
    Accounts payable and accrued expenses                                267,187         202,517
    Income taxes payable                                                     826             334
                                                                ----------------- ---------------
      Total current liabilities                                          349,571         302,537
                                                                ----------------- ---------------

LONG-TERM DEBT                                                           236,215         234,640
OBLIGATIONS UNDER CAPITAL LEASES                                           1,133           1,123
DEFERRED INCOME TAXES                                                      9,109           8,930
MINORITY INTEREST                                                       -                    618
COMMITMENTS
STOCKHOLDERS' EQUITY (DEFICIT)
    Series A  convertible  preferred  stock,  $.01  par  value,  
     886,240  shares authorized, shares issued and
     outstanding 422,500 ( $44,644 liquidation preference)                     4               4
    Series B convertible preferred stock, $.01 par value,
     300,000 shares authorized, shares issued and
     outstanding  57,500 ( $5,846 liquidation preference)                      1               1
    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         146,972
    Employee notes for stock purchases                                      (67)            (67)
    Accumulated deficit                                                (131,286)       (154,376)
    Foreign currency translation adjustment                                1,733           1,327
                                                                ----------------- ---------------
      Total stockholders' equity (deficit)                                17,054         (6,135)
                                                                ----------------- ---------------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)            $        613,082  $      541,713
                                                                ================= ===============
      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>

                                                                        Three Months Ended
                                                                             March 31,
                                                                 --------------------------------
                                                                        1996            1997
                                                                 ----------------- --------------
<S>                                                              <C>               <C>   
Net sales                                                        $        176,188  $     126,322

Cost of sales                                                             143,394        105,169
                                                                 ----------------- --------------

           Gross profit                                                    32,794         21,153

Selling, general and administrative expenses                               30,741         31,536
Restructuring and asset impairment charges                                    428         -
Amortization of intangible assets                                           2,848          3,918
                                                                 ----------------- --------------

                                                                           34,017         35,454
                                                                 ----------------- --------------

                                                                          (1,223)       (14,301)
                                                                 ----------------- --------------

Other income (expense)
    Amortization of deferred financing costs                                (469)          (515)
    Other income (expense) - net                                              204        (1,151)
    Interest expense                                                      (8,256)        (8,013)
                                                                 ----------------- --------------
                                                                          (8,521)        (9,679)
                                                                 ----------------- --------------

       Loss before income taxes                                           (9,744)       (23,980)

Benefit for income taxes                                                  (5,116)          (890)
                                                                 ----------------- --------------

       Net loss                                                  $        (4,628)  $    (23,090)
                                                                 ================= ==============

Loss per common share                                            $          (.13)  $       (.52)
                                                                 ================= ==============

Weighted average number of shares of
    common stock outstanding                                           35,837,493     44,767,357
                                                                 ================= ==============

           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)
                                                                                                    
                                         Capital Stock Issued                  Notes for                     Foreign  
                           -----------------------------------    Additional   Employee                      Currency
                              Series A   Series B     Common      Paid-In       Stock        Accumulated   Translation
                              Preferred  Preferred     Stock      Capital      Purchases       Deficit      Adjustment
                                Stock      Stock
                           ----------------------------------- -------------  ------------  ------------- --------------
<S>                        <C>         <C>          <C>        <C>            <C>           <C>           <C> 
Balance at December 31,    $       4   $         1  $       4  $    146,665   $      (67)   $  (131,286)  $       1,733
1996

Issuance of 225,352 shares
 of common stock for
 adjustment to purchase 
 price of subsidiary            -            -           -              366        -              -  
Adjustment for costs
 incurred in connection with                                                                                                
 issuance of preferred stock    -            -           -             (59)        -              -              -  
Net Loss                        -            -           -           -             -            (23,090)         -               
Translation Adjustment          -            -           -           -             -              -               (406)  
                           ----------  ------------ ---------- -------------  ------------  ------------- --------------

Balance at March 31, 1997  $       4   $         1  $       4  $    146,972   $      (67)   $  (154,376)  $       1,327   
                           ==========  ============ ========== =============  ============  ============= ==============

</TABLE>


   The accompanying notes are an integral part of these financial statements.


<PAGE>

<TABLE>
<CAPTION>

                                    ALLIANCE ENTERTAINMENT CORP. AND SUBSIDIARES
                                       CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                    (Unaudited)
                                               (Amounts in Thousands)

                                                                         Three Months Ended
                                                                              March 31,
                                                                --------------------------------
                                                                       1996            1997
                                                                ----------------- --------------
<S>                                                             <C>               <C> 
Cash Flows From Operating Activities
   Net loss                                                     $        (4,628)  $    (23,090)

   Adjustments to reconcile net loss to net cash 
    used in operating activities:
      Depreciation and amortization                                        4,772          6,060
   Change in assets and liabilities:
      Decrease in accounts receivable                                     34,157         54,899
      (Increase) decrease in inventory                                  (11,687)         20,053
      Increase in prepaid expenses and other                               (349)        (6,794)
      Increase in deferred income taxes                                  (1,122)          (477)
      Decrease in accounts payable and
         accrued expenses                                               (21,452)       (59,921)
      Increase (decrease) in income taxes payable                        (4,294)             91
                                                                ----------------- --------------

      Net cash used in operating activities                              (4,603)        (9,179)
                                                                ----------------- --------------

Cash Flows From Investing Activities

   Purchase of property and equipment, net                               (1,525)        (2,365)
   (Increase) decrease in copyrights                                     (1,946)          1,386
   (Increase) decrease in other assets                                        27        (1,564)
   Purchase of businesses including costs,
      net of cash acquired                                                 (747)          (135)
                                                                ----------------- --------------

      Net cash used in investing activities                              (4,191)        (2,678)
                                                                ----------------- --------------

Cash Flows From Financing Activities

   Decrease in excess of outstanding
      checks over bank balance                                           (7,327)        (4,888)
   Proceeds from issuance of  stock                                          458           (59)
   Proceeds from borrowings                                               74,324         18,420
   Payments on borrowings                                               (70,246)        (2,598)
   Payments for financing costs                                            (337)           (59)
                                                                ----------------- --------------

      Net cash provided by (used in) financing activities                (3,128)         10,816
                                                                ----------------- --------------

Effect of foreign currency translation                                        62          (406)
Net decrease in cash and cash equivalents                               (11,860)        (1,447)

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

   End of period                                                $            992  $       7,222
                                                                ================= ==============

</TABLE>

         The  accompanying  notes  are  an  integral  part  of  these  financial
         statements.



<PAGE>


                 ALLIANCE ENTERTAINMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Unaudited Interim Financial Information

     The  unaudited  balance  sheet  as of  March  31,  1997  and the  unaudited
statements of operations,  cash flows and stockholders' equity (deficit) for the
three  month  periods   ended  March  31,  1996  and  1997  (interim   financial
information),  are unaudited and 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'  ended March 31, 1997,  may not be
indicative of the operating results for the full year or any interim period.

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

Restructuring and Other Charges

     During the three months ended March 31,  1997,  approximately  $5.1 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 March
31,1997, approximately $12.9 million remains to be paid in future periods.

Credit Agreement Amendment

     The Company and Chase  Manhattan  Bank, as agent for the banks (the "Senior
Lenders") who are parties to the Third Amended and Restated Credit Agreement, as
subsequently  amended  (the  "Credit  Agreement"),  agreed to amend  the  Credit
Agreement to revise certain  financial  covenants for the period ended March 31,
1997 and provide the Company with an  overadvance  facility of $10 million for a
period of sixty days  commencing on May 7, 1997.  There can be no assurance that
the Company will be in compliance with the financial  covenants under the Credit
Agreement  in future  periods or satisfy the  Company's  obligation  to raise at
least $35 million in equity capital (the "Equity Condition") before July 1, 1997
under the terms of an  amendment to the Credit  Agreement  entered into on March
27, 1997. In the event that the Company is unable to meet such obligations,  the
Senior  Lenders  would have the right to terminate  the term loan and  revolving
credit  facility and declare all outstanding  loans,  interest and other amounts
payable under the Credit Agreement, immediately due and payable. In the event of
such  termination and  acceleration,  the Company would be unable to satisfy its
obligations under the Credit Agreement without  obtaining  additional  financing
from third parties.

     In order to satisfy  the Equity  Condition,  the cash  requirements  of the
Consolidation  Plan,  enhance the Company's working capital position and provide
needed capital for the expansion of the Company's  proprietary content business,
the Company is actively pursuing one or a combination of the following financing
alternatives,  including: (i) an investment, subject to certain conditions, from
a group including its existing investors to acquire  newly-issued  securities of
the Company or one of its subsidiaries; (ii) an investment proposal from a third
party, subject to a due diligence investigation and other conditions,  to make a
significant  capital  commitment  to the  Company in  connection  with a general
recapitalization of the Company; (iii) the sale of certain assets of the
<PAGE>

     Company;  and (iv) forebearance by certain of the Company's trade creditors
with  respect to certain  amounts  due and  payable  with  respect to  inventory
purchases  by the  Company.  Although  the  Company  has not  ruled out a rights
offering  of  $35  million  of   convertible   preferred   stock  as  previously
contemplated,  it is not actively  pursuing  such an  offering.  There can be no
assurances  that the Company  will be  successful  in  obtaining  the  financing
necessary to satisfy the Equity  Condition or provide it with  adequate  working
capital to achieve its business  plan through the  remainder of 1997 through one
of the foregoing alternatives.

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.


<PAGE>



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

Overview

Alliance Entertainment Corp. ("Alliance" or the "Company") 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. It is also the largest domestic full service distributor of pre-recorded
music and music  related  products to  traditional  as well as through  emerging
retail  channels.  Under  Alvin N.  Teller,  the  Company's  Co-Chairman,  Chief
Executive  Officer and  President,  the  Company is  expanding  its  proprietary
content  business as well as  consolidating  and focusing the  operations of the
Company.

The Company's  Proprietary  Products Group consists 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 (which  commenced  operations  in 1996 and released its first
full length  projects in the first quarter of 1997)  specializes  in new product
primarily in the alternative rock and urban genres, with particular focus on the
identification  and  development  of new talent.  It has  succeeded in acquiring
rights to certain  groups  also sought by labels of greater  size and  financial
resources.  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.

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).  While the  Company's  distribution  operation
services  primarily  store-based  retail  customers  currently,  the  Company is
actively seeking distribution and fulfillment opportunities with music retailers
operating  on-line or through the internet.  The Company is the exclusive  music
supplier to several  on-line music retail sites and also provides music database
services to many cyber-retailers, including Music Boulevard.

The Company  believes that its position as the largest full service  distributor
of music product in the United States provides certain competitive advantages to
its Proprietary Products Group over other labels with respect to identifying and
attracting new talent for the Proprietary Products Group and that this advantage
will enhance its growth and commercial success.

Industry Conditions

After  sustaining  significant  growth  from 1990 to 1995,  the  domestic  music
industry has gone through a period of little or no growth since 1995.  Estimated
United States retail sales volume for  pre-recorded  music and music videos,  as
published by the Recording  Industry  Association  of America  ("RIAA")  totaled
approximately  $12.5  billion  in  1996,   representing  a  1.5%  increase  from
approximately  $12.3  billion in 1995.  This  current slow down in the growth of
domestic music sales has combined with (i) an  over-expansion  of retail outlets
selling music products,  (ii) substantial discount pricing on pre-recorded music
by certain  traditional and alternative  music  retailers;  and (iii) changes in
<PAGE>

music consumption demographics to adversely impact the music industry in general
and the Company's customers in particular.  The adverse conditions have resulted
in,  among  other  things,  product  returns  to the  Company  well in excess of
historical  levels as well as the bankruptcy of several  significant  customers.
While the Company  believes that these adverse  factors are temporary in nature,
no assurances can be given as to when such conditions will be alleviated.

Consolidation Plan

In November 1996, the Company announced a comprehensive  consolidation plan (the
"Consolidation Plan") pursuant to which Alliance's operations are in the process
of being  streamlined and non-core  businesses  have been sold or  discontinued.
Pursuant to the Consolidation Plan, the Company will close five of the Company's
eight  domestic  distribution  facilities  by the first quarter of 1998 (a ninth
facility  was  closed  in  February  1996)  and  centralize  all  administrative
functions for the Company's One Stop Group and Independent  Distribution  Group.
Additionally,  the Consolidation Plan calls for the administrative  functions of
the Company's three domestic  proprietary labels (Red Ant, Castle US and Concord
Jazz) to be consolidated under Red Ant. The Consolidation Plan is expected to be
completed  by March 1998 and  includes  the  elimination  of  approximately  851
employee positions  comprised  principally of warehouse,  sales,  management and
administrative employees.

When fully  implemented,  the Company believes that the Consolidation  Plan will
result in annual  savings  to  Alliance  of  approximately  $25  million.  As of
December 31,  1996,  the Company  recorded  charges for costs and expenses to be
incurred pursuant to the Consolidation  Plan of $33.6 million,  $12.9 million of
which will be required to be expended after March 31, 1997.

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 ended March 31,
certain operating data as a percentage of net sales.
<TABLE>
<CAPTION>
                                                                  Three Months Ended
                                                                      March 31,
                                                               1996              1997
<S>                                                          <C>                <C> 
                                                          
Net Sales                                                       100.0%           100.0%

Gross Profit                                                     18.6             16.8

Selling, General & Administrative Expenses                    17.5(1)             25.0

Restructuring and Asset Impairment Charges                        .2               ---

Amortization of Intangible Assets                                1.6               3.1

Other income (expense) primarily
interest expense                                               (4.8)             (7.7)
                                                                                 
Benefit for income tax                                         (2.9)              (.7)

Net Loss                                                       (2.6)            (18.3) 
<PAGE>
<FN>
                                                                                
(1) Selling,  general & administrative  expenses for the three months ended
March 31, 1996  include  certain  non-recurring  charges of  approximately  $2.5
million.  See "Management's  Discussion and Analysis of Financial  Condition and
Results of  Operations-Three  Months Ended March 31, 1997 vs. Three Months Ended
March 31, 1996."
</FN>
</TABLE>
         The  following  table sets forth,  for the three months ended March 31,
1997,  certain operating data by business segment,  excluding  corporate related
expenses and assets.
<TABLE>
<CAPTION>
                                                                     Three Months Ended
                                                                        March 31, 1997
                                                                       (in thousands)

                                                                                      Proprietary
                                                                 Distribution           Products
<S>                                                              <C>                   <C>   
Net Sales                                                        $    114,423          $    11,436
                                                                               
Depreciation & Amortization                                               672                1,973

Operating Loss                                                        (3,488)              (5,220)
                                                                      
Capital Expenditures                                                      937                   84

Identifiable Assets                                                   272,532              124,969
</TABLE>

Three Months Ended March 31, 1997 vs. Three Months Ended March 31, 1996

         Net sales  decreased  from $176.2  million for the three  months  ended
March 31, 1996 to $126.3  million for the three months ended March 31, 1997,  or
28.3%.  Net sales  attributable  to the Company's  distribution  segment for the
three months ended March 31, 1997 were approximately  $114.4 million compared to
$157.1  million  for the three  months  ended March 31,  1996.  During the three
months ended March 31, 1997,  sales in the Company's  distribution  segment were
negatively  impacted by: (i)  decreased  export  sales;  (ii) an increase in the
number of unfilled orders due to inventory  shortages resulting from a reduction
in vendor credit with certain suppliers;  (iii) the divestiture of the Company's
Brazilian operations; and (iv) 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 March 31,
1997 were approximately  $11.4 million,  compared to approximately $19.0 million
for the three months ended March 31, 1996.  Net sales in this segment were lower
than the comparable  period in 1996 due in part to: (i) the elimination of sales
from the Company's video business that was discontinued in the fourth quarter of
1996;  and (ii) a reduced number of product  releases  during the quarter due to
the timing of release  schedules.  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 to 16.8% for the three months ended
March 31, 1997 from 18.6% for the three  months  ended March 31,  1996.  For the
three months ended March 31, 1997, the gross margin of the distribution  segment
was 13.1%,  compared to 15.9% for the three  months  ended March 31,  1996.  The
reduction in gross margin for the distribution segment was primarily related to:
(i)  increased  proportion  of sales of the One Stop Group  attributable  to new
release  product as opposed to higher  margin,  deep catalog  product;  (ii) the
Company's  inability  to take  advantage  of  discount  buying  and  advertising
programs  offered by vendors due to working capital  constraints;  and (iii) the
impact of the  disposition  of the  Brazilian  operations.  For the three months
ended March 31, 1997, the gross margin of the proprietary  products  segment was
50.1%  compared to 40.8% for the three months ended March 31, 1996. The increase
in the Company's gross margin for the proprietary  product segment resulted from
a higher 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 increased from $30.7 million,
or 17.5% of net sales,  for the three  months  ended March 31,  1996  (including
non-recurring  charges during the period of approximately  $2.5 million relating
to  the   termination  of  the  Company's   proposed   merger  with   Metromedia
International  Group,  Inc.) to $31.5  million,  or 25.0% of net sales,  for the
three  months  ended  March  31,  1997.  The  Company's  selling,   general  and
administrative  expenses  increased on an overall basis in the period  primarily
due to the inclusion of the operations of Red Ant for a full three months.  This
increase was partially offset by: (i) the divestiture of the Company's Brazilian
operations;  and (ii) the  non-recurring  charge  of $2.5  million  included  in
selling, general and administrative expenses in 1996.

      Net loss for the  three  months  ended  March  31,  1996 was $4.6  million
compared to a net loss in the three months ended March 31, 1997 of $23.1 million
which primarily  resulted from: (i) the results of operations  discussed  above;
(ii) increased  depreciation  and amortization of intangible  assets  associated
with  acquisitions  ($4.8  million  for the three  months  ended  March 31, 1996
compared to $5.8 million for the three months ended March 31,  1997);  and (iii)
reduced  tax  benefits  recorded  in the  first  quarter  of  1997  due to a net
operating loss carryforward at December 31, 1996.

Liquidity and Capital Resources

Cash Used in Operations

Cash used in  operations  for the three  months  ended  March 31,  1997 was $9.2
million  compared to $4.6  million for the three  months  ended March 31,  1996.
Accounts  receivable for the period decreased by $54.9 million or 32%, primarily
as a result of the Company's decrease in net sales during the three months ended
March 31,  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 $20.1 million or 12% as a result of: (i) the
Company's  decrease in net sales  during the three  months ended March 31, 1997;
and (ii) an on-going inventory reduction  initiative  implemented as part of the
Consolidation  Plan.  Accounts payable and accrued  expenses  decreased by $64.7
million or 24%,  primarily  as a result of: (i) the  Company's  decrease  in net
sales during the three months ended March 31, 1997; (ii) payments to vendors 
with respect to seasonal dating programs offered to the Company in the fourth
quarter of 1996;  and (iii) the payment  of  charges  accrued  in 1996  related
to the Consolidation Plan.

Cash Used in Investing Activities

The  Company's  capital  expenditures  for the three months ended March 31, 1997
were $2.4 million  compared to $1.5 million for the three months ended March 31,
1996.  The capital  spending  during the three  months  ended March 31, 1997 was
primarily focused on the  modernization of the Company's Coral Springs,  Florida
facility and the acquisition of computer hardware to enable the execution of the
Consolidation Plan.

During the three months ended March 31, 1997, the Company  expended $1.5 million
to enter into a joint venture  agreement with  Delicious  Vinyl Records Inc., in
order  to  expand  the  Company's   proprietary  music  rights.   The  Company's
investments in copyrights  decreased at March 31, 1997 by $1.4 million primarily
due to a foreign  currency  translation  adjustment  by its UK  subsidiary.  The
Company  anticipates  continued  expenditures  related  to  the  acquisition  of
proprietary music rights as opportunities are presented that are consistent with
the Company's long term objectives.

Consolidation Plan

When fully  implemented,  the Company believes that the Consolidation  Plan will
result in annual  savings  to  Alliance  of  approximately  $25  million.  As of
December 31,  1996,  the Company  recorded  charges for costs and expenses to be
incurred pursuant to the Consolidation  Plan of $33.6 million,  $12.9 million of
which will be required to be expended after March 31, 1997.

<PAGE>

Cash Provided from Financing Activities

The  Company  and Chase  Manhattan  Bank,  as agent for the banks  (the  "Senior
Lenders") who are parties to the Third Amended and Restated Credit Agreement, as
subsequently  amended  (the  "Credit  Agreement"),  agreed to amend  the  Credit
Agreement to revise certain  financial  covenants for the period ended March 31,
1997 and provide the Company with an  overadvance  facility of $10 million for a
period of sixty days  commencing on May 7, 1997.  There can be no assurance that
the Company will be in compliance with the financial  covenants under the Credit
Agreement  in future  periods or satisfy the  Company's  obligation  to raise at
least $35 million in equity capital (the "Equity Condition") before July 1, 1997
under the terms of an  amendment to the Credit  Agreement  entered into on March
27, 1997. In the event that the Company is unable to meet such obligations,  the
Senior  Lenders  would have the right to terminate  the term loan and  revolving
credit  facility and declare all outstanding  loans,  interest and other amounts
payable under the Credit Agreement, immediately due and payable. In the event of
such  termination and  acceleration,  the Company would be unable to satisfy its
obligations under the Credit Agreement without  obtaining  additional  financing
from third parties.

In  order  to  satisfy  the  Equity  Condition,  the  cash  requirements  of the
Consolidation  Plan,  enhance the Company's working capital position and provide
needed capital for the expansion of the Company's  proprietary content business,
the Company is actively pursuing one or a combination of the following financing
alternatives,  including: (i) an investment, subject to certain conditions, from
a group including its existing investors to acquire  newly-issued  securities of
the Company or one of its subsidiaries; (ii) an investment proposal from a third
party, subject to a due diligence investigation and other conditions,  to make a
significant  capital  commitment  to the  Company in  connection  with a general
recapitalization  of the  Company;  (iii)  the  sale of  certain  assets  of the
Company;  and (iv) forebearance by certain of the Company's trade creditors with
respect to certain  amounts due and payable with respect to inventory  purchases
by the Company.  Although the Company has not ruled out a rights offering of $35
million of convertible  preferred  stock as previously  contemplated,  it is not
actively  pursuing such an offering . There can be no assurances that the 
Company will be successful  in obtaining the financing  necessary to satisfy
the Equity  Condition or provide it with adequate working capital to achieve its
business  plan  through  the  remainder  of 1997  through  one of the  foregoing
alternatives.

Forward-Looking Statements

     Forward-looking  statements  herein are made  pursuant  to the safe  harbor
provisions  of the  Private  Securities  Litigation  Reform  Act of 1995.  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:  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.
<PAGE>

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.


<PAGE>

PART II - OTHER INFORMATION

Item 2. CHANGE IN SECURITIES

      The Company entered into a merger agreement dated as of September 5, 1995,
(the "Merger  Agreement"),  to acquire One Way Records,  Inc., and an affiliated
Independent  Label  (together,   "One  Way"),  for  a  total   consideration  of
$16,500,000  in cash,  notes and 147,309  shares of Alliance  common stock.  The
Merger Agreement provided for the payment of additional consideration to the One
Way selling  shareholders  based on the  operating  profit of One Way for fiscal
year 1995,  as  defined.  The  additional  consideration  was paid in March 1997
through the issuance of 225,352  shares of Alliance  common stock to the selling
shareholders  which  issuance was exempt from  registration  pursuant to Section
4(2) of the Securities Act of 1933.

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.  (Incorporated 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 3.3
     filed in the Registrants Form 10-Q for the period ended September  30,1996.
     (File No. 1-13054).)

3.4  Certificate of Designations.*

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).)

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, 1995  (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).)
<PAGE>

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).)

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).)
<PAGE>

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).)

10.10Lease dated March 25, 1993 between  Howard L. Bellowe and E. James Judd (as
     Landlord) and Encore  Distributors,  Inc., relating to the premises located
     at 2345 Delgany Street, Denver,  Colorado.  (Incorporated by reference from
     Exhibit 10.11 filed as part of the Proxy and Prospectus in connection  with
     the Special Meeting held on November 30, 1993 (File No. 33-68816).)

10.12Stock Sale  Agreement  dated December 11, 1992 between R. Tobias Knobel and
     the Registrant. (Incorporated by reference from Exhibit 10.20 filed as part
     of the Proxy and Prospectus in connection  with the Special Meeting held on
     November 30, 1993 (File No. 33-68816).)

10.13Merger   Agreement  dated  August  11,  1993  among  the   Registrant,   CD
     Acquisition  Corp.,  Titus  Oaks  Records,  Inc.,  Alan  Meltzer  and Diana
     Meltzer. (Incorporated by reference from Exhibit 10.21 filed as part of the
     Proxy  and  Prospectus  in  connection  with the  Special  Meeting  held on
     November 30, 1993 (File No. 33-68816).)

10.14Engagement  Letter dated October 29, 1992 between the Registrant and Tucker
     Anthony  Incorporated.  (Incorporated by reference from Exhibit 10.22 filed
     in the  Registrant's  Form 10-K for the year ended  December 31, 1993 (File
     No. 1-13054).)

10.15Amendment of Stock Sale  Agreement  and  Employment  Agreement  dated as of
     September   30,  1993  between  R.  Tobias   Knobel  and  the   Registrant.
     (Incorporated  by reference  from Exhibit  10.23 filed in the  Registrant's
     Form 10-K for the year ended December 31, 1993 (File No. 1-13054).)

10.16Form 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).)

10.17Form 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).)

10.18Form 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).)
<PAGE>

10.19Engagement  Letter  dated  September  9, 1993  between the  Registrant  and
     PaineWebber  Incorporated.  (Incorporated  by reference  from Exhibit 10.30
     filed in the  Registrant's  Form 10-K for the year ended  December 31, 1993
     (File No. 1-13054).)

10.20Engagement  Letter  dated May 27,  1993  between the  Registrant  and Bear,
     Stearns & Co. Inc.  (Incorporated  by reference from Exhibit 10.31 filed in
     the  Registrant's  Form 10-K for the year ended December 31, 1993 (File No.
     1-13054).)

10.21Asset  Purchase  Agreement  dated  December 16, 1993 between the Registrant
     and Nova Distributing  Corp.  (Incorporated by reference from Exhibit 10.32
     filed in the  Registrant's  Form 10-K for the year ended  December 31, 1993
     (File No. 1-13054).)

10.22Merger  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).)

10.23Extention  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).)

10.25Offer  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).)

10.26Lease between the  Registrant  and The  Northwestern  Mutual Life Insurance
     Company dated January 12, 1995,  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 31, 1994 (File No. 1-13054).)

10.27Third 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).)

10.28Merger  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).)

10.29Merger  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).)

10.30Management  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).)
<PAGE>

10.31Merger  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).)

10.33Quota  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).)

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

10.35Letter 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).)

10.36First  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).)

10.37Second  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).)

10.38Third  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).)

10.39Stock  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).)

10.40The 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).)

10.41Amendment  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).)

10.42Employment  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).)

10.43Stock 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).)

10.44Engagement  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).)
<PAGE>

10.45Right 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).)

10.46Fourth  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).)

10.47Purchase  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).)


10.48Settlement  Agreement dated as of March 10, 1997, among the Company,  David
     H. Schlang, Jack Rosenbloom and Peter Hyman.*

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.*

                  (b)      Reports on Form 8-K

None

*Filed herewith


<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.



        
Date: May 15, 1997                          By:     /s/ Timothy Dahltorp
                                                ----------------------------- 
 
                                                     Timothy Dahltorp
                                                     Executive Vice President,
                                                     Chief Financial Officer and
                                                     Treasurer