SETTLEMENT AGREEMENT AND RELEASE


                SETTLEMENT  AGREEMENT  AND  RELEASE  made as of the  10th day of
March, 1997 by and between ALLIANCE  ENTERTAINMENT CORP., a Delaware corporation
(hereinafter  referred to herein as  "Alliance"),  on the one hand, and DAVID H.
SCHLANG,  JACK  ROSENBLOOM and PETER HYMAN  (hereinafter  sometimes  referred to
collectively as the "Shareholders"), on the other hand,

                WHEREAS,  Alliance and the  Shareholders are parties to a merger
agreement dated as of September 1, 1995 (the "Merger Agreement") among Alliance,
One Way Acquisition,  Inc., a New York corporation, One Way Records, Inc., a New
York corporation, and the Shareholders;

                WHEREAS,  pursuant  to  Section  2.2  of the  Merger  Agreement,
Alliance agreed to pay to the Shareholders  certain additional  consideration in
certain circumstances specified in the Merger Agreement (the "Additional One Way
Merger Consideration" as defined in Section 2.2 of the Merger Agreement),  but a
dispute has arisen between  Alliance and the  Shareholders as to the amount,  if
any, of Additional One Way Merger  Consideration that is owed by Alliance to the
Shareholders; and

                WHEREAS,  after good faith negotiations between the parties with
respect to the amount, if any, of Additional One Way Merger  Consideration  that
is owed by Alliance to the  Shareholders,  the parties have agreed to settle the
amount due and payable under Section 2.2 of the Merger Agreement and provide for
payment to the Shareholders of the settlement amount,  upon terms and conditions
set forth herein;

                NOW THEREFORE,  in consideration of the agreements and covenants
contained herein, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby  acknowledged,  the undersigned  hereby covenant
and agree as follows: 
<PAGE>

                  1.       Settlement

                  1.1 Delivery of Shares. The Shareholders agree that Alliance's
obligation to pay the Additional One Way Merger Consideration shall be fulfilled
to the  Shareholders'  full  satisfaction  by the  transfer  and delivery to the
Shareholders  or their designees of 225,352 shares of Alliance Common Stock (the
"Settlement  Shares")  upon the execution  and delivery of this  Agreement.  The
Settlement   Shares  shall  be  transferred  and  delivered  to  the  individual
Shareholders  or their  designees  in the  amounts  set  forth  in a  letter  of
instruction  to  Alliance  signed  by the  Shareholders.  Any  such  Shareholder
designees shall be considered to be third-party beneficiaries of this Settlement
Agreement and shall exchange appropriate releases with Alliance.

                  1.2 Issuance of Common Stock. Alliance represents and warrants
that the Settlement  Shares of Alliance Common Stock which will be issued to the
Shareholders  pursuant to this  Agreement  will be duly and  validly  issued and
fully paid and  nonassessable,  and good and valid title thereto shall be vested
in the  Shareholders,  free and clear of liens,  encumbrances,  claims and other
commitments.  Alliance shall include such shares of Alliance Common Stock in the
next Registration Statement on Form S-3 filed by Alliance, and take such further
actions as are necessary to effect the  registration  of such shares of Alliance
Common  Stock  under  the  Securities  Act of 1933,  as  amended,  and under any
applicable state securities laws.

                  1.3 Restriction on Transfer. The Shareholders acknowledge that
the  certificates  representing  the Settlement  Shares shall bear the following
legend, and agree to abide by the terms thereof:

                           "The shares  represented by this certificate have not
                  been  registered  under the Securities Act of 1933. The shares
                  have  been  acquired  for  investment  and  may  not be  sold,
                  transferred  of  assigned  in  the  absence  of  an  effective
                  registration  statement for these shares under the  Securities
                  Act of 1933 or an opinion of the  Corporation's  counsel  that
                  registration is not required under said Act."

                  1.4 Compliance with Securities Laws.  Alliance  represents and
warrants that the issuance to the  Shareholders of the Settlement  Shares of the
Alliance Common Stock,  and the  consummation of the  transactions  contemplated
hereby, are in compliance with all applicable federal and state securities laws.
<PAGE>

                 2.        Mutual Releases.

                2.1  Upon the  execution  and  delivery  of this  Agreement  and
delivery of the Settlement Shares,  each of the parties hereto: (a) individually
and for each of its direct  and.  indirect  parent  corporations,  subsidiaries,
affiliates,  directors,  officers,  employees,  successors and assigns,  forever
releases,  remises, and discharges the other parties hereto and any of the other
parties' parent corporations,  subsidiaries and affiliates, officers, directors,
shareholders, agents, employees, predecessors, successors, and assigns, from and
against any and all claims,  demands,  debts,  damages,  liabilities,  costs and
expenses (including attorneys fees),  actions,  causes of action, suits, sums of
money  accounts,  covenants,  agreements,  contracts  and  promises in law or in
equity of every nature whatsoever, which the releasing party now has, has had or
at any time may have against the other parties  (and/or against any of the other
parties' parent corporations,  subsidiaries and affiliates, officers, directors,
shareholders, agents, employees,  predecessors,  successors and assigns) arising
out of, or in connection  with Section 2.2 of the Merger  Agreement,  whether or
not they have been  subject  to dispute  and  whether or not known or unknown or
suspected or  unsuspected,  by reason of any matter,  cause or thing  whatsoever
from the  beginning of the world to the date of these  presents;  and (b) hereby
covenants and agrees that he or it shall not initiate,  institute,  reinstitute,
maintain,   prosecute  or  voluntarily  aid  in  the  initiation,   institution,
reinstitution,   maintenance  or  prosecution  of,  any  action,   claim,  suit,
proceeding, arbitration or cause of action of any kind whatsoever, in any court,
administrative  agency or other  forum,  against  any person or entity  released
pursuant to  subsection  2.1(a)  hereof,  to recover  damages,  attorneys  fees,
expenses  of any type or any other  losses  allegedly  sustained  as a result of
Section 2.2 of the Merger Agreement or the transactions contemplated thereby.



                 2.2 The foregoing  provisions  shall not bar any claims arising
out of or relating to a breach of this Agreement.
<PAGE>

     3. No Admissions.  This Agreement, and the payments and other consideration
delivered  hereunder,  are solely for the purpose of  compromising  and settling
disputed  claims,  and do not  constitute  any  admission of liability or of the
truth or validity of any claims or assertions.

     4. Notices.  All notices given to the parties  hereunder and all statements
and  payments  hereunder  shall be  addressed  to the parties at the address set
forth below or at such other  addresses as shall be  designated  in writing from
time to time:



If to the Shareholders or their designees:        David H. Schlang
                                                  One Way Records, Inc.
                                                  15 Industrial Park Road
                                                  P.O. Box 6429
                                                  Albany, New York 12206

with a copy to:                                   Paul A. Feigenbaum, Esq.
                                                  Couch, White, Brenner, Howard
                                                  & Feigenbaum, LLP
                                                  540 Broadway, Box 22222
                                                  Albany, New York 12201-2222


If to Alliance:                                   Alliance Entertainment Corp.
                                                  110 East 59th Street
                                                  New York, New York 10022
                                                  Attn:     Timothy J. Dahltorp

with a copy to:                                   Alliance Entertainment Corp.
                                                  110 East 59th Street
                                                  New York, New York 10022
                                                  Attn:     General Counsel
<PAGE>

All notices  shall be in writing and shall be personally  delivered,  or sent by
certified mail, return receipt  requested,  or by overnight mail service such as
Federal Express, all charges pre-paid. Except as otherwise provided herein, such
notices  shall be deemed  given  upon  personal  delivery,  five (5) days  after
mailing  or one  (1)  day  after  delivery  to an  overnight  mail  service,  as
applicable,  except that notices of change of address  shall be  effective  only
after actual receipt thereof.  The failure of the recipient to accept or receive
notice given by certified mail, return receipt requested,  postage pre-paid,  or
by overnight mail service does not affect the validity of the notice.

                  5. Authority. The parties hereto represent and warrant to each
other that they have the  authority  to enter into and perform  this  Agreement;
that they comprehend the effect of this  Agreement;  and that they have executed
this  Agreement  and  consented to its contents  under the exercise of their own
free will  without the  coercion,  duress or undue  influence or the part of any
person or entity.

                  6.  Entire  Agreement.  This  Agreement  sets forth the entire
understanding  of the parties hereto  relating to the subject matter hereof.  No
modification,  amendment,  waiver, termination or discharge of this Agreement or
any of the terms or provisions  hereof shall be binding upon either party unless
confirmed by a written instrument signed by the parties hereto. No waiver by any
party of any term or provision of this Agreement or any default  hereunder shall
affect  the  parties'  respective  rights  thereafter  to  enforce  such term or
provision or to exercise any right or remedy in the event of any other  default,
whether  or not  similar.  Except  as  expressly  modified  herein,  the  Merger
Agreement  shall  remain in full force and effect and binding  according  to its
terms,  and nothing in Section 2 hereof shall  constitute a release of any party
or any  obligation  under the Merger  Agreement  beyond that which is  expressly
stated in Section 2 hereof.

                  7.  Governing  Law.  This  Agreement  shall be  subject to and
interpreted  under  the  laws of the  State of New York  without  regard  to the
conflict of laws provisions  related thereto.  If any provision of the Agreement
shall be held void, invalid or inoperative, no other provision of this Agreement
shall be affected as a result thereof, and accordingly, the remaining provisions
of this  Agreement  shall  remain in full force and effect as though  such void,
invalid or inoperative  provisions had not been contained herein,  provided that
the commercial purpose of this Agreement is not materially altered.  The parties
hereby consent to the sole  jurisdiction of the New York State or Federal counts
for the adjudication of any disputes hereunder.
 <PAGE>

     8.  Confidentiality.  The  parties  acknowledge  that  the  terms  of  this
Agreement  and  the   circumstances   giving  rise  thereto  will  remain  of  a
confidential  nature.  Accordingly,   the  parties  agree  that  no  information
pertaining to this Agreement or the  circumstances  giving rise thereto shall be
disclosed,  except to their respective  Settlement Share recipient designees and
to their respective  attorneys,  accountants and business advisors on a "need to
know" basis, or to the extent required by applicable law or legal process.

     9. Counterparts.  This Agreement may be executed in counterparts, each of
which shall be deemed an original,  but all of which together  shall  constitute
one and the same instrument.


<PAGE>



     IN WITNESS  WHEREOF,  the parties  hereto have caused this  Agreement to be
executed as of the date first written above.


ALLIANCE ENTERTAINMENT CORP.


By: /s/ Christopher J. Joyce
      ------------------------------------------------
Name:  Christopher J. Joyce
Title:  Executive Vice President/General Counsel


DAVID H. SCHLANG


By: /s/ David H. Schlang
      -------------------------------------------

 JACK ROSENBLOOM


By: /s/ Jack Rosenbloom
      -------------------------------------------


 PETER HYMAN

By: /s/ Peter Hyman
      -------------------------------------------