EMPLOYMENT AGREEMENT (the "Agreement"), dated as of the 15th day of August,
1996, between Alliance  Entertainment  Corp., a Delaware  corporation having its
principal  office at 110 E. 59th Street (the  "Company"),  and Alvin N.  Teller,
residing at 900 Stradella Road, Los Angeles, California 90077 (the "Executive").


                       R E C I T A L S :


          WHEREAS,  the Company considers it essential and in the best interests
of its  stockholders  to more closely align the interests of the Executive  with
those of its shareholders and that the Executive support the mission, values and
strategy of the Company and desires to retain the services of the Executive; and

          WHEREAS,  the  Executive  desires  to accept  such  employment  by the
Company, upon the terms and conditions hereinafter set forth.

          NOW,   THEREFORE,   in  consideration  of  the  mutual  covenants  and
agreements set forth herein, the parties agree as follows:

     1.  Employment  and  Duties.  During the full term of this  Agreement,  the
Company  agrees to employ the  Executive  as  Co-Chairman,  President  and chief
executive officer of the Company and all of its subsidiaries.  In such capacity,
the Executive  shall be the most senior  executive of the Company and all of its
subsidiaries and report solely and directly to the Company's Board of Directors.
The Executive  shall have full authority  over the day-to-day  operations of the
Company and all of its  subsidiaries  and over all officers and employees of the
Company,  including,  without  limitation,  the  power to hire and,  subject  to
contractual  commitments,  fire employees. The Executive accepts such employment
and agrees to perform all duties and services  consistent  with the  Executive's
position.  The Executive agrees to devote  substantially  all of the Executive's
business  time,  attention and energy to performing the  Executive's  duties and
services  hereunder;  provided,  however,  that nothing in this Agreement  shall
preclude the  Executive:  (a) from  devoting time during  reasonable  periods to
serving as a director of (i) any company  that is not engaged  primarily  in the
record business or (ii) any company  primarily engaged in the record business to
which the Board of Directors of the Company shall consent; or (b) from investing
his personal assets in a Passive Investment (as hereinafter

<PAGE>


defined).  For purposes of this Agreement,  a "Passive Investment" shall mean an
investment  in a business  or entity  which does not require  the  Executive  to
render any services in the  operations or affairs of such business or entity and
which does not materially  adversely affect or interfere with the performance of
the Executive's duties and obligations to the Company or any of its subsidiaries
or affiliates.  During the  Employment  Period (as defined  below),  the Company
agrees  it will  nominate  the  Executive  to  serve on the  Company's  Board of
Directors.

     1.2.  Principal  Place of  Employment.  During  the  Employment  Period (as
defined below),  the Executive's  place of employment  shall be at the principal
offices of the Company in the New York City area.

     2. Term of Employment.  The term of the Executive's  employment  under this
Agreement shall commence on August 15, 1996 (the "Effective Date") and shall end
on the fifth  anniversary of such date,  unless sooner terminated as provided in
Section 5 hereof (the "Employment Period"); provided, however that commencing on
August 15, 2001, and each August 15 thereafter, the term of this Agreement shall
automatically  be renewed for one (1) additional year unless,  not less than 120
and not more than 150 days prior to such date,  either party shall have provided
written  notice that such party elects not to renew the term of this  Agreement.
Each  consecutive  twelve-month  period  during  the  term  of  this  Agreement,
commencing on the Effective Date, and on each subsequent anniversary thereof, is
hereinafter referred to as a "Contract Year."

     3. Compensation and Benefits.

     3.1 Base Salary.  The Company  shall pay the Executive a base salary of not
less than One Million  Five  Hundred  Thousand  Dollars  ($1,500,000)  per annum
("Base Salary"). The Base Salary for each Contract Year after the first Contract
Year may be increased from time to time in the sole  discretion of the Board and
in any event will be increased  annually to reflect  corresponding  increases in
the United States  Department  of Labor,  Bureau of Labor  Statistics,  Consumer
Price Index, All Urban Consumers, United States City Average, all items (1982-88
= 100).  Base Salary shall be payable at such regular  intervals as salaries are
paid by the Company to its other executive  employees,  not less frequently than
bimonthly.

     3.2 Annual  Bonus.  In addition to Base  Salary and Signing  Options,  with
respect to each fiscal year of the


<PAGE>


Company (a "Fiscal Year") during the Employment  Period,  the Executive shall be
entitled  to  participate  in, and be eligible  for annual  bonuses  under,  the
Company's Executive Incentive Plan and other annual bonus, incentive, stock plan
and stock option programs of any kind or nature, in accordance with their terms.
Any such bonus  amount (a  "Bonus")  shall be payable at such time as  executive
bonuses customarily are paid by the Company,  but in no event later than 30 days
after the end of the Company's  Fiscal Year.  The initial  minimum  target Bonus
with  respect to each Fiscal Year shall be an amount equal to 95% of Base Salary
and the initial  maximum  target Bonus with respect to each Fiscal Year shall be
equal  to  125% of Base  Salary  for the  applicable  Fiscal  Year,  subject  to
satisfaction of applicable  performance  goals  established by the  Compensation
Committee of the Company's  Board of Directors (the  "Compensation  Committee");
provided,  however, that such minimum and maximum Bonus amounts shall be subject
to such increases as shall be determined by the Board of Directors.

     3.3 Acquisition  Bonus. If, at any time during the period commencing on the
Effective Date and  terminating on the first  anniversary of the  termination of
Executive's  employment hereunder (the "First Acquisition  Period"), a Change of
Control (as defined)  occurs  pursuant to which more than 50% of the outstanding
shares of common stock of the Company are acquired at a price, or receive value,
in cash or marketable  securities equal to or in excess of $11.00 per share (the
"Acquisition  Share Price"),  then  immediately  prior to  consummation  of such
acquisition,  the Executive shall receive a cash bonus (the "Acquisition Bonus")
equal to 1,000,000  multiplied by the difference  between the Acquisition  Share
Price  and  $11.00;  provided,  however,  that if the  term  of the  Executive's
employment  shall extend past the third  anniversary of the Effective Date, such
period  shall  terminate  on  the  second  anniversary  of  the  termination  of
Executive's  employment hereunder (the "Second Acquisition  Period");  provided,
however,  that if such acquisition  occurs during the last six (6) months of the
First  Acquisition  Period  or  the  last  twelve  (12)  months  of  the  Second
Acquisition Period, the Executive shall be entitled to 50% of the amount payable
hereunder,  and provided  further that no Acquisition  Bonus shall be payable to
Executive


<PAGE>



if Executive's employment is terminated for Cause or if Executive terminates his
employment  for other than Good  Reason,  death or  Disability.  As used in this
Agreement,  "Change  of  Control"  shall  mean  (i)  the  acquisition  of all or
substantially  all of the assets of the  Company,  (ii) the  acquisition  by any
party (or group,  as such term is defined in Section  13(d)(3) of the Securities
Exchange Act of 1934,  as amended) not currently a holder of more than 5% of the
outstanding  Common  Stock of the  Company  of more than 50% of the  outstanding
Common Stock of the Company, or (iii) any merger, combination,  consolidation or
similar transaction  involving the Company following which the holders of Common
Stock of the Company  immediately  prior to such  transaction  will not own more
than 50% of the Common Stock of the Company.

     3.4 Stock  Options.  The  Company  hereby  grants to the  Executive  on the
Effective  Date stock  options to acquire  five  million  (5,000,000)  shares of
common stock of the Company at an exercise  price of $6 per share (the  "Signing
Options").  One  million of the  Signing  Options  shall vest  immediately.  The
remaining  4,000,000  Signing  Options  shall vest in four  equal  installments,
commencing on the first  anniversary  of the Effective Date and annually on each
anniversary of the Effective Date for four years. The 1,000,000  options vesting
immediately,  as well as the 1,000,000  options vesting on the first anniversary
of the Effective Date,  shall expire six (6) years from the date of vesting with
the remaining options expiring five (5) years from the date of vesting,  subject
to earlier termination in the event of death, Disability,  termination for Cause
or other termination of the Executive's employment, as provided below.

     3.5 Benefit Plans.  During the Employment  Period,  the Executive  shall be
entitled to  participate  in all plans  adopted  for the general  benefit of the
Company's  employees  or executive  employees,  such as pension  plans,  medical
plans,  disability  plans,  incentive plans,  stock plans,  investment plans and
group or other insurance plans and benefits, to the extent that the Executive is
and remains  eligible  to  participate  therein  and subject to the  eligibility
provisions of such plans in effect from time to time. In addition to the Signing
Options,  the  Executive  shall be  eligible  to  receive  grants of  options to
purchase  shares of Common  Stock of the  Company  and  other  awards  which the
Company is permitted to grant under its Long-Term Incentive and Share Award Plan
and such other  stock  option or  incentive  plans as may be  maintained  by the
Company,  in such  amounts  and at such  times  as shall  be  determined  by the
Compensation Committee. The Executive's  participation in such plans shall be at
the highest level afforded to officers and employees of the Company.


<PAGE>



     3.6 Business Expenses. The Executive shall be reimbursed for his reasonable
out-of-pocket  expenses,   commensurate  with  his  position,  incurred  in  the
performance  of his duties upon  submission of appropriate  evidence  thereof in
conformity with normal Company policy. The Executive shall be entitled to travel
first class and first class  accommodations  and the Company shall reimburse the
Executive  for the cost of his  spouse's air fare when she  accompanies  him. In
addition,  the  Executive  shall  receive a per diem of  $1,000  for each day or
portion  thereof  he is  working  in the Los  Angeles  area  and  maintains  his
residence in Los Angeles. The Company shall also reimburse the Executive for all
reasonable  expenses  incurred  by him in  moving  to the New  York  City  area.
Reimbursable expenses shall include: (i) cost of selling Executive's Los Angeles
residence,  including  brokerage  commission;  and (ii)  moving  and  relocation
expenses.  Following  completion of (i) an equity offering for cash in an amount
of at least  $35  million  or (ii) a bank  refinancing,  the  Company  shall (a)
reimburse the Executive for any loss not to exceed $1,500,000 on a net after tax
basis, incurred by the Executive in selling his Los Angeles residence,  based on
Executive's cost basis  (including  improvements) or (b) at the Company's option
(subject to Executive's consent) purchase the residence from the Executive for a
price equal to Executive's cost basis in the residence (including improvements).

            3.7  Automobile.  The Company  shall lease a luxury  automobile  and
provide a driver  therefor in New York City for the exclusive use and benefit of
the Executive.  In addition, the Company shall lease a luxury automobile for the
exclusive  use and  benefit  of the  Executive  in Los  Angeles.  In  connection
therewith,  the Company shall  provide (i) insurance for both such  automobiles;
(ii) a parking space at a garage in New York City designated by the Company; and
(iii) all maintenance,  gas and repairs for such automobiles.  If any automobile
is leased,  such lease shall contain a clause allowing the Executive to purchase
the automobile at the termination of the term of the lease.  With respect to any
automobile provided to the Executive pursuant to this Section 3.7 which is owned
by the Company,  the Executive  shall have the right to purchase such automobile
at its depreciated book value.

            3.8 Perquisites.  In addition to the other benefits  provided to the
Executive  under this Section 3, the Executive shall be entitled to business and
other perquisites  commensurate  with his position and/or generally  afforded to
senior executives of the Company,  including an office in the Company's New York
City  headquarters,  office  furnishings  and  secretarial  assistance  at least
comparable to those of the


<PAGE>



other Co-Chairman.

     4. Vacation.  For each Contract  Year,  the Executive  shall be entitled to
paid vacation in accordance  with the Company's  standard  policy for any of the
Company's most senior executives, but not to be less than four weeks.

     5. Termination.

     5.1 Death. This Agreement shall  automatically  terminate upon the death of
the  Executive,  whereupon  the  Company  shall  be  obligated  to  pay  to  the
Executive's  estate any unpaid Base Salary and accrued and unpaid  benefits  and
Bonus  through  the date of death and an amount  equal to the greater of (i) the
Executive's  Bonus for the prior  Fiscal Year  prorated  for that portion of the
Fiscal Year which expired prior to the Executive's death or (ii) the Executive's
pro rata  Bonus for the  current  Fiscal  Year,  if any,  as  determined  by the
Compensation  Committee through the date of death. The Executive's  estate shall
be paid an  amount  equal to  one-half  of the  Acquisition  Bonus to which  the
Executive  would have been  entitled  pursuant to Section  3.3  hereof.  Amounts
payable  under this Section 5.1 shall be payable at the times and  intervals set
forth in Sections 3.1, 3.2 and 3.3 hereof. Upon such termination, 50% of the not
yet vested Signing Options shall vest, and all then vested Signing Options shall
be exercisable by the persons to whom the  Executive's  rights under the Signing
Options pass by will or the laws of descent and  distribution in accordance with
the terms of such options.

     5.2  Disability.  The  Company  shall  have  the  right to  terminate  this
Agreement  after the occurrence and during the  continuance of any Disability of
the Executive,  as hereinafter  defined,  upon thirty (30) days' prior notice to
the  Executive  during  the  continuance  of the  Disability.  "Disability"  for
purposes  of  this  Agreement  shall  mean  and be  deemed  to  occur  upon  the
Executive's  inability  to perform his  material  duties  hereunder by reason of
physical or mental  incapacity or disability  for a total of one hundred  eighty
(180) days or more in any  consecutive  period of three  hundred and  sixty-five
(365) days, in the reasonable  judgment of a physician selected by the Executive
and reasonably  acceptable to the Company,  which in the reasonable  judgment of
such physician shall be deemed reasonably likely to continue.  In the event of a
termination  by reason  of the  Executive's  Disability,  the  Company  shall be
obligated  to assist the  Executive  in  obtaining  payment  under the  existing
disability insurance  maintained by the Company for the Executive.  In addition,
the Company  shall be obligated to pay the  Executive any unpaid Base Salary and
accrued and unpaid benefits and Bonus through the date of  termination,  and the
greater  of  (i)  the  amount  payable  to the  Executive  under  the  Company's
disability  insurance or (ii) 50% of the  Executive's  Bonus paid for the Fiscal
Year prior to the year in which the Disability occurred.  The Executive shall be
paid an amount equal to one-half of the Acquisition Bonus to which the Executive
would have been entitled  pursuant to Section 3.3 hereof.  Amounts payable under
this  Section  5.2 shall be  payable  at the times  and  intervals  set forth in
Sections  3.1,  3.2 and 3.3 hereof.  Upon such  termination,  50% of the not yet
vested Signing  Options shall vest, and all then vested Signing Options shall be
exercisable by the Executive or the persons to whom the Executive's rights under
the  Signing  Options  pass by will or the laws of descent and  distribution  in
accordance with the terms of such options.

<PAGE>

     5.3 Termination for Cause or by Executive for Other than Good Reason.

     5.3.1 Upon the early termination of this Agreement by the Company for Cause
or by the  Executive  during the  Employment  Period for other than Good Reason,
death or  Disability,  the Company  shall only be obligated to pay the Executive
his Base  Salary  prorated  to the  date of  termination  and any  then  accrued
benefits  (excluding  any amount of bonus which the Executive may be eligible to
receive).  Upon such termination,  the Signing Options, to the extent not vested
by such termination  date, shall be terminated.  For purposes of this Agreement,
"Cause"  shall  mean (i) any  willful  and  continuing  material  failure by the
Executive to perform his material duties under this Agreement, taken as a whole;
(ii) the  Executive's  conviction  of, or plea of nolo  contendere to, a felony;
(iii) the Executive's  conviction of fraud or embezzlement  against the Company;
(iv) any  willful or  intentional  misconduct  having  the effect of  materially
injuring the business of the Company;  or (v) any willful and material breach by
the   Executive  of  any  of  the   provisions   of  the   Confidentiality   and
Non-Competition Agreement attached hereto as Attachment A. Termination for Cause
shall become effective upon notice to the Executive.  Anything  contained herein
to the contrary  notwithstanding,  none of the foregoing events or circumstances
shall  constitute  Cause for purposes of this Agreement unless the Company gives
the  Executive  written  notice of such event or  circumstance  (a  "Termination
Notice") at or  following a meeting of the Board of Directors of the Company for
which the Executive was given at least thirty (30) days' advance  written notice
and an opportunity to be heard,  and the Executive shall have failed to commence
to cure such event or circumstance  within thirty (30) days following the giving
of the Termination Notice; provided,  however, that the parties acknowledge that
the mere failure of the Company to achieve  projected or budgeted  results or to
attain  creative or artistic  success at any time or from time to time shall not
constitute  Cause  for  purposes  of  this  Agreement  unless  such  failure  is
accompanied by one or more of the circumstances described above.

     5.3.2 For purposes of this  Agreement,  "Good Reason" shall mean any of the
following:  (i)  a  reduction  or  adverse  change  in,  or a  change  which  is
inconsistent  with,  the  Executive's   responsibilities,   duties,   authority,
reporting,  power,  functions,  title,  working  conditions  or  status;  (ii) a
reassignment to another  geographic  location outside of the New York City area;
(iii) a material  breach by the  Company  of this  Agreement;  (iv) the  Company
requiring the Executive to render material services wholly inconsistent with the
services  to be  rendered  by the  Executive  hereunder;  (v) any time after the
occurrence of a Change of Control;  (vi) any time after the Executive  shall not
be a member of the Board of Directors of the Company;  or (vii) any other action
by the Company which materially interferes with the Executive's ability to carry
out his responsibilities under this Agreement.

     5.4  Termination  for  Other  Reason.  If  the  Executive's  employment  is
terminated during the term of this Agreement by the Executive for Good Reason or
by the Company  without  Cause,  then the Company shall pay the Executive a cash
lump sum in an amount  equal to the  greater  of:  (A) four times the sum of the
Executive's  Base  Salary  in  effect  at the  time  of the  termination  of his
employment  plus the maximum target Bonus amounts  payable to the Executive with
respect to the Fiscal  Year in which such  termination  occurs;  or (B) the Base
Salary  and  maximum  target  Bonus  amounts  payable to the  Executive  for the
remainder of the Employment  Period.  Such amount shall be payable no later than
thirty (30) days following the Executive's  termination pursuant to this Section
5.4. For the four year period after the  Executive's  termination  of employment
pursuant to this Section 5.4, the  Executive  (i) shall be entitled to continued
participation in all of the Company's employee benefit plans, including, without
limitation,  continued  accrual for retirement  benefits and continued  coverage
under the Company's  medical and  hospitalization  and life insurance plans, and
all of the other benefits and  perquisites  provided for under this Agreement or
(ii) be paid a cash lump sum equal to the aggregate  amounts which the Executive
would have been credited or received under all of such benefit plans,  incentive
plans, benefits and perquisites. In addition, the Company shall be obligated to:


<PAGE>



(i) pay the Acquisition Bonus pursuant to Section 3.3 hereof;  (ii) provide that
all options granted to the Executive under the Company's Long-Term Incentive and
Share  Award  Plan and such  other  stock  option or  incentive  plans as may be
maintained by the Company shall vest upon such  termination;  (iii)  transfer to
the Executive all right and title to the  automobiles  provided to the Executive
pursuant to Section 3.7 herein;  (iv) provide  coverage for the Executive  under
the  Company's  automobile  insurance  policies,  for which the Company shall be
reimbursed by the  Executive;  and (v) provide the Executive  coverage under the
Company's  medical plans and life  insurance  plans or other similar  medical or
life insurance  coverage,  or the economic  equivalent of such coverage,  for so
long as the Executive shall live. Upon termination of the Executive  pursuant to
this Section 5.4, all of the Signing Options and any other awards received under
any stock,  incentive and benefit plans shall vest in full and be exercisable by
the Executive in accordance with their terms.

     5.5 Nature of Payments.  If the Executive's  employment  hereunder shall be
terminated,  the  Executive  shall  be  under  no duty to seek or  accept  other
employment  (or  otherwise  mitigate  damages).  Any  payments  pursuant  to the
provisions  of this  Section 5 shall not be subject  to any offset  right of the
Company.

     5.6  Tax   Gross-Up.   Anything   in  this   Agreement   to  the   contrary
notwithstanding,  in the  event it  shall be  determined  that  any  payment  or
distribution made, or benefit provided,  by the Company to or for the benefit of
the Executive (whether paid or payable or distributed or distributable  pursuant
to the terms of this Agreement or otherwise,  but  determined  without regard to
any additional  payments required under this Section 5.6) (a "Payment") would be
subject to the excise tax imposed by Section 4999 of the  Internal  Revenue Code
of 1986, as amended and then in effect (the "Code") (or any similar  excise tax)
or any interest or penalties are incurred by the Executive  with respect to such
excise tax (such excise tax, together with any such interest and penalties,  are
hereinafter  collectively  referred to as the "Excise Tax"),  then the Executive
shall be entitled to receive an additional payment (a "Gross-Up  Payment") in an
amount such that after payment by the Executive of all Federal,  state, local or
other taxes  (including  any interest or  penalties  imposed with respect to any
such  taxes),  including,  without  limitation,  any such income  taxes (and any
interest and penalties imposed with respect thereto) and Excise Tax imposed upon
the Gross-Up  Payment,  the Executive  retains an amount of the Gross-Up Payment
equal to the Excise Tax imposed upon the Payments.



<PAGE>



            (i) Subject to the provisions of paragraph (ii) of this Section 5.6,
all determinations required to be made under this Section 5.6, including whether
and when a Gross-Up  Payment is required and the amount of such Gross-Up Payment
and the assumptions to be utilized in arriving at such  determination,  shall be
made by Coopers & Lybrand (the "Accounting Firm"),  which shall provide detailed
supporting calculations both to the Company and the Executive within 20 calendar
days of the receipt of written  notice from the Executive  that there has been a
Payment,  or such earlier time as is requested by the Company. In the event that
the  Accounting  Firm is serving as  accountant  or auditor for the  individual,
entity or group  effecting the change in control,  the Executive  shall have the
right by written notice to the Company to appoint another nationally  recognized
accounting firm to make the determinations  required hereunder (which accounting
firm shall then be referred to as the Accounting Firm  hereunder).  All fees and
expenses of the  Accounting  Firm shall be borne solely by the Company and shall
be paid by the Company upon demand of the Executive as incurred or billed by the
Accounting Firm. Any Gross-Up  Payment,  as determined  pursuant to this Section
5.6,  shall be paid by the  Company  to the  Executive  within  five days of the
receipt  of  the  Accounting  Firm's  determination.   If  the  Accounting  Firm
determines that no Excise Tax is payable by the Executive,  it shall furnish the
Executive with an unqualified written opinion in form and substance satisfactory
to the  Executive  that  failure to report  the  Excise  Tax on the  Executive's
applicable  federal  income tax return would not result in the  imposition  of a
negligence or similar penalty. As a result of the uncertainty in the application
of  Section  4999 of the Code at the time of the  initial  determination  by the
Accounting Firm hereunder,  it is possible that Gross-Up Payments which will not
have been made by the Company should have been made ("Underpayment"), consistent
with the  calculations  required  to be made  hereunder.  In the event  that the
Company  exhausts its remedies  described in paragraph  (ii) of this Section 5.6
and the  Executive  thereafter  is required to make a payment of any Excise Tax,
the  Accounting  Firm shall  determine the amount of the  Underpayment  that has
occurred  and any such  Underpayment  shall be paid by the Company to or for the
benefit of the  Executive  within  five days of the  receipt  of the  Accounting
Firm's  determination.  All  determinations  made  by  the  Accounting  Firm  in
connection with any Gross-Up Payment or Underpayment  shall be final and binding
upon the Company and the Executive.

           (ii) The  Executive  shall notify the Company in writing of any claim
asserted in writing by the Internal  Revenue  Service to the Executive  that, if
successful, would require the payment by the Company of the Gross-Up Payment.


<PAGE>



Such  notification  shall be given as soon as practicable  but not later than 60
days after the  Executive is informed in writing of such claim and shall apprise
the  Company  of the  nature of such  claim and the date on which  such claim is
requested  to be paid.  The  Executive  shall  not pay such  claim  prior to the
expiration of the 30-day period following the date on which it gives such notice
to the Company (or such  shorter  period  ending on the date that any payment of
taxes with respect to such claim is due). If the Company  notifies the Executive
in writing  prior to the  expiration  of such  period that it desires to contest
such claim, the Executive shall at the Company's expense:

            (a)   give the Company any information reasonably
      requested by the Company relating to such claim,

            (b) take such action in connection with contesting such claim as the
      Company shall reasonably request in writing from time to time,  including,
      without  limitation,  accepting legal  representation with respect to such
      claim by an attorney reasonably selected by the Company,

            (c)   cooperate with the Company in good faith in
      order effectively to contest such claim, and

            (d)   permit the Company to participate in any
      proceedings relating to such claim;

provided,  however, that the Company shall bear and pay directly as incurred all
costs and expenses  (including  additional  interest and penalties)  incurred in
connection  with  such  contest  and  shall  indemnify  and hold  the  Executive
harmless, on an after-tax basis, for any Excise Tax or any Federal, state, local
or other  income or other tax  (including  interest and  penalties  with respect
thereto)  imposed as a result of such  representation  and  payment of costs and
expenses.  Without  limitation on the foregoing  provisions of this Section 5.6,
the Company shall control all proceedings  taken in connection with such contest
and,  at its sole  option,  may  pursue  or  forego  any and all  administrative
appeals,  proceedings,  hearings and  conferences  with the taxing  authority in
respect of such claim and may, at its sole option,  either  direct the Executive
to pay the tax  claimed  and  sue for a  refund  or  contest  the  claim  in any
permissible  manner,  and the  Executive  agrees to prosecute  such contest to a
determination  before  any  administrative  tribunal,  in  a  court  of  initial
jurisdiction  and  in  one or  more  appellate  courts,  as  the  Company  shall
determine;  provided,  however, that if the Company directs the Executive to pay
such claim and sue for a refund,  the Company  shall  advance the amount of such
payment to the Executive, on an interest-free


<PAGE>



basis and shall  indemnify  and hold the  Executive  harmless,  on an  after-tax
basis, from any Excise Tax or Federal, state, local or other income or other tax
(including  interest or penalties with respect  thereto) imposed with respect to
such advance or with respect to any imputed income with respect to such advance;
and further  provided that any extension of the statute of limitations  relating
to payment of taxes for the taxable year of the Executive  with respect to which
such  contested  amount is claimed to be due is limited solely to such contested
amount.  Furthermore,  the Company's  control of the contest shall be limited to
issues with respect to which a Gross-Up  Payment would be payable  hereunder and
the  Executive  shall be entitled to settle or contest,  as the case may be, any
other  issue  raised  by  the  Internal  Revenue  Service  or any  other  taxing
authority.

          (iii) If, after the receipt by the Executive of an amount  advanced by
the Company  pursuant to  paragraph  (ii) of this  Section  5.6,  the  Executive
becomes entitled to receive any refund with respect to such claim, the Executive
shall  (subject to the Company's  complying with the  requirements  of paragraph
(ii) of this Section 5.6)  promptly pay to the Company the amount of such refund
(together  with any interest  paid or credited  thereon  after taxes  applicable
thereto)  upon receipt  thereof.  If,  after the receipt by the  Executive of an
amount advanced by the Company pursuant to paragraph (ii) of this Section 5.6, a
determination  is made that the  Executive  shall not be  entitled to any refund
with  respect to such claim and the  Company  does not notify the  Executive  in
writing of its intent to contest such denial of refund  prior to the  expiration
of 30 days after such  determination,  then such  advance  shall be forgiven and
shall not be required to be repaid and the amount of such advance  shall offset,
to the extent thereof, the amount of Gross-Up Payment required to be paid.

            In the event that the  Executive is subject to any  Federal,  state,
local or other income taxes or any interest or penalties  relating  thereto with
respect  to the  Executive's  receipt  of any  non-cash  consideration  from the
Company  from any  transaction  or event  between the Company and the  Executive
(such  income  taxes,  together  with  any  such  interest  and  penalties,  are
hereinafter  referred to as the "Income Tax"), the Company shall lend the amount
of such  Income  Tax to the  Executive,  subject  to any  applicable  bank  loan
restrictions or public indenture restrictions.  Such loan shall bear interest at
the lowest  interest rate at which the Company  borrows funds,  shall be due and
payable 10 years  from the date of the loan,  and shall be  evidenced  by a full
recourse, unsecured promissory note.



<PAGE>



     6.  Confidentiality and Non-Competition  Agreement.  The Executive shall be
bound by the terms of the Confidentiality and Non-Competition  Agreement, a copy
of which is annexed  hereto as Exhibit A, during the  Employment  Period and for
such  period   following  the   Employment   Period  as  is  set  forth  in  the
Confidentiality  and  Non-Competition  Agreement.  The Executive and the Company
shall  execute  a copy  of the  Confidentiality  and  Non-Competition  Agreement
simultaneously with the execution of this Agreement.

     7. Miscellaneous Provisions.

     7.1 Reimbursement.  Except as otherwise provided in Section 5.6 hereof, the
Executive shall reimburse the Company for any withholding tax liability (but not
any  interest or penalty)  respecting  amounts  treated as  compensation  to the
Executive actually paid by the Company with the Executive's  consent or when the
Company's  obligation  to pay the same is  ultimately  determined to be due, the
Company using  counsel of the  Executive's  choice,  which counsel is reasonably
acceptable to the Company.

     7.2   Entire   Agreement.   This   Agreement,   the   Confidentiality   and
Non-Competition  Agreement attached hereto as Exhibit A, and the 1996 Restricted
Stock  Plan  attached  hereto as Exhibit B set forth the  entire  agreement  and
understanding  between the parties with respect to the subject matter hereof and
supersede all prior agreements,  arrangements,  and  understandings  between the
parties with respect to the subject matter hereof.

     7.3  Modification.  This  Agreement may be amended,  modified,  superseded,
canceled,  renewed or extended, and the terms or covenants hereof may be waived,
only by a written instrument executed by both of the parties or in the case of a
waiver, by the party waiving compliance.

     7.4  Waiver.  The  failure of either  party at any time or times to require
performance  of any  provision  hereof in no manner  shall affect the right at a
later time to  enforce  the same.  No waiver by either  party of a breach of any
term or covenant  contained in this Agreement,  whether by conduct or otherwise,
in any one or more instances, shall be deemed to be or construed as a further or
continuing  waiver of any such  breach or a waiver of any other term or covenant
contained in this Agreement.

     7.5  Notices.  All  notices,  demands,  consents  or  other  communications
hereunder  shall be in  writing  and shall be given (and shall be deemed to have
been duly given) upon the earlier of receipt,  one business day after being sent
by


<PAGE>



nationally-recognized  overnight courier or three business days after being sent
by registered or certified  mail to the parties at the addresses set forth above
or to such other  address as either party shall  hereafter  specify by notice to
the other party. A copy of each notice,  demand,  consent or communication given
to the Executive hereunder shall  simultaneously be given to Allen Lenard, Esq.,
Lenard & Gonzalez, 2121 Avenue of the Stars, 22nd Floor, Los Angeles, California
90067.  Irrespective  of the  foregoing,  notice of change of  address  shall be
effective only upon receipt.

     7.6 Governing Law. This Agreement shall be construed in accordance with and
governed by the laws of the State of New York  applicable to contracts  made and
to be performed wholly within such state.

     7.7  Arbitration.  Any  controversy  or claim arising out of or relating to
this Agreement,  the making,  interpretation or the breach thereof, other than a
claim solely for  injunctive  relief for any alleged breach of the provisions of
the Confidentiality and Non-Competition  Agreement as to which the parties shall
have the right to apply for  specific  performance  to any court  having  equity
jurisdiction,  shall  be  resolved  by  arbitration  in New  York,  New  York in
accordance  with the Commercial  Arbitration  Rules of the American  Arbitration
Association  and  judgment  upon the award  tendered by the  arbitrators  may be
entered  in  any  court  having  jurisdiction  thereof  and  any  party  to  the
arbitration  may, if such party so elects,  institute  proceedings  in any court
having  jurisdiction for the specific  performance of any such award. The powers
for the  arbitrator or  arbitrators  shall  include,  but not be limited to, the
awarding of injunctive  relief. The arbitrator shall include in any award in the
prevailing party's favor the amount of his or its reasonable attorney's fees and
expenses and all other reasonable costs and expenses of the arbitration.  In the
event the arbitrator  does not rule in favor of the prevailing  party in respect
of all the claims  alleged by such party,  the  arbitrator  shall include in any
award in favor of the prevailing party the amount of his or its reasonable costs
and  expenses  of the  arbitration  as he deems  just and  equitable  under  the
circumstances.  Except as provided  above,  each party shall bear his or its own
attorney's  fees and expenses and the parties shall bear equally all other costs
and expenses of the arbitration.

     7.8  Indemnification.  The  Company  agrees  that  the  Executive  shall be
entitled to indemnification  and payment or reimbursement of expenses (including
attorneys' fees and expenses) to the fullest extent provided in the Company's


<PAGE>



Certificate of  Incorporation,  as in effect on the date hereof and as it may be
hereafter amended (but in no event on terms less favorable to the Executive than
those in  effect on the date  hereof),  for all  damages,  losses  and  expenses
incurred  by the  Executive  in  connection  with  any  claim,  action,  suit or
proceeding  which arises from the Executive's  services and/or  activities as an
officer and/or  employee of the Company or any affiliate  thereof.  This Section
shall survive any termination of the term of this Agreement.

     7.9 HSR Filings and  Approvals.  Anything in this Agreement or in any other
agreement as to which the Company and the Executive are parties notwithstanding,
if any  governmental  or other  filings or approvals  relating to or required by
Hart-  Scott-Rodino  are  required  before the Company can issue or transfer any
stock to the Executive or the Executive could receive any stock from the Company
(including from the exercise of any options  granted to the Executive)  pursuant
to the terms of this  Agreement or any such other  agreement or otherwise,  then
the  Company  shall bear and pay  directly as  incurred  all costs and  expenses
(including,  without  limitation,  any filing fees or any legal,  accounting  or
other expenses)  incurred by the Executive or the Company in connection with any
such  filings or in applying for any such  approvals.  If, after making any such
filings  or  applying  for any such  approvals,  the  Company is  prohibited  by
governmental or administrative rule,  determination or otherwise from issuing or
transferring any such stock to the Executive,  or the Executive is prohibited by
governmental or administrative  rule,  determination or otherwise from receiving
any such stock from the Company,  then the Company shall use its best efforts to
exhaust all reasonable administrative or judicial remedies that may be available
and shall bear and pay directly as incurred  all costs and expenses  (including,
without  limitation,  all legal,  accounting or other expenses)  incurred by the
Executive or the Company in pursuing any such remedies. If, after exhausting all
such  remedies,  the  Company  is  still  legally  prohibited  from  issuing  or
transferring any such stock to the Executive,  or the Executive is still legally
prohibited  from  receiving  any such stock from the  Company,  then the Company
shall engage an investment bank (at its sole cost and expense), which investment
bank shall be acceptable to the Executive,  to develop a method of providing the
Executive with equivalent  consideration which shall be reasonably acceptable to
the Executive and in accordance with the essential intent and principles of this
Agreement or any such other agreement, as the case may be.

     7.10  Assignability.   This  Agreement,  and  the  Executive's  rights  and
obligations hereunder, may not be assigned by the Executive, except by operation
of law, and except that Executive's rights, but not his obligations,


<PAGE>



hereunder may be assigned to a trust for the benefit of  Executive,  his spouse,
and any of the children of either.  The Company may assign its rights,  together
with its obligations hereunder, only to a successor by merger or by the purchase
of all or  substantially  all of the assets and business of the Company and such
rights and obligations shall inure to, and be binding upon, any such successor.

     7.11 Binding  Effect.  This Agreement shall be binding upon and shall inure
to the benefit of the parties and their respective legal representatives, heirs,
permitted successors and permitted assigns.

     7.12 Headings and Word Meanings.  Headings and titles in this Agreement are
for  convenience  of reference  only and shall not control the  construction  or
interpretation  of  any  provisions  hereof.   The  words  "herein,"   "hereof,"
"hereunder" and words of similar  import,  when used anywhere in this Agreement,
refer to this Agreement as a whole and not merely to a subdivision in which such
words appear, unless the context otherwise requires.  The singular shall include
the plural unless the context otherwise requires.

     7.13 Separability. Any term or provision of this Agreement which is invalid
or  unenforceable  in  any  jurisdiction  shall,  as to  such  jurisdiction,  be
ineffective  to the  extent  of  such  invalidity  or  unenforceability  without
rendering  invalid or  unenforceable  the remaining terms and provisions of this
Agreement or affecting  the  validity or  enforceability  of any of the terms or
provisions of this Agreement in any other jurisdiction.

     7.14 1996  Restricted  Stock  Plan.  During  the period  commencing  on the
Effective Date and  terminating  on the day after the fourth  anniversary of the
Effective  Date, the Company hereby adopts and shall maintain in effect the 1996
Restricted Stock Plan in the form annexed hereto as Exhibit B.


            IN WITNESS WHEREOF, the parties have duly executed this Agreement as
of the date first above written.


                          ALLIANCE ENTERTAINMENT CORP.


                                          By:/s/Anil K. Narang
                                          --------------------------------------
                                          Name: Anil K. Narang
                                          Title:    President and Vice Chairman


                                          /s/Alvin N. Teller
                                          -------------------------------------
                                          Alvin N. Teller



<PAGE>



                               Exhibit A



               CONFIDENTIALITY AND NON-COMPETITION AGREEMENT


            THIS    CONFIDENTIALITY   AND    NON-COMPETITION    AGREEMENT   (the
"Agreement"),  entered into and effective as of the 15th day of August, 1996, is
by and between ALLIANCE  ENTERTAINMENT CORP. (the "Company") and ALVIN N. TELLER
("Employee").

            In  consideration of Employee's  employment by the Company,  and for
other good and  valuable  consideration,  the receipt  and  adequacy of which is
hereby acknowledged, the parties agree as follows:

     1.  Confidential  Information.  By virtue of  Employee's  employment at the
Company,  Employee may obtain confidential or proprietary information developed,
or to be  developed,  by  the  Company.  "Confidential  Information"  means  all
information,  whether  in  oral,  written,  graphic  or  machine-readable  form,
including but not limited to all: software used or developed in whole or in part
by the Company (including source code); algorithms;  computer processing systems
and techniques; price lists; customer lists; procedures;  improvements, concepts
and ideas; business plans and proposals; technical plans and proposals; research
and development; budgets and projections; technical memoranda, research reports,
designs and specifications;  new product and service  developments;  comparative
analyses of competitive products,  services and operating procedures;  and other
information,  data and documents now existing or later  acquired by the Company,
regardless of whether any of such  information,  data or documents  qualify as a
"trade secret" under  applicable  Federal or State law. All such  information is
collectively referred to as the "Confidential Information". For purposes of this
Agreement,  "Confidential  Information" shall not include information which: (i)
was previously known to Employee prior to his employment with the Company;  (ii)
is generally  known in the music  industry or otherwise  generally  known to the
public;  (iii)  is in the  public  domain;  (iv) is  independently  obtained  by
Employee  from third  parties  under no  obligation  of  confidentiality  to the
Company or to any third  party;  or (v) is required to be disclosed by law or in
any legal or governmental investigation or proceeding.

     2. Non-Disclosure. Employee agrees that, except as directed by the Company,
he will not at any time (during the term of Employee's employment by the Company
or at any time thereafter), except as may be expressly authorized by the Company
in writing and except to the Company and its officers,  directors and employees,
disclose to any person or use any  Confidential  Information  whatsoever for any
purpose whatsoever,



<PAGE>


or permit any person  whatsoever to examine and/or make copies of any reports or
any  documents  or  software  (whether  in written  form or stored on  magnetic,
optical  or other  mass  storage  media)  prepared  by him or that come into his
possession or under his control by reason of his employment by the Company or by
reason of any  consulting or software  development  services he has performed or
may in the future  perform for the  Company  which  contain or are derived  from
Confidential  Information.  Employee  further  agrees that while employed at the
Company,  he shall  not  remove  Confidential  Information  from  the  Company's
business premises, without the prior written consent of the Company.

     3. Company Property. As used in this Agreement, the term "Company Property"
means all documents,  papers, computer printouts and disks, records, customer or
prospect  lists,  files,  manuals,  supplies,  computer  hardware and  software,
equipment,  inventory  and  other  materials  that have  been  created,  used or
obtained by the Company,  or otherwise  belonging to the Company, as well as any
other  materials  containing  Confidential  Information  as defined in Section 1
above. Employee recognizes and agrees that:

     3.1 All Company Property shall be and remain the property of the Company;

     3.2 Employee  will  preserve,  use and hold Company  Property  only for the
benefit of the Company and to carry out the Company's business; and

     3.3 When  Employee's  employment is terminated,  Employee will  immediately
deliver to the Company all Company  Property,  including all copies or any other
types of reproductions which Employee has in his possession or control.

     4.  Non-Solicitation.  During the period of his employment and for a period
of one (1) year after  termination  of his  employment  at the  Company  for any
reason,  Employee shall not, on his own behalf or on behalf of any person,  firm
or  corporation,  or in any capacity  whatsoever,  (i) hire,  offer to hire,  or
otherwise entice away any officer, employee, agent or


<PAGE>



consultant of the Company or anyone who has served in such capacities during the
most recent 6-month period during Employee's  employment (not including external
accountants,  counsel  or  financial  advisors),  (ii)  solicit  any  persons or
entities  with which the  Company had  contracts  or was  negotiating  contracts
regarding  products  or  services  during  the  one-year  period  preceding  the
termination  of Employee's  employment,  or (iii) induce,  suggest,  persuade or
recommend to any such persons or entities that they terminate,  alter or refrain
from  renewing or  extending,  their  relationship  with the Company or become a
client of Employee or any third party,  and Employee shall not himself and shall
not  knowingly  induce or permit any other person to approach any such person or
entity for any purpose.  Should Employee become aware that any other employee or
third party has engaged in such conduct,  Employee agrees to immediately  advise
the Company of the circumstances of any such conduct.

     5. Restrictive Covenant. Employee acknowledges that his employment with the
Company  will enable him to obtain  knowledge  about the  computer  software the
Company  develops or uses, as well as of the  entertainment  and other fields in
which the  Company  does  business,  and will also  enable  him to form  certain
relationships  with individuals and entities in the geographic area in which the
Company furnishes its services.  Employee further acknowledges that the goodwill
and other  proprietary  interests  of the Company  will suffer  irreparable  and
continuing damage in the event Employee enters into competition with the Company
within  three  (3)  years  subsequent  to the  termination  of  his  employment.
Therefore,  Employee  agrees  that during the term of his  employment  and for a
period of three (3) years thereafter, regardless of the cause of the termination
of Employee's  employment,  he will not,  without  prior written  consent of the
Company,  engage  directly or indirectly in any conduct,  activity,  or business
whatsoever  which would provide revenue to Employee or to any third party,  with
any  person or entity  manufacturing,  distributing  or  supplying  a product or
service  competing  with the  Company's  products  or  services  material to the
Company's business as of the date of Employee's termination;  provided, however,
that  nothing  herein  shall  prohibit  Employee  from owning less than five (5)
percent of the capital  stock of a publicly  traded  company.  Employee  further
acknowledges that his employment with the Company  constitutes fair and adequate
consideration  for his agreement not to engage in such conduct  within three (3)
years of the  termination  of his  employment,  regardless  of the cause of such
termination.  Employee  further  agrees  that  should the  Company,  in its sole
discretion, determine that it is desirable or appropriate to make any payment to
Employee upon termination of employment ("Severance Pay"), such


<PAGE>



Severance Pay shall be deemed additional  consideration  for Employee's  binding
obligation  not to  engage in such  conduct  during  the three (3) year  period.
However,  and  notwithstanding  any other  provision  of this  Agreement,  it is
understood  and agreed by the Company and Employee that any decision made by the
Company regarding  Severance Pay,  regardless of whether termination occurs with
or  without  cause,  shall in no way  discharge  or  release  Employee  from the
obligation not to engage in such conduct during the three (3) year period.

            In the event  that  during  the  period of two years  following  the
Effective Date, the price of the Common Stock of the Company remains at or above
$9.00, $10.00,  $11.00 or 12.00 per share for 25 trading days out of a period of
30  consecutive  trading days,  the  non-compete  period of three years shall be
reduced by three (3)  months,  six (6)  months,  nine (9) months or twelve  (12)
months,  respectively.  At any time Employee may elect to reduce the non-compete
period to two years by  transferring  to the  Company  160,000  shares of Common
Stock of the Company.

     6. Work Product.  Employee  agrees that,  during the term of his employment
with the Company:

            6.1 He will disclose  promptly and fully to the Company all works of
authorship, inventions, discoveries, improvements, designs, processes, software,
or any  improvements,  enhancements,  or documentation of or to the same that he
makes, works on or conceives, individually or jointly with others, in the course
of his  employment  by the  Company  or  with  the  use of the  Company's  time,
materials or  facilities,  in any way related or pertaining to or connected with
the  present or  anticipated  business,  development,  work or  research  of the
Company or which  results  from or are  suggested  by any work he may do for the
Company and whether  produced  during normal  business hours or on personal time
(collectively, the "Work Product").

            6.2 All Work  Product of  Employee  shall be deemed to be "work made
for hire"  within the  meaning of { 101 of the  Copyright  Act and all rights to
copyright  shall be vested  entirely in the Company.  If for any reason the Work
Product is deemed  not to be "work  made for hire," and its rights to  copyright
are thereby in doubt, this Agreement shall constitute an irrevocable  assignment
by Employee to the Company of all right,  title and interest in the copyright of
all Work Product created under this  Agreement.  The parties intend that any and
all  copyright  and other  intellectual  property  rights  in the Work  Product,
including,  without  limitation,  any and all rights of whatever kind and nature
now or hereafter to distribute  and  reproduce  such Work Product in any and all
media throughout the


<PAGE>



world,  are the sole property of the Company.  Employee  hereby agrees to assist
the  Company in any manner as shall be  reasonably  requested  by the Company to
protect the  Company's  interest in such  copyright  and/or  other  intellectual
property rights,  and to execute and deliver such legal instruments or documents
as the Company  shall request in order for the Company to register the Company's
worldwide  copyright in the Work Product with the U.S.  Copyright  Office and to
register  and protect the  Company's  copyright or other  intellectual  property
rights in the Work  Product  throughout  the world.  Likewise,  Employee  hereby
agrees to assist the Company by executing such other  documents and  instruments
which the Company deems necessary to enable it to evidence,  perfect and protect
its right, title and interest in and to the Work Product.

            6.3 Employee  shall make and maintain  adequate and current  written
records and  evidence of all Work  Product,  including  drawings,  work  papers,
graphs,  computer  records and any other  document which shall be and remain the
property of the  Company,  and which shall be  surrendered  to the Company  upon
request and upon the  termination  of  Employee's  employment  with the Company,
regardless of cause. The provisions of this section and the term Work Product as
used  herein do not apply to any  invention  for which no  equipment,  supplies,
facilities  or  confidential,  proprietary  or trade secret  information  of the
Company was used, and which was developed entirely on Employee's own time, while
not on the  Company's  business  premises,  and  which  does not  relate  to the
Company's business, unless: (i) the invention relates to the Company's actual or
demonstratively  anticipated  research development or (ii) the invention results
from any work performed by Employee for the Company.

     7.  Enforcement.  The breach or threatened breach by Employee of any of the
provisions of this Agreement  shall: (i) constitute cause for the termination of
Employee's  employment  and  (ii)  entitle  the  Company  to  seek  a  permanent
injunction or other  injunctive  relief in order to prevent or restrain any such
breach   or   threatened   breach  by   Employee   or  his   partners,   agents,
representatives,  servants,  independent contractors,  or any and all persons or
entities  directly or  indirectly  acting for or with  Employee.  The rights and
remedies of the Company under this Agreement  shall be in addition to and not in
limitation  of any of the rights,  remedies,  and  monetary or other  damages or
redress available to it at law or equity.

     8.  Acknowledgment.  Employee  acknowledges  that he has carefully read and
considered the provisions of this Agreement, and having done so, agrees that the
restrictions set forth are fair and reasonably required for the protection of


<PAGE>



the interests of the Company. In the event that,  notwithstanding the foregoing,
any  part  of  the   covenants  set  forth  shall  be  held  to  be  invalid  or
unenforceable,  the remaining  parts thereof shall  nevertheless  continue to be
valid and enforceable as though the invalid or unenforceable  parts had not been
included  therein.  In the event that any provision of this  Agreement  shall be
declared  by  a  court  of  competent   jurisdiction   to  be   unreasonable  or
unenforceable,  the court shall enforce the provision in a way which it deems to
be reasonable and enforceable.

     9.  Survival.  This Agreement  shall survive any  termination of Employee's
employment, whether or not for cause.

     10. The Company Defined. As used in this Agreement,  the term "the Company"
includes  the  Company,  any  assignee  or other  successor  in  interest of the
Company, and any parent,  subsidiary,  or other corporation or partnership under
common ownership or control with the Company.

     11.  Notices.  All notices in accordance  with this  Agreement  shall be in
writing and given by hand delivery,  overnight  express  delivery,  or certified
U.S. mail,  return receipt  requested,  and properly  addressed to the party for
whom it is intended at the following  addresses or such other address as is most
recently noticed for such party:


            If to the Company:            Alliance Entertainment Corp.
                                          110 E. 59th Street
                                          New York, New York 10022

                                          Attn: Joseph Bianco,
                                                Co-Chairman

            If to Employee:               Alvin N. Teller
                                          900 Stradella Road
                                          Los Angeles, California 90077

                                          With a copy to:

                                          Lenard & Gonzalez
                                          2121 Avenue of the Stars
                                          22nd Floor
                                          Los Angeles, California 90067

                                          Attn: Allen D. Lenard, Esq.

     12. Miscellaneous. This Agreement is legally


<PAGE>



binding on both  Employee  and the Company and  benefits  their  successors  and
assigns.  This Agreement is only assignable by the Company to the same extent as
is set forth in Section 7.10 of the Employment  Agreement dated as of August 15,
1996 and the Employee.It 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.  It  represents  the parties'  entire  understanding  regarding  the
subject  matter  of this  Agreement  and  supersedes  any and  all  other  prior
agreements  regarding the same subject matter.  The terms and provisions of this
Agreement cannot be terminated,  modified, or amended except in a writing signed
by the party  against  whom  enforcement  is  sought.  This  Agreement  shall be
construed in  accordance  with the laws of the State of New York,  and any suit,
action or  proceeding  arising  out of or relating  to this  Agreement  shall be
commenced and maintained in any court of competent  subject-matter  jurisdiction
in the State of New York, with exclusive venue in New York County.  In any suit,
action or proceeding  arising out of or in connection with this  Agreement,  the
prevailing  party shall be entitled to an award of the amount of attorneys' fees
and   disbursements   actually   billed  to  such  party,   including  fees  and
disbursements on one or more appeals.

     13.  No  Guarantee  of  Employment.  Nothing  in this  Agreement  shall  be
interpreted  or  construed  to  be a  guarantee  of  ongoing  employment,  or to
otherwise  limit the Company's right to terminate  Employee's  employment at any
time.


            IN WITNESS WHEREOF, the parties have duly executed this Agreement as
of the date first above written.


EMPLOYEE:                                 ALLIANCE ENTERTAINMENT CORP.

/s/Alvin Teller                           /s/Anil K. Narang
-------------------------                 -------------------------
   (signature)                                 (signature)

Alvin Teller                              Anil K. Narang
------------------------                  -------------------------
  (name printed)                              (name printed)

                                          President & Vice Chairman
                                          -------------------------
                                                 (title)



<PAGE>



                             EXHIBIT B


                     ALLIANCE ENTERTAINMENT CORP.

                      1996 RESTRICTED STOCK PLAN


     1. Purpose. The purpose of the Alliance Entertainment Corp. (the "Company")
1996  Restricted  Stock Plan (the  "Plan") is to  provide  incentive  to certain
employees  of the  Company to remain in the employ or service of the Company and
its present and future subsidiary corporations and affiliates  ("Subsidiaries"),
to encourage ownership of shares in the Company by such employees and to provide
additional  incentive for such employees to promote the success of the Company's
business.

     2.  Effective  Date of the Plan.  The Plan shall  become  effective  on the
earlier  to occur  of:  (i) the  date of  approval  of the Plan by the  Board of
Directors of the Company (the  "Board");  and (ii) the date of  commencement  of
employment as Chief Executive Officer ("CEO") of Alvin N. Teller (the "Effective
Date").

     3. Stock Subject to Plan.  500,000 of the authorized but unissued shares of
common stock,  $.0001 par value (the "Common Stock"),  of the Company are hereby
reserved  for issuance  under the Plan;  provided,  however,  that the number of
shares so reserved  may be reduced to the extent that the total of the Tranche 1
Shares  and  the  Tranche  2  Shares  (as  hereinafter  defined)  available  for
distribution is less than 500,000.  The shares available for distribution by the
Plan are hereinafter referred to as "Restricted Shares."

                  (a)  Tranche 1. If, at any time  during  the  period  from the
Effective Date to the second anniversary of the Effective Date, the price of the
Common  Stock  remains at or above the Target  Prices  indicated on the schedule
below for any 25 trading days out of a period of 30 consecutive  days,  then the
corresponding  percentage  of  250,000  shares  of  Common  Stock  shall  become
available for distribution (the "Tranche 1 Shares") by the Plan.



<PAGE>



    Target Price                          % of Tranche 1 Stock

    $     9.00                                    25.00%
    $     9.25                                    31.25%
    $     9.50                                    37.50%
    $     9.75                                    43.75%
    $    10.00                                    50.00%
    $    10.25                                    56.25%
    $    10.50                                    63.50%
    $    10.75                                    69.75%
    $    11.00                                    75.00%
    $    11.25                                    81.25%
    $    11.50                                    87.50%
    $    11.75                                    93.75%
    $    12.00                                   100.00%

                  (b)  Tranche 2. If, at any time  during  the  period  from the
Effective Date to the fourth anniversary of the Effective Date, the price of the
Common  Stock  remains at or above the Target  Prices  indicated on the schedule
below for any 85 trading days out of a period of 90  consecutive  trading  days,
then the corresponding percentage of 250,000 shares of Common Stock shall become
available for distribution (the "Tranche 2 Shares") by the Plan.

    Target Price                          % of Tranche 2 Stock

    $    13.00                                    50.00%
    $    13.50                                    56.50%
    $    14.00                                    62.50%
    $    14.50                                    68.75%
    $    15.00                                    75.00%
    $    15.50                                    81.25%
    $    16.00                                    87.50%
    $    16.50                                    93.75%
    $    17.00                                   100.00%

                  (c) Change of Control.  In the event of a Change of control of
the Company, all of the Tranche 1 Shares and the Tranche 2 Shares not previously
available for distribution shall become  immediately  available for distribution
by the Plan. As used herein,  "Change of Control" shall mean (i) the acquisition
of all or substantially  all of the assets of the Company,  (ii) the acquisition
by any party (or  group,  as such term is defined  in  Section  13(d)(3)  of the
Securities Exchange Act of 1934, as amended) not currently a holder of more than
5% of the  outstanding  Common  Stock  of the  Company  of more  than 50% of the
outstanding  Common  Stock  of  the  Company,  (iii)  any  merger,  combination,
consolidation or similar transaction involving the Company following which the


<PAGE>



holders of Common  Stock of the Company  immediately  prior to such  transaction
will not own more than 50% of the Common Stock of the Company.

                  (d)  Adjustments.  In the event that the Company  shall at any
time (i) subdivide (by any stock split, stock dividend or otherwise) one or more
classes  of its  outstanding  Common  Stock  into a greater  number of shares of
Common Stock,  (ii) combine (by reverse  stock split or  otherwise)  one or more
classes of its outstanding Common Stock into a smaller number of shares or (iii)
pay any  extraordinary  cash dividend on one or more classes of its  outstanding
Common  Stock;  then the  number of shares  subject  to the Plan and the  target
prices shall be proportionately adjusted.

     4. Administration and Eligibility.  The CEO shall allocate, in his sole and
absolute  discretion,  the Restricted Shares subject to the Plan to any employee
or employees of the Company,  including himself, on the terms and conditions set
forth herein;  provided,  however,  that no Restricted Shares shall be delivered
until such shares become  available for distribution by the Plan pursuant to the
terms  hereof.  The CEO shall also have  authority to interpret  the Plan and to
prescribe,  amend  and  rescind  rules  and  regulations  relating  to  it.  Any
determination  by the CEO in carrying out,  administering or construing the Plan
shall be final and binding for all purposes and upon all interested  persons and
their respective heirs, successors and personal representatives.

     5.  Registration.  The  issuance  by the  Company  of the  Shares  shall be
registered  by the  Company  under the  Securities  Act of 1933 on an  effective
registration  statement  as promptly as  reasonably  practicable  following  the
adoption of the Plan, which registration statement shall be maintained in effect
for not less than 5 years after the Effective Date.

     6.  Restrictions.  (a) The  Restricted  Shares  shall  be  subject  to such
restrictions,  if any,  as the  CEO  shall  determine  in his  sole  discretion,
including  but not limited to,  vesting  schedules  and  provisions  relating to
forfeiture.

            (b) The employee  receiving  Restricted  Shares shall (i) agree that
such employee's  Restricted Shares shall be subject to, and shall be held by him
or her in accordance  with all of the  applicable  terms and  provisions of, the
Plan, and (ii) agree that the Company may place on the certificates representing
the  Restricted  Shares or new or additional  or different  shares or securities
distributed with respect to the Restricted  Shares such legend or legends as the
Company may deem appropriate and that the Company may place a stop transfer


<PAGE>



order with respect to such Restricted  Shares with the Transfer Agent(s) for the
Common Stock.

            (c) Any  Restricted  Shares that are  forfeited  by the  Participant
shall become immediately available for reallocation and redistribution under the
Plan.

            (d)  Restricted  Shares  issued  under the Plan must be held for not
less  than  six  months  from  the  date of  issue  unless  the  allocation  and
distribution of such shares has been approved by the Board or a Committee of the
Board consisting solely of two (2) or more non-employee members of the Board.

     7.  Expenses  of  Administration.  All costs and  expenses  incurred in the
operation and administration of the Plan shall be borne by the Company.

     8.  No  Employment  Right.  Neither  the  existence  of the  Plan  nor  the
allocation  of any  Restricted  Shares  hereunder  shall  require the Company to
continue any Participant in the employ of the Company or any Subsidiary.

     9. Amendment of Plan. The Company shall, at any time and from time to time,
at the request of the CEO, make such  modifications of the Plan as it shall deem
advisable. No amendment of the Plan may, without the consent of the Participants
to whom any Restricted Shares shall  theretofore have been allocated,  adversely
affect the  rights or  obligations  of such  Participants  with  respect to such
Restricted  Shares.  The CEO may,  in his  discretion,  cause  the  restrictions
imposed in  accordance  with the  provisions of Section 6 hereof with respect to
any Restricted Shares to terminate,  in whole or in part, prior to the time when
they would otherwise terminate.

     10.  Expiration and  Termination of the Plan. The Plan shall  terminate the
day after the fourth anniversary of the Effective Date; provided,  however, that
such termination  shall not, without the consent of the Participants to whom any
Restricted  Shares shall  theretofore have been allocated,  adversely affect the
rights or  obligations  of such  Participants  with  respect to such  Restricted
Shares.

     11.  Governing  Law. The Plan shall be governed by the laws of the State of
New York applicable to agreements made and to be performed wholly therein.



<PAGE>



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




                                                       August 26, 1996



Mr. Alvin N. Teller
900 Stradella Road
Los Angeles, California 90077

Dear Al:

     Reference is hereby made to the Employment Agreement dated as of August 15,
1996,  (the  "Employment   Agreement")  between  Alliance   Entertainment  Corp.
("Alliance") and you.  Capitalized  terms used herein and not otherwise  defined
shall have the meanings ascribed to them in the Employment Agreement.

     Alliance and you desire to clarify  certain  provisions  of the  Employment
Agreement,  including, without limitation, the Restricted Stock Plan attached as
Exhibit B thereto (the "Plan").

     Accordingly,  in  consideration  of our mutual  agreements and obligations,
Alliance and you hereby agree as follows:

     1. The "Effective  Date" for all purposes of the Plan shall be deemed to be
the Effective Date as such term is defined in the Stock  Acquisition  and Merger
Agreement dated as of August 15, 1996, (the "Acquisition  Agreement") among you,
Wasserstein & Co., Inc.,  U.S.  Equity  Partners,  L.P.,  U.S.  Equity  Partners
(Offshore),  L.P., Red Ant Box, Inc.,  Alliance,  and Alliance  Acquisition Co.,
Inc.

     2. Alliance  confirms (i) that the references to "the exhibits hereto," the
"agreements  referenced  herein"  and  "the  transactions  contemplated  by  the
Agreement"  contained in the  representations and warranties in Section 6 of the
Acquisition  Agreement include the Plan and (ii) that such  representations  and
warrranties are true and correct as they apply to the Plan.

     3. Alliance  hereby  represents  and warrants that upon the issuance of any
shares of Common Stock of the Company  pursuant to the Plan, and pursuant to the
Stock Option Agreement  between the Company and you dated as of August 15, 1996,
such shares will be duly and validly issued, fully paid, and nonassessable.




<PAGE>


     4. This Letter Agreement may be executed in one or more counterparts,  each
of  which  shall  be an  original,  but  all of  which,  taken  together,  shall
constitute one agreement.

                                    Very truly yours,

                                    ALLIANCE ENTERTAINMENT CORP.




                                    By:/s/ Christopher J. Joyce
                                    -----------------------------------------
                                     Name:  Christopher J. Joyce
                                     Title: Senior Vice President, General
                                            Counsel, and Assistant Secretary


ACCEPTED AND AGREED:


/s/Alvin N. Teller
----------------------------------------
Alvin N. Teller