<PAGE>

================================================================================
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-Q
<TABLE>
<C>     <S>
[x]     Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

        For the quarterly period ended June 30, 2001                   Commission file number 000-25617

                                                                      OR

[ ]     Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from
        ________ to _______
</TABLE>
                               Valley media, Inc.
             (Exact name of registrant as specified in its charter)

             Delaware                                   94-2556440
   (State or other jurisdiction            (I.R.S. Employer Identification No.)
 of incorporation or organization)


                            ------------------------

               1280 Santa Anita Court, Woodland, California 95776

               (Address of principal executive offices) (zip code)
       Registrant's telephone number, including area code: (530) 661-6600

                            ------------------------

Indicate by check mark whether the registrant (1) has filed all reports required
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
             -----                     ----.



The number of shares outstanding of the Registrant's common stock as of June 29,
2001 was 8,617,876 shares.

================================================================================
<PAGE>

                         PART I--Financial Information

ITEM 1.  Financial Statements

                               Valley Media, Inc.

                           Consolidated Balance Sheets

                                   (Unaudited)
<TABLE>
<CAPTION>
                                                                                                    June 30,    March 31,
                                                                                                     2001         2001
                                                                                                   ---------    ---------
Dollars in thousands, except share data
<S>                                                                                                <C>         <C>
Assets
Current assets
        Cash ...................................................................................   $     207    $     385
        Accounts receivable, less allowance for doubtful accounts of $23,997 at June 30, 2001
          and $24,123 at March 31, 2001 ........................................................     117,071      144,410
        Inventories ............................................................................     157,953      167,457
        Investment in marketable equity securities, available for sale .........................         731          366
        Deferred income taxes ..................................................................      12,028       12,607
        Prepaid expenses and other .............................................................       2,583        3,985
                                                                                                   ---------    ---------
             Total current assets ..............................................................     290,573      329,210

Property and equipment, net ....................................................................      26,313       27,667

Goodwill and other intangibles, net ............................................................      11,372       11,739

Deferred income taxes ..........................................................................      12,149       12,103

Other assets ...................................................................................         384          562
                                                                                                   ---------    ---------

Total assets ...................................................................................   $ 340,791    $ 381,281
                                                                                                   =========    =========

Liabilities and Stockholders' Equity
Current liabilities
        Accounts payable .......................................................................   $ 147,503    $ 171,960
        Accrued liabilities ....................................................................       5,261        6,292
        Revolving line of credit ...............................................................     147,789      159,601
        Current portion of long-term debt ......................................................       1,838        1,881
        Deferred income taxes ..................................................................         447          447
                                                                                                   ---------    ---------
             Total current liabilities .........................................................     302,838      340,181

Deferred income taxes ..........................................................................       4,797        5,098

Long-term debt .................................................................................       3,443        3,969

Commitments and contingencies

Stockholders' equity
        Preferred stock, $.001 par value, 2,000,000 shares authorized, none issued .............
        Common stock, $.001 par value, 20,000,000 shares authorized, 8,617,876 shares issued and
          outstanding ..........................................................................           8            8
        Additional paid-in capital .............................................................      52,723       52,723
        Stockholders' notes receivable .........................................................         (70)         (70)
        Accumulated deficit ....................................................................     (22,597)     (20,049)
        Accumulated other comprehensive loss ...................................................        (351)        (579)
                                                                                                   ---------    ---------

             Total stockholders' equity ........................................................      29,713       32,033
                                                                                                   ---------    ---------

Total liabilities and stockholders' equity .....................................................   $ 340,791    $ 381,281
                                                                                                   =========    =========
</TABLE>

                See notes to consolidated financial statements.

                                       1
<PAGE>

                               Valley Media, Inc.

                      Consolidated Statements of Operations

                                   (Unaudited)
<TABLE>
<CAPTION>

                                                     Thirteen Weeks Ended
                                                  ---------------------------
                                                    June 30,        July 1,
                                                      2001           2000
                                                  -----------    -----------
<S>                                               <C>           <C>
Dollars in thousands, except share data
Net sales .....................................   $   145,922    $   181,262
Cost of goods sold ............................       127,525        167,051
                                                  -----------    -----------

Gross profit ..................................        18,397         14,211
Selling, general and administrative expenses ..        18,311         21,490
Video rental business exit costs ..............           906           --
                                                   -----------   -----------

Operating loss ................................          (820)        (7,279)
Interest expense ..............................         3,222          4,252
Equity in net loss (income) of investees ......            48             (4)
                                                   -----------   -----------

Loss before income taxes ......................        (4,090)       (11,527)
Income tax benefit ............................        (1,542)        (4,607)
                                                  -----------    -----------

Net loss ......................................   $    (2,548)   $    (6,920)
                                                  ===========    ===========


Basic and diluted net loss per share ..........   $     (0.30)   $     (0.82)
                                                  ===========    ===========

Weighted average shares used in the calculation     8,617,876      8,453,291
</TABLE>

                 See notes to consolidated financial statements.

                                       2
<PAGE>

                               Valley Media, Inc.

                      Consolidated Statements of Cash Flows

                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                                      Thirteen Weeks Ended
                                                                                     ----------------------
                                                                                      June 30,      July 1,
                                                                                        2001         2000
                                                                                     ---------    ---------
<S>                                                                                 <C>           <C>
Dollars in thousands
Cash flows from operating activities
   Net loss ......................................................................   $  (2,548)   $  (6,920)
   Adjustments to reconcile net loss to net cash provided by operating activities:
   Depreciation and amortization .................................................       1,873        1,842
   Bad debt expense ..............................................................       1,534          374
   Deferred income taxes .........................................................          95          (57)
   Amortization of deferred financing fees .......................................         114          234
   Noncash compensation expense ..................................................        --            538
   Other .........................................................................          54           (4)
   Changes in operating assets and liabilities:
        Accounts receivable ......................................................      25,805       19,190
        Inventories ..............................................................       9,504       10,896
        Prepaid expenses and other ...............................................       1,345       (7,308)
        Accounts payable .........................................................     (24,457)       3,791
        Accrued liabilities ......................................................      (1,031)         502
                                                                                     ---------    ---------
        Net cash provided by operating activities ................................      12,288       23,078
                                                                                     ---------    ---------

Cash flows from investing activities
   Net purchases of property and equipment .......................................        (158)      (1,686)
   Other .........................................................................          73          (25)
                                                                                     ---------    ---------
        Net cash used in investing activities ....................................         (85)      (1,711)
                                                                                     ---------    ---------

Cash flows from financing activities
   Short-term borrowings .........................................................     157,146      172,140
   Repayment of short-term borrowings ............................................    (168,958)    (192,416)
   Repayment of long-term debt ...................................................        (569)      (1,079)
                                                                                     ---------    ---------
       Net cash used in financing activities .....................................     (12,381)     (21,355)
                                                                                     ---------    ---------

NET INCREASE (DECREASE) IN CASH ..................................................        (178)          12
CASH, BEGINNING OF PERIOD ........................................................         385          274
                                                                                     ---------    ---------
CASH, END OF PERIOD ..............................................................   $     207    $     286
                                                                                     =========    =========
</TABLE>


                See notes to consolidated financial statements.

                                       3
<PAGE>

                               Valley Media, Inc.

             Notes to Consolidated Financial Statements (Unaudited)

1.  Basis of Presentation

         The accompanying consolidated financial statements of Valley Media,
Inc., and its subsidiaries ("Valley" or the "Company"), are unaudited and
reflect all normal, recurring adjustments, which, in the opinion of management,
are necessary for a fair presentation of such financial statements. The
Company's interim results are not indicative of results for a full year.

         The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Significant estimates include allowances
for doubtful accounts, vendor receivables, customer returns, goodwill recovery ,
and the deferred tax asset valuation allowance. Actual results could differ from
those estimates.

         These unaudited consolidated financial statements should be read in
conjunction with the audited financial statements included in the Company's
Annual Report on Form 10-K for the fiscal year ended March 31, 2001. Certain
prior year balances have been reclassified to conform to the current year
presentation.

2.  Results of Operations for Thirteen Weeks Ended June 30, 2001, and
    Management's Plans for Fiscal 2002

         The Company incurred a net loss of $2,548,000 in the thirteen weeks
ended June 30, 2001, and as a result, the Company has an accumulated deficit of
$22,597,000. At June 30, 2001 the Company had bank borrowings of $147,789,000
under a revolving line of credit. Management has implemented plans that it
believes will prevent a recurrence of significant losses in fiscal 2002 and will
enable the Company to continue without a significant curtailment of operations.

         Management of the Company has taken the following actions designed to
improve profitability:

         .  Hired a new Chief Executive Officer in April 2001, a new Chief
            Financial Officer, and other new members of senior management in
            fiscal 2001 and early fiscal 2002;
         .  Renegotiated the revolving line of credit as discussed in Note 3;
         .  Substantially improved pricing terms within all business segments;
         .  Implemented an inventory reduction program that reduces redundancies
            and duplications between distribution centers;
         .  Reduced the number of employees from approximately 2000 at April 1,
            2000 to approximately 1,300 at July 31, 2001;

                                       4
<PAGE>

         .  Curtailed discretionary spending on selling, general and
            administrative items;
         .  Renegotiated certain terms and conditions as to pricing and payment
            with several major vendors, effective April 1, 2001 and thereafter;
         .  Eliminated the video rental product line in April 2001.

         The Company has instituted and continues to pursue these and other
initiatives intended to increase liquidity, reduce costs, enhance gross profit
margins and better position the Company to compete under current market
conditions. Management's plans for fiscal 2002 are dependent upon several
factors, including its ability to attain revenue levels and reduce costs of
operations to generate positive cash flows.

         Management believes that the Company's borrowing availability under the
amended credit facility and cash flows from operations will be sufficient to
sustain its operations and meet its financial obligations through May 21,2002.
However, there can be no assurance that the Company will be successful in its
efforts to achieve future profitable operations, generate sufficient cash from
operations or obtain additional funding sources.

3.  Revolving Line of Credit

         On June 26, 2001, the Company amended its revolving line of credit
("Credit Facility"). The amendment reduced the overall commitment under the line
of credit to $175,000,000. The amended Credit Facility bears interest at Prime
plus 1.5%. Collateral availability is limited to a percentage of eligible
accounts receivable not to exceed $175,000,000, less any amount outstanding
under the inventory subline and the letter of credit facility. The inventory
sublimits and scheduled reductions therein are further defined in the Credit
Facility. Availability of letters of credit decreased to $15,000,000 and revised
financial covenants for net worth and EBITDA were established. The Company
expects to be in compliance with the amended covenants and the other terms and
conditions of the Credit Facility through May 21, 2002, the expiration date of
the Credit Facility.

4.  Sale of Video Rental Distribution Business

         During April 2001, the Company entered into an agreement to sell the
video rental distribution business. This decision resulted in closure of the
Company's Bristol, Pennsylvania distribution center as well as its sales offices
in Carnegie, Pennsylvania and Boston, Massachusetts. As a result, the Company
recorded $906,000 for closure costs, severance and related items, in the
thirteen weeks ended June 30, 2001. Approximately $323,000 was included in
accrued liabilities at June 30, 2001.

5.  Loudeye Agreement

         The Company's investment in Loudeye common stock at June 30, 2001, is
recorded at $731,000 (based upon the closing price of Loudeye common stock at
June 29, 2001, of $1.50 per share) with an unrealized gain of $228,000 (net of
deferred taxes of $137,000) included in

                                       5
<PAGE>

accumulated other comprehensive loss. At June 30, 2001, the Company had
approximately $290,000 of its inventory in Loudeye's possession.

During May 2001, Loudeye filed a demand for arbitration and statement of claim
of $10.0 million against the Company. Loudeye alleges breach of contract,
misrepresentation, fraud, unjust enrichment and promissory estoppel. The Company
has filed a counter claim. The Company is unable to predict the outcome of these
matters, and believes its total assets related to Loudeye of approximately
$1,021,000 are fully recoverable. Accordingly, no provision for any losses has
been accrued.

6.  Segment Information

         Management has determined that there are three reportable segments
based on the customers served by each segment: Full-line Distribution,
E-Fulfillment and Independent Distribution. Such determination was based on the
level at which executive management reviews the results of operations in order
to make decisions regarding performance assessment and resource allocation.

         Full-line Distribution serves music, video and other retailers
worldwide with customers ranging from independent stores to specialty chains to
retailers who sell music and video as an ancillary product line. E-Fulfillment
provides product and data to Internet retailers and traditional retailers with
Internet storefronts. Independent Distribution serves independent labels and
studios. Independent Distribution sells products to Full-line Distribution and
E-Fulfillment at market price, and accordingly, the intersegment revenues are
included in "intersegment eliminations" in the reconciliation of operating
income reported below.

         Expenses of the advertising, distribution, information systems, finance
and administrative groups are not allocated to the operating segments and are
included in "other" in the reconciliation of operating income reported below.
The Company does not allocate equity in net loss of investees, interest expense,
or income taxes to operating segments. The Company does not identify and
allocate assets or depreciation by operating segment.

Information on reportable segments is as follows:

                                       6
<PAGE>

                                               Thirteen Weeks Ended
                                           ------------------------------
                                             June 30,           July 1,
                                              2001               2000
                                           ---------          ----------
Dollars in thousands
Full-line Distribution
Net sales ................................ $  94,913          $ 105,463
Operating income ......................... $   7,976          $   6,745

E-Fulfillment
Net sales ................................ $  34,250          $  61,660
Operating income ......................... $   3,805          $   4,810

Independent Distribution
Net sales ................................ $  20,123          $  18,120
Operating income ......................... $   2,318          $   1,974

Other
Unallocated expenses ..................... $ (14,919)         $ (20,808)

Intersegment Eliminations
Net sales ................................ $  (3,364)         $  (3,981)

Total
Net sales ................................ $ 145,922          $ 181,262
Operating income (loss) .................. $    (820)         $  (7,279)

7.  Income Taxes

         The effective tax rate was a benefit of 37.7% and 40.0% in the thirteen
weeks ended June 30, 2001 and July 1, 2000, respectively.

         A valuation allowance is provided when it is more likely than not that
some portion of the deferred tax asset will not be realized. The Company has not
recorded any valuation allowances as of June 30, 2001, as management believes
that it will obtain the full benefit of all deferred tax assets on the basis of
its evaluation of the Company's anticipated taxable income over the period of
years that the temporary differences are expected to become tax deductions.
Actual results could differ from management's current estimates.

8.  Net Loss Per Share

         Basic net loss per share has been computed by dividing net loss by the
weighted average number of shares outstanding during the period. Diluted net
loss per share is computed by adjusting the weighted average number of shares
outstanding during the period for all potentially dilutive shares outstanding
during the period. Net loss and weighted average shares outstanding used for
computing diluted loss per share were the same as that used for computing basic
loss per share for the thirteen weeks ended June 30, 2001 and July 1, 2000.
Stock options to purchase 1,834,329 and 1,246,117 shares of common stock
outstanding during the thirteen weeks ended June 30, 2001 and July 1, 2000,
respectively, were not included in the computation of diluted net loss per share
since the inclusion of such shares would be antidilutive.

                                       7
<PAGE>

9. Comprehensive Loss

         The following information sets forth the calculation of comprehensive
loss:

<TABLE>
<CAPTION>
                                                               Thirteen Weeks Ended
                                                           -----------------------------
Dollars in thousands                                          June 30,       July 1,
                                                                2000           2000
                                                           -------------   ------------
<S>                                                        <C>          <C>
Net loss ................................................    $ (2,548)      $ (6,920)
Unrealized gain (loss) on marketable equity securities ..         228         (5,101)
                                                             --------       --------
Total comprehensive loss ................................    $ (2,320)      $(12,021)
                                                             ========       ========
</TABLE>

10. New Accounting Pronouncements

         The Company adopted Statement of Financial Accounting Standards (SFAS)
No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
effective April 1, 2001. SFAS 133, as amended, establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. Under SFAS
133, certain contracts that were not formerly considered derivatives may now
meet the definition of a derivative. The adoption of SFAS 133 did not have a
significant impact on the financial position, results of operations, or cash
flows of the Company.

         Emerging Issues Task Force ("EITF") No. 00-10, "Accounting for Shipping
and Handling Fees and Costs," requires revenues from shipping and handling to be
reported gross as revenues in the statement of operations and the costs of
shipping and handling to be reported as cost of goods sold. The Company adopted
EITF No. 00-10 in the fourth quarter of fiscal 2001 and reclassified all prior
periods to present shipping and handling revenues, as revenues and cost of goods
sold. The Company included $4,242,000, which represent reimbursements for
shipping and handling from customers, as gross amounts in revenues and cost of
goods sold in the statement of operations for the thirteen weeks ended July 1,
2000.

         In June 2001, the Financial Accounting Standards Board issued SFAS No.
142, "Goodwill and Other Intangible Assets." SFAS 142 addresses the initial
recognition and measurement of intangible assets acquired outside of a business
combination and the accounting for goodwill and other intangible assets
subsequent to their acquisition. SFAS 142 provides that intangible assets with
finite useful lives will be amortized and that goodwill and intangible assets
with indefinite lives will not be amortized, but rather will be tested at least
annually for impairment. At June 30, 2001, the Company's recorded goodwill, net
of accumulated amortization, was approximately $10,903,000. The Company will
adopt SFAS 142 for its fiscal year beginning March 31, 2002. Upon adoption of
SFAS 142, the Company will stop the amortization of goodwill that resulted from
business combinations initiated prior to the adoption of SFAS No. 141, "Business
Combinations."

                                       8
<PAGE>

The Company will evaluate goodwill under the SFAS 142 transitional impairment
test and has not yet determined whether or not there will be an impairment loss.
Any transitional impairment loss will be recognized as a change in accounting
principle.

                                       9
<PAGE>

ITEM 2.  Management's Discussion And Analysis Of Financial Condition And
         Results Of Operations

Results of Operations

        Thirteen Weeks Ended June 30, 2001 Compared with Thirteen Weeks Ended
        July 1, 2000

        Net sales decreased $35.4 million, or 20%, to $145.9 million in the
thirteen weeks ended June 30, 2001 from $181.3 million in the thirteen weeks
ended July 1, 2000. The net loss of $2.5 million ($0.30 per share) for the first
fiscal quarter of fiscal 2002 compares to net loss of $6.9 million ($0.82 per
share) in the first fiscal quarter of fiscal 2001 which includes adjustments for
obsolete inventory of $1.2 million after tax, as well as severance charges
totaling $1.0 million after tax.

        Full-line Distribution net sales decreased $10.6 million, or 10%, to
$94.9 million in the first quarter of fiscal 2002 from $105.5 million in the
prior year quarter. Net sales in this segment have been adversely affected by
slow retail sales to large audio retailers, and the sale of the video rental
distribution business in April 2001.

        E-Fulfillment sales decreased $27.4 million, or 44%, in the first
quarter to $34.3 million compared to $61.7 million in the prior year quarter.
Sales in this segment continue to decline as one large customer in this segment
has increased the amount of product it purchases directly from major suppliers,
and due to a general absence of viable Internet retailers.

        Independent Distribution net sales increased $2.0 million, or 11%, in
the first quarter of fiscal 2002 to $20.1 million compared to $18.1 million for
the comparable quarter in the prior year, due in large part to the re-release of
the Death Row Records catalog during the first quarter of fiscal 2002, and to a
lesser degree, to an expansion of existing market share with certain suppliers.

        Gross profit increased to $18.4 million in the first quarter of the year
compared to $14.2 million in the prior year quarter, with gross margin as a
percentage of net sales increasing from 7.8% to 12.6%. Margins in first quarter
of fiscal 2002 increased primarily due to favorable pricing terms with most of
our customers, a shift in product mix within the video line as a result of
management's decision to exit the rental product line, improved purchasing
efficiencies, and higher marketing incentives from vendors. Gross profit in the
first quarter of fiscal 2001 included a $2.0 million charge for obsolete
inventories.

        Selling, general and administrative expenses decreased $2.3 million, or
11%, to $19.2 million in the first quarter of fiscal 2002 from $21.5 million in
the first quarter of 2001, primarily as a result of a substantial reduction in
the work force and close attention to expense control during fiscal 2002. The
fiscal 2002 decrease in selling, general and administrative expenses was
realized despite $1.5 million of additional bad debt expense, and one time
charges of $0.9 million incurred as a result of management's decision to exit
the rental video business. Selling, general and administrative expenses in the
first quarter of fiscal 2001 include $0.9 million incurred as a result of the
termination of approximately 100 employees

                                       10
<PAGE>

on June 30, 2000 and $0.8 million of severance and non-cash charges due to the
extension of option exercise periods related to the resignation of the Company's
CEO and CFO in May 2000.

        Interest expense decreased $1.1 million, or 26%, to $3.2 million in the
first quarter of fiscal 2002 compared to $4.3 million in the first quarter of
the prior year, primarily due to lower average debt balances, continuous efforts
to maintain lower inventory levels, and a decrease of the average interest rate
to 7.7% in the most recent quarter from 9.3% in the corresponding quarter last
year.

        The effective tax rate was a benefit of 37.7% in the first quarter of
fiscal 2002, compared to a benefit of 40.0% in the prior year quarter primarily
because of the impact of permanent tax differences in loss years.

Liquidity and Capital Resources

        Net cash provided by operating activities of $12.3 million in the first
thirteen weeks of fiscal 2002 consisted primarily of a decrease in inventories
of $9.5 million and a decrease in accounts receivable of $25.8 million offset by
a decrease in accounts payable of $24.5 million. Net cash provided by operating
activities of $23.1 million in the first quarter of fiscal 2001 consisted
primarily of decreases in accounts receivable and inventories of $19.2 million
and $10.9 million, respectively.

        Net cash used in investing activities was $85,000 and $1.7 million for
the first thirteen weeks of fiscal 2002 and 2001, respectively. Cash used in the
first thirteen weeks of fiscal 2002 and 2001 consisted of expenditures for
property and equipment acquisitions.

        Net cash used in financing activities of $12.4 million and $21.4 million
in the first thirteen weeks of fiscal 2002 and 2001, respectively, consisted
primarily of repayments of amounts under our credit facility in excess of
additional borrowings for the period and repayments of $569,000 and $1.1
million, respectively, for long-term debt.

         In fiscal 2002, we have instituted the following measures to improve
liquidity:

         .   Renegotiated the revolving line of credit agreement as discussed in
             Note 3;

         .   Obtained extended payment terms for certain vendor payables;

         .   Reduced the number of employees from approximately 1,600 at March
             31, 2001 to approximately 1,300 at July 31, 2001; and

         .   Renegotiated certain terms and conditions as to pricing and payment
             with most customers.

         We will endeavor to take the following actions, among others, to help
sustain our operations and to meet our financial obligations for the remainder
of fiscal 2002:

         .   Aggressively manage inventories to reduce inventory levels;

                                       11
<PAGE>

         .   Accelerate collections of accounts receivable;

         .   Decrease discretionary spending on general and administrative
             items; and

         .   Evaluate opportunities to liquidate non-core assets.

         We will also need to refinance our revolving line of credit and may
need to obtain additional external equity or debt financing by the end of the
first quarter of fiscal 2003 in order to maintain current operations. We cannot
assure that we will be successful in any of these initiatives or that external
equity or debt financing will be available on favorable terms, or at all.

Seasonality in Operating Results

        The Company's quarterly net sales and operating results have varied
significantly in the past and will likely continue to do so in the future as a
result of seasonal variations in the demand for music and video. Historically,
sales are highest during the third fiscal quarter (the holiday season) and
returns are highest during the fourth fiscal quarter. Due to this seasonality,
the Company typically experiences significant changes in cash flows and capacity
needs during the year, with the heaviest credit needs and highest capacity
requirements typically occurring during the third and fourth fiscal quarters.

Factors Affecting Operating Results

        This report contains forward-looking statements made pursuant to the
"safe harbor" provisions of the Private Securities Litigation Reform Act of
1995. These statements are identified by words such as "will," "expects,"
"anticipates," "plans," or "intends" and by other descriptions of future
circumstances or conditions. Actual results may differ materially from those
projected in these forward-looking statements. Factors that could affect Valley
Media's actual results include, without limitation, risks and uncertainties
related to the following factors: Inability to obtain sufficient financing,
customer concentration, conditions in the online retail market for music and
video, and new delivery technologies. More information about these and other
factors that could negatively affect Valley Media's financial performance and
the value of its common stock is contained in Valley Media's Annual Report on
Form 10-K, which is on file with the Securities and Exchange Commission. Readers
of the 10-K should pay particular attention to the sections entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Factors Affecting Operating Results."

ITEM 3.  Quantitative and Qualitative Disclosures About Market Risk

       The Company is exposed to market risks primarily from changes in U.S.
interest rates. The Company does not engage in financial transactions for
trading or speculative purposes.

                                       12
<PAGE>

       The interest payable on the Company's revolving line of credit is based
on variable interest rates and is therefore affected by changes in market
interest rates. If interest rates on variable rate debt rose 0.77 percentage
points (a 10% change from the average interest rate as of June 30, 2001),
assuming no change in the Company's outstanding balance under the line of credit
(approximately $147.8 million as of June 30, 2001), the Company's annual loss
before taxes and cash flows from operating activities would increase by
approximately $1.1 million.

                           PART II--Other Information

ITEM 1.  Legal Proceedings

       The Company is subject to various legal proceedings that arise in the
ordinary course of business. While the outcome of all of these proceedings
cannot be predicted with certainty, management believes that none of such
proceedings, individually or in the aggregate, will have a material adverse
effect on the Company's business or financial condition.

ITEM 2.  Changes in Securities and Use of Proceeds

        Not applicable.

ITEM 3.  Defaults Upon Senior Securities

        Not applicable.

ITEM 4.  Submission Of Matters To A Vote Of Security Holders

        Not applicable.

ITEM 5.  Other Information

        Not applicable.

ITEM 6.  Exhibits And Reports On Form 8-K

(a)  Exhibits
        None.

(b)  Reports On Form 8
        The following reports on Form 8-K were filed during the thirteen weeks
ended June 30, 2001.

            (1)  Report on Form 8-K dated April 3, 2001, filed April 12, 2001,
                 announcing the hiring of the Company's new Chief Executive
                 Officer.

            (2)  Report on Form 8-K dated April 19, 2001, filed April 26, 2001,
                 announcing the sale of the Company's video rental distribution
                 business to Video Products Distributors, Inc.

            (3)  Report on Form 8-K dated May 17, 2001, filed May 24, 2001,
                 announcing that the Company received a Nasdaq Staff
                 Determination indicating that the Company fails to

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<PAGE>

                 comply with the market value of public float requirement for
                 continued listing and that its securities are, therefore,
                 subject to delisting from the Nasdaq National Market.

         In addition, the following report on Form 8-K was issued subsequent to
June 30, 2001.

            (1)  Report on Form 8-K dated July 13, 2001, filed July 16, 2001,
                 announcing that the Nasdaq Listing Qualifications Panel
                 determined to continue the listing of the Company's common
                 stock on the Nasdaq National Market.

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<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.

                                      VALLEY MEDIA, INC.


                                      By: /s/  Peter R. Berger
                                          --------------------------------------
                                          Peter R. Berger
                                          Chief Executive Officer
                                          Date: August 14, 2001

                                      By: /s/  Jerrold Benjamin
                                          --------------------------------------
                                          Jerrold Benjamin
                                          Chief Financial Officer
                                          Date: August 14, 2001

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