<PAGE>   1


                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

 X   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
---  ACT OF 1934

                    FOR THE FISCAL YEAR ENDED MARCH 31, 2001
                                       OR

     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
---  EXCHANGE ACT OF 1934

Commission file number: 0-22074

                           NATIONAL RECORD MART, INC.
             (Exact name of Registrant as specified in its charter)

             DELAWARE                                    11-2782687
  (State or other jurisdiction             (I.R.S. Employer Identification No.)
of incorporation or organization)

507 FOREST AVENUE, CARNEGIE, PENNSYLVANIA                   15106
 (Address of principal executive offices)                 (Zip Code)

       Registrant's telephone number, including area code: (412) 276-6200

Securities registered pursuant to Section 12 (b) of the Act: none

Securities registered pursuant to Section 12 (g) of the Act:

                         COMMON STOCK, $0.01 PAR VALUE.
                                (Title of Class)

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained herein, to
the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]

The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the closing sale price of the Common Stock on July 11,
2001 as reported on the OTC Bulletin Board, was approximately $404,133.36.
Shares of Common Stock held by each officer and director and by each person who
owns more than 5% of the outstanding Common Stock have been excluded in that
such persons may be deemed to be affiliates. The determination of affiliate
status is not necessarily a conclusive determination for other purposes.

As of July 11, 2001, Registrant had outstanding 5,051,667 shares of Common
Stock.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held September 27, 2001 (the "Proxy Statement") are
incorporated by reference into Part III.


<PAGE>   2


                                     PART I

ITEM 1.  BUSINESS

         National Record Mart, Inc. (the "Company"), a Delaware corporation,
founded in 1937, operates in a single industry segment as a specialty retailer
of prerecorded home entertainment products, including compact discs ("CD"),
audio cassettes, videos and related accessories. According to Billboard
magazine, the Company is the fourth largest specialty retailer of prerecorded
music in the country as measured by number of stores. The Company is a leading
specialty music retailer in its core western Pennsylvania/eastern Ohio market.

         As of March 31, 2001, the Company operated 151 stores in 32 states and
the U.S. territory of Guam with the majority of stores in the eastern part of
the United States.

         On June 19, 2001, an involuntary petition under Title 11 of the United
States Bankruptcy Code (the "Bankruptcy Code") was filed against the Company in
the United States Bankruptcy Court for the Western District of Pennsylvania
requesting relief under Chapter 7 (the "Involuntary Petition"). The Involuntary
Petition was filed by five of the Company's major suppliers: Universal Music and
Video Distribution, Inc., BMG Distribution, EMI Music Distribution, Sony Music
Entertainment, Inc. and Warner/Elektra/Atlantic (WEA) Corporation. The
Involuntary Petition indicates that the five suppliers hold an aggregate of
approximately $18,753,000 of claims against the Company incurred in the ordinary
course of their respective supply relationship with the Company. The Company is
required to respond to the petition on or before July 26, 2001. While preparing
a response to the Involuntary Petition, the Company continues to use, acquire,
and dispose of property as if the Involuntary Petition had not been filed in
accordance with Section 303 (f) of the Bankruptcy Code. The Company is in
discussions with its current lender in an effort to secure debtor-in-possession
financing in the event the Company chooses to file an election to convert to
reorganization under Chapter 11 of the Bankruptcy Code ("Chapter 11"). For
additional discussion of the impact of the Involuntary Petition on the Company
see "Item 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition -- Liquidity and Capital Resources."

         Certain statements in this annual report on Form 10-K are
forward-looking statements concerning the future operations of the Company. Such
statements are made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995, and there are many important factors
that could cause actual results to differ materially from those in the
forward-looking statements. Such factors include: developments with respect to
the Involuntary Petition, including the Company's ability to convert to a
Chapter 11 Reorganization; decisions of the Bankruptcy Court in the proceedings;
the pricing and marketing activities of large diversified retailers within the
geographic area of the Company's operations; the extent to which recording
artists release "hit" recordings; changes in sales and advertising promotion
practices by the major music distributors; weather, especially during the
Christmas selling season; and interest rates, which affect the Company's
financing costs.

INDUSTRY AND COMPETITIVE ENVIRONMENT

         The US retail music market was approximately $14.3 billion in 2000,
according to the Recording Industry Association of America (RIAA). The music
retail industry is highly competitive. The Company competes with national and
regional home entertainment product chains, mass merchandisers, electronic
retail chains, discount stores, warehouse clubs, music, video and other home
entertainment product stores, e-commerce music sites and mail order clubs. Some
of the Company's competitors have substantially greater resources than the
Company. The largest mail order clubs are affiliated with major manufacturers of
prerecorded music and may have advantageous marketing arrangements with their
affiliates. In addition, the Company's products may compete with other forms of
entertainment, such as movies, concerts, sporting events, cable television and
video games.

         The Company believes that its ability to compete successfully depends
on satisfactory resolution of the bankruptcy proceedings, offering broad product
selection, securing convenient sites, maintaining attractive locations, managing
merchandise efficiently, establishing and maintaining name recognition, pricing
its products competitively and providing effective customer service and
management.

SEASONALITY

         The Company's business is seasonal, with its highest sales and net
income levels historically occurring during the third quarter of its fiscal
year, which includes the Christmas selling season.



                                       2
<PAGE>   3



MERCHANDISING

         The Company's stores offer an assortment of CDs, prerecorded audio
cassettes and related accessories with a more limited selection of movie and
music videos. The following table shows the percentage of the Company's total
merchandise sales attributable to each product group:

<TABLE>
<CAPTION>
Products
--------                                         Fiscal Years
                                         2001        2000       1999
                                         ----        ----       ----
<S>                                   <C>          <C>       <C>
CDs                                       79.2%      76.6%      73.9%
Prerecorded audio cassettes                6.2        8.9       11.2
Singles                                    1.8        2.8        3.8
Movie and music videos*                    5.3        3.8        3.6
Accessories and other**                    7.5        7.9        7.5
                                         -----      -----      -----
         Total                           100.0%     100.0%     100.0%
                                         =====      =====      =====
</TABLE>

*    Includes DVD

**   Includes apparel, blank tapes, cleaning products, storage cases, posters,
     sheet music, LPs, magazines, books and miscellaneous items.

         Prerecorded Music. The Company's stores offer a broad array of CDs and
cassettes in all music categories including rock, pop, alternative, adult
contemporary, country, easy listening, classical, jazz, religious, new age,
rhythm and blues, children's, educational, show tunes, movie soundtracks, world
music and others. The Company maintains a broad inventory base, with individual
store inventory tailored to serve the particular customer demand in each store.
The Company's stores offer from 10,000 to 50,000 titles, with an average of
18,000 titles per store. The selection of prerecorded music offered at the
Company's stores includes "hits" which are best selling newer releases,
"catalog" items, which are older but still popular releases, and seasonal and
promotional items such as Christmas music, developing artist programs,
"cut-outs" (low-priced items which have been deleted from a manufacturer's
current catalog) and used CDs.

         Prerecorded Video Cassettes. The Company's stores offer for sale a
varied selection of prerecorded VHS video cassettes and DVD (digital versatile
discs). DVD sales continue to increase while the price of the hardware decreases
and more titles are offered. Titles are offered in all categories with an
emphasis on music and movies.

         Accessories and Other Products. The Company's stores carry a variety of
accessories such as blank video and audio cassette tapes, maintenance and
cleaning products, home and portable storage cases, sheet music, posters,
T-shirts, magazines, and other items.

         Tickets. To increase customer traffic, the Company offers tickets to
entertainment events in many of its stores located in certain states including
Pennsylvania, Ohio, Wisconsin, West Virginia, Kentucky, North Carolina, South
Carolina and Hawaii. The Company's ticket outlets provide customers with access
to tickets offered by Ticketmaster as well as tickets to other local concerts
and sporting events.

ADVERTISING

         The Company supports its retail sales through its own and various
vendor supported marketing and advertising programs. Due to decreased purchasing
from the Company's five major suppliers this support has materially decreased in
the Company's current fiscal year.

         More than 1.8 million store customers participate in the Company's
Passport program. Passport allows a customer to earn points on every CD, tape or
video purchase, which may be redeemed for a free CD, cassette, or video of
choice. The program combines the standard customer loyalty incentives of
frequent buyer programs, opportunities for discount on music and video products
and other products sold by other retailers. Passport also provides for database
marketing directly to consumers on a sophisticated, targeted basis. The Company
believes that Passport has the potential to differentiate its stores from the
competition, while creating incremental sales and increasing the average
purchase per transaction.


                                       3

<PAGE>   4

E-COMMERCE

         In December 1998, the Company launched its Internet commerce sites
www.nrmmusic.com and www.wavesmusic.com. Due to decreased sales the Company
ceased the operations of its commerce sites during its third fiscal quarter.

CUSTOMER SERVICE

         Customer service continues to be a primary focus of every employee of
the Company; including the field supervisory team, corporate operations
department and the human resources area.

STORE RESTRUCTURING STRATEGY

         The Company plans to continue its restructuring efforts by focusing on
closing stores that are below the Company's expectations and changing the
product mix in the stores that remain open to focus on product groups with
higher margins. As a result of this effort, the Company does not anticipate any
new store openings during the fiscal year 2002. The Company closed 29 stores
during fiscal 2001, and through the first quarter of 2002 the Company closed an
additional 22 stores.
         During fiscal 2000, the Company opened 18 locations, and closed 13
stores.

INVENTORY MANAGEMENT

         The Company utilizes a proprietary interactive management information
and point of sale system, FOCUS 1000. This combined system permits complete
sales data and customer transactions to interact with the Company's purchasing,
inventory control and accounting functions.

         Inventory Management System. FOCUS 1000 integrates the Company's
purchasing, warehousing, distribution, pricing and sales information, enabling
the Company to set the appropriate quantity and mix of products in each of its
stores, turn over inventory more quickly, minimize returns to suppliers and
limit out-of-stock situations. Individual store sale profiles are utilized to
set overall purchase quantities and store-by-store allocations of new releases,
current hits and catalog products. These parameters are periodically updated
based on sales trends and demand patterns. In addition to utilizing FOCUS 1000,
stock levels are also monitored by the Company's product distribution group to
further assure appropriate store inventory levels. The system segments the
Company's products into over forty specific music categories and tracks sales in
each store by category, so as to optimize sales/inventory ratios in each store.

         In November 1999 the Company installed a new point of sale (POS)
system. The adoption of the new software and equipment along with greatly
enhanced data switching relay equipment permitted the two way transfer of
significantly more information in less time and at a lower cost than the
previous POS system.

         Substantially all of the products sold by the Company are bar-coded.
Retail transactions and inventory shipped by vendors directly to stores are
captured through point-of-sale terminals at each store with data transmitted
nightly to the Company's central computer. This perpetual inventory system,
coupled with FOCUS 1000's replenishment system, determines target in-stock
levels for each store.

         Distribution. The Company operates one distribution center from which
store inventories are replenished and items are returned to manufacturers. FOCUS
1000 also permits inter-store transfers of inventory to achieve improved stock
balancing without requiring products to be routed through the Company's
distribution facility.

         Shipments from the distribution center and between stores are normally
made weekly, with more frequent shipments made to stores having very high
inventory turnover and to most stores during the Christmas shopping season.
Shipments are made by Company vehicles and by commercial shipping services such
as United Parcel Service. Certain new releases and other products are shipped
directly by manufacturers to the Company's stores.

SUPPLIERS AND PURCHASING

         Approximately 66% of the Company's music products were purchased
directly from the five major music distributors in fiscal 2001. They included:
Sony Music; Warner/Elektra/Atlantic (subsidiary of Time Warner); BMG Music
(subsidiary of Bertelsman); UNI Distribution; and EMD (EMI Music Distribution).
As is typical in its industry, the Company has no material long-term purchase
agreements with its suppliers.



                                       4
<PAGE>   5

         During its fourth fiscal quarter the Company was on credit hold with
its major suppliers and purchased, its additional purchasing needs on a cash
basis. Since January 2001, the Company has been operating without shipments from
two of its major suppliers and has decreased its purchasing from the remaining
three. The Company has increased the amount of purchases made through other
suppliers at higher cost in order to maintain inventory levels. These five major
suppliers filed the Involuntary Petition against the Company as discussed above
in this Item I.



                                       5
<PAGE>   6



         Four of the five major music vendors offer retailers a returns
incentive/disincentives plan that has in the past been beneficial for the
Company. To encourage retailers to buy carefully by limiting returns, an
incentive payment is issued on most purchases and a penalty restocking fee is
charged on only the product returned. If the retailer returns-to-purchases ratio
with the major vendors is below a certain point, (generally 14% to 17%) the
retailer will benefit. The Company's return percentages have been lower than the
break-even with the majority of its major vendors allowing the Company to
benefit from their returns policies.

TRADEMARKS AND SERVICE MARKS

         The Company operates its stores under various names and service marks,
including National Record Mart, NRM Music, Waves Music, Music Oasis, Vibes
Music, Waves Music and Gifts, Music X, House of Music and Tempo Music. The
Company has obtained federal registrations of its trademarks and service marks
for Waves Music, NRM Music, Oasis Music & Video, Music Oasis, Music X and Vibes
Music. The trade name Tempo Music was acquired through an acquisition in
November 1998.

PERSONNEL

         As of March 31, 2001, the Company employed 1,238 persons, 111 of whom
worked at the Company's headquarters (including 7 part-time employees) or were
area supervisors and 1,127 of whom worked at the Company's stores (including 769
part-time employees). The Company also adds part-time personnel during the
Christmas season. In December 2000, the Company employed approximately 222
seasonal employees. None of the Company's employees are represented by a union.


ITEM 2.  PROPERTIES

         Corporate Headquarters and Distribution Facility. The Company's
headquarters and distribution center is located in Carnegie, Pennsylvania, a
suburb of Pittsburgh. This leased facility consists of approximately 60,000
square feet of distribution and warehouse space and 10,000 square feet of office
space on approximately 3.5 acres of land. Management believes that its
distribution center can service up to 350 stores with a minimal increase in
personnel and fixtures. The Company's lease expires on April 30, 2005 and
provides for rental payments of an average of approximately $148,000 per year.

         Store Leases. All of the Company's stores are subject to operating
leases with various remaining terms, including renewal options, through the year
2010. The leases have initial terms ranging from 5 to 15 years, with the average
initial term being 8 years. The Company's store leases typically provide for a
fixed minimum rental, payable monthly, plus payment of a percentage of gross
receipts in excess of certain sales levels and common area maintenance, real
estate taxes and other charges. Certain of the Company's mall store leases
contain provisions permitting the landlord to relocate the Company's store or
terminate the lease upon failure to achieve specified minimum sales levels or
upon certain other conditions. In addition, many leases restrict the Company
from opening new stores within a specified mileage radius. The following table
lists the number of leases for the Company's stores due to expire in each
calendar year, including renewal options:


<TABLE>
<CAPTION>
<S>    <C>                 <C>                 <C>                      <C>
        2001                10                  2005                     13
        2002                16                  2006                     17
        2003                17                  2007                      9
        2004                19                  2008 and thereafter      43
</TABLE>


ITEM 3.  LEGAL PROCEEDINGS

         On June 19, 2001, an involuntary petition under Title 11 of the United
States Bankruptcy Code (the "Bankruptcy Code") was filed against the Company in
the United States Bankruptcy Court for the Western District of Pennsylvania
requesting relief under Chapter 7 (the "Involuntary Petition"). The Involuntary
Petition was filed by five of the Company's major suppliers: Universal Music and
Video Distribution, Inc., BMG Distribution, EMI Music Distribution, Sony Music
Entertainment, Inc. and Warner/Elektra/Atlantic (WEA) Corporation. The
Involuntary Petition indicates that the five suppliers hold an aggregate of
approximately $18,753,000 of claims against the Company




                                       6
<PAGE>   7

incurred in the ordinary course of their respective supply relationship with the
Company. The Company is required to respond to the petition on or before July
26, 2001. While preparing a response, the Company continues to use, acquire, and
dispose of property as if the Involuntary Petition had not been filed in
accordance with Section 303 (f) of the Bankruptcy Code. The Company is in
discussions with its current lender in an effort to secure debtor-in-possession
financing in the event the Company chooses to file an election to convert to
reorganization under Chapter 11 of the Bankruptcy Code ("Chapter 11"). For
additional discussion of the impact of the Involuntary Petition on the Company
see "Item 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition -- Liquidity and Capital Resources."

         There are no other legal proceedings pending to which the Company is a
party or to which any of its properties is subject, other than routine
litigation incidental to its business which is covered by insurance or which is
not expected to have a material adverse effect on the Company's financial
condition or results of operations..


ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         No matters were submitted to a vote of security holders during the
fourth quarter of fiscal 2001.


SUPPLEMENTARY ITEM.

IDENTIFICATION OF EXECUTIVE OFFICERS OF THE REGISTRANT

         The following table sets forth certain information with respect to the
executive officers of the Company as of July 10, 2001.

<TABLE>
<CAPTION>
         Name                               Age            Office with the Company
         ----                               ---            -----------------------
<S>                                        <C>            <C>
         William A. Teitelbaum              50             Chairman, CEO, President and
                                                           Director

         Theresa Carlise                    42             Senior Vice President, CFO,
                                                           Treasurer, Secretary and Director

         Scott Bargerstock                  51             Vice President of Business Development

         Charles Michael Stephenson         44             Vice President of Marketing
</TABLE>

William Teitelbaum has served as Chairman of the Company since 1986 and served
as President since 1991. In January of 1997 Mr. Teitelbaum resigned as President
while retaining the position of Chairman and Chief Executive Officer. In January
of 1998, Mr. Teitelbaum resumed the position of President. He also served as
Vice President and Treasurer from 1986 to 1991. From 1980 to 1985, he was a
partner of Bear Stearns & Co. In addition, since 1985, Mr. Teitelbaum has been
the sole shareholder and Chairman of Remsen Funding Corp., a New York investment
firm.

Theresa Carlise joined the Company in July of 1986 as a financial systems
consultant and subsequently became Controller of the Company in 1987. She served
as Vice President of Finance of the Company from April 1990 to April 1993, when
she became Senior Vice President, Chief Financial Officer and a Director of the
Company. Since January of 1991, she has also served as Treasurer of the Company.

Scott Bargerstock is Vice President of Business Development and has served the
Company since 1971 in various positions including Store Manager, District
Manager and Regional Manager. Mr. Bargerstock was promoted in February of 1998
to his current position.

Charles Michael Stephenson started his career at NRM with a music retail
background of twenty years with Camelot Music in Canton, Ohio. In April of 1996
he joined NRM as Director of Marketing. In February of 1998, Mr. Stephenson
became Vice President of Marketing for the Company.

         Officers are elected annually to serve until the ensuing year or until
their successors are duly elected.




                                       7
<PAGE>   8



                                     PART II

ITEM 5.  MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
         MATTERS

MARKET INFORMATION

         The Company's common stock is traded on the OTC bulletin Board under
the symbol NRMI.OB. For common stock price information, see Note 9 of Notes to
Consolidated Financial Statements.

         As of July 10, 2001, the approximate number of common stockholders of
record was 89. The approximate number of total stockholders as of that date was
2,100.

DIVIDEND POLICY

         In conjunction with the Company's senior credit facility, the Company
is prohibited from paying cash dividends on its common stock.


ITEM 6.  SELECTED FINANCIAL DATA


                           NATIONAL RECORD MART, INC.
                         SELECTED CONSOLIDATED FINANCIAL
                  DATA (IN THOUSANDS, EXCEPT PER SHARE DATA AND
                            SELECTED OPERATING DATA)
<TABLE>
<CAPTION>
                                                                                FISCAL YEAR ENDED (1)
                                                          ----------------------------------------------------------------
                                                          March 31,     March 25,     March 27,     March 28,    March 29,
                                                            2001          2000          1999          1998         1997
                                                          ---------     ---------     ---------     ---------    --------
<S>                                                      <C>           <C>           <C>           <C>          <C>
STATEMENTS OF OPERATIONS DATA:
Net sales                                                 $125,892      $142,645      $129,902      $112,448     $99,439
Gross profit                                                45,833        54,720        48,217        42,963      37,106
Selling, general and administrative expenses                49,719        51,189        43,743        36,859      34,385
Depreciation and amortization                                4,886         4,664         3,540         2,801       2,725
Impairment of assets write-down                              1,205            --            --            --          --
Interest expense, net                                        5,268         4,458         3,082         1,822       1,696
Other expense (income), net                                    398           140           539           104         (26)
Loss on disposal of asset                                      313           198
(Loss) income before income tax expense (benefit)          (15,956)       (5,929)       (2,688)        1,378      (1,674)
Net (loss) income                                          (15,956)       (8,072)       (1,691)          893      (1,101)
Basic net (loss) income per share                         $  (3.16)     $  (1.60)     $   (.35)     $    .18     $  (.23)
Diluted net (loss) income per share                       $  (3.16)     $  (1.60)     $   (.35)     $    .18     $  (.23)
Basic weighted average number of shares outstanding          5,052         5,049         4,801         4,845       4,852
Weighted average number of common shares and
  common share equivalent shares (warrants and options)
  outstanding                                                5,052         5,049         4,801         5,057       4,852

SELECTED OPERATING DATA:
Stores open at beginning of year                               179           174           148           147         151
Stores opened /acquired during year                              1            18            33            11           8
Stores closed during year                                       29            13             7            10          12
Stores open at end of year                                     151           179           174           148         147
Comparable store net sales (decrease) increase               (14.9)%          (3)%           4%           13%       (0.4)%
BALANCE SHEET DATA:
Working capital                                           $ (3,366)     $ 24,329      $ 28,058      $ 23,892     $23,964
Total assets                                                64,431        81,851        73,657        52,540      55,020
Long-term debt, including current maturities                40,841        42,940        35,325        19,413      21,370
Stockholders' equity                                        (8,149)        7,806        15,843        16,958      16,066
</TABLE>

(1)    Each fiscal year consisted of 52 weeks except the fiscal year ended
       March 31, 2001, which consisted of 53 weeks. Each fiscal year is
       hereafter referred to by the year in which it ended, e.g., the fiscal
       year ended March 25, 2001 is "fiscal 2001"

(2)    The Company adopted Financial Accounting Standards Board Statement
       No. 121, "Accounting for the Impairment of Long-Lived Assets to be
       Disposed of," in fiscal 1996. In connection with this adoption, the
       Company wrote down $1,843,788 of assets, which increased its net loss by
       $1,204,931 or $0.24 per share for fiscal year ended March 31, 2001.

(3)    A store is included in comparable store sales calculations at the
       beginning of its 13th full month of operation.




                                       8
<PAGE>   9





ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
         FINANCIAL CONDITION


RESULTS OF OPERATIONS

         The following table sets forth for the periods indicated certain items
in the Consolidated Statements of Operations as a percentage of net sales:

<TABLE>
<CAPTION>
                                                                   Fiscal Years
                                                          -----------------------------
                                                           2001        2000        1999
                                                          -----       -----       -----
<S>                                                      <C>         <C>         <C>
Net sales                                                 100.0%      100.0%      100.0%
Cost of sales                                              63.6        61.6        62.9
                                                          -----       -----       -----
  Gross profit                                             36.4        38.4        37.1
Selling, general and administrative expenses               39.5        35.9        33.7
Depreciation and amortization                               3.9         3.3         2.7
Impairment of assets write-down                             1.0          --          --
Interest expense, net                                       4.2         3.1         2.3
Loss on Disposal                                            0.2         0.2          --
Other expense                                               0.3         0.1         0.4
                                                          -----       -----       -----
(Loss) income before income taxes expense (benefit)       (12.7)       (4.2)       (2.0)
Provision (benefit) for income taxes                        0.0         1.5        (0.7)
                                                          -----       -----       -----
  Net (loss) income                                       (12.7)%      (5.7)%      (1.3)%
                                                          =====        ====        ====
</TABLE>

         Net Sales. Net sales decreased during fiscal 2001 by $16.8 million or
11.7% compared to fiscal 2000. Factors that contributed to the decrease in total
sales are the closing of 29 stores and a net comparable store decrease of 14.9%.
The decrease in comparable store sales is related to an increase in competition,
an increase in consumer preference for downloading prerecorded digital music
over the Internet and the Company's decreased ability to successfully maintain
product selection of the higher ranking music product. Net sales increased
during fiscal 2000 by $12.7 million or 9.8% compared to fiscal 1999. Factors
that contributed to the increase in total sales are the opening of 18 new stores
and the closing of 13 stores, which was partially, offset by the decrease in
comparable store sales of 3.4%.

         Gross Profit. Gross profit expressed as a percentage of net sales
decreased from 36.4% in fiscal 2001 to 36.9% in fiscal 2000. A primary reason
for the decrease in margin as a percentage of sales was the continued shift of
consumer preference from higher margin cassettes to lower margin CDs and a more
competitive shelf pricing environment. Gross profit expressed as a percentage of
net sales, increased from 37.1% in fiscal 1999 to 38.4% in fiscal 2000. A
primary reason for the increase in gross profit was due to the Company wide
increase in shelf pricing. This was offset slightly by the continued shift in
consumer preference from higher profit margin cassettes to lower profit margin
CDs.

         Expenses. Selling, general and administrative expenses, (SG&A)
expressed as a percentage of net sales increased from 35.9% in fiscal 2000 to
39.5% in fiscal 2001. The increase as a percentage of sales is primarily
attributable to the decrease in comparable store sales of 14.9%. As a percentage
of sales, SG&A increased from 33.7% in fiscal 1999 to 35.9% in fiscal 2000. This
increase expressed as a percentage of net sales, is largely attributable to
approximately 50 non-comp stores (stores not open for one full year) which sales
have not proportionally matured to their selling, general and administrative
expenses.

         Depreciation and amortization increased from $4.7 million in fiscal
2000 to $4.9 million in fiscal 2001, primarily due to the annualized effect of
the prior year additions. Depreciation and amortization increased from
$3.5 million in fiscal 1999 to $4.7 million in fiscal 2000 primarily due to the
addition of 18 new stores and the amortization of the costs associated with the
private placement of its subordinated debt. Depreciation and amortization
increased from $2.8 million in fiscal 1998 to $3.5 million in fiscal 1999 due to
the addition of 33 new stores.

         Interest Expense. Interest expense expressed as a percentage of net
sales was 4.2% or $5.3 million for fiscal 2001 compared to 3.2% or $4.5 million
for fiscal 2000. The increase in interest expense of approximately $800 thousand
in fiscal 2001 is primarily due to an increase in borrowings. Interest expense
expressed as a percentage of net sales was 3.2% or $4.5 million for fiscal 2000
compared to 2.4% or $3.2 million for fiscal 1999. The increase in interest


                                       9
<PAGE>   10

expense of approximately $1.3 million in fiscal 2000 is due to an increase in
borrowings relating to the addition of 18 new stores.

         Income Taxes. The Company's effective tax rate in fiscal 2001, 2000,
and 1999 was 0%, 35% and 34%, respectively.

         The Company recorded a valuation allowance in fiscal 2000 to reduce its
deferred income tax balances of approximately $4.2 million. See Note 5 of Notes
to Consolidated Financial Statements.

LIQUIDITY AND CAPITAL RESOURCES

         The Company's primary sources of liquidity are cash generated by
operations, trade credit, and amounts available under its credit facility. Net
cash provided by operating activities was $2.9 million in fiscal 2001 compared
to net cash provided by operating activities of $2.7 million in fiscal 2000 and
$2.3 million in fiscal 1999. During fiscal 2001, the $2.9 million provided by
operating activities was primarily due to a decrease in inventory, and a loss
from the disposal of property & equipment, while being offset by the net loss.

         In fiscal 2000 the net cash provided by operating activities was
primarily attributable to increases in depreciation and amortization, accounts
payable, and the recording of a deferred tax valuation allowance, while being
offset by the net loss and an increase in inventory.

         During fiscal 2001, 2000 and 1999, the Company used approximately $917
thousand, $9.8 million and $14.9 million, respectively, to purchase property and
equipment. The Company opened 1 new store and closed 29 stores in fiscal 2001,
18 new stores and closed 13 stores in fiscal 2000, and 33 new stores and 7
closed stores in fiscal 1999. In fiscal 1999, the 33 new stores included two
acquisitions. The Company acquired 4 stores from Record Den Inc. and DJK Records
& Video Inc. for approximately $933,000 and 13 stores from Happy Town and Tempo
for approximately $3.6 million. The Company has closed 22 stores in fiscal 2002.

         On February 17, 1998 the Company renewed its revolving line of credit
from an institutional lender through June 10, 2003. Under the line, the Company
is permitted to borrow up to $35 million, subject to a borrowing base
calculation based upon inventory levels. Between the months of October 1 and
December 31 an overadvance of $1.5 million is available to the Company in
addition to its borrowing base calculation, not to exceed in total the borrowing
limit of $35 million. As of February 6, 2001, the Company's institutional lender
increased its interest rates. Borrowings under the amended facility bear
interest at a floating rate equal to the lender's base rate (8.0% at March 31,
2001) plus two percentage points, or at the Company's option, the 30-day LIBOR
rate (5.078% at March 31, 2001) plus four percentage points.

         As of March 31, 2001, the Company's outstanding credit balance on its
revolver was approximately $25.7 million. The Company's borrowing availability
at March 31, 2001 was approximately $1.1 million. The revolver balance and the
Company's cash requirements peak in February when the Company's trade payables
become due from the Christmas selling season. A bankruptcy filing by the
Company (which would include an election to convert the involuntary petition
filed against the Company on June 19, 2001 to a Chapter 11 reorganization)
constitutes an event of default under the revolver.

         On April 16, 1998, the Company completed a private placement of
$15,000,000 of senior subordinated notes to a group of institutional lenders.
The notes carry an interest rate of 11.75% payable semi-annually. In
consideration of the placement the Company issued warrants to purchase 400,000
shares of common stock at $.01 per share. The Company used the funds to expand
its store base, update its point of sale equipment and general working capital
purposes. On April 13, 2001, the Company reached an agreement with the holders
of its senior subordinated notes to extend the maturity date of the notes, which
were due on April 15, 2001. Under this agreement, the maturity of the notes was
extended to October 15, 2001, the interest payment due on April 15, 2001 was
deferred until October 15, 2001, certain financial covenants were waived and the
noteholders agreed to forbear from the enforcement of remedies resulting from
the failure to make interest payments through but not including October 15,
2001. The forbearance obligation terminates upon certain events of default,
including a bankruptcy filing by the Company (which would include an election
to convert the involuntary petition filed against the Company on June 19, 2001
to a Chapter 11 reorganization).

         On February 23, 1994, the Board of Directors approved a program for the
Company to purchase up to $1,000,000 in value of its common stock. On September
17, 1998 the Board of Directors approved the Company to purchase up to 500,000
additional shares of the Company's common stock. Such purchases will be made
from time to time in the marketplace at the Company's discretion. Since the
inception of the programs, the Company has purchased 446,817 shares of its
stock.

         Under Chapter 7 of the Bankruptcy Code, the relief requested in the
Involuntary Petition, the Company's operations would cease and a trustee or
trustees would be elected or appointed to liquidate the assets of the Company.
The proceeds of the liquidation would then be distributed to the creditors of
the Company in accordance with the priorities established by the Bankruptcy
Code. No assurance can be given that there would be funds generated to pay every
creditor. The Company's shareholders may receive no money in a Chapter 7
liquidation. It is not possible at this time to predict the effect of a Chapter
7 liquidation on the interest of creditors or stockholders.



                                       10
<PAGE>   11

         The Company is in discussions with its current lender in an effort to
secure debtor-in-possession financing in the event the Company chooses to file
an election to convert to reorganization under Chapter 11. If an election to
convert to reorganization under Chapter 11 is made, the Company would continue
to conduct normal business operations as a debtor-in-possession subject to the
jurisdiction of the Bankruptcy Court. As a debtor-in-possession, the Company
could not engage in transactions outside the ordinary course of business without
approval of the Bankruptcy Court.

         Under Chapter 11, actions to enforce certain claims against the Company
are stayed if the claims arose, or are based on, events that occurred on or
before the date of the Involuntary Petition. The ultimate terms of settlement of
these claims will be determined in accordance with a plan of reorganization,
which requires voting of the impaired prepetition creditors and stockholders and
confirmation by the Bankruptcy Court. Other liabilities may arise or be subject
to compromise as a result of rejection of executory contracts, or unexpired
leases, or the Bankruptcy Court's resolution of claims for contingencies and
disputed amounts. The ultimate resolution of such liabilities, all of which are
subject to compromise, will be a part of the reorganization plan filed with the
Bankruptcy Court under Chapter 11.

A plan of reorganization would include a capital structure that will enable the
Company to generate sufficient cash flow after reorganization to meet its
restructured obligations. Accordingly, the rights of prepetition creditors and
the ultimate payment of their claims may be substantially changed, or even
eliminated under the Bankruptcy Code. It is not possible at this time to predict
the ultimate outcome of a reorganization under Chapter 11 or its effects on the
Company's business or on the interest of creditors or stockholders.

SEASONALITY

         The Company's business is seasonal in nature, with the highest sales
and earnings occurring in the third quarter of its fiscal year, which includes
the Christmas selling season. Approximately 32% of the Company's net sales for
fiscal 2001 were generated in the third quarter. (See Note 9 of Notes to the
Consolidated Financial Statements for quarterly financial data.) Year-to-year
comparisons of quarterly results and comparable store net sales can be affected
by a variety of factors, including the success and timing of new releases by
manufacturers, the timing and duration of the holiday selling seasons and the
timing of new store openings and sales promotions.


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         The Consolidated Financial Statements and related notes are included in
Item 14 of this report. See Index to Consolidated Financial Statements contained
in Item 14 herein.


ITEM 9.  CHANGES OR DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
         DISCLOSURE

     Disclosure of the information required under this Item 9 has been
previously reported, as that term is defined in Rule 12b-2 under the Securities
Exchange Act of 1934, as amended, and therefore is not required to be included
herein.


ITEM 10. (a) AND (b)  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

ITEM 11. EXECUTIVE COMPENSATION

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The information required by these items of Part III will be set forth
in the Company's Proxy Statement for its 2001 Annual Meeting of Stockholders to
be filed with the Securities and Exchange Commission within 120 days after March
31, 2001 under similar captions and is incorporated herein by reference, except
that the information required with respect to the executive officers of the
Company under Item 10 (b) is set forth immediately following Item 4.



                                       11
<PAGE>   12



                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORT ON FORM 8-K

(a)      DOCUMENTS FILED AS A PART OF THIS REPORT:

         (1)      CONSOLIDATED FINANCIAL STATEMENTS

                  See Index to Consolidated Financial Statements on Page 13.

         (2)      FINANCIAL STATEMENT SCHEDULES

                  None of the schedules for which provision is made in the
                  applicable accounting regulations of the Securities and
                  Exchange Commission are required.

(3)      EXHIBITS

                  See Exhibit Index on pages 27 through 29

(b)      REPORTS ON FORM 8-K

         On February 27, 2001, the Company filed a Form 8-K to report the
engagement of BDO Seidman, LLP to act as the principal accountant to audit the
Company's financial statements.

(c)      EXHIBITS:

         See Exhibit Index on pages 27 through 29.

(d)      OTHER FINANCIAL STATEMENTS

         Not applicable.



                                       12
<PAGE>   13



                                   SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, the Registrant has duly caused this report on Form 10-K
to be signed on its behalf by the undersigned, thereunto duly authorized.

                                          NATIONAL RECORD MART, INC.


                                          BY:  /s/ William A. Teitelbaum
                                             ----------------------------------
                                               William A. Teitelbaum
                                               Chairman of the Board, President
                                               and Chief Executive Officer


Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:

<TABLE>
<CAPTION>
Signature                                   Capacity                                    Date
---------                                   --------                                    ----
<S>                                        <C>                                         <C>
/s/ William A. Teitelbaum                   Chairman of the Board, President            July 10, 2001
---------------------------                 Chief Executive Officer and Director
William A. Teitelbaum


/s/ Theresa Carlise                         Senior Vice President                       July 10, 2001
---------------------------                 Chief Financial Officer,
Theresa Carlise                             Chief Accounting Officer,
                                            Treasurer, Secretary and Director


/s/ Irwin B. Goldstein                      Director                                    July 10, 2001
---------------------------
Irwin B. Goldstein


/s/ Damian Georgino                         Director                                    July 10, 2001
---------------------------
Damian Georgino


/s/ David Lang                              Director                                    July 10, 2001
---------------------------
David Lang
</TABLE>



                                       13
<PAGE>   14




                           NATIONAL RECORD MART, INC.

             INDEX TO CONSOLIDATED (UNAUDITED) FINANCIAL STATEMENTS



<TABLE>
<CAPTION>
                                                                                       Page
                                                                                       ----
<S>                                                                                   <C>
Statement Regarding Absence of Audit                                                    15

Consolidated (Unaudited) Statements of Operations for the fiscal years
ended March 31, 2001, March 25, 2000, and March 27, 1999                                16

Consolidated (Unaudited) Balance Sheets as of March 31, 2001 and March 25, 2000         17

Consolidated (Unaudited) Statements of Cash Flows for the fiscal years ended
March 31, 2001, March 25, 2000, and March 27, 1999                                      18

Consolidated (Unaudited) Statements of Stockholders' Equity for the fiscal years
ended March 31, 2001, March 25, 2000, and March 27, 1999                                19

Notes to Consolidated (Unaudited) Financial Statements                                  20
</TABLE>



                                       14
<PAGE>   15





Rider 18A
Statement Regarding Absence of Audit

The accompanying consolidated balance sheet of National Record Mart, Inc. and
subsidiary as of March 31, 2001 and March 25, 2000, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended March 31, 2001 have not been audited.

As reported under Items 1 and 3 of this Form 10-K, on June 19, 2001 an
involuntary petition under Title 11 of the United States Bankruptcy Code was
filed against the Company in the United States Bankruptcy Court for the Western
District of Pennsylvania requesting relief under Chapter 7. The Company received
no advance warning that this filing was about to be made. The Company is
required to respond to the petition on or before July 26, 2001.

The unexpected filing of this petition has caused the small number of Company
personnel who are responsible for the preparation of the Company's financial
statements, including working with the Company's auditors with respect to the
audit of such financial statements, to be diverted from such tasks in order to
focus upon the immediate and critical steps which the Company must take to
respond to the filing of the petition. In addition, as part of its response to
the petition, the Company has determined to take a variety of actions to
conserve available cash for vital operational needs. This has resulted in the
Company not making certain payments to its auditors, which the auditors have
indicated would be required to be made as a condition of delivery of any audit
report.

As a result, in order to provide the fullest information in this Form 10-K which
is available at this time, the Company has determined to file this Form 10-K
containing the accompanying financial statements, which have not been audited
and should not be relied upon.



                                       15
<PAGE>   16




                    NATIONAL RECORD MART, INC. and Subsidiary
                      CONSOLIDATED STATEMENTS OF OPERATIONS
     For the years ended March 31, 2001, March 25, 2000 and March 27, 1999

<TABLE>
<CAPTION>
                                                                                   Years Ended
                                                              ------------------------------------------------------
                                                                March 31,            March 25,            March 27,
                                                                   2001                 2000                 1999
                                                              ------------         ------------         ------------
<S>                                                          <C>                  <C>                  <C>
Net sales                                                     $125,892,129         $142,644,670         $129,902,083
Cost of sales                                                   80,059,078           87,924,659           81,685,053
                                                              ------------         ------------         ------------
     Gross profit                                               45,833,051           54,720,011           48,217,030

Selling, general and administrative expenses                    49,718,850           51,189,259           43,743,424
Depreciation and amortization                                    4,885,639            4,664,260            3,540,141
Interest expense                                                 5,305,109            4,494,690            3,165,988
Interest income                                                    (36,836)             (37,107)             (83,493)
Impairment write down                                            1,204,931
Loss on disposal of assets                                         312,643              197,581
Other expense                                                      398,372              140,189              539,173
                                                              ------------         ------------         ------------
Total expenses                                                  61,788,708           60,648,872           50,905,233
                                                              ------------         ------------         ------------
(Loss) income before income tax  (benefit) expense             (15,955,657)          (5,928,861)          (2,688,203)
Provision (benefit) for income taxes                                    --            2,143,319             (996,862)
                                                              ------------         ------------         ------------

      Net (loss) income                                       $(15,955,657)        $ (8,072,180)        $ (1,691,341)
                                                              ============         ============         ============

Basic net (loss) income per share                             $      (3.16)        $      (1.60)        $      (0.35)
Diluted net (loss) income per share                           $      (3.16)        $      (1.60)        $      (0.35)

Basic weighted average common shares outstanding                 5,051,667            5,048,788            4,800,867
Weighted average number of common shares and common
   equivalent shares (warrants and options) outstanding          5,051,667            5,048,788            4,800,867
</TABLE>


           See accompanying notes to consolidated financial statements



                                       16
<PAGE>   17



                    NATIONAL RECORD MART, INC. and Subsidiary
                           CONSOLIDATED BALANCE SHEETS
                     As of March 31, 2001 and March 25, 2000
<TABLE>
<CAPTION>
                                                           March 31,            March 25,
                                                             2001                 2000
                                                          -----------         -----------
<S>                                                      <C>                 <C>
Assets
  Current assets:
    Cash and cash equivalents                            $  1,232,449        $  1,935,092
    Merchandise inventory                                  41,153,818          51,040,684
    Due from stockholder                                      382,860             380,154
    Accounts Receivable                                         1,659                  --
    Other current assets                                      930,499           2,239,753
                                                         ------------        ------------
  Total current assets                                     43,701,285          55,595,683

  Property and equipment, at cost                          38,964,286          44,332,172
  Accumulated depreciation and amortization               (20,631,943)        (21,006,162)
                                                         ------------        ------------
  Property and equipment, net                              18,332,343          23,326,010

  Other assets:
    Security deposits                                          75,254                  --
    Intangibles                                             1,858,028           2,296,205
    Other assets                                              464,346             633,514
                                                         ------------        ------------
  Total other assets                                        2,397,628           2,929,719
                                                         ------------        ------------
    Total assets                                         $ 64,431,256        $ 81,851,412
                                                         ============        ============

Liabilities and stockholders' equity
  Current liabilities:
    Accounts payable                                      $25,583,207        $ 25,046,213
    Deferred income                                                --           1,012,159
    Other liabilities and accrued expenses                  6,156,435           5,046,649
    Current maturities of long-term debt                   15,027,027             161,770
                                                          -----------        ------------
Total current liabilities                                  46,766,669          31,266,791

  Long-term debt:
    Notes payable                                             131,584          14,558,285
    Revolving credit facility                              25,682,174          28,219,850
                                                         ------------        ------------
  Total long-term debt                                     25,813,758          42,778,135

  Commitments and contingencies

Stockholders' equity:
  Preferred Stock, $.01 par value, 2,000,000 shares
   authorized, none issued                                         --                  --
  Common Stock, $.01 par value, 9,000,000 shares
   authorized, 5,498,484 shares were issued,
   and 5,051,667 shares were outstanding
   at March 31, 2001 and March 25, 2000                        54,985              54,985
  Additional paid-in capital                               15,902,474          15,902,474
  Retained (deficit) earnings                             (22,437,405)         (6,481,748)
                                                         ------------        ------------
                                                           (6,479,946)          9,475,711
  Less Treasury Stock, 446,817  shares at both
    March 31, 2001 and March 25, 2000                      (1,669,225)         (1,669,225)
                                                         ------------        ------------
  Total stockholders' equity                               (8,149,171)          7,806,486
                                                         ------------        ------------
    Total liabilities and stockholders' equity           $ 64,431,256        $ 81,851,412
                                                         ============        ============
</TABLE>

           See accompanying notes to consolidated financial statements



                                       17
<PAGE>   18


                    NATIONAL RECORD MART, INC. and Subsidiary
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
     For the years ended March 31, 2001, March 25, 2000 and March 27, 1999

<TABLE>
<CAPTION>
                                                                               Years Ended
                                                             -------------------------------------------------------
                                                                March 31,            March 25,            March 27,
                                                                  2001                 2000                 1999
                                                             -------------        -------------        -------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S>                                                         <C>                  <C>                  <C>
Net (loss) income                                            $ (15,955,657)       $  (8,072,180)       $  (1,691,341)
Adjustments to reconcile net (loss) income to
net cash provided by operating activities:
    Depreciation and amortization                                4,885,639            4,664,260            3,540,141
    Accretion of notes payable for value assigned
      for warrants                                                 550,704              571,826              445,464
    Loss from disposal of property and equipment                 1,517,574              197,581              144,101
    Deferred income taxes                                               --            2,143,319             (816,319)
    Stock option compensation                                           --               33,343                   --
    Other                                                          121,139             (101,824)              29,835

Changes in operating assets and liabilities:
    Merchandise inventory                                        9,886,866           (6,625,693)          (4,862,139)
    Other assets                                                 1,320,520            1,041,497             (636,789)
    Refundable income taxes                                             --              229,860             (166,338)
    Accounts payable                                               536,997            8,345,311            4,373,283
    Deferred income                                                     --              493,795              312,822
    Other liabilities and accrued expenses                              --             (222,272)           1,805,352
    Income taxes payable                                                --                   --             (181,782)
                                                             -------------        -------------        -------------
      Net cash provided by operating activities                  2,863,782            2,698,823            2,296,290

CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment                                (913,895)          (9,398,411)         (10,300,704)
Asset purchases (see Note 8)                                            --             (540,535)          (4,507,275)
Amounts (loaned to) received from  stockholders                     (2,706)             114,095              (94,705)
                                                             -------------        -------------        -------------

Net cash used in investing activities                             (916,601)          (9,824,851)         (14,902,684)

CASH FLOWS FROM FINANCING ACTIVITIES
Payments on debt facilities                                   (140,510,466)        (160,387,046)        (164,655,790)
Net borrowings on revolving debt facilities                    137,860,642          167,429,966          180,122,821
Purchases of Treasury Stock                                             --               (8,360)          (1,229,881)
Exercise of stock options                                               --               10,250                1,250
                                                             -------------        -------------        -------------
   Net cash (used in) provided by financing activities          (2,649,824)           7,044,810           14,238,400
                                                             -------------        -------------        -------------

Net (decrease) increase in cash and cash equivalents              (702,643)             (81,218)           1,632,006
Cash and cash equivalents, beginning of year                     1,935,092            2,016,310              384,304
                                                             -------------        -------------        -------------
Cash and cash equivalents, end of year                       $   1,232,449        $   1,935,092        $   2,016,310
                                                             =============        =============        =============
</TABLE>


           See accompanying notes to consolidated financial statements



                                       18
<PAGE>   19


                    NATIONAL RECORD MART, INC. and Subsidiary
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
     For the years ended March 31, 2001, March 25, 2000 and March 27, 1999

<TABLE>
<CAPTION>
                                                      Additional                                 Total
                                    Common Stock       Paid-in        Retained               Treasury Stock  Stockholders'
                                  Shares     Amount    Capital   Earnings/(Deficit)  Shares      Amount         Equity
                                ---------   -------  ----------- -----------------  -------  --------------  ------------
<S>                            <C>         <C>      <C>         <C>                <C>      <C>             <C>
Balance at March 27, 1999       5,494,384    54,944   15,858,922       1,590,432    444,817    (1,660,865)      15,843,43
  Stock options exercised           4,100        41       10,209              --         --            --          10,250
  Stock option compensation            --        --       33,343              --         --            --          33,343
  Net loss                             --        --           --      (8,072,180)        --            --      (8,072,180)
  Purchases of treasury stock          --        --           --              --      2,000        (8,360)         (8,360)
                                ---------   -------  -----------    ------------    -------   -----------    ------------

Balance at March 25, 2000       5,498,484   $54,985  $15,902,474    $ (6,481,748)   446,817   $(1,669,225)   $  7,806,486
                                ---------   -------  -----------    ------------    -------   -----------    ------------
  Net loss                                                           (15,955,657)                             (15,955,657)

Balance at March 31, 2001       5,498,484   $54,985  $15,902,474    $ 22,437,405    446,817   $(1,669,225)   $ (8,149,171)
</TABLE>

           See accompanying notes to consolidated financial statements



                                       19
<PAGE>   20


                    NATIONAL RECORD MART, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.  NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

DESCRIPTION OF BUSINESS

National Record Mart, Inc. (the "Company") is a specialty retailer of home
entertainment products, including compact discs, audio and video cassettes, and
related accessories. As of March 31, 2001, the Company operated 151 stores in 32
states and the U.S. territory of Guam. The stores are primarily in the eastern
part of the United States and operate under five distinct store concepts,
National Record Mart or NRM Music, Waves Music, Vibes Music, Music Oasis and
Music X, each of which targets a different customer base. The Company's fiscal
year is the 52 or 53 weeks ending on the Saturday in March closest to March 31.
Fiscal years 2001, 2000, 1999 ended on March 31 (53 weeks), March 25 (52 weeks),
and March 27 (52 weeks), respectively.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiary, National Record Mart Investments, Inc., a Delaware
holding company. All intercompany accounts and transactions have been eliminated
in consolidation.

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents.

MERCHANDISE INVENTORY

Inventory is comprised of records, cassettes, compact discs, video tapes and
accessories and is stated at the lower of average cost or market. Market is net
realizable value.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost. Equipment and major improvements to
existing locations are capitalized. Expenditures for repairs and maintenance
which do not extend the useful life of assets are charged to expense as
incurred. Provisions for depreciation are computed using the straight-line
method for book purposes and accelerated methods for tax purposes based upon the
estimated useful lives of the assets. Leasehold improvements are amortized over
the shorter of the useful life of the improvement or the lease term which
includes anticipated renewal periods. Property and equipment of the Company
consist of the following:

<TABLE>
<CAPTION>
                                                               March  25,       March  25,
              Assets                        Asset Lives           2001             2000
              ------                        -----------       ------------     ------------
<S>                                        <C>               <C>              <C>
         Leasehold improvements              10 years         $ 15,278,113     $ 19,010,167
         Fixtures and equipment               7 years           23,614,454       25,250,286
         Vehicles                             5 years               71,719           71,719
                                                              ------------     ------------
                  Total                                         38,964,286       44,332,172
         Less accumulated depreciation                         (20,631,943)     (21,006,162)
                                                              ------------     ------------
                  Property and equipment, net                 $ 18,332,343     $ 23,326,010
                                                              ============     ============
</TABLE>


Depreciation expense for the years ended March 31, 2001, March 25, 2000, and
March 27, 1999 was approximately $4,430,000, $4,209,000, and $3,096,000,
respectively.

INTANGIBLE ASSETS

Intangible assets recorded by the Company are being amortized using the
straight-line method over their estimated useful lives. Goodwill represents the
excess of the purchase price over the fair value of the net assets acquired in
the original acquisition of the Company and the acquisitions of businesses in
fiscal 1994, fiscal 1999 and fiscal 2000 and is




                                       20
<PAGE>   21

being amortized over periods of 40 years for acquisitions taking place in fiscal
1994 and 15 years for acquisitions taking place in fiscal 1999 and fiscal 2000.
The amortization period is determined by taking into consideration the following
factors: the amortization periods generally used in the retail music business,
the highly competitive nature of the business including emerging forms of
competition and the overall history of profitability of the acquired business.
The estimated useful life of other intangible assets is five years. Accumulated
amortization as of March 31, 2001 and March 25, 2000 was approximately
$1,633,000 and $1,177,000, respectively. Amortization expense for the years
ended March 31, 2001, March 25, 2000, and March 27, 1999 was approximately
$456,000, $438,000, and $444,000, respectively.

VALUATION OF LONG-LIVED ASSETS

The Company monitors the recoverability of long-lived assets, based on factors
such as current market value, future asset utilization, business climate and
future undiscounted cash flows expected to result from the use of the related
assets. The Company's policy is to record an impairment loss in the period when
it is determined that the carrying amount of the asset may not be recoverable.
The impairment loss is calculated as the amount by which the carrying amount of
the asset exceeds the fair value of the asset.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts reported in the consolidated balance sheets for the
Company's financial instruments approximate their fair value.

STORE OPENING COSTS AND CLOSING COSTS

The expenses associated with the opening of new stores and closing stores are
charged to expense as incurred.

ADVERTISING COSTS

Advertising and sales promotional programs are charged to expense during the
periods in which they are run. Total advertising and sales promotional expenses
for the fiscal years ended March 31, 2001, March 25, 2000, and March 27, 1999
were approximately $1,353,000, $2,202,000, and $2,046,000, respectively.

STOCK OPTION PLANS

In October 1995, the Financial Accounting Standards Board (FASB) issued
Statement No. 123, "Accounting for Stock-Based Compensation," which establishes
financial accounting and reporting standards for stock-based employee
compensation plans. The Company continues to account for its stock-based
employee compensation plans using the intrinsic value method under Accounting
Principles Board Opinion No. 25. See pro forma disclosures required under FASB
Statement No. 123 in Note 4.

REVENUE RECOGNITION

Revenue from sales of merchandise is recognized at the point of sale to the
consumer, at which time payment is tendered. There are no provisions for
uncollectible amounts since payment is received at the time of sale. In
connection with gift certificates, a deferred revenue amount is established upon
purchase of the gift certificate by the customer and revenue is recognized upon
redemption and purchase of merchandise.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results may differ from those estimates.

RECENT FINANCIAL ACCOUNTING STANDARDS BOARD PRONOUNCEMENT

FAS 133, Accounting for Derivative Instruments and Hedging Activities

In 1998, the FASB issued Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which
establishes standards for the recognition and measurement of derivatives and
hedging activities. The standard is effective for fiscal 2002. The Company does
not currently engage in these types of risk management or investment activities.
Based upon current business practices, the statement is not anticipated to have
any impact on the Company's financial statements.



                                       21
<PAGE>   22


EARNINGS PER SHARE

The following table shows the share amounts used in computing basic and diluted
earnings per share.

<TABLE>
<CAPTION>
                                                         March 31,         March 25,         March 27,
                                                            2001              2000              1999
                                                       ------------       ------------      -----------
<S>                                                   <C>                 <C>              <C>
Weighted average common shares outstanding               5,051,667           5,048,788         4,800,867
Dilutive common stock equivalents                               --                  --                --
Treasury stock assumed to be repurchased using
   proceeds from options and warrants                           --                  --                --
                                                         ---------           ---------         ---------
Weighted average common shares and equivalents
   outstanding                                           5,051,667           5,048,788         4,800,867
                                                         =========           =========         ==========
</TABLE>


RECLASSIFICATION

Certain reclassifications have been made to the Consolidated Financial
Statements for prior periods in order to conform to the March 25, 2000
presentation.


2.  REVOLVING CREDIT FACILITY AND TERM DEBT

Long-term debt consisted of the following as of:
<TABLE>
<CAPTION>
                                                                 March 31,        March 25,
                                                                   2001              2000
                                                               -----------      -----------
<S>                                                           <C>              <C>
       Revolving Credit Facility -- Bears interest
       at the bank's base rate (8.00% at March 31, 2001),
       plus 2%, or the 30-day LIBOR rate (5.078% at
       March 31, 2001) plus 4.0%. Secured by substantially
       all of the assets of the Company.                       $25,682,174      $28,219,850

       Subordinated  Notes -- $15 million notes with interest
       rate of 11.75%. Notes net of discount of $32,006
       as of March 31, 2001.                                    14,967,994       14,417,290

       Other                                                       190,617          302,765
       -----                                                   -----------      -----------
                                                                40,840,785       42,939,905
       Less current maturities                                  15,027,027          161,770
                                                               -----------      -----------
       Long-term debt                                          $25,813,758      $42,778,135
                                                               ===========      ===========
</TABLE>

The Company has a revolving credit facility (the "Revolver") which expires on
June 10, 2003. The maximum borrowings under the Revolver are $35,000,000 and are
based upon eligible inventory levels as defined therein. During the months of
October through December 31 of each year, an overadvance is available in
addition to the borrowing base as calculated by levels of inventory in the
amount of $1.5 million. In any event, the total borrowings under this facility
shall not exceed the limit of $35 million. As of March 31, 2001, approximately
$26,750,000 was available and approximately $1,068,000 was unused under the
revolving line of credit facility. The Company is required to pay a monthly
commitment fee of .25% per annum on the unused portion of the Revolver and a
monthly collateral monitoring fee of $3,500.

The Revolver also contains various financial and other covenants that place
restrictions or limitations on the Company and its subsidiaries, the more
restrictive of which include: (i) maintenance of a number of financial ratios,
as defined, (ii) a restriction on dividends, and (iii) limitation on capital
expenditures. The covenants have been waived through August 15, 2001. A
bankruptcy filing by the Company (which would include an election to convert
the involuntary petition filed against the Company on June 19, 2001 to a
Chapter 11 reorganization) constitutes an event of default under the revolver.




                                       22
<PAGE>   23


On April 16, 1998, the Company secured a private placement of $15,000,000 in
senior subordinated notes. Originally, the notes carried an interest rate of
11.75% payable semiannually and matured April 15, 2001. By agreement dated
April 13, 2001, the maturity of the notes was extended to October 15, 2001, the
interest payment date on April 15, 2001 was deferred until October 15, 2001,
certain financial covenants were waived and the noteholders agreed to forebear
from the enforcement of remedies resulting from the failure to make interest
payments through but not including October 15, 2001. The forbearance
obligation terminates upon certain events of default, including a bankruptcy
filing by the Company (which would include an election to convert the
involuntary petition filed against the Company on June 19, 2001 to a Chapter 11
reorganization) In consideration of the placement, the Company
issued 400,000 common stock warrants with an exercise price of $0.01. The
Company has allocated $1,600,000 of value for accounting purposes to the
warrants, which has been recorded as a reduction of the $15,000,000. This
reduction will be accreted as additional interest expense over the term of the
note. The Company has issued 39,990 warrants for an additional expense of
$205,000 in the third quarter of fiscal 1999. The additional warrants are a
settlement for the delay in the effective date of registering the 400,000
warrants noted above with the SEC. During the year ended March 27, 1999, both
the 400,000 and 39,990 warrants were exercised.

Future scheduled maturities of long-term debt are as follows:

<TABLE>
<CAPTION>
                 Year Ended
                    March
                 ----------
<S>                                           <C>
                    2002                       $15,059,033
                    2003                            10,604
                    2004                        25,693,117
                    2005                            13,450
                    2006                            16,165
                    Thereafter                      80,421
                                               -----------
                                                40,872,790
                    Discount to be accreted         32,005
                                               -----------
                    Total                      $42,840,785
                                               ===========
</TABLE>

Interest payments of $5,305,000, $3,874,000, and $1,918,000 were made during the
fiscal years ended March 31, 2001, March 25, 2000, and March 27, 1999,
respectively.

3.  EMPLOYEE BENEFIT PLANS

Profit Sharing Plan. The Company sponsors a qualified, noncontributory profit
sharing plan for eligible employees. Contributions to the plan, as determined by
the Board of Directors, are discretionary but generally may not exceed 15% of
the defined annual compensation paid to all participating employees. No
contributions were made to the plan for any of the years presented.

401(k) Plan. The Company sponsors a 401(k) plan for eligible employees.
Employees who have attained age 21 and are paid for 1,000 or more hours of
service within the twelve months from the date hired are eligible to
participate. Under provisions of the plan, participants may contribute up to 15%
of their eligible compensation to the plan. These contributions are made through
payroll deductions and are partially matched by the Company. Contributions made
by the Company to its 401(k) plan were $68,000, $72,000, and $64,000 for the
years ended March 31, 2001, March 25, 2000, and March 27, 1999, respectively.

4.  STOCK OPTION PLANS

The National Record Mart, Inc. 1993 Stock Option Plan (the "Plan") provides for
the grant of 185,000 incentive or non-statutory stock options to purchase common
stock. Employees who share the responsibility for the management growth or
protection of the business of the Company are eligible to receive options which
are approved by a committee of the Board of Directors. These options primarily
vest over five years and are exercisable for a ten-year period from the date of
the grant.

Additionally, the Company's Board of Directors adopted the National Record Mart,
Inc. 1993 Non-Employee Director Stock Option Plan (the "Director Plan"). The
Director Plan provides for the grant of 15,000 stock options to purchase common
stock to all independent members of the Board of Directors who are not employees
of the Company and who are disinterested persons (as used in Rule 16b-3
promulgated under the Securities Exchange Act of 1934). These options vest over
five years and are exercisable for a ten-year period from the date of grant.



                                       23
<PAGE>   24



On June 10, 1996, the Company's Board of Directors granted Mr. William A.
Teitelbaum the option to purchase 200,000 shares of common stock par value $.01
per share of the Company at an option exercise price of $2.50 per share. The
right to exercise such option vests in four equal installments over a period of
four years beginning on June 15, 1997, and all options will vest automatically
upon (i) acquisition by a third party or group of a majority of the Company's
outstanding equity securities, or a sale of the Company, or all or substantially
all of its assets, (ii) termination of Mr. Teitelbaum's employment without
proper cause, (iii) a reorganization, merger or consolidation which results in a
change in control of the Company or (iv) Mr. Teitelbaum's death. If Mr.
Teitelbaum ceases to be employed by the Company for any other reason, the
unvested portion of the options will be extinguished. The option expires on June
15, 2007.

On June 30, 1997, the Company's Board of Directors approved the 1997
Non-Employee Directors Stock Option Plan. The 1997 Directors' Plan provides for
the grant of 25,000 shares to all independent members of the Board of Directors
who are not employees. The options are vested as of grant date and are
exercisable over a ten-year period from the date of grant at an exercise price
of $2.50.

The Company's Board of Directors approved on July 1, 1997 the issuance of
options to purchase 200,000 shares of the Company's common stock to William A.
Teitelbaum. The options vest over twenty years and are exercisable at $0.10,
with an expiration date of July 1, 2024. The options have a vesting event to
automatically vest in full upon termination, death, merger, acquisition or
liquidation.

Pro forma information regarding net income and earnings per share is required by
FASB Statement No. 123, which also requires that the information be determined
as if the Company has accounted for its employee stock options granted beginning
in the fiscal year subsequent to December 31, 1994 under the fair value method
of that Statement. The fair value for these options was estimated at the date of
grant using a Black-Scholes option pricing model with the following
weighted-average assumptions for the year ended March 31, 2001: risk free rate
of (*)%; no dividend yield; volatility factors of the expected market price of
the Company's common stock of (*); and weighted-average expected life of the
option of four or five years depending on terms of grant. For the year ended
March 25, 2000: risk free rate of 5.25%; no dividend yield; volatility factors
of the expected market price of the Company's common stock of 1.283; and
weighted-average expected life of the option of four or five years depending on
terms of grant. For the year ended March 27, 1999: risk-free interest rate of
5.48%; no dividend yield; volatility factors of the expected market price of the
Company's common stock of 1.283; and weighted-average expected life of the
option of five years.

The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.

For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the option's vesting period. The Company's pro
forma information follows:

<TABLE>
<CAPTION>
                                                  March 31,               March 25,           March 27,
                                                    2001*                   2000                 1999
                                                 ------------           -----------          -----------
<S>                                             <C>                    <C>                  <C>
Pro forma net income (loss)                      $(15,955,657)          $(8,130,646)         $(1,744,919)

Pro forma net income (loss) per share:
  Basic                                          $      (3.16)          $     (1.61)         $     (0.36)
  Fully diluted                                  $      (3.16)          $     (1.61)         $     (0.36)
</TABLE>
---------------
* To be calculated and submitted in an amended Form 10K.


Stock options granted prior to March 26, 1995 are excluded from the
determination of pro forma net income.


                                       24
<PAGE>   25

A summary of the Company's stock option activity follows:

<TABLE>
<CAPTION>
                                   March 31, 2001              March 25, 2000             March 27, 1999
                               -----------------------     ---------------------      ----------------------
                                             Weighted-                 Weighted-                   Weighted-
                                              Average                   Average                     Average
                                             Exercise                  Exercise                    Exercise
                               Options        Price        Options       Price        Options       Price
                               -------       --------      -------     ---------      -------      ---------
<S>                           <C>          <C>           <C>          <C>            <C>          <C>
Outstanding -
  beginning of year            524,000        $1.92        516,950       $1.88        503,300        $1.63

Granted                              0            0         26,000        3.86         34,350         5.90

Exercised                            0            0         (4,100)       2.50           (500)        2.50

Cancelled                      (17,850)       $6.11        (14,850)       4.21        (20,200)        2.50
                               -------        -----        -------       -----        -------        -----

Outstanding -
  end of year                  506,150        $1.77        524,000       $1.91        516,950        $1.88
                               =======        =====        =======       =====        =======        =====


Exercisable - end of year      273,880        $2.61        207,180       $2.66        134,600        $2.77
                               =======        =====        =======       =====        =======        =====
</TABLE>


5.  INCOME TAXES

The provision (benefit) for income taxes, as shown in the accompanying
Consolidated Statements of Operations, includes the following components:

<TABLE>
<CAPTION>
                                                    March 31,     March 25,      March 27,
                                                       2001         2000            1999
                                                    ---------    ----------      ---------
<S>                                                <C>          <C>             <C>
          Current provision (benefit):
               Federal                                $   --     $       --      $(175,520)
               State                                      --             --         (5,023)
                                                      ------     ----------      ---------
                                                          --             --       (180,543)
          Deferred provision (benefit)                    --             --       (816,319)
          Adjustment of the beginning of the year
            valuation allowance                           --      2,143,319             --
                                                      ------     ----------      ---------
          Total income tax provision (benefit)        $   --     $2,143,319      $(996,862)
                                                      ======     ==========      =========
</TABLE>

A reconciliation of the Company's effective income tax rate with the federal
statutory rate is as follows:

<TABLE>
<CAPTION>
                                                                 March 31,     March 25,     March 27,
                                                                   2001          2000          1999
                                                                ---------      ---------     --------
<S>                                                            <C>            <C>           <C>
          Federal statutory rate                                   34%            34%            34%
          State income taxes, net of federal tax benefit           --             --             --
          Current year valuation allowance                        (34)           (34)            --
          Adjustment of the beginning of the year
            valuation allowance                                    --             35             --
                                                                  ---            ---            ---
                 Effective income tax rate                         --             35%            34%
                                                                  ===            ===            ===
</TABLE>


For income tax purposes, National Record Mart, Inc. and its subsidiary have
approximately $26.8 million of net operating losses available to offset against
future taxable income, subject to certain limitations. Such losses expire
beginning in 2019 - 2021.




                                       25
<PAGE>   26


Tax refunds of approximately $0, $175,000 and $9,300 were received during the
fiscal years ended March 31, 2001, March 25, 2000, and March 27, 1999,
respectively.

Significant components of the Company's deferred tax assets and liabilities as
of March 31, 2001 and March 25, 2000 are as follows:

<TABLE>
<CAPTION>
                                                                         March 31,            March 25,
                                                                           2001                  2000
                                                                       -----------           -----------
<S>                                                                   <C>                   <C>
              Deferred tax assets:
                   Excess tax basis in property and equipment          $        --           $   861,000
                   Excess tax basis in inventory                           302,000               326,000
                   Other                                                   801,000               713,000
                   NOL carryforward                                      9,090,000             2,900,000
                   Valuation allowance                                  (9,708,000)           (4,229,000)
                                                                       -----------           -----------

                                                                           465,000               571,000
              Deferred tax liabilities:
                 Excess book basis in property and equipment                 7,000                    --
                 Excess book basis in other current assets                      --               571,000
                                                                       -----------           -----------
              Net deferred tax asset                                   $        --           $        --
                                                                       ===========           ===========
</TABLE>

Based on assessment of all available evidence as of March 31, 2001 and March 25,
2000, including the fact that the Company is in a cumulative loss position,
management has concluded that the deferred tax asset should be reduced by a
valuation allowance equal to the net deferred tax asset.

6.COMMITMENTS AND CONTINGENCIES

The Company leases its retail stores and distribution center under operating
leases. The lease agreements, including renewal options, expire on various dates
through 2011. Most leases provide for additional contingent rents based on a
percentage of sales and increases in real estate taxes. Future minimum annual
lease payments under noncancellable lease agreements in excess of one year at
March 31, 2001 are as follows:

<TABLE>
<CAPTION>
<S>              <C>                                       <C>
                  2002                                      $14,890,091
                  2003                                       14,031,259
                  2004                                       13,527,947
                  2005                                       12,413,807
                  2006                                       11,192,883
                  Thereafter                                 24,703,291
                                                            -----------
                  Total future minimum lease payments       $90,759,278
                                                            ===========
</TABLE>

Rent expense for the years ended March 31, 2001 March 25, 2000, and March 27,
1999 was $16,105,000, $15,884,000, and $13,168,000 respectively, including
contingent rentals of $5,700, $263,000 and $197,000, respectively.

7.  CONCENTRATION OF BUSINESS RISKS

The Company purchases inventory for its stores from approximately 250 suppliers,
with approximately 66% of purchases being made from five suppliers. As of
January of 2001, the Company has been operating without shipments from two of
its major suppliers and has decreased its purchasing from the remaining three.
The Company has increased the amount of purchases made through other suppliers
at a higher cost in order to maintain inventory levels. The Company's
advertising programs for the same period, have been adversely effected by the
decrease in purchases from its five major suppliers. These five major suppliers
filed the Involuntary Petition against the Company as discussed in Note 9.

8.  ASSET PURCHASES

On May 4, 1998, the Company purchased certain of the assets of Record Den Inc.
and DJK Records & Video Inc., totaling four stores. The acquisition was
accounted for using the purchase method of accounting for a purchase price of
approximately $933,000 resulting in $195,000 of goodwill which is being
amortized using the straight-line method over 15 years, $708,000 for purchased
assets and a $30,000 consulting and noncompete agreement for a period of three
years. The purchase price was paid in cash upon completion of the agreement.



                                       26
<PAGE>   27

On November 13, 1998, the Company purchased certain of the assets of Happy Town
Inc. and Tempo One Stop Records Inc., totaling twelve stores. The acquisition
was accounted for using the purchase method of accounting for a purchase price
of approximately $3,574,000 resulting in $869,000 of goodwill which is being
amortized using the straight-line method over 15 years, $2,648,000 for purchased
assets and a $57,000 consulting and noncompete agreement for a period of three
years. The purchase price was paid in cash upon completion of the agreement.

On May 5, 1999, the Company amended its asset purchase agreement with Tempo One
Stop Records Inc. and Happy Town Inc. to provide for the additional purchase of
two stores located in Guam. The acquisition was accounted for using the purchase
method of accounting for a purchase price of approximately $540,000 resulting in
$200,000 of goodwill, which is being amortized using the straight-line method
over 15 years, and $340,000 for purchased assets. The purchase price is being
paid through monthly installments equal to 7% of sales of the store with the
highest sales for the applicable month.

9.   LITIGATION

         On June 19, 2001, an involuntary petition under Title 11 of the United
States Bankruptcy Code (the "Bankruptcy Code") was filed against the Company in
the United States Bankruptcy Court for the Western District of Pennsylvania
requesting relief under Chapter 7 (the "Involuntary Petition"). The Involuntary
Petition was filed by five of the Company's major suppliers: Universal Music and
Video Distribution, Inc., BMG Distribution, EMI Music Distribution, Sony Music
Entertainment, Inc. and Warner/Elektra/Atlantic (WEA) Corporation. The
Involuntary Petition indicates that the five suppliers hold an aggregate of
approximately $18,753,000 of claims against the Company incurred in the ordinary
course of their respective supply relationship with the Company. The Company is
required to respond to the petition on or before July 26, 2001. While preparing
a response to the Involuntary Petition, the Company continues to use, acquire,
and dispose of property as if the Involuntary Petition had not been filed in
accordance with Section 303 (f) of the Bankruptcy Code. The Company is in
discussions with its current lender in an effort to secure debtor-in-possession
financing in the event the Company to file an election to convert to
reorganization under Chapter 11 of the Bankruptcy Code ("Chapter 11"). For
additional discussion of the impact of the Involuntary Petition on the Company
see "Item 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition -- Liquidity and Capital Resources."

Additionally, the Company is involved, from time to time, in lawsuits that arise
in the normal course of business. The Company actively and vigorously defends
all lawsuits. Management believes there are no such lawsuits that will have a
material effect on the Company's financial position.

10.  QUARTERLY RESULTS OF OPERATIONS IN THOUSANDS (UNAUDITED)

<TABLE>
<CAPTION>
                                                                         BASIC         DILUTED
                                                            NET        NET (LOSS)     NET (LOSS)       COMMON STOCK
                                              GROSS        INCOME        INCOME         INCOME            PRICE
                             SALES           PROFIT        (LOSS)      PER SHARE      PER SHARE       HIGH        LOW
                           --------          -------      --------     ---------      ---------     -------     -------
<S>                       <C>              <C>          <C>           <C>            <C>           <C>         <C>
2001:
          First            $ 30,231          $10,756      $ (4,176)      $(0.83)        $(0.83)     $4.1875     $  1.50
          Second             27,294            9,848        (4,920)       (0.97)         (0.97)      1.6875      0.6562
          Third              39,789           15,323           603         0.12           0.12       0.5938       0.125
          Fourth             28,578            9,906        (7,463)       (1.38)         (1.38)        0.26      0.1094
                           --------          -------      --------       ------         ------
            Total          $125,892          $46,173      $(15,956)      $(3.06)*       $(3.06)*
                           ========          =======      ========       ======         ======


          2000:
          First            $ 30,300          $11,292      $ (1,830)      $(0.36)        $(0.36)     $ 9.945     $ 5.183
          Second             30,682           12,461        (1,517)       (0.30)         (0.30)       4.691       3.266
          Third              48,756           18,928         2,654         0.50           0.50        4.977       3.091
          Fourth             32,906           12,039        (7,379)       (1.44)         (1.44)        6.00      2.9375
                           --------          -------      --------       ------         ------
            Total          $142,644          $54,720      $ (8,072)      $(1.60)*       $(1.60)*
                           ========          =======      ========       ======         ======
</TABLE>

*  data rounded in quarterly calculations


                                       27
<PAGE>   28
                                INDEX TO EXHIBITS

     The following documents are filed as part of this 10K for the year ended
March 31, 2001

<TABLE>
<CAPTION>
     Exhibit No.  Description
     -----------  -----------
<S>              <C>
         3.1      Amended and Restated Certificate of Incorporation of the
                  Company, filed as Exhibit 3.2 to the Company's Registration
                  Statement No. 33-62622 on Form S-1 and incorporated by
                  reference herein

         3.2      Amended and Restated By-Laws of the Company, filed as
                  Exhibit 3.4 to the Company's Registration Statement
                  No. 33-62622 on Form S-1 and incorporated by reference herein

         3.3      Amendment to Restated Certificate of Incorporation of the
                  Company, filed as Exhibit 3.3 to the Company's Annual Report
                  on Form 10-K for the fiscal year ended March 25, 1995 and
                  incorporated by reference herein

         4.1      Loan and Security Agreement, dated June 11, 1993, between the
                  Company and Barclays Business Credit, Inc., filed as
                  Exhibit 10.16 to the Company's Registration Statement
                  No. 33-62622 on Form S-1 and incorporated by reference herein

         4.2      Amendment, dated January 12, 1995, between the Company and
                  Barclays Business Credit, Inc., to the Loan and Security
                  Agreement, dated June 11, 1993, between the Company and
                  Barclays Business Credit, Inc., filed as Exhibit 4.2 to the
                  Company's Annual Report on Form 10K for the fiscal year ended
                  March 28, 1998 and incorporated by reference herein.

         4.3      Amendment, dated September 8, 1995, between the Company and
                  Shawmut Capital Corporation, successor to Barclays Credit,
                  Inc., to the Loan and Security Agreement, dated June 11, 1993,
                  between the Company and Barclays Business Credit, Inc., filed
                  as Exhibit 4.3 to the Company's Annual Report on Form 10K for
                  the fiscal year ended March 28, 1998 and incorporated by
                  reference herein.

         4.4      Amendment, dated July 19, 1996, between the Company and Fleet
                  Capital Corporation, successor to Shawmut Capital Corporation,
                  to the Loan and Security Agreement, dated June 11, 1993,
                  between the Company and Barclays Business Credit, Inc., filed
                  as Exhibit 4.4 to the Company's Annual Report on Form 10K for
                  the fiscal year ended March 28, 1998 and incorporated by
                  reference herein.

         4.5      Amendment, dated October 17, 1996, between the Company and
                  Fleet Capital Corporation, to the Loan and Security Agreement,
                  dated June 11, 1993, between the Company and Barclays Business
                  Credit, Inc., filed as Exhibit 10.10 to the Company's Annual
                  Report on Form 10-K for the fiscal year ended March 28, 1997
                  and incorporated by reference herein

         4.6      Amendment, dated June 25, 1997, between the Company and Fleet
                  Capital Corporation, to the Loan and Security Agreement, dated
                  June 11, 1993, between the Company and Barclays Business
                  Credit, Inc., filed as Exhibit 4.6 to the Company's Annual
                  Report on Form 10K for the fiscal year ended March 28, 1998
                  and incorporated by reference herein.

         4.7      Amendment, dated February 17, 1998, between the Company and
                  Fleet Capital Corporation, to the Loan and Security Agreement,
                  dated June 11, 1993, between the Company and Barclays Business
                  Credit, Inc., filed as Exhibit 4.7 to the Company's Annual
                  Report on Form 10K for the fiscal year ended March 28, 1998
                  and incorporated by reference herein.

         4.8      Amendment, dated April 16, 1998, between the Company and Fleet
                  Capital Corporation, to the Loan and Security Agreement, dated
                  June 11, 1993, between the Company and Barclays Business
                  Credit, Inc., filed as Exhibit 4.8 to the Company's Annual
                  Report on Form 10K for the fiscal year ended March 28, 1998
                  and incorporated by reference herein.

         4.9      Senior Subordinated Secured Note Purchase Agreement, dated as
                  of April 16, 1998, among the Company, the Guarantors from time
                  to time party thereto, the Purchasers from time to time party
                  thereto, and Robert Fleming, Inc., as Agent, filed as Exhibit
                  4.9 to the Company's Annual Report on Form 10K for the fiscal
                  year ended March 28, 1998 and incorporated by reference
                  herein.

</TABLE>

                                       28
<PAGE>   29

<TABLE>
<CAPTION>
     Exhibit No.  Description
     -----------  -----------
<S>              <C>
         4.10     Senior Subordinated Note Purchase Agreement, dated as of
                  April 16, 1998, among the Company, the Guarantors from time to
                  time party thereto, the Purchasers from time to time party
                  thereto, and Robert Fleming, Inc., as Agent, filed as
                  Exhibit 4.10 to the Company's Annual Report on Form 10K for
                  the fiscal year ended March 28, 1998 and incorporated by
                  reference herein.

         4.11     Issuer Security and Pledge Agreement, dated as of April 16,
                  1998, between the Company and Robert Fleming, Inc., as Agent,
                  filed as Exhibit 4.11 to the Company's Annual Report on Form
                  10K for the fiscal year ended March 28, 1998 and incorporated
                  by reference herein.

         4.12     Guarantor Security and Pledge Agreement, dated as of April 16,
                  1998, between NRM Investments, Inc. and Robert Fleming, Inc.,
                  as Agent, filed as Exhibit 4.12 to the Company's Annual Report
                  on Form 10K for the fiscal year ended March 28, 1998 and
                  incorporated by reference herein.

         4.13     Trademark Collateral Security Agreement, dated as of April 16,
                  1998, between the Company and Robert Fleming, Inc., as Agent,
                  filed as Exhibit 4.13 to the Company's Annual Report on Form
                  10K for the fiscal year ended March 28, 1998 and incorporated
                  by reference herein.

         4.14     Subordination Agreement, dated as of April 16, 1998, between
                  Robert Fleming, Inc., as Agent, and Fleet Capital Corporation,
                  acknowledged by the Company and NRM Investments, Inc., filed
                  as Exhibit 4.14 to the Company's Annual Report on Form 10K for
                  the fiscal year ended March 28, 1998 and incorporated by
                  reference herein.

         4.15     Junior Subordination Agreement, dated as of April 16, 1998,
                  between Robert Fleming, Inc., as Agent, and Fleet Capital
                  Corporation, acknowledged by the Company and NRM Investments,
                  Inc., filed as Exhibit 4.15 to the Company's Annual Report on
                  Form 10K for the fiscal year ended March 28, 1998 and
                  incorporated by reference herein.

         4.16     Collateral Sharing and Agency Agreement, dated as of April 16,
                  1998, among the Company, NRM Investments, Inc., Robert
                  Fleming, Inc., as Agent, and Fleet Capital Corporation, for
                  itself and as Collateral Agent, filed as Exhibit 4.16 to the
                  Company's Annual Report on Form 10K for the fiscal year ended
                  March 28, 1998 and incorporated by reference herein.

         4.17     Amended and Restated Loan and Security Agreement dated
                  November 1, 1999, between the Company and Fleet Capital
                  Corporation, filed as Exhibit 4.17 to the Company's Quarterly
                  Report on Form 10-Q for the quarter ended June 24, 2000 and
                  incorporated herein by reference.

         4.18     Waiver and Amendment No. 1, dated as of February 6, 2001, by
                  and between the Company and Fleet Capital Corporation, to the
                  Amended and Restated Loan and Security Agreement, dated
                  November 1, 1999, between the Company and Fleet Capital
                  Corporation, which was filed as Exhibit 4.17 to the Company's
                  Quarterly Report on Form 10-Q for the quarter ended June 24,
                  2000, filed as Exhibit 4.18 to the Company's Quarterly Report
                  on Form 10-Q for the quarter ended December 23, 2000 and
                  incorporated herein by reference.

         4.19     Amendment, dated as of December 23, 2000, by and among the
                  Company, NRM Investments, Inc., and The Chase Manhattan Bank,
                  as Agent for the Holders, to the Senior Subordinated Secured
                  Note Purchase Agreement, dated as of April 16, 1998, among the
                  Company, the Guarantors from time to time party thereto, the
                  Purchasers from time to time party thereto, and Robert
                  Fleming, Inc., as Agent, which was filed as Exhibit 4.9 to the
                  Company's Annual Report on Form 10-K for the fiscal year ended
                  March 28, 1998, filed as Exhibit 4.19 to the Company's
                  Quarterly Report on Form 10-Q for the quarter ended December
                  23, 2000 and incorporated herein by reference.

         4.20     Amendment, dated as of December 23, 2000, by and among the
                  Company, NRM Investments, Inc., and The Chase Manhattan Bank,
                  as Agent for the Holders, to the Senior Subordinated Note
                  Purchase Agreement, dated as of April 16, 1998, among the
                  Company, the Guarantors from time to time party thereto, the
                  Purchasers from time to time party thereto, and Robert
                  Fleming, Inc., as Agent, which was filed as Exhibit 4.10 to
                  the Company's Annual Report on Form 10-K for the fiscal year
                  ended March 28, 1998, filed as Exhibit 4.20 to the Company's
                  Quarterly Report on Form 10-Q for the quarter ended December
                  23, 2000 and incorporated herein by reference.


</TABLE>


                                       29
<PAGE>   30

<TABLE>
<CAPTION>
     Exhibit No.  Description
     -----------  -----------
<S>              <C>
         4.21     Second Amendment and Waiver and Forbearance Agreement, dated
                  as of April 13, 2001, by and among the Company, NRM
                  Investments, Inc., and The Chase Manhattan Bank, as Agent for
                  the Holders, to the Senior Subordinated Secured Note Purchase
                  Agreement, dated as of April 16, 1998 (as amended), among the
                  Company, the Guarantors from time to time party thereto, the
                  Purchasers from time to time party thereto, and Robert
                  Fleming, Inc., as Agent, which was filed as Exhibit 4.9 to the
                  Company's Annual Report on Form 10-K for the fiscal year ended
                  March 28, 1998, filed herewith.

         4.22     Second Amendment and Waiver and Forbearance Agreement, dated
                  as of April 13, 2001, by and among the Company, NRM
                  Investments, Inc., and The Chase Manhattan Bank, as Agent for
                  the Holders, to the Senior Subordinated Note Purchase
                  Agreement, dated as of April 16, 1998 (as amended), among the
                  Company, the Guarantors from time to time party thereto, the
                  Purchasers from time to time party thereto, and Robert
                  Fleming, Inc., as Agent, which was filed as Exhibit 4.10 to
                  the Company's Annual Report on Form 10-K for the fiscal year
                  ended March 28, 1998, filed herewith.

         10.1     Sublease dated July 1, 1992 between the Company and General
                  Motors Corporation, filed as Exhibit 10.12 to the Company's
                  Registration Statement No. 33-62622 on Form S-1 and
                  incorporated by reference herein.

         10.2     Employment Agreement dated April 1, 1993 between the Company
                  and William A. Teitelbaum, filed as Exhibit 10.11 to the
                  Company's Registration Statement No. 33-62622 on Form S-1 and
                  incorporated by reference herein

         10.3     Stock Option Agreement dated June 10, 1996 between the Company
                  and William A. Teitelbaum, filed as Exhibit 10.9 to the
                  Company's Annual Report on Form 10-K for the fiscal year ended
                  March 28, 1996 and incorporated by reference herein

         10.4     Stock Option Agreement dated July 1, 1997 between the Company
                  and William A. Teitelbaum, filed as Exhibit 10.4 to the
                  Company's Annual Report on Form 10K for the fiscal year ended
                  March 28, 1998 and incorporated by reference herein.

         10.5     Registration Rights Agreement dated July 1, 1997 between the
                  Company and William A. Teitelbaum, filed as Exhibit 10.5 to
                  the Company's Annual Report on Form 10K for the fiscal year
                  ended March 28, 1998 and incorporated by reference herein.

         10.6     Employment Agreement dated as of January 1, 1996 between the
                  Company and Theresa Carlise, filed as Exhibit 10.8 to the
                  Company's Annual Report on Form 10-K for the fiscal year ended
                  March 28, 1996 and incorporated by reference herein

         10.7     National Record Mart, Inc. 1993 Stock Option Plan, filed as
                  Exhibit 10.14 to the Company's Registration Statement No.
                  33-62622 on Form S-1 and incorporated by reference herein

         10.8     National Record Mart, Inc. Non-Employee Director Stock Option
                  Plan, filed as Exhibit 10.15 to the Company's Registration
                  Statement No. 33-62622 on Form S-1 and incorporated by
                  reference herein

         10.9     National Record Mart, Inc. 1997 Non-Employee Director Stock
                  Option Plan, filed as Exhibit 10.9 to the Company's Annual
                  Report on Form 10K for the fiscal year ended March 28, 1998
                  and incorporated by reference herein.

         10.10    Warrant Agreement, dated as of April 16, 1998, between the
                  Company, Robert Fleming, Inc. and Seneca Capital, L.P., filed
                  as Exhibit 10.10 to the Company's Annual Report on Form 10K
                  for the fiscal year ended March 28, 1998 and incorporated by
                  reference herein.

         10.11    Registration Rights Agreement, dated as of April 16, 1998,
                  between the Company and the holders of registrable securities
                  referred to therein, filed as Exhibit 10.11 to the Company's
                  Annual Report on Form 10K for the fiscal year ended March 28,
                  1998 and incorporated by reference herein.

</TABLE>
                                       30
<PAGE>   31

<TABLE>
<CAPTION>
     Exhibit No.  Description
     -----------  -----------
<S>              <C>

         10.12    Tag Along Agreement, dated as of April 16, 1998, between the
                  Company, Seneca Capital, L.P., Robert Fleming, Inc. and
                  certain holders of shares of common stock of the Company,
                  filed as Exhibit 10.12 to the Company's Annual Report on Form
                  10K for the fiscal year ended March 28, 1998 and incorporated
                  by reference herein.

         10.13    Amendment to Employment Agreement dated as January 1, 2001
                  by and between National Record Mart, Inc., and William A.
                  Teitelbaum, filed as Exhibit 10.13 to the Company's Quarterly
                  Report on Form 10-Q for the quarter Ended December 23, 2000
                  and incorporated herein by reference.

         10.14    Amendment to Employment Agreement dated as of December 31, 2000
                  by and between National Record Mart, Inc. and Theresa Carlise,
                  filed as Exhibit 10.14 to the Company's Quarterly Report on
                  Form 10-Q for the quarter ended December 23, 2000 and
                  incorporated herein by reference.

         10.15    Change in Control Agreement dated as of January 1, 2001 by and
                  between National Record Mart, Inc. and William A. Teitelbaum,
                  filed as Exhibit 10.15 to the Company's Quarterly Report on
                  Form 10-Q for the quarter ended December 23, 2000 and
                  incorporated herein by reference.

         10.16    Change in Control Agreement dated as of January 1, 2001 by and
                  between National Record Mart, Inc. and Theresa Carlisle,
                  filed as Exhibit 10.16 to the Company's Quarterly Report on
                  Form 10-Q for the quarter ended December 23, 2000 and
                  incorporated herein by reference.


</TABLE>
                                       31