<PAGE>
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

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


                                    FORM 10-K

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

                    For the fiscal year ended March 31, 2003

                         Commission File Number 0-22982

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


                               NAVARRE CORPORATION
             (Exact name of registrant as specified in its charter)

                  MINNESOTA                                     41-1704319
      (State or other jurisdiction of                         (IRS Employer
       incorporation or organization)                       Identification No.)

                   7400 49TH AVENUE NORTH, NEW HOPE, MN 55428
                    (Address of principal executive offices)

                                 (763) 535-8333
              (Registrant's telephone number, including area code)

        SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE

           SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
                          COMMON STOCK, NO PAR VALUE.

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 ( ) No (x)

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, to the
best of 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. ( )

Indicate by check mark whether the Registrant is an accelerated filer. Yes ( )
No (x)

The aggregate market value of the voting stock held by non-affiliates of the
Registrant at September 30, 2002 was $21,890,153 based on the closing sale price
on such date of $1.20 per share.

The Registrant had 21,616,187 shares of Common Stock, no par value, outstanding
at June 27, 2003.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the Registrant's Annual Meeting of
Shareowners to be held September 10, 2003 are incorporated by reference into
Part III of this Annual Report on Form 10-K.


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PART I

ITEM 1. BUSINESS

GENERAL

Navarre Corporation, a Minnesota corporation formed in 1983, is a provider of
distribution, fulfillment and marketing services for a broad range of home
entertainment and multimedia products, including personal computer ("PC")
software, audio and video titles, and interactive games. We maintain and
leverage strong relationships on both ends of the content distribution chain,
including relationships with leading national retailers, wholesalers and
rackjobbers, as well as major publishers, music labels and movie studios.

We are recognized as an industry leader in the distribution of consumer PC
software, interactive video games, DVD videos and independent music labels and
artists. Our product lines contain a broad assortment of compact discs, PC
software, video games and DVD/VHS videos sold to over 500 customers through over
18,000 locations internationally. Our broad base of customers includes (i)
wholesale clubs, (ii) mass merchandisers, (iii) computer specialty stores, (iv)
music specialty stores, (v) book stores, (vi) office superstores, and (vii)
electronic superstores.

Effective April 1, 2001, we realigned our operations into Navarre Distribution
Services (NDS) and Navarre Entertainment Media (NEM). In January 2002, we
announced the expansion of our distribution services to the market for
console-based video games.

Through Navarre Distribution Services, we distribute non-proprietary or
non-exclusive, entertainment products including PC software, major label music,
DVD video, video games and accessories. We focus on providing retailers and
publishers a wide array of high-quality services, including vendor-managed
inventory, full EDI protocol, packaging, manufacturing, fulfillment, and
marketing, for the broad, efficient distribution of non-proprietary home
entertainment products. We will pursue growth of NDS in several ways: (i) by
extending the number of software categories we serve, such as the productivity
category, where we recently signed an agreement with Adobe Systems, Inc., which
joins the publisher roster that includes other business and productivity lines
from Microsoft Corporation, Symantec Corporation, Roxio, Inc. and Network
Associates, Inc.; (ii) by expanding our presence in the distribution of home
entertainment content formats, such as DVD and interactive games; and (iii) by
leveraging our unique mix of capabilities to deepen relationships with existing
retailers and publisher clients.

Through Navarre Entertainment Media, we distribute proprietary, or exclusive,
prerecorded music of primarily independent labels and their artists on CD and
DVD audio, and video in DVD and VHS format to national and regional music
retailers, rackjobbers, and one-stops throughout the United States and Canada.
We offer independent content creators such as labels, studios and artists, the
resources and exposure to generate high visibility with valuable distribution in
a broad array of major outlets throughout North America. We seek to
significantly enhance our competitive position in independent music label
distribution in several ways (i) possible acquisition of competing independent
distribution companies, (ii) continuing to seek new proprietary distribution
opportunities, (iii) with increased ownership of content that broadens our reach
across all musical genres and (iv) exclusive licenses and outright strategic
acquisitions.

During the current fiscal year, we acquired the primary assets of Encore
Software, Inc. ("Encore"). Encore is an interactive publisher in the video game
and PC CD-ROM markets. Encore has been a leading publisher in the software
market for nearly a decade. They have built solid expertise in product
development, sales, distribution, marketing and public relations. The assets
purchased by the Company included certain fixed assets, intellectual property,
inventory, receivables, and contract rights related to Encore's business. The
assets are held by a majority-owned Navarre subsidiary, which has been named
Encore Software, Inc.

During fiscal years 2003, 2002, and 2001, sales for NDS accounted for 83.7%,
85.1%, and 85.6% of net sales, while sales of NEM accounted for 15.3%, 14.9%,
and 14.4% of net sales, respectively. During fiscal 2003, after the elimination
of intercompany sales, Encore Software, Inc. accounted for 1% of net sales.

Our corporate headquarters are located at 7400 49th Avenue North, in New Hope,
Minnesota, 55428 and our web-site address is www.navarre.com.


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OUR MARKETS

HOME ENTERTAINMENT PRODUCTS

NAVARRE DISTRIBUTION SERVICE - PC SOFTWARE, VIDEO GAMES, MAJOR LABEL MUSIC AND
DVD

PC Software

According to NPD Intelect (formerly P.C. Data), the PC software industry
achieved $5.1 billion in sales in 2002. Categories that experienced an increase
over 2001 were games, finance and personal productivity. During the past fiscal
year, we added several publishers to our distribution roster. In May of 2002,
Roxio, Inc., a leading manufacturer of digital media software, appointed us as a
distributor. In December of 2002, we entered into a distribution agreement with
Adobe Systems, Inc., the industry's market leader in network publishing and the
development of products that are utilized by both enterprise and individual
end-users. We intend to continue to add publishers that will increase our market
share across all categories of the PC software industry.

Video Games

In January 2002, we announced that we will expand into the distribution of
console-based video games. In 2002, United States sales in the interactive
entertainment industry grew 10 percent from 2001 to $10.3 billion. According to
industry researcher UBS Warburg, the industry is estimated to reach $31 billion
in worldwide sales by 2005.

Major Label Music

According to the Recording Industry Association of American ("RIAA"), audio and
music video product shipped to domestic markets was $12.6 billion in calendar
2002. Industry sources indicate that approximately 84.5% or approximately $10.7
billion of the industry's total revenue is derived from major recording labels
controlled by five major companies. Those companies are Warner-Elektra-Atlantic
Corp., Sony Music Entertainment Inc., EMI Music Marketing, Bertelsmann Music
Group, and Universal Music & Video Distribution Corp. Generally, these companies
control distribution of their products through major music retail chains and
other channels. We distribute major label music to wholesale clubs and mass
merchant retailers through our NDS division.

Major Studio DVD

According to Video Business, the home video industry totaled $20.3 billion in
sales in 2002. DVD sales accounted for $8.7 billion, an increase of 52.6% from
2001. According to Video Business the industry is forecasted to grow to $31
billion in 2006.

NAVARRE ENTERTAINMENT MEDIA - PROPRIETARY INDEPENDENT MUSIC AND DVD/VHS

In addition to the major labels and their distribution companies, there are a
number of independent music and video companies or labels and artists that are
distributed by independent distribution companies that enter into exclusive
distribution agreements with these labels on either a regional or national
basis.

The independent segment of the music industry currently represents $1.8 billion
or approximately 14.6% of total music product. We are one of a limited number of
large independent distribution companies that represent independent labels
exclusively on a regional or national basis. These companies provide products
and services to the nation's leading music specialty stores, wholesalers and
rackjobbers. They provide unique services to their labels and artists including
financing, manufacturing, marketing, promotion and access to North American
retailers.

We intend to increase our market share of the $1.8 billion independent
distribution business by continuing to select higher quality music labels and
provide greater service to our customers, in addition to providing content
ownership and licensing opportunities. We may also acquire other distribution
companies that complement our business.

E-COMMERCE

During fiscal year 2003, we continued to expand the number of electronic
commerce ("e-commerce") customers for whom we perform fulfillment and
distribution services. These services include sales of PC software, prerecorded
music and DVD/VHS videos and video games. Our business-to-business web-site
www.navarre.com integrates on-line ordering and deployment of text and visual
product information, and has been enhanced to allow for easier user navigation
and ordering.


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COMPETITION

The home entertainment products segment, comprised of prerecorded music, PC
software, DVD video and video games distribution industry, is highly
competitive. Our competitors include other national and regional distributors,
as well as some suppliers that sell directly to retailers. Some of these
competitors have substantially greater financial and other resources than we do.
Our ability to effectively compete in the future depends upon a number of
factors, including our ability to (i) obtain exclusive national distribution
contracts and licenses with independent labels, studios, content owners, artists
and manufacturers; (ii) maintain our margins and volume; (iii) expand our sales
through a varied range of products and personalized services; (iv) anticipate
changes in the marketplace including technological developments and successfully
continue our ability to distribute products in light of these developments; (v)
continue to provide our varied retail customers with specialized services; and
(vi) maintain operating expenses at an appropriate level.

In the personal computer software industry, we face competition from a number of
distributors including Ingram Micro, Inc., Tech Data Corporation and Atari, Inc.
as well as from manufacturers and publishers that sell directly to retailers. In
the prerecorded music industry, we face competition from the five major label
distribution companies, as well as other national independent distributors, such
as Koch Entertainment, RED Music Distribution, Alternative Distribution Alliance
("ADA"), Ryko Distribution, and Caroline Distribution, as well as from other
entities that sell directly to retailers.

We believe that the distribution of PC software, prerecorded music, DVD Video
and video games will remain highly competitive and the keys to growth and
profitability will be: (i) customer service, (ii) continued focus on
improvements and operating efficiencies, (iii) the ability to develop
proprietary products, and (iv) the ability to attract higher quality artists and
software publishers. We also believe that over the next several years, both the
personal computer software distribution industry and prerecorded music
distribution industry, particularly on the independent, side will continue to
further consolidate.

The market for Internet content providers is highly competitive and rapidly
changing. We expect that competition between suppliers to Web retailers will
continue to intensify. We support numerous Internet retailers, including
traditional music retail chains, record labels and independents with web-sites
on the Internet.

OUR STRATEGY

Our goal is to distribute products on an international basis in music, software,
video games and DVDs. We intend to achieve this goal by (i) increasing the
number and quality of exclusive national distribution arrangements with
proprietary prerecorded music artists, and labels, as well as, production
studios for DVD product; (ii) increasing our exclusive PC software and video
game product lines through distribution agreements and product development,
comparable to our acquisition of Encore Software, Inc., which provides us with
higher margins; (iii) continuing to deliver high levels of service to the growth
channels of retailing, including customized services and technological advances
such as e-commerce; (iv) continuing to expand the sale of prerecorded music, PC
software, video games and DVD video products in the marketplace; (v) continuing
to improve our efficiencies and technologies at our state-of-the-art
distribution center; (vi) expanding our business through strategic acquisitions
in areas or in businesses that complement our existing businesses; and (vii)
utilizing the Internet to expand the appeal of our products to a broader
customer base internationally.

EMPLOYEES

As of June 1, 2003, we had 373 employees, including 113 in administration,
finance and merchandising, 67 in sales and marketing and 193 in distribution.

BACKLOG

Because our products are shipped in response to orders, we do not maintain any
significant backlog.


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<PAGE>

FORWARD-LOOKING STATEMENTS / IMPORTANT FACTORS

Certain information in this Form 10-K includes forward-looking statements
related to our strategic expectations with respect to future performance. While
our management is optimistic about our long-term prospects, investors should
consider the following issues and uncertainties, among others, in evaluating our
future.

ADDITIONAL RISKS MAY AFFECT OPERATING RESULTS

The following risk factors and other information included in this Annual Report
on Form 10-K should be carefully considered. The risks and uncertainties
described below are not the only ones we face. Additional risks and
uncertainties not presently known to us or that we currently deem immaterial may
also impair our business operations. If any of the following risks occur, our
business, financial condition, operating results and cash flows could be
materially adversely affected.

WE ARE DEPENDENT UPON A KEY EMPLOYEE

Eric H. Paulson, our Chairman of the Board, President and Chief Executive
Officer has been with us since our inception in 1983. Although we have invested
a substantial amount of time and effort in developing our total management team,
the loss of Mr. Paulson's services could have a materially adverse effect upon
us.

OUR BUSINESS IS SEASONAL

Much of our business is seasonal in nature. As a distributor of products
ultimately sold to retailers, our business is affected by the pattern of
seasonality common to other suppliers of retailers, particularly the holiday
selling season. Because of this seasonality, if we experience a weak holiday
season, it could significantly affect our profitability for the entire year.

WE ARE DEPENDENT UPON SIGNIFICANT CUSTOMERS

In each of the past several years, we have had one or more customers that have
accounted for 10% or more of our net sales. During the fiscal year ended March
31, 2003, sales to three customers, Best Buy Co., Inc., CompUSA, Inc., and Sam's
Clubs each represented more than 10% of net sales. We are a non-exclusive
supplier to each of our customers and there can be no assurance that we will
continue to recognize a significant amount of revenue from sales to any specific
customer. If we are unable to continue to sell our products to all or any of
these three customers or are unable to continue to maintain our sales to these
customers at their current levels and are unable to find other customers to
replace these sales, there would be an adverse impact on our revenues and future
profitability.

WE ARE DEPENDENT UPON SIGNIFICANT VENDORS

Relationships with our publishers and labels such as Microsoft Corporation,
Symantec Corporation, Roxio, Inc., Adobe Systems Inc., Network Associates, Inc.,
Dreamcatcher Interactive, Inc., Sony Online Entertainment, Inc., Studio
Distribution, Inc. and Cleopatra Records, Inc. are important to Navarre. We
offer publishers a wide array of services for the broad, efficient distribution
of non-proprietary home entertainment products. The level of services given to
our content providers, which include labels, studios, and artists improve our
sales of prerecorded music of primarily independent artists and labels. We offer
independent content creators the resources and exposure to generate high
visibility for proprietary audio and DVD titles. If we are unable to continue to
sell these products there could be an adverse impact on our revenues and future
profitability.

OUR INDUSTRY TYPICALLY EXPERIENCES LOW INDUSTRY MARGINS

Competition in the prerecorded music and PC software distribution industries is
intense and is often based on price. Distributors, such as us, generally
experience low gross and operating margins. Consequently, our profitability is
highly dependent upon achieving expected sales levels as well as effective cost
and management controls. Any erosion in our gross profit margins could affect
our ability to maintain profitability.



                                                                               5
<PAGE>

WE MAY DEPEND UPON BANK BORROWINGS TO SUPPORT OUR BUSINESS

In the past, we have periodically relied upon bank borrowings to finance our
expansion, primarily for inventory and accounts receivable. Although on March
31, 2003, 2002 and 2001, we had no debt, we have a credit facility in the amount
of $40 million in place and, at times, borrow to finance working capital
requirements during the year. We believe that it may be necessary for us to
acquire additional bank financing in the future depending upon the growth of our
business and the possible financing of acquisitions. If we were unable to obtain
additional bank financing, our future growth and profitability would be
adversely affected. Under the terms of our credit facility, borrowings are
dependent upon the eligibility of accounts receivable and inventory, and certain
other covenants in the discretion of the bank.

WE MAY HAVE ADDITIONAL SIGNIFICANT WORKING CAPITAL NEEDS

As a distributor of prerecorded music and PC software products, we purchase
products directly from manufacturers for resale to retailers. As a result, we
have significant working capital requirements, the majority of which are to
finance inventory and accounts receivable. These working capital needs will
expand as inventory and accounts receivables increase in response to our growth.
Future growth will likely require additional working capital. Although we have
obtained financing sufficient to meet our requirements to date, there can be no
assurance that we will be able to obtain additional financing upon favorable
terms when required in the future.

DEPENDENCE UPON SOFTWARE DEVELOPERS AND MANUFACTURERS

We distribute interactive software pursuant to distribution agreements with
software developers and manufacturers. The continued growth and success of our
business depends partly upon our ability to procure and renew these agreements
and sell the underlying software. There can be no assurance that we will sign
such developers and manufacturers to distribution agreements or that we will be
able to sell software under existing distribution agreements. Further, there can
be no assurance that any current distribution agreement will be renewed or that
current agreements will not be terminated.

DEPENDENCE UPON RECORDING ARTISTS

A portion of the sales in our NEM Division are made pursuant to exclusive
distribution agreements. Our continued growth and success depends partly upon
our ability to procure and renew these agreements and sell the underlying
recordings. In addition, we are dependent upon these artists and labels to
generate additional quality recordings. In order to procure future distribution
agreements, we regularly review artists and labels. There is no assurance that
we will sign such artists and labels to distribution agreements or that we will
be able to sell recordings under existing distribution agreements. Further,
there can be no assurance that any current distribution agreements will be
renewed or that current agreements will not be terminated.

RETURNS AND INVENTORY OBSOLESCENCE POSE RISKS TO US

We maintain a significant investment in product inventory and, like other
companies in this industry, experience a relatively high level of product
returns as a percentage of revenues. Our agreements with our suppliers generally
permit us to return products that are in our suppliers' current product listing.
Adverse financial or other developments with respect to a particular supplier,
could cause a significant decline in the value and marketability of our products
and could make it difficult for us to return products to such a supplier and
recover our initial product acquisition costs. Such an event could have a
materially adverse effect upon our business and financial results. We maintain a
sales return reserve based on our trailing twelve months experience of sales
returns by product line. We have historically experienced an actual return rate
range of 17% to 20% depending upon the product, which we believe is in line with
the industry practice. Although our past experience indicates that these levels
are adequate to cover potential returns in these areas, there can be no
assurance that these reserves will be adequate in the future. We do take a
portion of our product offerings on consignment in order to lessen our exposure
to this risk.

TECHNOLOGY DEVELOPMENTS MAY ADVERSELY AFFECT DISTRIBUTION

Prerecorded music and PC software have traditionally been marketed and delivered
on a physical delivery basis. Traditionally, all our revenues have been
generated from sales to retail and wholesale channels. If in the future these


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products are increasingly marketed and delivered through technology transfers,
such as "electronic downloading" to a retail store or consumer's home, through
the Internet or another delivery mechanism, then retail and distribution could
be revolutionized. As physical and electronic distribution grows exponentially
through Internet resellers, competition between suppliers to such resellers will
intensify. We have developed a significant number of supplier relationships with
major electronic retailers resulting in significant growth in fulfillment of
software, music, and video products. We anticipate that this will represent a
rapidly increasing share of overall sales. We are also developing relationships
to facilitate electronic distribution of software and music content as new
industry standards become established.

COUNTERFEITING AND FREE MUSIC DOWNLOADS MAY AFFECT OUR REVENUES

The recorded music industry continues to be adversely affected by counterfeiting
of both audiocassettes and CDs, piracy and parallel imports, and also by
web-sites and technologies that allow consumers to electronically download
quality sound reproductions from the Internet without authorization. Listeners'
ability to access music from these sources could impair our ability to generate
revenues and could cause our business to suffer.

WHOLESALERS AND RETAILERS MAY CHANGE THEIR METHODS OF DISTRIBUTION

The success of our current sales strategy depends upon our wholesale and retail
customers' continued purchasing of products through us rather than directly from
manufacturers, other distributors, or other means of distribution. These
customers and retailers are constantly searching for ways to lower costs in an
attempt to maintain competitive prices and meet the pricing demands of
consumers. Our business could be adversely affected if our customers decide to
purchase directly from manufacturers, other distributors or other distribution
channels.

POSSIBLE VOLATILITY OF STOCK PRICE

The stock markets have experienced price and volume fluctuations that have
resulted in changes in the market prices of the stock of many companies; these
fluctuations may not have been directly related to the operating performance of
those companies. In addition, the market price of our common stock has
fluctuated significantly since April 1996. We believe that factors such as
indications of the market's acceptance of our products and failure to meet
market expectations, as well as general volatility in the securities markets,
could cause the market price of our common stock to fluctuate substantially.

ITEM 2. PROPERTIES

On March 12, 1998, we entered into an operating lease agreement of approximately
86,500 square feet of office and warehouse space for our principal facilities in
suburban Minneapolis. The lease expires in August 2013 and provides for monthly
payments of $39,719 over the lease term, with a 2.5% increase every 30 months.
In addition, we are responsible for taxes and all operating costs associated
with the building.

On April 22, 1999, we entered into an operating lease agreement of approximately
74,000 square feet of office and warehouse space for a second facility in
suburban Minneapolis. The lease expires in the year December 2003 and provides
for a monthly rental of $35,473 over the lease term. On February 28, 2003, the
lease was amended with an extension until February 2005 at the same rent. In
addition, we are responsible for taxes and all operating costs associated with
the building.

On March 30, 2000, we entered into an operating lease agreement of approximately
40,000 square feet of warehouse space for a third facility in suburban
Minneapolis. The lease, which expires in the year April 2004, has an option to
renew for two years and provides for a monthly rental of $13,333 over the lease
term. In addition, we are responsible for taxes and all operating costs
associated with the building.

On August 2, 2003, with the acquisition of Encore Software, Inc., we acquired
their operating lease of approximately 73,245 square feet of office and
warehouse space for their principal facilities in Gardena, California. The lease
expires in February 2005 and provides for a monthly rental of $40,438 over the
term of the lease. In addition, we are responsible for taxes and all operating
costs associated with the building.


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The Company's facilities are adequate for the Company's present operations. The
Company is exploring alternatives to certain of these facilities that could
expand the Company's capacities and enhance efficiencies, but no definitive
agreements have been entered into in this regard.

ITEM 3. LEGAL PROCEEDINGS

In the normal course of our business, we are involved in a number of routine
litigation matters that are incidental to the operation of our business. These
matters generally include collection matters with regard to products distributed
by us and accounts receivable owed to us. We currently believe that the
resolution of any of these pending matters will not have a material adverse
effect on our financial position or results of operation. In addition, we are
subject to the litigation listed below.

BOB GRADY AND WILSON MEADOWS

On or about January 29, 2001, Bob Grady Music and Wilson Meadows (collectively,
"Plaintiffs") filed this action in the United States District Court for the
Northern District of Georgia, Case No. 01-CV-0252, alleging, among other things,
copyright infringement against the Company and seeking damages in excess of
$150,000 in connection with the Company's distribution of musical albums
pursuant to a written distribution agreement with Fortune Entertainment, Inc.
("Fortune"). On March 13, 2001, the Company answered the Complaint, denying
liability, and asserting affirmative defenses. On March 13, 2001, the Company
filed a Third-Party Complaint against co-defendant Fortune and its owner Bruce
Dugan, seeking indemnity and contribution on the claims made by Bob Grady and
Wilson Meadows. Neither Fortune nor Bruce Dugan has responded to the Third Party
complaint. Discovery is completed, and the parties filed cross-motions for
summary judgment in approximately April 2002.

On March 31, 2003, the District Court granted the Company's motion for summary
judgment, denied Plaintiffs' motion for summary judgment, and entered judgment
dismissing all of Plaintiffs' claims against the Company. The Company moved for
an award of its attorneys' fees on April 14, 2003, and Plaintiffs responded,
opposing the motion, on May 12, 2003. The Company filed a reply on May 29, 2003.
Plaintiffs have filed with the 11th Circuit Court of Appeals a Notice of Appeal
of the District Court's decision, and the parties will submit their briefs per
the schedule issued by the Court.

The Company intends to vigorously defend against Plaintiffs' claims on appeal,
to purse the recovery of its attorneys' fees and costs incurred in the matter,
and to pursue indemnity and contribution from Fortune and Mr. Dugan.

CLOUD TEN PICTURES, INC.

On or about April 2, 2003, Cloud Ten Pictures, Inc. ("Plaintiff") commenced this
action in Hennepin County District Court for the State of Minnesota, by serving
the Company with a Summons and Complaint. Plaintiff alleges, among other things,
accounting, breach of contract, misrepresentation and negligent
misrepresentation, and seeks unspecified damages.

The Company responded to the Complaint and asserted its Counterclaim on May 2,
2003, alleging accounting, breach of contract, misrepresentation and negligent
misrepresentation, and seeking damages of at least $663,826.54. The Company also
served written discovery on Plaintiff and is awaiting complete responses.

The Company intends to vigorously pursue its claims against Plaintiff and to
vigorously defend against the claims asserted by Plaintiff.

SIRIUS PUBLISHING, INC. VS. NAVARRE CORPORATION

On April 30, 2001, Sirius Publishing, Inc. ("Sirius") commenced this action in
the Maricopa County Arizona Superior Court alleging that the Company had
breached its agreements with Sirius by failing to pay Sirius for computer
software which was sold by Sirius to the Company on a consignment basis. Sirius
did not specify its damages in its Complaint. Through discovery, Sirius has now
stated that its damages claim is for at least $270,000.


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<PAGE>

On May 30, 2001, the Company removed the action to the United States District
Court for the District of Arizona, Case No. CV01-952PHXSMM, served and filed its
Answer and Counterclaim and filed a motion to transfer venue to the United
States District Court for the District of Minnesota, which motion was denied. In
its Answer, the Company denied all liability on Sirius' claim. For its
Counterclaim, the Company has asserted that Sirius has breached the parties'
ongoing agreements by refusing to accept and pay the Company for returned
product. The Company is seeking damages on its Counterclaim against Sirius in
excess of $545,000.

On January 29, 2002, the United States District Court for the District of
Arizona issued an Order denying the Company's motion to transfer venue.
Discovery has been completed with the exception of expert discovery. A Final
Pretrial Conference is scheduled for August 5, 2003. No trial date has been
established.

The Company intends to vigorously defend against Sirius' claim and pursue its
counterclaim.

BROOKLYN MUSIC LTD.

The Company commenced this action against Brooklyn Music Limited, Frank Babar,
and Joe Natoli. The Complaint was filed with the Hennepin County District Court
for the District of Minnesota on July 26, 2002, Brooklyn Music Ltd. was served
with the Company's Complaint on July 31, 2002, Frank Babar was served with the
Company's Complaint on July 31, 2002, and Joe Natoli was served with the
Company's Complaint on October 9, 2002. The Company alleges, among other things,
that the Defendants breached distribution and loan contracts with the Company,
and the Company seeks damages of at least $295,000.

As of November 15, 2002, all Defendants had answered the Company's Complaint and
asserted counterclaims. Defendants allege eleven separate counterclaims based on
breach of contract, gross negligence, willful misconduct, and intentional bad
faith, and seek damages which are difficult to decipher but appear to
approximate $3,000,000, as well as nullification of the personal guaranties of
the individual defendants. The Court issued an Amended Scheduling Order
requiring that depositions be completed by June 1, 2003, that all dispositive
motions be completed by September 2, 2003, and that mediation shall be completed
by October 15, 2003. The Court also scheduled a Pretrial Conference for November
5, 2003, and the case is set for trial on January 5, 2004.

The Company intends to vigorously pursue its claims against Defendants, and to
vigorously defend against the claims asserted by Defendants.

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

There were no matters submitted to a vote of security holders during the
three-month period ended March 31, 2003.



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PART II

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

PRICE RANGE OF COMMON STOCK

Our Common Stock has been quoted on The Nasdaq Stock Market under the symbol
NAVR. The following table presents the range of high and low closing sale prices
for our stock for each period indicated as reported on The Nasdaq Stock Market.
Such prices reflect inter-dealer prices, do not include adjustments for retail
mark-ups, markdowns or commissions and may not necessarily represent actual
transactions.

<Table>
<Caption>
                                      QUARTER            HIGH              LOW
                                      -------            -----            -----


<S>                                    <C>               <C>              <C>
                     Fiscal 2003       First             $1.80            $1.11
                                       Second             1.67             1.20
                                       Third              2.66             1.02
                                       Fourth             2.40             1.52

                     Fiscal 2002       First             $1.48            $1.20
                                       Second             1.20             0.90
                                       Third              1.47             1.01
                                       Fourth             1.20             0.95
</Table>

HOLDERS AND DIVIDENDS

At June 1, 2003, we had approximately 10,300 shareholders, including
shareholders holding stock in street name. We have never paid any dividends on
our common stock and do not intend to pay any dividends on our common stock in
the foreseeable future.

EQUITY COMPENSATION PLAN INFORMATION

We adopted our 1992 Stock Option Plan to attract and retain persons to perform
services for Navarre by providing an incentive to these persons through equity
participation in Navarre and by rewarding such persons who contribute to the
achievement of Navarre's economic objectives. Eligible recipients are all
employees including, without limitation, officers and directors who are also
employees and non-employee directors, consultants and independent contractors of
Navarre or any subsidiary. A maximum number of 4,224,000 shares of common stock
have been authorized and reserved for issuance under the Plan. The number of
shares authorized may also be increased from time to time by approval of the
Board and the shareholders. The Plan terminates on July 1, 2006.

We are authorized to grant stock options and restricted stock grants under the
Plan. Options generally vest in increments of 20% of the original option grant
beginning one year from the date of grant and expire six years from the date of
grant, subject to early termination upon death, disability or termination of
employment. Performance-based options are subject to variable accounting and
will be recognized when, and if, the criteria are met for vesting.

Each director who is not an employee of Navarre on April 1 of each year is
granted an option to purchase 6,000 shares of common stock under the plan, at a
price equal to fair market value. These options are designated as non-qualified
stock options and are subject to the same terms and provisions as are then in
effect with respect to granting of non-qualified stock options to salaried
officers and key employees of Navarre. These options vest in increments of 20%
of the original option grant beginning one year from the date of grant and
expire six years from the date of grant.

We are entitled to (a) withhold and deduct from future wages of the participant
(or from other amounts that may be due and owing to the participant from the
Company), or make other arrangements for the collection of, all legally required
amounts necessary to satisfy any and all federal, state and local withholding
and employment-related tax requirements (i) attributable to the grant or
exercise of an option or a restricted stock award or to a disqualifying
disposition of stock

                                                                              10
<PAGE>

received upon exercise of an incentive stock option, or (ii) otherwise incurred
with respect to an option or a restricted stock award, or (iii) require the
participant promptly to remit the amount of such withholding to the Company
before taking any action with respect to an option or a restricted stock award.

THE FOLLOWING TABLE BELOW PRESENTS OUR EQUITY COMPENSATION PLAN INFORMATION:

EQUITY COMPENSATION PLAN INFORMATION

<Table>
<Caption>
                                 (a)                            (b)                            (c)
Plan Category                    Number of securities to be     Weighted-average exercise      Number of securities
                                 issued upon exercise of        price of outstanding           remaining available for
                                 outstanding options,           options, warrants and rights   future issuance under equity
                                 warrants and rights                                           compensation plans
                                                                                               (excluding securities
                                                                                               reflected in column (a))
<S>                              <C>                            <C>                            <C>
Equity compensation plan
approved by security holders               3,037,952                          $2.91                        12,002
                                 ==========================     ============================   ============================
</Table>

ITEM 6. SELECTED FINANCIAL DATA

(In thousands, except per share data)

<Table>
<Caption>
                                                                      FISCAL YEARS ENDED MARCH 31,
                                                    2003           2002           2001           2000           1999
                                                 ---------      ---------      ---------      ---------      ---------
<S>                                              <C>            <C>            <C>            <C>            <C>
STATEMENT OF OPERATIONS DATA:
Net sales                                        $ 359,384      $ 303,817      $ 314,199      $ 285,165      $ 210,386
Gross profit                                        45,131         32,893         37,421         36,381          8,762
Income (loss) from operations                        4,124            521         (2,364)        (4,554)       (25,572)

Interest expense                                      (194)          (173)          (223)          (476)        (2,543)
Other income (expense)                                 328            884          2,000          1,399            445
Impact of investment in NetRadio Corporation            63          1,480        (10,338)        (4,154)            --

Net income (loss)                                $   4,321      $   2,712      $ (10,925)     $  (7,785)     $ (27,670)

Income (loss) per basic share                    $     .20      $     .12      $    (.47)     $    (.33)     $   (4.41)
Income (loss) per diluted share                  $     .20      $     .12      $    (.47)     $    (.33)     $   (4.41)
Basic weighted average common
    shares outstanding                              21,616         22,553         25,137         23,483         14,179
Diluted weighted average common
    shares outstanding                              21,841         22,575         25,137         23,483         14,179

BALANCE SHEET DATA:

Total assets                                     $ 101,129      $  81,085      $  93,918      $ 109,711      $  79,480
Short-term borrowings                                  805             --             --             --            422
Long-term debt                                         268             --             --             --            114
Shareholders' equity                                28,671         24,350         24,350         41,423         25,164
</Table>



                                                                              11
<PAGE>

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

GENERAL

Navarre Corporation, a Minnesota corporation formed in 1983, is a provider of
distribution, fulfillment and marketing services for a broad range of home
entertainment and multimedia products, including personal computer ("PC")
software, audio and video titles, and interactive games. We maintain and
leverage strong relationships on both ends of the content distribution chain,
including relationships with leading national retailers, wholesalers and
rackjobbers, as well as major publishers and music labels and movie studios.

We are recognized as an industry leader in the distribution of consumer PC
software, interactive video games, DVD videos and independent music labels and
artists. Our product lines contain a broad assortment of compact discs, PC
software, video games and DVD/VHS videos sold to over 500 customers through over
18,000 locations internationally. Our broad base of customers includes (i)
wholesale clubs, (ii) mass merchandisers, (iii) computer specialty stores, (iv)
music specialty stores, (v) book stores, (vi) office superstores, and (vii)
electronic superstores.

Upon the acquisition of Encore Software, Inc., we operate in two business
segments: Home Entertainment Products and Encore Software, Inc. ("Encore"). Home
Entertainment Products consist of two divisions: Navarre Distribution Services
(NDS) and Navarre Entertainment Media (NEM), while our Encore subsidiary engages
in interactive publishing.

Through Navarre Distribution Services, we distribute non-proprietary or
non-exclusive, entertainment products including PC software, major label music,
DVD video, video games and accessories. We focus on providing retailers and
publishers a wide array of high-quality services, including vendor-managed
inventory, full EDI protocol, packaging, manufacturing, fulfillment, and
marketing, for the broad, efficient distribution of non-proprietary home
entertainment products. We will pursue growth of NDS in several ways: (i) by
extending the number of software categories we serve, such as the productivity
category, where we recently signed an agreement with Adobe Systems, Inc., which
joins the publisher roster that includes other business and productivity lines
from Microsoft Corporation, Symantec Corporation, Roxio, Inc. and Network
Associates, Inc.; (ii) by expanding the presence in distribution of home
entertainment content formats, such as DVD and interactive games; and (iii) by
leveraging our unique mix of capabilities to deepen relationships with existing
retailers and publisher clients.

Through Navarre Entertainment Media, we distribute proprietary, or exclusive,
prerecorded music of primarily independent labels and their artists on CD and
DVD audio, and video in DVD and VHS format to national and regional music
retailers, rackjobbers, and one-stops throughout the United States and Canada.
We offer independent content creators such as labels, studios and artists, the
resources and exposure to generate high visibility with valuable distribution in
a broad array of major outlets throughout North America. We seek to
significantly enhance our competitive position in independent music label
distribution in several ways: (i) possible acquisition of competing independent
distribution companies, (ii) continuing to seek new proprietary distribution
opportunities, (iii) with increased ownership of content that broadens our reach
across all musical genres, and (iv) exclusive licenses and outright strategic
acquisition.

During the current fiscal year, we acquired the primary assets of Encore
Software, Inc. ("Encore"). Encore is an interactive publisher in the video game
and PC CD-ROM markets. Encore has been a leading publisher in the software
market for nearly a decade. They have built solid expertise in product
development, sales, distribution, marketing and public relations. The assets
purchased by the Company included certain fixed assets, intellectual property,
inventory, receivables, and contract rights related to Encore's business. The
assets are held by a majority-owned Navarre subsidiary, which has been named
Encore Software, Inc.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared
in conformity with accounting principles generally accepted in the United
States. The preparation of these financial statements requires us to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an on-going basis, we review and evaluate our estimates,
including those related to customer programs and incentives, product returns,
bad debt, inventories, investments, intangible assets, restructuring reserves,
and litigation. We base our estimates on historical experience and various other
assumptions that are believed to be


                                                                              12
<PAGE>

reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results could differ from these
estimates under different assumptions or conditions.

We believe the following critical accounting policies are affected by our
judgment, estimates and/or assumptions used in the preparation of our
consolidated financial statements.

Revenue Recognition

Revenue from sales of product is recorded upon shipment. As a general matter, we
establish an allowance for sale returns at the time the sale is recorded based
on our trailing twelve months' experience by product line. These estimates are
consistent with our historical experience. We record estimated reductions to
revenue for customer programs and incentive offerings including special pricing
agreements, price protection, promotions and other volume-based incentives and
estimated returns. If market conditions were to decline, we may take actions to
increase customer incentive offerings possibly resulting in an incremental
reduction of revenue at the time the incentive is offered.

Allowance for Doubtful Accounts

We evaluate the collectibility of our accounts receivable, including advances
and balances with independent labels, based on a combination of factors. In
circumstances where we are aware of a specific customer's inability to meet
their financial obligations to us (e.g., bankruptcy filings, substantial
down-grading of credit scores), we record a specific reserve for bad debts
against amounts due to reduce the net recognized receivable to the amounts we
reasonably believe will be collected. For all other customers, we recognize
reserves for bad debts based on the length of time the receivables are past due
based on their historical experience. If circumstances change (i.e., higher than
expected defaults or an unexpected material adverse change in a major customer's
ability to meet its financial obligations to us), our estimates of the
recoverability of amounts due could be reduced by a material amount. These
estimates are consistent with our historical experience.

Goodwill Impairment

We review goodwill for potential impairment annually and when events or changes
in circumstances indicate the carrying value of the goodwill might exceed its
current fair value. We determine fair value using widely accepted valuation
techniques, including discounted cash flow and market multiple analysis. These
types of analyses require us to make certain assumptions and estimates regarding
industry economic factors and the profitability of future business strategies.
It is our policy to conduct impairment testing once annually based on our most
current business strategy in light of present industry and economic conditions,
as well as future expectations. If actual results are not consistent with our
assumptions and estimates, we may be exposed to a goodwill impairment charge
that could be material.

Effective April 1, 2002, we adopted the provisions of SFAS No. 142, Goodwill and
Other Intangible Assets, which eliminated the systematic amortization of
goodwill. SFAS No. 142 also required that goodwill be reviewed for impairment at
adoption and at least annually thereafter. As of March 31, 2003, we had $3.1
million of Goodwill, associated with the acquisition of Encore Software, Inc.

Cost Associated with Exit Activities

We adopted SFAS No. 146, Accounting for Costs Associated with Exit or Disposal
Activities on January 1, 2003. Since adoption, the present value of costs
associated with location closings, primarily future lease costs, real estate
taxes and common area maintenance, are charged to earnings when a location is
vacated. When applicable, the liability is reduced by estimated future sublease
income. Prior to our adoption of SFAS No. 146, a liability for location closings
was recognized when management made the commitment to relocate or close the
location. The adoption of SFAS No. 146 did not have a significant impact on our
net earnings or financial position and we do not anticipant it will have a
significant impact in the future.


                                                                              13
<PAGE>

RESULTS OF OPERATIONS

The following table sets forth for the periods indicated the percentage of net
sales represented by certain items included in our "Consolidated Statements of
Operations."

<Table>
<Caption>

                                            FISCAL YEARS ENDED MARCH 31,
                                     2003               2002               2001
                                  ------------       ------------       ------------
<S>                               <C>                <C>                <C>
Net sales:
  Home Entertainment

      Distribution Services               83.7%              85.1%              85.6%
      Entertainment Media                 15.3               14.9               14.4
                                  ------------       ------------       ------------
  Encore Software                          1.0                 --                 --
                                  ------------       ------------       ------------
Total net sales                          100.0              100.0              100.0
Cost of sales                             87.4               89.2               88.1
                                  ------------       ------------       ------------
Gross profit                              12.6               10.8               11.9
Selling and marketing                      3.7                2.7                2.9
Distribution and warehousing               1.5                1.7                2.5
General and administrative                 5.6                5.6                6.2
Depreciation and amortization              0.6                0.5                1.0
Restructuring                               --                0.2                 --
                                  ------------       ------------       ------------
Total operating expenses                  11.4               10.7               12.7
                                  ------------       ------------       ------------
Income (loss) from operations              1.2                0.2               (0.8)
Interest expense                          (0.1)              (0.1)              (0.1)
Other income                               0.1                0.3                0.6
                                  ------------       ------------       ------------
Net income (loss)                          1.2                0.9               (3.5)
                                  ============       ============       ============
</Table>


Certain information in this section contains forward-looking statements. Our
actual results could differ materially from the statements contained in the
forward-looking statements as a result of a number of factors, including risks
and uncertainties inherent in our business, dependency upon key employees, the
seasonality of our business, dependency upon significant customers and vendors,
erosions in our gross profit margins, dependency upon bank borrowings, obtaining
additional financing when required, dependency upon software developers and
manufacturers, dependency upon recording artists, risks of returns and inventory
obsolescence, effect of technology developments, effect of free music downloads,
change in retailers methods of distribution, and the possible volatility of our
stock price. See "Business - Forward-Looking Statements / Other Factors" in Item
1 of the Form 10-K.

HOME ENTERTAINMENT PRODUCTS

Net Sales

Net sales of home entertainment products were $355.9 million for fiscal 2003,
$303.8 million for fiscal 2002, and $314.2 million for fiscal 2001. The 17.1%
increase in net sales for fiscal 2003 was due to increased sales in both
Distribution Services and Entertainment Media as discussed below and the 3.3%
decrease in net sales for fiscal 2002 was due to lower sales in both
Distribution Services and Entertainment Media as discussed below.

Net sales for Distributed Services were $300.8 million for fiscal 2003, $258.7
million for fiscal 2002, and $268.8 million for fiscal 2001. The 16.3% increase
in net sales for fiscal 2003 was primarily due to the continued increase in our
market share across all categories of the software industry, particularly with
recent additions to our publisher roster of business and productivity lines. The
3.8% decrease in net sales for fiscal 2002 was primarily due to lower music and
DVD sales, resulting from lack of hit releases from the major studios and record
labels provided by the studios compared to prior years, coupled with lower
overall industry sales resulting from the weaker economy.

Net sales for Entertainment Media were $55.1 million for fiscal 2003, $45.1
million for fiscal 2002, and $45.4 million for fiscal 2001. The 22.1% increase
in net sales for fiscal 2003 was primarily due to NEM adding new content that
broadens our reach across all musical genres and our rich offering of catalog
titles continues to lessen our reliance on new releases. The slight decrease for
fiscal 2002 was due to a lower volume of new releases.


                                                                              14
<PAGE>

Gross Profit

Gross profit of home entertainment products was $39.3 million or 11.1% as a
percent of net sales for fiscal 2003, $32.9 million or 10.8% as a percent of net
sales for fiscal 2002, and $37.4 million or 11.9% as a percent of net sales for
fiscal 2001. The increase in gross profit and as a percentage of net sales for
fiscal 2003 resulted from an increase in Entertainment Media's gross profit as
discussed below. The decrease in gross profit and decrease as a percentage of
net sales for fiscal 2002 was due to margin decreases in both Distribution
Services and Entertainment Media as discussed below.

The gross profit from Distribution Services net sales was $30.9 million or 10.3%
of Distribution Services net sales for fiscal 2003, $26.8 million or 10.4% of
Distribution Services net sales for fiscal 2002 and $29.0 million or 10.8% of
Distribution Services net sales for fiscal 2001. The decreases as a percentage
of Distribution Services net sales for fiscal 2003 and 2002 were primarily due
to changes in the mix of products, such as business and productivity products
that have a lower gross margin percentage. Although some of the margins in these
areas may be a little lower, the return rates tend to be slightly lower, thus
causing a decrease in handling costs.

The gross profit from Entertainment Media net sales was $8.4 million or 15.2% of
Entertainment Media net sales for fiscal 2003, $6.1 million or 13.5% of
Entertainment Media net sales for fiscal 2002 and $8.4 million or 18.6% of
Entertainment Media net sales for fiscal 2001. The increase in gross profit and
as a percentage of Entertainment Media net sales for fiscal 2003 was
attributable to a greater sales mix of higher margin product compared to last
fiscal year. The decrease in gross profit and decrease as a percentage of net
sales for fiscal 2002 was due to our election not to offer select discounts to
certain customers and vendors due to an unstable economic environment, in
addition to the restructuring charges from the relocation of our Hawaiian
location to Minneapolis.

Operating Expenses

Selling and marketing expenses of home entertainment products were $10.7 million
or 3.0% as a percent of net sales for fiscal 2003, $8.1 million or 2.7% as a
percent of net sales for fiscal 2002, and $8.9 million or 2.8% as a percent of
net sales for fiscal 2001. The increase in selling and marketing expenses and as
a percent of net sales for fiscal 2003 was due to a higher level of sales. It
was also attributable to us recording an expense in the third quarter of this
year in connection with our purchase of specialty product display sales racks
when revenue from that distribution method failed to achieve expected results.
The decrease in selling and marketing expenses and as a percent of net sales for
fiscal 2002 was due to the lower costs associated with improved management of
and communication with our vendors to reduce the need for expedited freight.

Distribution and warehousing expenses of home entertainment products were $5.5
million or 1.5% as a percent of net sales for fiscal 2003, $5.2 million or 1.7%
as a percent of net sales for fiscal 2002, and $8.0 million or 2.5% as a percent
of net sales for fiscal 2001. The increase in distribution and warehousing
expense for fiscal 2003 was due to a higher level of sales but the decrease as a
percent of net sales was the effect of overall increased efficiencies. The
decrease in distribution and warehousing expenses and decrease as a percent of
net sales for distribution and warehousing expense for fiscal 2002 was primarily
due to the capabilities and ensuing efficiencies derived from our fully
automatic dedicated returns facility which has improved the handling of all the
products we distribute.

General and administrative expenses of home entertainment products consist
principally of executive, accounting and administrative personnel and related
expenses, including professional fees. General and administrative expenses of
home entertainment products were $17.8 million or 5.0% as a percent of net sales
for fiscal 2003, $16.9 million or 5.6% as a percent of net sales for fiscal
2002, and $17.6 million or 5.6% as a percent of net sales for fiscal 2001. The
increase in general and administration expenses for fiscal 2003 was associated
with the increase in sales and the decrease as a percent of net sales for
general and administration expenses for fiscal 2003 was attributable to
continued increased efforts to control expenses. The decrease in general and
administration expenses for fiscal 2002 was due to increased efficiencies of IT
expense as it relates to warehousing operations and better control of
professional fees. General and administrative expenses of home entertainment
products for fiscal 2002 included the restructuring costs of $316,000 associated
with relocation of the Hawaiian location.



                                                                              15
<PAGE>

Depreciation and amortization of home entertainment products was $1.3 million in
fiscal 2003, $1.5 million in fiscal 2002, and $1.3 million in fiscal 2001.
Included in fiscal 2002 was a charge of $356,000 associated with the relocation
of the Hawaiian location.

The net operating income for home entertainment products was $4.1 million for
fiscal 2003, $521,000 for fiscal 2002, and $1.6 million for fiscal 2001.

Net income for home entertainment products for fiscal 2003 was $4.6 million, for
fiscal 2002, before the impact of our investment in NetRadio Corporation net
income was $1.2 million, and for fiscal 2001, net income was $3.6 million.

ENCORE SOFTWARE, INC.

On July 31, 2003, we acquired the assets of Encore Software, Inc. ("Encore").
Net sales for Encore for fiscal 2003 were $14.7 million including $11.2 million
reported within Home Entertainment Products. Gross profit allocated to Encore
was $5.8 million or 39.4% as a percent of net sales. Encore's total operating
expenses were $5.8 million for fiscal 2003, including $2.2 million for sales and
marketing expenses, $468,000 for licensing and development expenses, $2.3
million for general and administration expenses and $822,000 for depreciation
and amortization expense, which included a charge of $501,000 for certain
intangible assets that were deemed impaired by events subsequent to the
acquisition. Encore's operating income was $41,000 and they had a net loss of
$309,000.

eSPLICE, INC.

Net sales for eSplice were $37,000 for fiscal 2001. eSplice's total operating
expenses were $4.0 million for fiscal 2001, including $219,000 for selling and
promotion expenses, $1.8 million for general and administration expenses, and
$1.9 million for depreciation and amortization expense, which included charges
of $1.2 million for accelerated depreciation of impaired assets. The net
operating loss for eSplice was $4.0 million for fiscal 2001. In the fourth
quarter of fiscal 2001, our management and Board of Directors determined that we
would not continue to support the further development of eSplice operations.

IMPACT OF INVESTMENT IN NETRADIO CORPORATION

Because we did not consolidate NetRadio's results for periods after November 5,
1999, NetRadio results for periods after November 5, 1999 are reflected in our
financial statements using the equity method. Under the equity method, Navarre
reported losses or gains in NetRadio for each period as "Impact of investment in
NetRadio Corporation."

The impact of the investment in NetRadio Corporation was a gain of $63,000 for
fiscal 2003, a gain of $1.5 million for fiscal 2002, and a loss of $10.3 million
for fiscal 2001. This entity was dissolved on January 15, 2003.

OTHER INCOME AND EXPENSE

Interest expense was $194,000 for fiscal 2003, $173,000 for fiscal 2002 and
$223,000 for fiscal 2001. The increase in interest expense for fiscal 2003 was
primarily due to having a credit facility in place for the full year. Other
income, which consists principally of interest income, was $328,000 for fiscal
2003, $884,000 for fiscal 2002 and $2.0 million for fiscal 2001. Lower interest
rates resulted in the decrease for fiscal 2003 and in an overall lower return on
capital. The decrease for fiscal 2002 resulted from not having a principal
balance on the note from NetRadio.

We had net income of $4.3 million for fiscal 2003, $2.7 million for fiscal 2002
and a net loss of $10.9 million for fiscal 2001.

Due to the accumulated losses from prior years, we have not recorded any tax
benefit.

MARKET RISK

Although we are subject to some interest rate risk, because we currently have no
bank debt, we believe a 10% increase or reduction in interest rates would not
have a material effect on future earnings, fair values or cash flows.



                                                                              16
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

We have historically financed our working capital needs through bank borrowings,
proceeds from the sale of equity securities and cash flows from operations. The
level of borrowings has historically fluctuated significantly during the year.
At March 31, 2003, we had net accounts receivable of $54.8 million, inventory of
$22.8 million, accounts payable of $67.1 million and no bank debt.

For the fiscal year ended March 31, 2003, net sales were $359.4 million, an
increase of $55.6 million from net sales of $303.8 million in fiscal 2002. We
had net income of $4.3 million during the year. We generated net cash of $1.3
million from operations. During the period, accounts receivable increased by
$7.5 million and inventories increased by $5.5 million. Accounts payable and
accrued expenses increased by $13.5 million. Investing activities used $9.3
million of cash of which $8.3 million was related with the acquisition of Encore
and $1.0 million for the purchase of furniture, equipment and leasehold
improvements. We used net cash of $536,000 in financing activities during the
period primarily for the repayment of a note acquired with the acquisition of
Encore.

In October 2001, we entered into an agreement with General Electric Capital
Corporation for a three-year $30 million credit facility. On June 24, 2003, we
amended the agreement to increase the credit facility to $40 million and extend
the agreement until June 2007. During fiscal year 2003, the maximum amount we
borrowed under the credit facility was $7.3 million. As of March 31, 2003, we
had no balance under this facility. We anticipate that we may borrow amounts
under this credit facility from time to time during fiscal 2004 to meet our
seasonal working capital requirements.

We currently believe funds generated from the expected results of operations and
available cash and cash equivalents and borrowings under our credit facility
will be sufficient to satisfy our working capital requirements and finance
anticipated expansion plans and strategic initiatives for the next fiscal year.

During the current fiscal year, we acquired the primary assets of Encore
Software, Inc. ("Encore") pursuant to an Amended and Restated Asset Purchase
Agreement between the Company and Encore effective as of July 10, 2002, as
amended by amendment No. 1 to the Agreement effective as of July 31, 2002
(collectively, the "Purchase Agreement"). The transaction was approved by the
Bankruptcy Court for the Central District of California and closed on August 2,
2002. We paid approximately $7.9 million in cash and assumed $1.6 million in
debt. The assets purchased by the Company included certain fixed assets,
intellectual property, inventory, receivables, and contract rights related to
Encore's business. We acquired Encore, an interactive publisher in the video
game and PC CD-ROM markets, to enable us to more actively participate in the
high growth video game industry and enable us to further extend our direct
distribution relationships with large retailers generating solid sell-through of
Encore titles. The acquisition was accounted for using the purchase method in
accordance with SFAS No. 141. Accordingly, the net assets were recorded at their
estimated fair values and operating results were included in our financial
statements from the date of acquisition. The allocation of the purchase price to
the assets acquired was finalized in the fourth quarter of fiscal 2003. The
final purchase price resulted in an increase of $786,000 to goodwill from our
preliminary allocation. Under SFAS No. 142, goodwill is not amortized, but is
reviewed for impairment at least annually.

CONTRACTUAL OBLIGATIONS

The following table presents information regarding contractual obligations by
fiscal year (in thousands).

<Table>
<Caption>
                       2004         2005         2006         2007         2008      THEREAFTER
                     --------     --------     --------     --------     --------    ----------

<S>                  <C>          <C>          <C>          <C>          <C>         <C>
Operating leases        1,134          892          491          501          501        2,724
                     --------     --------     --------     --------     --------     --------
Total                   1,134          892          491          501          501        2,724
                     ========     ========     ========     ========     ========     ========
</Table>


                                                                              17
<PAGE>

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk refers to the risk that a change in the level of one or more market
prices, interest rates, indices, volatilities, correlations or other market
factors such as liquidity will result in losses for a certain financial
instrument or group of financial instruments. The Company does not hold or issue
financial instruments for trading purposes, and it does not enter into forward
financial instruments to manage and reduce the impact of changes in foreign
currency rates because the Company has few foreign relationships and
substantially all of the Company's foreign transactions are negotiated, invoiced
and paid in U.S. dollars. Based on the controls in place and the relative size
of the financial instruments entered into, the Company believes the risks
associated with not using these instruments will not have a material adverse
effect on the Company's consolidated financial position or results of
operations.

In addition, the Company does not engage in speculative transactions and does
not use derivative instruments or engage in hedging activities. See the Notes to
Financial Statements for a description of the Company's accounting policies and
other information related to these financial instruments.

In the normal course of business, the Company is exposed to market risks,
including changes in interest rates and price changes that could affect the
Company's operating results. As of March 31, 2003, fluctuations in interest
rates, exchange rates and price changes would not have a material effect on the
Company's financial position or operating results.

INTEREST RATE RISK

The Company places its cash and cash equivalents, which generally have a term of
less than 90 days, with a high-quality financial institution and has investment
guidelines relative to diversification and maturities designed to maintain
safety and liquidity. As of March 31, 2003, the Company had cash and cash
equivalents totaling approximately $10,485,000. Due to the short-term nature of
these instruments, the carrying value approximates market value. If, during the
fiscal year 2004, average short-term interest rates decreased by 1.0% over
fiscal year 2003 average rates, the Company's projected interest income from
short-term investments would decrease by approximately $6,000, assuming a
similar level of investments in fiscal year 2004.

PRICE RISK

As of March 31, 2003, the Company held cash and cash equivalents and marketable
securities with an aggregate fair market value of $10,485,000. All of the
Company's marketable securities are held as cash or in cash-equivalent
investments. The value of such investments should be subject to only very
limited price fluctuations.

FOREIGN CURRENCY RISK

The Company has a limited number of foreign transactions. Substantially all of
the Company's foreign transactions are negotiated, invoiced and paid in U.S.
dollars. Therefore, fluctuations in the value of the dollar as compared to other
foreign currencies have not had an effect on the Company.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The consolidated financial statements and supplementary data of Navarre and the
Report of Independent Auditors thereon are included at the end of this document.

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

None.



                                                                              18
<PAGE>

PART  III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information required under this item is contained in the our Proxy Statement for
the Annual Meeting of Shareholders to be held on September 10, 2003 (the "2003
Proxy Statement"), a definitive copy of which will be filed with the Commission
within 120 days of the close of the fiscal year ended March 31, 2003, and is
incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

Information required under this item is contained in our 2003 Proxy Statement
and is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information required under this item is contained in our 2003 Proxy Statement
and is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

Information required under this item is contained in our 2003 Proxy Statement
and is incorporated herein by reference.

ITEM 14. CONTROLS AND PROCEDURES.

   (a)   Evaluation of disclosure controls and procedures. Based on their
         evaluation as of a date within 90 days of the filing date of this
         report, the Company's principal executive officer and principal
         financial officer have concluded that the Company's disclosure controls
         and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the
         Securities Exchange Act 1934 (the "Exchange Act") are effective to
         ensure that information required to be disclosed by the Company in
         reports that it files or submits under the Exchange Act is recorded,
         processed, summarized and reported within the time periods specified in
         Securities and Exchange Commission rules and forms.

   (b)   Changes in internal controls. There were no significant changes in the
         Company's internal controls or in other factors that could
         significantly affect these controls subsequent to the date of their
         evaluation. There were no significant deficiencies or material
         weakness, and therefore there were no corrective actions taken.

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K

(a)      Documents filed as part of this report

         (1)      Financial Statements. Our following financial statements and
                     the Report of Independent Auditors thereon are set forth at
                     the end of this document.

                  Report of Independent Auditors

                  Consolidated Balance Sheets as of March 31, 2003 and 2002

                  Consolidated Statements of Operations for each of the three
                     years in the period ended March 31, 2003, 2002 and 2001.

                  Consolidated Statements of Shareholders' Equity as of March
                     31, 2003, 2002 and 2001

                  Consolidated Statements of Cash Flows for each of the three
                     years in the period ended March 31, 2003, 2002 and 2001.

                  Notes to Consolidated Financial Statements

         (2)      Financial Statement Schedule for each of the three years in
                     the period ended March 31, 2003



                                                                              19
<PAGE>

                  Schedule II - Valuation and Qualifying Accounts and Reserves

                  Schedules other than those listed above have been omitted
                     because they are inapplicable or the required information
                     is either immaterial or shown in the Financial Statements
                     or the notes thereto.

         (3)      Exhibits

                  3.1      Articles of Incorporation, incorporated herein by
                           reference from Exhibit 3.1 to Form 10-K, for year
                           ended March 31, 2000.

                  3.2      Bylaws, incorporated herein by reference from Exhibit
                           3.2 to our Registration Statement on Form S-1, No.
                           333-68392.


                  10.1     *Employment Agreement, dated November 1, 2001,
                           between us and Eric H. Paulson, incorporated herein
                           by reference from Exhibit 10.1 to Form 10-Q, for the
                           period ended December 31, 2001.

                  10.2     *Employment Agreement, January 2, 2002, between us
                           and Charles E. Cheney, incorporated herein by
                           reference from Exhibit 10.2 to Form 10-K, for year
                           ended March 2002.

                  10.3     *Employment Agreement between Encore Software, Inc.
                           and Michael Bell.

                  10.4     Stock Buy and Sell Agreement, dated August 24, 2002,
                           between Encore Software, Inc. and Michael Bell.

                  10.5     Stock Purchase Agreement, dated August 24, 2002,
                           between Encore Software, and Michael Bell.

                  10.6     *1992 Stock Option Plan, amended and restated,
                           incorporated herein by reference from Exhibit 10.3 to
                           Form 10-K, for year ended March 2002.

                  10.7     *Form of Individual Stock Option Agreement under 1992
                           Stock Option Plan, incorporated herein by reference
                           from Exhibit 10.4 to our Registration Statement on
                           Form S-1 (No. 333-68392).

                  10.8     *Form of Termination Agreement for our Executives,
                           incorporated herein by reference from Exhibit 10.2 to
                           Form 10-Q, for the period ended December 31, 2001.

                  10.9     Lease dated March 12, 1998 between us and Cambridge
                           Apartments, Inc. with respect to the corporate
                           headquarters in New Hope, MN, incorporated herein by
                           reference from Exhibit 10.6 to Form 10-K, for year
                           ended March 31, 1999.

                  10.10    Lease dated May 1, 1999 between us and Sunlite III,
                           LLP with respect to a second facility in Brooklyn
                           Park, MN, incorporated herein by reference from
                           Exhibit 10.7 to Form 10-K, for year ended March 31,
                           1999.

                  10.10.1  Amendments No. 1, 2 and 3 to Lease Agreement.

                  10.11    Lease dated December 17, 1999 between Encore and
                           EastGroup Properties L.P., with respect to a third
                           facility in Gardena, California.

                  10.11.1  Amendment No. 1 to Lease Agreement

                  10.12    Credit Agreement, dated October 3, 2001, between
                           General Electric Capital Corporation and us,
                           incorporated herein by reference from Exhibit 10.1 to
                           Form 10-Q, for the period ended September 30, 2001.

                  10.12.1  Amendment No. 1 to Loan Documents, dated March 4,
                           2002, incorporated herein by reference from Form
                           10-K, for year ended March 2002.

                  10.12.2  Amendment No. 2 to Loan Documents, dated August 2,
                           2002, incorporated herein by reference from Form
                           10-Q, for the period ended September 30, 2002.

                  10.12.3  Amendment No. 3 to Loan Documents, dated June 24,
                           2003.

                  10.12.4  Amendment No. 4 to Loan Documents, dated June 24,
                           2003.

                  23.1     Consent of Ernst & Young LLP.

                  99.1     Certificate of Chief Officer and Chief Financial
                           Officer pursuant to 18 USC Section 1350.

                  * Indicates management contract or compensatory plan or
                     agreement required to be filed as an exhibit pursuant to
                     Item 14(c) of Form 10-K.

(b)      Reports on Form 8-K

                  There were no reports on Form 8-K filed during the quarter
ended March 31, 2003.



                                                                              20
<PAGE>


SIGNATURES

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

                                     NAVARRE CORPORATION
                                     (Registrant)


June 27, 2003                        By    /s/ Eric H. Paulson
                                        ------------------------------------
                                               Eric H. Paulson
                                               Chairman of the Board, President
                                               and Chief Executive Officer


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

(Power of Attorney)

Each person whose signature appears below constitutes and appoints Eric H.
Paulson and Charles E. Cheney as his true and lawful attorneys-in-fact and
agents, each acting alone, with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign any
of all amendments to this Annual Report on Form 10-K and to file the same, with
all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, each acting alone, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all said attorneys-in-fact and agents,
each acting alone, or his substitute or substitutes, may lawfully do or cause to
be done by virtue thereof.

<Table>
<Caption>
           Signature                                Title                               Date
--------------------------------        ---------------------------------           -------------
<S>                                     <C>                                         <C>

      /s/ Eric H. Paulson               Chairman of the Board, President            June 27, 2003
--------------------------------        and Chief Executive Officer
        Eric H. Paulson

     /s/ Charles E. Cheney              Treasurer and Secretary                     June 27, 2003
--------------------------------
       Charles E. Cheney

      /s/ James Gilbertson              Vice President and                          June 27, 2003
--------------------------------        Chief Financial Officer
        James Gilbertson

       /s/ James G. Sippl               Director                                    June 27, 2003
--------------------------------
         James G. Sippl

      /s/ Michael L. Snow               Director                                    June 27, 2003
--------------------------------
        Michael L. Snow

         /s/ Alfred Teo                 Director                                    June 27, 2003
--------------------------------
           Alfred Teo

          /s/ Tom Weyl                  Director                                    June 27, 2003
--------------------------------
            Tom Weyl

     /s/ Dickinson G. Wiltz             Director                                    June 27, 2003
--------------------------------
       Dickinson G. Wiltz
</Table>


                                                                              21
<PAGE>

                                 CERTIFICATIONS

         I, Eric H. Paulson, certify that:

         1. I have reviewed this annual report on Form 10-K of Navarre
Corporation;

         2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;

         3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

         4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

                  a) designed such disclosure controls and procedures to ensure
                  that material information relating to the registrant,
                  including its consolidated subsidiaries, is made known to us
                  by others within those entities, particularly during the
                  period in which this annual report is being prepared;

                  b) evaluated the effectiveness of the registrant's disclosure
                  controls and procedures as of a date within 90 days prior to
                  the filing date of this annual report (the "Evaluation Date");
                  and

                  c) presented in this annual report our conclusions about the
                  effectiveness of the disclosure controls and procedures based
                  on our evaluation as of the Evaluation Date;

         5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):

                  a) all significant deficiencies in the design or operation of
                  internal controls which could adversely affect the
                  registrant's ability to record, process, summarize and report
                  financial data and have identified for the registrant's
                  auditors any material weaknesses in internal controls; and

                  b) any fraud, whether or not material, that involves
                  management or other employees who have a significant role in
                  the registrant's internal controls; and

         6. The registrant's other certifying officer and I have indicated in
this annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

June 27, 2003                             By    /s/ Eric H. Paulson
                                                --------------------------------
                                                Eric H. Paulson
                                                Chairman of the Board, President
                                                and Chief Executive Officer



                                                                              22
<PAGE>

                                 CERTIFICATIONS

         I, James Gilbertson, certify that:

         1. I have reviewed this annual report on Form 10-K of Navarre
Corporation;

         2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;

         3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

         4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

                  a) designed such disclosure controls and procedures to ensure
                  that material information relating to the registrant,
                  including its consolidated subsidiaries, is made known to us
                  by others within those entities, particularly during the
                  period in which this annual report is being prepared;

                  b) evaluated the effectiveness of the registrant's disclosure
                  controls and procedures as of a date within 90 days prior to
                  the filing date of this annual report (the "Evaluation Date");
                  and

                  c) presented in this annual report our conclusions about the
                  effectiveness of the disclosure controls and procedures based
                  on our evaluation as of the Evaluation Date;

         5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):

                  a) all significant deficiencies in the design or operation of
                  internal controls which could adversely affect the
                  registrant's ability to record, process, summarize and report
                  financial data and have identified for the registrant's
                  auditors any material weaknesses in internal controls; and

                  b) any fraud, whether or not material, that involves
                  management or other employees who have a significant role in
                  the registrant's internal controls; and

         6. The registrant's other certifying officer and I have indicated in
this annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

June 27, 2003                                   By  /s/ James Gilbertson
                                                    ----------------------------
                                                    James Gilbertson
                                                    Vice President and
                                                    Chief Financial Officer



                                                                              23
<PAGE>

                         REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Shareholders
Navarre Corporation

We have audited the accompanying consolidated balance sheets of Navarre
Corporation as of March 31, 2003 and 2002, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
three years in the period ended March 31, 2003. Our audits also included the
financial statement schedule listed in the Index at Item 15(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Navarre
Corporation at March 31, 2003 and 2002, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
March 31, 2003, in conformity with accounting principles generally accepted in
the United States. Also in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.

Ernst & Young LLP
Minneapolis, Minnesota
April 25, 2003


                                                                              24
<PAGE>


                               NAVARRE CORPORATION
                           CONSOLIDATED BALANCE SHEETS
                      (in thousands, except share amounts)



<Table>
<Caption>
                                                                               AS OF MARCH 31,
                                                                             2003            2002
                                                                           ---------      ---------
<S>                                                                        <C>            <C>
ASSETS
Current assets:

      Cash                                                                 $  10,485      $  18,966
      Accounts receivable, less allowance for doubtful accounts
            and sales returns of $4,833 in 2003 and $2,411 in 2002            54,787         42,666
      Inventories                                                             22,828         15,316
      Prepaid expenses and other current assets                                4,845            163
                                                                           ---------      ---------
Total current assets                                                          92,945         77,111

Property and equipment, net of accumulated depreciation of
      $5,633 in 2003 and $5,089 in 2002                                        3,585          3,028

Other assets:
      Notes receivable, related parties                                          800            289
      Goodwill                                                                 3,109             --
      Other assets                                                               690            657
                                                                           ---------      ---------

Total assets                                                               $ 101,129      $  81,085
                                                                           =========      =========

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
      Note payable                                                         $     805      $      --
      Accounts payable                                                        67,093         54,305
      Accrued expenses                                                         4,292          2,430
                                                                           ---------      ---------
Total current liabilities                                                     72,190         56,735

      Note payable, long-term                                                    268             --
                                                                           ---------      ---------
 Total liabilities                                                            72,458         56,735

Shareholders' equity Common stock, no par value:

           Authorized shares - 100,000,000
           Issued and outstanding shares - 21,616,187 in 2003 and 2002        91,404         91,404
      Retained deficit                                                       (62,733)       (67,054)
                                                                           ---------      ---------
Total shareholders' equity                                                    28,671         24,350
                                                                           ---------      ---------

                                                                           ---------      ---------
Total liabilities and shareholders' equity                                 $ 101,129      $  81,085
                                                                           =========      =========
</Table>

See accompanying notes.


                                                                              25
<PAGE>


                               NAVARRE CORPORATION
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                    (in thousands, except per share amounts)



<Table>
<Caption>
                                                                   FISCAL YEARS ENDED MARCH 31,
                                                                2003           2002           2001
                                                              ---------      ---------      ---------

<S>                                                           <C>            <C>            <C>
Net sales                                                     $ 359,384      $ 303,817      $ 314,199

Cost of sales                                                   314,253        270,924        276,778
                                                              ---------      ---------      ---------

Gross profit                                                     45,131         32,893         37,421

Operating expenses:
    Selling and marketing                                        13,330          8,098          9,132
    Distribution and warehousing                                  5,514          5,202          7,990
    General and administrative                                   20,046         16,909         19,451
    Depreciation and amortization                                 2,117          1,491          3,212
    Restructuring                                                    --            672             --
                                                              ---------      ---------      ---------
                                                                 41,007         32,372         39,785
                                                              ---------      ---------      ---------

Income(loss) from operations                                      4,124            521         (2,364)

Other income (expense):
    Interest expense                                               (194)          (173)          (223)
    Other income                                                    328            884          2,000
                                                              ---------      ---------      ---------

Income(loss) before impact of investment in NetRadio Corp         4,258          1,232           (587)

Impact of investment in NetRadio Corporation                         63          1,480        (10,338)
                                                              ---------      ---------      ---------
Net income(loss)                                                  4,321          2,712        (10,925)

Excess of preferred stock buyback                                    --             --           (793)
                                                              ---------      ---------      ---------
Net income(loss) available to common shareholders             $   4,321      $   2,712      $ (11,718)
                                                              =========      =========      =========

Basic income(loss) per share                                  $     .20      $     .12      $    (.47)
                                                              =========      =========      =========
Diluted income(loss) per share                                $     .20      $     .12      $    (.47)
                                                              =========      =========      =========

Basic weighted average common shares outstanding                 21,616         22,553         25,137
Diluted weighted average common shares outstanding               21,841         22,575         25,137
</Table>

See accompanying notes.


                                                                              26
<PAGE>


                               NAVARRE CORPORATION
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                      (in thousands, except share amounts)



<Table>
<Caption>
                                                PREFERRED                   COMMON                     RETAINED
                                                 SHARES      PREFERRED      SHARES        COMMON       EARNINGS        UNEARNED
                                                 ISSUED       STOCK         ISSUED         STOCK       (DEFICIT)     COMPENSATION
                                                ---------    ---------    -----------    ---------    -----------    ------------
<S>                                             <C>          <C>          <C>            <C>          <C>            <C>
Balance at March 31, 2000                          34,000    $   8,010     23,534,435    $  91,501    $   (58,051)   $       (37)
   Preferred share conversion                     (20,390)      (4,804)     2,115,057        4,804             --             --
   Stock option compensation                           --           --             --           53             --             --
   Shares issued upon exercise of stock
     options                                           --           --          5,512           13             --             --
   Repurchase of preferred shares                 (13,610)      (3,206)            --           --           (790)            --
   Repurchase of common shares                         --           --     (1,624,625)      (2,255)            --             --
   Net loss                                            --           --             --           --        (10,925)            --
   Amortization of unearned compensation               --           --             --           --             --             37
                                                ---------    ---------    -----------    ---------    -----------    -----------
Balance at March 31, 2001                              --    $      --     24,030,379    $  94,116    $   (69,766)   $        --
   Repurchase of common shares                         --           --     (2,414,192)      (2,712)            --             --
   Net income                                          --           --             --           --          2,712             --
                                                ---------    ---------    -----------    ---------    -----------    -----------
Balance at March 31, 2002                              --    $      --     21,616,187    $  91,404    $   (67,054)   $        --
   NET INCOME                                          --           --             --           --          4,321             --
                                                ---------    ---------    -----------    ---------    -----------    -----------
BALANCE AT MARCH 31, 2003                              --    $      --     21,616,187    $  91,404    $   (62,733)   $        --
                                                =========    =========    ===========    =========    ===========    ===========
</Table>



See accompanying notes

                                                                              27
<PAGE>


                               NAVARRE CORPORATION
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)


<Table>
<Caption>
                                                                             FISCAL YEARS ENDED MARCH 31,
                                                                        2003           2002             2001
                                                                    ------------    ------------    ------------
<S>                                                                 <C>             <C>             <C>
OPERATING ACTIVITIES

Net income (loss)                                                   $      4,321    $      2,712    $    (10,925)
Adjustments to reconcile net income(loss) to net cash provided by
      (used in) operating activities:
      Depreciation and amortization                                        2,117           1,847           3,212
      Amortization of unearned compensation                                   --              --              37
      Equity in loss of NetRadio Corporation                                 (63)         (1,480)         10,338
      Stock option compensation                                               --              --              47
      Value of NetRadio stock issued to vendor                                --              --             200
      Write-off of notes receivable                                          258              56             292
      Changes in operating assets and liabilities:
          Accounts receivable                                             (7,506)          5,208           8,609
          Inventories                                                     (5,495)          7,313            (208)
          Prepaid expenses and assets                                     (5,831)           (481)             (9)
          Accounts payable and accrued expenses                           13,545         (12,833)          1,289
                                                                    ------------    ------------    ------------
Net cash provided by operating activities                                  1,346           2,342          12,882

INVESTING ACTIVITIES

Acquisition of Encore                                                     (7,546)             --              --
Notes receivable, related parties                                           (769)           (289)             27
Payments on NetRadio Note                                                     63           1,480           1,000
Purchases of equipment and leasehold improvements                         (1,039)           (973)         (4,288)
                                                                    ------------    ------------    ------------
Net cash (used in) provided by investing activities                       (9,291)            218          (3,261)

FINANCING ACTIVITIES

Proceeds from note payable, bank                                              --              --           5,000
Payments on note payable, bank                                                --              --          (5,000)
Repayment of note                                                           (536)             --              --
Repurchase of Navarre common stock                                            --          (2,712)         (2,255)
Repurchase of Class B preferred stock                                         --              --          (4,000)
Proceeds from exercise of common stock options                                --              --              13
                                                                    ------------    ------------    ------------
Net cash used in financing activities                                       (536)         (2,712)         (6,242)
                                                                    ------------    ------------    ------------

Net (decrease) increase in cash                                           (8,481)           (152)          3,379
Cash at beginning of year                                                 18,966          19,118          15,739
                                                                    ------------    ------------    ------------
Cash at end of year                                                 $     10,485    $     18,966    $     19,118
                                                                    ============    ============    ============

NON CASH ITEMS:
  Conversion of preferred stock to common stock                               --              --    $      4,804
</Table>



See accompanying notes.

                                                                              28
<PAGE>


                               NAVARRE CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 MARCH 31, 2003

1.       BUSINESS DESCRIPTION

Navarre Corporation, a Minnesota corporation formed in 1983, is a provider of
distribution, fulfillment and marketing services for a broad range of home
entertainment and multimedia products, including PC software, audio and video
titles, and interactive games. The Company maintains and leverages strong
relationships on both ends of the content distribution chain, including
relationships with leading national retailers, wholesalers and rackjobbers, as
well as major publishers and music labels and movie studios.

The Company is recognized as an industry leader in the distribution of consumer
PC software, interactive video games, DVD videos and independent music labels
and artists. Its product lines contain a broad assortment of compact discs, PC
software, video games and DVD/VHS videos sold to over 500 customers through over
18,000 locations internationally. Its broad base of customers include (i)
wholesale clubs, (ii) mass merchandisers, (iii) computer specialty stores, (iv)
music specialty stores, (v) book stores, (vi) office superstores, and (vii)
electronic superstores.

In addition, through its majority-owned subsidiary, Encore Software, Inc.,
Navarre is an interactive publisher in the video game and PC CD-ROM markets by
enabling them to more actively participate in the high growth video game
industry and enabling them to further extend their direct distribution
relationships with large retailers generating solid sell-through of Encore
titles.

2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

CONSOLIDATION

The financial statements include the accounts of the Company and its
majority-owned subsidiary Encore Software, Inc. and its formerly majority-owned
subsidiaries, eSplice, Inc. and NetRadio Corporation (collectively, the
Company). All intercompany accounts and transactions have been eliminated.

CASH AND CASH EQUIVALENTS

The Company considers short-term investments with a maturity of three months or
less when purchased to be cash equivalents. Cash equivalents are carried at
cost, which approximates market value.

INVENTORIES

Inventories are stated at the lower of cost or market with cost determined on
the first-in, first-out (FIFO) method. Obsolescence reserves were $1,018,000 on
March 31, 2003 in connection with Encore products.

PROPERTY AND EQUIPMENT

Property and equipment are recorded at cost. Depreciation is computed using the
straight-line method for leasehold improvements and accelerated methods for
equipment over estimated useful lives. Estimated useful lives by major asset
categories are as follows.

<Table>
<Caption>
               ASSET                                                              LIFE IN YEARS
               -----                                                              -------------
<S>                                                                               <C>
               Furniture and Fixtures                                                   7
               Office Equipment                                                         5
               Computer Equipment                                                       3
               Warehouse Equipment                                                      5
               Leasehold Improvements                                                  10
</Table>


                                                                              29
<PAGE>

IMPAIRMENT OF LONG-LIVED ASSETS

In accordance with Statement of Financial Accounting Standards (SFAS) No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets, long-lived
assets, such as property and equipment, are evaluated for impairment whenever
events or changes in circumstances indicate the carrying value of an asset may
not be recoverable. An impairment loss is recognized when estimated undiscounted
cash flows expected to result from the use of the asset plus net proceeds
expected from disposition of the asset (if any) are less than the carrying value
of the asset. When an impairment loss is recognized, the carrying amount of the
asset is reduced to its estimated fair value.

On January 1, 2003, the Company adopted SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. Since adoption, the present value
of costs associated with location closings, primarily future lease costs, are
charged to earnings when a location is vacated. Prior to this, the liability was
recognized when we made the decision to close the location.

GOODWILL AND INTANGIBLE ASSETS

Goodwill is the excess of the purchase price over the fair value of identifiable
net assets acquired in business combinations accounted for under the purchase
method. Effective April 1, 2002, the Company adopted Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets, which
eliminated the systematic amortization of goodwill. The Statement also required
that we review goodwill for impairment at adoption and at least annually
thereafter.

Prior to the adoption of FASB Statement 142, goodwill was amortized on a
straight-line basis over 5 to 15 years. This resulted in amortization expense
for fiscal years 2002 and 2001 of 356,000 and 35,000 respectively. Also included
in amortization expense for the current fiscal year was a charge related to a
contract-rights related intangible asset of $501,000. The net book value of the
remaining asset is $225,000 and will continue to be amortized over the remaining
life of the asset.

In the fourth quarter of fiscal 2003, we completed our annual impairment testing
of goodwill related to our acquisition of Encore Software and determined there
was no impairment. Fair values were determined utilizing widely accepted
valuation techniques including a discounted cash flows model. Encore's fair
value was based on the then current expectations for the business in light of
the existing software environment and the uncertainty associated with software
products.

<Table>
<Caption>

(in thousands, except per share amounts)                        FISCAL YEARS ENDED MARCH 31,
                                                             2003           2004           2005
                                                         ------------   ------------   ------------
<S>                                                      <C>            <C>            <C>
Net income (loss), as reported                           $      4,321   $      2,712   $    (11,718)
Add back goodwill amortization, net of tax                         --            356             35
                                                         ------------   ------------   ------------
Adjusted net income (loss)                               $      4,321   $      3,068   $    (11,683)

Basic and diluted income (loss) per share, as reported   $        .20   $        .12   $       (.47)
Add back goodwill amortization                                     --            .02             --
                                                         ------------   ------------   ------------
Adjusted basic and diluted income (loss) per share       $        .20   $        .14   $       (.47)
                                                         ------------   ------------   ------------
</Table>

The changes in the carrying amount of goodwill by segment were as follows: (in
thousands)

<Table>
<Caption>
                                                    HOME ENTERTAINMENT       ENCORE       CONSOLIDATED

<S>                                                 <C>                   <C>             <C>
Balances at March 31, 2000                              $        391      $         --    $        391
Systematic amortization of goodwill                              (35)                              (35)
                                                        ------------      ------------    ------------
Balances as of March 31, 2001                                    356                --             356
Systematic amortization of goodwill                             (356)               --            (356)
                                                        ------------      ------------    ------------
Balances as of March 31, 2002                                     --                --              --
Goodwill resulting from acquisitions                              --             2,323           2,323
Final purchase price allocation adjustment                                         786             786
                                                        ------------      ------------    ------------
Balances as of March 31, 2003                           $         --      $      3,109    $      3,109
</Table>


                                                                              30
<PAGE>

REVENUE RECOGNITION

Revenues from sales of product are recorded upon shipment. Allowances are
provided for estimated sales returns at the time the sale is recorded based on
the Company's trailing twelve months' experience by product line.

The Company performs periodic credit evaluations of its customers' financial
condition and generally does not require collateral. Receivables generally are
due within sixty days. Credit losses relating to customers consistently have
been within management's expectations.

CLASSIFICATION OF SHIPPING COSTS

Costs incurred with the shipment of product between the Company and its vendors
are classified in cost of goods sold. These costs were $1,660,000, $922,000, and
$1,129,000 for the years ended March 31, 2003, 2002, and 2001, respectively.

Costs incurred with the shipment of product from the Company to its customers
are classified in selling expenses. These costs were $6,259,000, $5,366,000, and
$6,326,000 for the years ended March 31, 2003, 2002, and 2001, respectively.

STOCK-BASED COMPENSATION

The Company has a stock option plan for officers, key employees and directors,
which is described more fully in Note 7. The Company accounts for this plan
under the recognition and measurement principles of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), and
related Interpretations. Under APB 25, when the exercise price of stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized. The Company has elected to apply
disclosure-only provisions of SFAS 123 as amended by SFAS No. 148. The following
table illustrates the effect on net income (loss) and net income (loss) per
share if the Company had applied the fair value recognition provision of
Financial Accounting Standards Board Statement No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), to stock-based employee compensation.

<Table>
<Caption>

         (In thousands, except for per share data)
                                                                                      FISCAL YEARS ENDED MARCH 31,
                                                                               2003           2002             2001
                                                                           ------------    ------------    ------------
<S>                                                                        <C>             <C>             <C>
Net income (loss), as reported                                             $      4,321    $      2,712    $    (10,925)
Add: Stock-based compensation, as reported                                           --              --              --
Deduct: Total stock-based compensation determined under
    fair value based method for all awards                                         (694)           (529)         (1,670)
                                                                           ------------    ------------    ------------
Adjusted net income (loss), fair value method for all stock-based awards   $      3,627    $      2,183    $    (12,595)

Basic and diluted income (loss) per share - as reported                    $        .20    $        .12    $       (.47)
Basic and diluted income (loss) per share - SFAS No. 123 adjusted          $        .17    $        .10    $       (.50)
</Table>

Pro forma information regarding net loss and loss per share is required by
Statement 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of Statement 123. The fair
value for these options was estimated at the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions: risk-free interest rate of 2.9%, 3.5%, and 4.6%, for 2003, 2002,
and 2001, respectively; volatility factor of the expected market price of the
Company's common stock of 73%, 117%, and 134%; and a weighted-average expected
life of the option of five years.

The weighted average fair value of options granted in 2003, 2002, and 2001 was
$0.87, $0.91, and $2.00 per share, respectively.


                                                                              31
<PAGE>

COMMITMENTS AND CONTINGENCIES

We are exposed to claims and litigation arising out of the ordinary course of
business. Management, after consulting with legal counsel, believes the
currently identified claims and litigation will not have a material adverse
effect on our results of operations or our financial condition taken as a whole.

INCOME TAXES

Income taxes are recorded under the liability method. Deferred income taxes are
provided for temporary differences between the financial reporting and tax bases
of assets and liabilities.

EARNINGS PER COMMON SHARE

The basic earnings per share is computed by dividing net income (loss) by the
weighted average number of common shares outstanding. The following table sets
forth the computation of basic and diluted earnings per share:

<Table>
<Caption>

       (In thousands, except for per share data)                       FISCAL YEARS ENDED MARCH 31,
                                                                  2003           2002           2001
                                                              ------------   ------------   ------------
<S>                                                           <C>            <C>            <C>
Numerator

   Net income (loss)                                          $      4,321   $      2,712   $    (10,925)
      Less excess of preferred share buyback                            --             --           (793)
      Adjusted net income (loss) applicable to common stock   $      4,321   $      2,712   $    (11,718)
                                                              ============   ============   ============
Denominator for basic earnings (loss) per
     share - weighted average shares                                21,616         22,553         25,137

Dilutive securities:  Employee Stock Options                           225             22             --
Denominator for diluted earnings (loss) per
     share - weighted average shares                                21,841         22,575         25,137
                                                              ============   ============   ============
Basic earnings (loss) per share                               $        .20   $        .12   $       (.47)
                                                              ============   ============   ============
Diluted earnings (loss) per share                             $        .20   $        .12   $       (.47)
                                                              ============   ============   ============
</Table>

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 could differ from those estimates.

VENDOR ALLOWANCES

The Company receives allowances from vendors as a result of purchasing their
products. In accordance with Emerging Issues Task Force (EITF) 02-16, Accounting
by a Customer (Including a Reseller) for Certain Consideration received from a
Vendor, vendor allowances are initially deferred. The deferred amounts are then
recorded as a reduction of cost of goods sold when the related product is sold.

PREPAID SOFTWARE DEVELOPMENT COSTS

Software costs incurred subsequent to the determination of the technological
feasibility of software products are capitalized. Capitalization ceases and
amortization of costs begin when the software product is available for general
release to customers or shipment has begun.



                                                                              32
<PAGE>

RESTRUCTURING

In December 2001, the Company initiated actions to close a warehouse and
distribution facility in Hawaii and subsequently consolidated the operations
into its Minneapolis facility. These actions resulted in the Company recording
an aggregate charge of $831,000, including goodwill impairment of $356,000. The
charges include $672,000 classified as restructuring and $159,000 of inventory
write-downs classified in cost of sales. Through March 31, 2003, the Company has
paid or incurred all of the $831,000 charge.

<Table>
<Caption>
                                        INCURRED THOUGH    BALANCE AS OF
                         TOTAL CHARGE    MARCH 31, 2003   MARCH 31, 2003
                        --------------  ---------------   --------------
<S>                     <C>             <C>               <C>
Inventory write-downs   $      159,000   $      159,000               --
Severance costs                131,000          131,000               --
Impairment charge              356,000          356,000               --
Other                          185,000          185,000               --
                        --------------   --------------   --------------
                        $      831,000   $      831,000               --
                        --------------   --------------   --------------
</Table>

3.       ACQUISITIONS

During the current fiscal year, the Company acquired the primary assets of
Encore Software, Inc. ("Encore") pursuant to an Amended and Restated Asset
Purchase Agreement between the Company and Encore effective as of July 10, 2002,
as amended by amendment No. 1 to the Agreement effective as of July 31, 2002
(collectively, the "Purchase Agreement"). The transaction was approved by the
Bankruptcy Court for the Central District of California and closed on August 2,
2002. The Company paid approximately $7.9 million in cash and assumed $1.6
million in debt. The assets purchased by the Company included certain fixed
assets, intellectual property, inventory, receivables, and contract rights
related to Encore's business. Navarre acquired Encore, an interactive publisher
in the video game and PC CD-ROM markets, to enable it to more actively
participate in the high growth video game industry and enable it to further
extend our direct distribution relationships with large retailers generating
solid sell-through of Encore titles. The acquisition was accounted for using the
purchase method in accordance with SFAS No. 141. Accordingly, the net assets
were recorded at their estimated fair values and operating results were included
in our financial statements from the date of acquisition. The allocation of the
purchase price to the assets acquired was finalized in the fourth quarter of
fiscal 2003. The final purchase price resulted in an increase of $786,000 to
goodwill from our preliminary allocation. Under SFAS No. 142, goodwill is not
amortized, but is reviewed for impairment at least annually.

The final purchase price allocation was as follows: (in thousands)

<Table>

<S>                                         <C>
Cash                                        $        354
Accounts receivable, net of allowances             3,333
Inventories                                          617
Prepaid expenses and other current assets          2,067
Property and equipment                             1,134
Goodwill                                           3,109
Current liabilities                               (1,105)
                                            ------------
TOTAL PURCHASE PRICE                        $      9,509
</Table>

4.       RELATED PARTY TRANSACTIONS

During fiscal year 2002, the Company entered into a five year amended employment
contract with its Chief Executive Officer. The agreement includes a loan to the
executive for a maximum of $1,000,000, of which $800,000 was outstanding at
March 31, 2003. Under the terms of the loan, $200,000 of the $1,000,000
principal and all unpaid and unforgiven interest is to be forgiven by the
Company on each of March 31, 2004, 2005, 2006 and 2007. During fiscal 2003, the
Company forgave $200,000 of principal and interest. The outstanding note amount
bears an annual interest rate of 5.25%.

Subsequent to the Company's acquisition of the assets of Encore Software, Inc.
("Encore") on August 24, 2002, the Company entered into a five-year agreement
with Michael Bell, to serve as Chief Executive Officer of Encore Software, Inc.
On the same date, it also entered into a stock purchase agreement with Mr. Bell
under which he acquired 20,000 of



                                                                              33
<PAGE>

the 100,000 outstanding shares of Encore. In connection with the stock purchase,
a stock buy and sell agreement was entered into between Mr. Bell and Encore.

We also paid a consulting fee of $187,000 to Michael Snow, a member of the
Company's Board of Directors, for consulting services provided in conjunction
with the acquisition of Encore Software, Inc.

5.       BANK FINANCING AND DEBT

On October 3, 2001, the Company entered into an agreement with General Electric
Capital Corporation for a three-year $30 million credit facility. On June 24,
2003, the Company amended the agreement and increased the credit facility to $40
million and extended the agreement until June 2007. In association with this
agreement, we also pay certain facility and agent fees. During fiscal year 2003,
the maximum amount the Company borrowed under the credit facility was $7.3
million. As of March 31, 2003, the Company had no balance under this facility.
Under this agreement the Company is required to meet certain covenants. The
Company is in compliance with these covenants as of March 31, 2003.

Interest under the GE Capital line of credit is at the Index Rate plus .25%
(4.5%) at March 31, 2003 and is payable monthly.

Interest paid was $194,000, $173,000, and $223,000 for the years ended March 31,
2003, 2002, and 2001, respectively.

6.       SHAREHOLDERS' EQUITY

On May 1, 1998, the Company issued 1,523,810 shares of Class A Convertible
Preferred Stock in a private placement to a group of investors for aggregate
consideration of $20 million. The Class A Convertible Preferred Stock was issued
at a price of $13.125 per share and was convertible into five shares of Navarre
common stock at any time after June 30, 1998. All of the Class A Convertible
Preferred Stock was converted into common stock in fiscal 2000. In addition, for
each share of Class A Convertible Preferred Stock acquired, each investor
received a five-year warrant to purchase five shares of Navarre common stock at
a price $3.50 per share. The Company also issued warrants to the private
placement agent to purchase 380,953 shares of common stock at $2.625 per share.
During fiscal 1999, 7,913,815 common stock warrants were exercised for
$27,348,500. There were 72,408 warrants outstanding at March 31, 2003. The
warrants expired May 1, 2003. The Class A Convertible Preferred Stock paid
cumulative quarterly dividends of ten percent (10%) payable beginning June 30,
1998. Total cash and stock dividends paid in fiscal year 1999 were $594,000. No
cash or stock dividends were paid in fiscal year 2003, 2002, or 2001.

The Class A Convertible Preferred Stock securities were deemed to have contained
beneficial conversion features that were recognized as a dividend paid to
preferred stockholders. Allocation of proceeds to the beneficial conversion
feature and warrants are analogous to a dividend, and were recognized as a
return to the preferred stockholders over the minimum conversion period (from
date securities were issued to date they were first convertible). The Company
valued the Nondetachable Conversion Feature and accompanying warrants at
$34,229,000.

On August 20, 1999, the Company announced that it had entered into a
subscription agreement with Fletcher International Limited ("Fletcher
International") for the issuance of up to 150,000 shares of Navarre's Class B
Convertible Preferred Stock ("Class B Preferred Stock") for an aggregate
purchase price of up to $37.5 million (the "Subscription Agreement"). Under the
terms of the Subscription Agreement, the Class B Preferred Stock could be issued
in three principal tranches. On August 20, 1999, Navarre issued the first
tranche, consisting of 34,000 shares of Class B Preferred Stock and a three-year
warrant to purchase up to 16,000 shares of Class B Preferred Stock. Fletcher
International paid a purchase price of $8.5 million, or $250 per share of Class
B Preferred Stock. Fletcher International would pay an additional $4.0 million,
or $250 per share of Class B Preferred Stock, if it exercised the warrant in its
entirety. On May 17, 2000, Fletcher International converted 20,390 shares of
Class B Preferred Stock to 2,115,057 shares of common stock.

On October 24, 2000, Navarre and Fletcher International entered into and closed
on a portion of the obligations contained in a Securities Redemption Agreement
("Redemption Agreement"). Under the Redemption Agreement, Navarre repurchased
all of the 13,610 shares of its Class B Preferred Stock not yet converted with a
carrying value of approximately $3.2 million. In connection with the repurchase,
Navarre paid Fletcher International $3.4 million and issued to Fletcher
International a promissory note due November 21, 2000 for an additional
$600,000. In November


                                                                              34
<PAGE>

2000, Navarre paid the promissory note and Fletcher International returned the
Warrant and all rights of Fletcher International and Navarre to purchase and
sell Navarre securities under the Subscription Agreement were terminated.

On October 17, 2000, Navarre announced that its board of directors had
authorized it to repurchase up to 5,000,000 shares of Navarre common stock or
approximately twenty percent of its outstanding common stock, in market or
private transactions. During the years ending March 31, 2002 and 2001, Navarre
repurchased 2,414,192 and 1,624,625 shares, respectively, for an average price
of $1.23. Navarre did not repurchase any shares during the fiscal year ending
March 31, 2003.

7.       STOCK OPTIONS AND GRANTS

The Company has a stock option plan for officers, key employees and directors.
The options are granted at fair market value and expire between five and eight
years after the grant date. Option activity is summarized as follows:

<Table>
<Caption>
                             PLAN OPTIONS                    WEIGHTED AVERAGE
                            AVAILABLE FOR   PLAN OPTIONS    EXERCISE PRICE PER
                               GRANT        OUTSTANDING          SHARE
                            -------------   ------------    ------------------

<S>                         <C>             <C>             <C>
Balance on March 31, 2000        854,298       1,451,168        $       3.02
   Granted                      (563,000)        563,000                3.12
   Canceled                       97,881         (97,881)               3.92
   Terminated                    147,766        (147,766)               2.25
   Exercised                          --          (5,512)               2.32
                            ------------    ------------        ------------
Balance on March 31, 2001        536,945       1,763,009        $       4.32
   Additional shares             750,000              --                  --
   Granted                      (494,000)        494,000                1.10
   Canceled                      141,400        (141,400)               3.78
   Terminated                    129,709        (129,709)               3.99
                            ------------    ------------        ------------
Balance on March 31, 2002      1,064,054       1,985,900        $       3.77
   GRANTED                    (1,294,252)      1,294,252                1.56
   CANCELED                      151,000        (151,000)               2.60
   TERMINATED                     91,200         (91,200)               3.00
                            ------------    ------------        ------------
BALANCE ON MARCH 31, 2003         12,002       3,037,952        $       2.91
                            ============    ============        ============
</Table>

On February 6, 2003, options were granted to officers and members of senior
management of the Company totaling 730,000 shares. Plan Options Available for
Grant prior to the grant on February 6, 2003 was only 637,754 shares. 112,248
shares of the grant were held pending shareholder approval at the Company's
Annual Meeting on September 10, 2003. The 112,248 shares were originally priced
on February 6, 2003 at $1.73. Upon shareholder approval of these shares, the
stock price at the date of approval will be compared to the price given on
February 6, 2003 and compensation will be recorded as necessary.

The exercise price of options outstanding at March 31, 2003 ranged from $0.93 to
$15.38 per share, as summarized in the following table:

<Table>
<Caption>
                            SHARES
                          OUTSTANDING      WEIGHTED AVERAGE     NUMBER OF     WEIGHTED AVERAGE
        RANGE OF          AT MARCH 31,        REMAINING          SHARES          EXERCISE
    EXERCISE PRICE           2003         CONTRACTUAL LIFE     EXERCISABLE    PRICE PER SHARE
-----------------------   ------------    -----------------    ------------   ---------------
<S>                       <C>             <C>                  <C>            <C>
     $ 0.93 - $  1.41          858,000       4.59 years             122,800   $          1.22
     $ 1.48 - $  1.91          879,752       4.39 years              63,600   $          1.53
     $ 2.10 - $  3.28          751,100       2.13 years             504,900   $          3.06
     $ 3.69 - $ 15.38          549,100       2.50 years             345,700   $          7.54
-----------------------   ------------    -----------------    ------------   ---------------
                             3,037,952       3.39 YEARS           1,037,000   $          4.24
                          ============    ==================   ============   ===============
</Table>

The number of options exercisable at March 31, 2003, 2002, and 2001 was
1,037,000, 753,975, and 563,309, respectively, at a weighted average exercise
price of $4.24, $4.39, and $4.32, per share, respectively.



                                                                              35
<PAGE>

The Company has granted 100,000 and 250,000 options, respectively, to two
current key employees. The options were deemed commensurate with their level of
responsibility. The options vest depending on attaining certain
performance-based criteria. The performance-based options are subject to
variable accounting and will be recognized when, and if, the criteria are met
for vesting. The options expire September 21, 2006 and September 6, 2008,
respectively,

8.       INCOME TAXES

Deferred income taxes reflect the available tax carryforwards and the net tax
effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax
purposes. Significant components of the Company's deferred tax assets as of
March 31, 2003 and 2002 (in thousands):

<Table>
<Caption>
                                      FISCAL YEARS ENDED MARCH 31,
                                         2003            2002
                                     ------------    ------------
<S>                                  <C>             <C>
Net operating loss carryforward      $      9,147    $     12,516
Collectablity reserves               $      3,231           2,108
Allowance for sales returns          $      2,071             520
Book/tax depreciation                $         55              86
Reserve for sales discounts          $        167             189
Accrued vacations                    $        267             115
Inventory - uniform capitalization   $         59              89
                                     ------------    ------------
                                     $     14,997    $     15,623
Valuation allowance                  $    (14,997)        (15,623)
                                     ------------    ------------
Total deferred tax assets            $         --    $         --
                                     ============    ============
</Table>

At March 31, 2003 the Company has net operating loss carryforwards of
approximately $22,868,947, which will begin to expire in 2014.

A reconciliation of income tax benefit to the statutory federal rate is as
follows (in thousands):

<Table>
<Caption>
                                                               FISCAL YEARS ENDED MARCH 31,
                                                           2003             2002             2001
                                                       ------------     ------------     ------------
<S>                                                    <C>              <C>              <C>
Tax expense (benefit) at statutory rate                $      1,467     $        922     $     (3,715)
State income taxes (benefit), net of federal benefit            259              162           (2,354)
Valuation allowance                                          (1,789)          (1,117)           5,354
Equity loss in NetRadio                                          --               --              591
Other                                                            63               33              124
                                                       ------------     ------------     ------------
                                                       $          0     $          0     $          0
                                                       ============     ============     ============
Effective tax rate                                                0%               0%               0%
                                                       ============     ============     ============
</Table>

Cash paid (received) for income taxes was $0, $0, and $0 for the years ended
March 31, 2003, 2002 and 2001, respectively.


                                                                              36
<PAGE>

9.       COMMITMENTS

LEASES

The Company leases substantially all of its office, warehouse and distribution
facilities. The terms of the lease agreements generally range from 2 to 15
years. The leases require payment of real estate taxes and operating costs in
addition to rent.

Total rent expense was $1,779,000, $1,736,000, and $1,731,000 for the years
ended March 31, 2003, 2002, and 2001, respectively.

The following is a schedule of future minimum rental payments required under
noncancelable operating leases as of March 31, 2002 (in thousands):

<Table>
<S>                                                               <C>

                        2004                                      $ 1,134
                        2005                                          892
                        2006                                          491
                        2007                                          501
                        2008                                          501
                        Thereafter                                  2,724
                                                                  =======
                                                                  $ 6,243
                                                                  =======
</Table>

10.      MAJOR CUSTOMERS

The Company has three major customers who accounted for 47%, 45%, and 49% of
sales in fiscal 2003, 2002, and 2001, respectively. Each of the three customers
accounted for over 10% of the net sales in each fiscal year.

11.      401K PLAN

The Company has a 401k plan, which covers substantially all full-time employees.
The Company contributed $101,139, $91,596, and $90,846 to the plan for the years
ended March 31, 2003, 2002, and 2001, respectively.

12.      BUSINESS SEGMENTS

Navarre currently operates two business segments: Home Entertainment Products,
which consists of Navarre Distribution Services (NDS) and Navarre Entertainment
Media (NEM), and Encore Software, Inc.

Through NDS, we distribute non-proprietary entertainment products including PC
software, major label music and DVD video. Through NEM, we distribute
proprietary prerecorded music of primarily independent artists and labels on CD
and DVD audio, and video in DVD and VHS format to national and retail music
retailers, rackjobbers, and one-stops throughout the United States and Canada.
Through Encore, a leading interactive publisher in the PC CD-ROM and videogame
markets, we offer a broad range of PC titles under internationally recognized
brands such as Sesame Street(TM), Dragon Tales(TM) and Kaplan(TM). Encore also
publishes best-selling software compilations in the game, education and kids
software markets.

The following table provides information by business segment:

<Table>
<Caption>

       (In thousands)
       FISCAL YEAR 2003        HOME ENTERTAINMENT      ENCORE      ELIMINATIONS   CONSOLIDATED
----------------------------   ------------------   ------------   ------------   ------------
<S>                            <C>                  <C>            <C>            <C>
Net Sales                           355,884               14,715         11,215        359,384
Operating Profit:                    39,330                5,801             --         45,131
Depreciation Expense:                 1,296                  321             --          1,617
Interest Expense:                       149                   45             --            194
Gain on NetRadio Investment:             63                   --             --             63
Capital Expenditures:                   994                   45             --          1,039
Total Assets:                        99,155               14,797         12,823        101,129
</Table>


                                                                              37
<PAGE>

13.      QUARTERLY DATA - SEASONALITY (UNAUDITED)

The Company's quarterly operating results have fluctuated significantly in the
past and will likely do so in the future as a result of seasonal variations of
products ultimately sold at retail. The Company's business is affected by the
pattern of seasonality common to other suppliers of retailers, particularly the
holiday selling season. Historically, more than 60% of the Company's sales and
substantial portions of the Company's profits have been in the third and fourth
quarters of the calendar year. Due to the lower level of sales during the off
periods, the Company has historically incurred losses during these periods.

The following table sets forth certain unaudited quarterly historical financial
data for each of the eight quarters in the period ended March 31, 2003. (In
thousands, except per share amounts)

<Table>
<Caption>

                                                             QUARTER ENDED
                                         JUNE 30      SEPTEMBER 30   DECEMBER 31      MARCH 31
                                      ------------    ------------   ------------   ------------
<S>                                   <C>             <C>            <C>            <C>
FISCAL YEAR 2003
Net Sales                             $     69,974    $     88,864   $    116,897   $     83,649
Gross profit                                 8,048          11,432         14,087         11,564
Net income (loss)                     $        198    $        676   $      3,005   $        442
                                      ============    ============   ============   ============
Net income (loss) per common share:
Basic and diluted                     $        .01    $        .03   $        .14   $        .02
                                      ============    ============   ============   ============


FISCAL YEAR 2002
Net Sales                             $     54,485    $     67,676   $    116,040   $     65,616
Gross profit                                 6,384           6,948         11,557          8,004
Net income (loss)                     $       (938)   $         32   $      3,278   $        340
                                      ============    ============   ============   ============
Net income (loss) per common share:
Basic and diluted                     $       (.04)   $        .00   $        .15   $        .02
                                      ============    ============   ============   ============
</Table>


                                                                              38
<PAGE>


                               NAVARRE CORPORATION

          SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

<Table>
<Caption>
                                      BALANCE AT     CHARGED TO      ADDITIONS/        BALANCE AT
                                       BEGINNING     COSTS AND      (DEDUCTIONS)         END OF
DESCRIPTION                            OF PERIOD     EXPENSES         DESCRIBE           PERIOD
----------------------------------   ------------   ------------    ------------       ------------
<S>                                  <C>            <C>             <C>                <C>
YEAR ENDED MARCH 31, 2003:
   DEDUCTED FROM ASSET ACCOUNTS:
   ALLOWANCE FOR DOUBTFUL ACCOUNTS      1,111,000         93,000        (531,000)(1)        673,000
   ALLOWANCE FOR SALES RETURNS          1,300,000        296,000       2,564,000 (2)      4,160,000
                                     ------------   ------------    ------------       ------------
   TOTALS                            $  2,411,000   $    389,000    $  2,033,000       $  4,833,000
                                     ============   ============    ============       ============


Year ended March 31, 2002:
   Deducted from asset accounts:
   Allowance for doubtful accounts      2,917,000      1,035,000      (2,841,000)(1)      1,111,000
   Allowance for sales returns          2,069,000       (769,000)             --          1,300,000
                                     ------------   ------------    ------------       ------------
   Totals                            $  4,986,000   $    266,000    $ (2,841,000)(1)   $  2,411,000
                                     ============   ============    ============       ============

Year ended March 31, 2001:
   Deducted from asset accounts:
   Allowance for doubtful accounts      2,511,000        620,000        (214,000)(1)      2,917,000
   Allowance for sales returns          1,838,000        231,000              --          2,069,000
                                     ------------   ------------    ------------       ------------
   Totals                            $  4,349,000   $    851,000    $   (214,000)(1)   $  4,986,000
                                     ============   ============    ============       ============
</Table>

(1)      Uncollectible accounts written off, net of recoveries.

(2)      Includes additional reserves associated with the operations of Encore
         Software.



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