10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

For the fiscal year ended January 4, 2009.

OR

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

For the transition period from              to

Commission File Number 001-15153

BLOCKBUSTER INC.

(Exact name of registrant as specified in its charter)

DELAWARE	52-1655102
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)

1201 Elm Street

Dallas, Texas 75270

(214) 854-3000

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

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

Title of Each Class	Name of Each Exchange on Which Registered
Class A Common Stock, $.01 par value per share	New York Stock Exchange
Class B Common Stock, $.01 par value per share	New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act).    Large accelerated filer  ¨    Accelerated filer  x    Non-accelerated filer  ¨    Smaller reporting company  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  x

As of July 3, 2008, which was the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the registrant’s common stock held by non-affiliates was $404,251,870, based on the closing price of $2.67 per share of Class A common stock and $2.12 per share of Class B common stock as reported on the New York Stock Exchange composite tape on that date.

As of March 30, 2009, 121,242,152 shares of Class A common stock, $0.01 par value per share, and 72,000,000 shares of Class B common stock, $0.01 par value per share, were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of our definitive proxy statement to be filed for our 2009 annual meeting of stockholders are incorporated by reference into Part III of this Form 10-K.

THIS ANNUAL REPORT ON FORM 10-K IS BEING DISTRIBUTED TO STOCKHOLDERS IN LIEU OF A SEPARATE ANNUAL REPORT PURSUANT TO RULE 14a-3(b) OF THE ACT AND SECTION 203.01 OF THE NEW YORK STOCK EXCHANGE LISTED COMPANY MANUAL.

BLOCKBUSTER INC.

TABLE OF CONTENTS TO FORM 10-K

		Page
PART I
Item 1.	Business	2
Item 1A.	Risk Factors	21
Item 1B.	Unresolved Staff Comments	35
Item 2.	Properties	35
Item 3.	Legal Proceedings	36
Item 4.	Submission of Matters to a Vote of Security Holders	36
PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	37
Item 6.	Selected Financial Data	39
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	41
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	72
Item 8.	Financial Statements and Supplementary Data	73
Item 9.	Changes In and Disagreements With Accountants on Accounting and Financial Disclosure	130
Item 9A.	Controls and Procedures	130
Item 9B.	Other Information	131
PART III
Item 10.	Directors, Executive Officers and Corporate Governance	132
Item 11.	Executive Compensation	132
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	132
Item 13.	Certain Relationships and Related Transactions, and Director Independence	133
Item 14.	Principal Accountant Fees and Services	133
PART IV
Item 15.	Exhibits and Financial Statement Schedules	134

DISCLOSURE REGARDING FORWARD-LOOKING INFORMATION

This annual report on Form 10-K contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements may also be included from time to time in our other public filings, press releases, our website and oral and written presentations by management. Specific forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts and include, without limitation, words such as “may,” “will,” “expects,” “believes,” “anticipates,” “plans,” “estimates,” “projects,” “predicts,” “targets,” “seeks,” “could,” “intends,” “foresees” or the negative of such terms or other variations on such terms or comparable terminology. Similarly, statements that describe our strategies, initiatives, objectives, plans or goals are forward-looking.

These forward-looking statements are based on management’s current intent, belief, expectations, estimates and projections regarding our Company and our industry. These statements are not guarantees of future performance and involve risks, uncertainties, assumptions and other factors that are difficult to predict. Therefore, actual results may vary materially from what is expressed in or indicated by the forward-looking statements. The risk factors set forth below under “Item 1A. Risk Factors,” and other matters discussed from time to time in subsequent filings with the Securities and Exchange Commission, including the “Disclosure Regarding Forward-Looking Information” and “Risk Factors” sections of our Quarterly Reports on Form 10-Q, among others, could affect future results, causing these results to differ materially from those expressed in our forward-looking statements. In that event, our business, financial condition, results of operations or liquidity could be materially adversely affected and investors in our securities could lose part or all of their investments. Accordingly, our investors are cautioned not to place undue reliance on these forward-looking statements because, while we believe the assumptions on which the forward-looking statements are based are reasonable, there can be no assurance that these forward-looking statements will prove to be accurate.

Further, the forward-looking statements included in this Form 10-K and those included from time to time in our other public filings, press releases, our website and oral and written presentations by management are only made as of the respective dates thereof. We undertake no obligation to update publicly any forward-looking statement in this Form 10-K or in other documents, our website or oral statements for any reason, even if new information becomes available or other events occur in the future.

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PART I

Item 1.    Business

BLOCKBUSTER OVERVIEW

Blockbuster Inc. is a leading global provider of rental and retail movie and game entertainment, with over 7,400 stores in the United States, its territories and 20 other countries as of January 4, 2009. Our mission is to provide our customers with the most convenient access to media entertainment, including movie and game entertainment delivered through multiple distribution channels such as our stores, by-mail, vending and kiosks, online and at home. We believe Blockbuster offers customers a value-priced entertainment experience, combining the broad product depth of a specialty retailer with local neighborhood convenience.

Domestic Operations

Physical Delivery

• In-store—As of January 4, 2009, we had 4,585 stores operating under the BLOCKBUSTER^® brand in the United States and its territories. Of these stores, 707 stores were operated through our franchisees. Our stores offer movie and game rental and new and traded movie and game product to our customers, including the addition of Blu-ray DVDs to our product offerings in 2007. Additionally, 404 of these locations include a game store-in-store concept operating under the GAME RUSH^® brand.

• By-mail—We offer an Internet-based subscription service through blockbuster.com that allows customers to rent DVDs by mail and offers substantially more titles than our individual stores, including a wide array of both new release and catalog DVDs. This allows us to reach customers located in geographic areas where we do not presently have store locations. Subscribers of our BLOCKBUSTER Total Access^™ program have the benefit of:

• over 90,000 movie titles;

• two ways to get movies with no due dates—online and in-store;

• a variety of plans to meet our customers’ lifestyle and budget needs;

• the convenience of thousands of participating store locations; and

• the option of video game rentals beginning in the first quarter of 2009.

• Vending—We have been exploring the growing vending channel as an opportunity to expand physical distribution of media entertainment. Vending machines are automated fixed capacity machines that enable the browsing and dispensing of a limited catalog of media entertainment. We recognize vending as an area of opportunity and we continue to test and evaluate solutions that would allow us to offer vending as an added form of convenience to customers.

Digital Delivery

• Download to PC—During 2008, we integrated our Movielink, LLC (“Movielink”) offering with the blockbuster.com website. Movielink is an online movie downloading business with one of the largest libraries of digital content for both rental and sale, which we purchased all the outstanding membership interests of in 2007. This has allowed us to capitalize on the rapidly growing filmed entertainment downloading market and provide additional entertainment delivery choices to meet our customers’ needs including 24/7 access to their blockbuster.com account for downloading and watching movies as well as movie recommendations and reviews.

• Other alternatives—We are committed to providing convenient access to media entertainment and are continually seeking out alternative methods to deliver on this mission. With the convergence of media

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content and electronic devices, we are exploring further opportunities to digitally deliver content to our customers, including the development of digital delivery kiosks in our stores, and leveraging strategic partners to digitally deliver entertainment content to our customers’ homes and electronic and portable devices. Along those lines, we launched BLOCKBUSTER OnDemand in November 2008 with the 2Wire MediaPoint^™ digital media player, an easy-to-use, on-demand video solution that offers movie fans instant access through their television sets to BLOCKBUSTER OnDemand content, including thousands of titles from the latest movie releases to classic favorites.

International Operations

As of January 4, 2009, we had 2,820 stores in 20 markets outside of the United States operating under the BLOCKBUSTER brand and other brand names we own. Of these stores, 892 stores were operated through our franchisees. In the Republic of Ireland and Northern Ireland, we operate under the XTRA-VISION^® brand name due to its strong local brand awareness. In Canada, Italy, Mexico and Denmark, we operate store-in-store game locations in addition to freestanding game locations in Mexico, all under the GAME RUSH brand. During 2008 and 2007, 32% and 35% of our worldwide revenues were generated outside of the United States, respectively. Our international operations have historically been more dependent on retail sales and, in particular, the retail game industry.

During the third quarter of 2008, we sold our Chilean subsidiary, coupled with a license agreement.

We plan to continue selectively licensing some of our international markets as this will allow us to retain our brand’s presence while redeploying capital. Longer term, a strong licensed presence in each country can significantly establish the BLOCKBUSTER brand, facilitate growth, and set the stage for a future digital offering.

We maintain offices for each major region and most of the countries in which we operate in order to manage, among other things, (i) store development and operations, (ii) marketing, and (iii) the purchase, supply and distribution of product. Additional information regarding our revenues and long-lived assets by geographic area and financial data by segment is included in Note 11 to the consolidated financial statements.

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INDUSTRY OVERVIEW

Domestic Media Entertainment Industry

We define our market as the media entertainment market. The estimated relative market sizes for various segments of the U.S. entertainment industry in which we compete are reflected in the following table (in millions):

	2008		2007
In-store rental	$	5,797	$	6,215
Vending		377		198
By-mail rental		2,128		1,789
Physical film rental market		8,302		8,202
Cable video-on-demand (“VOD”)		1,164		1,038
Digital VOD		258		166
Subscription VOD		468		277
Digital film rental market		1,890		1,481
Total film rental market		10,192		9,683
Physical retail		16,083		15,946
Digital retail		437		269
Film retail market		16,520		16,215
Game software (rental and retail)		8,886		6,667
Game hardware and accessories		7,975		7,000
Game portable hardware, software and accessories		4,469		4,309
Total game market		21,330		17,976
Total U.S. media entertainment market	$	48,042	$	43,874

The foregoing estimates and projections have been compiled from reports and information published by Adams Media Research, with respect to filmed entertainment, and NPD Group, with respect to game entertainment.

The overall domestic media entertainment industry grew 9.5% in 2008. The movie rental market is forecasted to continue that growth in 2009, while the overall industry is forecasted to decline slightly due to a low cyclical period for new game platform releases. There are continuing channel and product shifts, primarily driven by introduction of next-generation game console release cycles as well as the emergence of new channels of distribution for movie entertainment, such as by-mail delivery, vending, and digital. We believe we have capitalized on the next-generation game console launches and the associated broadening of the consumer demographic in 2008.

Movies

A competitive advantage that the U.S. retail home video industry has traditionally enjoyed over most other movie distribution channels, except theatrical release, is the early timing of its “distribution window.” Currently, studios distribute their movie entertainment content three to six months after theatrical release to the home video market; seven to eight months after theatrical release to pay-per-view and video-on-demand (“VOD”); one year after theatrical release to pay TV networks; and two to three years after theatrical release to basic cable and syndicated networks. Recently, there has been increasing experimentation by studios and various movie content

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aggregators and retailers with the traditional distribution window, including simultaneous VOD and DVD releases. For example, although movie selections tend to be limited at present, customers can now download to their computers or TVs certain available movies on the same day that the movie’s DVD is released by the studios nationwide in retail stores for rental or sale. In some cases consumers can also burn the downloaded movie to a blank DVD for playback in a DVD player, allowing them to watch the movies on their TVs or portable devices. We expect that the movie studios will continue to assess the traditional release windows and it is possible that the studios may decide to alter the traditional home video retailer distribution window for an increasing number of movies, particularly in connection with simultaneous VOD distribution of movies and DVD release dates. However, we also believe that the studios have a vested interest in maintaining the home video distribution window in a manner that allows them to maximize revenues generated by the retail home video industry.

Games

According to estimates by NPD Group, game revenues in the United States grew 18.7% in 2008 after a 43.5% increase in 2007. These trends were largely due to recent introduction of new, more advanced hardware platforms in 2007, including the Xbox 360, the Sony PlayStation 3 and the Nintendo Wii, and the growth of portable gaming systems, particularly the Nintendo DS Lite.

Many next-generation hardware platforms, including Sony PlayStation 2 and 3 and Microsoft Xbox and Xbox 360, utilize a DVD and/or Blu-Ray software format and have the potential to serve as multi-purpose entertainment centers by doubling as players for DVD movies and compact discs. For example, the Sony PlayStation 3 consoles are equipped to play high-definition Blu-ray discs. In addition, Sony PlayStation 3 and PSP, Nintendo DS and Wii and Microsoft Xbox 360 all provide Internet connectivity.

Sales of video game software generally increase as next-generation platforms mature and gain wider acceptance. Historically, when a new platform is released, a limited number of compatible game titles are immediately available, but the selection grows rapidly as manufacturers and third-party publishers develop and release game titles for that new platform. With respect to game rentals, we believe that the difference between the retail price and the rental price of a popular new video game title is typically high enough to make rentals an attractive alternative for customers. We also believe rental pricing provides both a testing ground for consumers considering a game purchase and an attractive alternative for customers who do not want to buy a game on an older format as they evaluate the purchase of a next generation hardware platform.

While the typical electronic game enthusiast is male and between the ages of 14 and 35, the electronic game industry is broadening its appeal across all demographics, especially with the introduction of Nintendo Wii. In addition, the availability of used video game products for sale has enabled a lower-economic demographic that may not have been able to afford the considerably more expensive new video game products, to participate in the video game industry.

International Home Video Industry—In-Home Movies

Some of the attributes of the home video industry outside of the United States are similar to those of the home video industry within the United States. For example, the major studios generally release movies outside of the United States according to sequential distribution windows. However, other attributes of the home video industry outside of the United States do not necessarily mirror the home video industry within the United States. For example, most countries have different systems of supply and distribution of movies, and competition in many of our international markets tends to be more fragmented. In addition, under the laws of some countries and trading blocs (e.g., the European Union), home video retailers must obtain the right to rent videos to consumers through a licensing arrangement or a “purchase-with-the-right-to-rent” arrangement. Studios may charge these home video retailers more for product purchased for rental than product purchased solely for sale to consumers. This is commonly referred to as “two-tiered pricing,” and affects our European operations. Two-tiered pricing not only results in increased competition from mass merchant retailers in those countries and

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trading blocs, it also creates increased competition with video rental outlets that operate in violation of the two-tiered pricing contractual limitations by renting product purchased at the lower retail price. The potential impact of studio pricing decisions is discussed under “Item 1A. Risk Factors.” The international home video industry also faces high levels of piracy. Although piracy is also a concern in the United States, it is having a more significant adverse affect on the rental and retail video industry in international markets. Piracy is discussed further below under “Competition” and “Item 1A. Risk Factors.”

Competition

We operate in a highly competitive environment. We believe our most significant competition comes from (i) retailers that rent, sell or trade movies and games; (ii) providers of direct delivery home viewing entertainment or other alternative delivery methods of entertainment content; (iii) piracy; and (iv) other forms of leisure entertainment. In addition, many consumers maintain relationships with several different in-home entertainment providers and can shift in-home entertainment spending from one provider to another.

Competition with Retailers that Rent, Sell or Trade Movies and Games. These retailers include, among others:

• mass merchant retailers, such as Wal-Mart, Best Buy and Target;

• local, regional and national video and game stores, such as GameStop and Movie Gallery;

• Internet sites and companies that rent or sell movies and other entertainment content, such as Netflix;

• toy and entertainment retailers; and

• supermarkets, pharmacies, convenience stores and fast food restaurants, including the kiosks operated by Redbox.

We believe that the principal factors we face in competing with retailers that rent, sell or trade movies and games are:

• consumer preference between purchasing and renting movies and games;

• alternative product distribution channels and the perceived convenience and ease of use of such alternative channels to the customer;

• pricing;

• convenience and visibility of store locations;

• quality, quantity and variety of titles in the desired format;

• customer service; and

• value-added services, such as movie search capabilities, ratings and recommendations and community features.

In particular, while the studios’ promotion of movies for simultaneous sale and rental has served to lower the wholesale cost of movies to us, it has also resulted in increased competition from mass merchant retailers, as discussed under “Item 1A. Risk Factors.”

Competition with Providers of Direct Delivery Home Viewing Entertainment or Other Alternative Delivery Methods of Entertainment Content. We believe that competitive risks to our business include direct broadcast satellite, digital cable television, high-speed Internet access, TIVO/DVR and other alternatives for delivering videos and entertainment content to consumers. These providers offer an expanded number of conventional channels and expanded programming, including sporting events, through these services. Direct broadcast satellite, digital cable and “traditional” cable providers not only offer numerous channels of

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conventional television, they also offer pay-per-view movies, which permit a subscriber to pay a fee to see a selected movie, and other specialized movie services. Many digital cable providers, Internet content providers and other companies also provide “video-on-demand,” which transmits movies and other entertainment content on demand with interactive capabilities such as start, stop and rewind. In addition, some cable providers allow a subscriber to purchase a DVD movie and watch it over the cable system while the DVD is shipped to the subscriber.

The availability and ease of downloading movies over the Internet continues to grow. Apple’s video iTunes service, Amazon’s Unbox and announcements from other companies ranging from Netflix to Intel regarding their efforts in digital delivery of content signal future growth of video entertainment delivery. Other examples of alternative delivery methods of entertainment content include personal video recorders, download-to-burn DVDs, video vending machines, download-to-burn kiosks, movie downloads to portable devices and disposable DVDs.

Any consolidation or vertical integration of media companies to include both content providers and digital distributors could pose additional competitive risk to our business. Risks associated with this competition are discussed further under “Item 1A. Risk Factors.”

Piracy. We compete against the illegal copying and sale of movies and video games. Because piracy is an illegal activity, it is difficult to quantify its exact impact on the home video industry. The primary methods of piracy affecting the home video industry are:

• the illegal copying of theatrical films at the time they are first run;

• the illegal copying of DVDs that are authorized by the studios solely for retail sale and/or rental by authorized retailers; and

• the illegal online downloading of movies.

These methods of piracy enable the low-cost sale of DVDs and free viewing and sharing of DVDs, both of which compete with rentals and sales by authorized retailers like us. Competition from piracy has increased in recent years, in particular in our international markets, due in part to developments in technology that allow for faster copying and downloading of DVDs. Piracy has had a lesser effect on the video game industry in the United States, but has been a significant hindrance to the development of the home video game industry in many international markets, particularly in Latin America and Asia.

Other Competition. We also compete generally for the consumer’s entertainment dollar and leisure time with, among others:

• movie theaters;

• Internet browsing, online gaming and other Internet-related activities;

• consumers’ existing personal movie libraries;

• live theater;

• sporting events; and

• music entertainment.

These and other competitive pressures may have a material adverse effect on our business.

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OUR OPERATIONS

Stores and Store Operations

Store Operations. Our U.S. company-operated stores generally operate under relatively similar hours of operation. Domestic stores are generally open 365 days a year, with daily hours from approximately 10:00 a.m. to 10:00 p.m. and closing later on weekends. We continually assess our store hours on a store by store basis in order to maximize profitability. The hours of operation for franchised stores will vary depending on the franchisee, but generally, franchisees follow the store hours of our company-operated stores. Our U.S. company-operated stores each employ an average of 10 people, including one store manager. Staffing for franchised stores will vary and is the sole responsibility of our franchisees. International store operations vary by country.

Portfolio Management. Within each targeted market, we identify potential sites for new and replacement stores by evaluating market dynamics, some of which include population demographics, customer concentration levels and possible competitive factors. We seek to place stores in locations that are convenient and visible to the public. We also seek to locate our stores in geographic areas with population and customer concentrations that enable us to better allocate available resources and manage operating efficiencies in inventory management, advertising, marketing, distribution, training and store supervision. We use our extensive membership transaction and real estate databases to monitor market conditions, select strategic store locations and attempt to maximize revenues without significantly decreasing the revenues of our nearby stores. We also periodically examine whether the sizes and formats of our existing stores are optimal for their locations and may adjust the sizes of, relocate or close existing stores as conditions require.

As a result of the declining revenues and anticipated consolidation in the in-store rental industry, during 2007 and to a lesser extent in 2008, we reviewed many of our store leases and selected a number of sites to close or downsize based on various factors, including proximity to other Blockbuster and competitor locations and profitability. We have also selected a number of locations based upon certain operational and financial criteria and are engaging landlords for those locations in negotiations regarding reduced monthly lease payments, in some instances in exchange for longer lease term commitments. We cannot now determine to what extent our efforts will be successful. Additionally, we anticipate closing or divesting of a comparable number of domestic store locations during 2009 as in 2008. During 2008, we also sold our Chilean subsidiary, coupled with a license agreement. We will continue to explore the divestiture of our non-core assets, including selling and/or franchising some of our remaining international operations.

The following table sets forth our store count information for both company-operated and franchised stores, domestic and international, during 2008:

	Company-Operated						Franchised						Total
	U.S.		Int’l.		Total		U.S.		Int’l.		Total		U.S.		Int’l.		Total
January 6, 2008	4,005		2,068		6,073		850		907		1,757		4,855		2,975		7,830
Opened	5		21		26		2		6		8		7		27		34
Closed	(167	)	(90	)	(257	)	(110	)	(92	)	(202	)	(277	)	(182	)	(459	)
Purchased/(sold)(1)	35		(71	)	(36	)	(35	)	71		36		0		0		0
Net additions/(closures)	(127	)	(140	)	(267	)	(143	)	(15	)	(158	)	(270	)	(155	)	(425	)
January 4, 2009	3,878		1,928		5,806		707		892		1,599		4,585		2,820		7,405

(1) In 2008, we acquired 35 stores from franchisees in our domestic markets, and refranchised or licensed 71 stores in our international markets.

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Store Locations. At January 4, 2009, in the United States and its territories, we operated 3,878 stores and our franchisees operated 707 stores. The following table sets forth, by state or territory, the number of domestic stores operated by us and our franchisees as of January 4, 2009.

STATE OR TERRITORY	Company- Operated	Franchised	Total
Alaska	—	16	16
Alabama	35	22	57
Arkansas	—	17	17
Arizona	122	5	127
California	504	23	527
Colorado	98	4	102
Connecticut	39	20	59
District of Columbia.	4	—	4
Delaware	7	8	15
Florida	325	53	378
Georgia	153	—	153
Guam.	2	—	2
Hawaii	22	—	22
Iowa	22	1	23
Idaho	1	8	9
Illinois	190	3	193
Indiana	67	31	98
Kansas	18	35	53
Kentucky	37	29	66
Louisiana	66	12	78
Massachusetts	72	17	89
Maryland	77	22	99
Maine	6	—	6
Michigan	139	1	140
Minnesota	49	8	57
Missouri	79	13	92
Mississippi	12	23	35
Montana	—	4	4
North Carolina	129	1	130
North Dakota	—	6	6
Nebraska	24	2	26
New Hampshire	19	—	19
New Jersey	115	20	135
New Mexico	—	18	18
Nevada	41	2	43
New York	193	8	201
Ohio	151	1	152
Oklahoma	60	5	65
Oregon	67	14	81
Pennsylvania	155	6	161
Puerto Rico	—	24	24
Rhode Island	12	6	18
South Carolina	71	2	73
South Dakota	—	9	9
Tennessee	42	54	96
Texas.	314	108	422
Utah	43	2	45
Virginia	100	22	122
Virgin Islands	—	2	2
Vermont	8	—	8
Washington	113	2	115
Wisconsin	63	3	66
West Virginia	12	6	18
Wyoming	—	9	9
Domestic Store Totals	3,878	707	4,585

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At January 4, 2009, we operated 1,928 stores outside of the United States, including game store-in-store concepts operating under the name GAME RUSH in Canada and Denmark and 13 specialty game stand-alone stores operating under the name GAME RUSH in Italy and Mexico. In addition, our franchisees operated 892 stores outside of the United States. The following table sets forth, by country, the number of stores operated by us and by our franchisees as of January 4, 2009.

	Company- Operated	Franchised	Total
Argentina	70	—	70
Australia	—	333	333
Brazil	—	175	175
Canada	459	—	459
Chile	—	69	69
Colombia	—	22	22
Denmark	70	—	70
Great Britain	663	—	663
Guatemala	—	5	5
Ireland (Republic) and Northern Ireland	186	—	186
Israel	—	10	10
Italy	157	55	212
Mexico	320	4	324
New Zealand	—	30	30
Panama	—	15	15
Portugal	—	19	19
Taiwan	—	132	132
Thailand	—	3	3
Uruguay	3	—	3
Venezuela	—	20	20
International Store Totals	1,928	892	2,820
United States	3,878	707	4,585
Domestic and International Store Totals	5,806	1,599	7,405

Franchised Operations

At January 4, 2009, 166 domestic franchisee entities operated 707 stores in the United States and 278 international franchisee entities operated 892 stores outside of the United States. Our $5.3 billion in revenues during fiscal 2008 does not include the actual revenues of our franchisees, as we only record royalty and fee revenues generated from our franchised operations. Under our current U.S. franchising program, we enter into a development agreement and subsequent franchise agreement(s) with the franchisee. Pursuant to the terms of a typical development agreement, we grant the franchisee the right to develop one or a specified number of stores at a permitted location or locations within a defined geographic area and within a specified time. We generally charge the franchisee a development fee at the time of execution of the development agreement for each store to be developed during the term of the development agreement. A development agreement is not, however, typically entered into when a franchisee acquires an existing store from us or another franchisee. The typical franchise agreement is a long-term agreement that governs, among other things, the operations of the store to protect our brand. We generally require the franchisee to pay us a one-time franchise fee and continuing royalty fees, service fees and monthly payments for, among other things, maintenance of our proprietary software. In addition, from time to time we provide optional programs and product and support services to our franchisees for which we occasionally receive fees. We also require our franchisees to contribute funds for national advertising and marketing programs and require that franchisees spend an additional amount for local advertising or other marketing efforts. The amounts our franchisees are required to contribute for national advertising and marketing

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efforts may change from time to time in order to allow our franchisees to invest in their business. Our international franchising program is similar in many ways to our domestic franchising program. For example, our international franchisees are generally required to pay us a one-time franchise fee and continuing royalty fees and service fees.

Our franchisees have control over all operating and pricing decisions at their respective locations. For example, our franchisees have control over whether to charge extended viewing fees and the specific rental terms underlying any elimination of extended viewing fees and over whether or not to participate in the BLOCKBUSTER Total Access program. This has resulted in variations of rental terms, selling terms and restocking fees between company-operated and franchised BLOCKBUSTER stores, as well as variations in these terms among franchised BLOCKBUSTER stores. As of January 4, 2009, 112 of our franchise stores in the United States were participating in the “no late fees” program. Many of our franchisees chose not to eliminate extended viewing fees or have returned to charging extended viewing fees due to the fact that they operate under a different business model than we do, whereby they are not able, or choose not, to purchase the additional product to support the “no late fees” program. As of January 4, 2009, substantially all of our franchisees in the United States were participating in the BLOCKBUSTER Total Access program. We also do not require our franchisees to purchase inventory from us. A franchisee has sole responsibility for all financial commitments relating to the development, opening and operation of its stores, including rent, utilities, payroll and other capital and incidental expenses. We cannot offer assurances that our franchisees will be able to achieve profitability levels in their businesses sufficient to pay our franchise fees, as discussed in more detail below under “Item 1A. Risk Factors—Our results of operations could be materially adversely affected if our franchisees failed to pay our franchise fees.” Furthermore, we cannot offer assurances that we will be successful in marketing and selling new franchises, that we will continue to actively pursue new franchisees or that any new franchisees will be able to obtain desirable locations and acceptable leases. Finally, we cannot predict the impact that our franchisees’ decisions with respect to product depth and pricing may have on our overall business results.

Alternative Delivery Method Operations

In addition to our traditional stores, we also offer consumers access to home video entertainment via mail and digital downloading.

By-mail. The BLOCKBUSTER by-mail program allows subscribers to select DVDs online which are then shipped to them free of charge by U.S. mail. Once a subscriber has finished viewing the DVD, the subscriber may return the DVD via mail using the postage prepaid envelope that accompanied the DVD or at a participating BLOCKBUSTER store. BLOCKBUSTER Total Access takes the concept of convenient DVDs by mail a step further and gives online subscribers the option of exchanging their DVDs through the mail or at a nearby participating BLOCKBUSTER store. There are no due dates for DVDs shipped via these online programs.

Digital Downloading. In 2007 we acquired all of the outstanding equity interests of Movielink, LLC, an online movie downloading business. Movielink lets customers download movies, television shows and other popular videos for rental or purchase. The customers can then watch the downloaded programs on their computer, television or portable electronic device. Downloaded videos that are rented may be stored for up to 30 days after the customer checks out and then watched as many times as desired during a 24-hour viewing period that commences when “Play Movie” is clicked. Movielink does not charge any subscription, membership or late fees. Downloaded videos that are purchased can be viewed on up to three personal computers and one portable device. As of December 16, 2008, the Movielink website was discontinued and its content was incorporated into blockbuster.com, where it became available to our customers, including former Movielink customers.

Marketing and Advertising

We design our marketing and advertising campaigns in order to maximize opportunities in the marketplace and thereby increase the return on our marketing and advertising expenditures. We obtain information from our

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membership transaction database, our real estate database and outside research agencies to formulate and adjust our marketing and advertising campaigns based on:

• membership behavior and transaction trends;

• consumer needs and attitudes;

• our market share in the relevant market;

• our financial position;

• our evaluation of industry trends;

• local demographics; and

• other competitive issues.

This enables us to focus our resources in areas that we believe will generate the best return on our investment.

During 2008, we focused on offering programs that are an alternative to the programs offered by mass merchant retailers and other online subscription service providers. We continued a tent-pole title strategy in the stores with both a rent and buy message and also continued to offer our in-store movie and game subscription services—Total Access In-Store and the BLOCKBUSTER Game Pass^®—and our BLOCKBUSTER Rewards^® program. Each of these is discussed below.

• BLOCKBUSTER Total Access. Online subscribers have the option of exchanging their DVDs through the mail or returning them to a nearby BLOCKBUSTER store in exchange for free in-store movie rentals. We offer various priced plans with associated in-store exchange quantity offerings.

• Tent-Pole Title Program. This in-store program is a major focus bringing customers more copies of big box office titles to rent or to buy and is supported with a significant marketing message in the store and in our customer relations management program.

• BLOCKBUSTER In-Store Total Access and BLOCKBUSTER Game Pass. These in-store programs allow customers to watch or play an unlimited amount of movies or games (the number of movies or games allowed out at a time is dependent on the pass the customer selects) for one monthly price and keep them for whatever period of time that they desire during the term of the pass, subject to certain limitations.

• BLOCKBUSTER Rewards. This premium in-store membership program is designed to offer benefits to our customers and enhance customer loyalty by encouraging our customers to rent movies and games only from our stores.

In 2008, we sponsored the Indiana Jones-themed car Marco Andretti drove in the Indianapolis 500 race. Andretti’s show car was featured at local community events at selected BLOCKBUSTER stores across the U.S. before hitting the track at the Indy 500 on May 25, 2008. The sponsorship and show car tour were both part of a unique program that brought Indiana Jones into Blockbuster stores nationwide through an in-store merchandising program that includes exclusive Indiana Jones and merchandise available for sale to the public only at our stores.

Our advertising efforts in 2008 were partially limited by our focus on our cash conservation strategy. We focused advertising efforts on the in-store marketing of our tent-pole title strategy, growing the games software and hardware category, new product line introductions and traffic-driving promotions. The studios generally spend a significant amount on advertising to promote new DVD releases, from which we benefit. We anticipate that the studios will continue this spending in 2009. In addition, some of our business alliances, including some of those with the studios, allow us to direct a portion of their home video advertising expenditures. For example, we often receive cooperative advertising funds from the studios that might be used for direct mail or point-of-purchase advertising. We expect to continue our cash conservation strategy in 2009, which will maintain current advertising limitations, and may require additional limitations on advertising commitments.

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Suppliers and Purchasing Arrangements

Our goal in purchasing domestic rental inventory is to design purchasing strategies with each individual studio or game publisher that will provide us with the most appropriate level of copy depth at the best available price in order to satisfy our customers’ demands and, eventually, to increase our customer traffic. In some instances, those deals involve our purchasing rental inventory on a title-by-title basis. In other instances, we may negotiate a revenue-sharing arrangement. Revenue-sharing arrangements for rental inventory generally provide for a lower initial payment in order to acquire the product. In exchange for this lower initial payment, these contracts include minimum purchase requirements that are based upon box office results of the title. In addition, we pay an agreed upon percentage of our rental revenues earned from that product to the studio/game vendor for a limited period of time. These revenue-sharing payments become due as the rental revenues are earned. In addition to the revenue-sharing component, most arrangements also provide for the method of disposition of the product at the conclusion of the rental cycle and/or additional payments for the early sale of unreturned product which is automatically purchased by the customer. A majority of our revenue sharing agreements require product to be destroyed at the conclusion of the initial rental cycle instead of converting the product to previously rented product (“PRP”), as is our practice under traditional purchase arrangements. This shortening of the rental life cycle negatively impacts our PRP revenues. While the terms of revenue-sharing arrangements are generally similar for rental movie and game software inventory, revenue-sharing arrangements for domestic rental movies are generally negotiated for all titles released during the term of the contract, while revenue-sharing arrangements for rental game software are generally negotiated on a title-by-title basis.

Our unit purchases of domestic movie rental inventory increased 13% in 2008 as compared with 2007 in order to maximize our product availability with the goal of improving our domestic movie rental revenues through improving customer satisfaction. We continued to utilize revenue-sharing arrangements during 2008 to support the increase in inventory unit purchases. Purchases under revenue sharing arrangements made up 85% of our total domestic movie rental unit purchases in 2008, versus 82% in 2007. The number of domestic game software rental inventory units purchased under revenue-sharing arrangements increased from 58% in 2007 to 65% in 2008.

In our international markets, 54% of our movie and game rental inventory units are purchased on a title-by-title basis directly from the studios or through sub-wholesalers appointed by the studios to distribute the studios’ product in particular countries. The remainder of our international rental product is purchased under revenue-sharing arrangements similar to those discussed above. Our purchasing arrangements vary by country and studio depending on factors such as the availability of the rental window and revenue-sharing terms.

New retail movie and game inventory is purchased from the studios or their designated sub-wholesalers on a title-by-title basis. We also acquire retail movie and game inventory through our trading programs. We purchase general merchandise that is complementary to our rental and retail movie and video game inventory, such as confection, game and other accessories and consumer electronics, from a variety of suppliers on a product-by-product basis.

We require each franchisee to comply with basic guidelines that set forth the minimum amount and selection of movies to be kept in its store inventory. Franchisees typically obtain movies from their own suppliers and are also responsible for obtaining some of the other complementary products from their own suppliers. However, if we have purchased the distribution rights to a movie or if a franchisee participates with us under our revenue-sharing arrangements, the franchisee may obtain the applicable product from us.

Distribution and Inventory Management

In the United States, we currently receive substantially all of our movies and games for our U.S. company-operated stores at our 850,000 square foot distribution center in McKinney, Texas. The distribution center is a highly automated, centralized facility that we use to mechanically repackage newly-released movies to make

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them suitable for rental at our stores. We also use our distribution center to restock products and process returns, as well as to provide some office space. We use a network of third-party delivery agents for delivery of products to our U.S. stores. We ship our products to these delivery agents, located strategically throughout the United States, which in turn deliver them to our stores. The distribution center supports substantially all of our company-operated stores in the United States and operates 24 hours a day, six days a week. As of January 4, 2009, we employed 973 employees at our distribution center. We are currently evaluating various alternatives to optimize our distribution network, including the potential outsourcing of these distribution center operations.

In addition to our distribution center in McKinney, we also have 38 distribution centers spread strategically throughout the United States to support our by-mail subscription service. These distribution centers are spread across the country because we use the United States Postal Service to distribute our online product, and the closer the distribution center is to a customer, the faster our customers receive the product and the faster it is made available for rental again once our customers mail them back. Additionally, to expedite the delivery of product to our by-mail customers, we currently transport product from our 38 distribution centers to a total of 85 different mail entry points, which enables us to reach over 90% of our online subscriber base within one business day. Each distribution center operates 16 hours a day, 5 days a week and employs approximately 15 people, including one distribution center manager.

Franchisees generally obtain their products directly from third-party suppliers, except for their point-of-sale systems’ hardware and software, some accessories and supplies, movies for which we have exclusive distribution rights and movies for franchisees that participate in our franchisee revenue-sharing programs, which domestic franchisees receive from our distribution center. We have negotiated new agreements with the studios that allow us to consolidate our purchases for our online business with those of our stores.

In our international markets, our stores generally receive rental product directly from the studios or sub-wholesalers. Retail product is generally distributed through a central warehouse for the market or through a third-party distributor.

Management Information Systems

We believe that the accurate and efficient management of purchasing, inventory and sales records is important to our future success. We maintain information, updated daily, regarding revenues, current and historical sales and rental activity, demographics of store customers and rental patterns. This information can be organized by store, market, region, state, country or for all operations.

All of our Blockbuster branded company-operated stores use our point-of-sale system. Our national point-of-sale system in the United States is linked with a data center located in our distribution center. The point-of-sale system tracks all of our products distributed from the distribution center to each U.S. store using scanned bar code information. All domestic rental and sales transactions are recorded by the point-of-sale system when scanned at the time of customer checkout. At the end of each day, the point-of-sale system transmits store data from operations to the data center and the membership transaction database.

Our online services use internally developed software that focus on optimizing our online supply chain to ensure timely delivery of products and providing a user-friendly website experience. These systems transmit data to a data center and other systems which support, among other things, content delivery, customer web analytics and offer management.

During 2008 we completed several information technology initiatives to stabilize our current infrastructure and enhance the customer experience. We outsourced our application development and maintenance as a means of stabilizing our existing application infrastructure while providing the flexibility to take on new initiatives. Additionally, we developed a new Store System Foundation that supports the legacy applications while enabling new functionality to be built on the new platform. We also created an enterprise payment platform and deployed

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it to blockbuster.com. It will be deployed to Blockbuster retail stores in 2009. Another major initiative improved the customer experience on blockbuster.com by implementing better site navigation and providing easy access to account activity for BLOCKBUSTER Total Access subscribers.

In addition to improving the customer experience on blockbuster.com, the site was modified to enable a wider selection of retail transactions. Customers are able to purchase DVDs, games, gift subscriptions, gift cards, and movie downloads on blockbuster.com.

Regulation

Domestic Regulation

We are subject to various federal, state and local laws that govern the access to and use of our video stores by disabled customers and the disclosure, retention and security of customer records and information, including laws pertaining to the use of our membership transaction database. We also must comply with various regulations affecting our business, including federal, state or local securities, advertising, consumer protection, credit protection, franchising, licensing, zoning, land use, construction, second-hand dealer, environmental, health and safety, minimum wage, labor and employment, trading activities and other regulations.

We are also subject to the Federal Trade Commission’s Trade Regulation Rule entitled “Disclosure Requirements and Prohibitions Concerning Franchising and Business Opportunity Ventures” and state laws and regulations that govern the offer and sale of franchises and franchise relationships. If we want to offer and sell a franchise, we are required to furnish to each prospective franchisee a current franchise disclosure document prior to the offer or sale of a franchise. In addition, a number of states require us to comply with registration or filing requirements prior to offering or selling a franchise in the state and to provide a prospective franchisee with a current franchise disclosure document complying with the state’s laws, prior to the offer or sale of the franchise. We intend to maintain a franchise disclosure document that complies with all applicable federal and state franchise sales and other applicable laws. However, if we are unable to comply with federal franchise sales and disclosure laws and regulations, we will be unable to offer and sell franchises anywhere in the United States. In addition, if we are unable to comply with the franchise sales and disclosure laws and regulations of any state that regulates the offer and sale of franchises, we will be unable to offer and sell franchises in that state.

We are also subject to a number of state laws and regulations that regulate some substantive aspects of the franchisor-franchisee relationship, including:

• those governing the termination or non-renewal of a franchise agreement, such as requirements that:

(a) “good cause” exist as a basis for such termination; and

(b) a franchisee be given advance notice of, and a right to cure, a default prior to termination;

• requirements that the franchisor deal with its franchisees in good faith;

• prohibitions against interference with the right of free association among franchisees; and

• those regulating discrimination among franchisees in charges, royalties or fees.

International Regulation

We are subject to various international laws that govern the disclosure, retention and security of customer records and information. For example, the laws pertaining to the use of our membership transaction database in some markets outside of the United States are more restrictive than the relevant laws in the United States and may restrict data flow across international borders.

We must also comply with various other international regulations affecting our business, including advertising, consumer protection, access to and use of our video stores by disabled customers, credit protection,

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film and game classification, franchising, licensing, zoning, land use, construction, second-hand dealer, environmental, health and safety, minimum wage and other labor and employment regulations. Some foreign countries have copyright and other intellectual property laws that differ from the laws of the United States. These laws may prevent or limit certain types of business activity in the affected markets.

Similar to the United States, some foreign countries have franchise registration and disclosure laws affecting the offer and sale of franchises within their borders and to their citizens. They are often not as extensive and onerous as U.S. laws and regulations. However, as in the United States, failure to comply with such laws could limit or preclude our ability to expand in those countries through franchising or could affect the enforceability of franchise agreements.

Compliance with any of the domestic or international regulations discussed above is costly and time-consuming, and we may encounter difficulties, delays or significant costs in connection with such compliance.

Historical Information

Our business and operations were previously conducted by Blockbuster Entertainment Corporation, which was incorporated in Delaware in 1982 and entered the movie rental business in 1985. Blockbuster Inc., formerly an indirect subsidiary of Viacom Inc. (“Viacom”), was incorporated under a different name on October 16, 1989 in Delaware. On September 29, 1994, Blockbuster Entertainment Corporation was merged with and into Viacom. Subsequent to the merger, our business and operations were conducted by various indirect subsidiaries of Viacom. Over the year and a half prior to our initial public offering in August 1999, our business and operations were either (1) merged into Blockbuster Inc. or (2) purchased by Blockbuster Inc. and/or one of its subsidiaries. In October 2004, Blockbuster Inc. split off from Viacom and became a fully independent company.

Intellectual Property

Trademarks. We own various existing trademark registrations and have trademark applications pending registration with respect to our services and products offered worldwide. These include BLOCKBUSTER^®, BLOCKBUSTER VIDEO^®, TORN TICKET Logos, blockbuster.com^®, BLOCKBUSTER Total Access^™ word mark and logo, BLOCKBUSTER GiftCard/s^®, BLOCKBUSTER Game Pass^® and BLOCKBUSTER Movie Pass^® word marks and logos, BLOCKBUSTER Night^®, BLOCKBUSTER Online^®, BLOCKBUSTER Rewards^® word mark and logo, MAKE IT A BLOCKBUSTER NIGHT^®, and the related BLOCKBUSTER Family of Marks, GAME RUSH^® word mark and logo, MyQ Logo^®, MyQ At A Glance Logo^®, MOVIE STORE AT YOUR DOOR^®, ONLINE RENTING WITHOUT THE WAIT^™, RENTING IS BETTER THAN EVER^®, THE GIFT OF ENTERTAINMENT^®, QUIK DROP^®, MOVIECLIQUE^™, MOVIELINK^® word mark and logo, and XTRA-VISION^®, among others, and trade dress elements including, but not limited to, the blue and yellow awning outside our stores. In addition, we own the domain name registration for “blockbuster.com” and the related BLOCKBUSTER “Family of Domain Names” for top level and country domain names, plus a wide variety of other domain name registrations worldwide. We consider our intellectual property rights to be among our most valuable assets.

Copyrights. In addition to our own intellectual property rights, the scope of the rights of those who own copyrights in the products we rent also are of importance to us. The copyright “first sale” doctrine provides that, in the United States, the owner of a legitimate copy of a copyrighted work may, without the consent of the copyright owner, sell, rent or otherwise transfer possession of that copy. The first sale doctrine does not apply to sound recordings or computer software (other than software made for a limited purpose computer, such as a video game platform) for which the U.S. Copyright Act vests the right to control the rental of the copy in the copyright holder. The first sale doctrine does not exist in most countries outside of the United States where the copyright owner retains the rental rights to a copyrighted work. In these countries, home video retailers must obtain the right to rent videos to consumers through a licensing arrangement or a “purchase-with-the-right-to-rent” arrangement. Studios may charge these home video retailers more for product purchased for rental than product purchased solely for

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sale to consumers. This is commonly referred to as “two-tiered pricing” and is discussed further above under “Industry Overview—International Home Video Industry—In-Home Movies.” The potential impact of studio pricing decisions in countries where two-tiered pricing is allowed is discussed under “Item 1A. Risk Factors—Risks Relating to Our Business Operations.” The risk of changes in U.S. and international copyright laws is discussed under “Item 1A. Risk Factors—Other Business Risks.”

Seasonality

Historically, there has been a distinct seasonal pattern to the home movie and video games business, with slower business in April and May, due in part to improved weather and Daylight Saving Time, and in September and October, due in part to the start of school and the introduction of new television programs. The months of November and December have also historically been our highest revenue months. While we expect these months to continue to make the largest contributions to our rental revenues, we believe the strength of rental revenues in these months has been and will continue to be negatively affected, to some degree, by consumers purchasing DVDs during the holiday season. Additionally, while we have diversified our product offerings in an effort to partially mitigate the impact of seasonality and weather conditions on our business, they are expected to continue to impact our business and our period-to-period financial results in the future. While we believe the current worldwide economic downturn will impact our future operational trends, we cannot predict the timing or extent to which this will occur.

Employees

As of January 4, 2009, we employed 58,561 persons, including 40,107 within the United States and 18,454 outside of the United States. Of the total number of U.S. employees, 11,700 were full-time, 26,732 were part-time and 1,675 were seasonal employees. We believe that our employee relations are good.

Directors and Executive Officers of the Registrant

The following information regarding our directors and executive officers is as of February 27, 2009.

Name	Age	Position
James W. Keyes	53	Chairman of the Board of Directors and Chief Executive Officer
Edward Bleier	79	Director
Robert A. Bowman	53	Director
Jackie M. Clegg	46	Director
James W. Crystal	71	Director
Gary J. Fernandes	65	Director
Jules Haimovitz	58	Director
Carl C. Icahn	73	Director
Strauss Zelnick	51	Director
Thomas M. Casey	50	Executive Vice President and Chief Financial Officer
Eric H. Peterson	48	Executive Vice President, General Counsel and Secretary

Set forth below is a description of the background of each of our directors and executive officers.

James W. Keyes has served as our Chairman of the Board of Directors and Chief Executive Officer since July 2007. Mr. Keyes served as President and Chief Executive Officer of 7-Eleven, Inc. from 2000 to 2005. Prior to his service as President and Chief Executive Officer, he was Executive Vice President and Chief Operating Officer of 7-Eleven, Inc. from 1998 to 2000 and Chief Financial Officer of 7-Eleven, Inc. from 1996 to 1998. Since his departure from 7-Eleven, Inc., Mr. Keyes has been Chairman of Key Development, LLC, a private investment firm.

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Edward Bleier was elected as a director of Blockbuster in May 2005. Mr. Bleier was with Warner Bros. Entertainment Inc., New York, New York, from October 1969 to January 2005, where he served, partly, as President of Domestic Pay-TV, Cable and Networks Features, encompassing feature films, TV programming, animation, network sales, video-on-demand and consumer marketing. Mr. Bleier is a member of the board of directors of RealNetworks, Inc. and CKX, Inc. He is also Chairman Emeritus of the Center for Communication and the Academy of the Arts Guild Hall, serves as a trustee of the Charles A. Dana Foundation and The Bleier Center for Television and Popular Culture at Syracuse University and is a member of the Council on Foreign Relations.

Robert A. Bowman was appointed as a director of Blockbuster in December 2004. He has served as President and CEO of Major League Baseball Advanced Media LP, the interactive media and Internet company of Major League Baseball, since 2000. Mr. Bowman serves as President of the Michigan Education Trust and is a member of the board of directors of World Wrestling Entertainment Inc., The Warnaco Group Inc. and Take-Two Interactive Software, Inc.

Jackie M. Clegg was appointed as a director of Blockbuster in July 2003. She serves as Managing Partner of Clegg International Consultants, LLC, an international strategic consulting firm she founded in September 2001. In July 2001, Ms. Clegg stepped down as Vice Chairman and First Vice President of the Export-Import Bank of the United States, financier to foreign buyers of U.S. goods and services, after serving in that role since June 1997. She also served as its Chief Operating Officer from January 1999 through fiscal year 2000. Ms. Clegg also serves on the board of directors and audit committees of Brookdale Senior Living Inc., Cardiome Pharma Corp. and Javelin Pharmaceuticals Inc. (chair). In accordance with the listing standards of the NYSE, Blockbuster’s Board of Directors has determined that Ms. Clegg’s simultaneous service on Blockbuster’s Audit Committee and on the audit committees of the foregoing public companies does not impair Ms. Clegg’s ability to effectively serve on Blockbuster’s Audit Committee. Ms. Clegg also serves on the board of directors of the Chicago Mercantile Exchange.

James W. Crystal was appointed as a director of Blockbuster in February 2007. Mr. Crystal currently serves as Chairman and Chief Executive Officer of Frank Crystal & Company, a privately owned insurance brokerage firm, and has served in such capacities since 1958. Mr. Crystal also serves as Vice Chairman, trustee and member of the executive committee and Co-Chairman of the audit committee of Mt. Sinai Medical Center as well as a trustee of Congregation Emanu-El. In addition, he serves on the board of directors of Stewart & Stevenson LLC, a publicly traded company where he also serves on the audit committee, Banco de Caribe, ENNIA Caribe Holding, N.V., Auto Resources, Inc. and Atlantic International Insurance Co., Ltd.

Gary J. Fernandes was appointed as a director of Blockbuster in December 2004. He has served as Chairman of FLF Investments, a family business involved with the acquisition and management of commercial real estate properties and other assets, since 1999. Since his retirement as Vice Chairman from Electronic Data Systems Corporation in 1998, he founded Convergent Partners, a venture capital fund focusing on buyouts of technology enabled companies. In addition, from 2000 to 2001, Mr. Fernandes served as Chairman and CEO of GroceryWorks.com, an internet grocery fulfillment company. In November 1998, he founded Voyagers The Travel Store Holdings, Inc., a chain of travel agencies, and was President and sole shareholder of Voyagers. Mr. Fernandes serves on the board of directors of BancTec, Inc. and Computer Associates International, Inc. He is also a member of the board of governors of the Boys & Girls Clubs of America and serves as a trustee for the O’Hara Trust and the Hall-Voyer Foundation.

Jules Haimovitz was appointed as a director of Blockbuster in May 2006. Mr. Haimovitz currently serves as President of Haimovitz Consulting Group. From 2002 to 2007, Mr. Haimovitz served as Vice Chairman and Managing Partner of Dick Clark Productions Inc., a producer of programming for television, cable networks and syndicators. From June 1999 to July 2004, Mr. Haimovitz served in various capacities at Metro Goldwyn Mayer Inc., including President of MGM Networks Inc., a wholly-owned subsidiary, Executive Consultant to the CEO, and Chair of the Library Task Force. From July 1997 to February 1999, he served as President and Chief Operating Officer of King World Productions, Inc., a worldwide distributor of first-run programming. Mr. Haimovitz has also

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served in executive positions at Diva Systems Corporation, ITC Entertainment Group, Spelling Entertainment Inc. and Viacom Inc. Mr. Haimovitz is on the board of directors of Infospace, Inc., a publicly traded company, TVN Entertainment Corporation, GNet Productions and ImClone Systems, Inc., a publicly traded company. Mr. Haimovitz serves on the audit committee of Infospace, Inc. and ImClone Systems, Inc.

Carl C. Icahn was elected as a director of Blockbuster in May 2005. Mr. Icahn has served as Chairman of the Board and a director of Starfire Holding Corporation and Chairman of the Board and a director of various subsidiaries of Starfire, since 1984. Since August 2007, through his position as Chief Executive Officer of Icahn Capital LP, a wholly-owned subsidiary of Icahn Enterprises L.P., and certain related entities, Mr. Icahn’s principal occupation is managing private investment funds, including Icahn Partners LP, Icahn Partners Master Fund LP, Icahn Partners Master Fund II LP, and Icahn Partners Master Fund III LP. Between September 2004 and August 2007, Mr. Icahn conducted this occupation through his entities CCI Onshore Corp. and CCI Offshore Corp. Since November 1990, Mr. Icahn has been chairman of the Board of Icahn Enterprises G.P., Inc., the general partner of Icahn Enterprises. Icahn Enterprises is a publicly traded diversified holding company engaged in a variety of businesses, including investment management, metals, real estate, and home fashion. Mr. Icahn was also Chairman of the Board and President of Icahn & Co., Inc., a registered broker-dealer and a member of the National Association of Securities Dealers, from 1968 to 2005. Since 1994, Mr. Icahn has been the principal beneficial stockholder of American Railcar Industries, Inc., currently a publicly-traded company that is primarily engaged in the business of manufacturing covered hopper and tank railcars, and has served as Chairman of the Board and as a director of American Railcar Industries, Inc. since 1994. Since November 1990, Mr. Icahn has been Chairman of the Board of American Property Investors, Inc., the general partner of American Real Estate Partners, L.P., a public limited partnership controlled by Mr. Icahn that invests in real estate and holds various other interests, including the interests in its subsidiaries that are engaged, among other things, in the casino entertainment business and the home textile business. From October 1998 through May 2004, Mr. Icahn was the President and a director of Stratosphere Corporation, which operates the Stratosphere Hotel and Casino in Las Vegas, which is currently a subsidiary of Icahn Enterprises. Mr. Icahn has been Chairman of the Board and a director of XO Holdings, Inc. since February 2006, and was Chairman of the Board and a director of XO Communications, Inc. (XO Holdings’ predecessor) from January 2003 to February 2006. XO Holdings is a publicly-traded telecommunications services provider controlled by Mr. Icahn. In October 2005, Mr. Icahn became a director of WestPoint International, Inc. a manufacturer of bed and bath home fashion products. In September 2006, Mr. Icahn became a director of ImClone Systems Incorporated, a publicly-traded biopharmaceutical company, and since October 2006, has been the Chairman of the Board of ImClone Systems Incorporated. In August 2007, Mr. Icahn became a director of WCI Communities, Inc., a publicly-traded homebuilding company, and since September 2007 has been Chairman of the Board of WCI Communities, Inc. In December 2007, Mr. Icahn became a director of Federal-Mogul Corporation., a publicly-traded supplier of automotive products, and since January 2008 has been Chairman of the Board of Federal-Mogul Corporation. Mr. Icahn has been a director of Cadus Corporation, a publicly-traded firm that holds various biotechnology patents, since 1993.

Strauss Zelnick was elected as a director of Blockbuster in May 2005. Mr. Zelnick founded ZelnickMedia LLC, an investment and advisory firm specializing in media and entertainment, in 2001. ZelnickMedia holds interests in an array of media enterprises, providing general management and strategic advisory services in the United States, Canada, Europe, Asia and Australia. Mr. Zelnick currently serves as Executive Chairman of Take-Two Interactive Software, Inc. From 1998 to 2000, Mr. Zelnick served as President and Chief Executive Officer of BMG Entertainment, Inc., a music and entertainment unit of Bertelsmann A.G. Mr. Zelnick served as President and Chief Executive Officer of BMG’s North American business unit from 1994 through 1998. Mr. Zelnick is Chairman of the Board of CME, Inc., OTX, Inc. and ITN Networks, Inc. Mr. Zelnick is a director of Naylor, LLC.

Thomas M. Casey has served as our Executive Vice President and Chief Financial Officer since September 2007. From 1999 until the commencement of his employment at Blockbuster, Mr. Casey served as managing director for Deutsche Bank Securities, Inc. where he was responsible for the bank’s retail industry relationships

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in North America and served as a strategic financial advisor to some of the world’s largest companies in the retail entertainment, food and drug, convenience store, food wholesale and foodservice industries. Prior to Deutsche Bank, Mr. Casey held positions with Citigroup, Merrill Lynch and Dillon Read & Co.

Eric H. Peterson has served as our Executive Vice President, General Counsel and Secretary since October 2007. Prior to his employment at Blockbuster, Mr. Peterson served as Executive Vice President and General Counsel for the former TXU Corp. from 2002 until 2006. From 2000 to 2002, Mr. Peterson served as Senior Vice President and General Counsel for DTE Energy Company, a Michigan-based energy company. Prior to his employment at DTE Energy, Mr. Peterson was a partner in the law firm of Worsham, Forsythe & Woolridge LLP (now known as Hunton & Williams).

Available Information, Investor Relations and Certifications

We file annual, quarterly and current reports, information statements and other information with the Securities and Exchange Commission (“SEC”). The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The address of that site is http://www.sec.gov.

The address of our Internet website is www.blockbuster.com, and the Investor Relations section of Blockbuster’s website may be accessed directly at http://investor.blockbuster.com. Through links on the Investor Relations portion of our website, we make available free of charge our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended. Such material is made available through our website as soon as reasonably practicable after we electronically file the material with, or furnish it to, the SEC. The information contained on our website does not constitute part of this annual report on Form 10-K.

Stock Transfer Agency

American Stock Transfer & Trust Company, LLC

59 Maiden Lane

New York, NY 10038

Questions and inquiries via telephone or AST’s website:

(800) 937-5449

http://www.amstock.com

Independent Registered Public Accounting Firm

PricewaterhouseCoopers LLP

2001 Ross Avenue

Suite 1800

Dallas, TX 75201

Stock Listing

Blockbuster Inc. Class A and Class B common stock trades on the New York Stock Exchange under the symbols BBI and BBI.B, respectively.

Certifications

We have submitted to the New York Stock Exchange the certification of our Chief Executive Officer, dated as of June 24, 2008, as required by Section 303A.12(a) of the New York Stock Exchange Listed Company Manual.

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We have filed with the SEC the certifications of our Chief Executive Officer and our Chief Financial Officer required under Section 302 of the Sarbanes-Oxley Act of 2002 with respect to this Annual Report on Form 10-K. The certifications are attached hereto as Exhibits 31.1 and 31.2.

Item 1A.    Risk Factors

In addition to the information set forth elsewhere in this report, including under Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the factors described below should be considered carefully in making any investment decisions with respect to our securities. These factors could materially affect our business, financial condition, results of operations or liquidity and cause investors in our securities to lose part or all of their investments.

Risks Relating to Economic Conditions and the Financial Markets

The obligation of the lenders to fund the $250 million amended credit facility is subject to the satisfaction of certain conditions, and there can be no assurances that these conditions will be satisfied. Even if the amended credit facility is funded upon the terms contemplated, we may not have sufficient liquidity to finance the ongoing obligations of our business, which raises substantial doubt about our ability to continue as a going concern.

Our revolving credit facility and Term A loan facility are each scheduled to expire in August 2009. Given the impending expiration of both our revolving credit facility and Term A loan facility, on April 2, 2009, we amended our revolving credit facility, Term A loan facility and Term B loan facility to include commitments from certain of our lenders and certain new lenders to (a) replace the existing revolving credit facility with a $250 million revolving credit facility with a maturity date of September 30, 2010 and (b) amend certain financial covenants, other covenants and other terms in our existing revolving credit facility, Term A loan facility and Term B loan facility. The obligation of the lenders to fund the $250 million amended credit facility and effectuate such amendments is subject to the satisfaction of certain conditions set forth in the amendment. While we believe that all such conditions will be met and that we will be in a position to close on the amended credit facility on or about May 11, 2009, there can be no assurance regarding these matters.

The risk that we may not successfully complete this refinancing and obtain the related amendment of certain financial covenants included therein, and/or the risk that we may not have adequate liquidity to fund our operations as a result of not meeting our projected financial results, even if the refinancing is completed within the time and upon the terms contemplated, raise substantial doubt about our ability to continue as a going concern.

Our plans with respect to addressing these matters are discussed in greater detail under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” and in Note 1 to our consolidated financial statements, but generally include the closing of the amendment and extension of our revolving credit facility, as well as a cash management strategy intended to enhance and preserve as much of our liquidity as possible. Our future viability is dependent on our ability to execute these plans successfully or otherwise address our liquidity shortfall. If we fail to do so for any reason, we would not have adequate liquidity to fund our operations, would not be able to continue as a going concern and could potentially be forced to seek relief through a filing under the U.S. Bankruptcy Code.

Our failure to comply with any of the restrictions in our debt agreements could result in acceleration of our debt. Were this to occur, we might not have, or be able to obtain, sufficient cash to pay our accelerated indebtedness.

The operating and financial restrictions and covenants in our debt agreements, including our credit agreement and the indenture governing our senior subordinated notes, may adversely affect our ability to finance

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future operations or capital needs or to engage in new business activities. The debt agreements restrict our ability to, among other things:

• declare dividends or redeem or repurchase capital stock;

• prepay, redeem or repurchase other debt;

• incur liens;

• make loans, guarantees, acquisitions and investments;

• incur additional indebtedness;

• engage in sale and leaseback transactions;

• amend or otherwise alter debt and other material agreements;

• engage in mergers, acquisitions or asset sales; and

• transact with affiliates.

In addition, our debt covenants require that we maintain certain financial measures and ratios. As a result of these covenants and ratios, we are limited in the manner in which we can conduct our business, and we may be unable to engage in favorable business activities or finance future operations or capital needs. Accordingly, these restrictions may limit our ability to successfully operate our business. A failure to comply with these restrictions or to maintain the financial measures and ratios contained in the debt agreements could lead to an event of default that could result in an acceleration of the indebtedness. During 2007, we were required to enter into an amendment to our credit agreement to modify or waive compliance with financial covenants thereunder. For an additional discussion of this amendment, please refer to “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Capital Structure.”

Should the outstanding obligations under our credit agreement be accelerated and become due and payable because of our failure to comply with the applicable debt covenants in the future, we would be required to search for alternative measures to finance current and ongoing obligations of our business. If amounts outstanding under the credit agreement were called by the lenders due to a covenant violation, amounts under other agreements, such as the indenture governing our senior subordinated notes, could also become due and payable immediately. There can be no assurance that such financing will be available on acceptable terms, if at all. Our ability to obtain future financing or to sell assets could be adversely affected because a very large majority of our assets have been secured as collateral under the credit agreement. In addition, our financial results, our substantial indebtedness, our credit ratings and the declining in-store rental industry in which we operate could adversely affect the availability and terms of our financing. Further, uncertainty surrounding our ability to finance our obligations has in the past caused some of our trade creditors to impose increasingly less favorable terms and future uncertainty could similarly result in unfavorable terms from our trade creditors. In addition, there are other situations (including a change in the composition of our Board of Directors, whereby the majority of directors who were serving on the Board at the time we entered into our credit agreement and indenture (or their successors or nominees) are no longer serving on the Board) where our debt may be accelerated and we may be unable to repay such debt. Any of these scenarios could adversely impact our liquidity and results of operations or force us to file for protection under the U.S. Bankruptcy Code.

Our level of indebtedness may make it more difficult for us to pay our debts and more necessary for us to divert our cash flow from operations to debt service payments.

Our total debt under our credit facilities and senior subordinated notes as of January 4, 2009 was $780.9 million. Our debt service obligations could have an adverse impact on our earnings and cash flows for as long as the indebtedness is outstanding.

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Our indebtedness could have important consequences for our business. For example, it could:

• make it more difficult for us to pay our debts as they become due during general adverse economic and market or industry conditions because any related decrease in revenues could cause us to not have sufficient cash flows from operations to make our scheduled debt payments;

• limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate, including limiting our ability to invest in certain strategic initiatives, and, consequently, place us at a competitive disadvantage to our competitors;

• require a substantial portion of our cash flows from operations to be used for debt service payments, thereby reducing the availability of our cash flow to fund working capital requirements including inventory, capital expenditures, acquisitions and other general corporate purposes;

• cause our trade creditors to change their terms for payment on goods and services provided to us, thereby negatively impacting our ability to receive products and services on acceptable terms; and

• result in higher interest expense in the event of increases in interest rates since some of our borrowings are, and will continue to be, at variable rates of interest.

Additionally, we could incur additional indebtedness in the future and, if new debt is added to our current debt levels, the risks above could intensify. Additional debt would further increase the possibility that we may not generate sufficient cash to pay, when due, interest on and other amounts due in respect of our indebtedness, and would further reduce our funds available for operations, working capital, capital expenditures, acquisitions and other general purposes. Additional debt may also decrease our ability to refinance or restructure our indebtedness, and further limit our ability to adjust to changing market conditions. If we or our subsidiaries add new debt to our current debt levels, the related risks that we and they now face could increase.

We may not have sufficient cash flows from operating activities, cash on hand and available borrowings under our credit facilities to service our indebtedness.

Our ability to make payments on and to refinance our indebtedness will depend on our ability to generate cash in the future. This, to some extent, is subject to general economic, financial, competitive, industry and other factors that are beyond our control. We cannot assure you that our future cash flow will be sufficient to meet our obligations and commitments. If we are unable to generate sufficient cash flow from operations in the future to service our indebtedness and to meet our other commitments, we will be required to adopt one or more alternatives, such as refinancing or restructuring our indebtedness, selling material assets or operations, reducing, deferring or eliminating certain capital expenditures or operating expenses or seeking to raise additional debt or equity capital. In connection with our cash management plan we have initiated certain actions discussed elsewhere herein to eliminate or reduce certain expenses. However, we cannot assure you that any of these actions could be effected on a timely basis or on satisfactory terms or maintained once initiated, or that these actions would enable us to continue to satisfy our capital requirements. In addition, our existing debt agreements, including the indenture governing our senior subordinated notes and our credit agreement, contain restrictive covenants which may prohibit us from adopting one or more of these alternatives, and any future debt agreements may contain similar restrictive covenants. Our failure to comply with these covenants could result in an event of default which, if not cured or waived, could result in the acceleration of all of our debts, which we may be unable to repay. If we are unable to repay our debt upon acceleration we may be forced to file for protection under the U.S. Bankruptcy Code.

Past and potential further downgrades in our debt ratings may adversely affect our cost of borrowing and related margins, liquidity, competitive position and access to capital markets.

The major debt-rating agencies routinely evaluate our debt and rate our debt according to a number of factors, among which are, our perceived financial strength and transparency with rating agencies and timeliness

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of financial reporting. On August 14, 2008, Moody’s Investors Service downgraded our probability of default rating to Caa1 from B3 based on refinancing challenges. However, Moody’s Investors Service upgraded the rating on our credit facility to B1 from B3 on the same date as a result of our operating improvements. The downgrade in our probability of default rating could adversely affect our cost of funds and related margins, liquidity, competitive position and access to capital markets. On March 4, 2009, Standard & Poor’s Ratings Service placed our credit ratings on credit watch in light of the pending maturities of our revolving credit facility and Term A loan facility in August 2009. Any downgrade in our credit ratings by Standard & Poor’s could further adversely affect our ability to access capital upon acceptable terms and conditions.

Risks Relating to Our Business Operations

We cannot predict the impact that the following may have on our business: (i) new or improved technologies or video formats, (ii) alternative methods of content delivery or (iii) changes in consumer behavior facilitated by these technologies or formats and alternative methods of content delivery. We also compete generally for the consumer’s entertainment dollar and leisure time.

Advances in technologies such as video-on-demand, new video formats, downloading or alternative methods of content delivery or certain changes in consumer behavior driven by these or other technologies and methods of delivery could have a negative effect on our business. In particular, our business could be adversely impacted if:

• newly released movies were to be made widely available by the studios to these technologies or these formats at the same time or before they are made available to home video retailers for rental; and

• these technologies or new formats were to be widely accepted by consumers.

Although we are pursuing, and may pursue in the future, initiatives related to alternative methods of content availability and delivery and believe that certain of these initiatives may be successfully integrated into our business model, we have limited experience with certain of these initiatives and cannot assure that they will be successful or profitable.

The widespread availability of additional channels on satellite and digital cable systems may significantly reduce public demand for our products. Advances in direct broadcast satellite and cable technologies may also adversely affect consumer demand for video store rentals and sales. Direct broadcast satellite providers transmit numerous channels of programs by satellite transmission into subscribers’ homes. In addition, cable providers are taking advantage of digital technology to transmit many additional channels of television programs over cable lines to subscribers’ homes. Because of their increased availability of channels, direct broadcast satellite and digital cable providers have been able to enhance their pay-per-view businesses by:

• substantially increasing the number and variety of movies they can offer their subscribers on a pay-per-view basis; and

• providing more frequent and convenient start times for the most popular movies.

In addition, pay-per-view allows the consumer to avoid trips to the video store for rentals and returns of movies. However, newly released movies are currently made available by the studios for rental prior to being made available on a pay-per-view basis. In addition, pay-per-view does not currently provide the same start, stop and rewind capabilities as DVD or video. If, however, direct broadcast satellite and digital cable services, including enhanced pay-per-view services, were to become more widely available and accepted, this could have a negative effect on our video store business. This is because a smaller number of movies may be rented or sold if viewers were to favor the expanded number of conventional channels and expanded content, including movies, specialty programming and sporting events, offered through these services. Additionally, increases in the size of the pay-per-view market could lead to an earlier distribution window for movies on pay-per-view if the studios were to perceive this to be a better way to maximize their revenues.

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The availability of content through personal video recorders, video-on-demand and other technologies may significantly reduce the demand for our products or otherwise negatively affect our business. Any method for delivery of entertainment content that serves as an alternative to obtaining product or services from our stores or our online DVD rental service can impact our business. Examples of delivery methods that have impacted, or could impact, our business include:

• personal video recorders,

• video-on-demand,

• download-to-burn DVDs,

• video vending machines and download-to-burn kiosks,

• video downloads to portable devices and personal computers, and

• disposable DVDs.

Moreover, technology and consumer offerings continue to develop, and we expect that new or enhanced technologies and consumer offerings will be available in the future. We may pursue certain of those technologies and consumer offerings if we believe they offer a sustainable customer proposition, are accretive to earnings and can be successfully integrated into our business model. However, we cannot predict consumer acceptance of these delivery channels or their impact on our business.

We also compete generally for the consumer’s entertainment dollar and leisure time with, among others, (i) movie theaters; (ii) Internet browsing, online gaming and other Internet-related activities; (iii) consumers’ existing personal movie libraries; (iv) live theater; (v) sporting events; and (vi) music entertainment. Our results can therefore fluctuate depending on the desirability of other forms of entertainment.

Overall revenues generated from the in-store home video industry are projected to continue to decline. A faster than anticipated decline in the in-store industry has, in the past and may in the future, adversely affect our business and our ability to implement our strategic initiatives, particularly when considering sustained decreases in consumer spending attributable to the unprecedented decline in overall economic conditions, the reversal of which cannot be accurately determined.

We continue to experience challenges caused by the faster than anticipated decline in the worldwide in-store home video rental industry. We believe that the faster than anticipated declines are caused primarily by (i) a weak slate of titles released to home video; (ii) increased competition from retail mass merchant sales of low-priced DVDs, online rentals, kiosk and vending rental and sales and other sources of in-home entertainment such as digital video recorders and other devices that are capable of downloading content for in-home viewing; (iii) competition from piracy in certain international markets; and (iv) competition from other forms of leisure entertainment. A faster than anticipated decline in the worldwide in-store home video rental industry in the future may similarly negatively impact our business and our ability to implement our strategic initiatives.

There can be no assurance that we will fully develop an ability to respond to changing consumer preferences, including with respect to new technologies and alternative methods of content delivery, to effectively adjust our product mix, service offerings and marketing and merchandising initiatives, or to selectively develop and maintain strategic alliances for products and services that meet and anticipate advances in technology and market trends.

We have implemented and expect to continue to implement initiatives that are designed to enhance efficiency, customer convenience and our product offerings. In doing so, we are competing in markets for products and services that are highly competitive and subject to evolving industry standards and rapid adoption of technical innovation and product enhancements by competitors. The implementation of new initiatives has involved, and will continue to involve, significant investments by us of time and money and could be adversely

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impacted by (i) our inability to timely implement and maintain the necessary information technology systems and infrastructure to support shifts in consumer preferences and any corresponding changes to our operating model, including continued support for our initiatives and (ii) the extent and timing of our continued investment of incremental operating expenses and capital expenditures to continue to develop and implement our initiatives and our corresponding ability to effectively control overall operating expenses and capital expenditures.

We are currently pursuing certain initiatives that are related to digital content distribution, kiosk vending and consumer electronic devices. In these areas we face substantial competition from companies that have significant technical, marketing, distribution and other resources, as well as established hardware, software, and digital supplier relationships. We expect competition to intensify as competitors individually and collaboratively adopt new technologies to offer integrated solutions in these areas. Because we have limited experience with some of our new customer proposition initiatives, we cannot assure you that they will be profitable or successful in retaining customers. Our ability to effectively and timely prioritize and implement our initiatives will also affect when and if they will have a positive impact on our profitability.

If the average sales and rental prices for our product are not at or above expected prices, our expected gross margins may be adversely affected.

To achieve our expected revenues and gross margins, we need to sell and rent, as applicable, our product, including previously rented, retail and rental (whether in-store or online) product at or above expected prices. If the average sales or rental prices of such product are not at or above these expected prices, our revenues and gross margins may be adversely affected.

It is also important that we maximize our gross margins through our allocation of store space. We may need to turn our inventory of previously rented and retail product more quickly in the future in order to make room in our stores for additional DVDs, new customer proposition initiatives or to downsize the store. Therefore, we cannot assure you that in the future we will be able to rent or sell, on average, our product at or above the expected price.

Other factors that could affect our ability to rent or sell our product at expected prices include:

• consumer desire to rent any of our movies and games;

• consumer desire to own a particular movie or game;

• the amount of product available for rental or sale by others to the public; and

• changes in the price of product by the studios or changes by other retailers, particularly mass merchant retailers.

Our financial results are impacted by seasonality, including the adverse impact caused by improved weather conditions.

There is a distinct seasonal pattern to the home video and video games business, with slower business in April and May, due in part to improved weather and Daylight Saving Time, and in September and October, due in part to the start of school and the introduction of new television programs. The months of November and December have historically been our highest revenue months. While we expect these months to continue to make the largest contributions to our rental revenues, we believe the strength of rental revenues in these months has been and will continue to be negatively affected, to some degree, by consumers purchasing DVDs during the holiday season. Although our online and in-store rental subscription offerings have helped us mitigate, to some extent, the impact of seasonality and weather conditions on our business by providing a more steady revenue stream across all months, seasonality and weather are expected to continue to impact our business and our period-to-period financial results in the future.

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Our revenues could be adversely affected due to the variability in consumer appeal of the movie titles and game software released for rental and sale, as well as the effect of game platform cycles.

The quality of movie titles and game software released for rental and sale is not within our control, and our results of operations have from time to time reflected the variability in consumer appeal for such items. We cannot assure you that future releases of movie titles and game software will appeal to consumers and, as a result, our revenues and profitability may be adversely affected.

Our financial results could be adversely affected if we are unable to manage our inventory effectively or if we are unable to reach agreements with service, product and content providers on favorable commercial terms, including on such matters as copy depth and uses of product.

Our purchasing decisions are influenced by many factors, including, among others, gross margin considerations and supplier product return policies. While much of our retail movie product in the United States, but not outside the United States, is returnable to vendors, our investments in retail movie inventory may result in excess inventories in the event anticipated sales fail to materialize. In addition, returns of our games inventory, which is prone to obsolescence risks because of the nature of the industry, are subject to negotiation with vendors.

Our purchasing decisions also involve predictions of consumer demand. While the historical growth of our in-store and online subscription programs and the free in-store rentals provided by our BLOCKBUSTER Total Access program have increased consumer demand for our products, these programs have increased the complexity of our purchasing decisions. In addition, the prevalence of multiple game platforms adds to the difficulty of accurately predicting consumer demand with respect to video games. The nature of and market for our products, particularly games and DVDs, also makes them prone to risk of theft and loss.

Our operating results could therefore suffer if we are not able to:

• obtain or maintain favorable terms from our suppliers with respect to such matters as copy depth, use of product, including without limitation fulfillment of online orders, and product returns;

• maintain adequate copy depth to maintain customer satisfaction;

• control shrinkage resulting from theft or loss; or

• avoid significant inventory excesses that could force us to sell products at a discount or loss.

Further, as discussed below, uncertainty surrounding our ability to finance our obligations has in the past caused some of our trade creditors to impose increasingly less favorable terms and future uncertainty could similarly result in unfavorable terms from our trade creditors.

Our business would lose a competitive advantage if the movie studios were to shorten or eliminate the home video retailer distribution window or otherwise adversely change their current practices with respect to the timing of the release of movies to the various distribution channels.

A competitive advantage that home video retailers currently enjoy over most other movie distribution channels, except theatrical release, is the early timing of the home video retailers’ distribution window. After the initial theatrical release of a movie, the studios’ current practice is to generally make their movies available to home video retailers (for rental and retail, including by mass merchant retailers) for specified periods of time. This distribution window has traditionally been exclusive against most other forms of non-theatrical movie distribution, such as pay-per-view, video-on-demand, premium television, basic cable, and network and syndicated television. The length of this exclusive distribution window for home video retailers varies, but since the mid-1990’s has averaged between 34 and 58 days for domestic home video retailers. Thereafter, movies are made sequentially available to television distribution channels. The studios’ traditional practices with respect to the distribution windows could change at any time.

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Our business could be negatively affected if:

• the home video retailer distribution windows were no longer the first following the theatrical release;

• the length of the home video retailer distribution windows were shortened; or

• the home video retailer distribution windows were no longer as exclusive as they are now.

This is because newly released movies would be made available earlier on these other forms of non-theatrical movie distribution, and consumers might no longer need to wait until after the home video retailer distribution window to view a newly released movie on one or more of these other distribution channels. In such event, we would need to address additional competition. According to industry statistics, more movies are now being released to pay-per-view at the shorter end of the home video retailer distribution window range than at the longer end. In addition, many of the major movie studios have entered into various ventures to provide video-on-demand or similar services of their own. Increased studio participation in or support of these types of services could impact their decisions with respect to the timing and exclusivity of the home video retailer distribution window.

Recently, there has been increasing experimentation by studios and various movie content aggregators and retailers with the traditional distribution windows, including simultaneous video-on-demand and DVD releases. For example, although movie selections tend to be limited at present, consumers can now download to their computers certain available movies on the same day that the movie’s DVD is released by the studios nationwide in retail stores for rental or sale, and, in some cases, consumers can also burn the downloaded movie to a blank DVD for playback in a DVD player, allowing them to watch the movies on their TVs or portable devices. We expect that the movie studios will continue to assess the traditional release windows and it is possible that the studios may decide to alter the traditional home video retailer distribution window for an increasing number of movies, particularly in connection with simultaneous video-on-demand distribution of movies and DVD release dates.

We believe that the studios have a significant interest in maintaining a viable home video retail industry. However, because the order, length and exclusivity of each window for each distribution channel are determined solely by the studio releasing the movie, we cannot predict the impact, if any, of any future decisions by the studios. In addition, any consolidation or vertical integration of media companies to include both content providers and digital distributors could pose a risk to the continuation of the home video retailer distribution window.

Changes in studio pricing policies have resulted in increased competition, in particular from mass merchant retailers, which has impacted consumer rental and purchasing behavior. We cannot control or predict future studio decisions or resulting consumer behavior, and future changes could negatively impact our profitability.

The studios’ current practice is generally to sequentially release their movies to different distribution channels. After the initial theatrical release of a movie, studios generally make their movies available to home video retailers (for rental and retail, including by mass merchant retailers) for a specified period of time. This distribution channel is typically exclusive against other forms of non-theatrical movie distribution, including cable and satellite distribution, and is commonly referred to as the home video retailers’ “distribution window.”

Historically, at the beginning of a particular movie title’s distribution window, the movie in VHS format would be priced to home video retailers based on the applicable studio’s decision to promote the movie to the consumer either primarily for rental, or for both rental and sale, at the beginning of the distribution window. In order to promote a movie title primarily for rental at the beginning of the distribution window, a studio would initially release the title to home video retailers at a price that was too high to enable them to sell the title to consumers at an affordable price. As rental demand subsided, the studio would reduce the pricing for the movie,

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which would then enable retailers to sell the title to consumers at an affordable price. The time during which the studios released the title at the higher pricing was commonly referred to as the “rental window.” Currently, substantially all DVD titles are initially released to home video retailers at a price that is low enough to allow them to offer movies at affordable prices to the consumer from the beginning of the home video retailers’ distribution window. This method of pricing is commonly referred to as “sell-through” pricing, and has improved our ability to purchase rental product at lower prices. However, the studios’ sell-through pricing policy has also led to increasing competition from other retailers, in particular mass merchants such as Wal-Mart, Best Buy and Target. It has also led to increased competition from online retailers. These other retailers are able, due to the lower sell-through prices, to purchase DVDs for sale to consumers at the same time as traditional home video retailers, who, like us, purchase product for rental. In addition, some retailers lower their sales prices in order to increase overall traffic to their stores or businesses, and mass merchants may be more willing to sell at lower, or even below wholesale, prices to drive traffic and thereby increase sales of their other inventory items. All of these factors have increased consumer interest in purchasing DVDs, which has resulted in increased competition and reduced the significance of the historical rental window.

We believe that the increased consumer purchases of movies have been due in part to consumer interest in building DVD libraries of classic movies and personal favorites and that the studios will remain dependent on traditional home video retailers to generate revenues for the studios from titles that are not classics or current box office hits. We therefore believe the importance of the video rental industry to the studios will continue to be a factor in studio pricing decisions. However, we cannot control or predict studio pricing policies with certainty, and we cannot assure you that consumers will not, as a result of further decreases in studio sell-through pricing and/or sustained or further depressed pricing by competitors, increasingly desire to purchase rather than rent movies. Personal DVD libraries could also cause consumers to rent or purchase fewer movies in the future. Our profitability could, therefore, be negatively affected further if, in light of any such consumer behavior, we were unable to (i) maintain or increase our rental business; (ii) replace gross profits from generally higher-margin rentals with gross profits from increased sales of generally lower-margin sell-through product; or (iii) otherwise positively affect gross profits, such as through price increases or cost reductions. Our ability to achieve one or more of these objectives is subject to risks, including the risk that we may not be able to compete effectively with other DVD retailers, some of whom may have competitive advantages such as the pricing flexibility described above or favorable consumer perceptions regarding value.

Our profitability is also dependent on our ability to enter into arrangements with the studios that effectively balance cost considerations and the number of copies of a title stocked by us. Each type of arrangement provides different advantages and challenges for us. Our profitability could be negatively affected if studios were to make other changes in their pricing policies, which could include changes in revenue-sharing arrangements, pricing or rental windows for DVDs or expanded exploitation by studios of international two-tiered pricing laws, which allow studios to charge different prices for movies intended for rental to consumers, as opposed to sale. In addition, we cannot predict what use the studios might make of current or future alternative supply methods, such as downloading to stores or consumers, or what impact the use of such supply chain changes by us or our competitors might have on our profitability.

Industry consolidation in the in-store home video rental industry has occurred and may continue. If we are not successful in capitalizing on this industry consolidation, our financial results may be adversely affected.

Based upon current industry projections, we believe that over-capacity exists in the video rental market and that, as a result, many video stores, including some of our own stores, will be forced to close in the future. If we are unable to capitalize on the store closings of our competitors, we may be unable to grow our market share and our financial results may be adversely affected. In addition, we have historically closed underperforming video stores and will continue to consider the closure of underperforming stores. We are currently reviewing many of our store leases and evaluating certain sites to close or downsize based on store profitability.

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Investment in new business strategies and initiatives could disrupt our ongoing business and present risks not originally contemplated.

We have invested, and in the future may invest, in new business strategies and initiatives. Such opportunities may also involve significant risks and uncertainties, including distraction of management from current operations, insufficient revenue to offset expenses associated with the strategy or initiative, inadequate return of capital, and unidentified issues not initially contemplated or discovered. Because these new strategies and initiatives may be relatively new for us, no assurance can be given that such strategies and initiatives will be successful and will not have a material adverse effect on our financial condition and operating results.

For certain of our customer proposition initiatives we may rely on third-party digital content, which may not be available to us on commercially reasonable terms or at all.

In addition to offering our own digital content from time to time we may contract with third parties to offer their digital content through our stores or alternative aggregation and content delivery products and services. In those cases, we could pay substantial fees to obtain rights to offer such content. Our licensing arrangements with these third-party content providers may be short-term and may not guarantee the continuation or renewal of these arrangements on reasonable terms. Some third-party content providers may also offer competing products and services, or offer similar content to our competitors, and could take action to make it more difficult for us to license their content in the future. If we are unable to continue to offer a wide variety of content at reasonable prices with acceptable usage rules, or continue to expand our systems and platforms and customer offerings for these relatively new customer proposition initiatives, our financial condition and operating results may be materially adversely affected.

Third-party content providers may require that we provide certain digital rights management and other security solutions. If these requirements change we may have to develop or license new technology to provide such solutions. There is no assurance that we will be able to develop or license such solutions at a reasonable cost and in a timely manner.

Any failure or inadequacy of our information technology infrastructure could harm our business.

The capacity, reliability and security of our information technology hardware and software infrastructure and our ability to expand and update this infrastructure in response to our changing needs are important to the continued implementation of our new customer proposition initiatives, as well as the operation of our business generally. To avoid technology obsolescence and enable future cost savings and customer enhancements, we are continually updating our information technology infrastructure. In addition, we intend to add new features and functionality to our products, services and systems that could result in the need to develop, license or integrate additional technologies. Our inability to add additional software and hardware or to upgrade our technology infrastructure could have adverse consequences, which could include the delayed implementation of our new customer proposition initiatives, service interruptions, impaired quality or speed of the users’ experience and the diversion of development resources. Our failure to provide new features or functionality to our systems also could result in these consequences. We may not be able to effectively upgrade and expand our systems, or add new systems, in a timely and cost effective manner and we may not be able to smoothly integrate any newly developed or purchased technologies with our existing systems. These difficulties could harm or limit our ability to improve our business. In addition, any failure of our existing information technology infrastructure could result in significant additional costs to us. Certain of our information technology services and support functions are performed by third parties. Service interruptions, contract disputes or the effect of general market conditions on these service providers could adversely impact the availability and reliability of service and support.

Our results of operations could be materially adversely affected if our franchisees failed to pay our franchise fees.

In certain areas within the United States and internationally, we rely on our franchisees to offer our products and services. A portion of our revenues are derived from royalty fees through our franchising program. Many of

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our franchisees have been negatively affected by the depressed economic conditions over the past 12 months. We may experience difficulties in collecting our franchise fees on a timely basis, or at all, for a variety of reasons, including the inability of our franchisees to achieve sufficient revenues and cash flows from their stores or to otherwise effectively operate their stores under challenging industry conditions. Some of our franchisees have perceived certain of our recent customer proposition initiatives as conflicting with their business interests. Lawsuits and other disputes with our franchisees may also reduce the amount of our royalties from franchise fees. Any failure by our franchisees to pay their franchise fees to us on time or at all could materially adversely affect our results of operations.

Piracy of the products we offer or the disregard of release dates by other retailers may adversely affect our operations.

Although piracy is illegal, it is a significant threat to the home video industry. The primary methods of piracy affecting the home video industry are (i) the illegal copying of theatrical films at the time they are first run; (ii) the illegal copying of DVDs that are authorized by the studios solely for retail sale and/or rental by authorized retailers; and (iii) the illegal online downloading of movies. These methods of piracy enable the low-cost sale of DVDs as well as the free viewing and sharing of DVDs, both of which compete with rentals and sales by authorized retailers like us. Competition from piracy has increased in recent years due in part to developments in technology that allow for faster copying and downloading of DVDs.

Although piracy is a concern in the United States, it is having a more significant adverse affect on the home video industry in international markets. We cannot assure you that movie studios and others with rights in the product that we rent or sell can, or will, take steps to enforce their rights against piracy or that they will be successful in preventing the distribution of pirated content. Increases in piracy could continue to negatively affect our revenues. For example, in 2006, we closed all of our store locations in Spain, driven in part by the impact of piracy in that market.

Another risk that we face is the disregard by other home video retailers of the studios’ specified release dates for their titles. If other home video retailers rent or sell product before the specified release dates (i.e., before us), we can be adversely affected, as the first weeks after a movie title’s release typically represent a significant portion of the demand for that title. We cannot assure you that the studios can or will control such distribution and release practices, particularly in countries outside of the United States.

Our business model is substantially dependent on the functionality of our distribution centers.

Our domestic distribution system for our store-based operations is centralized. We ship a substantial portion of the products to our U.S. company-operated stores through our distribution center. We also have 38 regional U.S. distribution centers to support our domestic online DVD subscription service. If our distribution centers became non-operational for any reason, we could incur significantly higher costs and longer lead times associated with distributing our movies and other products. In international markets, we utilize a variety of distribution methodologies with similar risks to those in the United States.

The application of SFAS No. 142, “Goodwill and Other Intangible Assets,” resulted in the recognition of a significant non-cash impairment charge for the quarter ended January 4, 2009, which has materially adversely affected our results of operations for the fourth quarter and the 2008 fiscal year. The application and impact of existing and future accounting policies or interpretations of existing accounting policies for future economic developments may further negatively impact our financial results.

In accordance with Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets referred to as “SFAS 142,” we test goodwill and other intangible assets for impairment during the fourth quarter of each year and on an interim date should factors or indicators become apparent that would require an interim test. In recent periods we have taken significant charges relating to the impairment of goodwill. See Note

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2 to the consolidated financial statements and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Estimates” in this Form 10-K.

As discussed in Note 2 to the consolidated financial statements, we performed our annual impairment test as of October 31, 2008. The test indicated that the goodwill associated with our domestic reporting unit was impaired. Therefore, we recognized a $432.6 million goodwill impairment charge during the fourth quarter of 2008.

The market price of our Class A common stock has been subject to substantial volatility and has decreased significantly during the first quarter of 2009. We believe that the need for an interim impairment test may be triggered by, among other factors, declines in the media entertainment industry, a reduction in our profitability, or a sustained decline in our stock price. Consequently, we may need to perform an interim impairment test and may recognize an additional non-cash goodwill impairment charge during 2009. Our goodwill balance totaled $338.1 million as of January 4, 2009. Any additional required non-cash impairment charge could significantly reduce this balance and have a material impact on our reported financial position and results of operations.

Risks Relating to Our Common Stock

The significant price and volume volatility in our common stock may continue not only as a result of generally depressed market conditions but also any change in sentiment in the market regarding our operations, business model, business prospects or ability to refinance our debt obligations.

The price at which our common stock has traded in recent periods has fluctuated greatly, and most recently has declined significantly. The price may continue to be volatile due to a number of factors including the following, some of which are beyond our control:

• variations in our operating results;

• variations between our actual operating results and the expectations of securities analysts, investors and the financial community;

• announcements of developments affecting our business, systems or expansion plans of others;

• competition, including the introduction of new competitors, their pricing strategies and services;

• perceptions regarding the current and long-term viability of our business model and the success of ongoing and proposed strategic initiatives;

• market volatility in general; and

• the operating results of our competitors.

As a result of these and other factors, investors in our common stock may not be able to resell their shares at or above their original purchase price.

Following certain periods of volatility in the market price of our securities, we have become the subject of securities litigation. We may experience more of such litigation following future periods of volatility. This type of litigation may result in substantial costs and a diversion of management’s attention and resources.

We may not be able to remain in compliance with the New York Stock Exchange’s continued listing criteria.

Our Class A and Class B common stock are traded on the New York Stock Exchange (“Exchange”) and are thereby subject to certain continued listing criteria established by the Exchange in order to maintain listing on the Exchange. Among such criteria is the requirement that the Class A stock maintain a $1.00 minimum average

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closing price. If the average closing price of the Class A stock is below $1.00 for any consecutive 30-trading-day period, the Class A and Class B stock will be delisted and moved to the Exchange’s ARCA electronic exchange.

The price at which the Class A stock has traded in recent periods has fluctuated greatly, and most recently has declined significantly, trading at prices at or below $1.00. If we are unable to maintain the Exchange listing for the Class A and Class B stock as a result of our failure to continue to comply with this, or any, minimum listing requirement, the Class A and Class B shares may be perceived as a less desirable investment, negatively affecting the market for the stock, which could decrease our ability to issue new stock and attract further equity investment. A delisting could also worsen the perception of the company’s financial distress among our lenders, trade creditors, business partners, vendors, analysts and the media, which could cause some of our trade creditors to impose increasingly less favorable terms and make it more difficult for us to obtain future financing and develop strategic alliances. In February 2009, the NYSE suspended its $1 minimum average closing price requirement on a temporary basis, initially through June 30, 2009. The effect of this suspension is that companies that fall below the $1 minimum price criteria during the suspension period will not be deemed to be below the Exchange’s continued listing criteria while the suspension is in place.

Other Business Risks

Our success depends largely on our ability to attract and retain key personnel. If we lose key senior management or are unable to attract and retain the talent required for our business, our operating results could suffer.

During 2007 we hired new members of our senior management team from outside of Blockbuster, including our Chief Executive Officer, Chief Financial Officer and General Counsel. Our performance depends in part on the ability of this largely new senior management team to coalesce, motivate our employees and address the changes presented by our dynamic industry and the challenging economic conditions. Additionally, we rely upon the continued service and availability of skilled personnel in technical, operations and staff positions. The unexpected future loss of services of one or more members of our senior management team could have an adverse effect on our business. We will need to attract and retain additional qualified personnel and develop, train and manage management-level employees. We have relied on equity awards as one means for recruiting and retaining highly skilled talent. Accounting regulations requiring the expensing of stock options have resulted in increased stock-based compensation expense, which could cause us to reduce the number of stock-based awards issued to employees and could negatively affect our ability to attract and retain key personnel. Additionally, significant adverse volatility in our stock price could result in a stock option’s exercise price exceeding the underlying stock’s market value, thus lessening the effectiveness of retaining employees through stock-based awards. In addition, recent cost containment initiatives affecting our compensation practices that have been adopted in response to the current economic environment will also impact our ability to attract and maintain personnel to some extent, depending upon the length of time during which these initiatives remain in effect. As a result of these factors, we cannot assure you that we will be able to continue to attract and retain personnel as needed in the future.

We are subject to governmental regulation particular to the retail home video industry and changes in U.S. or international laws may adversely affect us.

Any finding that we have been, or are, in noncompliance with respect to, or otherwise liable under, the laws affecting our business could result in costs, including, among other things, governmental penalties or private litigant damages, which could have a material adverse effect on us. We are subject to various international and U.S. federal and state laws that govern the offer and sale of our franchises because we act as a franchisor. In addition, because we operate video stores and develop new video stores, we are subject to various international and U.S. federal and state laws that govern, among other things, the disclosure and retention of our video rental records and access to and use of our video stores by disabled persons, and are subject to various international, U.S. federal, state and local advertising, consumer protection, credit protection, franchising, licensing, zoning,

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land use, construction, trading activities, second-hand dealer, minimum wage and labor and other employment regulations, as well as laws and regulations relating to the protection and cleanup of the environment and health and safety matters. The international home video and video game industry varies from country to country due to, among other things, legal standards and regulations, such as those relating to foreign ownership rights; unauthorized copying; intellectual property rights; movie ratings, which in many countries are legal standards unlike the voluntary standards of the United States; labor and employment matters; trade regulation and business practices; franchising and taxation; environmental matters; and format and technical standards. Our obligation to comply with, and the effects of, the above governmental regulations are increased by the magnitude of our operations.

Changes in existing laws, including environmental and employment laws, adoption of new laws or increases in the minimum wage, may increase our costs or otherwise adversely affect us. For example, the repeal or limitation in the United States of certain favorable copyright laws would have an adverse impact in the United States on our rental business. Similarly, the adoption or expansion of laws in any other country to allow copyright owners to charge retailers more for rental product than for sell-through product could have an adverse impact on our rental business in that country.

We are subject to business risks of international operations.

We derive a material portion of our revenue through our international operations. As a result, our financial condition and operating results could be significantly affected by risks associated with international activities, including economic and labor conditions, political instability, tax laws (including U.S. taxes on foreign operations), and changes in the value of the U.S. dollar relative to local currencies. Margins on the sale and rental of our products in foreign countries could be materially adversely affected by foreign currency exchange rate fluctuations and by international trade regulations.

We have assumed obligations pursuant to agreements with Viacom relating to certain real estate leases guaranteed by Viacom, which obligations may adversely affect our ability to negotiate renewals or modifications to a subset of such leases.

In October 2004, we completed our divestiture from Viacom. We entered into an amended and restated initial public offering and split-off agreement with Viacom in connection with this divestiture. This agreement, which is referred to as the “IPO agreement,” imposes various restrictions and limitations on our ability to renew or modify, in a manner that increases Viacom’s potential liability, a subset of the leases guaranteed by Viacom, which could make it more difficult and expensive, and in some cases impossible, to renew or modify certain of these leases.

We have also assumed obligations pursuant to the IPO agreement to maintain letters of credit in favor of Viacom, which obligations reduce our borrowing capacity.

Pursuant to the IPO agreement, we have provided letters of credit, at Viacom’s expense, for the benefit of Viacom to support Viacom’s potential liability for certain real estate lease obligations of ours. On October 24, 2008, we entered into an amendment to the IPO Agreement. Pursuant to the amendment, the face amount of the letters of credit required to be provided by us for the benefit of Viacom was reduced from $150.0 million to $75.0 million and the conditions on which Viacom may draw on the letters of credit were amended. In addition, in the amendment, we assumed responsibility for the payment of any and all fees and expenses incurred in connection with the establishment and maintenance of the letters of credit. As a result of the amendment our available borrowing capacity increased by $75.0 million. See Note 6 to the consolidated financial statements and the Liquidity and Capital Resources section of the MD&A in this Form 10-K.

Until the letters of credit or any renewals thereof are terminated, we anticipate any future or additional lenders may treat our letter of credit obligation as if it were outstanding indebtedness when assessing our

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borrowing capacity. Furthermore, if we are unable to renew or otherwise replace the letters of credit prior to their expiration as required by the IPO agreement, Viacom has the right to draw down the full amount of the outstanding letters of credit, which may cause us to borrow funds under our credit facility to reimburse the issuing bank. In either case, our obligation to maintain the letters of credit may restrict or prevent us from being able to borrow amounts necessary to engage in favorable business activities, consummate strategic acquisitions or otherwise fund capital needs.

We are subject to various litigation matters that could, if judgments were to be rendered against us, have an adverse effect on our operating results.

We are subject to various legal proceedings and claims that have arisen in the ordinary conduct of our business and are not yet resolved and additional claims may arise in the future. Results of legal proceedings cannot be predicted with certainty. Regardless of its merit, litigation may be both time consuming and disruptive to our operations and cause significant expense and diversion of management attention. In recognition of these considerations, we may from time to time enter into material settlements. Should we fail to prevail in certain matters, or should several of these matters be resolved against us in the same reporting period, we may be faced with significant monetary damages or injunctive relief that could materially adversely affect a portion of our business and might materially affect our financial condition and operating results. See Note 8 to the consolidated financial statements for a discussion of certain pending material litigation matters relating to our business.

Provisions in our charter documents and Delaware law could make it more difficult to acquire our Company.

Our second amended and restated certificate of incorporation (“certificate of incorporation”) and amended and restated bylaws (“bylaws”) contain provisions that may discourage, delay or prevent a third party from acquiring us, even if doing so would be beneficial to our stockholders. Our bylaws limit who may call special meetings of stockholders to any officer at the request of a majority of our Board of Directors, the Chairman of the Board or the Chief Executive Officer of the Company. Our certificate of incorporation and bylaws provide that the bylaws may be altered, amended or repealed by the Board of Directors.

Pursuant to our certificate of incorporation, the Board of Directors may by resolution establish one or more series of preferred stock, having such number of shares, designation, relative voting rights, dividend rates, liquidation or other rights, preferences and limitations as may be fixed by the Board of Directors without any further stockholder approval. Such rights, preferences, privileges and limitations as may be established could have the effect of impeding or discouraging the acquisition of control of us, which could adversely affect the price of our equity securities.

In addition, Section 203 of the Delaware General Corporation Law may discourage, delay or prevent a change in control by prohibiting us from engaging in a business combination with an interested stockholder for a period of three years after the person becomes an interested stockholder.

Item 1B.    Unresolved Staff Comments

None.

Item 2.    Properties

Our corporate headquarters are located at 1201 Elm Street, Dallas, Texas 75270 and consist of 242,615 square feet of space leased pursuant to an agreement that expires on June 30, 2017. Our primary distribution center is located at 3000 Redbud Blvd., McKinney, Texas 75069 and consists of about 850,000 square feet of space leased pursuant to an agreement that expires on December 31, 2012. We have set up our payroll and benefits center in Spartanburg, South Carolina. We also lease and operate 38 online distribution centers spread strategically throughout the United States to support our domestic online rental service.

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We have country head offices in Buenos Aires, Argentina; Toronto, Canada; Uxbridge, England; Dublin, Ireland; Milan, Italy; Herlev, Denmark; and Mexico City, Mexico. For most countries in which we have company-operated stores, we maintain offices to manage our operations within that country.

We lease substantially all of our existing store sites. Within the United States, Canada and Mexico, these leases generally have a term of three to five years. The leases in our European markets generally have a term of twenty to thirty years. We expect that most future stores will also occupy leased properties.

Item 3.    Legal Proceedings

Information regarding our material legal proceedings is set forth in Note 8 to the consolidated financial statements, in Item 8 of Part II of this Form 10-K, which information is incorporated herein by reference.

Item 4.    Submission of Matters to a Vote of Security Holders

None.

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PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

The shares of Blockbuster Class A and Class B common stock are listed and traded on the New York Stock Exchange, or “NYSE,” under the symbols “BBI” and “BBI.B,” respectively. Our Class A common stock began trading on August 11, 1999, following our initial public offering and our Class B common stock began trading on October 14, 2004, in conjunction with our divestiture from Viacom Inc. (“Viacom”). The following table contains, for the periods indicated, the high and low sales prices per share of our Class A and Class B common stock as reported on the NYSE composite tape and the cash dividends per share of our Class A and Class B common stock:

	Blockbuster Class A Common Stock Sales Price				Blockbuster Class B Common Stock Sales Price				Cash Dividends per share of Common Stock(1)
	High		Low		High		Low
Year Ended January 6, 2008:
Quarter Ended April 1, 2007	$	7.30	$	5.41	$	6.90	$	4.98	$	—
Quarter Ended July 1, 2007	$	6.67	$	3.94	$	6.18	$	3.54	$	—
Quarter Ended September 30, 2007	$	5.71	$	3.96	$	5.00	$	3.57	$	—
Quarter Ended January 6, 2008	$	5.80	$	2.99	$	5.12	$	2.57	$	—
Year Ended January 4, 2009:
Quarter Ended April 6, 2008	$	3.70	$	2.66	$	3.49	$	2.25	$	—
Quarter Ended July 6, 2008	$	3.55	$	2.38	$	2.92	$	1.92	$	—
Quarter Ended October 5, 2008	$	3.19	$	1.86	$	2.44	$	1.09	$	—
Quarter Ended January 4, 2009	$	2.00	$	0.72	$	1.59	$	0.18	$	—

(1) We have not paid a dividend since the second quarter of 2005. Our Board of Directors may evaluate declaring quarterly cash dividends in the future.

The terms of our debt agreements, as discussed in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources,” limit our ability to repurchase common stock and pay dividends. Subject to these limitations, our Board of Directors may change our dividend practices from time to time and decrease or increase the dividend paid, or not pay a dividend, on our common stock based on factors such as results of operations, financial condition, cash requirements and future prospects and other factors deemed relevant by our Board of Directors.

The number of holders on record of shares of our Class A and Class B common stock as of March 30, 2009 was 1,116 and 793, respectively.

For information regarding our equity compensation plans, refer to the proxy statement to be filed for our 2009 annual meeting of stockholders incorporated by reference into Item 12 of Part III of this Form 10-K.

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Stock Performance Graphs

The following stock performance graphs and related information shall not be deemed “soliciting material” or “filed” with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or Securities Exchange Act of 1934, except to the extent that Blockbuster specifically incorporates it by reference into such filing.

The following graph compares the cumulative total stockholder return on our Class A common stock over the five-year period ended December 31, 2008, the cumulative total return during such period of the Standard and Poor’s 500 Stock Index (“S&P 500 Index”) and the Hemscott Industry Group Index 743-Music & Video Stores (“Hemscott Group Index”). The comparison assumes $100 was invested on December 31, 2003, in our Class A common stock and in each of the foregoing indices and assumes reinvestment of dividends. The stock performance shown on the graph below represents historical stock performance and is not necessarily indicative of future stock price performance.

	12/31/03	12/31/04	12/31/05	12/31/06	12/31/07	12/31/08
Blockbuster Inc. Class A common stock	100.00	84.74	33.45	47.19	34.79	11.24
Hemscott Group Index*	100.00	73.93	60.61	67.62	62.16	50.79
S&P 500 Index	100.00	110.88	116.33	134.70	142.10	89.53

* The Hemscott Group Index consists of the following issuers: Blockbuster Inc. (Class A and Class B common stock); Hastings Entertainment, Inc.; Netflix, Inc.; and Trans World Entertainment Corporation.

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The following graph compares the cumulative total stockholder return on our Class B common stock over the period from October 14, 2004 to December 31, 2008, with the cumulative total return during such period of the S&P 500 Index and the Hemscott Group Index. The comparison assumes $100 was invested on October 14, 2004 in our Class B common stock and in each of the foregoing indices and assumes reinvestment of dividends. The stock performance shown on the graph below represents historical stock performance and is not necessarily indicative of future stock price performance.

	10/14/04	12/31/04	6/30/05	12/31/05	6/30/06	12/31/06	6/30/07	12/31/07	6/30/08	12/31/08
Blockbuster Inc. Class B common stock	100.00	115.51	113.00	43.86	57.82	64.53	51.50	45.31	26.60	8.56
Hemscott Group Index*	100.00	100.79	104.71	82.14	92.59	91.45	70.65	83.98	72.07	67.87
S&P 500 Index	100.00	109.23	108.35	114.60	117.70	132.70	141.93	139.99	123.31	88.20

* The Hemscott Group Index consists of the following issuers: Blockbuster Inc. (Class A and Class B common stock); Hastings Entertainment, Inc.; Netflix, Inc.; and Trans World Entertainment Corporation.

Item 6.    Selected Financial Data

The following table sets forth our selected consolidated historical financial data as of the dates and for the periods indicated. The selected consolidated statement of operations and balance sheet data for fiscal years 2004 through 2008 are derived from our consolidated financial statements. The financial information herein may not necessarily reflect our results of operations, financial position and cash flows in the future or what our results of operations, financial position and cash flows would have been had Viacom not owned a large majority of our equity and voting interest until October 2004.

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BLOCKBUSTER SELECTED CONSOLIDATED HISTORICAL

FINANCIAL DATA

The following data should be read in conjunction with, and is qualified by reference to, the consolidated financial statements and related notes, and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this document.

	Fiscal Year Ended or at Year End
	2008(1)			2007(2)(3)			2006(4)(5)			2005(6)(7)			2004(8)(9)(10)
	(In millions, except per share amounts)
Statement of Operations Data:
Revenues	$	5,287.9		$	5,542.4		$	5,522.2		$	5,721.8		$	5,932.8
Gross profit	$	2,722.5		$	2,864.6		$	3,042.5		$	3,160.8		$	3,545.0
Impairment of goodwill and other long-lived assets(11)	$	435.0		$	2.2		$	5.1		$	341.9		$	1,499.7
Operating income (loss)	$	(293.3	)	$	39.1		$	73.6		$	(382.9	)	$	(1,242.0	)
Income (loss) before discontinued operations and cumulative effect of change in accounting principle	$	(373.8	)	$	(74.2	)	$	63.7		$	(544.1	)	$	(1,251.2	)
Income (loss) per common share before discontinued operations and cumulative effect of change in accounting principle—basic and diluted	$	(2.01	)	$	(0.45	)	$	0.28		$	(2.96	)	$	(6.91	)
Income (loss) from discontinued operations, net of tax(12)	$	(0.3	)	$	0.4		$	(13.2	)	$	(39.8	)	$	4.9
Net income (loss)	$	(374.1	)	$	(73.8	)	$	50.5		$	(583.9	)	$	(1,246.3	)
Preferred stock dividends(13)	$	(11.3	)	$	(11.3	)	$	(11.3	)	$	—		$	—
Net income (loss) applicable to common stockholders	$	(385.4	)	$	(85.1	)	$	39.2		$	(583.9	)	$	(1,246.3	)
Net income (loss) per common share—basic and diluted	$	(2.01	)	$	(0.45	)	$	0.21		$	(3.18	)	$	(6.88	)
Cash dividends per common share	$	—		$	—		$	—		$	0.04		$	0.08
Special distribution per share	$	—		$	—		$	—		$	—		$	5.00
Weighted average shares outstanding—basic		191.8			190.3			187.1			183.9			181.2
Weighted average shares outstanding—diluted		191.8			190.3			189.0			183.9			181.2
Balance Sheet Data:
Cash and cash equivalents	$	154.9		$	184.6		$	394.9		$	276.2		$	330.3
Total assets	$	2,154.5		$	2,733.6		$	3,134.6		$	3,184.0		$	3,991.5
Long-term debt, including capital leases	$	611.3		$	703.0		$	899.5		$	1,121.6		$	1,119.7
Stockholders’ equity	$	214.3		$	655.7		$	723.3		$	637.6		$	1,062.9

(1) During 2008, we recognized $14.1 million of compensation expense related to share-based compensation as required by Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised), Share-Based Payments (“SFAS 123R”).

(2) During 2007, we recorded an $81.5 million gain on sale of Gamestation and a $6.3 million gain on sale of our Australian subsidiary, both of which are included in Operating income (loss).

(3) During 2007, we recognized $14.6 million of compensation expense related to share-based compensation as required by SFAS 123R.

(4) During 2006, we recorded $111.9 million in tax benefits resulting from the resolution of multi-year income tax audits.

(5) During 2006, we recognized $25.5 million of compensation expense related to share-based compensation as required by SFAS 123R.

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(6) During 2005, we recorded a valuation allowance on our deferred tax assets in various jurisdictions. See Note 7 to our consolidated financial statements.

(7) During 2005, we recognized $39.1 million of compensation expense related to share-based compensation as required by SFAS 123R.

(8) During 2004, we recognized a $37.1 million tax benefit as a result of specific federal income tax audit issues resolved during 2004.

(9) In conjunction with our adoption of SFAS 123R, we recognized $18.3 million of compensation expense related to share-based compensation in 2004. We also adopted the expense recognition provisions of FASB Interpretation No. 28, Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans (“FIN 28”) as of January 1, 2004. Because we applied the disclosure-only provisions of SFAS 123 through September 30, 2004, the cumulative effect of change in accounting principle of $23.1 million, net of tax, recognized upon adoption of the expense recognition provisions of FIN 28 has not been reflected in our Consolidated Statements of Operations for the year ended December 31, 2004.

(10) During the third quarter of 2004, we paid a $5.00 special distribution per share prior to our divestiture from Viacom.

(11) We have recognized non-cash charges to impair goodwill and other long-lived assets in accordance with SFAS 142 and SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS 144”). See Note 2 to the consolidated financial statements for a discussion of impairment charges.

(12) During 2006, we completed the divestiture of Movie Brands Inc. and MOVIE TRADING CO.^® in addition to closing all of our store locations in Spain. In January 2007, we also completed the sale of RHINO VIDEO GAMES^®. In accordance with SFAS 144, these operations have been classified as discontinued operations.

(13) During the third quarter of 2005, we completed a private placement of Series A cumulative convertible perpetual preferred stock. The first dividend payment was declared and paid in the first quarter of 2006.

Item 7.    Managements’ Discussion and Analysis of Financial Condition and Results of Operations

(Tabular Dollars in Millions)

Unless otherwise noted, the following discussion and analysis relates only to results from continuing operations. The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes appearing elsewhere in this document. We have the intent and ability to take actions necessary for the Company to continue as a going concern, as discussed herein, and accordingly our consolidated financial statements have been prepared assuming that we will continue as a going concern. Our revolving credit facility and Term A loan facility are each scheduled to expire in August 2009. Given the impending expiration of both our revolving credit facility and Term A loan facility, on April 2, 2009, we amended our revolving credit facility, Term A loan facility and Term B loan facility to include commitments from certain of our lenders and certain new lenders to (a) replace the existing revolving credit facility with a $250 million revolving credit facility with a maturity date of September 30, 2010 (the “amended credit facility”), and (b) amend certain financial covenants, other covenants and other terms in our existing revolving credit facility, Term A loan facility and Term B loan facility. The obligation of the lenders to fund the $250 million revolving credit facility and effectuate such amendments is subject to the satisfaction of certain conditions set forth in the amendment. While we believe that all such conditions will be met and that we will be in a position to close on the amended credit facility on or about May 11, 2009, there can be no assurance regarding these matters. The risk that we may not successfully complete this refinancing and obtain the related amendment of certain financial covenants included therein, and/or the risk that we may not have adequate liquidity to fund our operations as a result of not meeting our projected financial results, even if the refinancing is completed within the time and upon the terms contemplated, raise substantial doubt about our ability to continue as a going concern. Management’s plans concerning these matters are also discussed under “Liquidity and Capital Resources” below and in Note 1 to the consolidated financial statements. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

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Change in Fiscal Year End

On October 12, 2006, our Board of Directors approved a change in our fiscal year from a calendar year ending on December 31^st to a 52/53 week fiscal year ending on the first Sunday following December 30^th. The change in our fiscal year took effect on January 1, 2007 and, therefore, there was no transition period in connection with this change of fiscal year-end. Fiscal year 2008 includes the 52 weeks ended January 4, 2009, while fiscal year 2007 includes the 53 weeks ended January 6, 2008, and fiscal year 2006 includes the calendar year ended December 31, 2006.

Overview

Blockbuster Inc. is a leading global provider of in-home rental and retail movie and game entertainment, with over 7,400 stores in the United States, its territories and 20 other countries as of January 4, 2009. We also offer rental and retail movie entertainment through the Internet and by mail in the United States.

While the overall media entertainment industry has remained stable over the past few years, it has experienced a channel shift primarily driven by the emergence of new methods of distribution. Recognizing that shift, we have broadened our focus beyond DVD rental to providing convenient access to media entertainment across five channels of distribution:

• in-store,

• by mail,

• vending and kiosks,

• online, and

• at home (direct to the TV).

In 2008, we have continued to build on the series of actions we took during the second half of 2007 that were designed to both improve short-term profitability and position us to achieve our strategic objectives.

2008 Strategic Objectives and Accomplishments

Leverage and grow our leadership position in the movie and game rental business

• Greatly enhance product availability—We have increased our in-stock availability on new releases and have expanded Blu-ray to all stores with prominent positioning.

• Improve the customer experience—We are currently testing a number of store prototypes in approximately 600 stores that range from a refreshed and modernized look and feel of typical BLOCKBUSTER stores to Rock-the-Block stores that emphasize gaming, beverages and snacks and video-enabled electronic devices, all of which are designed to improve the in-store customer experience.

• Innovatively merchandise our product offerings—We are cross-merchandising retail and rental product in high-traffic areas in our stores.

Enhance retail and merchandising opportunities

• We are leveraging our leadership position in the rental market to increase sales of movies, games and other complementary entertainment-related products by cross-merchandising retail and rental product in high-traffic areas in our stores.

• We have broadened our product assortment to include Blu-ray, and completed a roll out of games software, hardware and accessories in all our U.S. corporate-owned stores during the second quarter of 2008.

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• We also have rolled out a focused assortment of consumer electronics to approximately 1,900 of our domestic stores.

• In December 2008, we announced a three-year agreement that makes BLOCKBUSTER stores the exclusive physical retail ticket outlet for Live Nation Ticketing, beginning with the start of the 2009 concert season.

Develop digital solutions

• We have launched digital downloading on blockbuster.com, which enables our customers to download entertainment content for both rental and purchase.

• We launched BLOCKBUSTER OnDemand in November 2008 with the 2Wire MediaPoint^™ digital media player, an easy-to-use, on-demand video solution that offers movie fans instant access through their television sets to BLOCKBUSTER OnDemand content, including thousands of titles from the latest movie releases to classic favorites.

• We are also testing digital delivery through kiosks in select stores to digitally deliver entertainment content to our customers’ portable devices.

Implement cost controls—We have surpassed our goal of reducing annualized overhead costs by $100 million through the elimination of staffing and operational redundancies in our in-store and online corporate support structure and through operational improvements. Our primary focus has been on cost reductions through:

• outsourcing,

• lease renegotiations to generate significant reductions in future store occupancy costs, and

• elimination of operational redundancies.

Key Financial Points for 2008

• Reported net loss of $374.1 million, driven by non-cash impairment charges to our goodwill and other long-lived assets of $435.0 million.

• Same-store revenues increased 3.9%.

• Selling, general and administrative expenses decreased by $291 million or 11%.

• Estimated impact of the 53^rd week in fiscal 2007:

• Revenues decreased by $102 million.

• Gross profit decreased by $52 million.

• Operating income decreased by $7 million.

• The worldwide economic downturn in late 2008 had a negative impact on our results of operations, especially in our international markets.

Outlook

While we continue to be committed to improving our financial results through the operational and strategic initiatives discussed above, due to the recent extraordinary and unexpected limitations in domestic and international capital and credit markets, we have temporarily deferred or limited our spending on certain of these initiatives while we take prudent actions that are intended to provide that cash on hand, cash from operations and available borrowings under our amended revolving credit facility (assuming that we close on such facility) will be sufficient to fund our cash requirements. These actions include, but are not limited to, adjusting capital expenditures and inventory levels, evaluating expenditures for strategic initiatives and continuing to implement

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ongoing cost controls. We intend that any such actions will remain in effect only until such time as improvements in the capital and credit markets provide additional options for sources of financing. Additionally, we continue to consider options for divesting certain non-core assets, including selling and/or licensing some of our international operations.

In 2009 we expect to continue facing the challenges of a depressed economy and the fragmentation of the media entertainment industry. Our current 2009 plan contemplates that worldwide same-store revenues will be lower than what we experienced in the fourth quarter of 2008. We believe that the actions we have taken to reduce costs and diversify our product offerings will help mitigate these challenges. However, there can be no assurances that conditions currently affecting the worldwide economic environment and other macroeconomic factors that could influence consumer confidence and spending behavior will not further alter our strategic objectives.

See “Liquidity and Capital Resources” below and Note 6 to the consolidated financial statements for discussion of our amended revolving credit facility, Term A loan facility and Term B loan facility.

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Results of Operations

Consolidated Results

The following table sets forth a summary of consolidated results of certain operating and other financial data.

	Fiscal Year Ended
	January 4, 2009			January 6, 2008			December 31, 2006
	(In millions, except worldwide store data)
Statement of Operations Data:
Revenues	$	5,287.9		$	5,542.4		$	5,522.2
Cost of sales		2,565.4			2,677.8			2,479.7
Gross profit		2,722.5			2,864.6			3,042.5
Operating expenses(1)		3,015.8			2,825.5			2,968.9
Operating income (loss)		(293.3	)		39.1			73.6
Interest expense		(73.0	)		(88.7	)		(101.6	)
Interest income		2.5			6.5			9.9
Other items, net(2)		15.6			(1.5	)		5.4
Income (loss) before income taxes		(348.2	)		(44.6	)		(12.7	)
Benefit (provision) for income taxes(3)		(25.6	)		(29.6	)		76.4
Income (loss) before discontinued operations		(373.8	)		(74.2	)		63.7
Income (loss) from discontinued operations, net of tax(4)		(0.3	)		0.4			(13.2	)
Net income (loss)	$	(374.1	)	$	(73.8	)	$	50.5
Cash Flow Data:
Cash flows provided by (used for) operating activities	$	51.0		$	(56.2	)	$	329.4
Cash flows provided by (used for) investing activities	$	(116.5	)	$	76.7		$	(41.0	)
Cash flows provided by (used for) financing activities	$	49.4		$	(241.0	)	$	(183.2	)
Other Data:
Depreciation and intangible amortization	$	152.2		$	185.7		$	210.9
Impairment of goodwill and other long-lived assets	$	435.0		$	2.2		$	5.1
Margins:
Rental margin(5)		62.1	%		60.7	%		65.2	%
Merchandise margin(6)		20.9	%		23.3	%		24.9	%
Gross margin(7)		51.5	%		51.7	%		55.1	%
Worldwide Store Data:
Same-store revenues increase (decrease)(8)		3.9	%		(2.3	)%		(4.2	)%
Company-operated stores at end of year		5,806			6,073			6,551
Franchised and joint venture stores at end of year		1,599			1,757			1,809
Total stores at end of year		7,405			7,830			8,360
	Total Number			Avg Sq. Footage			Total Sq. Footage
				(in thousands)			(in thousands)
Real Estate Data at January 4, 2009:
Domestic
Company-operated stores		3,878			5.5			21,484
Distribution centers		39			N/A			1,121
Corporate/regional offices		12			N/A			416
International
Company-operated stores		1,928			3.1			5,943
Distribution centers		7			N/A			199
Corporate/regional offices		7			N/A			117

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(1) Operating expenses include:

• non-cash charges to impair goodwill and other long-lived assets in accordance with SFAS 142 and SFAS 144 totaling $435.0 million, $2.2 million and $5.1 million for fiscal years 2008, 2007 and 2006, respectively; and

• a gain on sale of Gamestation of $81.5 million for fiscal 2007.

(2) Other items, net include the favorable impact of $15.5 million of foreign currency exchange gains related primarily to intercompany loans denominated in currencies other than the U.S. dollar in 2008.

(3) The benefit for income taxes in 2006 mainly relates to a benefit recorded in the first and second quarters of 2006 from the resolution of multi-year income tax audits.

(4) During 2006, we completed the divestiture of Movie Brands Inc. (“MBI”) and MOVIE TRADING CO. (“MTC”) in addition to closing all of our store locations in Spain. During January 2007, we also completed the sale of RHINO VIDEO GAMES (“RHINO”). In accordance with SFAS 144, these operations have been classified as discontinued operations.

(5) Rental gross profit (rental revenues less cost of rental revenues) as a percentage of rental revenues.

(6) Merchandise gross profit (merchandise sales less cost of merchandise sold) as a percentage of merchandise sales.

(7) Gross profit as a percentage of total revenues.

(8) A store is included in the same-store revenues calculation after it has been opened and operated by us for more than 52 weeks. An acquired store becomes part of the same-store base in the 53^rd week after its acquisition and conversion. The percentage change is computed by comparing total net revenues for same-stores at the end of the applicable reporting period with total net revenues from these same-stores for the comparable period in the prior year. The same-store revenues calculation does not include the impact of foreign exchange or by-mail subscription revenue. The method of calculating same-store revenues varies across the retail industry; therefore, our method of calculating same-store revenues may not be the same as other retailers’ methods.

Segments

Beginning in the fourth quarter of fiscal 2007, we operate our business in two reportable segments: Domestic and International. We identify segments based on how management makes operating decisions, assesses performance and allocates resources.

• The Domestic segment is comprised of all U.S. store operations and by-mail subscription service operations in addition to the digital delivery of movies through blockbuster.com. As of January 4, 2009, we had 4,585 stores operating under the BLOCKBUSTER brand in the United States and its territories. Of these stores, 707 stores were operated through our franchisees.

• The International segment is comprised of all non-U.S. store operations including operations in Europe, Latin America, Australia, Canada, Mexico and Asia. As of January 4, 2009, we had 2,820 stores operating under the BLOCKBUSTER brand and other brand names owned by us located in 20 markets outside of the United States. Of these stores, 892 stores were operated through our franchisees. In the Republic of Ireland and Northern Ireland, we operate under the XTRA-VISION^® brand name due to its strong local brand awareness. In Canada, Italy, Mexico and Denmark, we also operate freestanding and store-in-store game locations under the GAME RUSH brand. During 2007, we sold our freestanding game locations which operated under the brand name GAMESTATION^® and we retained 34 Gamestation locations that operate as a “store-in-store” within BLOCKBUSTER stores. Additionally, during 2006, 2007 and 2008, we sold our Taiwanese, Australian and Chilean subsidiaries, respectively, each coupled with a license agreement. The results of Gamestation, Taiwan, Australia and Chile have been included in continuing operations through the period in which they were sold.

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The following table is a summary of operating income (loss) by business segment.

	Domestic Segment			International Segment		Unallocated/ Corporate			Total
Statement of Operations Data:
Fiscal Year Ended January 4, 2009
Revenues	$	3,590.8		$	1,697.1	$	—		$	5,287.9
Cost of sales		1,673.4			892.0		—			2,565.4
Gross profit		1,917.4			805.1		—			2,722.5
Operating expenses		2,143.3			727.6		144.9			3,015.8
Operating income (loss)	$	(225.9	)	$	77.5	$	(144.9	)	$	(293.3	)
Fiscal Year Ended January 6, 2008
Revenues	$	3,607.9		$	1,934.5	$	—		$	5,542.4
Cost of sales		1,638.9			1,038.9		—			2,677.8
Gross profit		1,969.0			895.6		—			2,864.6
Operating expenses		1,907.9			734.7		182.9			2,825.5
Operating income (loss)	$	61.1		$	160.9	$	(182.9	)	$	39.1
Fiscal Year Ended December 31, 2006
Revenues	$	3,617.2		$	1,905.0	$	—		$	5,522.2
Cost of sales		1,452.5			1,027.2		—			2,479.7
Gross profit		2,164.7			877.8		—			3,042.5
Operating expenses		1,930.9			833.9		204.1			2,968.9
Operating income (loss)	$	233.8		$	43.9	$	(204.1	)	$	73.6

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Comparison of Fiscal 2008 (52 Weeks) to Fiscal 2007 (53 Weeks)

Domestic Segment. The following table is a summary of domestic results of operations.

	Fiscal Year Ended January 4, 2009 (52 Weeks)					Fiscal Year Ended January 6, 2008 (53 Weeks)				Increase/ (Decrease)
	Amount			Percent of Revenue		Amount		Percent of Revenue		Dollar			Percent
Revenues:
Rental revenues:
Movies	$	2,272.4		63.4	%	$	2,389.3	66.3	%	$	(116.9	)	(4.9	)%
Games		219.9		6.1	%		220.6	6.1	%		(0.7	)	(0.3	)%
Previously rented product (“PRP”)		492.7		13.7	%		527.3	14.6	%		(34.6	)	(6.6	)%
Total rental revenues		2,985.0		83.2	%		3,137.2	87.0	%		(152.2	)	(4.9	)%
Merchandise sales:
Movies		227.4		6.3	%		221.2	6.1	%		6.2		2.8	%
Games		155.0		4.3	%		47.4	1.3	%		107.6		227.0	%
General merchandise		200.1		5.6	%		177.9	4.9	%		22.2		12.5	%
Total merchandise sales		582.5		16.2	%		446.5	12.3	%		136.0		30.5	%
Royalties and other		23.3		0.6	%		24.2	0.7	%		(0.9	)	(3.7	)%
Total revenues		3,590.8		100.0	%		3,607.9	100.0	%		(17.1	)	(0.5	)%
Cost of sales:
Cost of rental revenues		1,196.9		33.3	%		1,314.3	36.4	%		(117.4	)	(8.9	)%
Cost of merchandise sold		476.5		13.3	%		324.6	9.0	%		151.9		46.8	%
		1,673.4		46.6	%		1,638.9	45.4	%		34.5		2.1	%
Gross profit		1,917.4		53.4	%		1,969.0	54.6	%		(51.6	)	(2.6	)%
Operating expenses:
General and administrative:
Stores		1,338.2		37.2	%		1,402.5	38.9	%		(64.3	)	(4.6	)%
Corporate and field		178.3		5.0	%		230.3	6.4	%		(52.0	)	(22.6	)%
Total general and administrative		1,516.5		42.2	%		1,632.8	45.3	%		(116.3	)	(7.1	)%
Advertising		85.9		2.4	%		150.5	4.2	%		(64.6	)	(42.9	)%
Depreciation and intangible amortization		105.9		2.9	%		122.4	3.3	%		(16.5	)	(13.5	)%
Impairment of goodwill and other long-lived assets		435.0		12.2	%		2.2	0.1	%		432.8		N/A
		2,143.3		59.7	%		1,907.9	52.9	%		235.4		12.3	%
Operating income (loss)	$	(225.9	)	(6.3	)%	$	61.1	1.7	%	$	(287.0	)	N/A
Margins:
Rental margin				59.9	%			58.1	%
Merchandise margin				18.2	%			27.3	%
Gross margin				53.4	%			54.6	%

	Fiscal Year Ended January 4, 2009
Same-store revenues increase/(decrease)
Store only:
Rental revenues	1.2	%
Merchandise revenues	37.4	%
Total revenues	6.4	%

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Domestic—Rental revenues

• Rental revenues decreased mainly as a result of:

• a $60 million decrease in by-mail revenues driven by a 26% average decline in by-mail subscribers, which is more than offset by related cost reductions described below under “Domestic—Gross profit;”

• an estimated $55 million decrease due to the 53^rd week included in fiscal 2007 results; and

• a 3.2% decline in company-operated stores due primarily to the continued selective closure of unprofitable stores;

• offset by the favorable impact of price increases which contributed to a same-store revenue increase of $28.7 million or 1.2%.

• Although we expect the in-store movie rental industry to continue declining in 2009, we believe that our initiatives to maximize product availability of new releases, simplify pricing terms, improve customer service, obtain exclusive content and innovatively merchandise our product offerings will help at least partially offset this trend.

• We have launched a pilot program during the first quarter of 2009, which allows select BLOCKBUSTER Total Access online customers to rent video games, as well as movies, through the mail as part of their subscription plan.

Domestic—Merchandise sales

• Same-store game sales increased $108.0 million or 244.9%, representing the favorable impact of:

• the expansion of games software, hardware and accessories to all stores;

• cross-merchandising games hardware, software and accessories to prominent positions in our stores; and

• a 37% higher average selling price per unit of games software due to an increase in games software sold for next generation game platforms that carry a higher average selling price than the older game platforms sold in 2007.

• Same-store general merchandise sales, which include sales of confections and other movie and game-related products, increased $30.3 million or 18.2% due to:

• our strategy of having an assortment of licensed merchandise product available for major theatrical releases; and

• the roll-out of framed entertainment posters to our stores during the first quarter of 2008.

• The following partially offset the increases to merchandise sales discussed above:

• the 3.2% decline in company-operated stores discussed above; and

• an approximately $11 million decrease in total merchandise sales due to the 53rd week included in fiscal 2007 results.

Domestic—Gross profit

• Rental gross profit decreased due to the decrease in rental revenues, offset by:

• reduced estimated costs for our by-mail offering of $150 million, including the favorable impact of approximately 50% fewer free in-store exchanges for BLOCKBUSTER Total Access (“Total Access”) subscribers; and

• favorable nonrecurring contractual settlements with vendors of $15.1 million.

• Merchandise gross margin decreased from 27.3% to 18.2% due to a change in product mix. As a percentage of sales, there has been an increase in games hardware and software sales which, due to the competitive prices at which we are selling them, negatively impacted our overall merchandise gross

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margin. In addition, DVD margin decreased due to more competitive consumer pricing. We may continue to experience lower merchandise gross margins as we continue to adjust our retail pricing models and invest in our retail growth.

• The 53^rd week included in fiscal 2007 results accounted for approximately $37 million of the decrease in total gross profit.

Domestic—Operating expenses

• Stores general and administrative expense decreased mainly due to our focus on closing less profitable stores and renegotiating leases, leading to decreased occupancy costs and store labor costs from prior year.

• Corporate and field general and administrative expense, which includes expenses incurred at the field and regional levels for store operations along with our by-mail offering, decreased due primarily to our cost-savings measures.

• Advertising expense, which includes by-mail subscriber acquisition costs, decreased 42.9% due to a reduction in our advertising spend to promote Total Access.

• Depreciation and intangible amortization decreased 13.5% primarily due to certain store assets becoming fully depreciated in addition to the decreased store count discussed above.

• Impairment of goodwill and other long-lived assets had the single largest impact on our operating expense increase over prior year with a 2008 impairment charge of $435.0 million compared to a $2.2 million impairment charge in 2007. For further discussion, see “Critical Accounting Estimates” below and Note 2 to our consolidated financial statements.

• The 53^rd week included in fiscal 2007 resulted in a reduction of approximately $29 million in total operating expenses.

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International Segment. The following table is a summary of international results of operations.

	Fiscal Year Ended January 4, 2009 (52 Weeks)				Fiscal Year Ended January 6, 2008 (53 Weeks)					Increase/ (Decrease)
	Amount		Percent of Revenue		Amount			Percent of Revenue		Dollar			Percent
Revenues:
Rental revenues:
Movies	$	688.6	40.6	%	$	756.9		39.1	%	$	(68.3	)	(9.0	)%
Games		57.6	3.4	%		59.4		3.1	%		(1.8	)	(3.0	)%
Previously rented product (“PRP”)		134.6	7.9	%		129.0		6.7	%		5.6		4.3	%
Total rental revenues		880.8	51.9	%		945.3		48.9	%		(64.5	)	(6.8	)%
Merchandise sales:
Movies		195.1	11.5	%		222.9		11.5	%		(27.8	)	(12.5	)%
Games		433.2	25.5	%		549.1		28.4	%		(115.9	)	(21.1	)%
General merchandise		178.6	10.5	%		181.6		9.4	%		(3.0	)	(1.7	)%
Total merchandise sales		806.9	47.5	%		953.6		49.3	%		(146.7	)	(15.4	)%
Royalties and other		9.4	0.6	%		35.6		1.8	%		(26.2	)	(73.6	)%
Total revenues		1,697.1	100.0	%		1,934.5		100.0	%		(237.4	)	(12.3	)%
Cost of sales:
Cost of rental revenues		270.1	16.0	%		289.7		15.0	%		(19.6	)	(6.8	)%
Cost of merchandise sold		621.9	36.6	%		749.2		38.7	%		(127.3	)	(17.0	)%
		892.0	52.6	%		1,038.9		53.7	%		(146.9	)	(14.1	)%
Gross profit		805.1	47.4	%		895.6		46.3	%		(90.5	)	(10.1	)%
Operating expenses:
General and administrative		652.0	38.4	%		724.8		37.5	%		(72.8	)	(10.0	)%
Advertising		36.1	2.1	%		43.5		2.2	%		(7.4	)	(17.0	)%
Depreciation and intangible amortization		39.5	2.3	%		47.9		2.5	%		(8.4	)	(17.5	)%
Gain on sale of Gamestation		—	0.0	%		(81.5	)	(4.2	)%		81.5		100.0	%
		727.6	42.8	%		734.7		38.0	%		(7.1	)	(1.0	)%
Operating income (loss)	$	77.5	4.6	%	$	160.9		8.3	%	$	(83.4	)	(51.8	)%
Margins:
Rental margin			69.3	%				69.4	%
Merchandise margin			22.9	%				21.4	%
Gross margin			47.4	%				46.3	%

	Fiscal Year Ended January 4, 2009
Same-store revenues increase/(decrease)(1)
Rental revenues	(2.8	)%
Merchandise revenues	2.4	%
Total revenues	(0.4	)%

(1) Changes in international same-store revenues do not include the impact of foreign exchange.

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International—Rental revenues

• Movie rental revenues decreased primarily due to:

• a 6.8% decline in company-operated stores due primarily to the continued selective closure of less profitable stores;

• a same-store sales for movie rentals decrease of $29.3 million or 3.4%, impacted by a price decrease in select European markets due to competition from low retail prices and reduced traffic due to the economic downturn; and

• a decrease in movie rental transactions due to competition from more popular TV offerings compared to 2007.

• Rental mix changed with more customers purchasing PRP due to increased promotional activity designed to move older product. Our international markets purchase a majority of their rental product under traditional purchase agreements and therefore their PRP title availability is not as limited by revenue sharing agreements as it is domestically.

• The 53^rd week included in fiscal 2007 results accounted for approximately $15 million of the decrease in total rental revenues.

• We experienced an unfavorable foreign currency exchange impact of $4.5 million.

International—Merchandise sales

• Movie sales decreased primarily due to:

• a same-store sales decrease of $21.9 million or 10.1% due to the economic downturn, fewer large box office titles, and increased competition primarily in the United Kingdom and Canada; and

• the reduced store count as discussed above.

• Game sales, including sales of new and traded games software, hardware consoles and accessories decreased in total due to:

• the sale of 217 Gamestation stores during the second quarter of 2007, which accounted for an estimated $150 million of the decrease; and

• the 6.8% reduction in company-operated stores in 2008;

• offset by a same-store games sales increase of $47.8 million or 12.4% due to increased inventory levels in all of our international markets and the successful roll out of our Game Rush store-in-store concept to many stores in our Latin American and European markets.

• We experienced an unfavorable foreign currency exchange impact of $29.5 million.

• The 53^rd week included in fiscal 2007 results accounted for approximately $21 million of the decrease in total merchandise sales.

International—Royalties and other revenues

• We received $25 million in connection with the termination and relicensing of our Brazilian franchise in 2007.

International—Gross profit

• Rental and merchandise gross profit decreased due primarily to the decrease in revenues discussed above, including:

• a $30 million estimated decrease due to the sale of 217 Gamestation stores during the second quarter of 2007;

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• a $15 million estimated decrease due to the impact of the 53^rd week included in fiscal 2007 results; and

• the 6.8% decline in company-operated stores in 2008.

• Royalties gross profit decreased approximately $25 million due to the 2007 Brazilian franchise payment discussed above.

• We experienced an unfavorable foreign currency exchange impact of $10.4 million.

International—Operating expenses

• Operating expenses decreased primarily due to:

• a $42.9 million or 11.5% decrease in compensation expense due to a reduction in head count, excluding the impact of foreign currency exchange;

• an estimated $30 million decrease due to the sale of 217 Gamestation stores in 2007;

• a $24.0 million or 9.2% decrease in occupancy costs driven by the 6.8% reduction in company-operated stores discussed above, excluding the impact of foreign currency exchange;

• the impact of 53^rd week included in 2007 results of $13 million; and

• a favorable foreign currency exchange impact of $2.7 million;

• offset by the 2007 gain on the sale of Gamestation of $81.5 million and the gain on sale of our operations in Australia of $6.3 million, which is recorded as a reduction to “General and administrative” expenses.

Unallocated Corporate. The following table is a summary of corporate operating expenses that are not allocated to either business segment.

	Fiscal Year Ended				Increase/(Decrease)
	January 4, 2009 (52 Weeks)		January 6, 2008 (53 Weeks)		Dollar			Percent
General and administrative	$	138.1	$	167.5	$	(29.4	)	(17.6	)%
Depreciation and intangible amortization		6.8		15.4		(8.6	)	(55.8	)%
Operating expenses	$	144.9	$	182.9	$	(38.0	)	(20.8	)%

Operating expenses decreased primarily due to:

• a reduction in general and administrative expense due to:

• a $14.2 million or 74.7% reduction in severance costs;

• a $12.6 million or 19.7% reduction in other general and administrative expenses primarily related to professional fees;

• a $9.2 million or 12.9% decrease in corporate compensation expense, related primarily to our 2007 changes in senior management;

• offset by an estimated $6.0 million increase in our outsourcing costs; and

• a reduction of depreciation expense due to certain assets becoming fully depreciated.

Additional Consolidated Results

• Interest expense decreased primarily due to lower average interest rates during 2008.

• Foreign currency exchange on intercompany loans denominated in currencies other than U.S. dollars contributed a favorable impact of $15.5 million to other income.

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Comparison of Fiscal 2007 (53 Weeks) to Fiscal 2006 (Calendar Year)

Domestic Segment. The following table is a summary of domestic results of operations.

	Fiscal Year Ended January 6, 2008 (53 Weeks)				Fiscal Year Ended December 31, 2006 (Calendar Year)				Increase/ (Decrease)
	Amount		Percent of Revenue		Amount		Percent of Revenue		Dollar			Percent
Revenues:
Rental revenues:
Movies	$	2,389.3	66.3	%	$	2,359.8	65.2	%	$	29.5		1.3	%
Games		220.6	6.1	%		246.4	6.8	%		(25.8	)	(10.5	)%
Previously rented product (“PRP”)		527.3	14.6	%		494.8	13.7	%		32.5		6.6	%
Total rental revenues		3,137.2	87.0	%		3,101.0	85.7	%		36.2		1.2	%
Merchandise sales:
Movies		221.2	6.1	%		234.7	6.5	%		(13.5	)	(5.8	)%
Games		47.4	1.3	%		77.5	2.1	%		(30.1	)	(38.8	)%
General merchandise		177.9	4.9	%		161.6	4.5	%		16.3		10.1	%
Total merchandise sales		446.5	12.3	%		473.8	13.1	%		(27.3	)	(5.8	)%
Royalties and other		24.2	0.7	%		42.4	1.2	%		(18.2	)	(42.9	)%
Total revenues		3,607.9	100.0	%		3,617.2	100.0	%		(9.3	)	(0.3	)%
Cost of sales:
Cost of rental revenues		1,314.3	36.4	%		1,111.5	30.7	%		202.8		18.2	%
Cost of merchandise sold		324.6	9.0	%		341.0	9.5	%		(16.4	)	(4.8	)%
		1,638.9	45.4	%		1,452.5	40.2	%		186.4		12.8	%
Gross profit		1,969.0	54.6	%		2,164.7	59.8	%		(195.7	)	(9.0	)%
Operating expenses:
General and administrative:
Stores		1,402.5	38.9	%		1,479.5	40.9	%		(77.0	)	(5.2	)%
Corporate and field		230.3	6.4	%		195.9	5.4	%		34.4		17.6	%
Total general and administrative		1,632.8	45.3	%		1,675.4	46.3	%		(42.6	)	(2.5	)%
Advertising		150.5	4.2	%		118.7	3.3	%		31.8		26.8	%
Depreciation and intangible amortization		122.4	3.3	%		136.8	3.8	%		(14.4	)	(10.5	)%
Impairment of goodwill and other long-lived assets		2.2	0.1	%		—	0.0	%		2.2		0.0	%
		1,907.9	52.9	%		1,930.9	53.4	%		(23.0	)	(1.2	)%
Operating income (loss)	$	61.1	1.7	%	$	233.8	6.4	%	$	(172.7	)	(73.9	)%
Margins:
Rental margin			58.1	%			64.2	%
Merchandise margin			27.3	%			28.0	%
Gross margin			54.6	%			59.8	%

	Fiscal Year Ended January 6, 2008
Same-store revenues increase/(decrease)
Store only:
Rental revenues	(7.2	)%
Merchandise revenues	(3.7	)%
Total revenues	(6.9	)%

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Domestic—Rental revenues

• We focused on driving BLOCKBUSTER Total Access subscriber growth early in fiscal 2007, which significantly increased subscription revenues.

• Base movie rental revenues decreased due to the transition of in-store only customers to BLOCKBUSTER Total Access customers who transact both online and in-store. Additionally, the in-store movie rental industry remained under pressure during 2007.

• Base game rentals decreased as the rentals of older game platforms declined more than the growth of rentals in the next-generation game platforms.

• PRP revenues increased due primarily to an increase of 8.5% in same-store sales for movie PRP.

• 53^rd week included in fiscal 2007 results accounted for an estimated $56 million of the increase in total rental revenues.

Domestic—Merchandise sales

• Game sales, including sales of new and traded game software, hardware consoles and accessories, decreased due primarily to a reduction in our retail game inventory which led to a 37.2% decrease in same-store game sales for 2007.

• The increase in general merchandise sales was driven by an increase in both confection and licensed merchandise sales.

• The overall decrease was offset by an approximately $11 million increase in total merchandise sales due to the 53^rd week included in fiscal 2007 results.

Domestic—Royalties and other revenues

• Royalties and fees received from our franchisees decreased $10.4 million due to:

• a reduction in royalty rates charged to franchisees during 2007 and

• a decrease in total revenues generated by our franchisees.

• In-store advertising sales decreased $8.7 million.

Domestic—Gross profit

• Rental gross margin decreased from 64.2% in 2006 to 58.1% in 2007 primarily due to an increase in cost of sales associated with the purchase of additional movie rental product to support BLOCKBUSTER Total Access.

• Merchandise gross margin of 27.3% for 2007 remained relatively flat from 2006.

• The decrease in total gross profit was partially offset by an estimated $37 million due to the 53^rd week included in fiscal 2007 results.

Domestic—Operating expenses

• Stores general and administrative expense, which includes expenses incurred both in-store and online:

• decreased due to the closure of company-owned stores;

• increased due to the impact of the 53^rd week;

• increased due to $9.6 million lower gains recognized during 2007 from sales of store operations and property and equipment; and

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• increased due to the increase in costs associated with the growth of BLOCKBUSTER Total Access.

• Corporate and field general and administrative expense, which includes expenses incurred at the field and regional levels for store operations, decreased due primarily to:

• lower bonus expense in 2007 and

• our continued cost reduction efforts in 2007.

• Advertising expense, which includes online subscriber acquisition costs, increased primarily due to the increase in our advertising spend during the first quarter of 2007 to support BLOCKBUSTER Total Access.

• Depreciation and intangible amortization decreased primarily due to certain store assets becoming fully depreciated in 2007 as well as decreased store count.

• The 53^rd week included in fiscal 2007 results partially offset the decrease in operating expenses by approximately $29 million.

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International Segment. The following table is a summary of international results of operations.

	Fiscal Year Ended January 6, 2008 (53 Weeks)					Fiscal Year Ended December 31, 2006 (Calendar Year)				Increase/ (Decrease)
	Amount			Percent of Revenue		Amount		Percent of Revenue		Dollar			Percent
Revenues:
Rental revenues:
Movies	$	756.9		39.1	%	$	745.1	39.1	%	$	11.8		1.6	%
Games		59.4		3.1	%		61.8	3.2	%		(2.4	)	(3.9	)%
Previously rented product (“PRP”)		129.0		6.7	%		121.2	6.4	%		7.8		6.4	%
Total rental revenues		945.3		48.9	%		928.1	48.7	%		17.2		1.9	%
Merchandise sales:
Movies		222.9		11.5	%		205.9	10.8	%		17.0		8.3	%
Games		549.1		28.4	%		587.9	30.9	%		(38.8	)	(6.6	)%
General merchandise		181.6		9.4	%		164.3	8.6	%		17.3		10.5	%
Total merchandise sales		953.6		49.3	%		958.1	50.3	%		(4.5	)	(0.5	)%
Royalties and other		35.6		1.8	%		18.8	1.0	%		16.8		89.4	%
Total revenues		1,934.5		100.0	%		1,905.0	100.0	%		29.5		1.5	%
Cost of sales:
Cost of rental revenues		289.7		15.0	%		292.4	15.3	%		(2.7	)	(0.9	)%
Cost of merchandise sold		749.2		38.7	%		734.8	38.6	%		14.4		2.0	%
		1,038.9		53.7	%		1,027.2	53.9	%		11.7		1.1	%
Gross profit		895.6		46.3	%		877.8	46.1	%		17.8		2.0	%
Operating expenses:
General and administrative		724.8		37.5	%		732.8	38.5	%		(8.0	)	(1.1	)%
Advertising		43.5		2.2	%		35.6	1.9	%		7.9		22.2	%
Depreciation and intangible amortization		47.9		2.5	%		60.4	3.1	%		(12.5	)	(20.7	)%
Impairment of goodwill and other long-lived assets		—		0.0	%		5.1	0.3	%		(5.1	)	(100.0	)%
Gain on sale of Gamestation		(81.5	)	(4.2	)%		—	0.0	%		(81.5	)	0.0	%
		734.7		38.0	%		833.9	43.8	%		(99.2	)	(11.9	)%
Operating income (loss)	$	160.9		8.3	%	$	43.9	2.3	%	$	117.0		266.5	%
Margins:
Rental margin				69.4	%			68.5	%
Merchandise margin				21.4	%			23.3	%
Gross margin				46.3	%			46.1	%

	Fiscal Year Ended January 6, 2008
Same-store revenues increase/(decrease)(1)
Rental revenues	(2.8	)%
Merchandise revenues	23.3	%
Total revenues	7.5	%

(1) Changes in international same-store revenues do not include the impact of foreign exchange.

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International—Rental revenues

• Favorable foreign currency exchange impact of $60.4 million.

• The 53^rd week included in fiscal 2007 results had a favorable impact of approximately $15 million.

• Same-store base game rental revenues decreased 11.0% driven primarily by our U.K. operations as they shifted their focus to selling new games.

International—Merchandise sales

• Favorable foreign currency exchange impact of $73.9 million.

• The 53^rd week included in fiscal 2007 results had a favorable impact of approximately $21 million.

• Game sales, including sales of new and traded game software, hardware consoles and accessories:

• decreased due to the sale of Gamestation in second quarter of 2007;

• increased due to an increase of 65.9% in same-store game sales driven by continued demand for new and traded games in various markets, resulting mainly from the introduction of next-generation game platforms during the first quarter of 2007; and

• increased due to favorable foreign currency exchange.

• General merchandise sales, which include sales of confections, other movie and game-related products and product sales to franchisees increased primarily due to favorable foreign currency exchange.

International—Royalties and other revenues

• We received $25 million in connection with the termination and relicensing of our Brazilian franchise in 2007.

International—Gross profit

• Unfavorable foreign currency exchange impact of $76.5 million.

• The 53^rd week included in fiscal 2007 results had a favorable impact of approximately $15 million.

• Merchandise gross margin decreased from 23.3% in 2006 to 21.4% in 2007. The decrease in merchandise gross margin and increase in cost of merchandise sold is due primarily to the mix of our DVD and games sales shifting from higher margin used products to the lower margin new products.

• Rental gross margin of 69.4% for 2007 remained relatively flat from 2006.

International—Operating expenses

• Unfavorable foreign currency exchange impact of $52.1 million.

• General and administrative expenses remained relatively flat because the costs savings associated with the sale of Gamestation and the closure of company-stores was offset by unfavorable foreign currency exchange and the impact of the 53^rd week.

• Advertising expense increased due to:

• several markets increasing their advertising spend to promote sales of merchandise inventory, and

• unfavorable foreign currency exchange.

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• Depreciation and intangible amortization expense decreased due to the sale of Gamestation and the closure of company-owned stores.

• In 2007, we recorded $81.5 million gain on the sale of Gamestation and $6.3 million gain on the sale of operations in Australia, which is recorded as a reduction to “General and administrative” expenses.

• The 53^rd week included in 2007 results had an unfavorable impact of approximately $13 million.

Unallocated Corporate. The following table is a summary of corporate operating expenses that are not allocated to either business segment.

	Fiscal Year Ended				Increase/(Decrease)
	January 6, 2008 (53 Weeks)		December 31, 2006 (Calendar Year)		Dollar			Percent
General and administrative	$	167.5	$	190.4	$	(22.9	)	(12.0	)%
Depreciation and intangible amortization		15.4		13.7		1.7		12.4	%
Operating expenses	$	182.9	$	204.1	$	(21.2	)	(10.4	)%

• General and administrative expenses decreased primarily due to:

• lower bonus expense in 2007;

• lower stock-based compensation expense in 2007; and

• continued cost-savings efforts.

Additional Consolidated Results

• Interest expense decreased primarily due to lower average outstanding debt balances during 2007 than 2006.

• Interest income decreased due to lower average cash balances.

• Benefit (provision) for income taxes for 2006 included a tax benefit of $111.9 million resulting from the resolution of multi-year income tax audits. The $111.9 million benefit is reflected as a $97.9 million tax benefit in “Benefit (provision) for income taxes” and a $14.0 million tax benefit within “Income (loss) from discontinued operations.”

• Income (loss) from discontinued operations for 2007 primarily contains the results of operations for RHINO. The 2006 amounts contain the results of operations for Spain, MTC, MBI, and RHINO.

Liquidity and Capital Resources

General

We generate cash from operations predominantly from the rental and retail sale of movies and games, and most of our revenue is received in cash and cash equivalents. Working capital requirements, including rental library purchases and normal capital expenditures, are generally funded with cash from operations.

As discussed in greater detail below under “Capital Structure,” our principal external sources of liquidity are our revolving credit facility which expires in August 2009, Term A loan facility which expires in August 2009, Term B loan facility which expires in August 2011 and our outstanding senior subordinated notes which expire in September 2012. Given the impending expiration of both our revolving credit facility and Term A loan facility, on April 2, 2009, we amended our revolving credit facility, Term A loan facility and Term B loan facility to include commitments from certain of our lenders and certain new lenders to (a) replace the existing revolving credit facility with a $250 million revolving credit facility with a maturity date of September 30, 2010, and

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(b) amend certain financial covenants, other covenants and other terms in our existing revolving credit facility, Term A loan facility and Term B loan facility. The obligation of the lenders to fund the $250 million revolving credit facility and effectuate such amendments is subject to the negotiation and execution of definitive documentation, as well as the satisfaction of certain conditions set forth in the amendment. While we believe that all such conditions will be met and that we will be in a position to close on the amended credit facility on or about May 11, 2009, there can be no assurance regarding these matters.

The risk that we may not successfully complete this refinancing and obtain the related amendment of certain financial covenants included therein, and/or the risk that we may not have adequate liquidity to fund our operations as a result of not meeting our projected financial results, even if the refinancing is completed within the time and upon the terms contemplated, raise substantial doubt about our ability to continue as a going concern.

If we close on our amended credit facility, this amended facility and our other indebtedness will impact our business by, among other things:

• requiring that a substantial portion of our cash flows from operations be used for debt service payments, thereby reducing the availability of cash flows to fund working capital requirements including inventory purchases, capital expenditures, acquisitions and other general corporate purposes;

• making us vulnerable to deterioration in our results of operations and to general adverse economic, market or industry conditions which could impact our ability to make our debt payments;

• limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate including limiting our ability to invest in certain strategic initiatives, consequently placing us at a competitive disadvantage to our competitors; and

• providing liquidity at or near minimum cash levels required to operate the business during certain periods of time during 2009.

We believe that cash on hand, cash from operations and available borrowings under the amended credit facility (assuming that we close on such facility) will be sufficient to fund our anticipated cash requirements for working capital purposes and normal capital expenditures, and that we will remain in compliance with the financial covenants contained in our amended debt agreements, for at least the next twelve months. However, there can be no assurance regarding these matters given the current state of the global economy, which has negatively impacted our ability to accurately forecast our results of operations and cash position, and which may result in deterioration of our revenues beyond what we anticipate. Our current 2009 plan contemplates that worldwide same-store revenues will be lower than what we experienced in the fourth quarter of 2008. Further deterioration would expose us to declining margins as a result of an imbalance between our inventory levels and customer demand. Additionally, if our trade creditors were to impose unfavorable terms on us, it would negatively impact our ability to obtain products and services on acceptable terms and operate our business.

Our independent registered public accounting firm has issued an opinion on our fiscal 2008 consolidated financial statements that includes an explanatory paragraph that expresses substantial doubt about our ability to continue as a going concern. As part of the amendment discussed above, and not subject to closing of the amended credit facility, our lenders have agreed to waive the requirement in our credit agreement that our fiscal 2008 audit opinion not include a going concern explanatory paragraph or like qualification.

If we are unable to generate sufficient cash flow from operations to service our indebtedness and remain in compliance with our financial covenants, we would be in default under one or more of our debt agreements, which if not cured or waived, could result in the acceleration of all of our debt due to cross-default provisions contained in such agreements and in certain of our leases. In such event, we would be required to search for alternative sources of liquidity to refinance the debt, which may not be available to us on acceptable terms, if at all. Our ability to obtain alternative financing would likely be adversely affected because substantially all of our assets have been secured as collateral for our existing debt and because our financial results, substantial

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indebtedness and credit ratings could each adversely affect the availability and terms of any such financing. If we were unable to repay our debt upon acceleration, we could be forced to file for protection under the U.S. Bankruptcy Code. In addition, as discussed above, our financing arrangements are relatively short-term in nature. As a result, we will face additional refinancing pressures over the next several years.

In order to reduce our exposure to these risks, we have also embarked on a cash management strategy to enhance and preserve as much of our liquidity as possible. This plan contemplates us, among other things:

• reducing our capital expenditures by eliminating, delaying or curtailing discretionary and non-essential spending;

• aggressively pursuing options for the divestiture of certain non-core assets, including selling and/or licensing some of our international operations;

• managing our working capital through the optimization of inventory levels;

• reducing advertising expenses;

• continuing to renegotiate leases to generate significant reductions in future store occupancy costs;

• reducing expenditures on consultants and professional service providers;

• restructuring and reengineering our organization and processes to reduce our operating costs and increase efficiency;

• working to further reduce our obligations in connection with the provision of letters of credit;

• exploring our options with respect to borrowing against unpledged assets in certain international markets;

• exploring the availability of issuing additional equity securities; and

• considering making future payments of preferred stock dividends in-kind as opposed to in cash.

We cannot make assurances as to whether any of these actions can be effected on a timely basis, on satisfactory terms or maintained once initiated, and if successful, our cash management strategy may limit certain of our operational and strategic initiatives designed to grow our business over the long term.

Adverse future developments regarding our pending and any future legal proceedings and other contingencies may also have a material adverse impact on our liquidity and results of operations. See Note 8 to the consolidated financial statements for further discussion of these items.

Contractual Obligations

As described more fully in Notes 6 and 8 to the consolidated financial statements, at January 4, 2009, our contractual obligations, were as follows:

Contractual Obligations(1)	< 1 Year		1-3 Years		3-5 Years		After 5 Years		Total
Operating leases	$	481.4	$	625.6	$	283.6	$	146.8	$	1,537.4
Capital lease obligations(2)		11.0		16.0		9.3		10.0		46.3
Purchase obligations(3)		156.7		21.4		4.2		7.3		189.6
Revenue-sharing obligations(4)		119.6		—		—		—		119.6
Long-term debt		198.0		283.0		300.0		—		781.0
Interest expense on long-term debt(5)		53.6		73.3		20.5		—		147.4
Preferred stock dividends(6)		11.3		22.5		22.5		—		56.3
	$	1,031.6	$	1,041.8	$	640.1	$	164.1	$	2,877.6

(1) Due to the uncertainty with respect to the timing of future cash flows associated with our unrecognized tax benefits at January 4, 2009, we are unable to make reasonably reliable estimates of the period of cash

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settlement with the respective taxing authority. Therefore, $2.2 million of unrecognized tax benefits, including accrued interest, have been excluded from the contractual obligations table above. See Note 7 to the consolidated financial statements for a discussion on income taxes.

(2) Includes both principal and interest.

(3) Purchase obligations include agreements to purchase goods or services as of January 4, 2009 that are legally binding on us and that specify all significant terms, including fixed or minimum quantities to be purchased, fixed, minimum or variable price provisions and the approximate timing of the transaction. Purchase obligations that can be cancelled without penalty have been excluded. In addition, these amounts exclude revenue-sharing obligations, which are included on the “Revenue-sharing obligations” line above, and outstanding accounts payable or accrued liabilities. For information about outstanding accounts payable and accrued liabilities, see the Consolidated Balance Sheets and Note 4 to the consolidated financial statements.

(4) As of January 4, 2009, we were a party to revenue-sharing arrangements with various studios that expire between February 2009 and December 2010. These contracts include minimum purchase requirements, based upon the box office results of the title, at a lower initial product cost as compared to traditional purchases. In addition, these contracts require net rental revenues to be shared with the studios over an agreed upon period of time. We have included an estimate of our contractual obligation under these agreements for minimum purchase requirements and performance guarantees for the period in which they can reasonably be estimated, which is usually two to four months in the future. Although these contracts may extend beyond the estimated two to four month period, we cannot reasonably estimate these amounts due to the uncertainty of purchases that will be made under these agreements. The amounts presented above do not include revenue-sharing accruals for rental revenues recorded during fiscal 2008. For information on revenue-sharing accruals for fiscal 2008 and 2007, see Note 4 to the consolidated financial statements.

(5) Calculated based on scheduled payments of our outstanding balances as of January 4, 2009. Borrowings under our senior secured credit facility are subject to variable rates of interest. Interest payments on these variable rate borrowings for future years were calculated using a weighted-average interest rate of 6.0% based on the LIBOR rate in effect at January 4, 2009. See Note 6 to the consolidated financial statements for further discussion.

(6) Our shares of preferred stock do not mature; therefore, amounts are provided for the next five years only. Our policy has been to pay these quarterly dividends in cash. However, we may choose to pay some future dividends in shares of our Class A common stock or to not declare dividends for some quarters. Any unpaid quarterly dividends will accumulate until declared and paid. See Note 3 to our consolidated financial statements for further information.

Capital Structure

On August 20, 2004, we entered into $1,150.0 million in senior secured credit facilities with a syndicate of lenders (the “Credit Facilities”), consisting of (i) a five-year $500.0 million revolving credit facility (“revolver”), of which $150.0 million was reserved for issuance of the Viacom Letters of Credit, at Viacom’s expense (the “Viacom Letters of Credit”), described in Note 6 to the consolidated financial statements; (ii) a five-year $100.0 million term loan A facility (the “Term A Loan Facility”); and (iii) a seven-year $550.0 million term loan B facility (the “Term B Loan Facility”), and we issued $300.0 million aggregate principal amount of 9% senior subordinated notes due 2012 (the “Senior Subordinated Notes”). These borrowings are described in Note 6 to the consolidated financial statements. Proceeds from the Credit Facilities and the Senior Subordinated Notes were used (i) to fund the payment of the special distribution in August 2004; (ii) to finance transaction costs and expenses in connection with our divestiture from Viacom and the special distribution; (iii) to repay amounts outstanding under our prior credit agreement; and (iv) for working capital and other general corporate purposes.

On April 18, 2007, we entered into an amendment to our amended and restated credit agreement which provided for additional sales, transfers or other dispositions of assets with a cumulative aggregate fair market value of up to $150 million, and required us to make prepayments on the Credit Facilities in an amount equal to 100% of the net proceeds received from such additional sales, transfers or other dispositions of assets.

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On July 2, 2007, we entered into an additional amendment (the “Second Amendment”) to our amended and restated credit agreement which became effective on July 13, 2007 and which:

• accelerated reductions in the revolving commitments that were previously scheduled to occur on October 1, 2007 and January 1, 2008, which effectively reduced the total amount of the revolving commitments from $500 million to $450 million;

• modified the applicable interest rate margins;

• amended the definition of Consolidated EBITDA;

• amended the asset sale baskets and the related mandatory prepayment requirements;

• provided for a premium of 1.0% in the event of certain refinancings through April 6, 2008;

• deferred the applicability of the Fixed Charge Coverage Ratio and Leverage Ratio requirements from fiscal 2008 to fiscal 2009;

• provided for a one-time fee payable by Blockbuster to the administrative agent, for the accounts of the lenders, in an amount equal to (a) 0.25% of the aggregate amount of revolving commitments and outstanding term loans on April 6, 2008, if the Leverage Ratio on such date exceeds 3.00 to 1.00 but does not exceed 3.50 to 1.00 or (b) 0.50% of the aggregate amount of revolving commitments and outstanding term loans on April 6, 2008, if the Leverage Ratio on such date exceeds 3.50 to 1.00 (we did not meet either criterion, therefore no payment was required);

• amended the Consolidated EBITDA requirements such that we may not permit Consolidated EBITDA for any period of four consecutive fiscal quarters to be less than (a) $140 million for the periods ending July 1, 2007 and September 30, 2007, (b) $165 million for the period ending January 6, 2008, (c) $180 million for the period ending April 6, 2008, (d) $200 million for the period ending July 6, 2008, (e) $225 million for the period ending October 5, 2008, and (f) $250 million for the period ending January 4, 2009; and

• waived any default resulting from our failure to comply with the Consolidated EBITDA requirement with respect to the period of four consecutive fiscal quarters ending July 1, 2007.

The Credit Facilities currently require compliance with a minimum EBITDA covenant through January 4, 2009, a maximum capital expenditure covenant for the remaining term of the credit agreement and maximum leverage ratio and minimum fixed charge coverage ratio covenants from 2009 through 2011. Additionally, the Credit Facilities and Senior Subordinated Notes contain certain restrictive covenants, which, among other things, limit, during the terms of the Credit Facilities and the Senior Subordinated Notes, (i) the amount of dividends that we may pay, (ii) the amount of our common stock that we may repurchase and (iii) the amount of other distributions that we may make in respect to our common stock.

On October 24, 2008, we entered into Amendment No. 1 (the “Amendment”) to the Amended and Restated Initial Public Offering and Split-Off Agreement dated as of June 18, 2004 with Viacom. Pursuant to the Amendment, the face amount of the letters of credit required to be provided by us for the benefit of Viacom was reduced from $150.0 million to $75.0 million and the conditions on which Viacom may draw on the letters of credit were amended. In addition, in the Amendment, we assumed responsibility for the payment of any and all fees and expenses incurred in connection with the establishment and maintenance of the letters of credit. The fees are calculated at an annual rate of 3.625% of the face amount of the letters of credit. As a result of the Amendment, on October 24, 2008, our available borrowing capacity increased by $75.0 million.

The borrowing availability under the Revolving Credit Facility is being automatically reduced by quarterly installments of 5% of the original borrowing availability beginning October 2007 through July 2009 and will terminate in full in August 2009. The Term A Loan Facility is payable in quarterly installments of 3.75% of the original principal balance from October 2005 through July 2008, and 13.75% of the original principal balance

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beginning October 2008 through August 2009. The Term B Loan Facility is payable in quarterly installments of 0.25% of the original principal balance from October 2005 through July 2008, 2.5% of the original principal balance beginning October 2008 through July 2010 and 19.25% of the original principal balance beginning October 2010 through August 2011. The term loans are subject to mandatory prepayments from a portion of proceeds from asset sales and excess cash flow. The scheduled principal payments for the Term A and B Loan Facility has and will continue to be adjusted to reflect any prepayments resulting from excess cash flow we generated as discussed below.

As a result of a significant reduction in our gross leverage ratio determined by our results of operations for the period ending April 6, 2008, our borrowing rate decreased 50 basis points during the second quarter of 2008.

On August 14, 2008, Moody’s Investors Service downgraded our probability of default rating to Caa1 from B3 based on perceived refinancing challenges given current and anticipated market conditions and the general unavailability of capital on favorable terms. However, Moody’s Investors Service upgraded the rating on our credit facility to B1 from B3 on the same date as a result of our operating improvements. As a result of the upgrade on our credit facility, our borrowing rate decreased 25 basis points during the third quarter of 2008. On March 4, 2009, Standard & Poor’s Ratings Service placed our credit ratings on credit watch in light of the pending maturities of our revolving credit facility and Term A loan facility in August 2009. Any downgrade in our credit ratings could adversely affect our ability to access capital upon acceptable terms and conditions.

Beginning with fiscal 2005, we have been required to make prepayments on the Credit Facilities in an aggregate amount equal to 50% of annual excess cash flow, as defined by the amended and restated credit agreement. Such payments are due at the end of the first quarter of the following year. In fiscal 2008, we generated excess cash flow, as defined by our credit agreement and made a prepayment of $25.1 million on April 6, 2009, which was classified as “Current portion of long-term debt” in our Consolidated Balance Sheets as of January 4, 2009. We did not generate excess cash flow in fiscal 2007. In fiscal 2006, we generated excess cash flow, as defined, and made a prepayment during the first quarter of fiscal 2007. During 2007, primarily as a result of our excess cash flows from fiscal 2006 and the completed divestiture of Gamestation in fiscal 2007, we paid down $214.1 million in debt. Additionally, we are required to make prepayments on the Credit Facilities related to sales of store operations and property and equipment, as defined by the amended and restated credit agreement. The following table summarizes payment activity regarding the term loan A and B facilities during fiscal 2008 and 2007:

	Fiscal 2008		Fiscal 2007
Scheduled payments	$	44.3	$	20.4
Sale of store operations and property and equipment		5.1		148.1
Excess cash flow (based on prior year cash flow)		—		45.6
	$	49.4	$	214.1

As of January 4, 2009, our available borrowing capacity under our Credit Facilities, excluding the $75.0 million reserved for issuance of the Viacom Letters of Credit and $44.6 million reserved to support other letters of credit, totaled $110.4 million. On March 11, 2009, we accessed our available borrowing capacity of $60 million in principal amount as a precaution against prevailing economic conditions and ongoing uncertainty in the credit market, and as a cushion in the event we require incremental capital in the coming months to cover our typical working capital, general corporate and operating needs.

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The following table sets forth the current portion of our long-term debt and capital lease obligations:

	January 4, 2009		January 6, 2008
Credit Facilities:
Revolving credit facility, interest rate ranging from 5.8% to 6.7% at January 4, 2009	$	120.0	$	—
Term A Loan Facility, interest rate of 5.8% at January 4, 2009		18.6		24.0
Term B Loan Facility, interest rate ranging from 5.4% to 6.6% at January 4, 2009		59.4		20.7
Total current portion of long-term debt		198.0		44.7
Current portion of capital lease obligations		8.5		10.1
	$	206.5	$	54.8

The following table sets forth our long-term debt and capital lease obligations, less current portion:

	January 4, 2009		January 6, 2008
Credit Facilities:
Term A Loan Facility	$	—	$	18.8
Term B Loan Facility, interest rate ranging from 5.4% to 6.6% at January 4, 2009		283.0		346.8
Senior Subordinated Notes, interest rate of 9.0% at January 4, 2009		300.0		300.0
Total long-term debt, less current portion		583.0		665.6
Capital lease obligations, less current portion		28.3		37.4
	$	611.3	$	703.0

Amended Credit Facility

On April 2, 2009, we amended our revolving credit facility, Term A loan facility and Term B loan facility to include commitments from certain of our lenders and certain new lenders to (a) replace the existing revolving credit facility with a $250 million revolving credit facility with a maturity date of September 30, 2010 and (b) amend certain financial covenants, other covenants and other terms in our existing revolving credit facility, Term A loan facility and Term B loan facility. The obligation of the lenders to fund the $250 million revolving credit facility and effectuate such amendments is subject to the satisfaction of certain conditions set forth in the amendment. While we believe that all such conditions will be met and that we will be in a position to close on the amended revolving credit and term loan facility on or about May 11, 2009, there can be no assurance regarding these matters. The $250 million amended revolving credit facility (the “amended revolver”) will mature on September 30, 2010, and will require that we make the following amortization payments prior to and on such date:

• $25 million will be due and payable on December 15, 2009;

• $20 million will be due and payable on January 31, 2010;

• $20 million will be due and payable on February 28, 2010;

• $20 million will be due and payable on March 31, 2010;

• $10 million will be due and payable on April 30, 2010;

• $15 million will be due and payable on May 31, 2010;

• $50 million will be due and payable on June 30, 2010;

• $10 million will be due and payable on July 31, 2010;

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• $10 million will be due and payable on August 31, 2010; and

• any remaining outstanding amounts will be due and payable on September 30, 2010.

Up to $12.5 million in voluntary prepayments made prior to December 15, 2009 may be applied to the foregoing scheduled amortization payments in their direct order of maturity, and any remainder would be applied to the amounts due in the reverse order of maturity. These payments will require a substantial portion of our cash flows from operations, thereby reducing the availability of cash flows to fund working capital requirements, including inventory purchases, capital expenditures, acquisitions and other general corporate purposes.

We will borrow the full availability under the amended revolver through the term thereof. Borrowings under the amended revolver will bear interest at a base rate (with a floor of 4.5%) plus 9% or at LIBOR (with a floor of 3.5%) plus 10%, at our discretion, which interest payments will be due and payable monthly. Should we be in default of the credit agreement, a default rate of interest of an additional 300 basis points on amounts outstanding under the amended revolver, Term A loans and Term B loans would also be payable.

In connection with the amended revolver, certain other provisions of our credit agreement will be amended as follows:

• we will no longer be required to make prepayments on our term loan facilities upon sales, transfers or other dispositions of assets;

• we will no longer be subject to a mandatory available cash sweep;

• we will be required to make certain prepayments on our revolving loans based on excess cash flow;

• the letters of credit issued under our existing revolving credit facility will be continued and renewed when applicable and will be cash- collateralized, and we will be restricted with respect to the issuance of any new letters of credit;

• to the extent cash collateral is released with respect to the letters of credit in an amount in excess of $52.5 million, we will be required to repay the revolving loans with such amounts, allocated to the amortization schedule in reverse order of maturity;

• 80% of the net proceeds of any foreign indebtedness incurred will be required to be used to repay the revolving loans, allocated to the amortization schedule in reverse order of maturity;

• with respect to certain extraordinary receipts received (which do not include disposition proceeds or insurance or condemnation proceeds), we will be required to apply the net proceeds to repay the revolving loans, allocated to the amortization schedule in reverse order of maturity;

• with respect to certain other indebtedness and equity offerings, we will be required to repay the revolving loans (x) with 75% of any net proceeds greater than $25 million and less than $50 million and (y) with 50% of any net proceeds greater than $50 million;

• to the extent that the outstanding principal balance of the revolving loans on April 30, 2010 is in excess of $75 million, we will be required to pay a fee to the revolving lenders equal to the lesser of $5 million and 10% of such excess;

• we will be permitted to enter into the sale and leaseback of our domestic store locations, provided that the fair market value of all property sold does not exceed $28 million, and after giving effect to such sale the Leverage Ratio does not exceed 2.50 to 1.00;

• we will be restricted against paying dividends on our common stock until the revolving loans are paid in full;

• we will be restricted from making additional investments in Foreign Subsidiaries in excess of $20 million;

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• we will be permitted to enter into certain intercompany affiliate transactions with non-loan parties on an arms’ length basis;

• our Fixed Charge Coverage Ratio will be amended such that we will be required to maintain a Fixed Charge Coverage Ratio of not less than 1.25 to 1.00 for periods ending March 31, 2009 through January 3, 2010, and of not less than 1.30 to 1.00 for periods ending March 31, 2010 and thereafter;

• our Leverage Ratio will be amended such that we will be required to maintain a maximum Leverage Ratio of 2.75 to 1.00, tested on a quarterly basis; and

• we will be restricted from making capital expenditures (a) in excess of $30 million in the 2009 fiscal year, (b) in excess of $40 million in the 2010 fiscal year, plus up to $10 million of amounts unused in the 2009 fiscal year, and (c) in excess of $80 million in the 2011 fiscal year.

We will pay the following fees in connection with the amendment to our credit agreement and amended revolver:

• an amendment fee of 25 basis points to all consenting term lenders;

• a commitment fee of up to 2% to certain of the lenders who provided early commitments to fund the amended revolver (the “specified lenders”);

• a funding fee of 8.0% to the specified lenders funding the amended revolver, and a funding fee of 11.25% to the other lenders funding the amended revolver, which is payable at closing;

• an exit fee of 3% on all repayments under the amended revolver; and

• a work fee of $250,000, which will be credited toward deposit and other expenses.

In addition, as part of the amendment, and not subject to closing of the amended credit facility, our lenders have agreed to waive the requirement in our credit agreement that our fiscal 2008 audit opinion not include a going concern explanatory paragraph or like qualification or exception.

Consolidated Cash Flows

Operating Activities. Net cash flows from operating activities increased $107.2 million to $51.0 million of cash provided by operating activities in fiscal year 2008 from $56.2 million of cash used for operating activities in 2007, primarily because of:

• increased net income as adjusted for non-cash items; and

• a $98.8 million decrease in rental inventory purchases;

• offset by a $71.9 million higher net increase in merchandise inventories in order to improve the selection and availability of product in our stores.

Investing Activities. Net cash flows from investing activities decreased $193.2 million to $116.5 million of cash used for investing activities in fiscal year 2008 from $76.7 million provided by investing activities in 2007, due mainly to:

• $147.7 million of net proceeds on the sale of Gamestation in 2007;

• a $43.7 million increase in capital expenditures, due mainly to upgrades and remodels of many domestic stores; and

• $17.8 million lower proceeds from sales of store operations than in 2007;

• offset by payments of $7.4 million to acquire patent rights in 2007.

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Financing Activities. Net cash flows from financing activities increased $290.4 million to $49.4 million of cash provided by financing activities in 2008 from $241.0 million of cash used for financing activities in 2007. This change was primarily due to net proceeds from debt under our credit facilities of $70.7 million in 2008 as compared to net repayments of $214.1 million in 2007.

General Economic Trends, Quarterly Results of Operations and Seasonality

Our business is affected by general economic and other consumer trends, and is subject to fluctuations in future operating results due to a variety of factors, many of which are outside of our control. These fluctuations may be caused by, among other things, a distinct seasonal pattern to the home video and video games business, particularly weaker business in April and May, due in part to improved weather and Daylight Saving Time, and in September and October, due in part to the start of school and the introduction of new television programs, and those factors set forth above under “Item 1A. Risk Factors.” The months of November and December have historically been our highest revenue months. While we expect these months to continue to make the largest contributions to our rental revenues, we believe the strength of rental revenues in these months has been and will continue to be negatively affected, to some degree, by consumers purchasing DVDs during the holiday season. Additionally, while we have diversified our product offerings in an effort to partially mitigate the impact of seasonality and weather conditions on our business, they are expected to continue to impact our business and our period-to-period financial results in the future. While we believe the current worldwide economic downturn will impact our future operational trends, we cannot predict the timing or extent to which this will occur.

Critical Accounting Estimates

The preparation of our consolidated financial statements, in conformity with accounting principles generally accepted in the United States, requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the balance sheet date and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, we evaluate our estimates, including those related to the useful lives and residual values surrounding our rental library, estimated accruals related to revenue-sharing titles subject to performance guarantees, merchandise inventory reserves, revenues generated by customer programs and incentives, useful lives of property and equipment, income taxes, impairment of our long-lived assets, including goodwill, share-based compensation and contingencies. We base our estimates on historical experience and on various other assumptions that we believe to be 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 may materially differ from these estimates under different assumptions or conditions.

We believe the following accounting policies require more significant judgments and estimates and that changes in these estimates or the use of different estimates could have a material impact on our results of operations or financial position.

Rental Library Amortization

We have established amortization policies with respect to our rental library that most closely allow for the matching of product costs with the related revenues generated by the utilization of our rental library product. These policies require that we make significant estimates based upon our experience as to the ultimate revenue and the timing of the revenue to be generated by our rental library product. We utilize the accelerated method of amortization because it approximates the pattern of demand for the product, which is generally high when the product is initially released for rental by the studios and declines over time. In establishing residual values for our rental library product, we consider the sales prices and volume of our previously rented product and other used product.

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Based upon these estimates and our current customer propositions and offerings, we currently amortize the cost of our in-store and online rental library, which includes movies and games, over periods ranging from six months to twenty-four months to estimated residual values ranging from $0 to $8 per unit, according to the product category.

We also review the carrying value of our rental library to ensure that estimated future cash flows exceed the carrying value. We record adjustments to the value of previously rented product primarily for estimated obsolete or excess product based upon changes in our original assumptions about future demand and market conditions. If future demand or actual market conditions are less favorable than those estimated by management, additional adjustments, including adjustments to rental amortization periods or residual values, may be required. We continually evaluate the estimates surrounding the useful lives and residual values used in amortizing our rental library. Changes to these estimates resulting from changes in consumer demand, changes in our customer propositions or the price or availability of retail video product may materially impact the carrying value of our rental library and our rental margins.

Merchandise Inventory

Our merchandise inventory, which includes new and traded movies and games and other general merchandise, including confections, is stated at the lower of cost or market. We record adjustments to the value of inventory primarily for estimated obsolete or excess inventory equal to the difference between the carrying value of inventory and the estimated market value based upon assumptions about future demand and market conditions. If future demand or actual market conditions are less favorable than those projected by management, additional inventory adjustments may be required. Our estimate for inventory shrinkage is based on the actual historical shrink results of our most recent physical inventories adjusted, if necessary, for current economic conditions. These estimates are compared with actual results as physical inventory counts are taken and reconciled to the general ledger. DVD and video game products are susceptible to shrinkage due to their portability and popularity.

Income Taxes

In determining net income for financial statement purposes, we make certain estimates and judgments in the calculation of tax expense and the resulting tax liabilities and in the recoverability of deferred tax assets that arise from temporary differences between the tax and financial statement recognition of revenue and expense.

We record deferred tax assets and liabilities for future income tax consequences that are attributable to differences between financial statement carrying amounts of assets and liabilities and their income tax bases. We base the measurement of deferred tax assets and liabilities on enacted tax rates that we expect will apply to taxable income in the year when we expect to settle or recover those temporary differences. We recognize the effect on deferred tax assets and liabilities of any change in income tax rates in the period that includes the enactment date.

As of January 1, 2007, we adopted Financial Interpretation No. 48, Accounting for Uncertainty in Income Taxes—an Interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48 addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under FIN 48, we may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities. The determination is based on the technical merits of the position and presumes that each uncertain tax position will be examined by the relevant taxing authority that has full knowledge of all relevant information. We recognize interest and penalties relating to income taxes as components of income tax expense. See Note 7 to our consolidated financial statements.

We record valuation allowances to reduce our deferred tax assets to amounts that are more likely than not to be realized. In 2005, we determined that it was unclear as to the timing of when we will generate sufficient

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taxable income to realize our deferred tax assets. This was primarily due to the negative industry trends, which caused our actual and anticipated financial performance to be significantly worse than we originally projected. Accordingly, we recorded a valuation allowance against our deferred tax assets in the United States and certain foreign jurisdictions. Until we determine that it is more likely than not that we will generate sufficient taxable income to realize our deferred income tax assets in certain markets, income tax benefits associated with current period losses will not be recognized.

Impairment of Goodwill

In accordance with SFAS 142, we test goodwill and intangible assets with indefinite lives for impairment at the reporting unit level during the fourth quarter of each year and on an interim date if events occur or circumstances change that would more likely than not reduce the fair value below its carrying amount.

Goodwill impairment is determined using a two-step process. The first step of the goodwill impairment test is to identify a potential impairment by comparing the book values of our reporting units, domestic and international, to their estimated fair values at the test dates. The estimates of fair value of our reporting units are computed using the present value of estimated future cash flows. This analysis utilizes a multi-year forecast of estimated cash flows and a terminal value at the end of the cash flow period. The forecast period assumptions consist of internal projections that are based on our budget and long-range strategic plan. The discount rate used at the test date is our weighted-average cost of capital which reflects the overall level of inherent risk of the reporting unit and the rate of return an outside investor would expect to earn. The sum of the fair values of the reporting units is reconciled to our current market capitalization (based upon our stock price) plus an estimated control premium.

If the fair value of a reporting unit exceeds its book value, goodwill of the reporting unit is not deemed impaired and the second step of the impairment test is not performed. If the book value of a reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. The second step of the goodwill impairment test compares the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. The implied fair value of goodwill is determined by allocating the estimated fair value of the reporting unit to the estimated fair value of our existing tangible assets and liabilities as well as existing identified intangible assets and previously unrecognized intangible assets in a manner similar to a purchase price allocation. The unallocated portion of the estimated fair value of the reporting unit is the implied fair value of goodwill. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess.

As discussed in Note 2 to the consolidated financial statements, we performed our annual impairment test as of October 31, 2008. The test indicated that the goodwill associated with our domestic reporting unit was impaired. Therefore, we recognized a $432.6 million goodwill impairment charge during the fourth quarter of 2008. The assumptions included in the impairment test require judgment; and changes to these inputs could materially impact the results of the calculation. Other than management’s internal projections of future earnings, the primary assumptions used in the impairment test were the weighted-average cost of capital, long-term growth rates and the control premium. The test is most sensitive to changes in the weighted-average cost of capital. Holding all other assumptions constant at the test date, a 100 basis point increase in the weighted-average cost of capital would reduce the enterprise value for the domestic and international reporting units by approximately 6%. A 6% decrease in the enterprise value of the domestic reporting unit as of the test date would result in an approximately $50 million increase in the impairment charge. A 6% decrease in the enterprise value of the international reporting unit as of the test date would not have caused the goodwill associated with the international reporting unit to be impaired.

Although our cash flow forecasts are based on assumptions that are considered reasonable by management and consistent with the plans and estimates we are using to manage the underlying businesses, there is significant

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judgment in determining the expected future cash flows attributable to these businesses. In addition, as discussed above, the determination of fair value requires that we make certain judgments, estimates and assumptions. While we believe the fair values we have estimated are reasonable, actual performance in the short-term and long-term could be materially different from our forecasts, which could impact future estimates of fair value of our reporting units and may result in additional impairments of goodwill.

The market price of our Class A common stock has been subject to substantial volatility and has decreased significantly during the first quarter of 2009. We believe that the need for an interim impairment test may be triggered by, among other factors, declines in the media entertainment industry, a reduction in our profitability, or a sustained decline in our stock price. Consequently, we may need to perform an interim impairment test and may recognize an additional non-cash goodwill impairment charge during 2009. Our goodwill balance totaled $338.1 million as of January 4, 2009. Any additional required non-cash impairment charge could significantly reduce this balance and have a material impact on our reported financial position and results of operations.

Share-Based Compensation

In 2004, we adopted SFAS 123R, which requires us to recognize compensation expense for all share-based payments made to employees based on the fair value of the share-based payment on the date of grant. We elected to use the modified prospective method for adoption, which requires compensation expense to be recorded for all unvested stock options and restricted shares beginning in the first quarter of adoption. For all unvested options outstanding as of October 1, 2004, the previously measured but unrecognized compensation expense, based on the fair value at the original grant date, is recognized on an accelerated basis in the Consolidated Statements of Operations over the remaining vesting period. For share-based payments granted subsequent to October 1, 2004, compensation expense, based on the fair value on the date of grant, is recognized in the Consolidated Statements of Operations on an accelerated basis over the vesting period. In determining the fair value of stock options, we use the Black-Scholes option pricing model that employs the following assumptions:

• Expected volatility—based on the weekly historical volatility of our stock price, over the expected life of the option.

• Expected term of the option—based on the vesting terms and the contractual life of the respective option.

• Risk-free rate—based upon the rate on a zero coupon U.S. Treasury bill, for periods within the contractual life of the option, in effect at the time of grant.

• Dividend yield—calculated as the ratio of historical dividends paid per share of common stock to the stock price on the date of grant.

Our stock price volatility and option lives involve management’s best estimates at that time, both of which impact the fair value of the option calculated under the Black-Scholes methodology and, ultimately, the expense that will be recognized over the life of the option.

The fair value of most of our restricted shares is based on the price of a share of our Class A common stock on the date of grant. Our performance-based awards of restricted shares and restricted share units are based on the price of a share of our Class A common stock on the date the award is approved and marked to market at each reporting period if we believe it is probable that the performance criteria will be met. Once the performance criteria are met, these awards will be granted and the fair value will be based on the share price at that date. The fair value of our grants of restricted shares and restricted share units that are subject to hold provisions is discounted for the lack of marketability due to such post-vesting restrictions.

SFAS 123R also requires that we recognize compensation expense for only the portion of options or restricted shares that are expected to vest. Therefore, we apply estimated forfeiture rates that are derived from historical employee termination behavior using a stratified model based on the employee’s position within

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Blockbuster and the vesting period of the respective stock options or restricted shares. If the actual number of forfeitures differs from those estimated by management, additional adjustments to compensation expense may be required in future periods.

Market Risk

We are exposed to various market risks including interest rates on our debt and foreign exchange rates, and we monitor these risks throughout the normal course of business. Significant fluctuations in our interest rates or foreign exchange rates could cause us to adjust our financing and operating strategies to mitigate these risks. At January 4, 2009 and January 6, 2008, we did not have any interest rate or foreign exchange hedging instruments in place.

Interest Rate Risk

Our primary exposure to interest rate risk results from outstanding borrowings under our credit agreement. Interest rates for the credit agreement are based on LIBOR plus an applicable margin or the prime rate or the federal funds rate plus applicable margins, at our option at the time of borrowing. The applicable margins vary based on the borrowing and specified leverage ratios. Our borrowings under the credit agreement totaled $481.0 million as of January 4, 2009, and the weighted-average interest rate for these borrowings was 6.0%. Our vulnerability to changes in LIBOR or other applicable rates could result in material changes to our interest expense, as a one percentage point increase or decrease in LIBOR or the other applicable rates would have a $4.9 million impact on our interest expense annually. In addition, a change in our gross leverage ratio, which could be driven by a change in our debt balance or our income, could result in an increase or decrease in the applicable margins on our Term A loan, Term B loan and revolving credit facility, thereby impacting our annual interest expense.

Foreign Exchange Risk

Operating in international markets involves exposure to movements in currency exchange rates. Currency exchange rate movements typically also reflect economic growth, inflation, interest rates, government actions and other factors. As currency exchange rates fluctuate, translation of the statements of operations of our international businesses into U.S. dollars may affect year-over-year comparability and could cause us to adjust our financing and operating strategies. Revenues and operating income would have increased by $34.1 million and $7.7 million, respectively, for 2008 if foreign exchange rates in 2008 were consistent with 2007.

Our operations outside the United States, mainly in Europe and Canada, constituted 32%, 35%, and 34% of our total revenues in fiscal years 2008, 2007, and 2006, respectively. Consequently, we have foreign exchange rate exposure to movements in exchange rates primarily for the British Pound, the Euro and the Canadian Dollar.

Recent Accounting Pronouncements

See Note 1 to the consolidated financial statements for a discussion of recently issued accounting pronouncements.

Off-Balance Sheet Arrangements

None.

Item 7A.    Quantitative and Qualitative Disclosures About Market Risk

The response to this item is included in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Market Risk.”

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Item 8.    Financial Statements and Supplementary Data

BLOCKBUSTER INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

	Page
Report of Independent Registered Public Accounting Firm	74
Audited Consolidated Financial Statements:
Consolidated Statements of Operations—Fiscal Years 2008, 2007 and 2006	75
Consolidated Balance Sheets—January 4, 2009 and January 6, 2008	76
Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Loss—Fiscal Years 2008, 2007 and 2006	77
Consolidated Statements of Cash Flows—Fiscal Years 2008, 2007 and 2006	78
Notes to Consolidated Financial Statements	79

All supplementary financial statement schedules have been omitted

because the information required to be set forth therein is either not applicable

or is shown in the consolidated financial statements or notes thereto.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and

Stockholders of Blockbuster Inc.:

In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Blockbuster Inc. and its subsidiaries at January 4, 2009 and January 6, 2008, and the results of their operations and their cash flows for each of the three years in the period ended January 4, 2009 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 4, 2009, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the risk the Company may not successfully complete a refinancing of its credit facility scheduled to mature in August 2009 and obtain related amendments of financial covenants included therein, and/or the risk the Company may not have adequate liquidity to fund their operations raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to this matter are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

As discussed in Note 7 to the consolidated financial statements, the Company changed the manner in which it accounts for uncertain tax positions as of January 1, 2007.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

PricewaterhouseCoopers LLP

Dallas, Texas

April 6, 2009

74

BLOCKBUSTER INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In millions, except per share amounts)

	Fiscal Year Ended
	January 4, 2009			January 6, 2008			December 31, 2006
Revenues:
Base rental revenues	$	3,238.5		$	3,426.2		$	3,413.1
Previously rented product (“PRP”) revenues		627.3			656.3			616.0
Total rental revenues		3,865.8			4,082.5			4,029.1
Merchandise sales		1,389.4			1,400.1			1,431.9
Other revenues		32.7			59.8			61.2
		5,287.9			5,542.4			5,522.2
Cost of sales:
Cost of rental revenues		1,467.0			1,604.0			1,403.9
Cost of merchandise sold		1,098.4			1,073.8			1,075.8
		2,565.4			2,677.8			2,479.7
Gross profit		2,722.5			2,864.6			3,042.5
Operating expenses:
General and administrative		2,306.6			2,525.1			2,598.6
Advertising		122.0			194.0			154.3
Depreciation and intangible amortization		152.2			185.7			210.9
Impairment of goodwill and other long-lived assets		435.0			2.2			5.1
Gain on sale of Gamestation		—			(81.5	)		—
		3,015.8			2,825.5			2,968.9
Operating income (loss)		(293.3	)		39.1			73.6
Interest expense		(73.0	)		(88.7	)		(101.6	)
Interest income		2.5			6.5			9.9
Other items, net		15.6			(1.5	)		5.4
Income (loss) from continuing operations before income taxes		(348.2	)		(44.6	)		(12.7	)
Benefit (provision) for income taxes		(25.6	)		(29.6	)		76.4
Income (loss) from continuing operations		(373.8	)		(74.2	)		63.7
Income (loss) from discontinued operations, net of tax		(0.3	)		0.4			(13.2	)
Net income (loss)		(374.1	)		(73.8	)		50.5
Preferred stock dividends		(11.3	)		(11.3	)		(11.3	)
Net income (loss) applicable to common stockholders	$	(385.4	)	$	(85.1	)	$	39.2
Net income (loss) per common share:
Basic and diluted
Continuing operations	$	(2.01	)	$	(0.45	)	$	0.28
Discontinued operations		—			—			(0.07	)
Net income (loss)	$	(2.01	)	$	(0.45	)	$	0.21
Weighted average shares outstanding:
Basic		191.8			190.3			187.1
Diluted		191.8			190.3			189.0

The accompanying notes are an integral part of these consolidated financial statements.

75

BLOCKBUSTER INC.

CONSOLIDATED BALANCE SHEETS

(In millions, except per share amounts)

	January 4, 2009			January 6, 2008
Assets
Current assets:
Cash and cash equivalents	$	154.9		$	184.6
Receivables, less allowances of $7.4 and $8.7 for fiscal 2008 and 2007, respectively		117.1			113.1
Merchandise inventories		432.8			343.9
Rental library, net		355.8			441.1
Deferred income taxes		13.4			15.9
Prepaid and other current assets		184.6			220.6
Total current assets		1,258.6			1,319.2
Property and equipment, net		406.0			463.0
Deferred income taxes		124.3			144.8
Intangibles, net		11.5			13.7
Goodwill		338.1			772.6
Other assets		16.0			20.3
	$	2,154.5		$	2,733.6
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	427.3		$	472.8
Accrued expenses		493.8			618.4
Current portion of long-term debt		198.0			44.7
Current portion of capital lease obligations		8.5			10.1
Deferred income taxes		125.8			142.5
Total current liabilities		1,253.4			1,288.5
Long-term debt, less current portion		583.0			665.6
Capital lease obligations, less current portion		28.3			37.4
Other liabilities		75.5			86.4
		1,940.2			2,077.9
Commitments and contingencies (Note 8)
Stockholders’ equity:
Series A convertible preferred stock, par value $0.01 per share: 100.0 shares authorized; 0.15 shares issued and outstanding for fiscal 2008 and 2007 with liquidation preference of $1,000 per share		150.0			150.0
Class A common stock, par value $0.01 per share; 400.0 shares authorized; 120.7 and 121.2 shares issued and outstanding for fiscal 2008 and 2007, respectively		1.2			1.2
Class B common stock, par value $0.01 per share; 500.0 shares authorized; 72.0 shares issued and outstanding for fiscal 2008 and 2007		0.7			0.7
Additional paid-in capital		5,378.4			5,375.2
Accumulated deficit		(5,228.7	)		(4,854.6	)
Accumulated other comprehensive loss		(87.3	)		(16.8	)
Total stockholders’ equity		214.3			655.7
	$	2,154.5		$	2,733.6

The accompanying notes are an integral part of these consolidated financial statements.

76

BLOCKBUSTER INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY AND COMPREHENSIVE LOSS (In millions)

	Fiscal Year Ended
	January 4, 2009					January 6, 2008				December 31, 2006
	Shares		Amount			Shares	Amount			Shares	Amount
Series A convertible preferred stock:
Balance, beginning of year	0.15		$	150.0		0.15	$	150.0		0.15	$	150.0
Balance, end of year	0.15		$	150.0		0.15	$	150.0		0.15	$	150.0
Class A common stock:
Balance, beginning of year	121.2		$	1.2		117.3	$	1.2		114.6	$	1.1
Issuance of Class A common stock, exercise of stock options and vesting of restricted shares, net of cancellations	(0.5	)		—		3.9		—		2.7		0.1
Balance, end of year	120.7		$	1.2		121.2	$	1.2		117.3	$	1.2
Class B common stock:
Balance, beginning of year	72.0		$	0.7		72.0	$	0.7		72.0	$	0.7
Balance, end of year	72.0		$	0.7		72.0	$	0.7		72.0	$	0.7
Additional paid-in capital:
Balance, beginning of year			$	5,375.2			$	5,371.3			$	5,360.9
Issuance of Class A common stock				0.7				0.7				0.3
Exercise/vesting and expense of share-based compensation, net of tax benefit				13.8				14.5				21.4
Cash dividends on preferred stock				(11.3	)			(11.3	)			(11.3	)
Balance, end of year			$	5,378.4			$	5,375.2			$	5,371.3
Accumulated other comprehensive loss:
Balance, beginning of year			$	(16.8	)		$	(18.0	)		$	(42.7	)
Other comprehensive income (loss):
Foreign currency translation, net of taxes				(70.5	)			1.2				24.7
Balance, end of year			$	(87.3	)		$	(16.8	)		$	(18.0	)
Accumulated deficit:
Balance, beginning of year			$	(4,854.6	)		$	(4,781.9	)		$	(4,832.4	)
FIN 48 adjustment (Note 7)				—				1.1				—
Net income (loss)				(374.1	)			(73.8	)			50.5
Balance, end of year			$	(5,228.7	)		$	(4,854.6	)		$	(4,781.9	)
Total stockholders’ equity			$	214.3			$	655.7			$	723.3
Comprehensive income (loss):
Net income (loss)			$	(374.1	)		$	(73.8	)		$	50.5
Other comprehensive income (loss):
Foreign currency translation, net of taxes				(70.5	)			1.2				24.7
Total comprehensive income (loss)			$	(444.6	)		$	(72.6	)		$	75.2

The accompanying notes are an integral part of these consolidated financial statements.

77

BLOCKBUSTER INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

	Fiscal Year Ended
	January 4, 2009			January 6, 2008			December 31, 2006
Cash flows from operating activities:
Net income (loss)	$	(374.1	)	$	(73.8	)	$	50.5
Adjustments to reconcile net income (loss) to net cash flow provided by (used for) operating activities:
Depreciation and intangible amortization		152.2			185.7			212.9
Impairment of goodwill and other long-lived assets		435.0			2.2			5.1
Rental library purchases		(610.5	)		(709.3	)		(656.4	)
Rental library amortization		681.8			740.5			691.0
Non-cash share-based compensation expense		14.1			14.6			25.5
Gain on sale of Gamestation		—			(81.5	)		—
Deferred income taxes, gain on sales of assets and other		5.9			(3.6	)		(10.7	)
Change in operating assets and liabilities:
Change in receivables		(10.2	)		21.6			(7.0	)
Change in merchandise inventories		(122.6	)		(50.7	)		(23.5	)
Change in prepaid and other assets		23.5			3.2			0.1
Change in accounts payable		(29.4	)		(32.6	)		133.4
Change in accrued expenses and other liabilities		(114.7	)		(72.5	)		(91.5	)
Net cash flow provided by (used for) operating activities		51.0			(56.2	)		329.4
Cash flows from investing activities:
Capital expenditures		(118.1	)		(74.4	)		(78.5	)
Cash used for acquisitions, net		(2.4	)		(12.0	)		(1.6	)
Proceeds from sales of property and equipment		0.5			1.9			22.7
Proceeds from sales of store operations		4.6			21.0			12.4
Proceeds from sale of Gamestation		—			147.7			—
Proceeds from insurance recoveries		—			—			4.0
Acquisition of intangible assets		—			(7.4	)		—
Other investing activities		(1.1	)		(0.1	)		—
Net cash flow provided by (used for) investing activities		(116.5	)		76.7			(41.0	)
Cash flows from financing activities:
Proceeds from credit agreements		235.0			115.0			—
Repayments on credit agreements		(164.3	)		(329.1	)		(155.5	)
Cash dividends		(11.3	)		(11.3	)		(11.3	)
Debt financing costs		—			(4.0	)		—
Capital lease payments		(10.0	)		(11.6	)		(16.4	)
Net cash flow provided by (used for) financing activities		49.4			(241.0	)		(183.2	)
Effect of exchange rate changes on cash		(13.6	)		10.2			13.5
Net increase (decrease) in cash and cash equivalents		(29.7	)		(210.3	)		118.7
Cash and cash equivalents at beginning of year		184.6			394.9			276.2
Cash and cash equivalents at end of year	$	154.9		$	184.6		$	394.9
Supplemental cash flow information:
Cash payments for interest	$	71.2		$	77.4		$	99.5
Cash payments (refunds) for income taxes, net	$	26.6		$	29.9		$	(2.2	)

The accompanying notes are an integral part of these consolidated financial statements.

78

BLOCKBUSTER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tabular dollars in millions except per share amounts)

Note 1—Description of Business and Summary of Significant Accounting Policies

Description of Business

Blockbuster Inc. and its subsidiaries (“Blockbuster,” “we,” “us” or “our”) primarily operate and franchise entertainment-related stores in the United States and a number of other countries. We offer movies and video games for in-store rental, sale and trade and sell other entertainment-related merchandise. We also operate an online service offering rental and sale of movies delivered by mail and digital delivery through blockbuster.com.

We operate our business in two segments. The Domestic segment consists primarily of all U.S. store operations and by-mail subscription service operations, as well as the digital delivery of movies through blockbuster.com. The International segment is comprised of all non-U.S. store operations, including operations in Europe, Latin America, Australia, Canada, Mexico and Asia.

Basis of Presentation and Liquidity

The accompanying financial statements have been prepared on the basis of accounting principles applicable to a going concern, which contemplates the realization of assets and extinguishment of liabilities in the normal course of business. As discussed further in Note 6, our revolving credit facility and Term A loan are scheduled to expire on August 20, 2009. Given the impending expiration of both our revolving credit facility and Term A loan facility, on April 2, 2009, we amended our revolving credit facility, Term A loan facility and Term B loan facility to include commitments from certain of our lenders and certain new lenders to (a) replace the existing revolving credit facility with a $250 million revolving credit facility with a maturity date of September 30, 2010 and (b) amend certain financial covenants, other covenants and other terms in our existing revolving credit facility, Term A loan facility and Term B loan facility. The obligation of the lenders to fund the $250 million amended credit facility and effectuate such amendments is subject to the satisfaction of certain conditions set forth in the amendment. While we believe that all such conditions will be met and that we will be in a position to close on the amended credit facility on or about May 11, 2009, there can be no assurance regarding these matters.

The risk that we may not successfully complete this refinancing and obtain the related amendment of certain financial covenants included therein, and/or the risk that we may not have adequate liquidity to fund our operations as a result of not meeting our projected financial results, even if the refinancing is completed within the time and upon the terms contemplated, raise substantial doubt about our ability to continue as a going concern.

If we close on our amended revolving credit and term loan facility, this amended facility and our other indebtedness will impact our business by, among other things:

• requiring that a substantial portion of our cash flows from operations be used for debt service payments, thereby reducing the availability of cash flows to fund working capital requirements including inventory purchases, capital expenditures, acquisitions and other general corporate purposes;

• making us vulnerable to deterioration in our results of operations and to general adverse economic, market or industry conditions which could impact our ability to make our debt payments;

• limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate, including limiting our ability to invest in certain strategic initiatives, consequently placing us at a competitive disadvantage to our competitors; and

• providing liquidity at or near minimum cash levels required to operate the business during certain periods of time during 2009.

79

BLOCKBUSTER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Tabular dollars in millions except per share amounts)

We believe that cash on hand, cash from operations and available borrowings under the amended credit facility (assuming that we close on such facility) will be sufficient to fund our anticipated cash requirements for working capital purposes and normal capital expenditures, and that we will remain in compliance with the financial covenants contained in our amended debt agreements, for at least the next twelve months. However, there can be no assurance regarding these matters given the current state of the global economy, which has negatively impacted our ability to accurately forecast our results of operations and cash position, and which may result in deterioration of our revenues beyond what we anticipate. Our current 2009 plan contemplates that worldwide same-store revenues will be lower than what we experienced in the fourth quarter of 2008. Further deterioration would expose us to declining margins as a result of an imbalance between our inventory levels and customer demand. Additionally, if our trade creditors were to impose unfavorable terms on us, it would negatively impact our ability to obtain products and services on acceptable terms and operate our business.

Our independent registered public accounting firm has issued an opinion on our fiscal 2008 consolidated financial statements that includes an explanatory paragraph that expresses substantial doubt about our ability to continue as a going concern. As part of the amendment, and not subject to closing of the amended credit facility, our lenders have agreed to waive the requirement in our credit agreement that our fiscal 2008 audit opinion not include a going concern explanatory paragraph or like qualification or exception.

If we are unable to generate sufficient cash flow from operations to service our indebtedness and remain in compliance with our financial covenants, we would be in default under one or more of our debt agreements, which if not cured or waived, could result in the acceleration of all of our debt due to cross-default provisions contained in such agreements and in certain of our leases. In such event, we would be required to search for alternative sources of liquidity to refinance the debt, which may not be available to us on acceptable terms, if at all. Our ability to obtain alternative financing would likely be adversely affected because substantially all of our assets have been secured as collateral for our existing debt and because our financial results, substantial indebtedness and credit ratings could each adversely affect the availability and terms of any such financing. If we were unable to repay our debt upon acceleration, we could be forced to file for protection under the U.S. Bankruptcy Code. In addition, as discussed above, our financing arrangements are relatively short-term in nature. As a result, we will face additional refinancing pressures over the next several years.

In order to reduce our exposure to these risks, we have also embarked on a cash management strategy to enhance and preserve as much of our liquidity as possible. This plan contemplates us, among other things:

• reducing our capital expenditures by eliminating, delaying or curtailing discretionary and non-essential spending;

• aggressively pursuing options for the divestiture of certain non-core assets, including selling and/or licensing some of our international operations;

• managing our working capital through the optimization of inventory levels;

• reducing advertising expenses;

• continuing to renegotiate leases to generate significant reductions in future store occupancy costs;

• reducing expenditures on consultants and professional service providers;

• restructuring and reengineering our organization and processes to reduce our operating costs and increase efficiency;

• working to further reduce our obligations in connection with the provision of letters of credit;

• exploring our options with respect to borrowing against unpledged assets in certain international markets;

80

BLOCKBUSTER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Tabular dollars in millions except per share amounts)

• exploring the availability of issuing additional equity securities; and

• considering making future payments of preferred stock dividends in-kind as opposed to in cash.

We cannot make assurances as to whether any of these actions can be effected on a timely basis, on satisfactory terms or maintained once initiated, and if successful, our cash management strategy may limit certain of our operational and strategic initiatives designed to grow our business over the long term.

Use of Estimates

The preparation of our consolidated financial statements, in conformity with accounting principles generally accepted in the United States (“US GAAP”), requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the balance sheet date and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, we evaluate our estimates, including those related to the useful lives and residual values surrounding our rental library, estimated accruals related to revenue-sharing titles subject to performance guarantees, merchandise inventory reserves, revenues generated by customer programs and incentives, useful lives of property and equipment, income taxes, impairment of our long-lived assets, including goodwill, share-based compensation and contingencies. We base our estimates on historical experience and on various other assumptions that we believe to be 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 may materially differ from these estimates under different assumptions or conditions.

Principles of Consolidation

We include our accounts and those of our wholly-owned subsidiaries in our consolidated financial statements. Investments in unconsolidated subsidiaries over which we have significant influence but do not have control are accounted for using the equity method. Investments over which we do not have significant influence are accounted for using the cost method. All significant intercompany transactions have been eliminated.

Fiscal Year

On October 12, 2006, our Board of Directors approved a change in our fiscal year from a calendar year ending on December 31st to a 52/53 week fiscal year ending on the first Sunday following December 30th. The change in our fiscal year took effect on January 1, 2007 and, therefore, there was no transition period in connection with this change of fiscal year-end. Fiscal 2008 includes the 52 weeks ended January 4, 2009, while fiscal 2007 includes the 53 weeks ended January 6, 2008 and fiscal 2006 includes the calendar year ended on December 31, 2006.

Cash and Cash Equivalents

Cash and cash equivalents consist of cash on hand and short-term (original maturity of three months or less) highly liquid investments. We utilize a cash management system under which a book cash overdraft may exist for our primary disbursement accounts. These overdrafts represent uncleared checks in excess of cash balances in bank accounts at the end of the reporting period and have been reclassified to current liabilities on the Consolidated Balance Sheets. We transfer cash on an as-needed basis to fund clearing checks.

Merchandise Inventories

Merchandise inventories consist primarily of new and traded movies and games and other general merchandise, including confections, and are stated at the lower of cost or market. We include in the cost of our

81

BLOCKBUSTER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Tabular dollars in millions except per share amounts)

merchandise inventory an allocation of costs incurred in our distribution center to prepare products for our stores. Merchandise inventory costs are determined using the weighted-average method, the use of which approximates the first-in, first-out basis. We accrue for inventory shrinkage based on the actual historical shrink results of our most recent physical inventories adjusted, if necessary, for current economic conditions. These estimates are compared with actual results as physical inventory counts are taken.

From time to time, we receive rebates and/or slotting fees related to certain products. Rebates primarily relate to volume rebates and are recognized as a reduction in the cost of the related inventory. Slotting fees represent payments from vendors for placement of product in preferred areas within stores for a contractual period of time and are recognized as a reduction to cost of goods sold as the products are sold. We also participate in a variety of cooperative advertising programs and other promotional programs with our vendors in which the vendors provide us with cash consideration in exchange for marketing and advertising of the vendor’s 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 recorded as a reduction in the cost of the applicable vendor’s products and recognized in cost of sales when the related product is sold unless the allowances represent reimbursement of a specific incremental and identifiable cost incurred to promote the vendor’s product. If the allowance represents a reimbursement of cost, it is recorded as an offset to the associated expense incurred. Any reimbursement greater than the costs incurred is recognized as a reduction to the cost of the product.

Rental Library

Rental library product consists of movie and game product available for rental by customers and previously rented movies and games that are available for sale. We include in the cost of rental inventory an allocation of costs incurred in our distribution center to prepare products for our stores. Because of the relatively short useful lives of this product and because this product is available for sale to customers at any time, we view these assets to be current assets. We classify the purchases of rental library product as an operating cash outflow.

We amortize our rental library in a manner that most closely allows for the matching of product costs with the related revenues generated by the utilization of the rental library product. These policies require that we make significant estimates based upon our experience as to the ultimate revenue and the timing of the revenue to be generated by the rental library product. We utilize the accelerated method of amortization because it approximates the pattern of demand for the product, which is generally high when the product is initially released for rental by the studios and declines over time. In establishing residual values for our rental library product, we consider the sales prices and volume of our previously rented product and other used product. We also review the carrying value of our rental library to ensure that estimated future cash flows exceed the carrying value. We record adjustments to the estimated residual value of previously rented product primarily for estimated obsolete or excess product based upon changes in our original assumptions about future demand and market conditions.

82

BLOCKBUSTER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Tabular dollars in millions except per share amounts)

We continually assess the reasonableness of the accounting estimates surrounding our rental library. The following table summarizes our estimated useful lives and residual values of our rental library:

	Estimated Useful Lives	Residual Values
Domestic
In-store new release movies	6 months	$4 - $5
In-store catalog movies	24 months	$4 - $5
Online new release movies	12 months	$0 - $5
Online catalog movies	24 months	$0
Games	12 months	$7
International*
In-store new release movies	6 months	$4 - $5
In-store catalog movies	12 months	$4 - $5
Games	12 months	$4 - $8

* International residual values are calculated using foreign currency exchange rates in effect as of January 4, 2009.

The costs of rental product purchased pursuant to revenue-sharing arrangements typically include a lower initial product cost and a percentage of the net rental revenues to be shared with the studios over an agreed period of time. Additionally, certain titles have performance guarantees. Certain of the up-front costs are amortized on an accelerated basis and revenue-sharing payments pursuant to the applicable arrangement are expensed as the related revenue is earned. We analyze titles that are subject to performance guarantees and recognize an estimated expense for under-performing titles throughout the applicable period based upon our analysis of the estimated shortfall. We revise these estimates on a monthly basis.

As our business continues to change as a result of our initiatives and market dynamics, we will continue to evaluate the reasonableness of the estimates surrounding our rental library.

Property and Equipment

Property and equipment is stated at cost. Depreciation expense is computed by the straight-line method over the estimated useful lives of the respective assets as follows:

Building and building improvements	3 to 19 years
Leasehold improvements	The shorter of the estimated useful life or the remaining lease term
Furniture and fixtures	4 to 10 years
Computer equipment	3 to 5 years
Equipment and other	3 to 10 years

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(Tabular dollars in millions except per share amounts)

The balances of major classes of assets and accumulated depreciation are as follows:

	January 4, 2009			January 6, 2008
Land, building and building improvements	$	184.4		$	187.4
Leasehold improvements		1,052.1			1,138.5
Furniture and fixtures		491.5			492.5
Computer equipment		499.2			484.2
Equipment and other		354.7			388.4
Total		2,581.9			2,691.0
Accumulated depreciation		(2,175.9	)		(2,228.0	)
Property and equipment, net	$	406.0		$	463.0

Maintenance and repair costs are charged to expense as incurred. Improvements that extend the estimated useful life of the assets are capitalized. Depreciation expense related to property and equipment was $150.0 million, $182.6 million and $211.2 million for fiscal 2008, 2007 and 2006, respectively, including depreciation on assets under capital leases discussed below.

Sales of assets are recorded by removing the cost and accumulated depreciation from the asset and accumulated depreciation accounts. During 2008, we completed the sale of our operations in Chile coupled with a license agreement to Rentas e Inversiones ISSI S.A. for $10.7 million before selling expenses of $1.2 million and cash held in Chile stores of $4.4 million. As a result, we recorded a loss on sale of $0.7 million, which is included in “General and administrative” expenses in our Consolidated Statements of Operations. During 2007, the net proceeds from sales of assets and store operations were $170.6 million. This created total gains of $90.3 million, of which $81.5 million pertained to the sale of Gamestation, $6.7 million is reflected as a reduction of “General and administrative” expenses and $2.1 is reflected in “Income (loss) from discontinued operations, net of tax.” During 2006, we completed several asset sales, including land and buildings associated with company-owned properties and the corporate airplane. The net proceeds from these sales were $22.7 million. As a result, we recorded a gain on sale of $6.8 million, which is reflected as a reduction of “General and administrative” expenses in our Consolidated Statements of Operations for fiscal 2006. Retirements and disposals are recorded by removing the cost and accumulated depreciation from the asset and accumulated depreciation accounts with any remaining net book value reflected as increased depreciation expense.

Included in computer equipment is the capitalized cost of internal-use software and website development, including software used to upgrade and enhance our website and processes supporting the business. In accordance with Statement of Position 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use, costs incurred during the application development stage related to the development of internal-use software are capitalized and amortized over an estimated useful life of three years. Costs incurred related to the conceptual design and maintenance of internal-use software are expensed as incurred. We recognized $18.6 million, $34.8 million and $36.7 million of expense related to the amortization of capitalized software costs in fiscal years 2008, 2007 and 2006, respectively. Capitalized software costs at January 4, 2009 and January 6, 2008 totaled $24.3 million and $29.2 million, net of accumulated amortization of $228.7 million and $211.0 million, respectively.

In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 143, Accounting for Asset Retirement Obligations (“SFAS 143”), we record obligations associated with retirements of tangible long-lived assets and the associated estimated retirement costs. SFAS 143 requires the capitalization of any retirement costs as part of the total cost of the related long-lived asset and the subsequent allocation of the total expense to future periods using

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(Tabular dollars in millions except per share amounts)

a systematic and rational method. SFAS 143 also requires the recognition of an estimated liability for the retirement costs. As a result, we recorded a discounted liability of $8.5 million and $7.0 million, which has been adjusted for the allocation of total retirement cost expense and offset by the settlement of asset retirement obligations, included in other long-term liabilities as of January 4, 2009 and January 6, 2008, respectively. Capitalized retirement costs of $4.2 million and $3.2 million are included in leasehold improvements as part of property and equipment in our Consolidated Balance Sheets as of January 4, 2009 and January 6, 2008, respectively.

Leases

We account for leases in accordance with SFAS No. 13, Accounting for Leases, and other related guidance. New store leases within the United States, Canada and Mexico generally provide for an initial lease term of three to five years, with extended renewal options. The leases in our European markets generally have a term of twenty to thirty years, with extended renewal options. We recognize rent expense in the statement of operations for leases classified as operating leases on a straight-line basis over the lease term (as defined within the guidance), including amortization of any lease incentives received from the lessor. Additionally, for leases classified as capital leases, we record an asset and a related obligation on the balance sheet at the beginning of the lease term. The net book values of assets under capital leases are summarized below:

	January 4, 2009			January 6, 2008
Buildings	$	167.7		$	170.1
Computer equipment		2.8			2.8
Equipment and other		1.4			1.5
Total		171.9			174.4
Accumulated depreciation		(142.7	)		(134.8	)
Assets under capital leases, net	$	29.2		$	39.6

Depreciation expense related to capital leases was $9.0 million, $9.9 million and $13.3 million for fiscal 2008, 2007 and 2006, respectively.

Goodwill and Intangible Assets

In accordance with SFAS No. 142, Goodwill and Other Intangible Assets (“SFAS 142”), we assess goodwill and intangible assets with indefinite lives for impairment at the reporting unit level on an annual basis and between annual tests if events occur or circumstances change that would more likely than not reduce the fair value below its carrying amount. SFAS 142 requires that the impairment test be performed through the application of a two-step fair value test. The first step of the test compares the book values of our reporting units, domestic and international, to their estimated fair values at the respective test dates. The estimated fair values of the reporting units are computed using the present value of estimated future cash flows. If fair value does not exceed carrying value then the second step must be performed to quantify the amount of the impairment. The second step of the goodwill impairment test compares the implied fair value of goodwill to the book value of goodwill. To determine the implied fair value of goodwill, our estimated fair value is allocated to the estimated fair value of our existing tangible assets and liabilities as well as existing identified intangible assets and previously unidentified intangible assets in a manner similar to a purchase price allocation. The estimated implied fair value of goodwill and the estimated fair value of identified intangibles are compared to their respective carrying values and any excess carrying value is recorded as a charge to operating income.

See Note 2 below for a discussion of impairment charges.

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(Tabular dollars in millions except per share amounts)

Impairment of Long-Lived Assets

In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS 144”), we assess long-lived assets (primarily property and equipment) for impairment whenever there is an indication that the carrying amount of the assets may not be recoverable. Recoverability is determined by comparing the estimated undiscounted cash flows generated by these assets to the assets’ net carrying value. The amount of impairment loss, if any, is measured as the difference between the net book value of the assets and their estimated fair value. Impairment review of long-lived assets associated with our stores is performed on a market-by-market basis both domestically and internationally.

See Note 2 below for a discussion of impairment charges.

Reserve Estimates

We use estimates to record reserves for certain liabilities, including medical and workers’ compensation claims. We estimate the potential costs related to these liabilities that will be incurred and record that amount as a liability in our financial statements. These estimates are reviewed and appropriately adjusted as the facts and circumstances related to the liabilities change.

Store Closures

In accordance with SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, we establish reserves for store closures in the month that a store is closed. Reserves for store closures are established by calculating the present value of the remaining lease obligation, adjusted for estimated subtenant rental income and any contractual lease buyouts. Expenses associated with the establishment of these reserves are reflected in “General and administrative” on our Consolidated Statements of Operations. The future lease obligation is inclusive of the net future minimum lease payments plus estimated common area maintenance charges, less any remaining accrual for straight-line average rent or tenant allowances. When a store is identified for closure, the depreciation of store assets is accelerated over the estimated remaining life of the store.

As of January 4, 2009 and January 6, 2008, the remaining liability to be paid in the future related to store closure reserves was $6.9 million and $11.5 million, respectively. We made payments of $8.8 million in rent and lease termination costs during fiscal 2008. There have been no significant adjustments to previously accrued store closure costs during 2008. The following table presents operating expenses related to store closures during fiscal 2008 and 2007:

	Fiscal Year Ended
	January 4, 2009		January 6, 2008		December 31, 2006
Closed store accruals and lease termination costs	$	4.6	$	9.1	$	11.3
Accelerated depreciation		7.0		6.3		9.0
Total store closure expense	$	11.6	$	15.4	$	20.3

Fair Value of Financial Instruments

At January 4, 2009, our carrying value of financial instruments approximated fair value except for our $481.0 million aggregate principal amount outstanding of our senior secured credit facilities (“Credit Facilities”) and our $300.0 million aggregate principal amount of 9% senior subordinated notes due 2012 (the “Senior Subordinated Notes”). The estimated fair values of our Credit Facilities and Senior Subordinated Notes at

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(Tabular dollars in millions except per share amounts)

January 4, 2009, based on recent trading activity and quoted market prices, respectively, were approximately $305.0 million and $152.4 million, respectively, compared with the carrying values of $481.0 million and $300 million, respectively. During fiscal 2008 and 2007, no financial instruments were held or issued for trading purposes.

Our receivables do not represent significant concentrations of credit risk at January 4, 2009 or January 6, 2008, due to the wide variety of customers, markets and geographic areas to which our products and services are sold.

Foreign Currency Translation and Transactions

The financial statements of our foreign operations were prepared in their respective local currencies and translated into U.S. dollars for reporting purposes. The assets and liabilities are translated at exchange rates in effect at the balance sheet date, while results of operations are translated at average exchange rates for the respective periods. The cumulative effects of exchange rate changes on net assets are included as a part of accumulated other comprehensive loss in fiscal 2008, 2007 and 2006.

We have market risk arising from changes in foreign currency exchange rates related to our International segment operations. We do not manage our foreign currency exchange rate risk through the use of any financial or derivative instruments, forward contracts or hedging activities.

During fiscal 2008, the U.S. dollar has been generally stronger throughout the year relative to the currencies of the foreign countries in which we operate. The overall strength of the U.S. dollar had a negative impact on our International segment’s revenue and net earnings because the foreign denominations translated into fewer U.S. dollars. In accordance with SFAS No. 52, Foreign Currency Translation, we have recorded a $15.5 million gain, a $1.5 million loss and a $4.4 million gain for foreign currency transactions in fiscal years 2008, 2007 and 2006, respectively, primarily related to intercompany loans denominated in foreign currencies. These amounts are included in “Other items, net” on our Consolidated Statements of Operations.

Revenue Recognition

Rental revenues are generally recognized at the time of rental or sale. Rental revenues are generated from the rental of movies and video games, any eventual sale of previously rented movies and video games, and restocking fees.

In order to provide customers with rental program options, our domestic stores offer the store-based BLOCKBUSTER In-Store Total Access and BLOCKBUSTER Game Pass rental programs. In addition, we launched an online subscription service in the United States and the United Kingdom in 2004. These rental programs allow customers to rent an unlimited number of titles during a month, having up to eight out at a time (depending on the pass), for one price; and items can be returned at any time during the term of the pass. Under the terms of the in-store movie and game passes, if a customer keeps an item beyond the pass term, including renewals, the rental then continues for the same term and price as if rented under our standard rental terms and not under the pass. The rental is continued under such terms until the item is either returned or purchased under the terms of the standard membership agreement. Under the terms of the online subscription agreement, if a customer keeps an item beyond the pass term, including renewals, the item is purchased under the terms of the online subscription membership agreement. Additionally, online subscribers receive free in-store rental coupons, which may be used toward movie or game rentals. These coupons are subject to the applicable in-store rental terms.

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(Tabular dollars in millions except per share amounts)

We recognize rental revenues for the sale of BLOCKBUSTER In-Store Total Access, BLOCKBUSTER Game Pass and the online subscription service over the term of the related pass or service. The monthly fee billed to customers for an online subscription membership inherently includes fees incurred for the shipping and handling of product to and from online customers. In accordance with EITF 00-10, Accounting for Shipping and Handling Fees and Costs, rental revenues include the full online subscription fee billed to customers, and cost of rental revenues includes expenses incurred for the shipping and handling of product to and from online customers.

In 2005 we implemented the “no late fees” program, which means we stopped charging extended viewing fees on any movie or game rentals at substantially all of our company-operated BLOCKBUSTER stores in the United States and Canada. Under this program, rental transactions continue to have two-day or weekly rental periods, depending on the specific rental, with all transactions having a one-week goodwill period from the due date. If the product is not returned by the end of the goodwill period, it is purchased by the customer under the terms of our standard membership agreement. The purchase price is the lower of (i) the full retail price or (ii) the price for previously-rented product at the time of the rental, if the product was available from Blockbuster as a previously-rented product. If the product is subsequently returned within 30 days from the date the customer is charged for the product, the customer receives a full credit to his or her account, less a minimal restocking fee.

Prior to the second quarter of 2007, revenues generated from sales to customers for product that has not been returned by the end of the original rental and goodwill periods in stores where the extended viewing fees have been eliminated was recognized after expiration of a 30-day return period. Beginning in the second quarter of 2007, we began recognizing revenues generated from these sales based upon historical customer return history in accordance with SFAS No. 48, Revenue Recognition When Right of Return Exists. Since the implementation of the “no late fees” program, we have accumulated sufficient historical data to make a reasonable estimate of sales that will ultimately be returned. As a result, $6.7 million of incremental rental revenues and $3.3 million of incremental cost of rental revenues were recognized in the second quarter of 2007.

Revenues generated from restocking fees are recognized upon return of the rental product within the 30-day return period. Revenues are reduced by estimated amounts that we do not anticipate collecting based upon historical experience.

In locations that charge late fees, the customer is charged an extended viewing fee for each day the product is kept past the initial due date. When a customer keeps rental product beyond the initial rental period, the rental is generally successively continued at a daily rate, until the product is either returned or purchased under the terms of the membership agreement.

We are continuously evaluating new rental terms and pricing policies in various markets in order to give our customers more choice, more control and more value. During 2008, we launched a “choose your terms” program in select markets giving the customer more flexibility when choosing the length of their rental. This program offered customers the choice of a low daily rate or the option to keep the product for a longer term for a value price. Under these new rental terms, additional daily rates were charged if the customers chose to keep their rental past the original due date, until the rental was either returned or purchased under the terms of the agreement. We may make a variation of the “choose your terms” program available in additional markets in 2009. During 2008, we recorded $83.6 million related to both extended viewing fees and additional daily rates. For fiscal years 2007 and 2006, we recorded rental revenues related to extended viewing fees of $78.5 million and $76.1 million, respectively.

Merchandise sales include the sales of new movies and games and other general merchandise, including confections. In addition, we offer movie and game trading, pursuant to which we purchase used movies and game

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(Tabular dollars in millions except per share amounts)

software from our customers in exchange for merchandise credit, discounts on other products and, in some international stores, cash. The sales of traded product are also included in merchandise sales. Sales of merchandise are recognized at the time of sale and a provision for sales returns and allowances on merchandise sales is estimated and recorded based on historical trends. Due to the nature of the products we sell, sales returns and allowances are minimal.

We have agreements with certain companies that allow these companies to purchase free rental cards from us, which can then be awarded at their discretion. We defer revenue for the estimated number of free rental cards that will ultimately be redeemed and recognize the amounts deferred as revenue upon redemption. Revenue for estimated non-redemptions, net of the estimated escheat liability, is generally recognized when the cards are issued. We also sell gift cards, which are available in various denominations. After 24 months of inactivity, cards sold prior to November 2007 expire, while cards sold after this time do not expire. Gift card liabilities are recorded at the time of sale and the costs of designing, printing and distributing the cards are recorded as advertising expense at the time of sale. The liability is relieved and revenue is recognized upon redemption of the gift cards. Revenue for unredeemed gift cards is recognized when the liability has been extinguished, which is generally upon expiration of the gift card or when it can be determined the likelihood of redemption is remote.

Our premium membership program, BLOCKBUSTER Rewards, is designed to enhance customer loyalty by encouraging customers to rent movies only from us. For an annual fee, a customer can join the program and earn free movie or video game rentals. The fee, less direct costs, is recognized as revenue ratably over the membership period.

We record revenues net of applicable sales taxes collected from customers.

Franchise Fees

We execute franchise agreements covering retail locations, which provide the terms of the arrangement with the franchisee. The franchise agreements generally require an initial fee, an area development fee for each store opened and continuing fees based upon a percentage of sales, which are negotiated with each franchisee.

We recognize initial fees as revenue when all initial services, as required by the franchise agreement, have been substantially performed. Area development fees are deferred when received and recognized upon the opening of the applicable franchise store and when all services related to such store as required by the franchise agreement have been substantially performed. Continuing fees based upon a percentage of sales are recognized when earned. These amounts are included in “Other revenues” in our Consolidated Statements of Operations.

Sales of product to franchisees are recognized upon transfer of title to the franchisee and included in “Merchandise sales” in our Consolidated Statements of Operations. Direct costs of sales and servicing of franchise agreements are charged to the applicable expense category as incurred.

Share-Based Payments

Effective October 1, 2004, we adopted SFAS No. 123 (revised 2004), Share-Based Payments (“SFAS 123R”). SFAS 123R requires all share-based payments to employees to be recognized in the financial statements based on their fair values using an option-pricing model, such as the Black-Scholes model, at the date of grant. We utilize the provisions of FASB Interpretation No. 28, Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans (“FIN 28”). In accordance with FIN 28, unearned compensation associated with share-based awards with graded vesting periods is amortized on an accelerated basis over the

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(Tabular dollars in millions except per share amounts)

vesting period of the option or award. SFAS 123R requires that we estimate forfeitures when recognizing compensation expense and that this estimate of forfeitures be adjusted over the requisite service period based on the extent to which actual forfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures are recognized through a cumulative catch-up adjustment, which is recognized in the period of change, and also impact the amount of unamortized compensation expense to be recognized in future periods.

See Note 3 below for further information on share-based compensation.

Comprehensive Income (Loss)

Comprehensive loss is defined as the change in equity (net assets) of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. It consists of net loss and other gains and losses affecting stockholders’ equity that, under US GAAP, are excluded from net income (loss), such as foreign currency translation gains and losses. Currency translation is the only item of comprehensive income (loss) impacting our accumulated other comprehensive income (loss).

Advertising Expenses

Advertising production costs are expensed the first time the advertising takes place. Media (television and printed materials) placement costs are expensed in the month the advertising appears. As of January 4, 2009 and January 6, 2008, $2.9 million and $3.1 million of prepaid advertising was included in “Prepaid and other current assets” on our Consolidated Balance Sheets, respectively.

In accordance with EITF 02-16, Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor, we record certain consideration received from vendors in connection with cooperative advertising programs and other vendor marketing programs as a reduction to advertising costs when the allowance represents a reimbursement of a specific incremental and identifiable cost. See additional discussion in “Merchandise Inventories” above.

Customer acquisition costs are expensed when incurred. These costs consist of the cost of commissions paid to authorized third parties for the acquisition of online subscribers through their respective distribution channels.

Income Taxes

We record deferred tax assets and liabilities for future income tax consequences that are attributable to differences between financial statement carrying amounts of assets and liabilities and their income tax bases. The measurement of deferred tax assets and liabilities is based on enacted tax rates that are expected to apply to taxable income in the year when settlement or recovery of those temporary differences is expected to occur. We recognize the effect on deferred tax assets and liabilities of any change in income tax rates in the period that includes the enactment date. We record a valuation allowance to reduce deferred tax assets if it is more likely than not that some portion or all of the deferred tax assets will not be realized.

As of January 1, 2007, we adopted Financial Interpretation No. 48, Accounting for Uncertainty in Income Taxes—an Interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48 addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under FIN 48, the tax benefit from an uncertain tax position may be recognized only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities. The determination is based on the technical merits of the position and presumes that each uncertain tax position will be examined by the relevant

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(Tabular dollars in millions except per share amounts)

taxing authority that has full knowledge of all relevant information. Although we believe the estimates are reasonable, no assurance can be given that the final outcome of these matters will not be different than what is reflected in the historical income tax provisions and accruals.

See Note 7 below for further information on our income taxes.

Amended and Restated Employment Agreement with Former CEO

As previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2006, filed with the SEC on March 1, 2007, we were in discussions with our former Chief Executive Officer, John F. Antioco, in an attempt to resolve a disagreement concerning the Board of Directors’ 2006 bonus award to Mr. Antioco. On January 25, 2007, the Board of Directors exercised negative discretion and awarded a 2006 bonus to Mr. Antioco of $2.28 million, which would be in addition to his 2006 salary and deferred compensation of approximately $2.5 million. This bonus award was subject to the condition that the Board of Directors would award him no 2006 bonus if Mr. Antioco contested the award.

Mr. Antioco maintained that he would be entitled to a 2006 bonus of $7.65 million based on the application of the 2006 senior bonus plan performance goals. We had accrued $4.5 million at December 31, 2006 for this contingency based on the guidance outlined in SFAS No. 5, Accounting for Contingencies. On March 20, 2007, we announced that we reached a settlement agreement with Mr. Antioco. The settlement agreement provided for an amended and restated employment agreement that collectively resolved the disagreement and set forth the terms of Mr. Antioco’s continued employment with Blockbuster. Under the amended and restated employment agreement, Mr. Antioco received a 2006 bonus of approximately $3.1 million. As a result, we reversed approximately $1.4 million of bonus expense during the first quarter of 2007 which had been accrued at December 31, 2006.

On July 2, 2007, we announced the appointment of James W. Keyes as our new Chairman of the Board and Chief Executive Officer. As a result of the appointment of Mr. Keyes, the amended and restated employment agreement with Mr. Antioco was terminated and we recorded approximately $6.3 million in costs during the second quarter of 2007 in accordance with the provisions of the agreement. Additionally, we recorded $1.4 million in share-based compensation expense relating to the immediate vesting of Mr. Antioco’s previously unvested restricted share units and stock options as further discussed in Note 3 below.

Severance Charges

We have incurred severance costs as a result of involuntary employee terminations initiated as part of our focus on operating expense management. These termination benefits have been included in “General and administrative” expenses in our Consolidated Statements of Operations. As of January 4, 2009, we had an ending severance accrual of $4.7 million, which we expect to pay out within the next six months. The following table presents the activity in severance liability for fiscal 2008, 2007 and 2006:

	Fiscal Year
	2008			2007			2006
Beginning balance	$	15.5		$	6.2		$	3.7
Expense incurred and accrued		6.4			30.8			18.2
Adjustments to accruals		(3.1	)		—			—
Amount paid during year		(14.1	)		(21.5	)		(15.7	)
Ending balance	$	4.7		$	15.5		$	6.2

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BLOCKBUSTER INC.

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(Tabular dollars in millions except per share amounts)

Net Income (Loss) Per Share

Basic net income (loss) per share (“EPS”) is computed by dividing the net income (loss) applicable to common shares by the weighted average number of common shares outstanding during the period. Diluted EPS adjusts the basic weighted average number of common shares outstanding by the assumed exercise of Blockbuster stock options, vesting of restricted shares and restricted share units, and shares issuable under the conversion feature of our Series A convertible preferred stock, as defined below, using the if-converted method only in periods in which such effect would have been dilutive on income before cumulative effect of change in accounting principle. Options to purchase 18.1 million, 18.2 million and 6.7 million shares of Class A common stock were outstanding as of January 4, 2009, January 6, 2008 and December 31, 2006, respectively. Additionally, 1.8 million, 2.8 million and 3.5 million restricted shares and restricted share units that are convertible into shares of Class A common stock were outstanding as of January 4, 2009, January 6, 2008 and December 31, 2006, respectively. Because their inclusion would be anti-dilutive, all stock options for fiscal years 2008, 2007 and 2006, all restricted shares and restricted share units for fiscal years 2008 and 2007, and all shares of Series A convertible preferred stock for fiscal years 2008, 2007 and 2006 were excluded from the computation of the weighted-average shares for diluted EPS.

The table below presents a reconciliation of weighted-average shares, in millions, used in the calculation of basic and diluted EPS:

	Fiscal Year Ended
	January 4, 2009	January 6, 2008	December 31, 2006
Weighted-average shares for basic EPS	191.8	190.3	187.1
Incremental shares for restricted shares and restricted share units	—	—	1.9
Weighted-average shares for diluted EPS	191.8	190.3	189.0

Hurricane Katrina

In August 2005, Hurricane Katrina had a major impact on certain portions of the United States Gulf Coast region and resulted in the temporary closure of 128 Blockbuster stores. Due to the extent of the damage caused by Hurricane Katrina, we permanently closed 12 of these stores. We maintain insurance coverage for this type of loss, which provides for reimbursement from losses resulting from property damage, loss of product, as well as business interruption coverage. During 2005, we recognized expense for our insurance deductible of $1.0 million and wrote off the net book value of damaged inventory, property and equipment and store supplies and recorded an insurance receivable for those assets as well as for repair and maintenance expenses incurred in the stores impacted by Hurricane Katrina. During fiscal 2006, we finalized a partial claim totaling $8.0 million with the insurance company and recorded a gain of $4.5 million, net of the insurance deductible and receivable balance, resulting from insurance recoveries. This gain is reflected as a reduction of $3.2 million in “General and administrative” expenses, $1.0 million in “Cost of rental revenues” and $0.3 million in “Cost of merchandise sold” in our Consolidated Statements of Operations for fiscal year 2006. During fiscal 2007, we finalized the remaining portion of the insurance claim and recognized a gain of $1.9 million, which is reflected as a $1.6 million reduction of “Cost of rental revenues” and a $0.3 million reduction of “Cost of merchandise sold” our Consolidated Statements of Operations for fiscal year 2007. No further claims relating to Hurricane Katrina are outstanding as of January 4, 2009.

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(Tabular dollars in millions except per share amounts)

Transactions with Franchisees

During 1999, we sold 42 stores to a Blockbuster franchisee and financed a note with the franchisee of $18.8 million. During the fourth quarter of 2005, the franchisee ceased making payments on the note and, as a result, we placed the note in default and began negotiations to resolve this matter. In accordance with SFAS No. 114, Accounting by Creditors for Impairment of a Loan, we determined that this loan was impaired during the fourth quarter of 2005 and recorded bad debt expense of $4.5 million based upon the estimated fair value of our collateral. Upon impairment of the loan in the fourth quarter of 2005, we ceased recognizing interest income on the note. During the second quarter of 2006, we acquired 40 of these franchisee stores and recorded a loss of $2.3 million based on the difference between the outstanding note balance at that time and the fair value of net assets acquired. This amount has been included in “General and administrative” expenses in our Consolidated Statements of Operations for the year ended December 31, 2006.

During 2001, one of our franchisees paid off a note to us related to their purchase of stores from us. At the same time, that franchisee financed a note for $7.7 million with a third party, which we guaranteed. During the third quarter of 2006, the franchisee defaulted on the note, which had an outstanding balance of $5.4 million and, during the fourth quarter of 2006, we were required to perform under our guarantee. Our guarantee was collateralized by selected store assets and a personal guarantee of the franchisee. We filed a lawsuit against the franchisee to recover payment or assets to satisfy this liability. As a result, we recorded a $4.0 million charge to record this liability during the third quarter of 2006, net of the estimated fair value of the collateralized assets, which is included in “General and administrative” expenses in our Consolidated Statements of Operations. On July 12, 2007, we settled the case with the franchisee. The settlement of the case did not have a material impact on our financial statements. On August 22, 2007, the case was dismissed with prejudice.

As of January 4, 2009, there are no other material outstanding obligations that we have guaranteed for our franchisees.

During the first quarter of 2007, our franchisee in Brazil sold its store base to Lojas Americanas. As part of this transaction, we entered into a termination agreement with the existing franchisee and subsequently entered into a license agreement with Lojas Americanas. As a result of the termination agreement, we received a termination fee of approximately $20 million, which has been included in “Other revenues” in our Consolidated Statements of Operations. During the second quarter of 2007, we received $5 million related to the license agreement with Lojas Americanas, which is included in “Other revenues” in our Consolidated Statements of Operations.

Recent Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS 157”). This statement defines fair value as used in various accounting pronouncements, establishes a framework for measuring fair value under US GAAP and expands disclosure related to the use of fair value measures in financial statements. SFAS 157 does not expand the use of fair value measures in financial statements, but standardizes its definition and guidance in US GAAP. SFAS 157 establishes a fair value hierarchy with observable market data as the highest level and fair value based on an entity’s own fair value assumptions as the lowest level. The provisions of SFAS 157 are required to be applied to financial assets and liabilities for fiscal years beginning after November 15, 2007. The adoption of SFAS 157 did not have a material impact on our consolidated financial statements. In February 2008, the FASB delayed the effective date of SFAS 157 for nonfinancial assets and liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis. We do not believe the adoption of SFAS 157 as it relates to nonfinancial assets and liabilities will have a material impact on our consolidated financial statements.

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(Tabular dollars in millions except per share amounts)

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS 159”), which permits entities to choose to measure certain financial assets and liabilities at fair value. The provisions of SFAS 159 are effective for fiscal years beginning after November 15, 2007. The adoption of SFAS 159 did not have a material impact on our consolidated financial statements.

In December 2007, the FASB issued SFAS No. 141R, Business Combinations, which requires, among other things, the acquiring entity in a business combination to recognize the full fair value of the assets acquired, liabilities assumed and any noncontrolling interest as of the acquisition date; the immediate expense recognition of transaction costs; and accounting for restructuring plans separately from the business combination. This statement applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Early adoption is not allowed. This standard will impact our accounting treatment for future business combinations.

In June 2008, the FASB issued FSP No. Emerging Issues Task Force (“EITF”) 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities (“FSP 03-6-1”). FSP 03-6-1 clarifies that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and are to be included in the computation of earnings per share under the two-class method described in SFAS No. 128, Earnings per Share. FSP 03-6-1 is effective for fiscal years beginning after December 15, 2008. We do not believe the adoption of this statement will have a material effect on our consolidated financial statements.

Note 2—Goodwill and Other Long-Lived Assets

Impairment of Goodwill and Other Long-Lived Assets

In accordance with SFAS 142, we test goodwill and other intangible assets for impairment during the fourth quarter of each year and on an interim date should factors or indicators become apparent that would require an impairment test.

During the fourth quarters of fiscal 2007 and 2006, we performed our annual impairment test, which resulted in the estimated fair values of each of our reporting units exceeding their book values.

We performed our annual impairment test as of October 31, 2008. The estimated fair value of each of our domestic and international reporting units included a combination of factors, including the current economic environment, our operating results, and a decline in our market capitalization. As a result of these factors and the related risks associated with our business, the fair values of our reporting units were negatively impacted. The estimated fair value of our international reporting unit was more than its related book value, therefore we determined it was not necessary to perform step two of the goodwill impairment test for the international reporting unit. The estimated fair value of our domestic reporting unit was less than its related book value and we determined that its goodwill balance was impaired. Accordingly, step two of the goodwill impairment test was completed for the domestic reporting unit which resulted in an impairment charge totaling $432.6 million in the fourth quarter of 2008.

Additionally, in accordance with SFAS 144, we evaluate our other long-lived assets for impairment during the fourth quarter of each year and on an interim date should factors or indicators become apparent that would require an impairment test. During the fourth quarters of quarters of 2008, 2007 and 2006, respectively, we determined that the carrying value of certain fixed assets and reacquired franchise rights in domestic and

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(Tabular dollars in millions except per share amounts)

international markets exceeded the undiscounted future cash flows to be generated by those assets. Therefore, we recorded impairment charges. The following table summarizes the impairment charges recorded:

	Fiscal Year Ended
	January 4, 2009		January 6, 2008		December 31, 2006
Domestic
Goodwill	$	432.6	$	—	$	—
Property and equipment		1.4		2.2		—
Reacquired franchise rights		1.0		—		—
International
Property and equipment		—		—		5.1
Total	$	435.0	$	2.2	$	5.1

Our impairment charges related to goodwill and long-lived assets discussed above have been included in “Impairment of goodwill and other long-lived assets” in our Consolidated Statements of Operations.

Goodwill and Other Intangible Assets

The following table summarizes changes in our goodwill during fiscal 2008 and 2007:

	Fiscal Year 2008									Fiscal Year 2007
	Domestic			International			Total			Domestic			International			Total
Beginning balance	$	664.5		$	108.1		$	772.6		$	665.7		$	140.3		$	806.0
Impairment		(432.6	)		—			(432.6	)		—			—			—
Divestiture allocations		—			(1.8	)		(1.8	)		(4.3	)		(32.2	)		(36.5	)
Acquisitions and other adjustments		—			(0.1	)		(0.1	)		3.1			—			3.1
Ending balance	$	231.9		$	106.2		$	338.1		$	664.5		$	108.1		$	772.6

All of our intangible assets other than goodwill are subject to amortization and consist of the following:

	January 4, 2009							January 6, 2008
	Gross Value		Accumulated Amortization			Net		Gross Value		Accumulated Amortization			Net
Reacquired franchise rights	$	10.0	$	(5.4	)	$	4.6	$	10.0	$	(3.8	)	$	6.2
Patents		7.3		(2.0	)		5.3		7.3		(1.6	)		5.7
Other		3.6		(2.0	)		1.6		2.4		(0.6	)		1.8
	$	20.9	$	(9.4	)	$	11.5	$	19.7	$	(6.0	)	$	13.7

Reacquired franchise rights are amortized on a straight-line basis over twenty years. Patents are amortized on a straight-line basis over the life of the patent.

Amortization expense for fiscal 2008, 2007, and 2006 was $2.2 million, $3.1 million and $1.7 million, respectively. Based on the current amount of intangible assets subject to amortization, amortization expense is estimated to be $1.8 million in 2009, $1.0 million in 2010, and $0.9 million per year in 2011 through 2013. As acquisitions and dispositions may occur in the future, these amounts may vary.

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(Tabular dollars in millions except per share amounts)

Note 3—Stock and Share-Based Payments

Capital Stock

We have one class of preferred stock and two classes of common stock. Our Class A common stock entitles the holder to one vote per share and has a par value of $0.01 per share. Our Class B common stock entitles the holder to two votes per share and also has a par value of $0.01 per share.

On November 15, 2005, we completed a private placement of 150,000 shares of 7 ¹/2% Series A cumulative convertible perpetual preferred stock (the “Series A convertible preferred stock”) for an aggregate offering price of $150.0 million. The Series A convertible preferred stock is convertible into shares of our Class A common stock at the holder’s option at any time at a conversion price of $5.15, subject to adjustment. On or after November 20, 2010, we have the option to cause the conversion rights to expire, but only if certain conditions are met. We may pay dividends on the Series A convertible preferred stock in cash, or if certain conditions are met, shares of our Class A common stock or a combination of both. Dividends will be payable to the extent the payment of dividends is not prohibited by our credit agreement, assets are legally available to pay dividends and the Board of Directors or an authorized committee of the Board of Directors declares a dividend payable. Dividends will accumulate and be cumulative from the date of issuance, but will not bear any interest. The first dividend totaling $2.8 million was declared and paid during the first quarter of 2006. All quarterly dividends during fiscal 2008, 2007 and 2006 were paid in cash.

If we fail to pay dividends on the Series A convertible preferred stock on six dividend payment dates (whether consecutive or not), then holders of the Series A convertible preferred stock will be entitled to receive, when, as and if declared by the our Board of Directors, out of funds legally available therefore, dividends at the rate per annum equal to the stated annual dividend rate of 7 ¹/2% plus 1.0% on and after such sixth dividend payment date until we have paid all accumulated and unpaid dividends in full. Following such payment of unpaid dividends, the dividend rate will revert to 7 ¹/2% per annum; provided, however, that upon any further failure to pay dividends, the dividend rate will again increase by 1.0% to 8 ¹/2% per annum until we have again paid all accumulated and unpaid dividends in full. In addition, if we fail to pay dividends for six quarterly dividend periods (whether or not consecutive), holders of the Series A convertible preferred stock who currently have very limited voting rights, will have certain additional voting rights, including the right to elect two additional directors to our Board of Directors, such additional directors to serve until we have paid all accumulated and unpaid dividends in full.

In the event of any liquidation, winding up or dissolution of Blockbuster, each holder of the Series A convertible preferred stock will be entitled to receive the liquidation preference of $1,000 per share, plus accumulated and unpaid dividends (whether or not declared) to the date of liquidation, winding up or dissolution out of the assets available for distribution to Blockbuster stockholders before any payment or distribution of assets is made to holders of the Class A or Class B common stock but after any payment or distribution in respect of obligations under our debt obligations.

Our policy is to issue new shares of common stock upon conversion of shares of Series A convertible preferred stock.

Blockbuster Long-Term Incentive Plans

During 1999, our sole stockholder approved the adoption of the Blockbuster Inc. 1999 Long-Term Management Incentive Plan (as amended to date, the “1999 Plan”) for the benefit of our employees, directors and

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(Tabular dollars in millions except per share amounts)

advisors. An aggregate of 40.3 million shares of Class A common stock are reserved for issuance under the Plan, as adjusted for historical dividends, distributions or other specified transactions and less any shares previously issued or subject to outstanding awards. As of January 4, 2009 11.9 million shares remain outstanding for future grant under the 1999 Plan. The Plan provides for the grant of share-based incentive awards, including stock options to purchase shares of Class A common stock, stock appreciation rights that may be settled in cash and/or shares of Class A common stock or other securities of Blockbuster, restricted shares of Class A common stock, unrestricted shares of Class A common stock, restricted share units that may be settled in cash (based on the fair market value of a share of Class A common stock or of a share of Class B common stock or a weighted value average of the fair market value of a share of Class A common stock or Class B common stock) and/or Class A common stock and phantom shares. The purpose of the 1999 Plan is to benefit and advance the interests of Blockbuster by (i) attracting and retaining employees, non-employee directors and advisors of Blockbuster and (ii) rewarding such persons for their contributions to the financial success of Blockbuster and thereby motivating them to continue to make such contributions in the future.

On July 20, 2004, our stockholders approved the adoption of the 2004 Long-Term Management Incentive Plan (as amended to date the “2004 Plan”) and approved and adopted an amended and restated 1999 Plan. An aggregate of 20.0 million shares of Class A common stock have been reserved for issuance under the 2004 Plan, which provides for the grant of the same types of awards as the 1999 Plan. As of January 4, 2009, 2.3 million shares remain outstanding for future grant under the 2004 Plan. Our policy is to issue new shares of common stock upon exercise of employee stock options and for grants of restricted shares.

We have made various grants of restricted shares, restricted share units and stock options to certain employees. Outstanding stock options granted prior to July 1, 2007 generally vest over a three-year to five-year period from the date of grant and generally expire ten years after the date of grant. Generally, outstanding stock options granted subsequent to July 1, 2007 vest over a one-year to three-year period from the date of grant and expire five years after the date of grant. Restricted shares and restricted share units, excluding restricted share units granted to Mr. Antioco as discussed below, generally vest over a one-year to three-year period from the date of grant and are payable in shares of Class A common stock. Certain awards of restricted shares and restricted share units are performance-based awards. We recognize compensation expense relating to performance-based awards if it is probable that the performance conditions will be achieved. However, performance-based awards are not issued until the performance goals are actually met. Stock-settled stock appreciation rights (“SSARs”) were awarded during 2008 to various employees. These SSARs were subject to performance criteria which were not met, and as a result, no SSARs are considered outstanding as of January 4, 2009.

During the first quarter of 2007, we entered into an amended and restated employment agreement with our former Chief Executive Officer, John F. Antioco, as discussed in Note 1. As a result of the amended and restated employment agreement, Mr. Antioco was entitled to the immediate vesting of his restricted share units that were settleable in cash upon the conclusion of his employment with Blockbuster. We paid approximately $7.5 million to settle this award. As of January 6, 2008, no liability remained related to Mr. Antioco’s restricted share units. Additionally, the exercisability of all of his previously granted stock options that had not become exercisable on or prior to the date of the conclusion of his employment was accelerated and such stock options, together with all of his previously granted stock options that were exercisable on or prior to the date of the conclusion of his employment, will be exercisable for 30 months following December 31, 2007. As a result, we recorded approximately $1.4 million in stock compensation expense related to the acceleration of Mr. Antioco’s unvested restricted share units and stock options during the second quarter of 2007. Under Mr. Antioco’s previous employment agreement, he was allowed 24 months to exercise his stock options if his employment agreement was not renewed. The additional 12 months during which Mr. Antioco is allowed to exercise his stock options is considered a modification under SFAS 123R and

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(Tabular dollars in millions except per share amounts)

resulted in additional compensation expense of approximately $0.9 million, of which approximately $0.8 million was recorded during the first quarter of 2007 related to options that had vested and the remainder was recognized during the second quarter of 2007 upon termination of his employment.

On July 2, 2007, we announced the appointment of James W. Keyes as our new Chairman of the Board and Chief Executive Officer. We entered into a three-year employment agreement with Mr. Keyes commencing on July 2, 2007 (the “Effective Date”). On the Effective Date, Mr. Keyes was granted approximately 7.8 million stock options to purchase shares of Class A common stock, of which approximately 33.3% were granted at an exercise price of $4.485, approximately 22.2% were granted at an exercise price of $5.1578, approximately 22.2% were granted at an exercise price of $5.9314 and approximately 22.2% were granted at an exercise price of $6.8211. The options will vest over a three-year period on each anniversary of the Effective Date and expire on the fifth anniversary of the Effective Date. Additionally, under Mr. Keyes’ employment agreement, he was issued approximately 0.7 million restricted share units settleable in shares of Class A common stock, which will vest in full on the third anniversary of the Effective Date.

For the fiscal years ended January 4, 2009, January 6, 2008 and December 31, 2006, we recognized share-based compensation expense related to stock options and restricted shares and restricted share units of $14.1 million, $14.6 million and $25.5 million, respectively. The unamortized compensation expense, net of estimated forfeitures, related to restricted shares, restricted share units and stock options issued and outstanding as of January 4, 2009 will be recognized in future periods as follows:

	Restricted Shares and Restricted Share Units		Stock Options		Total
Fiscal year 2009	$	1.9	$	4.4	$	6.3
Fiscal year 2010		0.5		1.4		1.9
Total	$	2.4	$	5.8	$	8.2
Weighted-average vesting period		1.3 years		1.2 years

The following table summarizes stock option activity pursuant to our stock option plans:

	Options Outstanding		Weighted- Average Exercise Price
Balance at December 31, 2005	7,305,617		$	8.76
Granted	—			—
Exercised	—			—
Cancelled	(575,684	)		10.31
Balance at December 31, 2006	6,729,933		$	8.63
Granted	12,723,259			5.47
Exercised	—			—
Cancelled	(1,247,178	)		6.26
Balance at January 6, 2008	18,206,014		$	6.58
Granted	620,000			3.45
Exercised	—			—
Cancelled	(758,175	)		6.05
Balance at January 4, 2009	18,067,839		$	6.50

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(Tabular dollars in millions except per share amounts)

The following table summarizes information concerning stock options issued to Blockbuster employees that are vested or are expected to vest and stock options exercisable as of January 4, 2009:

	Options	Weighted-Average Remaining Contractual Life (Years)	Weighted-Average Exercise Price		Aggregate Intrinsic Value
Total options vested or expected to vest	17,675,518	4.2	$	6.55	$	—
Exercisable	10,040,183	4.6	$	7.39	$	—

The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:

	2008
Expected dividend yield(1)	0.0	%
Expected stock price volatility(2)	50.0	%
Risk-free interest rate(3)	2.2	%
Expected life of options (years)(4)	3.4

(1) We do not currently pay and have no intention to pay cash dividends on Blockbuster’s common stock.

(2) Expected volatility is based on the weekly historical volatility of our stock price, over the expected life of the option.

(3) The risk-free rate is based upon the rate on a zero coupon U.S. Treasury bill, for periods within the contractual life of the option, in effect at the time of grant.

(4) The expected term of the option is based on the vesting terms and the contractual life of the respective option.

The weighted-average fair value of each option granted, as of the grant date, was $1.18 in fiscal 2008. There were no options exercised during fiscal 2008, fiscal 2007 or fiscal 2006.

As of January 4, 2009, January 6, 2008 and December 31, 2006, there were approximately 8.0 million, 11.7 million and 1.7 million unvested options outstanding, respectively.

A summary of the status of our restricted shares and restricted share units is presented below:

	Shares and Units Outstanding		Weighted- Average Fair Value at Date of Grant
Restricted shares and units at December 31, 2005	7,633,326		$	7.01
Granted	1,798,535			3.98
Vested(1)	(3,508,926	)		6.81
Cancelled	(1,596,344	)		6.79
Restricted shares and units at December 31, 2006	4,326,591		$	5.99
Granted	3,149,040			6.03
Vested(1)	(2,820,974	)		6.51
Cancelled	(1,840,092	)		6.33
Restricted shares and units at January 6, 2008	2,814,565		$	5.29
Granted	464,600			1.95
Vested(1)	(763,118	)		5.35
Cancelled	(695,631	)		5.67
Restricted shares and units at January 4, 2009	1,820,416		$	4.19

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(Tabular dollars in millions except per share amounts)

(1) The total fair value of restricted shares and restricted share units vested during fiscal 2008, 2007 or 2006 was $2.1 million, $13.3 million and $16.6 million, respectively.

Viacom’s Long-Term Incentive Plan

During 2003, certain of our employees were granted Viacom stock options under Viacom’s long-term incentive plans (the “Viacom Plans”). The Viacom Plans provide for fixed grants of equity-based interests pursuant to awards of phantom shares, stock options, stock appreciation rights, restricted shares or other equity-based interests and for subsequent payments of cash with respect to phantom shares or stock appreciation rights based, subject to certain limits, on their appreciation in value over stated periods of time. The stock options generally vested over a three to six-year period from the date of grant and expire ten years after the date of grant. No Viacom stock options were granted to Blockbuster employees during fiscal 2008, 2007 or 2006.

On May 17, 2004, the Viacom Compensation Committee agreed, subject to completion of the Viacom Exchange Offer, to extend the life of selected stock options to purchase Viacom stock granted to Blockbuster executives. Such options were extended to the fourth anniversary of the date of the Committee’s action, provided that (i) the applicable executives remain actively employed by Blockbuster and (ii) the applicable executives are subject to employment agreements that contain non-competition provisions in favor of Blockbuster. In addition, all unvested options for Viacom common stock automatically vested upon our divestiture from Viacom, which occurred on October 17, 2004.

As of January 4, 2009, no options were outstanding under the Viacom Plans. The following table summarizes stock option activity under Viacom’s various plans as it relates to our employees:

	Options Outstanding		Weighted- Average Exercise Price
Balance at December 31, 2005	1,072,720		$	39.88
Conversion to CBS Corporation Class B common stock(1)	293,312			—
Adjusted balance at December 31, 2005	1,366,032		$	31.32
Granted	—			—
Exercised	(18,464	)		24.00
Cancelled	(95,505	)		35.08
Balance at December 31, 2006	1,252,063		$	31.14
Granted	—			—
Exercised	(1,208,767	)		30.88
Cancelled	(31,835	)		43.35
Balance at January 6, 2008	11,461		$	24.00
Granted	—			—
Exercised	—			—
Cancelled	(11,461	)		24.00
Balance at January 4, 2009	—		$	—

(1) On December 31, 2005, the separation of Viacom into two publicly traded entities, CBS Corporation (“CBS Corporation”) and new Viacom Inc. (“New Viacom”) was completed (the “Viacom Separation”). On the effective date of the Viacom Separation, all outstanding unexercised options to purchase shares of

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(Tabular dollars in millions except per share amounts)

Viacom Class B common stock held by employees of Blockbuster were converted into options to purchase shares of CBS Corporation Class B common stock in a manner designed to preserve their intrinsic value. Accordingly, adjustments were made to the number of options and the option exercise prices. As a result, each outstanding stock option to purchase shares of former Viacom Class B common stock was converted into 1.273438 stock options to purchase shares of CBS Corporation Class B common stock.

Note 4—Accrued Expenses

Our accrued expenses consist of the following:

	January 4, 2009		January 6, 2008
Accrued compensation	$	66.1	$	96.5
Accrued revenue-sharing		115.8		126.3
Accrued gift card liability		88.1		112.6
Accrued taxes		65.2		91.7
Deferred revenue		74.3		88.7
Accrued insurance		30.5		33.6
Accrued interest		11.9		13.7
Other		41.9		55.3
	$	493.8	$	618.4

Note 5—Related Party Transactions

On March 29, 2007, Strauss Zelnick, a member of our Board of Directors, was appointed chairman of the board of directors of Take-Two Interactive Software, Inc. (“Take-Two”), a global publisher, developer and distributor of interactive games software, hardware and accessories and a party to considerable commercial transactions with us. On February 15, 2008, Take-Two announced the appointment of Mr. Zelnick as executive chairman. In addition, ZelnickMedia Corporation (“ZelnickMedia”), of which Mr. Zelnick is a founder and principal owner, entered into a management agreement with Take-Two on March 30, 2007, as amended on July 26, 2007 and February 14, 2008, pursuant to which ZelnickMedia provides financial and management consulting services to Take-Two. Mr. Zelnick is entitled during the term of the management agreement to serve as chairman of Take-Two’s board of directors and will also have the authority during such term to hire and/or terminate the chief executive officer and chief financial officer of Take-Two, subject to the approval of Take-Two’s compensation committee. We paid Take-Two $47.6 million and $23.1 million for the years ended January 4, 2009 and January 6, 2008, respectively, pursuant to our commercial arrangements with Take-Two. During 2008, payments to Take-Two substantially increased due to increased purchases of games software. At January 4, 2009, our Consolidated Balance Sheets included $1.1 million of accrued revenue-share expenses for Take-Two recorded in “Accrued expenses” and a net $2.6 million reduction for product returns and other vendor credits from Take-Two in “Accounts payable.” At January 6, 2008, our payables to Take-Two included $0.9 million of accrued revenue-sharing recorded in “Accrued expenses” and $0.1 million recorded in “Accounts payable” in the Consolidated Balance Sheets.

Note 6—Credit Agreement and Other Debt

On August 20, 2004, we entered into $1,150.0 million in senior secured credit facilities with a syndicate of lenders (the “Credit Facilities”). The Credit Facilities provided for three facilities: (i) a five-year $500.0 million revolving credit facility (“revolver”), of which $150.0 million was reserved for the issuance, at Viacom’s

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(Tabular dollars in millions except per share amounts)

expense, of the Viacom Letters of Credit, although such reserve amount may be decreased from time to time by the joint instructions of Viacom and Blockbuster; (ii) a five-year $100.0 million term loan A facility (the “Term A Loan Facility”); and (iii) a seven-year $550.0 million term loan B facility (the “Term B Loan Facility”). The Credit Facilities are secured by pledges of the stock of all of our domestic subsidiaries and 65% of the stock of certain of our international subsidiaries and are guaranteed by our domestic subsidiaries. In connection with the amendment entered into on August 8, 2005, the Credit Facilities were further secured by substantially all of our domestic assets.

As of January 4, 2009, $120.0 million was outstanding under our revolver and $361.0 million was outstanding under the term loan portions of our credit facilities. The available borrowing capacity under the revolver, excluding the $75.0 million reserved for issuance of letters of credit provided for Viacom Inc. (“Viacom”), and $44.6 million reserved to support other letters of credit, totaled $110.4 million at January 4, 2009. Borrowings under the credit facilities accrue interest at a rate equal to either the London Inter Bank Offering Rate (“LIBOR”) plus an applicable margin or the prime rate or the federal funds rate plus applicable margins. The applicable margins vary based on the borrowing and specified leverage ratios. The weighted-average interest rate at January 4, 2009 for borrowings under the credit facilities was 6.0%. As of January 4, 2009, commitment fees are charged at an annual rate of 0.375% on the unused portion of the revolver, and participation and fronting fees are also incurred on letters of credit.

On October 24, 2008, we entered into Amendment No. 1 (the “Amendment”) to the Amended and Restated Initial Public Offering and Split-Off Agreement dated as of June 18, 2004 with Viacom. Pursuant to the Amendment, the face amount of the letters of credit required to be provided by us for the benefit of Viacom was reduced from $150.0 million to $75.0 million and the conditions on which Viacom may draw on the letters of credit were amended. In addition, in the Amendment, we assumed responsibility for the payment of any and all fees and expenses incurred in connection with the establishment and maintenance of the letters of credit. The fees are calculated at an annual rate of 3.625% of the face amount of the letters of credit. As a result of the Amendment, on October 24, 2008, our available borrowing capacity increased by $75.0 million.

The borrowing availability under the revolver is being automatically reduced by quarterly installments of 5% of the original borrowing availability beginning October 2007 through July 2009 and will terminate in full in August 2009. The Term A Loan Facility is payable in quarterly installments of 3.75% of the original principal balance from October 2005 through July 2008, and 13.75% of the original principal balance beginning October 2008 through August 2009. The Term B Loan Facility is payable in quarterly installments of 0.25% of the original principal balance from October 2005 through July 2008, 2.5% of the original principal balance beginning October 2008 through July 2010 and 19.25% of the original principal balance beginning October 2010 through August 2011. The term loans are subject to mandatory prepayments from a portion of proceeds from asset sales and excess cash flow. The scheduled principal payments for the Term A and B Loan Facility has been and will continue to be adjusted to reflect any prepayments resulting from excess cash flow we generated as discussed below.

On August 20, 2004, we issued $300.0 million aggregate principal amount of 9% Senior Subordinated Notes due September 1, 2012. As of January 4, 2009, $300.0 million of principal was outstanding under the Senior Subordinated Notes. Interest accrues on the Senior Subordinated Notes from August 20, 2004, and is payable on March 1 and September 1 of each year. We may redeem all or a portion of the Senior Subordinated Notes at any time at certain redemption prices.

Under a registration rights agreement as part of the offering of the Senior Subordinated Notes, we were obligated to use our reasonable best efforts to file with the SEC a registration statement with respect to an offer to exchange the Senior Subordinated Notes for substantially similar notes that are registered under the Securities

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BLOCKBUSTER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Tabular dollars in millions except per share amounts)

Act of 1933 (the “Securities Act”). Because an exchange offer for the Senior Subordinated Notes was not completed before May 18, 2005, we were required to pay additional interest on the Senior Subordinated Notes until May 30, 2006 when the exchange offer was completed. At that time, the interest rate on the Senior Subordinated Notes reverted back to 9.0% per annum.

On April 18, 2007, we entered into an amendment to our amended and restated credit agreement which provided for additional sales, transfers or other dispositions of assets with a cumulative aggregate fair market value of up to $150 million, and required that we make prepayments on the Credit Facilities in an amount equal to 100% of the net proceeds received from such additional sales, transfers or other dispositions of assets.

On July 2, 2007, we entered into an additional amendment (the “Second Amendment”) to our amended and restated credit agreement which became effective on July 13, 2007 and which:

• accelerated reductions in the revolving commitments that were previously scheduled to occur on October 1, 2007 and January 1, 2008 which effectively reduces the total amount of the revolving commitments from $500 million to $450 million;

• modified the applicable interest rate margins;

• amended the definition of Consolidated EBITDA;

• amended the asset sale baskets and the related mandatory prepayment requirements;

• provided for a premium of 1.0% in the event of certain refinancings through April 6, 2008;

• deferred the applicability of the Fixed Charge Coverage Ratio and Leverage Ratio requirements from fiscal 2008 to fiscal 2009;

• provided for a one-time fee payable by us to the administrative agent, for the accounts of the lenders, in an amount equal to (a) 0.25% of the aggregate amount of revolving commitments and outstanding term loans on April 6, 2008, if the Leverage Ratio on such date exceeds 3.00 to 1.00 but does not exceed 3.50 to 1.00 or (b) 0.50% of the aggregate amount of revolving commitments and outstanding term loans on April 6, 2008, if the Leverage Ratio on such date exceeds 3.50 to 1.00 (we did not meet either criterion, therefore no payment was required);

• amended the Consolidated EBITDA requirements such that we may not permit Consolidated EBITDA for any period of four consecutive fiscal quarters to be less than (a) $140 million for the periods ending July 1, 2007 and September 30, 2007, (b) $165 million for the period ending January 6, 2008, (c) $180 million for the period ending April 6, 2008, (d) $200 million for the period ending July 6, 2008, (e) $225 million for the period ending October 5, 2008, and (f) $250 million for the period ending January 4, 2009; and

• waived any default resulting from our failure to comply with the Consolidated EBITDA requirement with respect to the period of four consecutive fiscal quarters ending July 1, 2007.

Without the benefit of the lenders’ waiver of the Consolidated EBITDA requirement with respect to the period of four consecutive fiscal quarters ending July 1, 2007 that is contained in the Second Amendment, we would have been in default of such covenant.

In connection with the Second Amendment, the applicable margin for our borrowings under the credit facilities increased 50 basis points. We were also required to pay a standard amendment fee to the administrative agent and the syndicate lenders.

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BLOCKBUSTER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Tabular dollars in millions except per share amounts)

We continue to be in compliance with the required minimum EBITDA covenant, the maximum capital expenditure covenant and all other applicable covenants, after giving effect to the amendment described below, as of January 4, 2009. However, if amounts outstanding under the credit facilities were called by the lenders due to a covenant violation, amounts under other agreements, such as the indenture governing our Senior Subordinated Notes and certain leases, could also become due and payable immediately.

Beginning with fiscal 2005, we have been required to make prepayments on the Credit Facilities in an aggregate amount equal to 50% of annual excess cash flow, as defined by the amended and restated credit agreement. Such payments are due at the end of the first quarter of the following year. In fiscal 2008, we generated excess cash flow, as defined by our credit agreement, and made a prepayment of $25.1 million on April 6, 2009, which was classified as “Current portion of long-term debt” on our Consolidated Balance Sheets as of January 4, 2009. We did not generate excess cash flow in fiscal 2007. In fiscal 2006, we generated excess cash flow, as defined, and made a prepayment of $45.6 in the first quarter of 2007. During 2007, primarily as a result of our excess cash flows from fiscal 2006 and the completed divestiture of Gamestation in fiscal 2007, we paid down $214.1 million in debt. Additionally, we are required to make prepayments on the Credit Facilities related to sales of store operations and property and equipment, as defined by the amended and restated credit agreement. The following table summarizes payment activity regarding the Term A and B Loan Facilities during fiscal 2008 and 2007:

	Fiscal 2008		Fiscal 2007
Scheduled payments	$	44.3	$	20.4
Sale of store operations and property and equipment		5.1		148.1
Excess cash flow (based on prior year cash flow)		—		45.6
	$	49.4	$	214.1

The following table sets forth our current portion of long-term debt and capital lease obligations:

	January 4, 2009		January 6, 2008
Credit Facilities:
Revolving credit facility, interest rate ranging from 5.8% to 6.7% at January 4, 2009	$	120.0	$	—
Term A Loan Facility, interest rate of 5.8% at January 4, 2009		18.6		24.0
Term B Loan Facility, interest rate ranging from 5.4% to 6.6% at January 4, 2009		59.4		20.7
Total current portion of long-term debt		198.0		44.7
Current portion of capital lease obligations		8.5		10.1
	$	206.5	$	54.8

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BLOCKBUSTER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Tabular dollars in millions except per share amounts)

The following table sets forth our long-term debt and capital lease obligations, less current portion:

	January 4, 2009		January 6, 2008
Credit Facilities:
Term A Loan Facility	$	—	$	18.8
Term B Loan Facility, interest rate ranging from 5.4% to 6.6% at January 4, 2009		283.0		346.8
Senior Subordinated Notes, interest rate of 9.0% at January 4, 2009		300.0		300.0
Total long-term debt, less current portion		583.0		665.6
Capital lease obligations, less current portion		28.3		37.4
	$	611.3	$	703.0

The scheduled maturities on our debt excluding capital lease obligations are as follows:

2009	$	198.0
2010		150.1
2011		132.9
2012		300.0
2013 and thereafter		—
Total	$	781.0

Interest expense related to capital leases was $3.5 million, $4.8 million and $6.4 million during fiscal 2008, 2007 and 2006, respectively. See Note 8 for further information regarding capital lease obligations.

As a result of a significant reduction in our gross leverage ratio determined by our results of operations for the period ending April 6, 2008, our borrowing rate decreased 50 basis points during the second quarter of 2008.

On August 14, 2008, Moody’s Investors Service downgraded our probability of default rating to Caa1 from B3 based on perceived refinancing challenges given current and anticipated market conditions and the general unavailability of capital on favorable terms. However, Moody’s Investors Service upgraded the rating on our credit facility to B1 from B3 on the same date as a result of our operating improvements. As a result of the upgrade on our credit facility, our borrowing rate decreased 25 basis points during the third quarter of 2008. On March 4, 2009, Standard & Poor’s Ratings Service placed our credit ratings on credit watch in light of the pending maturities of our revolving credit facility and Term A loan facility in August 2009. Any downgrade in our credit ratings could adversely affect our ability to access capital upon acceptable terms and conditions.

Amended Credit Facility

On April 2, 2009, we amended our revolving credit facility, Term A loan facility and Term B loan facility to include commitments from certain of our lenders and certain new lenders to (a) replace the existing revolving credit facility with a $250 million revolving credit facility with a maturity date of September 30, 2010 and (b) amend certain financial covenants, other covenants and other terms in our existing revolving credit facility, Term A loan facility and Term B loan facility. The obligation of the lenders to fund the $250 million revolving credit facility and effectuate such amendments is subject to the satisfaction of certain conditions set forth in the

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BLOCKBUSTER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Tabular dollars in millions except per share amounts)

amendment. While we believe that all such conditions will be met and that we will be in a position to close on the amended revolving credit and term loan facility on or about May 11, 2009, there can be no assurance regarding these matters. The $250 million amended revolving credit facility (the “amended revolver”) will mature on September 30, 2010, and will require that we make the following amortization payments prior to and on such date:

• $25 million will be due and payable on December 15, 2009;

• $20 million will be due and payable on January 31, 2010;

• $20 million will be due and payable on February 28, 2010;

• $20 million will be due and payable on March 31, 2010;

• $10 million will be due and payable on April 30, 2010;

• $15 million will be due and payable on May 31, 2010;

• $50 million will be due and payable on June 30, 2010;

• $10 million will be due and payable on July 31, 2010;

• $10 million will be due and payable on August 31, 2010; and

• any remaining outstanding amounts will be due and payable on September 30, 2010.

Up to $12.5 million in voluntary prepayments made prior to December 15, 2009 may be applied to the foregoing scheduled amortization payments in their direct order of maturity, and any remainder would be applied to the amounts due in the reverse order of maturity. These payments will require a substantial portion of our cash flows from operations, thereby reducing the availability of cash flows to fund working capital requirements, including inventory purchases, capital expenditures, acquisitions and other general corporate purposes.

We will borrow the full availability under the amended revolver through the term thereof. Borrowings under the amended revolver will bear interest at a base rate (with a floor of 4.5%) plus 9% or at LIBOR (with a floor of 3.5%) plus 10%, at our discretion, which interest payments will be due and payable monthly. Should we be in default of the credit agreement, a default rate of interest of an additional 300 basis points on amounts outstanding under the amended revolver, Term A loans and Term B loans would also be payable.

In connection with the amended revolver, certain other provisions of our credit agreement will be amended as follows:

• we will no longer be required to make prepayments on our term loan facilities upon sales, transfers or other dispositions of assets;

• we will no longer be subject to a mandatory available cash sweep;

• we will be required to make certain prepayments on our revolving loans based on excess cash flow;

• the letters of credit issued under our existing revolving credit facility will be continued and renewed when applicable and will be cash- collateralized, and we will be restricted with respect to the issuance of any new letters of credit;

• to the extent cash collateral is released with respect to the letters of credit in an amount in excess of $52.5 million, we will be required to repay the revolving loans with such amounts, allocated to the amortization schedule in reverse order of maturity;

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BLOCKBUSTER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Tabular dollars in millions except per share amounts)

• 80% of the net proceeds of any foreign indebtedness incurred will be required to be used to repay the revolving loans, allocated to the amortization schedule in reverse order of maturity;

• with respect to certain extraordinary receipts received (which do not include disposition proceeds or insurance or condemnation proceeds), we will be required to apply the net proceeds to repay the revolving loans, allocated to the amortization schedule in reverse order of maturity;

• with respect to certain other indebtedness and equity offerings, we will be required to repay the revolving loans (x) with 75% of any net proceeds greater than $25 million and less than $50 million and (y) with 50% of any net proceeds greater than $50 million;

• to the extent that the outstanding principal balance of the revolving loans on April 30, 2010 is in excess of $75 million, we will be required to pay a fee to the revolving lenders equal to the lesser of $5 million and 10% of such excess;

• we will be permitted to enter into the sale and leaseback of our domestic store locations, provided that the fair market value of all property sold does not exceed $28 million, and after giving effect to such sale the Leverage Ratio does not exceed 2.50 to 1.00;

• we will be restricted against paying dividends on our common stock until the revolving loans are paid in full;

• we will be restricted from making additional investments in Foreign Subsidiaries in excess of $20 million;

• we will be permitted to enter into certain intercompany affiliate transactions with non-loan parties on an arms’ length basis;

• our Fixed Charge Coverage Ratio will be amended such that we will be required to maintain a Fixed Charge Coverage Ratio of not less than 1.25 to 1.00 for periods ending March 31, 2009 through January 3, 2010, and of not less than 1.30 to 1.00 for periods ending March 31, 2010 and thereafter;

• our Leverage Ratio will be amended such that we will be required to maintain a maximum Leverage Ratio of 2.75 to 1.00, tested on a quarterly basis; and

• we will be restricted from making capital expenditures (a) in excess of $30 million in the 2009 fiscal year, (b) in excess of $40 million in the 2010 fiscal year, plus up to $10 million of amounts unused in the 2009 fiscal year, and (c) in excess of $80 million in the 2011 fiscal year.

We will pay the following fees in connection with the amendment to our credit agreement and amended revolver:

• an amendment fee of 25 basis points to all consenting term lenders;

• a commitment fee of up to 2% to certain of the lenders who provided early commitments to fund the amended revolver (the “specified lenders”);

• a funding fee of 8.0% to the specified lenders funding the amended revolver, and a funding fee of 11.25% to the other lenders funding the amended revolver, which is payable at closing;

• an exit fee of 3% on all repayments of the amended revolver; and

• a work fee of $250,000, which will be credited toward deposit and other expenses.

In addition, as part of the amendment, and not subject to closing of the amended credit facility, our lenders have agreed to waive the requirement in our credit agreement that our fiscal 2008 audit opinion not include a going concern explanatory paragraph or like qualification or exception.

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BLOCKBUSTER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Tabular dollars in millions except per share amounts)

Note 7—Income Taxes

Prior to September 30, 2004, we were included in consolidated federal, state and local income tax returns filed by Viacom. On September 30, 2004, we ceased to be a member of the Viacom consolidated tax group due to Viacom’s ownership of Blockbuster decreasing below 80% of the total value of our stock. The tax benefit (provision) reflected in our Consolidated Statements of Operations and deferred tax assets and liabilities reflected in our Consolidated Balance Sheets have been prepared as if such benefit (provision) were computed on a separate return basis.

We entered into a tax matters agreement with Viacom which provides that subsequent to the closing of our initial public offering on August 16, 1999 and prior to September 30, 2004, we would be included in the Viacom federal consolidated income tax return and certain consolidated, combined and unitary state tax returns. The tax matters agreement requires us to make payments to Viacom equal to the amount of income taxes which we would pay, subject to certain adjustments, if we had filed a stand-alone return for any taxable year or portion thereof beginning after August 16, 1999 and ending September 30, 2004. The income tax liabilities for the periods presented prior to August 16, 1999 were paid by Viacom. Any tax losses we generated have been utilized by Viacom to reduce our consolidated taxable income. Accordingly, these amounts were reflected in stockholders’ equity on our Consolidated Balance Sheets. The tax matters agreement also specifies that Viacom will indemnify us against any and all tax adjustments to Viacom’s consolidated federal and consolidated, combined and unitary state tax returns from September 29, 1994 through August 16, 1999. Subsequent to August 16, 1999, we are solely responsible for all tax adjustments to our federal and state returns. The period ended September 30, 2004 and all periods subsequent to December 31, 2004 are open for audit. We and certain of our subsidiaries are also under examination by other relevant taxing authorities for various tax years.

With respect to tax attributes such as net operating losses, tax credits and capital losses that occurred prior to September 30, 2004, we have the right of reimbursement or offset, which was determined based on the extent we could utilize such tax attributes if we had not been included in the Viacom group. The right to reimbursement or offset will arise regardless of whether we are a member of the Viacom group at the time we could have used the attributes.

As of January 1, 2007, we adopted Financial Interpretation No. 48, Accounting for Uncertainty in Income Taxes—an Interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48 addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under FIN 48, the tax benefit from an uncertain tax position may be recognized only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities. The determination is based on the technical merits of the position and presumes that each uncertain tax position will be examined by the relevant taxing authority that has full knowledge of all relevant information. Although we believe the estimates are reasonable, no assurance can be given that the final outcome of these matters will not be different than what is reflected in the historical income tax provisions and accruals. Our effective tax rate includes the impact of tax contingency reserves and changes to the reserves, including related interest, as considered appropriate by management. The tax contingency reserves are included in “Other liabilities” in our Consolidated Balance Sheets. Upon adoption of FIN 48 on January 1, 2007, we reduced the total liability relating to our uncertain tax positions by approximately $1.1 million, which is reflected as a decrease to accumulated deficit.

During the first and second quarters of 2006, we recognized a tax benefit of $111.9 million resulting from the resolution of multi-year income tax audits. The $111.9 million benefit is reflected as a $97.9 million tax benefit in “Benefit for income taxes” and a $14.0 million tax benefit within “Income (loss) from discontinued operations” for the year ended December 31, 2006. Additionally, we recognized $2.7 million of “Interest

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BLOCKBUSTER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Tabular dollars in millions except per share amounts)

income” in our Consolidated Statements of Operations for the year ended December 31, 2006 associated with this benefit. The total benefit for the year ended December 31, 2006 consisted of a cash refund of $21 million and a reduction of accrued liabilities of $94 million.

We are required by SFAS No. 109, Accounting for Income Taxes (“SFAS 109”), to periodically assess whether it is more likely than not that we will generate sufficient taxable income to realize our deferred income tax assets. In making this determination, we consider all available positive and negative evidence and make certain assumptions. We consider, among other things, our deferred tax liabilities, the overall business environment, our historical earnings and losses, current industry trends and our outlook for future years. In the third quarter of 2005, we determined that it was unclear as to the timing of when we will generate sufficient taxable income to realize our deferred tax assets. This was primarily due to the negative industry trends, which caused our actual and anticipated financial performance to be significantly worse than we originally projected. Accordingly, during the third quarter of 2005, we recorded a valuation allowance against our deferred tax assets in the United States and certain foreign jurisdictions. Management continues to believe a valuation allowance is appropriate in these jurisdictions as of January 4, 2009. The 2008 provision for income taxes includes $18.9 million primarily related to tax expense in jurisdictions where we expect to be a taxpayer. Until we determine that it is more likely than not that we will generate sufficient taxable income to realize our deferred income tax assets in certain markets, income tax benefits associated with current period losses will be fully reserved.

In accordance with Accounting Principles Board Opinion No. 23, Accounting for Income Taxes—Special Areas (as amended), deferred taxes have not been provided on unremitted earnings of certain foreign subsidiaries of $84.7 million that arose in years ended on or before January 4, 2009 since such earnings have been permanently reinvested. Deferred taxes on such earnings are not considered material.

Income (loss) before income taxes (for continuing and discontinued operations) is attributable to the following jurisdictions:

	Fiscal Year Ended
	January 4, 2009			January 6, 2008			December 31, 2006
United States	$	(402.2	)	$	(149.6	)	$	(70.1	)
Foreign		53.7			105.4			30.2
Total	$	(348.5	)	$	(44.2	)	$	(39.9	)

Components of the income tax benefit (provision) for continuing and discontinued operations are as follows:

	Fiscal Year Ended
	January 4, 2009			January 6, 2008			December 31, 2006
Current:
Federal	$	(1.6	)	$	(2.8	)	$	105.8
State and local		(4.8	)		(0.9	)		1.7
Foreign		(17.7	)		(22.7	)		(11.4	)
		(24.1	)		(26.4	)		96.1
Deferred:		(1.5	)		(3.2	)		(5.7	)
Total	$	(25.6	)	$	(29.6	)	$	90.4

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BLOCKBUSTER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Tabular dollars in millions except per share amounts)

A reconciliation of the statutory U.S. federal tax rate to our effective tax rate on loss before income taxes are as follows:

	Fiscal Year Ended
	January 4, 2009		January 6, 2008		December 31, 2006
Statutory U.S. tax benefit (provision)	35.0	%	35.0	%	35.0	%
Non-deductible portion of goodwill amortization/impairment	(44.2	)	—		—
State and local taxes, net of federal tax benefit	2.5		(2.9	)	3.9
Effect of foreign operations	0.4		(14.8	)	(6.7	)
Audit resolution	(0.1	)	4.1		278.7
Valuation allowance (increase) decrease	10.6		(77.7	)	(120.0	)
Dual consolidated loss recapture	—		(5.9	)	—
Extraterritorial Income Exclusion	—		—		40.1
Subpart F Income	(7.0	)	—		—
Other, net	(4.6	)	(5.0	)	(4.3	)
Tax benefit (provision)	(7.4	)%	(67.2	)%	226.7	%

The following is a summary of the deferred tax accounts in accordance with SFAS 109:

	January 4, 2009			January 6, 2008
Deferred tax assets:
Accrued liabilities and tax credit carryforwards	$	5.3		$	9.8
Book-tax basis differences in long-lived assets		117.5			107.3
Net operating loss carryforwards		143.3			232.0
Total deferred tax assets		266.1			349.1
Valuation allowance		(144.4	)		(204.9	)
Net deferred tax assets		121.7			144.2
Deferred tax liabilities:
Deferred expenses		(24.2	)		(21.5	)
Book-tax basis differences in rental library		(85.6	)		(104.5	)
Total deferred tax liabilities		(109.8	)		(126.0	)
Total net deferred tax asset	$	11.9		$	18.2

Our tax effected net operating loss carryforwards of $143.3 million at January 4, 2009 consist of $122.2 million of domestic net operating loss carryforwards and $21.1 million of net operating loss carryforwards for foreign subsidiaries. These losses are subject to certain limitations in accordance with domestic and foreign tax laws. Of the total tax effected net operating loss carryforwards, $139.9 million will expire between 2009 and 2028, and $3.4 million has no expiration.

Under special tax rules (Internal Revenue Code Section 382), cumulative stock ownership changes among material shareholders exceeding 50 percent during a 3-year period can potentially limit a company’s future use of net operating losses and tax credits. Based on available information, we believe we are not currently subject to the Section 382 Limitation. If triggered, the Section 382 Limitation could impact the timing and ability to utilize our net operating loss carryforwards.

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BLOCKBUSTER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Tabular dollars in millions except per share amounts)

As of January 4, 2009, the liability for uncertain tax positions was approximately $2.2 million and is reflected in “Other liabilities” on our Consolidated Balance Sheets. If recognized, this amount would result in a favorable effect on our effective tax rate. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

	Fiscal Year Ended
	January 4, 2009			January 6, 2008
Unrecognized tax benefits at beginning of year	$	1.5		$	2.8
Increases in tax positions from prior years		—			—
Decreases in tax positions from prior years		(1.5	)		(1.0	)
Increases in tax positions for current year		2.1			—
Settlements		—			(0.3	)
Lapse in statute of limitations		—			—
Unrecognized tax benefits at end of year	$	2.1		$	1.5

Interest expense and penalties related to our uncertain tax positions have been reflected as a component of “Benefit (provision) for income taxes” in our Consolidated Statements of Operations. For the years ended January 4, 2009 and January 6, 2008, we recorded interest and penalties related to our uncertain tax positions of $0.4 million. As of January 4, 2009 and January 6, 2008, we had recorded liabilities of approximately $0.1 million and $0.4 million, respectively, associated with accrued interest and penalties related to uncertain tax positions.

While we expect the amount of unrecognized tax liabilities to change in the next twelve months, we do not expect the change to have a significant impact on our results of operations or financial position.

On July 9, 2007, we reached an agreement with the State of New Mexico and settled an audit assessment for the tax years 1995 through 1998. The total assessment was $0.8 million and consisted of $0.3 million of tax and $0.5 million of interest. The $0.8 million payment and reduction in “Accrued expenses” on our Consolidated Balance Sheets did not have an effect on our effective tax rate.

On December 6, 2007, the State of Louisiana dismissed a court case against us on grounds of abandonment for the tax years ended December 31, 1997 and December 31, 1998. The reduction of $1.8 million in “Accrued expenses” on our Consolidated Balance Sheets included $1.0 million of tax and $0.8 million of interest, which had a favorable effect on our effective tax rate.

The following is a summary of our domestic tax returns and whether or not they remain subject to the amended and restated tax matters agreement (the “Tax Matters Agreement”) with Viacom/CBS and examination by the Internal Revenue Service (“IRS”):

Jurisdiction	Tax Year(s) Ending	Open	IRS Audit Complete	Currently Being Audited	Subject to Tax Matters Agreement with Viacom/CBS
Domestic	12/31/03 and prior	No	Yes	N/A	Yes
Domestic	9/30/2004	Yes	Yes	N/A	Yes
Domestic	12/31/2004	No	Yes	N/A	No
Domestic	12/31/2005	Yes	N/A	No	No
Domestic	12/31/2006	Yes	N/A	No	No
Domestic	12/31/2007	Yes	N/A	No	No
Domestic	12/31/2008	Yes	N/A	No	No

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BLOCKBUSTER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Tabular dollars in millions except per share amounts)

The following is a summary of our other major tax jurisdictions:

Jurisdictions	Closed Tax Years	Open Tax Years	Years Under Examination
Canada	2000 and prior	Post 2000	2001-2002
Ireland	2003 and prior	Post 2003	N/A
Italy	2004 and prior	Post 2004	N/A
Mexico	2000 and prior	Post 2000	N/A
United Kingdom	2004 and prior	Post 2004	N/A

Note 8—Commitments and Contingencies

We have long-term non-cancelable lease commitments for various real and personal property, including stores, and office space which expire at various dates. Certain leases contain renewal and escalation clauses. Generally, leases are three to five years with extended renewal options.

At January 4, 2009, minimum rental payments under non-cancelable leases are as follows:

	Operating		Capital
2009	$	481.4	$	11.0
2010		363.5		9.1
2011		262.1		6.9
2012		173.9		5.0
2013		109.7		4.3
2014 and thereafter		146.8		10.0
Total minimum lease payments	$	1,537.4		46.3
Less amount representing interest				9.5
Present value of minimum payments			$	36.8

Rent expense, including lease termination costs, was $543.0 million, $589.6 million and $607.1 million for fiscal 2008, 2007 and 2006, respectively. Subtenant rental income was $7.5 million, $9.1 million and $12.4 million for fiscal 2008, 2007 and 2006, respectively. Future minimum lease payments have not been reduced by future minimum subtenant rental income of $31.5 million.

On June 8, 2001, C-Span Entertainment, et al v. Blockbuster Inc., et al, was filed in the 192^nd Judicial District Court of Dallas County, Texas. Plaintiffs purchased eleven Blockbuster corporate stores in East Texas in 1999 and turned them into franchise stores. Plaintiffs claim that before consummation of the sales, they received inaccurate financial information and that Blockbuster made false verbal representations concerning inventory of the stores. On September 21, 2001, plaintiffs amended their lawsuit to include as a defendant the law firm that represented them in the store purchase. On February 2, 2004, the court granted Blockbuster’s motion for partial summary judgment and dismissed all of plaintiffs’ fraud claims. On September 28, 2004, the court granted Blockbuster’s motion to enforce plaintiffs’ waiver of a jury trial and to try the case as a non-jury case. Plaintiffs’ claims against the law firm will be adjudicated in a separate trial. On the eve of trial, the court allowed the plaintiffs to amend their pleadings and assert fraud in the inducement, along with plaintiffs’ pending claims for breach of warranties, breach of contract and conversion. Plaintiffs’ amended petition sought $6 million to $20 million in actual damages, $20 million in punitive damages, pre-judgment and post-judgment interest and

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(Tabular dollars in millions except per share amounts)

attorneys’ fees. On April 5, 2006, the trial court rendered a judgment in the case awarding plaintiffs damages of $5.9 million, pre-judgment interest of approximately $2.1 million and attorneys’ fees through the date of the judgment of approximately $0.5 million, for a total of approximately $8.6 million. On June 15, 2006, Blockbuster appealed the judgment to the Fifth Court of Appeals, Dallas County, Texas. On August 12, 2008, the Fifth Court of Appeals, Dallas County, Texas reversed the before-referenced judgment of the trial court and rendered judgment for Blockbuster and awarded Blockbuster damages of $2.5 million in costs and attorney’s fees. Plaintiffs asked the Fifth Court of Appeals, Dallas County, Texas to reconsider their granting of this judgment. On November 6, 2008, the Fifth Court of Appeals, Dallas County, Texas overruled Plaintiffs’ request for reconsideration. On January 21, 2009, Plaintiffs filed a petition for review with the Texas Supreme Court of the before-referenced judgment for Blockbuster by the Fifth Court of Appeals, Dallas County, Texas. We continue to deny all material allegations of the complaint.

On January 31, 2001, an antitrust complaint alleging federal and California state law claims was filed in the Superior Court of California, Los Angeles County, by over 200 individual plaintiffs seeking class certification and monetary damages against Blockbuster, Viacom, and major motion picture studios and their home video subsidiaries. In January 2002, the California court denied the plaintiffs’ request for class certification. By order dated February 20, 2003, the California state court judge dismissed with prejudice all claims against Blockbuster and the other defendants. On appeal, the California appellate court affirmed dismissal of the antitrust conspiracy claims but reversed and remanded to the trial court for further consideration the state law unfair practices and unfair competition claims. The appellate court did not consider the appeal of the decision denying class certification. On May 2, 2007, the trial court granted Blockbuster’s motion for summary judgment dismissing the state law unfair practices and unfair competition claims. On August 17, 2007, plaintiffs filed their notice of intent to appeal the trial court’s dismissal. On July 9, 2008, plaintiffs’ appeal of the trial court’s dismissal was dismissed with prejudice.

Blockbuster was a defendant in 12 lawsuits filed by customers in nine states and the District of Columbia between November 1999 and April 2001. These putative class action lawsuits alleged common law and statutory claims for fraud and deceptive practices and/or unlawful business practices regarding our extended viewing fee policies for customers who chose to keep rental product beyond the initial rental term. Some of the cases also alleged that these policies imposed unlawful penalties and resulted in unjust enrichment. In January 2002, the 136^th Judicial District Court of Jefferson County, Texas entered a final judgment approving a national class settlement (the “Scott settlement”). Under the approved settlement, we paid $9.25 million in plaintiffs’ attorneys’ fees during the first quarter of 2005 and made certificates available to class members for rentals and discounts through November 2005. One additional extended viewing fee case in the United States is inactive and subject to dismissal pursuant to the Scott settlement. In addition, there is one case, filed on February 18, 1999 in the Circuit Court of Cook County, Illinois, Chancery Division, Cohen v. Blockbuster, not completely resolved by the Scott settlement. Marc Cohen, Uwe Stueckrad, Marc Perper and Denita Sanders assert common law and statutory claims for fraud and deceptive practices, unjust enrichment and unlawful penalties regarding Blockbuster’s extended viewing fee policies. Such claims were brought against Blockbuster, individually and on behalf of all entities doing business as Blockbuster or Blockbuster Video. Plaintiffs seek relief on behalf of themselves and other plaintiff class members including actual damages, attorneys’ fees and injunctive relief. By order dated April 27, 2004, the Cohen trial court certified plaintiff classes for U.S. residents who incurred extended viewing fees and/or purchased unreturned videos between February 18, 1994 and December 31, 2004, and who were not part of the Scott settlement or who do not have a Blockbuster membership with an arbitration clause. In the same order, the trial court certified a defendant class comprised of all entities that have done business in the United States as Blockbuster or Blockbuster Video since February 18, 1994. On August 15, 2005, the trial court denied Blockbuster’s motion to reconsider the trial court’s certification of plaintiff classes. On September 26, 2007, the Illinois Appellate Court remanded the trial court’s decision to certify plaintiff classes back to the trial court for

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(Tabular dollars in millions except per share amounts)

reconsideration of our motion to decertify plaintiff classes. Plaintiffs did not petition the Illinois Supreme Court for leave to appeal. On March 14, 2008, upon reconsideration the trial court granted Blockbuster’s motion to decertify plaintiff classes and decertified both plaintiff and defendant classes. We believe the plaintiffs’ position in Cohen is without merit and we intend to vigorously defend ourselves in the lawsuit. In addition, two putative class action lawsuits are pending against Blockbuster in Canada. William Robert Hazell filed an action in the Supreme Court of British Columbia on August 24, 2001 against Viacom Entertainment Canada Inc., Viacom, Blockbuster Canada Inc. and Blockbuster. The case asserts claims for unconscionability, violations of the trade practices act, breach of contract and high handed conduct. The relief sought includes actual damages, disgorgement, and exemplary and punitive damages. Douglas R. Hedley filed an action in the Court of Queen’s Bench, Judicial Centre of Regina, in Saskatchewan on July 19, 2002. The case asserts claims of unconscionability, unjust enrichment, misrepresentation and deception, and seeks recovery of actual damages of $3 million, disgorgement, declaratory relief, punitive and exemplary damages of $1 million and attorneys’ fees. We believe the plaintiffs’ positions in all of these cases are without merit and, if necessary, intend to vigorously defend ourselves.

On February 10, 2004, Howard Vogel filed a lawsuit in the Newcastle County Chancery Court, Delaware naming John Muething, Linda Griego, John Antioco, Jackie Clegg, Blockbuster, Viacom and Blockbuster’s directors who were also directors and/or officers of Viacom as defendants. The plaintiff alleged that a stock swap mechanism anticipated to be announced by Viacom would be a breach of fiduciary duty to minority stockholders and that the defendants engaged in unfair dealing and coercive conduct. The stockholder class action complaint asked the court to certify a class and to enjoin the then-anticipated transaction. On August 15, 2008, the court dismissed plaintiff’s claims with prejudice for failure to prosecute.

On February 25, 2005, Michael L. Galeno filed a putative class action in the Supreme Court of New York County, New York, alleging breach of contract, unjust enrichment and that Blockbuster’s “no late fees” program violated New York’s consumer protection statutes prohibiting deceptive and misleading business practices. The suit sought compensatory and punitive damages and injunctive relief. Blockbuster removed the case to the United States District Court, Southern District of New York. On August 19, 2008, plaintiff Galeno’s claims were dismissed with prejudice. Blockbuster is a defendant in one remaining lawsuit arising out of our “no late fees” program. On March 4, 2005, Beth Creighton filed a putative class action in the Circuit Court of Multnomah County, Oregon alleging that Blockbuster’s “no late fees” program violates Oregon’s consumer protection statutes prohibiting deceptive and misleading business practices. The suit alleges fraud and unjust enrichment and seeks equitable and injunctive relief. Blockbuster removed the case to the United States District Court of Oregon. We believe that this claim still pending is without merit and we intend to vigorously defend ourselves.

On August 3, 2006, Beverly Pfeffer filed a putative class action complaint under Delaware corporate fiduciary laws against Sumner M. Redstone, George S. Abrams, David R. Andelman, Joseph A. Califano, Jr., William S. Cohen, Philippe P. Dauman, Alan C. Greenberg, Jan Leschly, Shari Redstone, Frederic V. Salerno, William Schwartz, Patty Stonesifer and Robert D. Walter in the Court of Chancery of New Castle County, Delaware. On January 12, 2007, plaintiff filed an amended class action complaint and asserted additional claims under Delaware corporate fiduciary laws against National Amusements, Inc., John F. Antioco, Richard J. Bressler, Jackie M. Clegg, Michael D. Fricklas, Linda Griego, John L. Muething and CBS Corp. (f.k.a. Viacom Inc.). The amended class action complaint purports to be filed on behalf of all former Viacom stockholders who tendered their Viacom stock in exchange for common shares of Blockbuster stock as part of the Blockbuster split-off exchange offer commenced on September 8, 2004 and completed on October 5, 2004, and all Blockbuster shareholders at the time a special dividend was declared by the Blockbuster Board of Directors in connection with the Blockbuster split-off exchange offer in June 2004. Plaintiff claimed that the above-named

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(Tabular dollars in millions except per share amounts)

defendants breached their fiduciary duties in violation of Delaware corporate fiduciary laws and, as a result, plaintiff sought declaratory relief, compensatory damages, pre-judgment and post-judgment interest, court costs and expenses, expert witness fees and attorneys’ fees. On February 1, 2008, the Court of Chancery granted the above-named defendants’ motions to dismiss and dismissed all of plaintiff’s claims with prejudice. On February 28, 2008, plaintiff Pfeffer filed her notice of appeal of the Court of Chancery’s dismissal. On April 14, 2008, plaintiff Pfeffer withdrew her notice of appeal of the Court of Chancery’s dismissal as it applied to defendants John F. Antioco, Jackie M. Clegg, Linda Griego, and John L. Muething. On January 23, 2009, the Supreme Court of the State of Delaware affirmed the Court of Chancery’s dismissal, dismissing plaintiff Pfeffer’s claims against the remaining above-named defendants.

On September 8, 2006, John Halaris filed a putative class action complaint under the Employee Retirement Income Security Act (“ERISA”) in the United States District Court for the Northern District of Texas purporting to act on behalf of all persons who were participants in or beneficiaries of the Blockbuster Investment Plan whose accounts included investments in Blockbuster stock, at any time, since November 15, 2003. Plaintiff asserted claims against Viacom, the Viacom Investment Committee, the Viacom Retirement Committee, William A. Roskin, John R. Jacobs, Mary Bell, Bruce Lewis, Robert G. Freedline, Larry J. Zine, Keith M. Holtz, Barbara Mickowski, Dan Satterthwaite, Phillipe P. Dauman, Sumner M. Redstone, Richard Bressler, Michael D. Fricklas, John L. Muething, Linda Griego, Jackie M. Clegg, John F. Antioco, Peter A. Bassi, Robert A. Bowman, Gary J. Fernandes, Mel Karmazin, Blockbuster, the Blockbuster Retirement Committee and the Blockbuster Investment Committee. Plaintiff claimed that the above-named defendants breached their fiduciary duties in violation of ERISA. Plaintiff sought declaratory relief, recovery of actual damages, court costs, attorneys’ fees, a constructive trust, restoration of lost profits to the Blockbuster Investment Plan and an injunction. On September 21, 2007, the trial court partially granted the above-named defendants’ motions to dismiss the complaint and dismissed plaintiff’s claims for restitution damages and alleged omissions by the above-named defendants. The trial court denied other portions of defendants’ motions to dismiss and reserved judgment on other portions of defendants’ motions to dismiss. The trial court allowed plaintiff the opportunity to re-plead his claims in light of the trial court’s partial dismissal. On November 5, 2007, plaintiff Halaris filed an amended class action complaint adding Dennis Conniff as an additional named plaintiff. On August 19, 2008, the trial court dismissed plaintiffs’ claims with prejudice.

Blockbuster is a defendant in two lawsuits arising out of the Blockbuster and Facebook websites. On April 9, 2008, Cathryn Elaine Harris filed a putative class action complaint under the Video Privacy Protection Act (“VPPA”) in the United States District Court for the Eastern District of Texas. On June 3, 2008, plaintiff Harris filed her first amended class action complaint adding Mario Herrera and Maryam Hosseiny as additional named plaintiffs. Plaintiffs are purporting to act on behalf of every individual who has ever been a member of Facebook and Blockbuster online during the same time period since November 6, 2007, whose name, and/or address, or a title, description, or subject matter of any video tapes or other audio visual materials that were rented, sold or delivered to each individual were distributed to third parties by Blockbuster without the informed written consent of such individuals obtained at the time the disclosure was made. Plaintiffs claim Blockbuster violated the VPPA when we knowingly distributed plaintiffs video tape rental and sales records to Facebook, a third party, without plaintiffs consent at the time of the disclosure. Plaintiffs seek class certification, statutory damages, punitive damages, attorneys’ fees, costs, and injunctive relief. On December 30, 2008, the trial court granted Blockbuster’s amended motion to transfer venue and transferred the lawsuit to the United States District Court for the Northern District of Texas, Dallas Division. We believe that the claims are without merit and intend to vigorously defend ourselves in the lawsuit. On August 12, 2008, Sean Lane, Mohannaed Sheikha, Sean Martin, Ali Sammour, Mohammaed Zidan, Sara Karrow, Colby Henson, Denton Hunker, Firas Sheikha, Hassen Sheikha, Linda Stewart, Tina Tran, Matthew Smith, Erica Parnell, John Conway, Austin Muhs, Phillip Huerta,

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(Tabular dollars in millions except per share amounts)

Alicia Hunker, and Mega Lynn Hancock (a minor, through her parent Rebecca Holey) filed a putative class action complaint under the VPPA, the Electronic Communications Privacy Act (“ECPA”), the Computer Fraud and Abuse Act (“CFAA”), California’s Consumer Legal Remedies Act, and California’s Computer Crime Law in the United States District Court for the Northern District of California. Plaintiffs assert claims against Facebook, Inc., Blockbuster Inc., Fandango, Inc., Hotwire, Inc., STA Travel, Inc., Overstock.com, Inc., Zappos.com, Inc., Gamefly, Inc., and John Does 1-40, corporations. Plaintiffs are purporting to act on behalf of every Facebook member who visited one or more of Facebook’s affiliates’ websites and engaged in activities that triggered the Facebook affiliates’ websites to communicate with Facebook regarding the activity from November 6, 2007 to December 5, 2007. Plaintiffs claim Blockbuster violated the VPPA, ECPA, and CFAA by allegedly violating the plaintiffs’ privacy through their activities on the Blockbuster and Facebook websites. Plaintiffs seek class certification, injunctive and equitable relief, statutory damages, attorneys’ fees, and costs. Plaintiffs have stipulated that Blockbuster is not required to respond to the pending complaint at this time. We believe that the claims are without merit and should it become necessary, we intend to vigorously defend ourselves.

Blockbuster is subject to various other legal proceedings in the course of conducting our business, including our business as a franchisor. Although we believe that these proceedings are not likely to result in judgments that will have a material adverse effect on our business, we cannot predict the impact of future developments affecting our outstanding claims and litigation.

Note 9—401(k) Savings Plan

Effective May 1, 1999, we established the Blockbuster Investment Plan (the “Plan”), a defined contribution 401(k) plan for the benefit of employees meeting certain eligibility requirements. Under the Plan, participants may contribute a portion of their earnings on a pre-tax basis, where we match some portion of those contributions based upon the employee’s compensation status in accordance with the U.S. Internal Revenue Code. Employee contributions are forwarded to the Plan administrator and invested in various funds, including our Class A and Class B common stock, at the discretion of the employee. Through December 31, 2005, Blockbuster matching contributions were initially invested in our Class A common stock and could be reallocated at the sole discretion of the employee. Beginning on January 1, 2006, our matching contributions are invested in various funds at the discretion of the employee. We incurred 401(k) savings plan expenses of $4.5 million, $5.1 million and $5.0 million for fiscal 2008, 2007 and 2006, respectively.

Note 10—Acquisition, Divestitures and Discontinued Operations

Acquisition

On August 8, 2007, we completed the acquisition of all of the outstanding membership interest of Movielink, LLC (“Movielink”), an online movie downloading business. We purchased all of the outstanding membership interest of Movielink from MGM On Demand Inc., DIGICO Inc., SPDE—MF Holdings, Inc., Universal VOD Venture Holdings LLC, and WB—MF LLC for $7.0 million in cash, as adjusted for Movielink’s working capital at the closing and before considering cash held in Movielink accounts of $1.0 million. Additionally, we paid approximately $0.7 million of acquisition-related expenses. The purchase price for the acquisition and acquisition-related expenses was financed from our available cash, and the results of Movielink’s operations have been included in our consolidated financial statements since the date of acquisition.

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(Tabular dollars in millions except per share amounts)

The acquisition was accounted for under the purchase method of accounting. The following table summarizes fair values of the assets acquired and liabilities assumed:

Net assets of Movielink at August 8, 2007	$	2.0
Liabilities assumed for estimated Movielink severance costs recorded in accordance with EITF No. 95-3, Recognition of Liabilities in Connection with a Purchase Business Combination		(0.8	)
Adjustment to reflect Movielink’s property and equipment at fair value		1.4
Acquired intangible encoding cost assets		2.1
Allocation of excess purchase price to goodwill		3.0
	$	7.7

The following unaudited pro forma summary presents information as if Movielink had been acquired at the beginning of the periods and assumes that there were no other changes in our operations. The pro forma information does not necessarily reflect the actual results that would have occurred had we been combined with Movielink during the periods presented, nor is it necessarily indicative of the future results of operations of the combined companies.

	Fiscal Year Ended
	January 6, 2008			December 31, 2006
Pro forma net revenues	$	5,544.7		$	5,526.3
Pro forma net income (loss)	$	(87.2	)	$	26.8
Pro forma net income (loss) per share—basic and diluted	$	(0.52	)	$	0.08

Divestitures

Taiwan. We sold our Taiwan subsidiary, coupled with a master franchise license, in the fourth quarter of 2006. As a result, during the fourth quarter of 2006, we recorded a gain on sale of $7.1 million, which is reflected as a reduction of “General and administrative” expenses in our Consolidated Statements of Operations.

Gamestation. In the second quarter of 2007, we completed the divestiture of Games Station Ltd. (“Gamestation”) to the THE GAME GROUP PLC for $151.2 million before selling expenses of $6.8 million and cash held in Gamestation accounts of $8.6 million. Additionally, we subsequently received $11.9 million relating to a working capital adjustment, resulting in final net proceeds of $147.7 million. We recorded a gain on sale of $81.5 million inclusive of a $22.4 million foreign currency translation gain. Because we retained 34 Gamestation locations that operate as a “store-in-store” within BLOCKBUSTER stores, the operations of Gamestation remain in continuing operations in our fiscal 2007 consolidated financial statements. These retained stores continue to be operated as specialty game stores under the BLOCKBUSTER brand, as permitted by the sale agreement.

Australia. During the fourth quarter of 2007, we sold our equity interest in BBA Holdings Pty Ltd., our wholly owned subsidiary for operations in Australia for $13.4 million to Video Ezy Australia Pty Limited, coupled with a master franchise license. We operated 29 stores while 346 stores were operated by franchisees. We recorded a gain on sale of $6.3 million, net of a $3.0 million foreign currency translation loss, which is reflected as a reduction of “General and administrative” expenses in our Consolidated Statements of Operations.

Chile. During the third quarter of 2008, we completed the sale of our operations in Chile coupled with a license agreement to Rentas e Inversiones ISSI S.A. for $10.7 million before selling expenses of $1.2 million and

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(Tabular dollars in millions except per share amounts)

cash held in Chile stores of $4.4 million. We recorded a loss on the sale of $0.7 million inclusive of a $3.2 million foreign currency translation loss. Because we have continued involvement through the license agreement, the operations of Chile remain in continuing operations in our consolidated financial statements.

Discontinued Operations

Spain. In the second quarter of 2006, because of a continuing deterioration in market conditions, including the impact of piracy, we closed all of our company-operated store locations in Spain. We recorded $7.2 million in severance costs, inventory charges and other charges associated with the closure of these locations during 2006. Additionally, we recognized a $3.2 million foreign currency translation loss, net of tax, upon dissolution of the operations.

MTC. In the third quarter of 2006, we completed the divestiture of our MOVIE TRADING CO.^® (“MTC”) locations. The divestiture was completed through the sale of eleven stores to an unrelated third party and the closure of the remaining stores. We recorded $1.2 million in inventory charges and other charges incurred with the divestiture of these locations during 2006.

MBI. In the fourth quarter of 2006, we completed the divestiture of Movie Brands Inc. (“MBI”), a wholly-owned subsidiary. The divestiture was completed through the sale of 52 stores to unrelated parties and the closure of the remaining stores. We recorded a loss on disposal of $0.6 million, net of tax, during the fourth quarter of 2006 associated with the divestiture of these locations.

RHINO. In the first quarter of 2007, we completed the sale of RHINO VIDEO GAMES^® (“RHINO”) to GameStop Corp. We recorded a gain on sale of $2.1 million, net of tax, in connection with this divestiture.

Income (loss) from discontinued operations. In accordance with SFAS 144, the operations and gains and losses discussed above of Spain, MTC, MBI and RHINO have been classified as discontinued operations. Additionally, our consolidated financial statements and related notes have been adjusted to reflect these entities as discontinued operations for all periods presented.

The following table summarizes the results of discontinued operations:

	Fiscal Year Ended
	January 4, 2009			January 6, 2008		December 31, 2006
Revenues	$	—		$	2.0	$	87.8
Income (loss) before income taxes	$	(0.3	)	$	0.4	$	(27.2	)
Benefit (provision) for income taxes (Note 7)		—			—		14.0
Income (loss) from discontinued operations	$	(0.3	)	$	0.4	$	(13.2	)

Note 11—Segment and Geographic Information

Segment Information

We operate our business in two reportable business segments: Domestic and International. Segments have been identified based on how management makes operating decisions, assesses performance and allocates resources. Management reviews asset information on a global basis, not by segment. Beginning in the fourth quarter of fiscal 2007, we increased our reporting segments from one to two. Segment information from all prior periods presented reflects these two segments.

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(Tabular dollars in millions except per share amounts)

The Domestic segment is comprised of all U.S. store operations and by-mail subscription service operations in addition to the digital delivery of movies through blockbuster.com. The International segment is comprised of all non-U.S. store operations, including operations in Europe, Latin America, Australia, Canada, Mexico and Asia.

	Domestic Segment			International Segment		Unallocated Corporate			Total
Fiscal year ended January 4, 2009
Revenues	$	3,590.8		$	1,697.1	$	—		$	5,287.9
Operating income (loss)	$	(225.9	)		77.5		(144.9	)		(293.3	)
Depreciation and intangible amortization	$	105.9			39.5		6.8			152.2
Impairment of goodwill and other long-lived assets	$	435.0			—		—			435.0
Net capital expenditures	$	89.0			20.1		9.0			118.1
Fiscal year ended January 6, 2008
Revenues	$	3,607.9		$	1,934.5	$	—		$	5,542.4
Operating income (loss)		61.1			160.9		(182.9	)		39.1
Depreciation and intangible amortization		122.4			47.9		15.4			185.7
Impairment of goodwill and other long-lived assets		2.2			—		—			2.2
Net capital expenditures		44.9			28.6		0.9			74.4
Fiscal year ended December 31, 2006
Revenues	$	3,617.2		$	1,905.0	$	—		$	5,522.2
Operating income (loss)		233.8			43.9		(204.1	)		73.6
Depreciation and intangible amortization		136.8			60.4		13.7			210.9
Impairment of goodwill and other long-lived assets		—			5.1		—			5.1
Net capital expenditures		41.3			30.6		6.6			78.5

Geographic Information

Information regarding our operations by geographic area is presented below. We are domiciled in the United States and have international operations in Europe, Latin America, Australia, Canada, Mexico and Asia. Intercompany transactions between geographic areas are not significant.

	Fiscal Year Ended
	January 4, 2009		January 6, 2008		December 31, 2006
Revenues:
United States	$	3,590.8	$	3,607.9	$	3,617.2
United Kingdom		551.6		755.0		840.6
Canada		482.7		472.1		434.6
International—all other		662.8		707.4		629.8
Total revenues	$	5,287.9	$	5,542.4	$	5,522.2
Long-lived assets(1):
United States	$	569.2	$	1,022.9	$	1,123.2
United Kingdom		23.0		35.7		78.5
Canada		27.3		39.0		34.4
International—all other		152.1		172.0		206.8
Total long-lived assets	$	771.6	$	1,269.6	$	1,442.9

(1) Includes all non-current assets except deferred tax assets.

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(Tabular dollars in millions except per share amounts)

Note 12—Quarterly Results of Operations (unaudited)

Summarized Quarterly Data

The table below summarizes quarterly data for fiscal 2008 and 2007:

	First Quarter			Second Quarter			Third Quarter			Fourth Quarter(1)			Total Year
Fiscal Year Ended January 4, 2009
Revenues	$	1,394.1		$	1,304.5		$	1,204.6		$	1,384.7		$	5,287.9
Gross profit	$	741.7		$	655.2		$	643.3		$	682.3		$	2,722.5
Income (loss) from continuing operations	$	45.7		$	(41.9	)	$	(17.8	)	$	(359.8	)	$	(373.8	)
Net income (loss)	$	45.4		$	(41.9	)	$	(17.8	)	$	(359.8	)	$	(374.1	)
Basic net income (loss) per share:
Net income (loss) from continuing operations	$	0.22			($0.23	)		($0.11	)		($1.89	)	$	(2.01	)
Net income (loss)	$	0.22			($0.23	)		($0.11	)		($1.89	)	$	(2.01	)
Diluted net income (loss) per share:
Net income (loss) from continuing operations	$	0.21			($0.23	)		($0.11	)		($1.89	)	$	(2.01	)
Net income (loss)	$	0.20			($0.23	)		($0.11	)		($1.89	)	$	(2.01	)
Weighted average shares outstanding—basic		191.4			191.7			192.1			192.1			191.8
Weighted average shares outstanding—diluted		221.5			191.7			192.1			192.1			191.8
	First Quarter			Second Quarter(2)			Third Quarter			Fourth Quarter			Total Year
Fiscal Year Ended January 6, 2008
Revenues	$	1,473.9		$	1,263.2		$	1,238.2		$	1,567.1		$	5,542.4
Gross profit	$	762.5		$	634.8		$	670.2		$	797.1		$	2,864.6
Income (loss) from continuing operations	$	(51.6	)	$	(30.3	)	$	(34.2	)	$	41.9		$	(74.2	)
Net income (loss)	$	(49.0	)	$	(31.4	)	$	(34.4	)	$	41.0		$	(73.8	)
Basic net income (loss) per share:
Net income (loss) from continuing operations	$	(0.28	)	$	(0.17	)	$	(0.20	)	$	0.20		$	(0.45	)
Net income (loss)	$	(0.27	)	$	(0.18	)	$	(0.20	)	$	0.20		$	(0.45	)
Diluted net income (loss) per share:
Net income (loss) from continuing operations	$	(0.28	)	$	(0.17	)	$	(0.20	)	$	0.19		$	(0.45	)
Net income (loss)	$	(0.27	)	$	(0.18	)	$	(0.20	)	$	0.18		$	(0.45	)
Weighted average shares outstanding—basic		189.4			190.0			190.6			191.1			190.3
Weighted average shares outstanding—diluted		189.4			190.0			190.6			221.7			190.3

(1) During the fourth quarter of 2008, as described in Note 2 above, we recognized a non-cash impairment charge of $435.0 million.

(2) During the second quarter of 2007, as described in Note 10 above, we recognized a gain on sale of Gamestation of $81.5 million.

Note 13—Condensed Consolidating Financial Statements

Our Senior Subordinated Notes were issued by Blockbuster Inc., which conducts the majority of our domestic operations. All domestic subsidiaries have provided, on a senior subordinated basis, a joint and several guarantee of the Senior Subordinated Notes. Our domestic subsidiaries consist primarily of our distribution center. There are no significant restrictions on the parent company’s ability to obtain funds from any of the guarantor subsidiaries in the form of a dividend or loan. The notes are not guaranteed by our foreign subsidiaries. Additional information regarding our Senior Subordinated Notes is included in Note 6 above.

120

BLOCKBUSTER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Tabular dollars in millions except per share amounts)

Blockbuster Inc. and its non-guarantor subsidiaries are parties to various intercompany agreements, which affect the amount of operating expenses reported in the following condensed consolidating statements of operations and corresponding amounts in the condensed consolidating balance sheets and condensed consolidating statements of cash flows. Among other things, management fees are charged to the non-guarantor subsidiaries relating to the use of tradenames, information systems and other corporate overhead. An allocation of corporate overhead expenses has also been made to our guarantor subsidiaries. These intercompany amounts are eliminated in consolidation.

We file a consolidated U.S. federal income tax return. All income taxes are allocated in accordance with our tax matters agreement with Viacom.

121

BLOCKBUSTER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Tabular dollars in millions except per share amounts)

The following financial information presents condensed consolidating statements of operations, balance sheets and statements of cash flows for Blockbuster Inc., all guarantor subsidiaries, all non-guarantor subsidiaries and the eliminations necessary to arrive at the information for Blockbuster on a consolidated basis. The information has been presented as if Blockbuster Inc. accounted for its ownership of the guarantor and non-guarantor subsidiaries using the equity method of accounting.

	Statement of Operations for the Fiscal Year Ended January 4, 2009
	Blockbuster Inc.			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated Blockbuster Inc.
Revenues:
Rental revenues	$	2,985.1		$	—		$	880.7		$	—		$	3,865.8
Merchandise sales		582.5			—			806.9			—			1,389.4
Other revenues		62.1			91.7			7.0			(128.1	)		32.7
		3,629.7			91.7			1,694.6			(128.1	)		5,287.9
Cost of sales:
Cost of rental revenues		1,197.0			—			270.0			—			1,467.0
Cost of merchandise sold		476.6			—			621.8			—			1,098.4
		1,673.6			—			891.8			—			2,565.4
Gross profit		1,956.1			91.7			802.8			(128.1	)		2,722.5
Operating expenses:
General and administrative		1,662.1			91.8			680.8			(128.1	)		2,306.6
Advertising		85.9			—			36.1			—			122.0
Depreciation and intangible amortization		112.7			—			39.5			—			152.2
Impairment of goodwill and other long-lived assets		435.0			—			—			—			435.0
		2,295.7			91.8			756.4			(128.1	)		3,015.8
Operating income (loss)		(339.6	)		(0.1	)		46.4			—			(293.3	)
Interest (expense) income, net		(75.9	)		—			5.4			—			(70.5	)
Other items, net		13.7			—			1.9			—			15.6
Income (loss) from continuing operations before income taxes		(401.8	)		(0.1	)		53.7			—			(348.2	)
Benefit (provision) for income taxes		(6.5	)		—			(19.1	)		—			(25.6	)
Equity in income (loss) of affiliated companies, net of tax		34.4			—			—			(34.4	)		—
Income (loss) from continuing operations		(373.9	)		(0.1	)		34.6			(34.4	)		(373.8	)
Income (loss) from discontinued operations, net of tax		(0.2	)		(0.1	)		—			—			(0.3	)
Net income (loss)	$	(374.1	)	$	(0.2	)	$	34.6		$	(34.4	)	$	(374.1	)

122

BLOCKBUSTER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Tabular dollars in millions except per share amounts)

	Statement of Operations for the Fiscal Year Ended January 6, 2008
	Blockbuster Inc.			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated Blockbuster Inc.
Revenues:
Rental revenues	$	3,137.1		$	—		$	945.4		$	—		$	4,082.5
Merchandise sales		446.4			—			953.7			—			1,400.1
Other revenues		78.8			77.2			8.5			(104.7	)		59.8
		3,662.3			77.2			1,907.6			(104.7	)		5,542.4
Cost of sales:
Cost of rental revenues		1,314.3			—			289.7			—			1,604.0
Cost of merchandise sold		322.2			2.3			749.3			—			1,073.8
		1,636.5			2.3			1,039.0			—			2,677.8
Gross profit		2,025.8			74.9			868.6			(104.7	)		2,864.6
Operating expenses:
General and administrative		1,798.0			78.0			753.8			(104.7	)		2,525.1
Advertising		150.5			—			43.5			—			194.0
Depreciation and intangible amortization		137.7			—			48.0			—			185.7
Impairment of goodwill and other long-lived assets		2.2			—			—			—			2.2
Gain on sale of Gamestation		—			—			(81.5	)		—			(81.5	)
		2,088.4			78.0			763.8			(104.7	)		2,825.5
Operating income (loss)		(62.6	)		(3.1	)		104.8			—			39.1
Interest (expense) income, net		(80.2	)		—			(2.0	)		—			(82.2	)
Other items, net		(3.7	)		—			2.2			—			(1.5	)
Income (loss) from continuing operations before income taxes		(146.5	)		(3.1	)		105.0			—			(44.6	)
Benefit (provision) for income taxes		(8.3	)		—			(21.3	)		—			(29.6	)
Equity in income (loss) of affiliated companies, net of tax		81.1			—			—			(81.1	)		—
Income (loss) from continuing operations		(73.7	)		(3.1	)		83.7			(81.1	)		(74.2	)
Income (loss) from discontinued operations, net of tax		(0.1	)		1.3			(0.8	)		—			0.4
Net income (loss)	$	(73.8	)	$	(1.8	)	$	82.9		$	(81.1	)	$	(73.8	)

123

BLOCKBUSTER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Tabular dollars in millions except per share amounts)

	Statement of Operations for the Fiscal Year Ended December 31, 2006
	Blockbuster Inc.			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated Blockbuster Inc.
Revenues:
Rental revenues	$	3,100.8		$	—		$	928.3		$	—		$	4,029.1
Merchandise sales		473.8			—			958.1			—			1,431.9
Other revenues		69.2			76.2			13.5			(97.7	)		61.2
		3,643.8			76.2			1,899.9			(97.7	)		5,522.2
Cost of sales:
Cost of rental revenues		1,111.6			—			292.3			—			1,403.9
Cost of merchandise sold		339.5			—			736.3			—			1,075.8
		1,451.1			—			1,028.6			—			2,479.7
Gross profit		2,192.7			76.2			871.3			(97.7	)		3,042.5
Operating expenses:
General and administrative		1,871.4			79.6			745.3			(97.7	)		2,598.6
Advertising		118.7			—			35.6			—			154.3
Depreciation and intangible amortization		150.6			—			60.3			—			210.9
Impairment of goodwill and other long-lived assets		—			—			5.1			—			5.1
		2,140.7			79.6			846.3			(97.7	)		2,968.9
Operating income (loss)		52.0			(3.4	)		25.0			—			73.6
Interest (expense) income, net		(83.0	)		—			(8.7	)		—			(91.7	)
Other items, net		(23.1	)		—			28.5			—			5.4
Income (loss) from continuing operations before income taxes		(54.1	)		(3.4	)		44.8			—			(12.7	)
Benefit (provision) for income taxes		91.5			—			(15.1	)		—			76.4
Equity in income (loss) of affiliated companies, net of tax		(0.9	)		—			—			0.9			—
Income (loss) from continuing operations		36.5			(3.4	)		29.7			0.9			63.7
Income (loss) from discontinued operations, net of tax		14.0			(12.6	)		(14.6	)		—			(13.2	)
Net income (loss)	$	50.5		$	(16.0	)	$	15.1		$	0.9		$	50.5

124

BLOCKBUSTER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Tabular dollars in millions except per share amounts)

	Balance Sheet as of January 4, 2009
	Blockbuster Inc.		Guarantor Subsidiaries			Non-Guarantor Subsidiaries		Eliminations			Consolidated Blockbuster Inc.
Assets
Current assets:
Cash and cash equivalents	$	92.5	$	0.1		$	62.3	$	—		$	154.9
Receivables, net		84.6		—			32.5		—			117.1
Intercompany receivables		—		4.9			66.8		(71.7	)		—
Merchandise inventories		257.6		—			175.2		—			432.8
Rental library, net		272.7		—			83.1		—			355.8
Deferred income taxes		—		—			13.4		—			13.4
Prepaid and other current assets		145.7		—			38.9		—			184.6
Total current assets		853.1		5.0			472.2		(71.7	)		1,258.6
Property and equipment, net		312.4		—			93.6		—			406.0
Deferred income taxes		111.2		—			13.1		—			124.3
Investment in subsidiaries		425.4		—			—		(425.4	)		—
Intangibles, net		10.7		—			0.8		—			11.5
Goodwill		231.9		—			106.2		—			338.1
Other assets		14.2		—			1.8		—			16.0
	$	1,958.9	$	5.0		$	687.7	$	(497.1	)	$	2,154.5
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	283.6	$	5.5		$	138.2	$	—		$	427.3
Intercompany payables		71.7		—			—		(71.7	)		—
Accrued expenses		397.4		0.2			96.2		—			493.8
Current portion of long-term debt		198.0		—			—		—			198.0
Current portion of capital lease obligations		8.4		—			0.1		—			8.5
Deferred income taxes		111.2		—			14.6		—			125.8
Total current liabilities		1,070.3		5.7			249.1		(71.7	)		1,253.4
Long-term debt, less current portion		583.0		—			—		—			583.0
Capital lease obligations, less current portion		28.3		—			—		—			28.3
Other liabilities		63.0		—			12.5		—			75.5
		1,744.6		5.7			261.6		(71.7	)		1,940.2
Total stockholders’ equity		214.3		(0.7	)		426.1		(425.4	)		214.3
	$	1,958.9	$	5.0		$	687.7	$	(497.1	)	$	2,154.5

125

BLOCKBUSTER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Tabular dollars in millions except per share amounts)

	Balance Sheet as of January 6, 2008
	Blockbuster Inc.		Guarantor Subsidiaries			Non-Guarantor Subsidiaries		Eliminations			Consolidated Blockbuster Inc.
Assets
Current assets:
Cash and cash equivalents	$	65.7	$	0.2		$	118.7	$	—		$	184.6
Receivables, net		75.0		—			38.1		—			113.1
Intercompany receivables		—		3.3			—		(3.3	)		—
Merchandise inventories		158.9		—			185.0		—			343.9
Rental library, net		337.8		—			103.3		—			441.1
Deferred income taxes		—		—			15.9		—			15.9
Prepaid and other current assets		173.3		—			47.3		—			220.6
Total current assets		810.7		3.5			508.3		(3.3	)		1,319.2
Property and equipment, net		328.4		—			134.6		—			463.0
Deferred income taxes		128.4		—			16.4		—			144.8
Investment in subsidiaries		403.2		—			—		(403.2	)		—
Intangibles, net		13.7		—			—		—			13.7
Goodwill		664.6		—			108.0		—			772.6
Other assets		16.2		—			4.1		—			20.3
	$	2,365.2	$	3.5		$	771.4	$	(406.5	)	$	2,733.6
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	289.1	$	3.8		$	179.9	$	—		$	472.8
Intercompany payables		0.4		—			2.9		(3.3	)		—
Accrued expenses		464.3		0.3			153.8		—			618.4
Current portion of long-term debt		44.7		—			—		—			44.7
Current portion of capital lease obligations		10.0		—			0.1		—			10.1
Deferred income taxes		128.4		—			14.1		—			142.5
Total current liabilities		936.9		4.1			350.8		(3.3	)		1,288.5
Long-term debt, less current portion		665.6		—			—		—			665.6
Capital lease obligations, less current portion		37.4		—			—		—			37.4
Other liabilities		69.6		—			16.8		—			86.4
		1,709.5		4.1			367.6		(3.3	)		2,077.9
Total stockholders’ equity		655.7		(0.6	)		403.8		(403.2	)		655.7
	$	2,365.2	$	3.5		$	771.4	$	(406.5	)	$	2,733.6

126

BLOCKBUSTER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Tabular dollars in millions except per share amounts)

	Statement of Cash Flows for the Year Ended January 4, 2009
	Blockbuster Inc.			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations		Consolidated Blockbuster Inc.
Net cash provided by (used for) operating activities	$	66.7		$	(0.1	)	$	(15.6	)	$	—	$	51.0
Investing activities:
Capital expenditures		(98.0	)		—			(20.1	)		—		(118.1	)
Cash used for acquisitions, net		(2.4	)		—			—			—		(2.4	)
Proceeds from sales of property and equipment		0.2			—			0.3			—		0.5
Proceeds from sales of store operations		—			—			4.6			—		4.6
Other investing activities		—			—			(1.1	)		—		(1.1	)
Net cash flow provided by (used for) investing activities		(100.2	)		—			(16.3	)		—		(116.5	)
Financing activities:
Proceeds from credit agreements		235.0			—			—			—		235.0
Repayments on credit agreements		(164.3	)		—			—			—		(164.3	)
Cash dividends		(11.3	)		—			—			—		(11.3	)
Capital lease payments		(9.7	)		—			(0.3	)		—		(10.0	)
Intercompany loans		10.6			—			(10.6	)		—		—
Net cash flow provided by (used for) financing activities		60.3			—			(10.9	)		—		49.4
Effect of exchange rate changes on cash		—			—			(13.6	)		—		(13.6	)
Net increase (decrease) in cash and cash equivalents		26.8			(0.1	)		(56.4	)		—		(29.7	)
Cash and cash equivalents at beginning of year		65.7			0.2			118.7			—		184.6
Cash and cash equivalents at end of year	$	92.5		$	0.1		$	62.3		$	—	$	154.9

127

BLOCKBUSTER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Tabular dollars in millions except per share amounts)

	Statement of Cash Flows for the Year Ended January 6, 2008
	Blockbuster Inc.			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations		Consolidated Blockbuster Inc.
Net cash flow provided by (used for) operating activities	$	(36.1	)	$	(16.6	)	$	(3.5	)	$	—	$	(56.2	)
Investing activities:
Capital expenditures		(45.8	)		—			(28.6	)		—		(74.4	)
Cash used for acquisitions, net		(6.7	)		—			(5.3	)		—		(12.0	)
Proceeds from sales of property and equipment		1.9			—			—			—		1.9
Proceeds from sales of store operations		—			8.5			12.5			—		21.0
Proceeds from Sale of Gamestation		—			—			147.7			—		147.7
Acquisition of intangible assets		(7.4	)		—			—			—		(7.4	)
Other investing activities		(0.1	)		—			—			—		(0.1	)
Net cash flow provided by (used for) investing activities		(58.1	)		8.5			126.3			—		76.7
Financing activities:
Proceeds from credit agreements		115.0			—			—			—		115.0
Repayments on credit agreements		(329.1	)		—			—			—		(329.1	)
Cash dividends		(11.3	)		—			—			—		(11.3	)
Debt Financing Costs		(4.0	)		—			—			—		(4.0	)
Capital lease payments		(11.2	)		—			(0.4	)		—		(11.6	)
Intercompany loans		172.0			—			(172.0	)		—		—
Net cash flow provided by (used for) financing activities		(68.6	)		—			(172.4	)		—		(241.0	)
Effect of exchange rate changes on cash		—			—			10.2			—		10.2
Net increase (decrease) in cash and cash equivalents		(162.8	)		(8.1	)		(39.4	)		—		(210.3	)
Cash and cash equivalents at beginning of year		228.5			8.3			158.1			—		394.9
Cash and cash equivalents at end of year	$	65.7		$	0.2		$	118.7		$	—	$	184.6

128

BLOCKBUSTER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Tabular dollars in millions except per share amounts)

	Statement of Cash Flows for the Year Ended December 31, 2006
	Blockbuster Inc.			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations		Consolidated Blockbuster Inc.
Net cash flow provided by (used for) operating activities	$	292.7		$	(0.7	)	$	37.4		$	—	$	329.4
Investing activities:
Capital expenditures		(47.6	)		(0.3	)		(30.6	)		—		(78.5	)
Cash used for acquisitions, net		(1.4	)		—			(0.2	)		—		(1.6	)
Proceeds from sales of property and equipment		22.2			—			0.5			—		22.7
Proceeds from sales of store operations		1.5			—			10.9			—		12.4
Proceeds from insurance recoveries		4.0			—			—			—		4.0
Net cash flow provided by (used for) investing activities		(21.3	)		(0.3	)		(19.4	)		—		(41.0	)
Financing activities:
Repayments on credit agreements		(155.5	)		—			—			—		(155.5	)
Cash dividends		(11.3	)		—			—			—		(11.3	)
Capital lease payments		(15.7	)		—			(0.7	)		—		(16.4	)
Intercompany loans		24.6			—			(24.6	)		—		—
Net cash flow provided by (used for) financing activities		(157.9	)		—			(25.3	)		—		(183.2	)
Effect of exchange rate changes on cash		—			—			13.5			—		13.5
Net increase (decrease) in cash and cash equivalents		113.5			(1.0	)		6.2			—		118.7
Cash and cash equivalents at beginning of year		115.0			9.3			151.9			—		276.2
Cash and cash equivalents at end of year	$	228.5		$	8.3		$	158.1		$	—	$	394.9

129

Item 9.    Changes In and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A.    Controls and Procedures

I. Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) designed to provide reasonable assurance that the information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that this information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. It should be noted that, because of inherent limitations, our disclosure controls and procedures, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the disclosure controls and procedures are met.

In connection with the preparation of this Annual Report, our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as required by Rule 13a-15(b) of the Exchange Act), as of January 4, 2009. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) were effective to provide reasonable assurance as of January 4, 2009.

II. Management’s Report on Internal Control over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Exchange Act Rule 13a-15(f). Our internal control over financial reporting is a process, under the supervision of our Chief Executive Officer and Chief Financial Officer, designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. Our internal control over financial reporting includes those policies and procedures that:

(i) Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect our transactions and dispositions of our assets;

(ii) Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and

(iii) Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.

Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management evaluated the effectiveness of our internal control over financial reporting as of January 4, 2009. In making this evaluation, we used the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Our management concluded that our internal control over financial reporting was effective as of January 4, 2009.

130

Our independent registered public accounting firm, PricewaterhouseCoopers LLP, has audited the effectiveness of our internal control over financial reporting as of January 4, 2009, as stated in their report which is included herein.

III. Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended January 4, 2009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Item 9B.    Other Information

None.

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PART III

The information required by Items 10 through 14 of this Part III is incorporated by reference from our definitive proxy statement to be filed for our 2009 annual meeting of stockholders (“2009 Proxy Statement”), as indicated below. Our 2009 Proxy Statement will be filed with the Securities and Exchange Commission (“SEC”) not later than 120 days after January 4, 2009.

Item 10.    Directors, Executive Officers and Corporate Governance

Directors and Executive Officers

The information required by this item regarding our directors and executive officers is set forth under the caption “Directors and Executive Officers of the Registrant” in Item 1 of Part I of this Form 10-K, which information is incorporated herein by reference.

Section 16(a) Compliance

The information to appear in our 2009 Proxy Statement under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” is incorporated herein by reference.

Code of Ethics and Other Governance Information

The information required by this item regarding the Supplemental Code of Ethics for our Senior Financial Officers (“Code of Ethics”), audit committee financial experts, audit committee members and procedures for stockholder recommendations of nominees to our Board of Directors will be set forth in our 2009 Proxy Statement under the caption “Corporate Governance,” which information is incorporated herein by reference.

Our Code of Ethics may be found on our website at http://www.blockbuster.com by clicking on the link for “Investor Relations” and then the link for “Governance,” and a copy of our Code of Ethics is also available in print, without charge, upon written request to Blockbuster Inc., Attn: Investor Relations, 1201 Elm Street, Dallas, Texas 75270. In accordance with the rules of the New York Stock Exchange and the SEC, we currently intend to disclose any future amendments to our Code of Ethics, or waivers from our Code of Ethics for our Chief Executive Officer, Chief Financial Officer and Controller, by posting such information on our website (www.blockbuster.com) within the time period required by applicable SEC and New York Stock Exchange rules.

Item 11.    Executive Compensation

The information required by this item regarding the compensation of our “named executive officers” and directors and other required information will be set forth in our 2009 Proxy Statement under the caption “Executive Officer and Director Compensation,” which information is incorporated herein by reference. In accordance with the rules of the SEC, information to be contained in the 2009 Proxy Statement under the caption “Executive Officer and Director Compensation—Compensation Committee Report” is not deemed to be “filed” with the SEC, subject to the liabilities of Section 18 of the Securities Exchange Act of 1934 or incorporated by reference in any report of registration statement.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Beneficial Ownership Tables

The information required by this item regarding security ownership of certain beneficial owners and management will be set forth in our 2009 Proxy Statement under the caption “Security Ownership of Certain Beneficial Owners and Management,” which information is incorporated herein by reference.

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Equity Compensation Plan Information

The information required by this item regarding securities authorized for issuance under equity compensation plans will be set forth in our 2009 Proxy Statement under the caption “Equity Compensation Plan Information,” which information is incorporated herein by reference.

Item 13.    Certain Relationships and Related Transactions, and Director Independence

Transactions with Related Persons

The information required by this item regarding transactions with related persons will be set forth in our 2009 Proxy Statement under the caption “Corporate Governance—Related Party Transaction and Director Independence,” which information is incorporated herein by reference.

Policies and Procedures for Review, Approval or Ratification of Transactions with Related Persons

The information required by this item regarding our policies and procedures for the review, approval or ratification of related party transactions that are required to be disclosed under the SEC’s rules and regulations will be set forth in our 2009 Proxy Statement under the caption “Corporate Governance,” which information is incorporated herein by reference.

Director Independence

The information required by this item regarding director independence will be set forth in our 2009 Proxy Statement under the caption “Corporate Governance—Related Party Transactions and Director Independence,” which information is incorporated herein by reference.

Item 14.    Principal Accountant Fees and Services

The information required by this item regarding the audit committee’s pre-approval policies and procedures and the disclosures of fees billed by our principal independent auditor will be set forth in our 2009 Proxy Statement under the captions “Audit Committee and Independent Registered Public Accounting Firm—Audit and Non-Audit Fees” and “Audit Committee and Independent Registered Public Accounting Firm—Pre-Approval Policies and Procedures,” which information is incorporated herein by reference.

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PART IV

Item 15.    Exhibits and Financial Statement Schedules

(a) 1. Financial Statements.

Our financial statements that are filed as part of this Form 10-K are listed in the Index to Consolidated Financial Statements under Part II, Item 8 of this Form 10-K.

2. Financial Statement Schedules.

All financial statement schedules have been omitted because the information required to be set forth therein is either not applicable or is shown in the consolidated financial statements or Notes thereto under Part II, Item 8 of this Form 10-K.

3. Exhibits.

The Exhibit Index on pages 136 through 140 of this Form 10-K lists the exhibits that are filed or furnished, as applicable, as part of this Form 10-K.

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SIGNATURES

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

BLOCKBUSTER INC.
By:	/s/    JAMES W. KEYES
	James W. Keyes Chairman of the Board and Chief Executive Officer
Date:	April 6, 2009

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

	Signature	Title	Date
By:	/s/    JAMES W. KEYES         James W. Keyes	Chairman of the Board and Chief Executive Officer (Principal Executive Officer)	April 6, 2009
By:	/s/    THOMAS M. CASEY         Thomas M. Casey	Executive Vice President and Chief Financial Officer (Principal Financial and     Accounting Officer)	April 6, 2009
By:	/s/    EDWARD BLEIER         Edward Bleier	Director	April 6, 2009
By:	/s/    ROBERT A. BOWMAN         Robert A. Bowman	Director	April 6, 2009
By:	/s/    JACKIE M. CLEGG         Jackie M. Clegg	Director	April 6, 2009
By:	/s/    JAMES W. CRYSTAL         James W. Crystal	Director	April 6, 2009
By:	/s/    GARY J. FERNANDES         Gary J. Fernandes	Director	April 6, 2009
By:	/s/    JULES HAIMOVITZ         Jules Haimovitz	Director	April 6, 2009
By:	/s/    STRAUSS ZELNICK         Strauss Zelnick	Director	April 6, 2009

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EXHIBIT INDEX

We are incorporating certain exhibits listed below by reference from other Blockbuster filings with the Securities and Exchange Commission, which we have identified in parentheses after each applicable exhibit.

Charter Documents
3.1		Second Amended and Restated Certificate of Incorporation of Blockbuster Inc. (see Current Report on Form 8-K, filed on October 8, 2004).
3.2		Certificate of Amendment of Second Amended and Restated Certificate of Incorporation of Blockbuster Inc. (see current Report on Form 8-K, filed on May 10, 2007).
3.3		Amended and Restated Bylaws of Blockbuster Inc. (see Current Report on Form 8-K, filed on October 8, 2004).
3.4		Amendment to Amended and Restated Bylaws of Blockbuster Inc. (see Current Report on Form 8-K, filed on May 10, 2007).
Instruments Defining Rights of Security Holders
4.1		Specimen Class A Common Stock Certificate of Blockbuster Inc. (see Quarterly Report on Form 10-Q for the period ended September 30, 1999, filed on November 15, 1999).
4.2		Specimen Class B Common Stock Certificate of Blockbuster Inc. (see Quarterly Report on Form 10-Q for the period ended June 30, 2004, filed on August 9, 2004).
4.3		Indenture, dated August 20, 2004, among Blockbuster Inc., the subsidiary guarantors named on the signature pages thereto and The Bank of New York Trust Company, N.A., as trustee, with respect to the 9% Senior Subordinated Notes due 2012 (see Amendment No. 2 to Registration Statement on Form S-4 (333-116617), as amended, filed on August 24, 2004).
4.4		First Supplemental Indenture, dated December 22, 2004, among Blockbuster Inc., the subsidiary guarantors named on the signature pages thereto and The Bank of New York Trust Company, N.A., as trustee, with respect to the 9% Senior Subordinated Notes due 2012 (see Registration Statement on Form S-4 (333-122485), filed on February 2, 2005).
4.5		Certificate of Designations for Blockbuster Inc.’s 7 1/2% Series A Cumulative Convertible Perpetual Preferred Stock (see Current Report on Form 8-K, filed on November 15, 2005).
4.6		Registration Rights Agreement dated November 15, 2005, among Blockbuster Inc. and the Initial Purchasers named therein with respect to Blockbuster Inc.’s 7 1/2% Series A Cumulative Convertible Perpetual Preferred Stock (see Annual Report on Form 10-K for the fiscal year ended December 31, 2005, filed on March 15, 2006).
Viacom Agreements
10.1	(a)	Amended and Restated Initial Public Offering and Split-Off Agreement among Blockbuster Inc., Viacom International Inc. and Viacom Inc. dated June 18, 2004 (see Registration Statement on Form S-4 (333-116617), filed on June 18, 2004).
10.1	(b)	Amended and Restated Release and Indemnification Agreement between Blockbuster Inc. and Viacom Inc. dated June 18, 2004 (see Registration Statement on Form S-4 (333-116617), filed on June 18, 2004).
10.1	(c)	Letter Agreement, dated as of August 26, 2004, to the Amended and Restated Release and Indemnification Agreement (see Amendment No. 3 to the Registration Statement on Form S-4 (333-116617), filed on September 8, 2004).

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10.1	(d)	Amended and Restated Transition Services Agreement between Blockbuster Inc. and Viacom Inc. dated June 18, 2004 (see Registration Statement on Form S-4 (333-116617), filed on June 18, 2004).
10.1	(e)	Amended and Restated Registration Rights Agreement between Blockbuster Inc. and Viacom Inc. dated June 18, 2004 (see Registration Statement on Form S-4 (333-116617), filed on June 18, 2004).
10.1	(f)	Agreement between and among Viacom Inc., Paramount Home Entertainment, Inc., Sumner Redstone and Blockbuster Inc. dated June 18, 2004 (see Quarterly Report on Form 10-Q for the period ended September 30, 2005, filed on November 8, 2005).
10.1	(g)	Amended and Restated Tax Matters Agreement between Blockbuster Inc. and Viacom Inc. dated June 18, 2004 (see Registration Statement on Form S-4 (333-116617), filed on June 18, 2004).
10.1	(h)	Letter Agreement, dated as of October 24, 2008, to the Amended and Restated Initial Public Offering and Split-Off Agreement; the Amended and Restated Release and Indemnification Agreement; the Amended and Restated Registration Rights Agreement; the Amended and Restated Transition Services Agreement; the Amended and Restated Tax Matters Agreement; the Insurance Agreement; and the Agreement between and among Viacom Inc., Paramount Home Entertainment, Inc., Sumner Redstone and Blockbuster Inc. (see Current Report on Form 8-K, filed on October 10, 2008).
10.1	(i)	Amendment No. 1 to the Amended and Restated Initial Public Offering and Split-Off Agreement between Blockbuster Inc. and Viacom Inc. dated October 24, 2008 (see Current Report on Form 8-K, filed on October 10, 2008).
Executive Officer Employment and Separation Agreements
10.2	(a)	Employment Agreement between Blockbuster Inc. and James W. Keyes, effective July 2, 2007 (see Current Report on Form 8-K, filed on July 2, 2007).
10.2	(b)	Employment Agreement between Blockbuster Inc. and Thomas Casey, effective September 12, 2007 (see Current Report on Form 8-K, filed on September 12, 2007).
10.2	(c)	Employment Agreement between Blockbuster Inc. and Eric Peterson, effective October 15, 2007 (see Annual Report on Form 10-K for the fiscal year ended January 6, 2008, filed on March 6, 2008).
10.2	(d)	Amended and Restated Employment Agreement between Blockbuster Inc. and John F. Antioco, dated March 19, 2007 (see Current Report on Form 8-K, filed on March 20, 2007).
10.2	(e)	Settlement Agreement and Mutual Release between Blockbuster Inc. and John F. Antioco, dated March 19, 2007 (see Current Report on Form 8-K, filed on March 20, 2007).
10.2	(f)	Employment Agreement between Blockbuster Inc. and Larry Zine, commencing November 23, 1999 (see Annual Report on Form 10-K for the fiscal year ended December 31, 2000, filed on March 29, 2001).
10.2	(g)	Letter Agreement between Blockbuster Inc. and Larry Zine dated February 21, 2006 (see Current Report on Form 8-K, filed on February 23, 2006).
10.2	(h)	Letter Agreement between Blockbuster Inc. and Larry Zine dated June 19, 2007 (see Current Report on Form 8-K, filed on June 21, 2007).
10.2	(i)	Employment Agreement between Blockbuster Inc. and Nicholas Shepherd, commencing October 10, 2001 (see Annual Report on Form 10-K for the fiscal year ended December 31, 2003, filed on March 15, 2004).
10.2	(j)	Amendment to the Employment Agreement between Blockbuster Inc. and Nicholas Shepherd, dated March 1, 2003 (see Annual Report on Form 10-K for the fiscal year ended December 31, 2003, filed on March 15, 2004).
10.2	(k)	Amendment to the Employment Agreement between Blockbuster Inc. and Nicholas Shepherd, dated April 11, 2007 (see Current Report on Form 8-K, filed on April 13, 2007).

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10.2	(l)	Amendment to Employment Agreement between Blockbuster Inc. and Nicholas Shepherd, dated September 10, 2007 (see Current Report on Form 8-K, filed on September 11, 2007).
10.2	(m)	Employment Agreement between Blockbuster Inc. and Frank Paci, dated January 28, 2003 (see Annual Report on Form 10-K for the fiscal year ended December 31, 2005, filed on March 15, 2006).
Management Compensatory Plans and Forms of Award Agreements
10.3	(a)	Blockbuster Inc. Amended and Restated 1999 Long-Term Management Incentive Plan, as amended through October 6, 2004 (see Quarterly Report on Form 10-Q for the period ended September 30, 2004, filed on November 8, 2004).
10.3	(b)	Blockbuster Inc. 2004 Long-Term Management Incentive Plan, as amended through October 6, 2004 (see Quarterly Report on Form 10-Q for the period ended September 30, 2004, filed on November 8, 2004).
10.3	(c)	Form of Performance-Based Restricted Share Award Agreement (September 2005 and February 2006 contingent awards) (see Current Report on Form 8-K, filed on September 23, 2005).
10.3	(d)	Form of Performance-Based Restricted Share Unit Award Agreement (September 2005 contingent awards) (see Current Report on Form 8-K, filed on September 23, 2005).
10.3	(e)	Form of Restricted Share Award Agreement (December 20, 2004 award) (see Current Report on Form 8-K, filed on December 20, 2004).
10.3	(f)	Form of Restricted Share Award Agreement (Blockbuster tender offer to exchange outstanding options for restricted shares) (see Appendix B to Schedule TO, filed on November 9, 2004 ).
10.3	(g)	Form of Restricted Share Unit Award Agreement for Residents of the United Kingdom Not Subject to U.S. Federal Income Taxation (Blockbuster tender offer to exchange outstanding options for restricted shares) (see Appendix C to Schedule TO, filed on November 9, 2004 ).
10.3	(h)	Form of Non-Qualified Stock Option Agreement pursuant to the Blockbuster Inc. Amended and Restated 1999 Long-Term Management Incentive Plan, as amended through October 6, 2004 (see Current Report on Form 8-K, filed May 24, 2007).
10.3	(i)	Blockbuster Inc. Amended and Restated Senior Executive Short-Term Incentive Plan, as amended and restated through July 20, 2004 (see Quarterly Report on Form 10-Q for the period ended September 30, 2004, filed on November 8, 2004).
10.3	(j)	Amendment No. 1 to the Blockbuster Inc. Amended and Restated Senior Executive Short-Term Incentive Plan, effective as of March 8, 2005 (see Annual Report on Form 10-K for the fiscal year ended December 31, 2004, filed on March 29, 2005).
10.3	(k)	Blockbuster Inc. Excess Investment Plan, as amended effective December 10, 2003 (see Annual Report on Form 10-K for the fiscal year ended December 31, 2003, filed on March 15, 2004).
10.3	(l)	Amendment to the Blockbuster Inc. Excess Investment Plan, dated as of July 20, 2004 (see Quarterly Report on Form 10-Q for the period ended September 30, 2004, filed on November 8, 2004).
10.3	(m)	Blockbuster Inc. Excess Investment Plan, as amended and restated effective January 1, 2005 (see Current Report on Form 8-K, filed on December 16, 2005).
10.3	(n)	First Amendment to the Blockbuster Inc. Amended and Restated 1999 Long-Term Management Incentive Plan dated August 5, 2008 (see Quarterly Report on Form 10-Q for the period ended October 5, 2008, filed on November 13, 2008).
10.3	(o)	First Amendment to the Blockbuster Inc. 2004 Long-Term Management Incentive Plan dated August 5, 2008 (see Quarterly Report on Form 10-Q for the period ended October 5, 2008, filed on November 13, 2008).

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10.3	(p)	Second Amendment to the Blockbuster Inc. Amended and Restated Senior Executive Short-Term Incentive Plan dated August 5, 2008 (see Quarterly Report on Form 10-Q for the period ended October 5, 2008, filed on November 13, 2008).
Director Compensation
10.4	(a)	Summary of Non-Employee Directors’ Compensation (see Annual Report on Form 10-K for the fiscal year ended January 6, 2008, filed on March 6, 2008).
10.4	(b)	Form of Deferred Share Unit Award Agreement for Non-Employee Directors (see Annual Report on Form 10-K for the fiscal year ended January 6, 2008, filed on March 6, 2008).
Director and Officer Indemnity Agreements
10.5		Form of Indemnification Agreement for Blockbuster Directors and Certain Blockbuster Officers (see Registration Statement on Form S-4 (333-122485), filed on February 2, 2005).
Credit Agreement
10.6	(a)	Credit Agreement between Blockbuster Inc. and the banks named therein, dated August 20, 2004 (see Amendment No. 3 to the Registration Statement on Form S-4 (333-116617), filed on September 8, 2004).
10.6	(b)	Guarantee and Collateral Agreement among Blockbuster Inc., certain subsidiaries of Blockbuster Inc. and JPMorgan Chase Bank, dated as of August 20, 2004 (see Amendment No. 3 to the Registration Statement on Form S-4 (333-116617), filed on September 8, 2004).
10.6	(c)	Supplement No. 1 to the Guarantee and Collateral Agreement among Blockbuster Inc., certain subsidiaries of Blockbuster Inc. and JPMorgan Chase Bank, dated as of December 22, 2004 (see Annual Report on Form 10-K for the fiscal year ended December 31, 2004, filed on March 29, 2005).
10.6	(d)	First Amendment, dated as of May 4, 2005, to Credit Agreement dated August 20, 2004 between Blockbuster Inc. and the banks named therein (see Current Report on Form 8-K, filed on May 6, 2005).
10.6	(e)	Second Amendment and Waiver, dated as of August 8, 2005, to Credit Agreement dated August 20, 2004 between Blockbuster Inc. and the banks named therein, including Exhibit A thereto (Form of Mortgage) and Exhibit B thereto (Security Agreement) (see Quarterly Report on Form 10-Q for period ended June 30, 2005, filed on August 9, 2005).
10.6	(f)	Third Amendment and Restatement, dated as of November 4, 2005, to Credit Agreement dated August 20, 2004 between Blockbuster Inc. and the banks named therein (see Quarterly Report on Form 10-Q for the period ended September 30, 2005, filed on November 8, 2005).
10.6	(g)	First Amendment, dated as of April 10, 2007, to Credit Agreement dated August 20, 2004, as amended and restated as of November 4, 2005 (see Current Report on Form 8-K, filed on April 24, 2007).
10.6	(h)	Second Amendment, dated as of July 2, 2007, to Credit Agreement dated August 20, 2004, as amended and restated as of November 4, 2005 (see Current Report on Form 8-K, filed on July 18, 2007).
10.6	(i)*	Amendment Agreement, dated as of April 2, 2009, to Credit Agreement dated August 20, 2004, as amended and restated as of November 4, 2005, which includes as Exhibit A: Credit Agreement between Blockbuster Inc. and the banks named therein, as amended and restated as of April 2, 2009, and as Exhibit B: Form of Assignment and Assumption.
Other Material Agreements
10.7	(a)	Agreement for the Sale and Purchase of the Entire Issued Share Capital of Games Station Limited, dated May 2, 2007, between THE GAME GROUP PLC and Blockbuster UK Limited (see Current Report on Form 8-K, filed on May 7, 2007).

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10.7	(b)	Tax Deed, dated May 2, 2007, between THE GAME GROUP PLC and Blockbuster UK Limited (see Current Report on Form 8-K, filed on May 7, 2007).
Other Exhibits
21.1	*	List of Subsidiaries of the Registrant.
23.1	*	Consent of PricewaterhouseCoopers LLP.
31.1	*	Certification pursuant to Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	*	Certification pursuant to Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	*	Furnished Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	*	Furnished Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

* Filed or furnished herewith, as applicable.

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EX-10.6(I)

Exhibit 10.6i

EXECUTION COPY

AMENDMENT AGREEMENT dated as of April 2, 2009 (this “Amendment”), to the Credit Agreement dated as of August 20, 2004, as amended and restated as of November 4, 2005, as amended by the First Amendment dated as of April 10, 2007, and the Second Amendment dated as of July 2, 2007 (as so amended, the “Original Credit Agreement”), among BLOCKBUSTER INC., a Delaware corporation (the “Borrower”), the LENDERS party thereto (the “Lenders”), JPMORGAN CHASE BANK, N.A., as Administrative Agent and Collateral Agent, CITICORP NORTH AMERICA, INC., as Syndication Agent, and CREDIT SUISSE FIRST BOSTON, acting through its Cayman Islands branch, as Documentation Agent.

WHEREAS, the Original Credit Agreement provides for a revolving credit facility, with the Revolving Commitments thereunder expiring, and outstanding Revolving Loans required to be repaid in full on or prior to, August 20, 2009;

WHEREAS, the Borrower has requested that (a) the Revolving Lenders agree to extend the expiration of all or any portion of their Revolving Commitments, and the final maturity of the corresponding portion of their outstanding Revolving Loans, to September 30, 2010 and (b) certain Persons that are not Revolving Lenders as of the date hereof acquire Revolving Commitments and Revolving Loans, and become Revolving Lenders, as of the Restatement Effective Date (as defined below), in each case on the terms and subject to the conditions set forth herein;

WHEREAS, the Persons that are Revolving Lenders whose names are set forth on Schedule 2.01 attached hereto (such Revolving Lenders being referred to as the “Extending Revolving Lenders”; the Revolving Lenders that are not Extending Revolving Lenders are being referred to as the “Terminating Revolving Lenders”) and the other Persons whose names are set forth on such Schedule (such Persons being referred to as the “New Revolving Lenders”) have agreed to provide the Revolving Commitments and make or acquire Revolving Loans pursuant thereto, in each case on the terms and subject to the conditions set forth herein; and

WHEREAS, in connection with the foregoing, the Borrower and the other parties hereto desire to amend and restate, as of the Restatement Effective Date, the Original Credit Agreement as set forth herein and to enter into certain other agreements as set forth herein.

NOW, THEREFORE, in consideration of the above premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Borrower, each Issuing Bank, the Swingline Lender, the Administrative Agent, the Issuing Banks Agent, each New Revolving Lender, each Extending Revolving Lender and the other Lenders party hereto agree as follows:

SECTION 1. Defined Terms. (a) Capitalized terms used but not otherwise defined herein have the meanings assigned to them in the Original Credit Agreement or the Restated Credit Agreement (as defined below), as the context may require.

(b) For purposes of this Amendment, the term “Specified Revolving Lenders” means such of the Extending Revolving Lenders and New Revolving Lenders as shall have agreed in writing to be the Specified Revolving Lenders for the purposes hereof.

SECTION 2. Amendment and Restatement of Original Credit Agreement. Effective as of the Restatement Effective Date, (a) the Original Credit Agreement is hereby amended and restated to be in the form of Exhibit A attached hereto (the Original Credit Agreement, as so amended and restated, being referred to as the “Restated Credit Agreement”), and (b) Exhibit A to the Original Credit Agreement is hereby amended and restated to be in the form and substance of Exhibit B attached hereto. Except as expressly set forth therein, all Schedules referred to in the Restated Credit Agreement shall be deemed to refer to the corresponding Schedules to the Original Credit Agreement.

SECTION 3. Concerning the Extended Revolving Facility. (a) On the Restatement Effective Date:

(i) The New Revolving Lenders shall be deemed to have assumed and purchased, and the Terminating Revolving Lenders shall be deemed to have sold, assigned and transferred, in each case without recourse, the Revolving Commitments of the Terminating Revolving Lenders (and the proportionate part of the Revolving Loans of the Terminating Revolving Lenders) to such extent as shall be necessary in order that, after giving effect to all such assumptions, purchases, sales, assignments and transfers, each New Revolving Lender shall have a Revolving Commitment that is equal to the amount set forth with respect to such New Revolving Lender on Schedule 2.01 hereto. Each New Revolving Lender shall be deemed to have assumed and purchased the Revolving Commitments of the Terminating Revolving Lenders (and the proportionate part of the Revolving Loans of the Terminating Revolving Lenders) ratably among the Terminating Revolving Lenders, based, with respect to each Terminating Revolving Lender, on the percentage of the total Revolving Commitments of the Terminating Revolving Lenders as of the Restatement Effective Date represented by such Lender’s Revolving Commitment as of such date. The purchase price for each such assumption and purchase shall equal the aggregate principal amount of the Revolving Loans so purchased.

(ii) The Revolving Commitment of each Terminating Revolving Lender shall, to the extent not assumed, assigned and transferred as provided in clause (i) above, terminate. The Borrower shall repay all the Revolving Loans of each Terminating Revolving Lender to the extent such Revolving Loans shall not have been purchased, assigned and transferred as provided in paragraph (a)(i) of this Section.

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(iii) The Revolving Commitment of each Extending Revolving Lender shall, to the extent such Revolving Commitment exceeds the amount set forth with respect to such Extending Revolving Lender on Schedule 2.01 hereto, be permanently reduced by the amount of such excess. The Borrower shall prepay Revolving Loans of each Extending Revolving Lender to the extent the aggregate principal amount of such Revolving Loans exceeds as of the Restatement Effective Date the amount set forth with respect to such Extending Revolving Lender on Schedule 2.01 hereto.

(iv) Each Eurodollar Revolving Loan outstanding on the Restatement Effective Date after giving effect to the transactions referred to in paragraphs (a)(i), (a)(ii) and (a)(iii) above shall convert to an ABR Revolving Loan.

(v) The Borrower shall be deemed to have requested that each Extending Revolving Lender and each New Revolving Lender make, and each Extending Revolving Lender and each New Revolving Lender shall make, an ABR Revolving Loan equal to the excess of (A) the amount set forth with respect to such Extending Revolving Lender or such New Revolving Lender, as the case may be, on Schedule 2.01 hereto and (B) the aggregate principal amount of Revolving Loans of such Extending Revolving Lender or such New Revolving Lender, as the case may be, outstanding on the Restatement Effective Date after giving effect to the transactions referred to in paragraphs (a)(i), (a)(ii) and (a)(iii) of this Section.

(vi) The Borrower shall pay to the Administrative Agent, for the account of the Revolving Lenders entitled thereto, all interest accrued under the Original Credit Agreement on the Revolving Loans to but excluding the Restatement Effective Date, and all fees payable to the Revolving Lenders under the Original Credit Agreement with respect to all periods ending prior to the Restatement Effective Date.

(b) Each New Revolving Lender and each Extending Revolving Lender shall make the ABR Revolving Loan required to be made by it pursuant to paragraph (a)(v) of this Section, and each New Revolving Lender shall make the purchases required to be made by it pursuant to paragraph (a)(i) of this Section, by wire transfer of immediately available funds to the account of the Administrative Agent designated by it for such purpose of an aggregate amount equal to the principal amount of such ABR Revolving Loan required to be made by such New Revolving Lender or such Extending Revolving Lender, as the case may be, together with, in the case of any New Revolving Lender, the aggregate purchase price payable by such New Revolving Lender pursuant to paragraph (a)(i) of this Section and, subject to the final paragraph of Section 8 hereof, the Administrative Agent shall distribute such amounts received by it to the Terminating Revolving Lenders and the Borrower in accordance with their interests therein.

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(c) Each New Revolving Lender and each Extending Revolving Lender agrees that, on and after the Restatement Effective Date, the terms and conditions of its Revolving Commitment and Revolving Loans, including, in the case of any New Revolving Lender, its Revolving Commitment and Revolving Loans assumed and purchased pursuant to paragraph (a)(i) of this Section, shall be as set forth in the Restated Credit Agreement, and that such Revolving Commitments and Revolving Loans shall continue to be in effect and outstanding on the terms and conditions set forth in the Restated Credit Agreement.

SECTION 4. Concerning Letters of Credit. Each Issuing Bank agrees that the letters of credit issued by it that are set forth on Schedule 2.06 hereto (such letters of credit being collectively referred to as the “Letters of Credit”) shall, as of the Restatement Effective Date, constitute “Letters of Credit” under, and be subject to the terms and conditions set forth in, the Restated Credit Agreement. Each Issuing Bank further agrees that, notwithstanding anything to the contrary in the Original Credit Agreement, on and after the Restatement Effective Date, no Revolving Lender shall have any participation in any Letter of Credit issued by such Issuing Bank, or any obligation to fund all or any portion of any LC Disbursement made under, or any other obligation with respect to, any such Letter of Credit.

SECTION 5. Concerning the Issuing Banks Agent. JPMorgan Chase Bank, N.A. hereby agrees to act as the Issuing Banks Agent under the Restated Credit Agreement, subject to the terms and conditions set forth therein.

SECTION 6. Representations and Warranties. The Borrower hereby represents and warrants to each other party hereto that:

(a) this Amendment (i) has been duly authorized by all necessary corporate or other organizational and, if required, stockholder action of the Borrower, (ii) has been duly executed and delivered by the Borrower and (iii) constitutes a legal, valid and binding obligation of the Borrower, enforceable against it in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium or other laws affecting creditors’ rights generally and subject to general principles of equity, regardless of whether considered in a proceeding in equity or at law; and

(b) after giving effect to Section 9 hereof, (i) no Default has occurred and is continuing and (ii) the representations and warranties of each Loan Party set forth in the Original Credit Agreement and the other Loan Documents are true and correct in all material respects as of the date hereof (or, if any such representation or warranty is expressly stated to have been made as of a specific date, as of such specific date).

SECTION 7. Effectiveness of this Amendment. This Amendment shall become effective as of the first date (such date being referred to as the “Amendment Agreement Effective Date”) on which each of the following conditions shall have been satisfied:

(a) the Administrative Agent (or its counsel) shall have received from the Borrower, each Issuing Bank, the Swingline Lender, the Issuing Banks Agent, each New Revolving Lender, each Extending Revolving Lender and such other Lenders as, together with the Extending Revolving Lenders, shall represent the Required Lenders either (i) a counterpart of this Amendment signed on behalf of such party or (ii) written evidence satisfactory to the Administrative Agent (which may include facsimile transmission of a signed signature page of this Amendment) that such party has signed a counterpart of this Amendment;

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(b) the Administrative Agent shall have received a certificate, in form and substance reasonably satisfactory to the Administrative Agent, of the chief financial officer of the Borrower, dated the Amendment Agreement Effective Date, certifying as to the solvency of the Borrower and its Subsidiaries, taken as a whole, and of the Loan Parties, taken as a whole;

(c) the Administrative Agent shall have received a favorable written opinion (dated the Amendment Agreement Effective Date and addressed to the Administrative Agent, each Issuing Bank, the Issuing Banks Agent, each New Revolving Lender and each Lender) of Kirkland & Ellis LLP, counsel for the Borrower, in form and substance reasonably satisfactory to the Administrative Agent;

(d) the Administrative Agent shall have received such documents and certificates as the Administrative Agent or its counsel may reasonably request relating to the organization, existence and good standing of the Borrower, the authorization of the transactions contemplated hereby and any other legal matters relating to the Borrower, the Loan Documents or the transactions contemplated hereby, all in form and substance reasonably satisfactory to the Administrative Agent;

(e) the representations and warranties of the Borrower set forth in Section 6 hereof shall be true and correct as of the Amendment Agreement Effective Date, and the Administrative Agent shall have received a certificate, dated the Amendment Agreement Effective Date and signed by the Chief Executive Officer or a Financial Officer of the Borrower, confirming the accuracy thereof, which shall be in form and substance reasonably satisfactory to the Administrative Agent;

(f) the Administrative Agent shall have received, for account of the Tranche B Lenders entitled thereto, the Amendment Fees required to be paid pursuant to Section 11(a) hereof; and

(g) the Administrative Agent shall have received all amounts due and payable to the Administrative Agent on or prior to the Amendment Agreement Effective Date pursuant to the Loan Documents, including reimbursement of all out-of-pocket expenses (including reasonable fees, charges and disbursements of counsel) required to be reimbursed or paid by the Borrower hereunder or under

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any other Loan Document, and the Administrative Agent and its Affiliates, and the applicable Lenders, shall have received all amounts due and payable on or prior to the Amendment Agreement Effective Date pursuant to certain fee letter agreements entered into in connection with this Amendment and the transactions contemplated hereby, including reimbursement of all out-of-pocket expenses (including reasonable fees, charges and disbursements of counsel) required to be reimbursed or paid by the Borrower pursuant to such letter agreements.

SECTION 8. Restatement Effective Date. The amendment and restatement of the Original Credit Agreement as set forth in Section 2 hereof, and the amendment and restatement of Exhibit A to the Original Credit Agreement as set forth in Section 2 hereof, shall be effective on such date after the Amendment Agreement Effective Date and on or prior to May 11, 2009 (the “Termination Date”) as shall have been specified by the Borrower to the Administrative Agent in a telephonic or written notice (such date, subject to the satisfaction or waiver of the conditions set forth below, being referred to as the “Restatement Effective Date”); provided that the following conditions shall have been satisfied as of such date (or waived by an agreement in writing entered into by the Administrative Agent, the Issuing Banks Agent, each Issuing Bank, each New Revolving Lender and each Extending Revolving Lender):

(a) the Borrower shall have established the LC Cash Collateral Account and shall have deposited, or substantially concurrently with the consummation of the transactions referred to in Section 3 hereof shall deposit, into the LC Cash Collateral Account an amount in cash equal to 105.00% of the aggregate LC Exposure of all the Issuing Banks as of the Restatement Effective Date;

(b) the Borrower shall have paid, or substantially concurrently with the consummation of the transaction referred to in Section 3 hereof shall pay, all amounts required to be paid by it on the Restatement Effective Date pursuant to Section 3 hereof;

(c) the representations and warranties of the Borrower set forth in Section 6 hereof shall be true and correct as of the Restatement Effective Date, and the Administrative Agent shall have received a certificate, dated the Restatement Effective Date and signed by the chief executive officer or a Financial Officer of the Borrower, confirming the accuracy thereof, which shall be in form and substance reasonably satisfactory to the Administrative Agent;

(d) the Administrative Agent shall have received, for account of the New Revolving Lenders and Extending Revolving Lenders (including the Specified Revolving Lenders) entitled thereto, the Restatement Effective Date Fees required to be paid pursuant to Section 11(b) hereof and the Ticking Fees required to be paid pursuant to Section 11(c) hereof;

(e) the Administrative Agent shall have received all amounts due and payable to the Administrative Agent on or prior to the Restatement Effective Date pursuant to the Loan Documents, including reimbursement of all out-of-pocket

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expenses (including reasonable fees, charges and disbursements of counsel) required to be reimbursed or paid by the Borrower hereunder or under any other Loan Document, and the Administrative Agent and its Affiliates, and the applicable Lenders, shall have received all amounts due and payable on or prior to the Restatement Effective Date pursuant to certain fee letter agreements entered into in connection with this Amendment and the transactions contemplated hereby, including reimbursement of all out-of-pocket expenses (including reasonable fees, charges and disbursements of counsel) required to be reimbursed or paid by the Borrower pursuant to such letter agreements;

(f) each Subsidiary Loan Party shall have entered into a Reaffirmation Agreement in form and substance reasonably satisfactory to the Administrative Agent; and

(g) notwithstanding the notice requirements set forth in Section 5.11 of the Original Credit Agreement, if any Subsidiary has been formed or acquired within 10 days prior to the Restatement Effective Date, the Borrower shall have notified the Administrative Agent of any such formation or acquisition; and the Administrative Agent shall have received a certificate, dated the Restatement Effective Date and signed by the chief executive officer or a Financial Officer of the Borrower, to such effect.

It is agreed that, in the event any New Revolving Lender or any Extending Revolving Lender shall have failed on the date specified by the Borrower as set forth above to purchase or make any Loan required to be purchased or made by it pursuant to Section 3 hereof on such date if such date were the Restatement Effective Date (any such failure being referred to as a “Lender Default”; and any such New Revolving Lender or any such Extending Revolving Lender being referred to as a “Defaulting New Revolving Lender” or a “Defaulting Extending Revolving Lender”), then, unless agreed to otherwise in writing by the Borrower, the Administrative Agent, the Issuing Banks Agent, each Issuing Bank, each New Revolving Lender (other than any Defaulting New Revolving Lender) and each Extending Revolving Lender (other than any Defaulting Extending Revolving Lender), such date shall not, whether or not the conditions set forth above shall have been satisfied or waived, be deemed to be the “Restatement Effective Date” for all purposes of this Amendment (other than for purposes of determining liability, if any, of such Defaulting New Revolving Lender or such Defaulting Extending Revolving Lender to the Borrower on account of such failure); provided, however, that if, within three Business Days of such date, one or more Replacement Revolving Lenders (as defined below) shall have made and/or purchased the Loans that are the subject of all the Lender Defaults, then, subject to the satisfaction or waiver of the conditions set forth above, the date of such making or purchase of the Loans shall be the “Restatement Effective Date”. The Administrative Agent shall promptly notify all the Extending Revolving Lenders and all the New Revolving Lenders of any Lender Default, and, to the extent necessary to give effect to this paragraph, the Termination Date shall be extended by not more than three Business Days.

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SECTION 9. Going Concern Qualification Waiver. The Lenders party hereto hereby permanently and irrevocably waive any Default or Event of Default arising from a “going concern” or like qualification or exception, if any, contained in the audit report of PricewaterhouseCoopers LLP with respect to the consolidated balance sheet of the Borrower as of January 4, 2009, and the related statements of operations, stockholders’ equity and cash flows for the fiscal year then ended, and further agree that, for purposes of the representations and warranties of the Borrower set forth in Section 6 hereof, insofar as such representations and warranties relate to the representation and warranty of the Borrower set forth in Section 3.04(c) of the Original Credit Agreement or Section 3.04(c) of the Restated Credit Agreement, the term “Material Adverse Effect” shall be deemed to exclude any event, condition or circumstance arising solely from such audit report containing such a “going concern” or like qualification or exception.

SECTION 10. Certain Other Agreements. (a) The Borrower hereby agrees that, on and after the Amendment Agreement Effective Date and prior to the earlier of (i) the Restatement Effective Date and (ii) the Termination Date, the Borrower shall not request any Borrowing, or any issuance of a Letter of Credit (it being understood that amendments (other than to increase the amount thereof), renewals and extensions of Letters of Credit in accordance with the terms of the Original Credit Agreement shall not be deemed to be issuances of letters of credit).

(b) Notwithstanding anything to the contrary in Section 9.04(e) of the Original Credit Agreement, on and after the Amendment Agreement Effective Date and prior to the earlier of (i) the Restatement Effective Date and (ii) the Termination Date, no Lender shall sell participations in all or any portion of such Lender’s rights and obligations under the Original Credit Agreement to any prospective Participant unless such Participant has represented and warranted to such Lender that such Participant is not, and for so long as it shall be a Participant will not become, an Affiliated Assignee (it being understood that, in the event the Restatement Effective Date shall occur, the sale of participations in Lenders’ rights and obligations under the Restated Credit Agreement shall be subject to the limitations set forth in the Restated Credit Agreement).

(c) Each Lenders party hereto hereby waives, solely in respect of the consummation of transactions contemplated by Section 3 hereof on the Restatement Effective Date, compliance with Sections 2.08, 2.09(d), 2.09(e), 2.09(g), 2.12(a), 2.12(f) and 2.12(g) of the Original Credit Agreement and Section 2.03 of the Restated Credit Agreement.

(d) Notwithstanding anything to the contrary in Section 5.01(a) of the Original Credit Agreement, no Default or Event of Default under such Section shall be deemed to have occurred in respect of the delivery of the Borrower’s audited consolidated balance sheet as of January 4, 2009, and the related audited consolidated statements of operations, stockholders’ equity and cash flows for the fiscal year then ended if the Borrower furnishes to the Administrative Agent and the Lenders such audited consolidated balance sheet and related audited

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consolidated statements, all reported on as required by such Section, on or prior to April 6, 2009 (together with the certificates required to be delivered at such time by Sections 5.01(c) and 5.01(d)).

SECTION 11. Fees. (a) The Borrower agrees to pay to the Administrative Agent, for the account of each Tranche B Lender that delivers to the Administrative Agent (or its counsel) an executed counterpart hereof (or a facsimile transmission of a signed signature page of this Amendment) on or prior to 12:00 noon, New York City time, on March 31, 2009, an amendment fee (the “Amendment Fee”) in an amount equal to 0.25% of the aggregate principal amount of such Lender’s Term Loans outstanding as of such date. The Amendment Fee shall be payable on, and subject to the occurrence of, the Amendment Agreement Effective Date.

(b) The Borrower agrees to pay to the Administrative Agent, for the account of (i) each Specified Revolving Lender, a fee in an amount equal to 8.00% of the Revolving Commitment of such Specified Revolving Lender set forth on Schedule 2.01 hereto and (ii) each Extending Revolving Lender (other than the Specified Revolving Lenders) and each New Revolving Lender (other than the Specified Revolving Lenders) a fee in an amount equal to 11.25% of the Revolving Commitment of such Extending Revolving Lender or such New Revolving Lender, as the case may be, set forth on Schedule 2.01 hereto (such fees being collectively referred to as the “Restatement Effective Date Fees”). The Restatement Effective Date Fees shall be payable on, and subject to the occurrence of, the Restatement Effective Date.

(c) The Borrower agrees to pay to the Administrative Agent (i) for the account of each New Revolving Lender, a fee accruing as set forth herein at a rate equal to 10.00% per annum on the amount set forth with respect to such New Revolving Lender on Schedule 2.01 hereto and (ii) for the account of each Extending Revolving Lender, a fee accruing as set forth herein at a rate equal to 10.00% per annum on the excess, if any, of (A) the amount set forth with respect to such Extending Revolving Lender on Schedule 2.01 hereto over (B) the product of (x) the Applicable Percentage under the Original Credit Agreement of such Extending Revolving Lender as of the Amendment Agreement Effective Date and (y) the aggregate amount set forth with respect to all the New Revolving Lenders and all the Extending Revolving Lenders on Schedule 2.01 hereto (such fees referred to in clause (i) and (ii) above being collectively referred to as the “Ticking Fees”). Subject to Section 12 hereof, the Ticking Fee payable for the account of any New Revolving Lender or any Extending Revolving Lender shall accrue from (and including) the Amendment Agreement Effective Date to (but excluding) the earlier of the Restatement Effective Date and the Termination Date (computed on the basis of the actual number of days elapsed over a year of 360 days), and shall be payable on the earlier of the Restatement Effective Date and the Termination Date. For purposes of this paragraph, any Person that is a New Revolving Lender as of the Amendment Agreement Effective Date shall continue to be a “New Revolving Lender” (and shall not be deemed to be an “Extending

9

Revolving Lender”) notwithstanding that such Person shall have become a Revolving Lender under the Original Credit Agreement after the Amendment Agreement Effective Date.

SECTION 12. Concerning Schedule 2.01. (a) In the event any New Revolving Lender shall have become a Defaulting New Revolving Lender, or any Extending Revolving Lender shall have become a Defaulting Extending Revolving Lender, Schedule 2.01 hereto may be modified, by an agreement in writing entered into by the Administrative Agent and each Replacement Revolving Lender, (i) to reduce (including to zero) the amount set forth on such Schedule with respect to such Defaulting New Revolving Lender or such Defaulting Extending Revolving Lender, as the case may be, and (ii) (A) to increase the amount set forth on such Schedule with respect to one or more other New Revolving Lenders or Extending Revolving Lenders or (B) to add to such Schedule the name of, and the amount with respect to, any Person that at the time thereof is not a New Revolving Lender or an Extending Revolving Lender (each such New Revolving Lender, Extending Revolving Lender or other Person referred to in this clause (ii) being referred to as a “Replacement Revolving Lender”); provided, however, that the aggregate amount of the increases or additions made pursuant to clause (ii) above shall be equal to the aggregate amount of the reductions made pursuant to clause (i) above. Upon execution and delivery by any Replacement Revolving Lender that is not a party hereto as of the Amendment Agreement Effective Date of the written agreement referred to above, such Replacement Revolving Lender shall become a party hereto as a “New Revolving Lender” or an “Extending Revolving Lender”, as the case may be, and shall be bound by, and have the benefit of, the terms and provisions hereof.

(b) Following any modification of Schedule 2.01 hereto as set forth in paragraph (a) of this Section, (i) all references herein to Schedule 2.01 hereto (including all references thereto in Sections 3 and 11 hereof) shall be deemed to be references to such Schedule as so modified, (ii) in the event the amount set forth on Schedule 2.01 hereto as so modified shall have been reduced with respect to any Defaulting New Revolving Lender or any Defaulting Extending Revolving Lender to zero, such Defaulting New Revolving Lender or such Defaulting Extending Revolving Lender, as the case may be, shall cease to be a New Revolving Lender or an Extending Revolving Lender, as the case may be, for purposes of this Agreement and (iii) the Ticking Fee payable for the account of any Lender shall be deemed to have been accruing from (and including) the Amendment Agreement Effective Date based on the amount set forth next to such Lender’s name on Schedule 2.01 hereto as so modified.

SECTION 13. Effect of Amendment. Except as expressly set forth herein, this Amendment shall not by implication or otherwise limit, impair, constitute a waiver of, or otherwise affect the rights and remedies of the Lenders, the Administrative Agent, the Collateral Agent, the Issuing Banks or the Lenders under the Original Credit Agreement or any other Loan Document, and shall not alter, modify, amend or in any way affect any of the terms, conditions, obligations, covenants or agreements contained in the Original Credit Agreement or any other Loan Document, all of which, as amended,

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supplemented or otherwise modified hereby, are ratified and affirmed in all respects and shall continue in full force and effect (it being understood and agreed that all interest and fees accruing under the Original Credit Agreement in respect of periods prior to the Restatement Effective Date will accrue at the rates specified in the Original Credit Agreement prior to it being amended by this Amendment and, subject to Section 3 hereof, be payable at the times provided in the Original Credit Agreement). Nothing herein shall be deemed to entitle any Loan Party to a consent to, or a waiver, amendment, modification or other change of, any of the terms, conditions, obligations, covenants or agreements contained in the Original Credit Agreement, the Restated Credit Agreement or any other Loan Document in similar or different circumstances. This Amendment shall constitute a Loan Document. On and after the Amendment Agreement Effective Date or the Restatement Effective Date, any reference to the Original Credit Agreement in any Loan Document shall mean such Original Credit Agreement as amended hereby as of such date.

SECTION 14. Expenses. The Borrower agrees to reimburse the Administrative Agent for its reasonable out-of-pocket expenses in connection with this Amendment, including the reasonable fees, charges and disbursements of Cravath, Swaine & Moore LLP.

SECTION 15. Waivers; Amendments. Neither this Amendment nor any provision hereof (including any Exhibit or Schedule hereto) may be waived, amended or modified except pursuant to an agreement or agreements in writing entered into by the Borrower, the Administrative Agent, the Issuing Banks Agent, each Issuing Bank, each New Revolving Lender, each Extending Revolving Lender and the Required Lenders, subject to, in the case of any such waiver, amendment or modification requiring the consent of any other Person under Section 9.02(b) of the Original Credit Agreement, the consent of such Person.

SECTION 16. Counterparts. This Amendment may be executed in counterparts (and by different parties hereto on different counterparts), each of which shall constitute an original, but all of which when taken together shall constitute a single contract. Delivery of an executed counterpart of a signature page of this Amendment by facsimile or other electronic transmission shall be effective as delivery of a manually executed counterpart of this Amendment.

SECTION 17. Governing Law. This Amendment shall be construed in accordance with and governed by the law of the State of New York.

SECTION 18. WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN ANY LEGAL PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AMENDMENT OR ANY OTHER LOAN DOCUMENT (WHETHER BASED ON CONTRACT, TORT OR ANY OTHER THEORY). EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY

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OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AMENDMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION.

SECTION 19. Headings. Section headings used herein are for convenience of reference only, are not part of this Amendment and shall not affect the construction of, or be taken into consideration in interpreting, this Amendment.

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IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed by their authorized officers as of the date first above written.

BLOCKBUSTER INC.,
By
	Name:
	Title:

JPMORGAN CHASE BANK, N.A., individually and as the Administrative Agent, the Swingline Lender, an Issuing Bank and the Issuing Banks Agent,
By
	Name:
	Title:

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SIGNATURE PAGE TO

AMENDMENT AGREEMENT

RELATING TO THE CREDIT AGREEMENT OF

BLOCKBUSTER INC.

Name of Lender (including, if such Lender is an Issuing Bank, in its capacity as an Issuing Bank):

by
	Name:
	Title:

For any Lender requiring a second signature block:

by
	Name:
	Title:

EXHIBIT A

CREDIT AGREEMENT

dated as of

August 20, 2004,

as amended and restated as of April 2, 2009 and

effective as of the Restatement Effective Date,

among

BLOCKBUSTER INC.

The LENDERS Party Hereto,

JPMORGAN CHASE BANK, N.A.,

as Administrative Agent and Collateral Agent,

CITICORP NORTH AMERICA, INC.,

as Syndication Agent,

and

CREDIT SUISSE FIRST BOSTON,

as Documentation Agent

THE BANK OF NEW YORK and

WACHOVIA BANK, NATIONAL ASSOCIATION,

Co-Documentation Agents

J.P. MORGAN SECURITIES INC.

and CITIGROUP GLOBAL MARKETS INC.,

Joint Lead Arrangers and Joint Bookrunners

TABLE OF CONTENTS

ARTICLE I
Definitions
SECTION 1.01.	Defined Terms	1
SECTION 1.02.	Classification of Loans and Borrowings	31
SECTION 1.03.	Terms Generally	31
SECTION 1.04.	Accounting Terms; GAAP	32
ARTICLE II
The Credits
SECTION 2.01.	Commitments	32
SECTION 2.02.	Loans and Borrowings	33
SECTION 2.03.	Requests for Revolving Borrowings	33
SECTION 2.04.	Competitive Bid Procedure	34
SECTION 2.05.	Swingline Loans	34
SECTION 2.06.	Letters of Credit	34
SECTION 2.07.	Funding of Borrowings	41
SECTION 2.08.	Interest Elections	42
SECTION 2.09.	Termination and Reduction of Commitments	43
SECTION 2.10.	Repayment of Loans; Evidence of Debt	44
SECTION 2.11.	Amortization of Loans	44
SECTION 2.12.	Prepayment of Loans	46
SECTION 2.13.	Fees	48
SECTION 2.14.	Interest	49
SECTION 2.15.	Alternate Rate of Interest	50
SECTION 2.16.	Increased Costs	51
SECTION 2.17.	Break Funding Payments	52
SECTION 2.18.	Taxes	52
SECTION 2.19.	Payments Generally; Pro Rata Treatment; Sharing of Set-offs	54
SECTION 2.20.	Mitigation Obligations; Replacement of Lenders	55
ARTICLE III
Representations and Warranties
SECTION 3.01.	Organization; Powers	56
SECTION 3.02.	Authorization; Enforceability	57
SECTION 3.03.	Governmental Approvals; No Conflicts	57
SECTION 3.04.	Financial Condition; No Material Adverse Change	57

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SECTION 3.05.	Properties	58
SECTION 3.06.	Litigation and Environmental Matters	58
SECTION 3.07.	Compliance with Laws and Agreements	58
SECTION 3.08.	Investment Company Status	58
SECTION 3.09.	Taxes	58
SECTION 3.10.	ERISA	59
SECTION 3.11.	Disclosure	59
SECTION 3.12.	Subsidiaries	59
SECTION 3.13.	Insurance	59
SECTION 3.14.	Labor Matters	59
SECTION 3.15.	Solvency	60
SECTION 3.16.	Senior Indebtedness	60
SECTION 3.17.	Franchises	60
SECTION 3.18.	Security Interests	60
SECTION 3.19.	Use of Proceeds	62
SECTION 3.20.	Federal Reserve Regulation	62
ARTICLE IV
Conditions
SECTION 4.01.	Restatement Effective Date	62
SECTION 4.02.	Each Credit Event	62
ARTICLE V
Affirmative Covenants
SECTION 5.01.	Financial Statements and Other Information	63
SECTION 5.02.	Notices of Material Events	66
SECTION 5.03.	Information Regarding Collateral	67
SECTION 5.04.	Existence; Conduct of Business	67
SECTION 5.05.	Payment of Obligations	67
SECTION 5.06.	Maintenance of Properties	67
SECTION 5.07.	Insurance	67
SECTION 5.08.	Books and Records; Inspection and Audit Rights	68
SECTION 5.09.	Compliance with Laws	68
SECTION 5.10.	Use of Proceeds and Letters of Credit	68
SECTION 5.11.	Additional Subsidiaries	68
SECTION 5.12.	Further Assurances	68
SECTION 5.13.	Cash Management System	69

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ARTICLE VI
Negative Covenants
SECTION 6.01.	Indebtedness; Certain Equity Securities	70
SECTION 6.02.	Liens	71
SECTION 6.03.	Fundamental Changes	73
SECTION 6.04.	Investments, Loans, Advances, Guarantees and Acquisitions	73
SECTION 6.05.	Asset Sales	74
SECTION 6.06.	Sale and Leaseback Transactions	75
SECTION 6.07.	Hedging Agreements	76
SECTION 6.08.	Restricted Payments; Certain Payments of Indebtedness	76
SECTION 6.09.	Transactions with Affiliates	76
SECTION 6.10.	Restrictive Agreements	77
SECTION 6.11.	Amendment of Material Documents	77
SECTION 6.12.	Fixed Charge Coverage Ratio	78
SECTION 6.13.	Leverage Ratio	78
SECTION 6.14.	Capital Expenditures	78
SECTION 6.15.	Deposit and Securities Accounts	78
ARTICLE VII
Events of Default
ARTICLE VIII
The Agents
ARTICLE IX
Miscellaneous
SECTION 9.01.	Notices	85
SECTION 9.02.	Waivers; Amendments	85
SECTION 9.02A	Concerning the Issuing Banks Agent	87
SECTION 9.02B	Concerning the Revolving Lenders	87
SECTION 9.03.	Expenses; Indemnity; Damage Waiver	87
SECTION 9.04.	Successors and Assigns	89
SECTION 9.05.	Survival	92
SECTION 9.06.	Counterparts; Integration; Effectiveness	93
SECTION 9.07.	Severability	93
SECTION 9.08.	Right of Setoff	93
SECTION 9.09.	Governing Law; Jurisdiction; Consent to Service of Process	93

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SECTION 9.10.	WAIVER OF JURY TRIAL	94
SECTION 9.11.	Headings	94
SECTION 9.12.	Confidentiality	94
SECTION 9.13.	Interest Rate Limitation	95
SECTION 9.14.	Patriot Act	95

SCHEDULES:

Schedule 3.12 — Original Effective Date Subsidiaries

Schedule 3.13 — Original Effective Date Insurance

Schedule 6.01 — Original Effective Date Existing Indebtedness

Schedule 6.02 — Original Effective Date Existing Liens

Schedule 6.10 — Original Effective Date Existing Restrictive Agreements

EXHIBITS:

Exhibit A — Form of Assignment and Assumption

iv

CREDIT AGREEMENT dated as of August 20, 2004, as amended and restated as of April 2, 2009 and effective as of the Restatement Effective Date (as defined below), among BLOCKBUSTER INC., the LENDERS party hereto, JPMORGAN CHASE BANK, N.A., as Administrative Agent and Collateral Agent, CITICORP NORTH AMERICA, INC., as Syndication Agent, and CREDIT SUISSE FIRST BOSTON, acting through its Cayman Islands branch, as Documentation Agent.

The parties hereto agree as follows:

ARTICLE I

Definitions

SECTION 1.01. Defined Terms. As used in this Agreement, the following terms have the meanings specified below:

“2009 CapEx Amount” has the meaning assigned to such term in Section 6.14.

“ABR”, when used in reference to any Loan or Borrowing, refers to whether such Loan, or the Loans comprising such Borrowing, are bearing interest at a rate determined by reference to the Alternate Base Rate.

“Account Control Agreement” means an account control agreement, in form and substance reasonably satisfactory to the Administrative Agent and the Borrower, duly executed and delivered by (a) the applicable Loan Party and (b) the relevant depositary bank or securities intermediary.

“Additional Margin” means, for any day with respect to any Term Loan, the applicable rate per annum set forth below based upon the Gross Leverage Ratio as of the most recent determination date.

Gross Leverage Ratio:	Additional Margin
Category 1 Greater than or equal to 4.00 to 1.00	0.50	%
Category 2 Greater than or equal to 3.00 to 1.00 but less than 4.00 to 1.00	0.25	%
Category 3 Less than 3.00 to 1.00	0.00	%

For purposes of the foregoing, (a) the Gross Leverage Ratio shall be determined as of the end of each fiscal quarter of the Borrower’s fiscal year based upon the Borrower’s consolidated financial statements delivered pursuant to Section 5.01(a) or 5.01(b) and (b) each change in the Additional Margin resulting from a change in the Gross Leverage Ratio shall be effective during the period commencing on and including the date of delivery to the Administrative Agent of such consolidated financial statements accompanied by the compliance certificate required by Section 5.01(c) indicating such change and ending on the date immediately preceding the effective date of the next such change; provided that the Gross Leverage Ratio shall be deemed to be in Category 1 at the option of the Administrative Agent or at the request of the Required Lenders if the Borrower fails to deliver the consolidated financial statements required to be delivered by it pursuant to Section 5.01(a) or 5.01(b), during the period from the expiration of the time for delivery thereof until such consolidated financial statements are delivered.

“Adjusted LIBO Rate” means, with respect to any Eurodollar Borrowing for any Interest Period, an interest rate per annum (rounded upwards, if necessary, to the next 1/100 of 1%) equal to (a) the LIBO Rate for such Interest Period multiplied by (b) the Statutory Reserve Rate.

“Administrative Agent” means JPMorgan Chase Bank, N.A., in its capacity as administrative agent and collateral agent hereunder and under the other Loan Documents, and its successors in such capacity as provided in Article VIII. Unless otherwise specified, references in any other Loan Document to the “Collateral Agent” shall be deemed to be references to the Administrative Agent.

“Administrative Questionnaire” means an Administrative Questionnaire in a form supplied by the Administrative Agent.

“Affiliate” means, with respect to a specified Person, another Person that directly, or indirectly through one or more intermediaries, Controls or is Controlled by or is under common Control with the Person specified.

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“Affiliated Assignee” means, at any time, any Person that at such time (a) owns, directly or indirectly, beneficially or of record, Equity Interests in the Borrower that, together with all the Equity Interests in the Borrower owned, directly or indirectly, beneficially or of record, by any Affiliate of such Person or any member of the group (within the meaning of the Securities Exchange Act of 1934 and the rules of the SEC thereunder) that such Person is a part of, represent more than 5.00% of the aggregate voting power represented by the issued and outstanding Equity Interests in the Borrower, (b) has a right to elect or appoint one or more members of the board of directors of the Borrower, whether such right is exercisable at such time or only upon the occurrence of any event or satisfaction of any condition, (c) is an Affiliate of the Borrower or any Subsidiary or of any Person described in clause (a) or (b) above or (d) is a director or an executive officer of any Person described in clause (a), (b) or (c) above.

“Aggregate LC Obligations” means, at any time, the sum of (a) the aggregate LC Exposure of all the Issuing Banks at such time, (b) the aggregate amount at such time of any accrued but unpaid interest hereunder in respect of LC Disbursements and (c) the aggregate amount at such time of any accrued but unpaid Issuing Bank Fees.

“Affiliate Subordination Agreement” means an Affiliate Subordination Agreement substantially in the form attached as Exhibit J to the Original Credit Agreement.

“Agreement” means this Credit Agreement, as modified, amended or restated from time to time.

“Alternate Base Rate” means, for any day, (a) with respect to ABR Revolving Loans, a rate per annum equal to the greatest of (i) the Prime Rate in effect on such day, (ii) the Federal Funds Effective Rate in effect on such day plus 1/2 of 1.00%, (iii) the Adjusted LIBO Rate on such day (or if such day is not a Business Day, the immediately preceding Business Day) for a deposit in dollars with a maturity of one month, plus 1.00%, and (iv) 4.50%, and (b) otherwise, a rate per annum equal to the greater of (i) the Prime Rate in effect on such day and (ii) the Federal Funds Effective Rate in effect on such day plus 1/2 of 1.00%. For purposes of clause (a)(iii) above, the Adjusted LIBO Rate on any day shall be based on the rate per annum appearing on the Reuters “LIBOR01” screen displaying British Bankers’ Association Interest Settlement Rates (or on any successor or substitute screen provided by Reuters, or any successor to or substitute for such service, providing rate quotations comparable to those currently provided on such screen, as determined by the Administrative Agent from time to time for purposes of providing quotations of interest rates applicable to dollar deposits in the London interbank market) at approximately 11:00 a.m., London time, two Business Days prior to such day for deposits in dollars with a maturity of one month. Any change in the Alternate Base Rate due to a change in the Prime Rate, the Federal Funds Effective Rate or the Adjusted LIBO Rate shall be effective from and including the effective date of such change in the Prime Rate, the Federal Funds Effective Rate or the Adjusted LIBO Rate, as the case may be.

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“Amendment Agreement” means the Amendment Agreement dated as of April 2, 2009, among the Borrower, the Lenders party thereto, the Issuing Banks, the Issuing Banks Agent and the Administrative Agent.

“Amendment Agreement Effective Date” has the meaning assigned to such term in the Amendment Agreement.

“Applicable Margin” means, for any day, with respect to (a) any ABR Revolving Loan, 9.00% per annum, (b) any Eurodollar Revolving Loan, 10.00% per annum and (c) any ABR Loan or Eurodollar Loan that is a Tranche A Term Loan or a Tranche B Term Loan, the applicable rate per annum set forth below under the caption “Tranche A ABR Spread”, “Tranche A Eurodollar Spread”, “Tranche B ABR Spread” or “Tranche B Eurodollar Spread”, as the case may be, based upon the rating by S&P and Moody’s, respectively, applicable on such day to the Index Debt plus, solely in the case of Category 3, the Additional Margin in effect on such day:

Index Debt Ratings	Tranche A ABR Spread		Tranche A Eurodollar Spread		Tranche B ABR Spread		Tranche B Eurodollar Spread
Category 1 B+ or B1 or higher	1.75	%	2.75	%	2.00	%	3.00	%
Category 2 B or B2	2.25	%	3.25	%	2.50	%	3.50	%
Category 3 lower than B or B2	2.50	%	3.50	%	2.75	%	3.75	%

For purposes of the foregoing, (a) if either Moody’s or S&P shall not have in effect a rating for the Index Debt (other than by reason of the circumstances referred to in the last sentence of this paragraph), then such rating agency shall be deemed to have established a rating in Category 3; (b) if the ratings established or deemed to have been established by Moody’s and S&P for the Index Debt shall fall within different Categories, the Applicable Margin shall be based on the lower of the two ratings; and (c) if the ratings established or deemed to have been established by Moody’s or S&P for the Index Debt shall be changed, such change shall be effective as of the date on which it is first announced by the applicable rating agency. Each change in the Applicable Margin shall apply during the period commencing on the effective date of such change and ending on the date immediately preceding the effective date of the next such change. If the rating

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system of Moody’s or S&P shall change, or if either such rating agency shall cease to be in the business of rating corporate debt obligations, the Borrower and the Lenders shall negotiate in good faith to amend this definition to reflect such changed rating system or the unavailability of ratings from such rating agency and, pending the effectiveness of any such amendment, the Applicable Margin shall be determined by reference to the rating most recently in effect prior to such change or cessation.

“Approved Fund” has the meaning assigned to such term in Section 9.04.

“Assignment and Assumption” means an assignment and assumption entered into by a Lender and an assignee (with the consent of any party whose consent is required by Section 9.04(b)), and accepted by the Administrative Agent, in the form of Exhibit A or any other form approved by the Administrative Agent.

“Attributable Debt” means, on any date, in respect of any lease of the Borrower or any Subsidiary entered into as part of a Sale and Leaseback Transaction subject to Section 6.06, (a) if such lease is a Capital Lease Obligation, the capitalized amount thereof that would appear on a balance sheet of such Person prepared as of such date in accordance with GAAP and (b) if such lease is not a Capital Lease Obligation, the capitalized amount of the remaining lease payments under such lease that would appear on a balance sheet of such Person prepared as of such date in accordance with GAAP if such lease were accounted for as a Capital Lease Obligation.

“Available Cash” means, on any date, (a) the fair market value on such date of cash and cash equivalents held in securities accounts of the Borrower and the Domestic Subsidiaries and (b) the amount of available funds held on such date (i) in bank deposit accounts of the Borrower into which cash is transferred, directly or indirectly, by local depositary banks from bank deposits accounts into which Stores deposit cash, credit card receipts and similar items (including the Borrower’s concentration accounts maintained with Bank of America, N.A.) and (ii) in bank deposit accounts of any Domestic Subsidiary, provided, however, that funds in bank deposit accounts of Domestic Subsidiaries will be included in calculating Available Cash on any date to the extent, but only to the extent, the aggregate amount of such funds exceeds $5,000,000.

“Board” means the Board of Governors of the Federal Reserve System of the United States of America.

“Borrower” means Blockbuster Inc., a Delaware corporation.

“Borrowing” means Loans of the same Class and Type made, converted or continued on the same date and, in the case of Eurodollar Loans, as to which a single Interest Period is in effect.

“Borrowing Request” means a request by the Borrower for a Revolving Borrowing in accordance with Section 2.03, which, if in writing, shall be substantially in the form attached as Exhibit B to the Original Credit Agreement (or any other form approved by the Administrative Agent).

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“Business Day” means any day that is not a Saturday, Sunday or other day on which commercial banks in New York City are authorized or required by law to remain closed; provided that, when used in connection with a Eurodollar Loan, the term “Business Day” shall also exclude any day on which banks are not open for dealings in dollar deposits in the London interbank market.

“Capital Expenditures” means, for any period, the sum, without duplication, of the additions to property, plant or equipment and other capital expenditures, including replacements, capitalized repairs and improvements during such period, of the Borrower and the Subsidiaries for such period, determined in accordance with GAAP; provided that “Capital Expenditures” will be deemed to exclude assets received as a result of Permitted Store Swaps.

“Capital Lease Obligations” of any Person means the obligations of such Person to pay rent or other amounts under any lease of (or other arrangement conveying the right to use) real or personal property, or a combination thereof, which obligations are required to be classified and accounted for as capital leases on a balance sheet of such Person under GAAP, and the amount of such obligations shall be the capitalized amount thereof determined in accordance with GAAP.

“Capital Lease Principal Payments” means, for any period, amounts recorded or required to be recorded as principal payments of Capital Lease Obligations on the consolidated financial statements of the Borrower prepared in accordance with GAAP.

“Change in Control” means (a) the acquisition of ownership, directly or indirectly, beneficially or of record, by any Person or group (within the meaning of the Securities Exchange Act of 1934 and the rules of the SEC thereunder), of Equity Interests in the Borrower representing more than 50% of the aggregate voting power represented by the issued and outstanding Equity Interests in the Borrower; (b) occupation of a majority of the seats (other than vacant seats) on the board of directors of the Borrower by Persons who were not (i) members of the board of directors of the Borrower both on the Original Effective Date and immediately after the Split-Off Date, (ii) appointed to the board of directors of the Borrower in connection with the Split-Off, as set forth in the S-4, or (iii) nominated or appointed to the board of directors of the Borrower by Persons described in clauses (i) and (ii) or their board nominees or appointees; or (c) the occurrence of a “Change of Control”, as defined in the Subordinated Debt Documents.

“Change in Law” means (a) the adoption of any law, rule or regulation after the Original Effective Date, (b) any change in any law, rule or regulation or in the interpretation or application thereof by any Governmental Authority having regulatory or supervisory authority over banks or other financial institutions after the Original Effective Date or (c) compliance by any Lender or any Issuing Bank (or, for purposes of Section 2.16(b), by any lending office of such Lender or by such Lender’s or such Issuing Bank’s holding company, if any) with any request, guideline or directive (whether or not having the force of law) of any Governmental Authority having regulatory or supervisory authority over banks or other financial institutions made or issued after the Original Effective Date.

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“Class”, when used in reference to (a) any Loan or Borrowing, refers to whether such Loan, or the Loans comprising such Borrowing, are Revolving Loans, Tranche A Term Loans or Tranche B Term Loans, (b) any Commitment, refers to whether such Commitment is a Revolving Commitment, Tranche A Commitment or Tranche B Commitment and (c) any Lender, refers to whether such Lender has a Loan or a Commitment of a particular Class.

“Class A Common Stock” means shares of Class A Common Stock, par value of $0.01 per share, of the Borrower.

“Class B Common Stock” means shares of Class B Common Stock, par value of $0.01 per share, of the Borrower.

“Code” means the Internal Revenue Code of 1986, as amended from time to time.

“Collateral” means any “Collateral”, as such term is defined in any Security Document, and any assets in respect of which a Lien is created or purported to be created in favor of the Administrative Agent or, in the case of the LC Cash Collateral, the Issuing Banks Agent pursuant to any Loan Document.

“Collateral Agreement” means the Guarantee and Collateral Agreement dated as of the Original Effective Date, among the Borrower, the Subsidiary Loan Parties and the Administrative Agent, together with all supplements thereto.

“Collateral and Guarantee Requirement” means the requirement that:

(a) the Administrative Agent shall have received from each Loan Party (i) either (A) a counterpart of the Collateral Agreement duly executed and delivered on behalf of such Loan Party or (B) in the case of any Person that becomes a Loan Party after the date of the Collateral Agreement, a supplement to the Collateral Agreement, in the form specified therein, duly executed and delivered on behalf of such Loan Party and (ii) either (A) a counterpart of the Security Agreement duly executed and delivered on behalf of such Loan Party or (B) in the case of any Person that becomes a Loan Party after the date of the Security Agreement, a supplement to the Security Agreement, in the form specified therein, duly executed and delivered on behalf of such Loan Party;

(b) all outstanding Equity Interests in each Domestic Subsidiary and in each Significant Foreign Subsidiary owned by or on behalf of any Loan Party shall have been pledged pursuant to the Collateral Agreement or a Foreign Pledge Agreement (except that the Loan Parties shall not be required to pledge more than 65% of the outstanding voting Equity Interests in any Significant Foreign Subsidiary), and the Administrative Agent shall have received certificates or other instruments representing all such Equity Interests, together with undated stock powers or other instruments of transfer with respect thereto endorsed in blank;

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(c) the Administrative Agent shall have received (i) a counterpart of each Mortgage required to be entered into pursuant to Section 5.12 with respect to any Mortgaged Property, duly executed and delivered by the record owner of such Mortgaged Property, (ii) a policy or policies of title insurance issued by a nationally recognized title insurance company insuring the Lien of each such Mortgage as a valid first Lien on the Mortgaged Property described therein, free of any other Liens (other than Permitted Encumbrances), together with such endorsements (other than survey endorsements) as the Administrative Agent may reasonably request, and (iii) such legal opinions and other documents as the Administrative Agent may reasonably request with respect to any such Mortgage or Mortgaged Property;

(d) the Administrative Agent shall have received from (i) each applicable Loan Party and (ii) each relevant depositary bank or securities intermediary an executed counterpart of an Account Control Agreement in respect of each deposit account and each securities account with respect to which an Account Control Agreement is required to be entered into pursuant to Section 6.05(d), 6.05(e) or 6.15; and

(e) all documents and instruments required by law or reasonably requested by the Administrative Agent to be filed, registered or recorded to (i) create the Liens intended to be created by the Security Documents and (ii) perfect such Liens to the extent required by, and with the priority required by, the Loan Documents, shall have been filed, registered or recorded or delivered to the Administrative Agent for filing, registration or recording.

“Commercial Paper” means (a) any unsecured promissory note of the Borrower with a maturity at the time of issuance not exceeding nine months, exclusive of days of grace, issued by the Borrower pursuant to a commercial paper program and (b) any unsecured borrowing by the Borrower due within nine months of the borrowing date, exclusive of days of grace, pursuant to money market or other similar short-term uncommitted credit lines.

“Commitment” means a Revolving Commitment, Tranche A Commitment or Tranche B Commitment, or any combination thereof (as the context requires).

“Consolidated EBITDA” means, with respect to any period, the Consolidated Operating Income of the Borrower and the Subsidiaries for such period, plus, without duplication, the sum of:

(a) other income of the Borrower and the Subsidiaries for such period determined on a consolidated basis in accordance with GAAP, to the extent such other income is positive;

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(b) interest income of the Borrower and the Subsidiaries for such period determined on a consolidated basis in accordance with GAAP;

(c) amounts attributable to depreciation and amortization for such period (excluding depreciation and amortization related to the rental inventory of the Borrower and the Subsidiaries), to the extent deducted in determining Consolidated Operating Income for such period;

(d) all Non-Cash Non-Recurring Charges for such period, to the extent deducted in determining Consolidated Operating Income for such period;

(e) all losses associated with asset sales (including sales of Equity Interests) or dispositions of businesses permitted under this Agreement during such period (other than losses on sales of inventory sold in the ordinary course of business and losses on sales of other assets if such losses are less than $1,000,000 individually and less than $10,000,000 in the aggregate during such period), to the extent deducted in determining Consolidated Operating Income for such period; and

(f) all fees and expenses of consultants, counsel and other advisors to the Borrower incurred, or of consultants, counsel and other advisors to any other Person to the extent reimbursed by the Borrower, in each case during such period (but only after January 3, 2009 and on or prior to the Restatement Effective Date); provided that (i) the aggregate amount of fees and expenses added back pursuant to this clause (f) shall not exceed $15,000,000 for all periods and (ii) no addback pursuant to this clause (f) shall be made in determining Consolidated EBITDA for purposes of determining Gross Leverage Ratio;

and minus, without duplication, the sum of:

(i) other income of the Borrower and the Subsidiaries for such period determined on a consolidated basis in accordance with GAAP, to the extent such other income is negative;

(ii) all Non-Cash Non-Recurring Gains for such period, to the extent included in determining Consolidated Operating Income or other income referred to in clause (a) above, in each case for such period;

(iii) all cash expenditures made in such period attributable to non-cash charges (other than non-recurring charges) added back in determining Consolidated EBITDA pursuant to clause (d) above;

(iv) all gains associated with asset sales (including sales of Equity Interests) and dispositions of businesses during such period (other than gains on sales of inventory sold in the ordinary course of business and gains on sales of other assets and businesses if such gains are less than $1,000,000 individually and less than $10,000,000 in the aggregate during such period), to the extent included in determining Consolidated Operating Income or other income referred to in clause (a) above, in each case for such period; and

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(v) the proportional EBITDA of the interests held by any other Person in entities fully consolidated with the Borrower and the Subsidiaries, as determined in accordance with the terms of this definition, to the extent not deducted in determining Consolidated Operating Income or other income or interest income referred to in clause (a) or (b) above, in each case for such period.

For purposes of determining Consolidated EBITDA for any period, if the Borrower (x) acquires all or substantially all the Equity Interests or assets of another Person during such period for aggregate consideration in excess of $25,000,000 or (y) sells or transfers any Subsidiary, all or substantially all the assets of a Subsidiary or other assets constituting a business operation during such period for aggregate consideration in excess of $25,000,000, Consolidated EBITDA will be determined on a pro forma basis giving effect to such acquisition or disposition as if it had occurred on the first day of such period.

“Consolidated Interest Expense” means, for any period, the excess of (a) the sum of (i) the interest expense (including imputed interest expense in respect of Capital Lease Obligations) of the Borrower and the Subsidiaries for such period, determined on a consolidated basis in accordance with GAAP, (ii) any interest accrued during such period in respect of Indebtedness of the Borrower or any Subsidiary that is required to be capitalized rather than included in consolidated interest expense for such period in accordance with GAAP and (iii) any cash payments made during such period in respect of obligations referred to in clause (b)(ii) below that were amortized or accrued in a previous period, minus (b) the sum of (i) to the extent included in such consolidated interest expense for such period, non-cash amounts attributable to amortization of financing costs paid in a previous period and (ii) to the extent included in such consolidated interest expense for such period, non-cash amounts attributable to amortization of debt discounts or accrued interest payable in kind for such period.

“Consolidated Net Income” means, for any period, the net income or loss of the Borrower and the Subsidiaries for such period determined on a consolidated basis in accordance with GAAP.

“Consolidated Operating Income” means, for any period, the revenues from operations of the Borrower and the consolidated Subsidiaries for such period less the aggregate amount of (a) the operating costs and expenses (including, without duplication, general and administrative expenses and payments under guarantees of leases) and (b) the cost of sales of the Borrower and the consolidated Subsidiaries for such period, in each case determined on a consolidated basis in accordance with GAAP; provided, however, that there shall be excluded (i) the operating income of any Person (other than a Loan Party) in which any other Person (other than the Borrower or a Subsidiary or any director holding qualifying shares in compliance with applicable law) owns an Equity Interest, except to the extent of the amount of dividends or other distributions actually paid to the Borrower or any of the Subsidiaries during such period,

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and (ii) the operating income or loss of any Person accrued prior to the date it becomes a Subsidiary or is merged with the Borrower or any Subsidiary or the date that such Person’s assets are acquired by the Borrower or any Subsidiary.

“Control” means the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a Person, whether through the ability to exercise voting power, by contract or otherwise. “Controlling” and “Controlled” have meanings correlative thereto.

“Convertible Preferred Stock” means the 7.50% Series A Cumulative Convertible Perpetual Preferred Stock of the Borrower having the rights, preferences and privileges set forth in the Certificate of Designation dated as of November 14, 2005.

“Default” means any event or condition which constitutes an Event of Default or which upon notice, lapse of time or both would, unless cured or waived, become an Event of Default.

“dollars” or “$” refers to lawful money of the United States of America.

“Domestic Subsidiary” means each Subsidiary that is not a Foreign Subsidiary.

“Environmental Laws” means all laws, rules, regulations, codes, ordinances, orders, decrees, judgments, injunctions, notices or binding agreements issued, promulgated or entered into by any Governmental Authority, relating in any way to the environment, preservation or reclamation of natural resources, the management, release or threatened release of any Hazardous Material or to health and safety matters relating to any Hazardous Materials and, in each case, applicable to the Borrower or any Subsidiary.

“Environmental Liability” means any liability, contingent or otherwise (including any liability for damages, costs of environmental remediation, fines, penalties or indemnities), of the Borrower or any Subsidiary directly or indirectly resulting from or based upon (a) violation of any Environmental Law, (b) the generation, use, handling, transportation, storage, treatment or disposal of any Hazardous Materials, (c) exposure to any Hazardous Materials, (d) the release or threatened release of any Hazardous Materials into the environment or (e) any contract, agreement or other consensual arrangement pursuant to which liability is assumed or imposed with respect to any of the foregoing.

“Equity Interests” means shares of capital stock, partnership interests, membership interests in a limited liability company, beneficial interests in a trust or other equity ownership interests in a Person.

“ERISA” means the Employee Retirement Income Security Act of 1974, as amended from time to time.

“ERISA Affiliate” means any trade or business (whether or not incorporated) that, together with the Borrower, is treated as a single employer under Section 414(b) or (c) of the Code or, solely for purposes of Section 302 of ERISA and Section 412 of the Code, is treated as a single employer under Section 414 of the Code.

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“ERISA Event” means (a) any “reportable event”, as defined in Section 4043 of ERISA or the regulations issued thereunder with respect to a Plan (other than an event for which the 30-day notice period is waived); (b) a failure by any Plan to satisfy the minimum funding standards (as defined in Section 412 of the Code or Section 302 of ERISA) applicable to such plan in each instance, whether or not waived; (c) the filing pursuant to Section 412(c) of the Code or Section 302(c) of ERISA of an application for a waiver of the minimum funding standard with respect to any Plan; (d) a determination that any Plan is, or is expected to be, in “at risk” status (as defined in Section 430(i)(4) of the Code or Section 430(i)(4) of the or Section 303(i)(4) of ERISA; (e) the incurrence by the Borrower or any of its ERISA Affiliates of any liability under Title IV of ERISA with respect to the termination of any Plan; (f) the receipt by the Borrower or any ERISA Affiliate from the PBGC or a plan administrator of any notice relating to an intention to terminate any Plan or Plans or to appoint a trustee to administer any Plan; (g) the incurrence by the Borrower or any of its ERISA Affiliates of any liability with respect to the withdrawal or partial withdrawal from any Plan or Multiemployer Plan; or (h) the receipt by the Borrower or any ERISA Affiliate of any notice, or the receipt by any Multiemployer Plan from the Borrower or any ERISA Affiliate of any notice, concerning the imposition of Withdrawal Liability or a determination that a Multiemployer Plan is, or is expected to be, insolvent or in reorganization, within the meaning of Title IV of ERISA or in “endangered” or “critical” status (within the meaning of Section 432 of the Code or Section 305 of ERISA); (i) the occurrence of a non-exempt “prohibited transaction” (as defined in Section 4975 of the Code or Section 406 of ERISA) with respect to which the Borrower or any ERISA Affiliate is a “disqualified person” (within the meaning of Section 4975 of the Code) or a “party in interest” (within the meaning of Section 406 of ERISA) or could otherwise be liable; or (j) any other event or condition with respect to a Plan or Multiemployer Plan that could result in liability of the Borrower or any ERISA Affiliate.

“Eurodollar”, when used in reference to any Loan or Borrowing, refers to whether such Loan, or the Loans comprising such Borrowing, are bearing interest at a rate determined by reference to the Adjusted LIBO Rate.

“Event of Default” has the meaning assigned to such term in Article VII.

“Excess Cash Flow” means, for any fiscal year, the sum (without duplication) of:

(a) Consolidated Net Income for such fiscal year, adjusted to exclude any gains or losses attributable to Prepayment Events; plus

(b) depreciation, amortization and other non-cash charges or losses deducted in determining such Consolidated Net Income for such fiscal year (excluding depreciation and amortization related to the rental inventory of the Borrower and the Subsidiaries); plus

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(c) the net amount for such fiscal year, if any, of any increase in the deferred tax liability of the Borrower and the consolidated Subsidiaries or any decrease in the deferred tax asset of the Borrower and the consolidated Subsidiaries, excluding any change in deferred taxes that does not change or offset the taxes payable (or receivable if applicable) account of the Borrower and the consolidated Subsidiaries; minus

(d) the sum of (i) any non-cash gains included in determining such Consolidated Net Income for such fiscal year plus (ii) the net amount for such fiscal year, if any, of any decrease in the deferred tax liability of the Borrower and the consolidated Subsidiaries or any increase in the deferred tax asset of the Borrower and the consolidated Subsidiaries, excluding any change in deferred taxes that does not change or offset the taxes payable (or receivable if applicable) account of the Borrower and the consolidated Subsidiaries; minus

(e) the sum, without duplication, of (i) cash Capital Expenditures for such fiscal year (except to the extent attributable to the incurrence of Capital Lease Obligations or otherwise financed by incurring Indebtedness and except to the extent made with Net Proceeds in respect of sales, transfers or other dispositions of assets) plus (ii) cash consideration paid during such fiscal year to make acquisitions or other investments (other than Permitted Investments and except to the extent financed by incurring Indebtedness); minus

(f) the aggregate principal amount of Long-Term Indebtedness repaid or prepaid by the Borrower and the consolidated Subsidiaries during such fiscal year, excluding (i) Indebtedness in respect of Revolving Loans and Letters of Credit (other than voluntary prepayments of Revolving Loans in an aggregate amount not in excess of $50,000,000 that are accompanied by permanent reductions of the Revolving Commitments in an equal amount), (ii) Term Loans prepaid pursuant to Section 2.12(c), and (iii) repayments or prepayments of Long-Term Indebtedness financed by incurring other Long-Term Indebtedness; minus

(g) the aggregate amount of cash dividends (other than any special dividend or extraordinary dividend) paid on the Borrower’s common stock and the Convertible Preferred Stock during such fiscal year, in each case to the extent permitted by Section 6.08(a) of the Original Credit Agreement and, to the extent not deducted in determining Consolidated Net Income, the amount of cash repurchases of the Borrower’s common stock made pursuant to Section 6.08(a)(iii) of the Original Credit Agreement during such fiscal year.

“Excluded Taxes” means, with respect to the Administrative Agent, any Lender, an Issuing Bank or any other recipient of any payment to be made by or on account of any obligation of the Borrower hereunder, (a) income or franchise taxes imposed on (or measured by) its net income by the United States of America, or by the jurisdiction (or any political subdivision thereof) under the laws of which (or of a political subdivision of which) such recipient is organized or in which its principal office is located or, in the case of any Lender, in which its applicable lending office is located,

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(b) any branch profits taxes imposed by the United States of America or any similar tax imposed by any other jurisdiction described in clause (a) above and (c) in the case of a Foreign Lender (other than an assignee pursuant to a request by the Borrower under Section 2.20(b)), any withholding tax that (i) is in effect and would apply to amounts payable to such Foreign Lender at the time such Foreign Lender becomes a party to this Agreement (or designates a new lending office), except to the extent that such Foreign Lender (or its assignor, if any) was entitled, at the time of designation of a new lending office (or assignment), to receive additional amounts from the Borrower with respect to any withholding tax pursuant to Section 2.18(a), or (ii) is attributable to such Foreign Lender’s failure to comply with Section 2.18(e).

“Federal Funds Effective Rate” means, for any day, the weighted average (rounded upwards, if necessary, to the next 1/100 of 1%) of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published on the next succeeding Business Day by the Federal Reserve Bank of New York, or, if such rate is not so published for any day that is a Business Day, the average (rounded upwards, if necessary, to the next 1/100 of 1%) of the quotations for such day for such transactions received by the Administrative Agent from three Federal funds brokers of recognized standing selected by it.

“Financial Officer” means the chief financial officer, principal accounting officer, treasurer, assistant treasurer or controller of the Borrower.

“Fixed Charge Coverage Ratio” means, for any period, the ratio of (a) the sum of (i) Consolidated EBITDA for such period and (ii) Operating Lease Payments for such period to (b) the sum for such period of (i) Consolidated Interest Expense, (ii) Operating Lease Payments, (iii) Capital Lease Principal Payments and (iv) dividends paid in cash during such period by the Borrower to holders of the Convertible Preferred Stock and other Equity Interests in the Borrower pursuant to Section 6.08(a)(v) or (vi) of the Original Credit Agreement.

“Foreign Lender” means any Lender that is organized under the laws of a jurisdiction other than that in which the Borrower is located. For purposes of this definition, the United States of America, each State thereof and the District of Columbia shall be deemed to constitute a single jurisdiction.

“Foreign Pledge Agreement” means a pledge agreement, debenture or other Security Document securing any of the Obligations that is governed by the law of a jurisdiction other than the United States and is reasonably satisfactory in form and substance to the Administrative Agent.

“Foreign Subsidiary” means any Subsidiary that is organized under the laws of a jurisdiction other than the United States of America or any State thereof or the District of Columbia.

“Franchisees” means a franchisee or licensee of the Borrower or any Subsidiary operating a video rental store under the “Blockbuster” name or another tradename owned by the Borrower or any Subsidiary pursuant to an area development agreement, a franchise agreement or a licensing agreement.

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“GAAP” means generally accepted accounting principles in the United States of America as in effect from time to time, applied on a basis consistent (except for changes concurred with by the Borrower’s independent registered public accounting firm) with the consolidated financial statements of the Borrower contained in the Borrower’s Form 10-K filed with the SEC on March 15, 2004.

“Governmental Authority” means the government of the United States of America, any other nation or any political subdivision thereof, whether state or local, and any agency, authority, instrumentality, regulatory body, court, central bank or other entity exercising executive, legislative, judicial, taxing, regulatory or administrative powers or functions of or pertaining to government.

“Gross Leverage Ratio” means, as of any date, the ratio of (a) the aggregate principal amount of Indebtedness of the Borrower and the Subsidiaries outstanding as of such date, in the amount that would be reflected on a balance sheet of the Borrower and the Subsidiaries prepared as of such date on a consolidated basis in accordance with GAAP, to (b) Consolidated EBITDA for the period of the four consecutive fiscal quarters of the Borrower most recently ended on or prior to such date for which financial statements are available.

“Guarantee” of or by any Person (the “guarantor”) means any obligation, contingent or otherwise, of the guarantor guaranteeing or having the economic effect of guaranteeing any Indebtedness of any other Person (the “primary obligor”) in any manner, whether directly or indirectly, and including any obligation of the guarantor, direct or indirect, (a) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness or to purchase (or to advance or supply funds for the purchase of) any security for the payment thereof, (b) to purchase or lease property, securities or services for the purpose of assuring the owner of such Indebtedness of the payment thereof, (c) to maintain working capital, equity capital or any other financial statement condition or liquidity of the primary obligor so as to enable the primary obligor to pay such Indebtedness or (d) as an account party in respect of any letter of credit or letter of guaranty issued to support such Indebtedness; provided, that the term Guarantee shall not include endorsements for collection or deposit in the ordinary course of business.

“Hazardous Materials” means all explosive or radioactive substances or wastes and all hazardous or toxic substances, wastes or other pollutants, including petroleum or petroleum distillates, polychlorinated biphenyls, radon gas, infectious or medical wastes and all other substances or wastes of any nature regulated pursuant to any Environmental Law.

“Hedging Agreement” means any agreement with respect to any swap, forward, future or derivative transaction or option or similar agreement involving, or settled by reference to, one or more rates, currencies, commodities, equity or debt

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instruments or securities, or economic, financial or pricing indices or measures of economic, financial or pricing risk or value, any similar transaction or any combination of the foregoing transactions; provided that no phantom stock or similar plan providing for payments only on account of services provided by current or former directors, officers, employees or consultants of the Borrower or any Subsidiary shall be a Hedging Agreement.

“Indebtedness” of any Person means, without duplication, (a) all indebtedness and other obligations of such Person (i) for the payment of borrowed money (including, in the case of the Borrower, the obligations of the Borrower for borrowed money under this Agreement), (ii) evidenced by bonds, notes, debentures, loan agreements, credit agreements or similar instruments or agreements or (iii) which are or should be shown on a consolidated balance sheet prepared in accordance with GAAP as debt liabilities, (b) all Capital Lease Obligations of such Person, (c) all obligations of such Person to pay the deferred purchase price of property or services (excluding current accounts payable incurred in the ordinary course of business), (d) all Indebtedness of others secured by a Lien on any assets of such Person, whether or not such Indebtedness is assumed by such Person, (e) all obligations in respect of letters of credit (if drawn or supporting obligations that constitute Indebtedness) and bankers’ acceptances and (f) all Guarantees of payment or collection of any obligation described in clauses (a), (b), (c), (d) and (e) above of any other Person. Notwithstanding anything to the contrary contained herein, the Viacom LCs shall constitute Indebtedness only to the extent that they support, directly or indirectly, Capital Lease Obligations or other obligations that would constitute Indebtedness and to the extent of any unreimbursed LC Disbursement relating thereto; provided such Indebtedness will not in any event be counted in duplication of any associated Indebtedness otherwise covered by the definition of Indebtedness. The Indebtedness of any Person shall include the Indebtedness of any other entity (including any partnership in which such Person is a general partner) to the extent such Person is liable therefor as a result of such Person’s ownership interest in or other relationship with such entity, except to the extent the terms of such Indebtedness provide that such Person is not liable therefor. The Indebtedness of any Person shall not include revenue sharing arrangements or royalty obligations, including those relating to the production, distribution or acquisition of motion pictures, video games or other programming, talent or publishing rights.

“Indemnified Taxes” means Taxes other than Excluded Taxes and Other Taxes.

“Index Debt” means senior, secured, long-term indebtedness for borrowed money of the Borrower that is not Guaranteed by any other Person (other than any Subsidiary) or subject to any other credit enhancement; provided that if the Indebtedness under this Agreement is rated by S&P or Moody’s separately from other Indebtedness that would fall within the foregoing definition, the Index Debt for purposes of ratings established by such rating agency shall be the Indebtedness of the Borrower under this Agreement.

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“Information Memorandum” means the Confidential Information Memorandum dated July 2004 relating to the Borrower and the Transactions, together with (a) the written presentation materials and projections dated April 21, 2005, and the related written projections dated April 20, 2005, in each case delivered in connection with a conference call on April 21, 2005 among the Borrower and the Lenders, (b) the written presentation materials and projections dated August 2, 2005, delivered in connection with a conference call on August 2, 2005 among the Borrower and the Lenders, (c) the written presentation materials and projections dated October 25, 2005, and the related written projections dated October 25, 2005, in each case delivered in connection with a conference call on October 25, 2005 among the Borrower and the Lenders, (d) the written presentation materials delivered in connection with a conference call on March 20, 2009 among the Borrower and the Lenders and (e) the written presentation materials and projections delivered in connection with a conference call on March 23, 2009 among the Borrower and the Lenders.

“Interest Election Request” means a request by the Borrower to convert or continue a Revolving Borrowing or Term Borrowing in accordance with Section 2.08, which, if in writing, shall be substantially in the form attached as Exhibit C to the Original Credit Agreement (or any other form approved by the Administrative Agent).

“Interest Payment Date” means (a) with respect to any ABR Term Loan, the last day of each March, June, September and December, (b) with respect to any Eurodollar Term Loan, the last day of the Interest Period applicable to the Borrowing of which such Loan is a part and, in the case of a Eurodollar Borrowing with an Interest Period of more than three months’ duration, each day prior to the last day of such Interest Period that occurs at intervals of three months’ duration after the first day of such Interest Period, and (c) with respect to any Revolving Loan, the last day of each calendar month.

“Interest Period” means, with respect to any Eurodollar Borrowing, the period commencing on the date of such Borrowing and ending on the numerically corresponding day in the calendar month that is one, two, three or six months thereafter (or nine months or 12 months thereafter or the day that is seven days or 14 days thereafter if, at the time of the relevant Borrowing, Eurodollar funding for such a period is available to all Lenders participating therein), as the Borrower may elect; provided that (a) if any Interest Period for a Eurodollar Borrowing would end on a day other than a Business Day, such Interest Period shall be extended to the next succeeding Business Day unless such next succeeding Business Day would fall in the next calendar month, in which case such Interest Period shall end on the next preceding Business Day, and (b) any Interest Period for a Eurodollar Borrowing that commences on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the last calendar month of such Interest Period) shall end on the last Business Day of the last calendar month of such Interest Period. For purposes hereof, the date of a Borrowing initially shall be the date on which such Borrowing is made and thereafter shall be the effective date of the most recent conversion or continuation of such Borrowing.

“Investment” means purchasing, holding or acquiring (including pursuant to any merger or consolidation with any Person that was not a wholly owned Subsidiary

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prior to such merger) any Equity Interests in or evidences of indebtedness or other securities (including any option, warrant or other right to acquire any of the foregoing) of, or making or permitting to exist any loans or advances to, guaranteeing any obligations of, or making or permitting to exist any investment or any other interest in, any other Person, or purchasing or otherwise acquiring (in one transaction or a series of transactions) any assets of any other Person constituting a business unit. The amount, as of any date of determination, of any Investment shall be the original cost of such Investment (including any Indebtedness assumed in connection therewith), plus the cost of all additions, as of such date, thereto, and minus the amount, as of such date, of any portion of such Investment repaid to the investor in cash as a repayment of principal or a return of capital, as the case may be, but without any other adjustment for increases or decreases in value of, or write-ups, write-downs or write-offs with respect to, such Investment.

“Issuing Banks” means JPMorgan Chase Bank, N.A., Credit Suisse First Boston, Citicorp North America, Inc. and Wachovia Bank, National Association, in each case in its capacity as an issuer of one or more Letters of Credit.

“Issuing Banks Agent” means JPMorgan Chase Banks, N.A., in its capacity as the issuing banks’ agent hereunder, and its successors in such capacity as provided in Article VIII.

“Issuing Bank Fee” means the issuing bank fee payable to the Issuing Banks pursuant to Section 2.13(a).

“LC Cash Collateral” means, at any time, the funds on deposit in or credited to the LC Cash Collateral Account at such time.

“LC Cash Collateral Account” means a blocked deposit account established by the Borrower with JPMorgan Chase Bank, N.A., as the Issuing Banks Agent, prior to the Restatement Effective Date to be the “LC Cash Collateral Account” hereunder or, in the event a successor Issuing Banks Agent shall have been appointed pursuant to Article VIII, a blocked deposit account established by the Borrower with such successor Issuing Banks Agent to be the “LC Cash Collateral Account” hereunder.

“LC Cash Collateral Deficiency” shall exist at any time if the value of the LC Cash Collateral at such time shall be less than 105.00% of the aggregate LC Exposure of all the Issuing Banks at such time, and the amount of such deficiency shall be the amount of the LC Cash Collateral Deficiency at such time.

“LC Cash Collateral Excess” shall exist at any time if the value of the LC Cash Collateral at such time shall exceed by more than 5.00% the Aggregate LC Obligations at such time, and the amount of such excess shall be the amount of the LC Cash Collateral Excess at such time.

“LC Disbursement” means a payment made by an Issuing Bank pursuant to a Letter of Credit.

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“LC Exposure” means, with respect to any Issuing Bank at any time, the sum of (a) the aggregate undrawn amount of all Letters of Credit issued by such Issuing Bank that are outstanding at such time and (b) the aggregate amount of all LC Disbursements made by such Issuing Bank to the extent such LC Disbursements have not yet been reimbursed by or on behalf of the Borrower at such time.

“Lenders” means the Persons listed on Schedule 2.01 to the Original Credit Agreement and any other Person that shall have become a party hereto pursuant to an Assignment and Assumption or the Amendment Agreement, other than any such Person that ceases to be a party hereto pursuant to an Assignment and Assumption.

“Letter of Credit” means each letter of credit issued pursuant to the Original Credit Agreement prior to, and outstanding on, the Restatement Effective Date that is set forth on Schedule 2.06 to the Amendment Agreement.

“Leverage Ratio” means, on any date, the ratio of (a) Total Indebtedness as of such date to (b) Consolidated EBITDA for the period of the four consecutive fiscal quarters of the Borrower most recently ended on or prior to such date for which financial statements are available or, if earlier, are required to be delivered hereunder.

“LIBO Rate” means, with respect to any Eurodollar Borrowing for any Interest Period, the rate appearing on the Reuters “LIBOR01” screen displaying British Bankers’ Association Interest Settlement Rates (or on any successor or substitute screen provided by Reuters, or any successor to or substitute for such service, providing rate quotations comparable to those currently provided on such screen, as determined by the Administrative Agent from time to time for purposes of providing quotations of interest rates applicable to dollar deposits in the London interbank market) at approximately 11:00 a.m., London time, two Business Days prior to the commencement of such Interest Period, as the rate for dollar deposits with a maturity comparable to such Interest Period. In the event that such rate is not available, then the “LIBO Rate” with respect to such Eurodollar Borrowing for such Interest Period shall be the rate per annum at which dollar deposits are offered by the principal office of the Administrative Agent in London to prime banks in the London interbank market at approximately 11:00 a.m., London time, two Business Days prior to the commencement of such Interest Period with a maturity equal to such Interest Period; provided, however, that if the LIBO Rate determined as provided above with respect to any Eurodollar Revolving Borrowing for any Interest Period would be less than 3.50% per annum, then the Eurodollar Rate with respect to such Eurodollar Revolving Borrowing for such Interest Period shall be deemed to be 3.50% per annum.

“Lien” means, with respect to any asset, (a) any mortgage, deed of trust, lien, pledge, hypothecation, encumbrance, charge or security interest in, on or of such asset, (b) the interest of a vendor or a lessor under any conditional sale agreement, capital lease or title retention agreement (or any financing lease having substantially the same economic effect as any of the foregoing) relating to such asset and (c) in the case of securities, any purchase option, call or similar right of a third party with respect to such securities.

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“Loan Documents” means this Agreement, the Amendment Agreement and the Security Documents.

“Loan Parties” means the Borrower and the Subsidiary Loan Parties.

“Loans” means the loans made by the Lenders to the Borrower pursuant to this Agreement.

“Long-Term Indebtedness” means any Indebtedness (including in respect of Capital Lease Obligations) that, in accordance with GAAP, constitutes (or, when incurred, constituted) a long-term liability.

“Material Adverse Effect” means any event, condition or circumstance that has had or would reasonably be expected to have a material adverse effect on (a) the business, operations, assets or financial condition of the Borrower and the Subsidiaries, taken as a whole, (b) the ability of the Loan Parties, taken as a whole, to perform any of their material obligations under any Loan Document or (c) the material rights of or benefits available to the Lenders under any Loan Document.

“Material Indebtedness” means (a) Indebtedness (other than the Loans, Letters of Credit and Guarantees under the Loan Documents) of any one or more of the Borrower and the Subsidiaries, in an aggregate principal amount exceeding $25,000,000 or (b) obligations in respect of one or more Hedging Agreements of any one or more of the Borrower and the Subsidiaries in an aggregate principal amount exceeding $5,000,000. For purposes of determining Material Indebtedness, the “principal amount” of the obligations of the Borrower or any Subsidiary in respect of any Hedging Agreement at any time shall be the maximum aggregate amount (giving effect to any netting agreements) that the Borrower or such Subsidiary would be required to pay if such Hedging Agreement were terminated at such time.

“Material Subsidiary” means, at any date, for purposes of Section 3.12 and clauses (h), (i) and (j) of Article VII, any Subsidiary, or any group of Subsidiaries in respect of which the events referred to in any such clause have occurred, which (a) had aggregate revenues during the period of four consecutive fiscal quarters of the Borrower most recently ended on or prior to such date in respect of which financial statements have been delivered pursuant to Section 5.01 of 5% or more of total consolidated revenues of the Borrower and the Subsidiaries for such period or (b) had total assets as of the last day of the most recent fiscal quarter of the Borrower in respect of which financial statements have been delivered pursuant to Section 5.01 equal to 5% or more of the total consolidated assets of the Borrower and the Subsidiaries as of such date (in the case of any group of Subsidiaries taken together, calculated on a combined basis in accordance with GAAP).

“Moody’s” means Moody’s Investors Service, Inc.

“Mortgage” means any mortgage, deed of trust, assignment of leases and rents, leasehold mortgage or other security document granting a Lien on any real property and improvements thereto to secure the Obligations. Each Mortgage shall be substantially in the form specified in the Original Credit Agreement, with such changes thereto as may be appropriate to accommodate local legal requirements.

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“Mortgaged Property” means each parcel of real property and improvements thereto located in the United States and owned by a Loan Party with respect to which a Mortgage is required to be granted pursuant to Section 5.12.

“Multiemployer Plan” means a multiemployer plan as defined in Section 4001(a)(3) of ERISA.

“Net Proceeds” means, with respect to any event, (a) the cash proceeds received in respect of such event (including any cash received in respect of any non-cash proceeds or escrowed amounts, but only as and when received, and excluding any portion of any such cash proceeds that would be included in determining Excess Cash Flow for the fiscal year of the Borrower in which such event occurs or such cash proceeds are received), net of (b) the sum, without duplication, of (i) all fees and out-of-pocket expenses paid by the Borrower and the Subsidiaries to third parties (other than Affiliates) in connection with such event and (ii) the amount of all taxes paid (or estimated to be payable) by the Borrower and the Subsidiaries directly attributable to such event (as determined reasonably and in good faith by a Financial Officer). For purposes of this definition, proceeds received by any Subsidiary of the Borrower that is not a wholly-owned Subsidiary shall be deemed to be Net Proceeds received by the Borrower only in an amount proportionate to the Equity Interest owned, directly or indirectly, by the Borrower in such Subsidiary.

“Non-Cash Non-Recurring Charges” means, for any period, all non-cash non-recurring charges (to the extent such charges are not associated with asset sales or disposition of businesses described in clause (e) of the definition of Consolidated EBITDA) incurred during such period, including, without limitation, all non-cash charges in respect of (a) provisions for losses and additions to valuation allowances, (b) provisions for restructuring, litigation and environmental reserves and losses on the disposition of businesses, (c) pension settlement charges, (d) provisions required by SFAS 142 or SFAS 143 or any successor pronouncements thereto and (e) any non-cash compensation charge or other non-cash expenses or charges arising from the grant of or issuance or repricing of stock, stock options or other equity-based awards or any amendment, modification, substitution or change of any such stock, stock options or other equity-based awards, in each case in connection with employee plans or other compensation arrangements.

“Non-Cash Non-Recurring Gains” means, for any period, all non-cash non-recurring gains and all other non-cash gains (to the extent such other non-cash gains are not realized in the ordinary course of business or do not constitute ordinary course operating income and are otherwise not associated with asset sales or dispositions of businesses described in clause (e) of the definition of Consolidated EBITDA), realized during such period, including refranchising gains.

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“Non-Viacom LC Cash Collateral Excess” means, at any time, the portion, if any, of the LC Cash Collateral Excess at such time that does not represent a Viacom LC Cash Collateral Excess.

“Obligations” means (a) the obligations of the Borrower hereunder to pay the principal of and interest on the Loans, to reimburse the LC Disbursements and to pay all other monetary obligations of the Borrower, including in respect of fees, costs, expenses and indemnities, to the Lenders in their capacities as such under this Agreement or any other Loan Document and (b) all other “Obligations”, as such term is defined in the Collateral Agreement.

“Operating Lease Payments” means, for any period, amounts recorded or required to be recorded as operating lease expenses on consolidated financial statements of the Borrower prepared in accordance with GAAP plus, to the extent not otherwise included therein, payments by the Borrower or any Subsidiary during such period pursuant to Guarantees of operating leases of Franchisees or other Persons.

“Original Credit Agreement” means the Credit Agreement dated as of August 20, 2004, as amended and restated as of November 4, 2005, and as amended prior to the Restatement Effective Date, among the Borrower, the Lenders party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent and Collateral Agent, and the other parties thereto.

“Original Effective Date” means August 20, 2004.

“Other Taxes” means any and all present or future recording, stamp, documentary, excise, transfer, sales, property or similar taxes, charges or levies arising from any payment made by or on account of any obligation of the Borrower or any Subsidiary Loan Party under any Loan Document or from the execution, delivery or enforcement of, or otherwise with respect to, any Loan Document.

“PBGC” means the Pension Benefit Guaranty Corporation referred to and defined in ERISA and any successor entity performing similar functions.

“Permitted Encumbrances” means:

(a) Liens imposed by law for taxes, assessments, or other governmental charges or levies that are not yet due or are being contested in compliance with Section 5.05;

(b) carriers’, warehousemen’s, mechanics’, materialmen’s, repairmen’s, landlord’s and other like Liens imposed by law, arising in the ordinary course of business and securing obligations that are not overdue by more than 30 days or are being contested in compliance with Section 5.05, or which, individually or in the aggregate, would not reasonably be expected to result in a Material Adverse Effect;

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(c) pledges and deposits made in the ordinary course of business in compliance with workers’ compensation, unemployment insurance and other social security laws or similar regulations;

(d) judgment liens in respect of judgments that do not constitute an Event of Default under clause (k) of Article VII; provided that no such judgment lien shall have equal or greater priority than the Liens created under the Loan Documents;

(e) performance bonds made or similar obligations incurred in the ordinary course of business, and appeal bonds in connection with judgments that do not constitute an Event of Default under clause (k) of Article VII or deposits with the court to support, or deposits made to secure obligations under letters of credit provided to support, obligations of the Borrower or any Subsidiary in respect of any such judgment pending its appeal; provided that the aggregate amount of such bonds, obligations and deposits does not exceed $5,000,000 at any time;

(f) easements, zoning restrictions, rights-of-way and similar encumbrances on real property imposed by law or arising in the ordinary course of business that do not secure any monetary obligations and do not materially detract from the value of the affected property or interfere with the ordinary conduct of business of the Borrower or any Subsidiary; and

(g) banker’s liens, rights of setoff or similar rights and remedies as to deposit accounts or other funds maintained with depository institutions; provided that such deposit accounts or funds are not established or deposited for the purpose of providing collateral for any Indebtedness and are not subject to restrictions on access by the Borrower or any Subsidiary in excess of those required by applicable banking regulations;

provided that the term “Permitted Encumbrances” shall not include any Lien securing Indebtedness.

“Permitted Investments” means:

(a) direct obligations of, or obligations the principal of and interest on which are unconditionally guaranteed by, the United States of America (or by any agency thereof to the extent such obligations are backed by the full faith and credit of the United States of America), in each case maturing within one year from the date of acquisition thereof;

(b) Investments in commercial paper maturing within 270 days from the date of acquisition thereof and having, at such date of acquisition, the highest credit rating obtainable from S&P or from Moody’s;

(c) Investments in certificates of deposit, banker’s acceptances and time deposits maturing within 360 days from the date of acquisition thereof issued or

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guaranteed by or placed with, and money market deposit accounts issued or offered by, any domestic office of any commercial bank organized or licensed under the laws of the United States of America or any State thereof which has a combined capital and surplus and undivided profits of not less than $500,000,000;

(d) fully collateralized repurchase agreements with a term of not more than 30 days for securities described in clause (a) above and entered into with a financial institution satisfying the criteria described in clause (c) above; and

(e) Investments in money market mutual funds that (i) comply with the criteria set forth in Rule 2a-7 adopted by the SEC under the Investment Company Act of 1940, (ii) are rated AAA by S&P and Aaa by Moody’s and (iii) have portfolio assets in excess of $2,000,000,000.

“Permitted Store Sales” means the sale, transfer, assignment, sublease or other disposition by the Borrower or any Subsidiary of all or any portion of any Store or of all or any portion of any properties and leasehold interests used or previously used by the Borrower and/or any Subsidiary to operate any Store (and associated inventory, equipment and fixtures), including in connection with the sale or disposition of all or any Stores or any portions thereof in a given geographic region; provided that any such sale, transfer, assignment, sublease or disposition is in the ordinary course of business and consistent with past practice; and provided further that “Permitted Store Sales” will be deemed to exclude assets transferred by the Borrower and the Subsidiaries as a result of Permitted Store Swaps.

“Permitted Store Swap” means the exchange of (a) assets of the Borrower and the Subsidiaries all or substantially all of which consist of Stores and related equipment and inventory for (b) assets of any other Person all or substantially all of which consist of Stores and related equipment and inventory; provided that the value of the assets received by the Borrower and the Subsidiaries in any such exchange are of reasonably equivalent value as the assets transferred by the Borrower and the Subsidiaries in any such exchange.

“Permitted Subordinated Indebtedness” means Indebtedness of the Borrower the payment of which is subordinated to the Borrower’s obligations in respect of the Obligations on terms no less favorable in any significant respect to the Lenders than those applicable to the Subordinated Debt, and which Indebtedness (a) is unsecured, (b) is not Guaranteed by any Subsidiary that is not a Subsidiary Loan Party and, to the extent Guaranteed by any Subsidiary Loan Party, such Guarantee is subordinated to such Subsidiary Loan Party’s obligations in respect of the Obligations on terms no less favorable in any significant respect to the Lenders than those applicable to the Subsidiary Guarantees of the Subordinated Debt, and (c) does not mature or require any amortization payment to be made prior to the date that is six months after the Tranche B Maturity Date.

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“Person” means any natural person, corporation, limited liability company, trust, joint venture, association, company, partnership, Governmental Authority or other entity.

“Plan” means any employee pension benefit plan (other than a Multiemployer Plan) subject to the provisions of Title IV of ERISA or Section 412 of the Code or Section 302 of ERISA, and in respect of which the Borrower or any ERISA Affiliate is (or, if such plan were terminated, would under Section 4069 of ERISA be deemed to be) an “employer” as defined in Section 3(5) of ERISA.

“Prepayment Event” means any sale, transfer, assignment, sublease or other disposition (including pursuant to a sale and leaseback transaction) of any property or asset of the Borrower or any Subsidiary (including any Equity Interests in Subsidiaries), other than (i) sales, transfers or dispositions referred to in clauses (a) and (b) of Section 6.05 and subleases of Stores in the ordinary course of business and (ii) sales, transfers, assignments and other dispositions, other than those made in reliance on clause (e) of Section 6.05, resulting in aggregate cumulative Net Proceeds received after the Original Effective Date not exceeding $50,000,000.

“Prime Rate” means the rate of interest per annum publicly announced from time to time by JPMorgan Chase Bank, N.A. as its prime rate in effect at its principal office in New York City. Each change in the Prime Rate shall be effective from and including the date such change is publicly announced as being effective.

“Pro Rata Share” means, with respect to any Issuing Bank at any time, the product of (a) the value of the LC Cash Collateral at such time and (b) a fraction the numerator of which is the LC Exposure of such Issuing Bank at such time and the denominator of which is the aggregate LC Exposure of all the Issuing Banks at such time.

“Refinancing Indebtedness” means Indebtedness issued or incurred (including by means of the extension or renewal of existing Indebtedness) to extend, renew or refinance existing Indebtedness (“Refinanced Debt”); provided that (a) such extending, renewing or refinancing Indebtedness is in an original aggregate principal amount not greater than the aggregate principal amount of, and unpaid interest on, the Refinanced Debt plus the amount of any premiums paid thereon and fees and expenses associated therewith, (b) such Indebtedness has the same or later maturity and the same or longer weighted average life than the Refinanced Debt, (c) if the Refinanced Debt or any Guarantees thereof are subordinated to the Obligations, such Indebtedness and any Guarantees thereof are subordinated to the Obligations on terms no less favorable in any significant respect to the holders of the Obligations than the subordination terms of such Refinanced Debt or Guarantees thereof (and no Loan Party that has not guaranteed such Refinanced Debt guarantees such Indebtedness), (d) such Indebtedness contains covenants and events of default and is benefited by Guarantees (if any) which, taken as a whole, are not materially less favorable to the Borrower than the covenants and events of default of or Guarantees (if any) in respect of such Refinanced Debt, (e) if such Refinanced Debt or any Guarantees thereof are secured, such Indebtedness and any Guarantees thereof are either unsecured or secured only by such assets as secured the

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Refinanced Debt and Guarantees thereof and (f) if such Refinanced Debt and any Guarantees thereof are unsecured, such Indebtedness and Guarantees thereof are also unsecured.

“Register” has the meaning assigned to such term in Section 9.04(c).

“Related Parties” means, with respect to any specified Person, such Person’s Affiliates and the respective directors, officers, employees, agents and advisors of such Person and such Person’s Affiliates.

“Required Lenders” means, at any time, Lenders having Revolving Exposures, Term Loans and unused Commitments representing more than 50% of the sum of the total Revolving Exposures, outstanding Term Loans and unused Commitments at such time; provided that, for purposes of declaring the Loans to be due and payable pursuant to Article VII, and for all purposes after the Loans become due and payable pursuant to Article VII or the Commitments expire or terminate, “Required Lenders” shall mean Lenders having outstanding Term Loans and Revolving Exposures representing more than 50% of the sum of the total outstanding Term Loans and Revolving Exposures; provided further that, for purposes of this definition, if any Lender has defaulted in its obligation to fund any Loan hereunder, then the unused Commitments of such Lender shall be disregarded for all purposes in determining the Required Lenders.

“Restatement Effective Date” has the meaning assigned to such term in the Amendment Agreement.

“Restricted Payment” means any dividend or other distribution (whether in cash, securities or other property) to any Person other than the Borrower or any Loan Party with respect to any Equity Interests in the Borrower or any Subsidiary, or any payment (whether in cash, securities or other property), including any sinking fund or similar deposit, on account of the purchase, redemption, retirement, acquisition, cancellation or termination of any Equity Interests in the Borrower or any Subsidiary or any option, warrant or other right to acquire any such Equity Interests in the Borrower or any Subsidiary.

“Revolving Commitment” means, with respect to each Lender, the commitment, if any, of such Lender to make Revolving Loans hereunder on the Restatement Effective Date, expressed as an amount representing the maximum principal amount of the Revolving Loans to be made by such Lender hereunder, as such commitment may be (a) reduced from time to time pursuant to Section 2.09 and (b) reduced or increased from time to time pursuant to assignments by or to such Lender pursuant to Section 9.04. The initial amount of each Lender’s Revolving Commitment is set forth on Schedule 2.01 to the Amendment Agreement, or in the Assignment and Assumption pursuant to which such Lender shall have assumed its Revolving Commitment, as applicable. The initial aggregate amount of the Lenders’ Revolving Commitments is $250,000,000.

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“Revolving Exposure” means, with respect to any Lender at any time, the aggregate principal amount of such Lender’s Revolving Loans outstanding at such time.

“Revolving Lender” means a Lender with a Revolving Commitment or, if the Revolving Commitments have terminated or expired, an outstanding Revolving Loan.

“Revolving Loan” means a Loan made pursuant to Section 2.01(a).

“Revolving Maturity Date” means September 30, 2010.

“Revolving Prepayment Event” means:

(a) the incurrence by the Borrower or any Subsidiary of any Indebtedness, other than Indebtedness permitted to be incurred under clauses (iv), (ix), (x), (xi), (xii) and (xiii) of Section 6.01(a);

(b) any issuance by the Borrower of any Equity Interests, or the receipt by the Borrower of any capital contribution, other than any issuance of common stock in the Borrower to management or employees of the Borrower or any Subsidiary under any employee stock option or stock purchase plan or employee benefit plan; or

(c) any receipt by the Borrower or any Subsidiary of (i) cash or cash equivalents on account of purchase price adjustments, tax refunds, judgments and litigation settlements, pension plan reversions and indemnity payments, in each case resulting in aggregate Net Proceeds of $500,000 or more, and (ii) cash or cash equivalents on account of any Viacom Beneficiary Cash Collateral Release, but, in the case of this clause (ii), only to the extent (A) the sum of (x) the aggregate fair market value of cash and cash equivalents received by the Borrower and the Subsidiaries on account of all the Viacom Beneficiary Cash Collateral Releases and (y) the aggregate amount of the LC Cash Collateral that has been released or that, but for the occurrence of any event specified in Section 2.06(h)(iv) restricting such release, would have been released to the Borrower pursuant to Section 2.06(h)(iv) exceeds (B) $52,500,000.

“S-4” means the Form S-4 registration statement filed with the SEC, as amended prior to the Original Effective Date, pursuant to which Viacom exchanged shares of Class A Common Stock and shares of Class B Common Stock for shares of Class A common stock, par value $0.01 per share, of Viacom and shares of Class B common stock, par value $0.01 per share, of Viacom.

“S&P” means Standard & Poor’s Rating Services, a division of The McGraw-Hill Companies, Inc.

“Sale and Leaseback Transaction” has the meaning assigned to such term in Section 6.06.

“SEC” means the Securities and Exchange Commission.

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“SEC Documents” has the meaning assigned to such term in Section 3.04(b).

“Secured Party” has the meaning assigned to such term in the Collateral Agreement.

“Security Agreement” means the Security Agreement dated as of August 8, 2005, among the Borrower, the Subsidiary Loan Parties and the Administrative Agent, together with all supplements thereto.

“Security Documents” means the Collateral Agreement, the Security Agreement, the Foreign Pledge Agreements, the Mortgages, the Account Control Agreement and each other security agreement or other instrument or document executed and delivered pursuant to Section 5.12.

“Significant Foreign Subsidiary” means, on any date, each of Blockbuster Canada Co, Blockbuster Entertainment (Ireland) Limited, Blockbuster Holdings Ireland, Blockbuster de Mexico S.A. de C.V., Blockbuster UK Limited and any other Foreign Subsidiary (a) Equity Interests in which are directly owned by any Loan Party and (b) a substantial portion of the consolidated revenues of which are derived from its operations and the operations of its subsidiaries in Canada, the United Kingdom, Ireland, Mexico or Australia.

“Split-Off” means the distribution by Viacom of shares of Class A Common Stock and Class B Common Stock described in the S-4.

“Split-Off Agreement” means the agreement referred to in clause (a) of the definition of Viacom Agreements.

“Split-Off Date” means the date on which Viacom has distributed, in connection with the Split-Off, shares of Class A Common Stock or Class B Common Stock which in the aggregate represent a distribution of “control” as defined in Section 368(c) of the Code.

“Statutory Reserve Rate” means a fraction (expressed as a decimal), the numerator of which is the number one and the denominator of which is the number one minus the aggregate of the maximum reserve percentages (including any marginal, special, emergency or supplemental reserves) expressed as a decimal established by the Board to which the Administrative Agent is subject for eurocurrency funding (currently referred to as “Eurocurrency Liabilities” in Regulation D of the Board). Such reserve percentages shall include those imposed pursuant to such Regulation D. Eurodollar Loans shall be deemed to constitute eurocurrency funding and to be subject to such reserve requirements without benefit of or credit for proration, exemptions or offsets that may be available from time to time to any Lender under such Regulation D or any comparable regulation. The Statutory Reserve Rate shall be adjusted automatically on and as of the effective date of any change in any reserve percentage.

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“Store” means a retail outlet owned or operated by a Person for the sale, rental or trade of video products (including videocassettes, DVDs and any technological successors thereto) and/or game products, and associated or other retail inventory of such Person.

“Subordinated Debt” means the 9% Senior Subordinated Notes due 2012 in the aggregate principal amount of $300,000,000, and the Indebtedness represented thereby.

“Subordinated Debt Documents” means the indenture under which the Senior Subordinated Debt is issued and all other instruments, agreements and other documents evidencing or governing the Senior Subordinated Debt or providing for any Guarantee or other right in respect thereof.

“subsidiary” means, with respect to any Person (the “parent”) at any date, any corporation, limited liability company, partnership, association or other entity the accounts of which would be consolidated with those of the parent in the parent’s consolidated financial statements if such financial statements were prepared in accordance with GAAP as of such date, as well as any other corporation, limited liability company, partnership, association or other entity of which securities or other ownership interests representing more than 50% of the equity or more than 50% of the ordinary voting power or, in the case of a partnership, more than 50% of the general partnership interests are, as of such date, owned, controlled or held by the parent and/or one or more subsidiaries of the parent.

“Subsidiary” means any subsidiary of the Borrower.

“Subsidiary Loan Party” means each Subsidiary that is not a Foreign Subsidiary; provided that for purposes of Article VI, and each other provision hereof where the context so requires, a Subsidiary shall be deemed to be a “Subsidiary Loan Party” only if, and for so long as, the requirements of clause (a) of the definition of the term “Collateral and Guarantee Requirement” shall have been satisfied with respect to such Subsidiary.

“Swingline Lender” means JPMorgan Chase Bank, N.A., in its capacity as lender of swingline loans under the Original Credit Agreement.

“Taxes” means any and all present or future taxes, levies, imposts, duties, deductions, charges or withholdings imposed by any Governmental Authority, including any interest, additions to tax or penalties applicable thereto.

“Term Loans” means Tranche A Term Loans and Tranche B Term Loans.

“Total Indebtedness” means, as of any date, (a) the aggregate principal amount of Indebtedness of the Borrower and the Subsidiaries outstanding as of such date, in the amount that would be reflected on a balance sheet of the Borrower and the Subsidiaries prepared as of such date on a consolidated basis in accordance with GAAP, less (b) the amount of cash and Permitted Investments of the Borrower and the

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Subsidiaries that would be reflected on such balance sheet as of such date (other than any such cash or Permitted Investments that constitutes “restricted cash” or is otherwise subject to any Lien (other than any Lien created under the Loan Documents or any Permitted Encumbrance of the type described in clause (g) of the definition of such term) in favor of any third party).

“Tranche A Commitment” has the meaning assigned to such term in the Original Credit Agreement. The aggregate amount of the Lenders’ Tranche A Commitments as of the Original Effective Date was $100,000,000.

“Tranche A Lender” means a Lender with an outstanding Tranche A Term Loan.

“Tranche A Maturity Date” means August 20, 2009.

“Tranche A Term Loans” means the Tranche A Term Loans made by the Lenders to the Borrower on the Original Effective Date pursuant to the Original Credit Agreement and outstanding on the Restatement Effective Date.

“Tranche B Commitment” has the meaning assigned to such term in the Original Credit Agreement. The aggregate amount of the Lenders’ Tranche B Commitments as of the Original Effective Date was $550,000,000.

“Tranche B Lender” means a Lender with an outstanding Tranche B Term Loan.

“Tranche B Maturity Date” means August 20, 2011.

“Tranche B Term Loans” means the Tranche B Term Loans made by the Lenders to the Borrower on the Original Effective Date pursuant to the Original Credit Agreement and outstanding on the Restatement Effective Date.

“Transactions” means the execution, delivery and performance by each Loan Party of the Loan Documents to which it is to be a party, the borrowing of Loans, the use of the proceeds thereof and the issuance of Letters of Credit hereunder.

“Type”, when used in reference to any Loan or Borrowing, refers to whether the rate of interest on such Loan, or on the Loans comprising such Borrowing, is determined by reference to the Adjusted LIBO Rate or the Alternate Base Rate.

“Viacom” means Viacom Inc., a Delaware corporation.

“Viacom Agreements” means (a) the Amended and Restated Initial Public Offering and Split-Off Agreement, dated as of June 18, 2004, among Viacom, Viacom International and the Borrower, (b) the Amended and Restated Release and Indemnification Agreement, dated as of June 18, 2004, between Viacom and the Borrower, (c) the Amended and Restated Transition Services Agreement, dated as of June 18, 2004, between Viacom and the Borrower, (d) the Amended and Restated

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Registration Rights Agreement, dated as of June 18, 2004, between Viacom and the Borrower, (e) the Amended and Restated Tax Matters Agreement, dated as of June 18, 2004, between Viacom and the Borrower, and (f) the Judgment Sharing Agreement, dated as of June 18, 2004 among Paramount Pictures Corporation, Sumner M. Redstone, Viacom and the Borrower, as each may be amended from time to time to the extent permitted by Section 6.11.

“Viacom International” means Viacom International, Inc., a Delaware corporation.

“Viacom LC” means each Letter of Credit that is designated as a “Viacom LC” on Schedule 2.06 to the Amendment Agreement.

“Viacom LC Cash Collateral Excess” means, at any time, (a) the portion, if any, of the LC Cash Collateral Excess at such time that is attributable to a cancelation or expiration of any Viacom LC or a permanent reduction in the amount of any Viacom LC, less (b) the excess, if any, at such time of (i) $52,500,000 over (ii) the sum of (A) the aggregate amount of the LC Cash Collateral that has been released or that, but for the occurrence of any event specified in Section 2.06(h)(iv) restricting such release, would have been released to the Borrower pursuant to Section 2.06(h)(iv) and (B) the aggregate fair market value of cash and cash equivalents received by the Borrower and the Subsidiaries on account of all the Viacom Beneficiary Cash Collateral Releases.

“Viacom Beneficiary Cash Collateral Release” means, in the event any drawing under any Viacom LC shall have been made, any remittance or other refunding by Viacom or Viacom International, or any of their Affiliates, to the Borrower or any Subsidiary of all or any part of the amounts drawn.

“Withdrawal Liability” means liability to a Multiemployer Plan as a result of a complete or partial withdrawal from such Multiemployer Plan, as such terms are defined in Part I of Subtitle E of Title IV of ERISA.

SECTION 1.02. Classification of Loans and Borrowings. For purposes of this Agreement, Loans may be classified and referred to by Class (e.g., a “Revolving Loan”) or by Type (e.g., a “Eurodollar Loan”) or by Class and Type (e.g., a “Eurodollar Revolving Loan”). Borrowings also may be classified and referred to by Class (e.g., a “Revolving Borrowing”) or by Type (e.g., a “Eurodollar Borrowing”) or by Class and Type (e.g., a “Eurodollar Revolving Borrowing”).

SECTION 1.03. Terms Generally. The definitions of terms herein shall apply equally to the singular and plural forms of the terms defined. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. The words “include”, “includes” and “including” shall be deemed to be followed by the phrase “without limitation”. The word “will” shall be construed to have the same meaning and effect as the word “shall”. Unless the context requires otherwise, (a) any definition of or reference to any agreement, instrument or other document herein shall be construed as referring to such agreement, instrument or other

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document as from time to time amended, supplemented or otherwise modified (subject to any restrictions on such amendments, supplements or modifications set forth herein), (b) any reference herein to any Person shall be construed to include such Person’s successors and assigns, (c) the words “herein”, “hereof” and “hereunder”, and words of similar import, shall be construed to refer to this Agreement in its entirety and not to any particular provision hereof, (d) all references herein to Articles, Sections, Exhibits and Schedules shall be construed to refer to Articles and Sections of, and Exhibits and Schedules to, this Agreement and (e) the words “asset” and “property” shall be construed to have the same meaning and effect and to refer to any and all tangible and intangible assets and properties, including cash, securities, accounts and contract rights. Each reference in this Agreement to a fiscal quarter ended March 31, June 30, September 30 or December 31 and to a fiscal year ended December 31 shall mean the fiscal quarter, or fiscal year, as applicable, ended on or around such date.

SECTION 1.04. Accounting Terms; GAAP. Except as otherwise expressly provided herein, all accounting terms and all terms of a financial nature shall be interpreted, all accounting determinations thereunder shall be made, and all financial statements required to be delivered thereunder shall be prepared, in accordance with GAAP; provided that, if the Borrower notifies the Administrative Agent that the Borrower requests an amendment of any financial covenant to eliminate or modify the effect of any change after the Original Effective Date in GAAP or in the application thereof on the operation of such covenant (or if the Administrative Agent notifies the Borrower that the Required Lenders request an amendment of the financial covenants for such purpose), regardless of whether any such notice is given before or after such change in GAAP or in the application thereof, then the Borrower’s compliance with such covenant shall be determined on the basis of GAAP as in effect and applied immediately before the relevant change became effective, until either such notice is withdrawn or such covenant is amended in a manner satisfactory to the Borrower and the Required Lenders.

ARTICLE II

The Credits

SECTION 2.01. Commitments. (a) Subject to the terms and conditions set forth herein, each Revolving Lender agrees to make a Revolving Loan to the Borrower on the Restatement Effective Date in a principal amount not exceeding its Revolving Commitment. The Borrower and the Revolving Lenders acknowledge the making of Revolving Loans prior to the Restatement Effective Date under the Original Credit Agreement and agree that, to the extent outstanding on the Restatement Effective Date, such Revolving Loans shall continue to be outstanding pursuant to the terms and conditions of this Agreement and the other Loan Documents. Amounts repaid in respect of Revolving Loans may not be reborrowed.

(b) On the Original Effective Date, (i) the Tranche A Lenders made Tranche A Term Loans to the Borrower in an aggregate principal amount of $100,000,000 and (ii) the Tranche B Lenders made Tranche B Term Loans to the

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Borrower in an aggregate principal amount of $550,000,000. The Borrower, the Tranche A Lenders and the Tranche B Lenders acknowledge the making of the Term Loans under the Original Credit Agreement and agree that, to the extent outstanding on the Restatement Effective Date, such Term Loans shall continue to be outstanding pursuant to the terms and conditions of this Agreement and the other Loan Documents. Amounts repaid in respect of Term Loans may not be reborrowed.

SECTION 2.02. Loans and Borrowings. (a) Each Loan shall be made as part of a Borrowing consisting of Loans of the same Class and Type made by the Lenders ratably in accordance with their Commitments of the applicable Class. The failure of any Lender to make any Loan required to be made by it shall not relieve any other Lender of its obligations hereunder; provided that the Commitments of the Lenders are several and no Lender shall be responsible for any other Lender’s failure to make Loans as required.

(b) Subject to Section 2.15, each Revolving Borrowing and Term Borrowing shall be comprised entirely of ABR Loans or Eurodollar Loans as the Borrower may request in accordance herewith. Each Lender at its option may make any Eurodollar Loan by causing any domestic or foreign branch or Affiliate of such Lender to make such Loan; provided that any exercise of such option shall not affect the obligation of the Borrower to repay such Loan in accordance with the terms of this Agreement.

(c) At the commencement of each Interest Period for any Eurodollar Borrowing, such Borrowing shall be in an aggregate amount that is an integral multiple of $1,000,000 and not less than $5,000,000. At the time that each ABR Revolving Borrowing is made, such Borrowing shall be in an aggregate amount that is an integral multiple of $1,000,000 and not less than $5,000,000. Borrowings of more than one Type and Class may be outstanding at the same time; provided that there shall not at any time be more than a total of 15 Eurodollar Revolving Borrowings outstanding.

(d) Notwithstanding any other provision of this Agreement, the Borrower shall not be entitled to request, or to elect to convert or continue, any Borrowing if the Interest Period requested with respect thereto would end after the Revolving Maturity Date, Tranche A Maturity Date or Tranche B Maturity Date, as applicable.

SECTION 2.03. Requests for Revolving Borrowings. To request a Revolving Borrowing, the Borrower shall notify the Administrative Agent of such request by telephone (a) in the case of a Eurodollar Borrowing, not later than 11:00 a.m., New York City time, three Business Days before the date of the proposed Borrowing or (b) in the case of an ABR Borrowing, not later than 11:00 a.m., New York City time, on the Business Day of the proposed Borrowing. Each such telephonic Borrowing Request shall be irrevocable and shall be confirmed promptly by hand delivery or fax to the Administrative Agent of a written Borrowing Request signed by the Borrower. Each such telephonic and written Borrowing Request shall specify the following information in compliance with Section 2.02:

(i) the aggregate amount of such Borrowing;

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(ii) the date of such Borrowing, which shall be a Business Day;

(iii) whether such Borrowing is to be an ABR Borrowing or a Eurodollar Borrowing;

(iv) in the case of a Eurodollar Borrowing, the initial Interest Period to be applicable thereto, which shall be a period contemplated by the definition of the term “Interest Period”; and

(v) the location and number of the Borrower’s account to which funds are to be disbursed, which shall comply with the requirements of Section 2.07.

If no election as to the Type of Borrowing is specified, or if no Interest Period is specified with respect to any requested Eurodollar Revolving Borrowing, then the requested Borrowing shall be deemed a Eurodollar Revolving Borrowing with an Interest Period of one month’s duration. Promptly following receipt of a Borrowing Request in accordance with this Section, the Administrative Agent shall advise each Lender of the details thereof and of the amount of such Lender’s Loan to be made as part of the requested Borrowing.

SECTION 2.04. Competitive Bid Procedure. [Reserved.]

SECTION 2.05. Swingline Loans. [Reserved.]

SECTION 2.06. Letters of Credit. (a) Prior to the Restatement Effective Date, the Issuing Banks have issued the Letters of Credit pursuant to the Original Credit Agreement. On and after the Restatement Effective Date, (i) no Issuing Bank shall have any obligation to issue any letter of credit pursuant to this Agreement (it being understood that amendments, renewals and extensions of Letters of Credit in accordance with the terms hereof shall not be deemed to be issuances of letters of credits), (ii) the terms and conditions of this Agreement shall apply to each Letter of Credit and (iii) no Revolving Lender shall have any participation in any Letter of Credit, or any obligation to fund all or any portion of any LC Disbursement under, or other obligation with respect to, any Letter of Credit, all such participations and obligations having been released by each Issuing Bank with respect to the Letters of Credit issued by such Issuing Bank as set forth in the Amendment Agreement.

(b) Amendment, Renewal or Extension of the Letters of Credit; Certain Conditions. Subject to the terms and conditions set forth herein, the Borrower may request an amendment, renewal or extension of any outstanding Letter of Credit; provided, however, that the Borrower may not request an increase in the amount of any Letter of Credit. To request the amendment, renewal or extension of an outstanding Letter of Credit, the Borrower shall hand deliver or fax (or transmit by electronic communication, if arrangements for doing so have been approved by the applicable Issuing Bank) to the applicable Issuing Bank, the Administrative Agent and the Issuing Banks Agent (reasonably in advance of the requested date of amendment, renewal or extension) a notice identifying the Letter of Credit to be amended, renewed or extended, and specifying the requested amendment, renewal or extension and the requested date of the effectiveness thereof (which shall be a Business Day) and such other information as

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shall be necessary to amend, renew or extend such Letter of Credit. Each Issuing Bank agrees that, in the case of any request by the Borrower to extend or renew any Letter of Credit issued by such Issuing Bank, such Issuing Bank shall, subject to Section 4.02, renew or extend such Letter of Credit as so requested; provided, however, that no Issuing Bank shall be obligated to extend or renew any Letter of Credit to a date that does not comply with paragraph (c) of this Section. In the event of any inconsistency between the terms and conditions of this Agreement and the terms and conditions of any form of letter of credit application or other agreement submitted by the Borrower to, or entered into by the Borrower with, any Issuing Bank relating to any Letter of Credit issued by such Issuing Bank, the terms and conditions of this Agreement shall control.

(c) Expiration Date. Each Letter of Credit shall expire at or prior to the close of business on the earlier of (i) the date one year after the date of the issuance of such Letter of Credit (or, in the case of any renewal or extension thereof, one year after such renewal or extension) and (ii) the date that is five Business Days prior to the Revolving Maturity Date; provided, however, that any Letter of Credit may provide for automatic renewal on an annual basis so long as any such Letter of Credit expires at or prior to the date that is five Business Days prior to the Revolving Maturity Date.

(d) Disbursements. The applicable Issuing Bank shall, promptly following its receipt thereof, examine all documents purporting to represent a demand for payment under a Letter of Credit. The applicable Issuing Bank shall promptly notify the Borrower, the Administrative Agent and the Issuing Banks Agent by telephone (confirmed by fax) of such demand for payment, whether such Issuing Bank will make an LC Disbursement thereunder and, in the event such Issuing Bank makes such an LC Disbursement, of the making thereof and the amount of the payment made; provided that any failure to give or delay in giving any such notice shall not relieve the Borrower of its obligation to reimburse such Issuing Bank with respect to any such LC Disbursement.

(e) Reimbursement. If an Issuing Bank shall make any LC Disbursement, the Borrower shall reimburse such LC Disbursement by paying to the Administrative Agent, for the account of such Issuing Bank, an amount equal to such LC Disbursement not later than (i) if the Borrower shall have received notice of such LC Disbursement prior to 12:00 noon, New York City time, on any Business Day, then 5:00 p.m., New York City time, on the Business Day immediately following the day that the Borrower receives such notice or (ii) otherwise, 5:00 p.m., New York City time, on the second Business Day immediately following the day that the Borrower receives such notice; provided, however, that the Borrower hereby irrevocably authorizes, instructs and directs the Issuing Banks Agent, and, on the terms and subject to the conditions set forth in paragraph (h)(ii) of this Section, the Issuing Banks Agent hereby agrees, to make such payment on behalf of the Borrower with the LC Cash Collateral, and, to the extent such payment is so made, the Borrower’s obligation to make such payment shall be discharged.

(f) Obligations Absolute. The Borrower’s obligation to reimburse LC Disbursements as provided in paragraph (e) of this Section shall be absolute, unconditional and irrevocable, and shall be performed strictly in accordance with the

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terms of this Agreement under any and all circumstances whatsoever and irrespective of (i) any lack of validity or enforceability of any Letter of Credit or this Agreement, or any term or provision therein, (ii) any draft or other document presented under a Letter of Credit proving to be forged, fraudulent or invalid in any respect or any statement therein being untrue or inaccurate in any respect, (iii) payment by the applicable Issuing Bank under a Letter of Credit against presentation of a draft or other document that does not comply with the terms of such Letter of Credit, or (iv) any other event or circumstance whatsoever, whether or not similar to any of the foregoing, that might, but for the provisions of this Section, constitute a legal or equitable discharge of, or provide a right of setoff against, the Borrower’s obligations hereunder. None of the Administrative Agent, the Issuing Banks Agent, any Issuing Bank, any Lender or any of their Related Parties shall have any liability or responsibility by reason of or in connection with the issuance or transfer of any Letter of Credit or any payment or failure to make any payment thereunder (irrespective of any of the circumstances referred to in the preceding sentence), or any error, omission, interruption, loss or delay in transmission or delivery of any draft, notice or other communication under or relating to any Letter of Credit (including any document required to make a drawing thereunder), any error in interpretation of technical terms or any consequence arising from causes beyond the control of such Issuing Bank; provided that the foregoing shall not be construed to excuse any Issuing Bank from liability to the Borrower to the extent of any direct damages (as opposed to consequential damages, claims in respect of which are hereby waived by the Borrower to the extent permitted by applicable law) suffered by the Borrower that are caused by such Issuing Bank’s failure to exercise care when determining whether drafts and other documents presented under a Letter of Credit comply with the terms thereof. The parties hereto expressly agree that, in the absence of gross negligence, bad faith or willful misconduct on the part of any Issuing Bank (as finally determined by a court of competent jurisdiction), such Issuing Bank shall be deemed to have exercised care in each such determination. In furtherance of the foregoing and without limiting the generality thereof, the parties agree that, with respect to documents presented which appear on their face to be in substantial compliance with the terms of a Letter of Credit, an Issuing Bank may, in its sole discretion, either accept and make payment upon such documents without responsibility for further investigation, regardless of any notice or information to the contrary, or refuse to accept and make payment upon such documents if such documents are not in strict compliance with the terms of such Letter of Credit.

(g) Interim Interest. If an Issuing Bank shall make any LC Disbursement, then, unless such LC Disbursement shall have been reimbursed in full on the date such LC Disbursement is made, the unpaid amount thereof shall bear interest, for each day from and including the date such LC Disbursement is made to but excluding the date such LC Disbursement is reimbursed in full, at the rate per annum then applicable to ABR Revolving Loans; provided that, if such LC Disbursement shall not have been reimbursed when due pursuant to paragraph (e) of this Section, then Section 2.14(c) shall apply. Interest accrued pursuant to this paragraph shall be paid to the Administrative Agent, for the account of the applicable Issuing Bank, and shall be payable on demand or, if no demand has been made, on the date on which the Borrower reimburses the applicable LC Disbursement in full.

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(h) LC Cash Collateral. (i) Pursuant to the Amendment Agreement, prior to the Restatement Effective Date the Borrower shall have established the LC Cash Collateral Account and, on the Restatement Effective Date, shall have deposited into the LC Cash Collateral Account an amount in cash equal to 105.00% of the aggregate LC Exposure of all the Issuing Banks as of the Restatement Effective Date. The Issuing Banks Agent shall hold the LC Cash Collateral as collateral for the payment and performance of the obligations of the Borrower in respect of the Aggregate LC Obligations, and the Borrower hereby grants to the Issuing Banks Agent, for the benefit of the Issuing Banks, a security interest in the LC Cash Collateral Account and the LC Cash Collateral (including all funds and investments from time to time in the LC Cash Collateral Account), and the proceeds thereof, to secure the Aggregate LC Obligations. The Issuing Banks Agent shall have exclusive dominion and control, including the exclusive right of withdrawal, over the LC Cash Collateral Account. Without limiting the foregoing, the Issuing Banks Agent is hereby irrevocably authorized, instructed and directed by the Borrower to make such withdrawals as are described in this Section or as the Issuing Banks Agent, in its sole discretion, determines are appropriate to satisfy any of the Aggregate LC Obligations of the Borrower, including obligations with respect to the payment of interest pursuant to paragraph (g) of this Section and Issuing Bank Fees pursuant to Section 2.13(a), and each Issuing Bank hereby acknowledges the foregoing and agrees thereto. The Issuing Banks Agent shall invest funds on deposit in the LC Cash Collateral Account in one or more money market deposit accounts offered by the entity serving as the Issuing Banks Agent or, at the discretion of the Issuing Banks Agent, any other Permitted Investments of the type referred to in clause (c) of the definition of the term “Permitted Investments”, it being agreed that such investment shall be made at the Borrower’s risk and expense. Interest or profits, if any, on such investment shall accumulate in such account and be part of the LC Cash Collateral.

(ii) If an Issuing Bank shall have made an LC Disbursement, the Issuing Banks Agent shall, not later than (A) if the Issuing Banks Agent shall have received notice of such LC Disbursement prior to 12:00 noon, New York City time, on any Business Day, then 5:00 p.m., New York City time, on the Business Day immediately following the day that the Issuing Banks Agent receives such notice, and (B) otherwise, 5:00 p.m, New York City time, on the second Business Day immediately following the day that the Issuing Banks Agent receives such notice, withdraw from the LC Cash Collateral Account and remit to such Issuing Bank an amount equal to the lesser of (x) the amount of such LC Disbursement and (y) the value of the LC Cash Collateral at the time but not in excess, solely if the Issuing Banks Agent shall have received notice from the Borrower, the Administrative Agent, any Issuing Bank or the Required Lenders that an Event of Default has occurred and is continuing at the time, of such Issuing Bank’s Pro Rata Share thereof at such time; provided, however, that the Issuing Banks Agent shall not be required to make any such withdrawal and remittance if it determines, in its sole discretion, that it may not do so under applicable law.

(iii) In the event the Issuing Banks Agent shall have determined, based on reports provided to the Issuing Banks Agent pursuant to paragraph (i) of this Section, that an LC Cash Collateral Deficiency exists, the Issuing Banks Agent

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shall promptly inform the Borrower and the Administrative Agent thereof, and the Borrower shall, within three Business Days of receiving such notice, deposit in the LC Cash Collateral Account an amount in cash equal to the amount of such LC Cash Collateral Deficiency.

(iv) In the event the Issuing Banks Agent shall have determined, based on reports provided to the Issuing Banks Agent pursuant to paragraph (i) of this Section, that a Viacom LC Cash Collateral Excess exists, the Issuing Banks Agent shall promptly inform the Borrower and the Administrative Agent thereof and, unless the Issuing Banks Agent shall have received notice from the Borrower, the Administrative Agent, any Issuing Bank or the Required Lenders that an Event of Default has occurred and is continuing at the time, the Issuing Banks Agent shall withdraw from the LC Cash Collateral Account and remit to the Borrower the amount of such Viacom LC Cash Collateral Excess; provided, however, that, in the case no such remittance is made as a result of the Issuing Banks Agent having received such a notice of an Event of Default, the Borrower may request that the amount of such Viacom LC Cash Collateral Excess be remitted to the Administrative Agent in satisfaction of an obligation of the Borrower to prepay Revolving Borrowings. To make such a request, the Borrower shall hand deliver or fax to the Issuing Banks Agent, with a copy to the Administrative Agent, a notice identifying the amount of the prepayment of the Revolving Borrowings requested to be made with such Viacom LC Cash Collateral Excess and the details thereof (including the provisions hereof pursuant to which such prepayment is made), and further requesting the Issuing Banks Agent to remit, on the date specified in such request (which shall be at least one Business Day after the date of such notice) to the Administrative Agent the amount specified in such notice (which shall not exceed the amount of such prepayment). Upon receipt of such notice, the Issuing Banks Agent shall, on the date specified therein, withdraw from the LC Cash Collateral Account and remit to the Administrative Agent, for the account of the Revolving Lenders, an amount equal to the lesser of (x) the amount specified in such notice and (y) the amount of such Viacom LC Cash Collateral Excess. To the extent of the amounts received by the Administrative Agent, the Borrower’s obligation to make the prepayment of the Revolving Borrowings specified in such notice shall be discharged. Notwithstanding anything in this paragraph to the contrary, the Issuing Banks Agent shall not be required to make any withdrawal or remittance referred to in this paragraph if it determines, in its sole discretion, that it may not do so under applicable law.

(v) In the event the Issuing Banks Agent shall have determined, based on reports provided to the Issuing Banks Agent pursuant to paragraph (i) of this Section, that a Non-Viacom LC Cash Collateral Excess of $500,000 or more exists, the Issuing Banks Agent shall promptly inform the Borrower and the Administrative Agent thereof and shall withdraw from the LC Cash Collateral Account and remit to the Administrative Agent the amount of such Non-Viacom LC Cash Collateral Excess, in satisfaction of the obligations of the Borrower under Section 2.12(f) in respect thereof; provided, however, that the Issuing Banks Agent shall not be required to make any such withdrawal and remittance if it determines, in its sole discretion, that it may not do so under applicable law.

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(vi) The Issuing Banks Agent (and, in the event any Issuing Bank shall have been appointed as a sub-agent of the Issuing Banks Agent pursuant to Article VIII, such Issuing Bank) hereby agrees, solely for the purpose of allowing the Administrative Agent to obtain control of the LC Cash Collateral Account under Section 9-104 of the Uniform Commercial Code of the State of New York (as in effect from time to time) and to perfect its security interest in the LC Cash Collateral Account and the LC Cash Collateral in accordance with Sections 9-312 and 9-314 of said Uniform Commercial Code, to act as a sub-agent of the Administrative Agent. Notwithstanding the foregoing (but without affecting the agreement of the Issuing Banks Agent and any such Issuing Bank to act as a sub-agent of the Administrative Agent for the foregoing purpose), so long as any of the Aggregate LC Obligations shall be outstanding, the Issuing Banks Agent shall continue to have exclusive dominion and control over the LC Cash Collateral Account, and may deal with the LC Cash Collateral Account and the LC Cash Collateral without regard to the Administrative Agent’s security interest in the LC Cash Collateral Account or the LC Cash Collateral (and the Administrative Agent agrees with the Issuing Bank Agent for the benefit of the Issuing Banks that so long as any of the Aggregate LC Obligations are outstanding, it shall not issue instructions to the Issuing Banks Agent (or any of its sub-agents), in its capacity as a sub-agent of the Administrative Agent, with respect to, or otherwise exercise control over, the LC Cash Collateral Account or the LC Cash Collateral).

(vii) Notwithstanding anything to the contrary in any Loan Document, each party to this Agreement agrees that any Lien of the Issuing Banks Agent (or any of its sub-agents) on the LC Cash Collateral Account and the LC Cash Collateral now or hereafter held by or for the benefit of any Issuing Bank as security for any of the Aggregate LC Obligations shall be senior in right, priority, operation, effect and all other respects to all Liens thereon of the Administrative Agent now or hereafter held by or for the benefit of any Secured Party as security for any of the Obligations other than the Aggregate LC Obligations, such Liens of the Administrative Agent being junior and subordinate in right, priority, operation, effect and all other respects to any such Lien of the Issuing Banks Agent (or any such sub-agent). Each party to this Agreement agrees that, to effectuate the intent of the parties as provided above, the value of the Liens of the Issuing Banks Agent (or any of its sub-agents) on the LC Cash Collateral Account and the LC Cash Collateral shall be determined without regard to the existence of the Liens thereon securing the Obligations other than the Aggregate LC Obligations. The relative Lien priorities set forth above are only with respect to the priority of the Liens described herein, and shall not constitute a subordination of any Obligations to any other Obligations. Each party to this Agreement further agrees that (A) the grant of any Lien to the Issuing Banks Agent (or any of its sub-agents) on the LC Cash Collateral Account and the LC Cash Collateral now or hereafter held by or for the benefit of any Issuing Bank as security for any of

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the Aggregate LC Obligations and the grant of any Lien thereon to the Administrative Agent now or hereafter held by or for the benefit of any Secured Party as security for any of the Obligations other than the Aggregate LC Obligations constitute two separate and distinct grants of Liens and (B) because of, among other things, their differing rights in the LC Cash Collateral Account and the LC Cash Collateral, the Aggregate LC Obligations are fundamentally different from the Obligations other than the Aggregate LC Obligations and must, solely to the extent the LC Cash Collateral Account and the LC Cash Collateral are concerned, be separately classified in any plan of reorganization proposed or adopted in an insolvency proceeding of the Borrower. To further effectuate the intent of the parties as provided in the immediately preceding sentence, if it is held that the claims of the Issuing Banks and the other Secured Parties in respect of the LC Cash Collateral Account and LC Cash Collateral constitute only one secured claim (rather than separate classes of senior and junior secured claims), then all distributions in respect of the Aggregate LC Obligations and the Obligations other than the Aggregate LC Obligations shall be made as if they were two separate classes of senior and junior secured claims against the Borrower in respect of the LC Cash Collateral Account and LC Cash Collateral, with each Lender agreeing to turn over to the Issuing Banks Agent, for the benefit of the Issuing Banks, amounts otherwise received or receivable by it to the extent necessary to effectuate the intent of this sentence.

(i) Issuing Bank Reports. Each Issuing Bank shall, in addition to its notification obligations set forth elsewhere in this Section, report in writing to the Administrative Agent and the Issuing Banks Agent (i) reasonably prior to the time that such Issuing Bank amends, renews or extends any Letter of Credit, the date of such amendment, renewal or extension and the details thereof, (ii) on each Business Day on which such Issuing Bank makes any LC Disbursement, the date and amount of such LC Disbursement, (iii) on any Business Day on which the Borrower fails to reimburse in full an LC Disbursement required to be reimbursed to such Issuing Bank on such day, the date of such failure and the unreimbursed amount of such LC Disbursement, (iv) on each day (or, if such day is not a Business Day, on the next following Business Day) on which the LC Exposure of such Issuing Bank shall have reduced, the amount of such reduction and the details thereof and (v) on any other Business Day, such other information as the Administrative Agent or the Issuing Banks Agent shall reasonably request as to the Letters of Credit issued by such Issuing Bank. The Administrative Agent and the Issuing Banks Agent shall be entitled to rely, and shall not incur any liability for relying, upon any information reported to it by the Issuing Banks pursuant to this paragraph. Without limiting the foregoing, the Issuing Banks Agent may determine the existence of any LC Cash Collateral Deficiency or any LC Cash Collateral Excess (and whether such excess is a Viacom LC Cash Collateral Excess or a Non-Viacom LC Cash Collateral Excess) and each Issuing Bank’s Pro Rata Share solely on the basis of the information reported to it by the Issuing Banks pursuant to this paragraph, and shall incur no liability for any errors in such determination arising from any inaccuracy of such information.

(j) Cooperation. The Issuing Banks Agent shall provide to the Administrative Agent or any Issuing Bank such information with respect to the LC Cash

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Collateral Account and the LC Cash Collateral as the Administrative Agent or such Issuing Bank may from time to time request. The Administrative Agent shall provide to the Issuing Banks Agent such information regarding the Issuing Banks and the Letters of Credit as the Issuing Banks Agent may from time to time request.

(k) Concerning Viacom LCs. The Borrower agrees that, without the prior written consent of each Issuing Bank that shall have issued a Viacom LC outstanding at the time, (A) it shall not request an extension or renewal of any Viacom LC unless it shall have requested such an extension or renewal with respect to each Viacom LC and (B) it shall not request any amendment of any Viacom LC to reduce the face amount thereof unless it shall have concurrently therewith requested such amendments of one or more other Viacom LC to reduce the face amount thereof as shall be required in order for the aggregate amount of such requested reductions to be allocated among the Issuing Banks in accordance with their pro rata share. For purposes of the foregoing, an Issuing Bank’s “pro rata share” of any such reductions shall be determined based on the proportion the face amount of its Viacom LC as of the Restatement Effective Date bears to the aggregate face amount of all the Viacom LCs as of the Restatement Effective Date; provided, however, that if, as a result of any drawing thereunder since the Restatement Effective Date, the face amount of any Issuing Bank’s Viacom LC shall have been reduced without a corresponding reduction in the face amount of the other Issuing Banks’ Viacom LCs, then, to the extent such drawing shall have been reimbursed, the pro rata share of such Issuing Bank shall be adjusted so that the aggregate amount of all the reductions in the aggregate face amount of the Viacom LCs is allocated to the banks, as nearly as possible, on a pro rata basis (determined as set forth above).

SECTION 2.07. Funding of Borrowings. (a) Each Lender shall make each Loan to be made by it hereunder on the proposed date thereof by wire transfer of immediately available funds by 12:00 noon, New York City time, to the account of the Administrative Agent most recently designated by it for such purpose by notice to the Lenders. The Administrative Agent will make such Loans available to the Borrower by promptly crediting or transferring the amounts so received, in like funds, to an account of the Borrower maintained with the Administrative Agent in New York City or any other domestic bank deposit account of the Borrower, in each case as designated by the Borrower in the applicable Borrowing Request.

(b) Unless the Administrative Agent shall have received notice from a Lender prior to the proposed date of any Borrowing that such Lender will not make available to the Administrative Agent such Lender’s share of such Borrowing, the Administrative Agent may assume that such Lender has made such share available on such date in accordance with paragraph (a) of this Section and may, in reliance upon such assumption, make available to the Borrower a corresponding amount. In such event, if a Lender has not in fact made its share of the applicable Borrowing available to the Administrative Agent, then the applicable Lender and the Borrower severally agree to pay to the Administrative Agent forthwith on demand such corresponding amount with interest thereon, for each day from and including the date such amount is made available to the Borrower to but excluding the date of payment to the Administrative Agent, at (i) in the case of such Lender, the greater of the Federal Funds Effective Rate and a rate

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determined by the Administrative Agent in accordance with banking industry rules on interbank compensation or (ii) in the case of the Borrower, the interest rate applicable to ABR Loans. If such Lender pays such amount to the Administrative Agent, then such amount shall constitute such Lender’s Loan included in such Borrowing.

SECTION 2.08. Interest Elections. (a) Each Revolving Borrowing and Term Borrowing initially shall be of the Type specified in the applicable Borrowing Request and, in the case of a Eurodollar Borrowing, shall have an initial Interest Period as specified in such Borrowing Request. Thereafter, the Borrower may elect to convert such Borrowing to a different Type or to continue such Borrowing and, in the case of a Eurodollar Borrowing, may elect Interest Periods therefor, all as provided in this Section. The Borrower may elect different options with respect to different portions of the affected Borrowing, in which case each such portion shall be allocated ratably among the Lenders holding the Loans comprising such Borrowing, and the Loans comprising each such portion shall be considered a separate Borrowing.

(b) To make an election pursuant to this Section, the Borrower shall notify the Administrative Agent of such election by telephone by the time that a Borrowing Request would be required under Section 2.03 if the Borrower were requesting a Revolving Borrowing of the Type resulting from such election to be made on the effective date of such election. Each such telephonic Interest Election Request shall be irrevocable and shall be confirmed promptly by hand delivery or fax to the Administrative Agent of a written Interest Election Request signed by the Borrower.

(c) Each telephonic and written Interest Election Request shall specify the following information in compliance with Section 2.02 and paragraph (e) of this Section:

(i) the Borrowing to which such Interest Election Request applies and, if different options are being elected with respect to different portions thereof, the portions thereof to be allocated to each resulting Borrowing (in which case the information to be specified pursuant to clauses (iii) and (iv) below shall be specified for each resulting Borrowing);

(ii) the effective date of the election made pursuant to such Interest Election Request, which shall be a Business Day;

(iii) whether the resulting Borrowing is to be an ABR Borrowing or a Eurodollar Borrowing; and

(iv) if the resulting Borrowing is a Eurodollar Borrowing, the Interest Period to be applicable thereto after giving effect to such election, which shall be a period contemplated by the definition of the term “Interest Period”.

If any such Interest Election Request requests a Eurodollar Borrowing but does not specify an Interest Period, then the Borrower shall be deemed to have selected an Interest Period of one month’s duration.

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(d) Promptly following receipt of an Interest Election Request, the Administrative Agent shall advise each Lender of the applicable Class of the details thereof and of such Lender’s portion of each resulting Borrowing.

(e) If the Borrower fails to deliver a timely Interest Election Request with respect to a Eurodollar Borrowing prior to the end of the Interest Period applicable thereto, then, unless such Borrowing is repaid as provided herein, at the end of such Interest Period such Borrowing shall be continued as a Eurodollar Borrowing of one month’s duration. Notwithstanding any contrary provision hereof, if any Event of Default described in clauses (a), (b), (h) or (i) of Article VII shall occur and be continuing and the Administrative Agent, at the request of the Required Lenders, so notifies the Borrower, then, so long as such Event of Default is continuing (i) no outstanding Borrowing may be converted to or continued as a Eurodollar Borrowing and (ii) unless repaid, each Eurodollar Borrowing shall be converted to an ABR Borrowing at the end of the Interest Period applicable thereto.

SECTION 2.09. Termination and Reduction of Commitments. (a) The Tranche A Commitments and Tranche B Commitments terminated on the Original Effective Date. Unless previously terminated in accordance with the terms hereof, the Revolving Commitments shall terminate on the Revolving Maturity Date.

(b) In the event the aggregate amount of the Revolving Commitments shall exceed at any time the aggregate principal amount of the Revolving Loans outstanding at such time, the Revolving Commitments shall automatically and permanently reduce by the amount of such excess.

(c) Subject to compliance with the provisions of paragraph (d) of this Section, the Borrower may at any time terminate, or from time to time reduce, the Revolving Commitments; provided that the Borrower shall not terminate or reduce the Revolving Commitments if, after giving effect to any concurrent prepayment of the Revolving Loans in accordance with Section 2.12, the aggregate principal amount of the Revolving Loans shall exceed the aggregate amount of the Revolving Commitments.

(d) The Borrower shall notify the Administrative Agent in writing of any election to terminate or reduce the Revolving Commitment under paragraph (c) of this Section not later than 11:00 a.m., New York City time, on the effective date of such termination or reduction, specifying such election and the effective date thereof. Promptly following receipt of any notice, the Administrative Agent shall advise the Lenders of the applicable Class of the contents thereof. Each notice delivered by the Borrower pursuant to this Section shall be irrevocable; provided that a notice of termination of the Revolving Commitments delivered by the Borrower may state that such notice is conditioned upon the effectiveness of other credit facilities, in which case such notice may be revoked by the Borrower (by notice to the Administrative Agent on or prior to the specified effective date) if such condition is not satisfied. Any termination or reduction of the Revolving Commitments shall be permanent. Each reduction of the Revolving Commitments shall be made ratably among the Revolving Lenders in accordance with their Revolving Commitments.

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SECTION 2.10. Repayment of Loans; Evidence of Debt. (a) The Borrower hereby unconditionally promises to pay to the Administrative Agent for the account of each Lender the then unpaid principal amount of each Loan of such Lender as provided in Section 2.11.

(b) Each Lender shall maintain in accordance with its usual practice an account or accounts evidencing the indebtedness of the Borrower to such Lender resulting from each Loan made by such Lender, including the amounts of principal and interest payable and paid to such Lender from time to time hereunder.

(c) The Administrative Agent shall maintain accounts in which it shall record (i) the amount of each Loan made hereunder, the Class and Type thereof and the Interest Period applicable thereto, (ii) the amount of any principal or interest due and payable or to become due and payable from the Borrower to each Lender hereunder and (iii) the amount of any sum received by the Administrative Agent hereunder for the account of the Lenders and each Lender’s share thereof.

(d) The entries made in the accounts maintained pursuant to paragraph (b) or (c) of this Section shall be prima facie evidence of the existence and amounts of the obligations recorded therein; provided that the failure of any Lender or the Administrative Agent to maintain such accounts or any error therein shall not in any manner affect the obligation of the Borrower to repay the Loans in accordance with the terms of this Agreement.

(e) Any Lender may request that Loans of any Class made by it be evidenced by a promissory note. In such event, the Borrower shall prepare, execute and deliver to such Lender a promissory note payable to the order of such Lender (or, if requested by such Lender, to such Lender and its registered assigns) and in a form approved by the Administrative Agent and the Borrower. Thereafter, the Loans evidenced by such promissory note and interest thereon shall at all times (including after assignment pursuant to Section 9.04) be represented by one or more promissory notes in such form payable to the order of the payee named therein (or, if such promissory note is a registered note, to such payee and its registered assigns).

SECTION 2.11. Amortization of Loans. (a) Subject to adjustment pursuant to paragraph (e) of this Section, the Borrower shall repay Tranche A Term Borrowings on each date set forth below in the aggregate principal amount set forth opposite such date:

Date	Amount
October 1, 2005	$	3,750,000
January 1, 2006		3,750,000
April 1, 2006		3,750,000
July 1, 2006		3,750,000
October 1, 2006		3,750,000
January 1, 2007		3,750,000

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Date	Amount
April 1, 2007	3,750,000
July 1, 2007	3,750,000
October 1, 2007	3,750,000
January 1, 2008	3,750,000
April 1, 2008	3,750,000
July 1, 2008	3,750,000
October 1, 2008	13,750,000
January 1, 2009	13,750,000
April 1, 2009	13,750,000
August 20, 2009	13,750,000

(b) Subject to adjustment pursuant to paragraph (e) of this Section, the Borrower shall repay Tranche B Term Borrowings on each date set forth below in the aggregate principal amount set forth opposite such date:

Date	Amount
October 1, 2005	$	1,375,000
January 1, 2006		1,375,000
April 1, 2006		1,375,000
July 1, 2006		1,375,000
October 1, 2006		1,375,000
January 1, 2007		1,375,000
April 1, 2007		1,375,000
July 1, 2007		1,375,000
October 1, 2007		1,375,000
January 1, 2008		1,375,000
April 1, 2008		1,375,000
July 1, 2008		1,375,000
October 1, 2008		13,750,000
January 1, 2009		13,750,000
April 1, 2009		13,750,000
July 1, 2009		13,750,000
October 1, 2009		13,750,000
January 1, 2010		13,750,000
April 1, 2010		13,750,000
July 1, 2010		13,750,000
October 1, 2010		105,875,000
January 1, 2011		105,875,000
April 1, 2011		105,875,000
August 20, 2011		105,875,000

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(c) Subject to adjustment pursuant to paragraph (e) of this Section, the Borrower shall repay Revolving Borrowings on each date set forth below in the aggregate principal amount set forth opposite such date:

Date	Amount
December 15, 2009	$	25,000,000
January 31, 2010	$	20,000,000
February 28, 2010	$	20,000,000
March 31, 2010	$	20,000,000
April 30, 2010	$	10,000,000
May 31, 2010	$	15,000,000
June 30, 2010	$	50,000,000
July 31, 2010	$	10,000,000
August 31, 2010	$	10,000,000

(d) To the extent not previously paid, all Tranche A Term Loans shall be due and payable on the Tranche A Maturity Date, all Tranche B Term Loans shall be due and payable on the Tranche B Maturity Date and all Revolving Loans shall be due and payable on the Revolving Maturity Date.

(e) Any prepayment of a Term Borrowing of either Class, including any mandatory prepayments pursuant to Section 2.12, shall be applied to reduce ratably the subsequent scheduled repayments of the Term Borrowings of such Class to be made pursuant to this Section. Any prepayment of a Revolving Borrowing, including any mandatory prepayments pursuant to Section 2.12, shall be applied to reduce the subsequent scheduled repayments of the Revolving Borrowings to be made pursuant to this Section in the reverse order of maturity; provided, however, that any optional prepayment of Revolving Borrowings made pursuant to Section 2.12(a) at any time after the Restatement Effective Date and prior to December 15, 2009 shall be applied, first, to reduce by not more than $12,500,000 in the aggregate the scheduled repayment required to be made on December 15, 2009, and, thereafter, as set forth above.

(f) Prior to any repayment of any Borrowings of any Class under this Section, the Borrower shall select the Borrowing or Borrowings of the applicable Class to be repaid and shall notify the Administrative Agent by telephone (confirmed by fax) of such selection not later than (i) 11:00 a.m., New York City time, three Business Days before the scheduled date of such repayment, in the case of a Eurodollar Borrowing, and (ii) 11:00 a.m., New York City time, on the scheduled date of such repayment, in the case of an ABR Borrowing. Each repayment of a Borrowing shall be applied ratably to the Loans included in the repaid Borrowing. Repayments of Borrowings under this Section shall be accompanied by accrued interest on the amount repaid.

SECTION 2.12. Prepayment of Loans. (a) The Borrower shall have the right at any time and from time to time to prepay any Borrowing in whole or in part in an integral multiple of $1,000,000, subject to the requirements of this Section.

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(b) In the event and on each occasion that the aggregate principal amount of the Revolving Loans exceeds the aggregate amount of the Revolving Commitments, the Borrower shall prepay the Revolving Loans in an aggregate principal amount equal to such excess.

(c) Following the end of each fiscal year of the Borrower, the Borrower will prepay Term Borrowings in an aggregate amount equal to 50% of Excess Cash Flow, if any, for such fiscal year. Each prepayment pursuant to this paragraph shall be made on or before the date on which financial statements are required to be delivered pursuant to Section 5.01 with respect to the fiscal year for which Excess Cash Flow is being calculated (and in any event within 90 days after the end of such fiscal year).

(d) Following the end of each fiscal year of the Borrower, commencing with the fiscal year ending December 31, 2009, the Borrower will prepay Revolving Borrowings in an aggregate amount equal to (i) the sum of (A) the lesser of (x) 50% of the Excess Cash Flow for such fiscal year and (y) $50,000,000 plus (B) in the event the Excess Cash Flow for such fiscal year (determined without any deduction otherwise required to be made pursuant to clause (f) of the definition of such term on account of any optional prepayments of Revolving Loans made during such fiscal year (but, in the case of the fiscal year ending December 31, 2009, only after the Restatement Effective Date)) shall exceed $200,000,000, 25% of the amount of such excess, less (ii) the amount of any optional prepayments of Revolving Loans made during such fiscal year (but, in the case of the fiscal year ending December 31, 2009, only after the Restatement Effective Date). Each prepayment pursuant to this paragraph shall be made on or before the date on which financial statements are required to be delivered pursuant to Section 5.01 with respect to the fiscal year for which Excess Cash Flow is being calculated (and in any event within 90 days after the end of such fiscal year).

(e) In the event and on each occasion that any Net Proceeds are received by or on behalf of the Borrower or any Subsidiary in respect of any Revolving Prepayment Event, the Borrower shall, on the day such Net Proceeds are received (or, in the case of a Revolving Prepayment Event described in clause (c) of the definition of such term, within 10 Business Days after such Net Proceeds are received), prepay Revolving Borrowings in an aggregate amount equal to (i) in the case of a Revolving Prepayment Event described in clause (c) of the definition of such term, 100% of such Net Proceeds and (ii) in the case of a Revolving Prepayment Event described in clause (a) or (b) of the definition of such term, (A) in the case of any such Revolving Prepayment Event that is an incurrence of Indebtedness by a Foreign Subsidiary, 80% of such Net Proceeds and (B) otherwise, (1) 0% of such Net Proceeds, to the extent the aggregate amount of such Net Proceeds received since the Restatement Effective Date in respect of all such Revolving Prepayment Events does not exceed $25,000,000, (2) 75% of such Net Proceeds, to the extent the aggregate amount of such Net Proceeds received since the Restatement Effective Date in respect of all such Revolving Prepayment Events exceeds $25,000,000 but does not exceed $50,000,000, and (3) 50% of such Net Proceeds, to the extent the aggregate amount of such Net Proceeds received since the Restatement Effective Date in respect of all such Revolving Prepayment Events exceeds $50,000,000.

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(f) In the event and on each occasion that any LC Cash Collateral shall be released to the Administrative Agent as provided in Section 2.06(h)(v), the Borrower shall prepay Revolving Borrowings in like amount, such prepayment to be made on the date of such release and to be deemed automatically to have been discharged upon receipt by the Administrative Agent of such LC Cash Collateral.

(g) Prior to any optional or mandatory prepayment of Borrowings hereunder, the Borrower shall select the Borrowing or Borrowings to be prepaid and shall specify such selection in the notice of such prepayment pursuant to paragraph (h) of this Section; provided that in the case of any prepayment of Revolving Borrowings made pursuant to paragraph (f) of this Section, the selection of the Borrowing or Borrowings to be prepaid shall be made by the Administrative Agent unless, prior to the time of such prepayment, the Administrative Agent shall have received from the Borrower a written notice specifying such selection. In the event of any mandatory prepayment of Term Borrowings made pursuant to paragraph (c) of this Section at a time when Term Borrowings of both Classes remain outstanding, the Borrower shall select Term Borrowings to be prepaid so that the aggregate amount of such prepayment is allocated between the Tranche A Term Borrowings and Tranche B Term Borrowings pro rata based on the aggregate principal amount of outstanding Borrowings of each such Class.

(h) Except for prepayments made pursuant to paragraph (f) of this Section, the Borrower shall notify the Administrative Agent by telephone (confirmed by fax) of any prepayment hereunder (i) in the case of prepayment of a Eurodollar Borrowing, not later than 11:00 a.m., New York City time, three Business Days before the date of prepayment, or (ii) in the case of prepayment of an ABR Borrowing, not later than 11:00 a.m., New York City time, on the date of prepayment. Each such notice shall be irrevocable and shall specify the prepayment date, the principal amount of each Borrowing or portion thereof to be prepaid and, in the case of a mandatory prepayment, a reasonably detailed calculation of the amount of such prepayment; provided that, if a notice of optional prepayment is given in connection with a conditional notice of termination of the Revolving Commitments as contemplated by Section 2.09, then such notice of prepayment may be revoked if such notice of termination is revoked in accordance with Section 2.09. Promptly following receipt of any such notice, the Administrative Agent shall advise the Lenders of the applicable Class of the contents thereof. Each partial prepayment of any Borrowing shall be in an amount that would be permitted in the case of an advance of a Borrowing of the same Type as provided in Section 2.02, except as necessary to apply fully the required amount of a mandatory prepayment. Each prepayment of a Borrowing shall be applied ratably to the Loans included in the prepaid Borrowing. Prepayments of Borrowings shall be accompanied by accrued interest on the amount prepaid.

SECTION 2.13. Fees. (a) The Borrower agrees to pay each Issuing Bank an issuing bank fee, which shall accrue at the rate of 2.00% per annum on the outstanding undrawn amount of Letters of Credit issued by such Issuing Bank during the period from and including the Restatement Effective Date to but excluding the date on which there ceases to be any outstanding Letters of Credit issued by such Issuing Bank, as well as the applicable Issuing Bank’s standard and customary fees with respect to the amendment,

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renewal or extension of any Letter of Credit or processing of drawings thereunder. Issuing Bank Fees accrued through and including the last day of each calendar month shall be payable on the third Business Day following such last day, commencing on the first such date to occur after the Restatement Effective Date; provided that all such fees shall be payable on the date on which the Revolving Commitments terminate and any such fees accruing after the date on which the Revolving Commitments terminate shall be payable on written demand. Any other fees payable to the applicable Issuing Bank pursuant to this paragraph shall be payable within 10 days after written demand. All Issuing Bank Fees shall be computed on the basis of a year of 360 days and shall be payable for the actual number of days elapsed (including the first day but excluding the last day).

(b) All repayments and prepayments of Revolving Loans effected on or prior to the Revolving Maturity Date will be accompanied by an exit fee equal to 3.00% of the aggregate principal amount of any such repayment or prepayment; provided, however, that (i) in the event the aggregate principal amount of the Revolving Loans prepaid pursuant to Section 2.12(a) since the Restatement Effective Date and on or prior to January 3, 2010 shall be at least $50,000,000, no such fee shall be payable with respect to any subsequent repayment or prepayment of Revolving Loans made on or prior to January 3, 2010, and (ii) in the case of any prepayment of Revolving Loans pursuant to Section 2.12(a) made on or after January 4, 2010, such fee shall be reduced to 2.00% of the aggregate principal amount of any such prepayment. Such exit fee shall be paid by the Borrower to the Administrative Agent, for the accounts of the applicable Lenders, on the date of such repayment or prepayment.

(c) In the event the aggregate principal amount of the Revolving Loans outstanding on April 30, 2010 shall exceed $75,000,000, the Borrower shall pay to the Administrative Agent, for the account of the Revolving Lenders, a duration fee equal to the lesser of (i) 10.00% of the amount of such excess and (ii) $5,000,000. Such fee shall be distributed to the Revolving Lenders on a pro rata basis.

(d) The Borrower agrees to pay to the Administrative Agent, for its own account, fees payable in the amounts and at the times separately agreed upon in writing between the Borrower and the Administrative Agent.

(e) All fees payable hereunder shall be paid on the dates due, in immediately available funds, to the Administrative Agent (or to the Issuing Bank, in the case of fees payable to it), for distribution, in the case of fees payable to the Lenders, to the Lenders entitled thereto. Fees paid shall not be refundable under any circumstances.

SECTION 2.14. Interest. (a) The Loans comprising each ABR Borrowing shall bear interest at the Alternate Base Rate plus the Applicable Margin.

(b) The Loans comprising each Eurodollar Borrowing shall bear interest at the Adjusted LIBO Rate for the Interest Period in effect for such Borrowing plus the Applicable Margin.

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(c) Notwithstanding the foregoing, (i) if any Event of Default shall have occurred and is continuing, each Loan shall bear interest at a rate of 3.00% plus the rate otherwise applicable to such Loan as provided in the preceding paragraphs of this Section and (ii) if any interest on any Loan or any fee or other amount payable by the Borrower hereunder (other than any principal of any Loan) is not paid when due, whether at stated maturity, upon acceleration or otherwise, such overdue amount shall bear interest, after as well as before judgment, at a rate per annum equal to 2.00% plus the rate applicable to ABR Revolving Loans as provided in paragraph (a) of this Section, from the date overdue until such amount is paid.

(d) Accrued interest on each Loan shall be payable in arrears on each Interest Payment Date for such Loan and, in the case of Revolving Loans, upon termination of the Revolving Commitments; provided that (i) interest accrued pursuant to paragraph (c) of this Section shall be payable on written demand, (ii) in the event of any repayment or prepayment of any Loan, accrued interest on the principal amount repaid or prepaid shall be payable on the date of such repayment or prepayment and (iii) in the event of any conversion of any Eurodollar Loan prior to the end of the current Interest Period therefor, accrued interest on such Loan shall be payable on the effective date of such conversion.

(e) All interest hereunder shall be computed on the basis of a year of 360 days, except that interest computed by reference to the Alternate Base Rate at times when the Alternate Base Rate is based on the Prime Rate shall be computed on the basis of a year of 365 days (or 366 days in a leap year), and in each case shall be payable for the actual number of days elapsed (including the first day but excluding the last day). The applicable Alternate Base Rate or Adjusted LIBO Rate shall be determined by the Administrative Agent, and such determination shall be conclusive absent manifest error.

SECTION 2.15. Alternate Rate of Interest. If prior to the commencement of any Interest Period for a Eurodollar Borrowing:

(a) the Administrative Agent determines (which determination shall be conclusive absent manifest error) that adequate and reasonable means do not exist for ascertaining the Adjusted LIBO Rate for such Interest Period; or

(b) the Administrative Agent is advised by the Required Lenders that the Adjusted LIBO Rate for such Interest Period will not adequately and fairly reflect the cost to such Lenders of making or maintaining their Loans included in such Borrowing for such Interest Period;

then the Administrative Agent shall give notice thereof to the Borrower and the Lenders by telephone or fax as promptly as practicable thereafter and, until the Administrative Agent notifies the Borrower and the Lenders that the circumstances giving rise to such notice no longer exist, (i) any Interest Election Request that requests the conversion of any Borrowing to, or continuation of any Borrowing as, a Eurodollar Borrowing shall be ineffective and (ii) if any Borrowing Request requests a Eurodollar Borrowing, such Borrowing shall be made as an ABR Borrowing.

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SECTION 2.16. Increased Costs. (a) If any Change in Law shall:

(i) impose, modify or deem applicable any reserve, special deposit or similar requirement against assets of, deposits with or for the account of, or credit extended by, any Lender (except any such reserve requirement reflected in the Adjusted LIBO Rate) or an Issuing Bank; or

(ii) impose on any Lender or an Issuing Bank or the London interbank market any other condition affecting this Agreement or Eurodollar Loans made by such Lender or any Letter of Credit;

and the result of any of the foregoing shall be to increase the cost to such Lender of making or maintaining any Eurodollar Loan (or of maintaining its obligation to make any such Loan) or to increase the cost to the applicable Issuing Bank of maintaining any Letter of Credit or to reduce the amount of any sum received or receivable by such Lender or the applicable Issuing Bank hereunder (whether of principal, interest or otherwise), then the Borrower will pay to such Lender or the applicable Issuing Bank, as the case may be, such additional amount or amounts as will compensate such Lender or such Issuing Bank, as the case may be, for such additional costs incurred or reduction suffered.

(b) If any Lender or an Issuing Bank determines that any Change in Law regarding capital requirements has or would have the effect of reducing the rate of return on such Lender’s or such Issuing Bank’s capital or on the capital of such Lender’s or such Issuing Bank’s holding company, if any, as a consequence of this Agreement or the Loans made by such Lender, or the Letters of Credit issued by such Issuing Bank, to a level below that which such Lender or such Issuing Bank or such Lender’s or such Issuing Bank’s holding company could have achieved but for such Change in Law (taking into consideration such Lender’s or such Issuing Bank’s policies and the policies of such Lender’s or such Issuing Bank’s holding company with respect to capital adequacy), then from time to time the Borrower will pay to such Lender or such Issuing Bank, as the case may be, such additional amount or amounts as will compensate such Lender or such Issuing Bank or such Lender’s or such Issuing Bank’s holding company for any such reduction suffered.

(c) A certificate of a Lender or an Issuing Bank setting forth (i) the amount or amounts necessary to compensate such Lender or such Issuing Bank or its holding company, as the case may be, as specified in paragraph (a) or (b) of this Section and (ii) that is such Lender’s or Issuing Bank’s customary practice, from and after the date of such certificate, to charge its borrowers for such increased costs incurred by such Lender or such Issuing Bank, as the case may be, shall be delivered to the Borrower and shall be conclusive absent manifest error. The Borrower shall pay such Lender or such Issuing Bank, as the case may be, the amount shown as due on any such certificate within 10 days after receipt thereof.

(d) Failure or delay on the part of any Lender or an Issuing Bank to demand compensation pursuant to this Section shall not constitute a waiver of such

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Lender’s or such Issuing Bank’s right to demand such compensation; provided that the Borrower shall not be required to compensate a Lender or an Issuing Bank pursuant to this Section for any increased costs or reductions incurred more than 30 days prior to the date that such Lender or such Issuing Bank, as the case may be, notifies the Borrower of the Change in Law giving rise to such increased costs or reductions and of such Lender’s or such Issuing Bank’s intention to claim compensation therefor.

SECTION 2.17. Break Funding Payments. In the event of (a) the payment of any principal of any Eurodollar Loan other than on the last day of an Interest Period applicable thereto (including as a result of an Event of Default), (b) the conversion of any Eurodollar Loan other than on the last day of the Interest Period applicable thereto, (c) the failure to borrow, convert, continue or prepay any Revolving Loan or Term Loan on the date specified in any notice delivered pursuant hereto (regardless of whether such notice may be revoked under Section 2.09 or Section 2.12(h) and is revoked in accordance therewith) or (d) the assignment of any Eurodollar Loan other than on the last day of the Interest Period applicable thereto as a result of a request by the Borrower pursuant to Section 2.20 or 9.02, then, in any such event, the Borrower shall compensate each Lender for the loss, cost and expense attributable to such event. In the case of a Eurodollar Loan, such loss, cost or expense to any Lender shall be deemed to equal an amount determined by such Lender to be the excess, if any, of (i) the amount of interest which would have accrued on the principal amount of such Loan had such event not occurred, at the Adjusted LIBO Rate that would have been applicable to such Loan, for the period from the date of such event to the last day of the then current Interest Period therefor (or, in the case of a failure to borrow, convert or continue, for the period that would have been the Interest Period for such Loan), over (ii) the amount of interest which would accrue on such principal amount for such period at the interest rate which such Lender would bid were it to bid, at the commencement of such period, for dollar deposits of a comparable amount and period from other banks in the eurodollar market. A certificate of any Lender setting forth any amount or amounts that such Lender is entitled to receive pursuant to this Section shall be delivered to the Borrower and shall be conclusive absent manifest error. The Borrower shall pay such Lender the amount shown as due on any such certificate within 10 days after receipt thereof.

SECTION 2.18. Taxes. (a) Any and all payments by or on account of any obligation of the Borrower hereunder or under any other Loan Document shall be made free and clear of and without deduction for any Indemnified Taxes or Other Taxes; provided that if the Borrower shall be required to deduct any Indemnified Taxes or Other Taxes from such payments, then (i) the sum payable shall be increased as necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section) the Administrative Agent, each Lender, the Issuing Banks Agent and each Issuing Bank receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrower shall make such deductions and (iii) the Borrower shall pay the full amount deducted to the relevant Governmental Authority in accordance with applicable law.

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(b) In addition, the Borrower shall pay any Other Taxes (not already paid pursuant to paragraph (a)(iii) of this Section) to the relevant Governmental Authority in accordance with applicable law.

(c) The Borrower shall indemnify the Administrative Agent, each Lender, the Issuing Banks Agent and each Issuing Bank, within 10 days after written demand therefor, for the full amount of any Indemnified Taxes or Other Taxes paid by the Administrative Agent, such Lender, the Issuing Banks Agent or such Issuing Bank, as the case may be, on or with respect to any payment by or on account of any obligation of the Borrower hereunder or under any other Loan Document (including Indemnified Taxes or Other Taxes imposed or asserted on or attributable to amounts payable under this Section), whether or not such Indemnified Taxes or Other Taxes were correctly or legally imposed or asserted by the relevant Governmental Authority. A certificate as to the amount of such payment or liability delivered to the Borrower by a Lender, the applicable Issuing Bank or the Issuing Banks Agent, or by the Administrative Agent on its own behalf or on behalf of a Lender or an Issuing Bank, shall be conclusive absent manifest error. Notwithstanding the foregoing, the Borrower shall have no liability pursuant to this paragraph to indemnify the Administrative Agent, a Lender, the Issuing Banks Agent or an Issuing Bank for Indemnified Taxes or Other Taxes that were paid by the Administrative Agent, such Lender, the Issuing Banks Agent or such Issuing Bank, as the case may be, more than 90 days prior to written demand for indemnification.

(d) As soon as practicable after any payment of Indemnified Taxes or Other Taxes by the Borrower to a Governmental Authority, the Borrower shall deliver to the Administrative Agent the original or a certified copy of a receipt, if any, issued by such Governmental Authority evidencing such payment, a copy of the return, if any, reporting such payment or other evidence of such payment reasonably satisfactory to the Administrative Agent.

(e) Any Foreign Lender that is entitled to an exemption from or reduction of withholding tax under the law of the jurisdiction in which the Borrower is located, or any treaty to which such jurisdiction is a party, with respect to payments under this Agreement shall deliver to the Borrower (with a copy to the Administrative Agent), at the time or times prescribed by applicable law, such properly completed and executed documentation prescribed by applicable law or reasonably requested by the Borrower as will permit such payments to be made without withholding or at a reduced rate of withholding, provided that such Foreign Lender has received written notice from the Borrower advising it of the availability of such exemption or reduction and supplying all applicable documentation provided by such jurisdiction.

(f) If the Administrative Agent, a Lender, the Issuing Banks Agent or an Issuing Bank determines, in its sole discretion, that it has received a refund of any Taxes or Other Taxes as to which it has been indemnified by the Borrower or with respect to which the Borrower has paid additional amounts pursuant to this Section, it shall pay over such refund to the Borrower (but only to the extent of indemnity payments made, or additional amounts paid, by the Borrower under this Section with respect to the Taxes or Other Taxes giving rise to such refund), net of all reasonable out-of-pocket expenses of

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the Administrative Agent, such Lender, the Issuing Banks Agent or such Issuing Bank and without interest (other than any interest paid by the relevant Governmental Authority with respect to such refund); provided, that the Borrower, upon the request of the Administrative Agent, such Lender, the Issuing Banks Agent or such Issuing Bank agrees to repay the amount paid over to the Borrower (plus any interest imposed by the relevant Governmental Authority) by the Administrative Agent, such Lender, the Issuing Banks Agent or such Issuing Bank in the event the Administrative Agent, such Lender, the Issuing Banks Agent or such Issuing Bank is required to repay such refund to such Governmental Authority. This Section shall not be construed to require the Administrative Agent, any Lender, the Issuing Banks Agent or any Issuing Bank to make available its tax returns (or any other information relating to its taxes which it deems confidential) to the Borrower or any other Person.

(g) Notwithstanding any provision of the Loan Documents to the contrary, this Section shall be the sole provision governing indemnities and claims for Indemnified Taxes and Other Taxes under the Loan Documents.

SECTION 2.19. Payments Generally; Pro Rata Treatment; Sharing of Set-offs. (a) The Borrower shall make each payment required to be made by it hereunder or under any other Loan Document (whether of principal, interest, fees or reimbursement of LC Disbursements, or of amounts payable under Section 2.16, 2.17 or 2.18, or otherwise) prior to the time expressly required hereunder or under such other Loan Document for such payment (or, if no such time is expressly required, prior to 12:00 noon, New York City time), on the date when due, in immediately available funds, without set-off or counterclaim. Any amounts received after such time on any date may, in the discretion of the Administrative Agent, be deemed to have been received on the next succeeding Business Day for purposes of calculating interest thereon. All such payments shall be made to the Administrative Agent at its offices at 270 Park Avenue, New York, New York, except payments to be made directly to an Issuing Bank or the Issuing Banks Agent as expressly provided herein and except that payments pursuant to Sections 2.16, 2.17, 2.18 and 9.03 shall be made directly to the Persons entitled thereto and payments pursuant to other Loan Documents shall be made to the Persons specified therein. The Administrative Agent shall distribute any such payments received by it for the account of any other Person to the appropriate recipient promptly following receipt thereof. If any payment under any Loan Document shall be due on a day that is not a Business Day, the date for payment shall be extended to the next succeeding Business Day, and, in the case of any payment accruing interest, interest thereon shall be payable for the period of such extension. All payments under each Loan Document shall be made in dollars.

(b) If at any time insufficient funds are received by and available to the Administrative Agent to pay fully all amounts of principal, interest and fees then due hereunder, such funds shall be applied (i) first, towards payment of interest and fees then due hereunder, ratably among the parties entitled thereto in accordance with the amounts of interest and fees then due to such parties, and (ii) second, towards payment of principal then due hereunder, ratably among the parties entitled thereto in accordance with the amounts of principal then due to such parties.

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(c) If any Lender shall, by exercising any right of set-off or counterclaim or otherwise, obtain payment in respect of any principal of or interest on any of its Revolving Loans or Term Loans resulting in such Lender receiving payment of a greater proportion of the aggregate amount of its Revolving Loans or Term Loans and accrued interest thereon than the proportion received by any other Lender, then the Lender receiving such greater proportion shall purchase (for cash at face value) participations in the Revolving Loans and Term Loans of other Lenders to the extent necessary so that the benefit of all such payments shall be shared by the Lenders ratably in accordance with the aggregate amount of principal of and accrued interest on their respective Revolving Loans and Term Loans; provided that (i) if any such participations are purchased and all or any portion of the payment giving rise thereto is recovered, such participations shall be rescinded and the purchase price restored to the extent of such recovery, without interest, and (ii) the provisions of this paragraph shall not be construed to apply to any payment made by the Borrower pursuant to and in accordance with the express terms of this Agreement or any payment obtained by a Lender as consideration for the assignment of or sale of a participation in any of its Loans to any assignee or participant, other than to the Borrower or any Subsidiary or Affiliate thereof (as to which the provisions of this paragraph shall apply). The Borrower consents to the foregoing and agrees, to the extent it may effectively do so under applicable law, that any Lender acquiring a participation pursuant to the foregoing arrangements may exercise against the Borrower rights of set-off and counterclaim with respect to such participation as fully as if such Lender were a direct creditor of the Borrower in the amount of such participation.

(d) Unless the Administrative Agent shall have received notice from the Borrower prior to the date on which any payment is due to the Administrative Agent for the account of the Lenders or an Issuing Bank hereunder, that the Borrower will not make such payment, the Administrative Agent may assume that the Borrower has made such payment on such date in accordance herewith and may, in reliance upon such assumption, distribute to the Lenders or the applicable Issuing Bank, as the case may be, the amount due. In such event, if the Borrower has not in fact made such payment, then each of the Lenders or such Issuing Bank, as the case may be, severally agrees to repay to the Administrative Agent forthwith on demand the amount so distributed to such Lender or Issuing Bank with interest thereon, for each day from and including the date such amount is distributed to it to but excluding the date of payment to the Administrative Agent at the greater of the Federal Funds Effective Rate and a rate determined by the Administrative Agent in accordance with banking industry rules on interbank compensation.

(e) If any Lender shall fail to make any payment required to be made by it pursuant to Section 2.07(b), 2.19(d) or 9.03(c), then the Administrative Agent may, in its discretion (notwithstanding any contrary provision hereof), apply any amounts thereafter received by the Administrative Agent for the account of such Lender to satisfy such Lender’s obligations under such Sections until all such unsatisfied obligations are fully paid.

SECTION 2.20. Mitigation Obligations; Replacement of Lenders. (a) If any Lender requests compensation under Section 2.16, or if the Borrower is required to pay any additional amount to any Lender or any Governmental Authority for the account

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of any Lender pursuant to Section 2.18, then such Lender shall use reasonable efforts to designate a different lending office for funding or booking its Loans hereunder or to assign its rights and obligations hereunder to another of its offices, branches or affiliates, if, in the judgment of such Lender, such designation or assignment (i) would eliminate or reduce amounts payable pursuant to Section 2.16 or 2.18, as the case may be, in the future and (ii) would not subject such Lender to any unreimbursed cost or expense and would not otherwise be disadvantageous in any material respect to such Lender. The Borrower hereby agrees to pay all reasonable out-of-pocket costs and expenses incurred by any Lender in connection with any such designation or assignment.

(b) If any Lender requests compensation under Section 2.16, or if the Borrower is required to pay any additional amount to any Lender or any Governmental Authority for the account of any Lender pursuant to Section 2.18, or if any Lender defaults in its obligation to fund Loans hereunder, then the Borrower may, at its sole expense and effort, upon notice to such Lender and the Administrative Agent, require such Lender to assign and delegate, without recourse (in accordance with and subject to the restrictions contained in Section 9.04), all its interests, rights and obligations under this Agreement to an assignee that shall assume such obligations (which assignee may be another Lender, if a Lender accepts such assignment); provided that (i) the Borrower shall have received the prior written consent of the Administrative Agent, which consent shall not unreasonably be withheld or delayed, (ii) such Lender shall have received payment of an amount equal to the outstanding principal of its Loans, accrued interest thereon, accrued fees and all other amounts payable to it hereunder, from the assignee (to the extent of such outstanding principal and accrued interest and fees) or the Borrower (in the case of all other amounts) and (iii) in the case of any such assignment resulting from a claim for compensation under Section 2.16 or payments required to be made pursuant to Section 2.18, such assignment will result in a material reduction in such compensation or payments. A Lender shall not be required to make any such assignment and delegation if, prior thereto, as a result of a waiver by such Lender or otherwise, the circumstances entitling the Borrower to require such assignment and delegation cease to apply.

ARTICLE III

Representations and Warranties

The Borrower represents and warrants to the Lenders that:

SECTION 3.01. Organization; Powers. The Borrower and each of the Subsidiaries is duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or organization, as applicable, has all requisite power and authority to carry on its business as now conducted and, except where the failure to do so, individually or in the aggregate, has not had and would not reasonably be expected to result in a Material Adverse Effect, is qualified to do business in, and is in good standing in, every jurisdiction where such qualification is required.

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SECTION 3.02. Authorization; Enforceability. The Transactions to be entered into by each Loan Party are within such Loan Party’s corporate or other organizational powers and have been duly authorized by all necessary corporate or other organizational and, if required, stockholder action. The Amendment Agreement has been duly executed and delivered by the Borrower, and the Amendment Agreement and this Agreement constitute, and each other Loan Document to which any Loan Party is to be a party, when executed and delivered by such Loan Party, will constitute, a legal, valid and binding obligation of the Borrower or such Loan Party (as the case may be), enforceable in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium or other laws affecting creditors’ rights generally and subject to general principles of equity, regardless of whether considered in a proceeding in equity or at law.

SECTION 3.03. Governmental Approvals; No Conflicts. The Transactions (a) do not require any consent or approval of, registration or filing with, or any other action by, any Governmental Authority, except such as have been obtained or made and are in full force and effect and except filings necessary to perfect Liens created under the Loan Documents, (b) will not violate any applicable law or regulation or order of any Governmental Authority (except where such violation has not resulted, and would not reasonably be expected to result in, a Material Adverse Effect) or the charter, by-laws or other organizational documents of the Borrower or any of the Subsidiaries, (c) will not violate or result in a default under any indenture or any other material agreement or instrument binding upon the Borrower or any of the Subsidiaries or its assets, or give rise to a right thereunder to require any payment to be made by the Borrower or any of the Subsidiaries, and (d) will not result in the creation or imposition of any Lien on any asset of the Borrower or any of the Subsidiaries, except Liens created under the Loan Documents or otherwise permitted under Section 6.02.

SECTION 3.04. Financial Condition; No Material Adverse Change. (a) The Borrower has heretofore furnished to the Lenders its consolidated balance sheet and statements of income, stockholders’ equity and cash flows as of and for the fiscal year ended December 31, 2007, reported on by PricewaterhouseCoopers LLP, independent registered public accounting firm, certified by its chief financial officer. Such financial statements present fairly, in all material respects, the financial position and results of operations and cash flows of the Borrower and the consolidated Subsidiaries as of such dates and for such periods in accordance with GAAP.

(b) Except (i) as set forth in the Borrower’s filings with the SEC publicly available after January 1, 2008 and prior to March 30, 2009 (the “SEC Documents”) or in the projections included in the Information Memorandum, and (ii) any event, condition or circumstance arising solely from the report of PricewaterhouseCoopers LLP on the consolidated balance sheet and statements of income, stockholders’ equity and cash flows of the Borrower as of and for the fiscal year ended December 31, 2008, containing any “going concern” or like qualification or exception, since December 31, 2007, there has been no event, condition or circumstance that has had or would reasonably be expected to have a Material Adverse Effect.

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SECTION 3.05. Properties. (a) The Borrower and each of the Subsidiaries has good title to, or valid leasehold interests in, all its real and personal property material to its business, except for minor defects in title that do not interfere with its ability to conduct its business as currently conducted or to utilize such properties for their intended purposes.

(b) The Borrower and each of the Subsidiaries owns, or is licensed to use, all trademarks, tradenames, copyrights, patents and other intellectual property material to the business of the Borrower and the Subsidiaries, taken as a whole, and, to the knowledge of the Borrower, the use thereof by the Borrower and the Subsidiaries does not infringe upon the rights of any other Person, except for any such infringements that, individually or in the aggregate, has not had and would not reasonably be expected to result in a Material Adverse Effect.

SECTION 3.06. Litigation and Environmental Matters. (a) Except as set forth in the SEC Documents, there are no actions, suits or proceedings by or before any arbitrator or Governmental Authority pending against or, to the knowledge of the Borrower, threatened against or affecting the Borrower or any of the Subsidiaries (i) as to which there is a reasonable possibility of an adverse determination and that, if adversely determined, would reasonably be expected, individually or in the aggregate, to result in a Material Adverse Effect or (ii) that involve any of the Loan Documents or the Transactions.

(b) Except with respect to matters that, individually or in the aggregate, have not had and would not reasonably be expected to result in a Material Adverse Effect, neither the Borrower nor any of the Subsidiaries (i) has failed to comply with any Environmental Law or to obtain, maintain or comply with any permit, license or other approval required under any Environmental Law, (ii) has become subject to any Environmental Liability, (iii) has received written notice of any claim with respect to any Environmental Liability or (iv) knows of any basis for any Environmental Liability.

SECTION 3.07. Compliance with Laws and Agreements. The Borrower and each of the Subsidiaries is in compliance with all laws, regulations and orders of any Governmental Authority applicable to it or its property and all indentures, agreements and other instruments binding upon it or its property, except where the failure to do so, individually or in the aggregate, has not had and would not reasonably be expected to result in a Material Adverse Effect.

SECTION 3.08. Investment Company Status. Neither the Borrower nor any of the Subsidiaries is an “investment company” as defined in, or subject to regulation under, the Investment Company Act of 1940.

SECTION 3.09. Taxes. The Borrower and each of the Subsidiaries has timely filed or caused to be filed all Tax returns and reports required to have been filed and has paid or caused to be paid all Taxes required to have been paid by it, except (a) any Taxes that are being contested in good faith by appropriate proceedings and for which the Borrower or such Subsidiary, as applicable, has set aside on its books adequate reserves or (b) to the extent that the failure to do so has not had and would not reasonably be expected to result in a Material Adverse Effect.

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SECTION 3.10. ERISA. No ERISA Event has occurred or is reasonably expected to occur that, when taken together with all other such ERISA Events for which liability is reasonably expected to occur, would reasonably be expected to result in a Material Adverse Effect. The present value of all accumulated benefit obligations under each Plan (based on the assumptions used for purposes of Statement of Financial Accounting Standards No. 87) did not, as of the date of the most recent financial statements reflecting such amounts, exceed by more than $25,000,000 the fair market value of the assets of such Plan, and the present value of all accumulated benefit obligations of all Plans (based on the assumptions used for purposes of Statement of Financial Accounting Standards No. 87) did not, as of the date of the most recent financial statements reflecting such amounts, exceed by more than $25,000,000 the fair market value of the assets of all such Plans.

SECTION 3.11. Disclosure. The Borrower has delivered to the Administrative Agent true and correct copies of the Viacom Agreements. Neither the Information Memorandum nor any of the other reports, financial statements, certificates or other information furnished by or on behalf of any Loan Party to the Administrative Agent, the Issuing Banks Agent, any Lender or any Issuing Bank in connection with the negotiation of this Agreement or any other Loan Document or delivered hereunder or thereunder (as modified or supplemented by other written information so furnished) contains any material misstatement of fact or omits to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, taken as a whole, not misleading; provided that, with respect to projected financial information, the Borrower represents only that such information was prepared in good faith based upon assumptions believed to be reasonable at the time when prepared, it being recognized by the Lenders that such projections and other information regarding future events are not to be viewed as facts and that actual results or developments during the period or periods covered may differ from the delivered projections and other prospective information.

SECTION 3.12. Subsidiaries. Schedule 3.12 sets forth the name of, and the ownership interest of the Borrower in, each Subsidiary of the Borrower and identifies each Material Subsidiary, each Significant Foreign Subsidiary and each Foreign Subsidiary, in each case as of the Original Effective Date.

SECTION 3.13. Insurance. Schedule 3.13 sets forth a description of all insurance maintained by or on behalf of the Borrower and the Subsidiaries as of the Original Effective Date. As of the Original Effective Date, all premiums in respect of such insurance have been paid. The Borrower believes that the insurance maintained by or on behalf of the Borrower and the Subsidiaries is adequate.

SECTION 3.14. Labor Matters. As of the Restatement Effective Date, there are no material strikes, lockouts or slowdowns against the Borrower or any Subsidiary pending or, to the knowledge of the Borrower, threatened. The consummation

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of the Transactions will not give rise to any right of termination or right of renegotiation on the part of any union under any material collective bargaining agreement to which the Borrower or any Subsidiary is bound.

SECTION 3.15. Solvency. Immediately after the consummation of the Transactions to occur on the Restatement Effective Date and immediately following the making of each Loan made on the Restatement Effective Date and after giving effect to the application of the proceeds of such Loans, (a) the fair value of the assets of the Borrower and the other Loan Parties on a consolidated basis, at a fair valuation, will exceed its debts and liabilities, subordinated, contingent or otherwise; (b) the present fair saleable value of the property of the Borrower and the other Loan Parties on a consolidated basis will be greater than the amount that will be required to pay the probable liability of its debts and other liabilities, subordinated, contingent or otherwise, as such debts and other liabilities become absolute and matured; (c) the Borrower and the other Loan Parties on a consolidated basis will be able to pay its debts and liabilities, subordinated, contingent or otherwise, as such debts and liabilities become absolute and matured; and (d) the Borrower and the other Loan Parties on a consolidated basis will not have unreasonably small capital with which to conduct the business in which it is engaged as such business is now conducted and is proposed to be conducted following the Restatement Effective Date.

SECTION 3.16. Senior Indebtedness. The Obligations constitute “Senior Indebtedness” under and as defined in the Subordinated Debt Documents.

SECTION 3.17. Franchises. The Borrower and each of the Subsidiaries (a) is not in default under any material franchise agreement or material area development agreement between the Borrower and any of its Franchisees and (b) is in compliance with all state and federal franchise laws applicable to the Borrower and the Subsidiaries, except for instances of default or noncompliance that, individually or in the aggregate, have not had and would not reasonably be expected to result in a Material Adverse Effect.

SECTION 3.18. Security Interests. (a) When executed and delivered, the Security Documents will be effective to create in favor of the Administrative Agent, for the ratable benefit of the Secured Parties, a valid and enforceable security interest in the Collateral and (i) when the Collateral constituting certificated securities (as defined in the Uniform Commercial Code) is delivered to the Administrative Agent, together with instruments of transfer duly endorsed in blank, the security interest of the Administrative Agent therein will constitute a fully perfected Lien on, and security interest in, all right, title and interest of the pledgors in such Collateral, prior and superior in right to any other Person (it being understood that no representation is made under this clause (i) as to (A) any such Collateral that is subject to a Foreign Pledge Agreement or (B) the perfection or priority of any Lien to the extent that such perfection or priority is determined under the law of a jurisdiction outside the United States, which are covered by paragraph (b) below), and (ii) when financing statements in appropriate form are filed in the appropriate filing offices, the security interest of the Administrative Agent will constitute a fully perfected Lien on and security interest in all right, title and interest of the Loan Parties in

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the remaining Collateral to the extent perfection can be obtained by filing Uniform Commercial Code financing statements, prior and superior to the rights of any other Person subject only to the Liens permitted by Section 6.02.

(b) After taking the actions specified for perfection therein, each Foreign Pledge Agreement, when executed and delivered, will be effective under applicable law to create in favor of the Administrative Agent, for the ratable benefit of the Secured Parties, a valid and enforceable security interest in the Collateral subject thereto, and will constitute a fully perfected Lien on and security interest in all right, title and interest of the Loan Parties in the Collateral subject thereto, prior and superior to the rights of any other Person.

(c) When the Security Agreement or an adequate summary thereof is properly filed in the United States Patent and Trademark Office and the United States Copyright Office, and, with respect to Collateral in which a security interest cannot be perfected by such filings, upon the proper filing of the financing statements referred to in paragraph (a) above, the Security Agreement and such financing statements shall constitute a fully perfected Lien on, and security interest in, all right, title and interest of the grantors thereunder in the Intellectual Property (as defined in the Security Agreement), in each case prior and superior to the rights of any other Person subject only to Permitted Encumbrances (it being understood that subsequent recordings in the United States Patent and Trademark Office and the United States Copyright Office may be necessary to perfect a Lien on registered trademarks and patents, trademark and patent applications and registered copyrights acquired by the Loan Parties since the date of the Security Agreement).

(d) Each Mortgage, upon execution and delivery thereof by the parties thereto, shall be effective to create in favor of the Administrative Agent, for the ratable benefit of the Secured Parties, a legal, valid and enforceable Lien on all of the applicable Loan Party’s right, title and interest in and to the Mortgaged Property thereunder and the proceeds thereof, and when such Mortgage is filed in the proper real estate filing offices, such Mortgage shall constitute a fully perfected Lien on, and security interest in, all right, title and interest of the applicable Loan Party in such Mortgaged Property and the proceeds thereof, in each case prior and superior to the rights of any other Person subject only to Permitted Encumbrances.

(e) Upon the execution by (i) the applicable Loan Party, (ii) the relevant depositary bank or securities intermediary and (iii) the Administrative Agent of an Account Control Agreement in respect of a deposit account or a securities account, the security interest created in favor of the Administrative Agent, for the ratable benefit of the Secured Parties, by the Security Agreement shall constitute a fully perfected Lien on, and security interest in, all right, title and interest of the applicable Loan Party in such deposit account or securities account and the proceeds thereof, in each case prior and superior to the rights of any other Person.

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SECTION 3.19. Use of Proceeds. The proceeds of the Term Loans and the Revolving Loans made prior to the Restatement Effective Date were used, and Letters of Credit were issued, only for the purposes set forth in the Original Credit Agreement.

SECTION 3.20. Federal Reserve Regulation. No part of the proceeds of any of the Loans were or will be used for any purpose which violates or is inconsistent with the provisions of Regulation T, U or X of the Board. None of Borrower or any of the Subsidiaries is engaged or will engage, principally or as one of its important activities, in the business of extending credit for the purpose of “purchasing” or “carrying” any “margin stock” within the meaning of Regulation U of the Board. As of the Restatement Effective Date, not more than 25% of the value of the assets of the Borrower, or of the Borrower and the Subsidiaries taken as a whole, which are subject to the restrictions contained in Article VI constitute “margin stock” within the foregoing meaning. If the proceeds of any Loans are to be used in a manner which would cause such Loans to be classified as “purpose credits” under Regulation U of the Board, then at the time of the making of such Loans and at the time of the making of each Loan thereafter (after applying the proceeds of all Loans then being or theretofore made), not more than 25% of the value of the assets of the Borrower, or of the Borrower and the Subsidiaries taken as a whole, which are subject to the restrictions contained in Article VI shall constitute “margin stock” within the foregoing meaning.

ARTICLE IV

Conditions

SECTION 4.01. Restatement Effective Date. The effectiveness of the amendment and restatement of the Original Credit Agreement in the form of this Agreement is subject to the satisfaction of the conditions precedent set forth in the Amendment Agreement (or waiver thereof in accordance with the terms of the Amendment Agreement).

SECTION 4.02. Each Credit Event. (a) The obligation of each Lender to make a Loan on the occasion of any Borrowing is subject to receipt of the request therefor in accordance herewith and to the satisfaction of the following conditions:

(i) the representations and warranties of each Loan Party set forth in the Loan Documents shall be true and correct in all material respects on and as of the date of such Borrowing (or, if any such representation or warranty is expressly stated to have been made as of a specific date, as of such specific date); and

(ii) at the time of and immediately after giving effect to such Borrowing, no Default shall have occurred and be continuing.

(b) The obligation of an Issuing Bank to amend, renew or extend any Letter of Credit is subject to the satisfaction of the condition that, at the time of and immediately after giving effect to such amendment, renewal or extension of such Letter of Credit, no Default shall have occurred and be continuing.

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Each Borrowing shall be deemed to constitute a representation and warranty by the Borrower on the date thereof as to the matters specified in paragraph (a) of this Section, and each amendment, renewal or extension of a Letter of Credit shall be deemed to constitute a representation and warranty by the Borrower on the date hereof as to the matters specified in paragraph (b) of this Section.

ARTICLE V

Affirmative Covenants

Until the Commitments have expired or been terminated and the principal of and interest on each Loan and all fees payable hereunder shall have been paid in full and all Letters of Credit shall have expired or terminated and all LC Disbursements shall have been reimbursed, the Borrower covenants and agrees with the Lenders that:

SECTION 5.01. Financial Statements and Other Information. The Borrower will furnish to the Administrative Agent, for distribution to the Lenders:

(a) within 90 days after the end of each fiscal year of the Borrower, its audited consolidated balance sheet and related audited statements of operations, stockholders’ equity and cash flows as of the end of and for such year, setting forth in each case in comparative form the figures for the previous fiscal year, all reported on by PricewaterhouseCoopers LLP or other independent registered public accounting firm of recognized national standing (without, other than in the case of the consolidated balance sheet and related statements of operations, stockholders’ equity and cash flows as of the end of and for the fiscal year ending December 31, 2009, a “going concern” or like qualification or exception and without any qualification or exception as to the scope of such audit) to the effect that such consolidated financial statements present fairly in all material respects the financial condition and results of operations of the Borrower and the consolidated Subsidiaries on a consolidated basis in accordance with GAAP (it being understood that such financial statements and opinion may be furnished, if included therein, in the form of the Borrower’s Annual Report on Form 10-K and any related Annual Report delivered to stockholders and filed with the SEC);

(b) within 45 days after the end of each of the first three fiscal quarters of each fiscal year of the Borrower, its consolidated balance sheet and related statements of operations, stockholders’ equity and cash flows as of the end of and for such fiscal quarter and the then elapsed portion of the fiscal year, setting forth in each case in comparative form the figures for the corresponding period or periods of (or, in the case of the balance sheet, as of the end of) the previous fiscal year, all certified by one of its Financial Officers as presenting fairly in all material respects the financial condition and results of operations of the Borrower

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and the consolidated Subsidiaries on a consolidated basis in accordance with GAAP, subject to normal year-end audit adjustments and the absence of footnotes (it being understood that such financial statements may be furnished, if included therein, in the form of the Borrower’s Quarterly Report on Form 10-Q filed with the SEC);

(c) concurrently with any delivery of financial statements under clause (a) or (b) above, a certificate of a Financial Officer of the Borrower (i) certifying as to whether a Default has occurred and, if a Default has occurred, specifying the details thereof and any action taken or proposed to be taken with respect thereto, (ii) certifying that all notices required to be provided under Section 5.03(a), 5.11 or 5.12(b) have been provided, (iii) setting forth reasonably detailed calculations demonstrating compliance with Sections 6.12, 6.13 and 6.14, (iv) stating whether any change in GAAP or in the application thereof has occurred since the date of the consolidated balance sheet of the Borrower theretofore most recently delivered under clause (a) above and, if any such change has occurred, specifying the effect of such change on the financial statements accompanying such certificate, (v) in the case of any delivery of financial statements under clause (a) above, setting forth a reasonably detailed calculation of Excess Cash Flow for the applicable fiscal year of the Borrower and (vi) setting forth a list of (A) Permitted Store Sales and Permitted Store Swaps effected during the most recent fiscal quarter covered by such financial statements, (B) any other asset sold, transferred or otherwise disposed of by the Borrower and the Subsidiaries during the most recent fiscal quarter covered by such financial statements for consideration having a fair value of $5,000,000 or more and (C) individual Capital Expenditure transactions of $5,000,000 or more effected during the most recent fiscal quarter covered by such financial statements, specifying the amounts thereof;

(d) concurrently with any delivery of financial statements under clause (a) above, a certificate of the accounting firm that reported on such financial statements stating whether they obtained knowledge during the course of their examination of such financial statements of any Default (which certificate may be limited to the extent required by accounting rules or guidelines);

(e) promptly after the same become publicly available, copies of all periodic and other reports and proxy statements filed by the Borrower or any Subsidiary with the SEC, or any Governmental Authority succeeding to any or all of the functions of the SEC, or with any national securities exchange, or distributed by the Borrower to its shareholders generally, as the case may be;

(f) not later than (x) the 20th Business Day after the end of each month that is not the end of a fiscal quarter of the Borrower, (y) the 45th day after the end of each month that is also the end of each of the first three fiscal quarters of each fiscal year of the Borrower and (z) the 90th day after the end of each month that is also the end of each fiscal year of the Borrower:

(i) an unaudited consolidated income statement of the Borrower for such month and for the elapsed portion of the fiscal quarter including such month, in each case, broken down by domestic and international operations, together with (A) comparative consolidated financial information with respect to the elapsed portion of the corresponding fiscal quarter during the prior fiscal year and (B) a reconciliation to the forecast with respect to the corresponding periods contained in the then-current business plan and a detailed explanation of material variances from such forecast,

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(ii) an unaudited consolidated balance sheet of the Borrower as of the last day of such month, together with comparative consolidated financial information with respect to the last day of the corresponding month of the prior fiscal year, and an unaudited consolidated statement of cash flows of the Borrower for such month and the elapsed portion of the fiscal quarter including such month, together with comparative financial information with respect to the elapsed portion of the corresponding fiscal quarter during the prior fiscal year, and setting forth (A) the amount of Capital Expenditures of the Borrower and the Subsidiaries for such month and (B) the Borrower’s consolidated cash balance as of the last day of such month, broken down by domestic and international operations and Available Cash balances and other domestic cash balances, and

(iii) forecasted consolidated monthly financial statements of the Borrower for the ensuing two fiscal years (or, if shorter, forecasted monthly consolidated financial statements of the Borrower for each fiscal year through and including the fiscal year during which the Tranche B Maturity Date occurs),

in the case of all information delivered pursuant to this clause (f), in such form and detail as the quarterly financial statements delivered pursuant to clause (b) of this Section or such other format and detail as is reasonably acceptable to the Administrative Agent;

(g) not later than the 20th Business Day of each month, a consolidated cash flow forecast for the Borrower’s domestic operations for the ensuing 13 weeks, together with a reconciliation to the forecast contained in the then-current business plan and a detailed explanation of material variances from such forecast, in each case, broken down by week and otherwise in form and detail reasonably acceptable to the Administrative Agent;

(h) not later than (x) the 45th day after the end of each month that is also the end of each of the first three fiscal quarters of each fiscal year of the Borrower and (y) the 90th day after the end of each month that is also the end of each fiscal year of the Borrower, an unaudited income statement relating to the Borrower’s and the Subsidiaries’ foreign operations for the most recently ended fiscal quarter, together with (A) comparative financial information with respect to the

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corresponding period during the prior fiscal year and (B) a reconciliation to the forecast with respect to the corresponding period contained in the then current business plan and a detailed explanation of material variances from such forecast;

(i) not later than January 31st of each year, a comprehensive five-year business plan (or, if shorter, a business plan through and including the fiscal year during which the Tranche B Maturity Date occurs) for the Borrower and the Subsidiaries, covering (x) each month during the then current fiscal year, (y) each fiscal quarter for the following two fiscal years and (z) each fiscal year thereafter, which business plan will be in form and detail reasonably satisfactory to the Administrative Agent after consultation with the Borrower; and

(j) promptly following any request therefor, such other information (including key operational metrics) regarding the operations, business affairs and financial condition of, the Borrower or any Subsidiary, or compliance with the terms of any Loan Document, as the Administrative Agent or any Lender may reasonably request.

Reports and other information required to be delivered pursuant to clauses (a), (b) and (e) of this Section shall be deemed to have been delivered on the date on which the Borrower posts such reports on its website at www.blockbuster.com or when such reports are posted on the SEC’s website at www.sec.gov; provided that the Borrower shall deliver to the Administrative Agent at the time such financial statements are made available the certification of a Financial Officer, as required by clause (b) above, and, in the case of annual financial statements, the certification required by clause (c) above.

SECTION 5.02. Notices of Material Events. The Borrower will furnish to the Administrative Agent and, in the case of clauses (a) and (e) below, the Issuing Banks Agent, promptly after any Financial Officer or other executive officer of the Borrower becomes aware thereof, written notice of the following:

(a) the occurrence of any Default;

(b) the filing or commencement of any action, suit or proceeding by or before any arbitrator or Governmental Authority against or affecting, the Borrower or any Subsidiary that, if adversely determined, would reasonably be expected to result in a Material Adverse Effect;

(c) the occurrence of any ERISA Event that, alone or together with any other ERISA Events that have occurred, would reasonably be expected to result in liability of the Borrower and the Subsidiaries in an aggregate amount exceeding $25,000,000;

(d) any other event or occurrence that results in, or would reasonably be expected to result in, a Material Adverse Effect; and

(e) the occurrence of any Viacom Beneficiary Cash Collateral Release.

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Each notice delivered under this Section shall be accompanied by a statement of a Financial Officer or other executive officer of the Borrower setting forth the details of the event or development requiring such notice and any action taken or proposed to be taken with respect thereto.

SECTION 5.03. Information Regarding Collateral. The Borrower will furnish to the Administrative Agent prompt written notice of any change (a) in any Loan Party’s legal name, (b) in any Loan Party’s identity, form of organization or jurisdiction of organization or (c) in any Loan Party’s Federal Taxpayer Identification Number or identifying number (if any) assigned by the jurisdiction of its organization. The Borrower agrees not to effect or permit any change referred to in the preceding sentence unless all filings have been made under the Uniform Commercial Code or otherwise that are required in order for the Administrative Agent to continue at all times following such change to have a valid, legal and perfected first priority security interest in all the Collateral.

SECTION 5.04. Existence; Conduct of Business. The Borrower will, and will cause each of the Subsidiaries to, do or cause to be done all things necessary to preserve, renew and keep in full force and effect its legal existence and (except where the failure to do so would not reasonably be expected to result in a Material Adverse Effect) the rights, licenses, permits, privileges, franchises, patents, copyrights, trademarks and trade names material to the conduct of its business; provided that the foregoing shall not prohibit any merger, consolidation, liquidation or dissolution permitted under Section 6.03.

SECTION 5.05. Payment of Obligations. The Borrower will, and will cause each of the Subsidiaries to, pay its Taxes and other material obligations (other than Indebtedness), before the same shall become delinquent or in default, except where (a) the validity or amount thereof is being contested in good faith by appropriate proceedings, and the Borrower or such Subsidiary has set aside on its books adequate reserves with respect thereto in accordance with GAAP, and (b) the failure to make payment would not reasonably be expected to result in a Material Adverse Effect.

SECTION 5.06. Maintenance of Properties. The Borrower will, and will cause each of the Subsidiaries to, keep and maintain all property material to the conduct of its business in good working order and condition, ordinary wear and tear excepted. In addition, the Borrower will, and will cause each of the Subsidiaries to, from time to time make or cause to be made all appropriate repairs, renewals and replacements, except where the failure to do so would not reasonably be expected to result in a Material Adverse Effect.

SECTION 5.07. Insurance. The Borrower will, and will cause each of the Subsidiaries to, maintain, with financially sound and reputable insurance companies insurance in such amounts (with no greater risk retention) and against such risks as a prudent company with similar financial resources engaged in the same or similar businesses operating in the same or similar locations would maintain. The Borrower will furnish to the Lenders, upon reasonable written request of the Administrative Agent, information in reasonable detail as to the insurance so maintained.

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SECTION 5.08. Books and Records; Inspection and Audit Rights. The Borrower will, and will cause each of the Subsidiaries to, keep proper books of record and account in which full, true and correct entries are made of all dealings and transactions in relation to its business and activities. The Borrower will, and will cause each of the Subsidiaries to, permit any representatives designated by the Administrative Agent or any Lender, upon reasonable prior written notice, to visit and inspect its properties, to examine and make extracts from its books and records, and to discuss its affairs, finances and condition with its officers and independent accountants, all at such reasonable times during normal business hours and as often as reasonably requested.

SECTION 5.09. Compliance with Laws. The Borrower will, and will cause each of the Subsidiaries to, comply with all laws, rules, regulations and orders of any Governmental Authority applicable to it or its property, except where the failure to do so, individually or in the aggregate, would not reasonably be expected to result in a Material Adverse Effect.

SECTION 5.10. Use of Proceeds and Letters of Credit. The Revolving Loans made on or after the Restatement Effective Date will be used only for general corporate purposes, including working capital purposes, payment of fees and expenses incurred in connection with the Amendment Agreement and the deposit of the LC Cash Collateral pursuant to the Amendment Agreement. No part of the proceeds of any Loan will be used, whether directly or indirectly, for any purpose that entails a violation of any of the Regulations of the Board, including Regulations U and X.

SECTION 5.11. Additional Subsidiaries. If any Subsidiary is formed or acquired on or after the Restatement Effective Date, the Borrower will, within 10 Business Days after such Subsidiary is formed or acquired, notify the Administrative Agent and the Lenders thereof and within 15 Business Days after such Subsidiary is formed or acquired cause the Collateral and Guarantee Requirement to be satisfied with respect to such Subsidiary (if it is a Subsidiary Loan Party) and with respect to any Equity Interest in such Subsidiary, if it is a Domestic Subsidiary or a Significant Foreign Subsidiary, owned by or on behalf of any Loan Party (subject to the limits on Significant Foreign Subsidiaries set forth in clause (b) of the definition of “Collateral and Guarantee Requirement” and in the Collateral Agreement and the Security Agreement).

SECTION 5.12. Further Assurances. (a) The Borrower will, and will cause each Subsidiary Loan Party to, execute any and all further documents, financing statements, agreements and instruments, and take all such further actions (including the filing and recording of financing statements, fixture filings, Mortgages and other documents), that may be required under any applicable law, or that the Administrative Agent may reasonably request, to cause the Collateral and Guarantee Requirement to be and remain satisfied, all at the expense of the Loan Parties; provided that the Collateral and Guarantee Requirement need not be satisfied with respect to (i) any real property owned by the Borrower or any Subsidiary Loan Party with an individual fair market

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value (including fixtures and improvements) of $500,000 or less or (ii) any real property held by the Borrower or any Subsidiary Loan Party as a lessee under a lease. The Borrower also agrees to provide to the Administrative Agent, from time to time upon request, evidence reasonably satisfactory to the Administrative Agent as to the perfection and priority of the Liens created or intended to be created under the Security Documents.

(b) If any asset (including any real property or improvements thereto or any interest therein) that has an individual fair market value of more than $500,000 is owned or acquired by the Borrower or any Subsidiary Loan Party or owned by an entity at the time it becomes a Subsidiary Loan Party (in each case other than assets constituting Collateral under any Security Document that become subject to the Lien of such Security Document upon acquisition thereof), the Borrower will, to the extent it has not already done so, notify the Administrative Agent and the Lenders thereof, and, if requested by the Administrative Agent or the Required Lenders, the Borrower will cause such asset to be subjected to a Lien securing the Obligations and will take, and cause the Subsidiary Loan Parties to take, such actions as shall be necessary or reasonably requested by the Administrative Agent to grant and perfect such Liens, including actions described in paragraph (a) of this Section, all at the expense of the Loan Parties; provided that the Collateral and Guarantee Requirement need not be satisfied with respect to (i) any real property held by the Borrower or any Subsidiary as a lessee under a lease and (ii) any other assets with respect to which the Administrative Agent determines that the cost or impracticability of including such assets as Collateral would be excessive in relation to the benefits to the Lenders afforded thereby.

SECTION 5.13. Cash Management System. The Borrower will, and will cause each of the Subsidiaries to, continue to administer and conduct their existing cash management system in the ordinary course and consistently with past practice, including in connection with the making, processing and crediting of credit card and other deposits and the collection and transmission of funds in connection therewith; provided that the foregoing will not preclude the Borrower from implementing improvements in such cash management systems to achieve faster collection and transmission of funds so long as such improvements are described in reasonable detail in a notice furnished by the Borrower to the Administrative Agent reasonably in advance of any such implementation. Without limiting the foregoing, the Borrower will, and will cause each of its Domestic Subsidiaries to, continue to deposit cash and credit card receipts into local depositary banks substantially in accordance with their existing practice and schedules, to obtain availability of funds from such depositary banks substantially in accordance with existing schedules and on existing terms and cause available funds to be transferred by such depositary banks on such daily or other basis as in effect on the Restatement Effective Date, or, in each case, on such faster schedules as the Borrower may achieve pursuant to implementing improvements referred to in the immediately preceding sentence.

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ARTICLE VI

Negative Covenants

Until the Commitments have expired or terminated and the principal of and interest on each Loan and all fees payable hereunder have been paid in full and all Letters of Credit have expired or terminated and all LC Disbursements shall have been reimbursed, the Borrower covenants and agrees with the Lenders that:

SECTION 6.01. Indebtedness; Certain Equity Securities. (a) The Borrower will not, and will not permit any Subsidiary to, create, incur, assume or permit to exist any Indebtedness or any Attributable Debt in respect of Sale and Leaseback Transactions, except:

(i) Indebtedness created under the Loan Documents;

(ii) the Subordinated Debt;

(iii) Indebtedness existing on the Original Effective Date and, in the case of Indebtedness owed to Persons other than the Borrower or the Subsidiaries in a principal amount in excess of $1,000,000, set forth on Schedule 6.01;

(iv) unsecured Indebtedness of the Borrower, the Net Proceeds of which are used solely to prepay Term Loans and pay associated interest, costs and expenses within five Business Days of the receipt of the Net Proceeds of such unsecured Indebtedness;

(v) Indebtedness represented by Commercial Paper; provided that such Indebtedness is permitted pursuant to Section 6.13;

(vi) Permitted Subordinated Indebtedness; provided that such Indebtedness is permitted pursuant to Section 6.13;

(vii) other unsecured Indebtedness of the Borrower or any Subsidiary; provided that (A) the aggregate principal amount of Indebtedness permitted by this clause shall not exceed $50,000,000 at any time outstanding and (B) such Indebtedness is permitted pursuant to Section 6.13;

(viii) Indebtedness of the Foreign Subsidiaries (other than Indebtedness owed to the Borrower or any Domestic Subsidiary) in an aggregate principal amount at any time outstanding not in excess of the greater of (A) $100,000,000 and (B) an amount equal to 10% of the total assets of all the Foreign Subsidiaries as of the end of the most recent fiscal quarter in respect of which financial statements have been delivered pursuant to Section 5.01 (calculated on a combined basis for such Foreign Subsidiaries in accordance with GAAP); provided, in the case of any such Indebtedness incurred after the Restatement Effective Date, the Net Proceeds thereof shall be used to prepay Revolving Loans to the extent required by Section 2.12(e);

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(ix) unsecured Indebtedness of the Borrower owed to any Subsidiary and of any Subsidiary owed to the Borrower or any other Subsidiary; provided that (A) such Indebtedness owed by any Loan Party is subordinated to the Obligations in accordance with the provisions of an Affiliate Subordination Agreement and (B) Indebtedness of any Subsidiary that is not a Loan Party owed to the Borrower or any Subsidiary Loan Party shall be subject to Section 6.04;

(x) (A) any Indebtedness and Attributable Debt of the Borrower or any Subsidiary incurred to finance the acquisition, construction or improvement of any franchise development rights or capital or other long-term assets, including Capital Lease Obligations, (B) any Indebtedness or Attributable Debt assumed in connection with the acquisition of any capital or long-term assets or secured by a Lien on any such assets prior to the acquisition thereof (or prior to the acquisition of any Subsidiary holding such assets, provided that such Indebtedness or Attributable Debt was not incurred in contemplation thereof) and (C) Attributable Debt incurred in connection with Sale and Leaseback Transactions permitted by Section 6.06(b); provided that, in the case of any Indebtedness or Attributable Debt referred to in clause (A) or (B) above, (x) such Indebtedness or Attributable Debt is incurred prior to or within 90 days after the acquisition of such franchise development rights or such assets or the completion of such construction or improvement of such assets, (y) the amount of such Indebtedness or Attributable Debt does not exceed the cost of acquiring, constructing or improving such franchise development rights or such assets and (z) the aggregate principal amount of such Indebtedness and Attributable Debt, together with any Refinancing Indebtedness in respect thereof, shall not exceed $40,000,000 at any time outstanding;

(xi) Refinancing Indebtedness in respect of Indebtedness permitted by clauses (iii), (iv) and (x) above; provided that the amount of such Refinancing Indebtedness in respect of Indebtedness permitted by clause (x) above shall be subject to the limitation set forth in clause (x) above;

(xii) Guarantees permitted by Section 6.04(e); and

(xiii) Indebtedness (other than Long-Term Indebtedness) not in excess of $10,000,000 at any time outstanding incurred to finance the payment of premiums on insurance policies.

(b) The Borrower will not permit any Domestic Subsidiary or Significant Foreign Subsidiary to issue any preferred Equity Interests other than to the Borrower or any Subsidiary Loan Party; provided that any such preferred Equity Interests issued to the Borrower or any Subsidiary Loan Party shall be pledged pursuant to the terms of the Collateral Agreement or, in the case of Equity Interests of Significant Foreign Subsidiaries, a Foreign Pledge Agreement.

SECTION 6.02. Liens. The Borrower will not, and will not permit any Subsidiary to, create, incur, assume or permit to exist any Lien on any property or asset now owned or hereafter acquired by it, or assign or sell any income or revenues (including accounts receivable) or rights in respect of any thereof, except:

(a) Liens created under the Loan Documents;

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(b) Permitted Encumbrances;

(c) any Lien on any property or asset of the Borrower or any Subsidiary existing on the Original Effective Date and set forth in Schedule 6.02; provided that any such Lien shall secure only Indebtedness or obligations which it secured on the Original Effective Date or any Refinancing Indebtedness permitted in respect of any such Indebtedness or any refinancing of any such other obligation not constituting Indebtedness that does not significantly increase the amount thereof;

(d) Liens on franchise development rights or capital or other long-term assets acquired, constructed or improved by the Borrower or any Subsidiary after the Original Effective Date; provided that (i) such Liens secure Indebtedness permitted by Section 6.01(a)(x) or Refinancing Indebtedness in respect thereof permitted by Section 6.01(a)(xi), (ii) except in the case of Capital Lease Obligations permitted by Section 6.01(a)(x)(C), (A) such Liens are incurred prior to or within 90 days after such acquisition or the completion of such construction or improvement and (B) the Indebtedness secured thereby does not exceed the cost of acquiring, constructing or improving such rights or assets and (iii) such Liens shall not apply to any other assets of the Borrower or any Subsidiary;

(e) Liens on assets of Subsidiaries acquired after the Original Effective Date existing at the time of such acquisition and not incurred in contemplation thereof securing Indebtedness permitted by Section 6.01(a)(x);

(f) Liens on assets of Foreign Subsidiaries securing Indebtedness permitted by Section 6.01(a)(viii);

(g) Liens created pursuant to the express terms of the Viacom Agreements as in effect on the Original Effective Date, or as subsequently amended or modified to the extent permitted by Section 6.11; provided, however, that no Lien permitted under this clause (g) will extend to any Collateral;

(h) Liens on funds of the Borrower or any Subsidiary held in deposit accounts with third party providers of payment services securing credit card charge-back reimbursement and similar obligations of the Borrower or the Subsidiaries; provided that the amount of funds at any time subject to such Liens does not exceed $1,000,000; and

(i) Liens on insurance policies and proceeds of insurance policies (including rebates of premiums) securing Indebtedness incurred pursuant to Section 6.01(a)(xiii) to finance the payment of premiums on the insurance policies subject to such Liens.

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SECTION 6.03. Fundamental Changes. The Borrower will not, and will not permit any Subsidiary to, merge into or consolidate with any other Person, or permit any other Person to merge into or consolidate with it, or liquidate or dissolve, except that, if at the time thereof and immediately after giving effect thereto no Default shall have occurred and be continuing, (a) any wholly-owned Domestic Subsidiary may merge or consolidate with the Borrower in a transaction in which the Borrower is the surviving entity, (b) any Person may merge or consolidate with any Subsidiary in a transaction in which the surviving entity is a Subsidiary (and if any party to such merger is a Subsidiary Loan Party, is or will concurrently therewith become a Subsidiary Loan Party) and (c) any Subsidiary (other than a Subsidiary Loan Party) may liquidate or dissolve if the Borrower determines in good faith that such liquidation or dissolution is in the best interests of the Borrower and is not materially disadvantageous to the Lenders; provided, in each case that any such merger or consolidation involving a Person that is not a wholly-owned Subsidiary immediately prior to such merger shall not be permitted unless also permitted by Section 6.04.

SECTION 6.04. Investments, Loans, Advances, Guarantees and Acquisitions. The Borrower will not, and will not permit any of the Subsidiaries to, purchase, hold, acquire, make or permit to exist any Investment, except:

(a) Permitted Investments;

(b) Investments (other than in Subsidiaries) existing on the Original Effective Date;

(c) investments by the Borrower and the Subsidiaries in Equity Interests in their subsidiaries; provided that (i) such subsidiaries are Subsidiaries prior to such investments, (ii) any such Equity Interests held by a Loan Party in a Domestic Subsidiary or a Significant Foreign Subsidiary shall be pledged pursuant to the Collateral Agreement or a Foreign Pledge Agreement (subject to the limitations applicable to Equity Interests of a Significant Foreign Subsidiary referred to in the definition of “Collateral and Guarantee Requirement”) and (iii) the aggregate amount of such investments by Loan Parties in, and loans and advances by Loan Parties to, and Guarantees by Loan Parties of Indebtedness and other obligations of, Foreign Subsidiaries (excluding all such investments, loans, advances and Guarantees existing on the Amendment Agreement Effective Date) shall not exceed $20,000,000 at any time outstanding;

(d) loans or advances made by the Borrower to any Subsidiary and made by any Subsidiary to the Borrower or any other Subsidiary; provided that (i) such loans or advances comply with Section 6.01(a)(ix) and (ii) the amount of such loans and advances made by Loan Parties to Foreign Subsidiaries shall be subject to the limitation set forth in clause (c) above;

(e) Guarantees by the Borrower of Indebtedness or other obligations of any Subsidiary, and Guarantees by any Subsidiary of Indebtedness or other obligations of any other Subsidiary; provided that the amount of Indebtedness and other obligations of Foreign Subsidiaries that is Guaranteed by Loan Parties shall be subject to the limitation set forth in clause (c) above;

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(f) Investments received in connection with the bankruptcy or reorganization of, or settlement of delinquent accounts and disputes with, customers, Franchisees and suppliers, in each case in the ordinary course of business;

(g) Investments consisting of non-cash consideration permitted to be received in respect of sales, transfers or dispositions of assets permitted by Section 6.05, including Permitted Store Swaps; and

(h) other Investments in an aggregate amount not to exceed (A) on or prior to December 31, 2009, $5,000,000 at any time outstanding and (B) thereafter, $10,000,000, provided, however, that not more than $5,000,000 of such Investments in the aggregate outstanding at any time may be in the form of Investments in Equity Interests, evidences of Indebtedness or other securities of, or loans or advances to, or Guarantees of any Indebtedness or other obligation of, any Person.

SECTION 6.05. Asset Sales. The Borrower will not, and will not permit any of the Subsidiaries to, sell, transfer, lease or otherwise dispose of (in one transaction or a series of transactions) all or any substantial part of the assets of the Borrower and the Subsidiaries, taken as a whole, or any Equity Interest owned by it, nor will the Borrower permit any of the Subsidiaries to issue any additional Equity Interest in such Subsidiary (other than to the Borrower or a Subsidiary), except:

(a) sales of inventory, used or surplus equipment and Permitted Investments in the ordinary course of business, including sales to Franchisees;

(b) sales, transfers and dispositions to the Borrower or a Subsidiary; provided that any such sales, transfers or dispositions involving a Subsidiary that is not a Loan Party shall be made in compliance with Section 6.09;

(c) Permitted Store Sales and Permitted Store Swaps; provided that the sum of (i) the aggregate non-cash consideration received for all Permitted Store Sales (other than non-cash consideration permitted by clause (ii) of the proviso at the end of this Section in transactions involving consideration at least 75% of which is cash and cash equivalents) plus (ii) the aggregate fair market value of all Stores and related assets transferred by the Borrower and its Subsidiaries in Permitted Store Swaps (less any consideration in the form of cash and cash equivalents received in exchange therefor) does not exceed $25,000,000; and

(d) sales, transfers and other dispositions of assets (including sales of Equity Interests) that are consummated after July 2, 2007; provided that (i) the cumulative aggregate fair market value of all assets (including Equity Interests) sold, transferred or otherwise disposed of in reliance on this clause (d) (determined at the time of any such sale, transfer or other disposition and without

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regard to subsequent changes in such value) shall not exceed $45,000,000 and (ii) all proceeds of any such sale, transfer or other disposition consummated by the Borrower or any Domestic Subsidiary after the Restatement Effective Date that are in the form of cash and cash equivalents shall, substantially concurrently with the receipt thereof by the Borrower or such Domestic Subsidiary, be deposited in one or more deposit accounts or securities accounts that are subject to Account Control Agreements; and

(e) sales, transfers and other dispositions of assets (including sales of Equity Interests) that are consummated after July 2, 2007; provided that (i) the cumulative aggregate fair market value of all assets (including Equity Interests) sold, transferred or otherwise disposed of in reliance on this clause (e) (determined at the time of any such sale, transfer or other disposition and without regard to subsequent changes in such value) shall not exceed $75,000,000 and (ii) all proceeds of any such sale, transfer or other disposition consummated by the Borrower or any Domestic Subsidiary after the Restatement Effective Date that are in the form of cash and cash equivalents shall, substantially concurrently with the receipt thereof by the Borrower or such Domestic Subsidiary, be deposited in one or more deposit accounts or securities accounts that are subject to Account Control Agreements;

provided that all sales, transfers, leases and other dispositions permitted hereby (including sales of Equity Interests) (i) shall (except in the case of those permitted by clause (b) above) be made for fair value and (ii) shall be made solely for consideration of which at least 75% thereof is in cash or cash equivalents (provided that sales of Permitted Investments shall be made solely for cash or cash equivalents and Permitted Store Sales and Permitted Store Swaps may be effected for non-cash consideration to the extent permitted by clause (c) above).

SECTION 6.06. Sale and Leaseback Transactions. The Borrower will not, and will not permit any of the Subsidiaries to, enter into any arrangement, directly or indirectly, whereby it shall sell or transfer any property, real or personal, used or useful in its business, whether now owned or hereinafter acquired, and thereafter rent or lease such property or other property that it intends to use for substantially the same purpose or purposes as the property sold or transferred (a “Sale and Leaseback Transaction”), except for (a) any such sale of any fixed or capital assets that is made for cash consideration in an amount not less than the cost of such fixed or capital asset and is consummated within 90 days after the Borrower or any Subsidiary acquires or completes the construction of such fixed or capital asset and (b) any other such sale of any property, provided that (i) such sale is made for cash consideration in an amount not less than the fair market value of such property, (ii) the aggregate fair market value of all property sold in reliance on this clause (b) (determined at the time of any such sale and without regard to subsequent changes in such value) shall not exceed $28,000,000 and (iii) after giving effect to any such sale on a pro forma basis, including the incurrence of any Indebtedness arising therefrom and any repayment of Indebtedness with the proceeds thereof, the Leverage Ratio, determined as of the last day of the fiscal quarter of the Borrower most recently ended on or prior to the date of such sale, shall not exceed 2.50 to 1.00.

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SECTION 6.07. Hedging Agreements. The Borrower will not, and will not permit any of the Subsidiaries to, enter into any Hedging Agreement, other than Hedging Agreements entered into in the ordinary course of business to hedge or mitigate risks to which the Borrower or any Subsidiary is exposed in the conduct of its business or the management of its liabilities.

SECTION 6.08. Restricted Payments; Certain Payments of Indebtedness. (a) The Borrower will not, and will not permit any Subsidiary to, declare or make, or agree to pay or make, directly or indirectly, any Restricted Payment, or incur any obligation (contingent or otherwise) to do so, except (i) the Borrower may declare and pay dividends with respect to its capital stock payable solely in additional shares of its common stock, (ii) Subsidiaries may declare and pay dividends ratably with respect to their capital stock, (iii) the Borrower may declare and pay regular quarterly dividends with respect to the Convertible Preferred Stock (payable solely in shares of Convertible Preferred Stock or common stock of the Borrower) from time to time and (iv) the Borrower may acquire Equity Interests in the Borrower or options with respect thereto in exchange solely for Equity Interests in the Borrower or options for Equity Interests in the Borrower pursuant to stock option and other employee benefits plans of the Borrower.

(b) The Borrower will not, and will not permit any Subsidiary to, make or agree to pay or make, directly or indirectly, any payment or other distribution (whether in cash, securities or other property) of or in respect of principal of or interest on any Indebtedness, or any payment or other distribution (whether in cash, securities or other property), including any sinking fund or similar deposit, on account of the purchase, redemption, retirement, acquisition, cancellation or termination of any Indebtedness, except:

(i) payment of Indebtedness created under the Loan Documents;

(ii) payment of regularly scheduled interest and principal payments as and when due in respect of any Indebtedness;

(iii) refinancings of Indebtedness to the extent permitted by Section 6.01; and

(iv) payment of secured Indebtedness that becomes due as a result of the voluntary sale or transfer of the property or assets securing such Indebtedness; and

(v) prepayments of Capital Lease Obligations with respect to real estate interests in Stores or with respect to equipment for the purpose of enabling the Borrower or a Subsidiary to acquire such real estate interests or equipment.

SECTION 6.09. Transactions with Affiliates. The Borrower will not, and will not permit any Subsidiary to, sell, lease or otherwise transfer any property or assets to, or purchase, lease or otherwise acquire any property or assets from, or otherwise engage in any other transactions with, any of its Affiliates, except (a) transactions in the ordinary course of business that are at prices and on terms and conditions not less

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favorable to the Borrower or such Subsidiary than could be obtained on an arm’s-length basis from unrelated third parties, (b) transactions between a Loan Party and a Subsidiary that is not a Loan Party that are at prices and on terms and conditions not less favorable to such Loan Party than could be obtained on an arm’s-length basis from unrelated third parties, (c) transactions between or among the Borrower and the other Loan Parties not involving any other Affiliate, (d) the performance and payment by the Borrower of its obligations under, and other transactions required pursuant to, the Viacom Agreements, (e) Restricted Payments permitted pursuant to Section 6.08 and (f) Investments permitted pursuant to Section 6.04(c), 6.04(d) or 6.04(e).

SECTION 6.10. Restrictive Agreements. The Borrower will not, and will not permit any Subsidiary to, directly or indirectly, enter into, incur or permit to exist any agreement or other arrangement that prohibits, restricts or imposes any condition upon (a) the ability of the Borrower or any Subsidiary to create, incur or permit to exist any Lien upon any of its property or assets to secure any Obligations, or (b) the ability of any Subsidiary to pay dividends or other distributions with respect to any shares of its capital stock or to make or repay loans or advances to the Borrower or any other Subsidiary or to Guarantee Indebtedness of the Borrower or any other Subsidiary; provided that (i) the foregoing shall not apply to restrictions and conditions imposed by law or by any Loan Document or Subordinated Debt Document, (ii) the foregoing shall not apply to restrictions and conditions existing on the Original Effective Date identified on Schedule 6.10 (but shall apply to any extension or renewal of, or any amendment or modification expanding the scope of, any such restriction or condition), (iii) the foregoing shall not apply to customary restrictions and conditions contained in agreements relating to the sale of a Subsidiary pending such sale, provided such restrictions and conditions apply only to the Subsidiary that is to be sold and such sale is permitted hereunder, (iv) the foregoing shall not apply to restrictions and conditions imposed by agreements relating to Indebtedness of Foreign Subsidiaries permitted under clause (viii) of Section 6.01(a), provided that such restrictions and conditions apply only to Foreign Subsidiaries, (v) clause (a) of the foregoing shall not apply to restrictions or conditions imposed by any agreement relating to secured Indebtedness permitted by this Agreement if such restrictions or conditions apply only to the property or assets securing such Indebtedness and (vi) clause (a) of the foregoing shall not apply to customary provisions in leases restricting the assignment or subletting thereof.

SECTION 6.11. Amendment of Material Documents. The Borrower will not, and will not permit any Subsidiary to, amend, modify or waive any of its rights or increase its obligations under (a) its certificate of incorporation, by-laws or other organizational documents in a manner materially adverse to the interests of the Lenders, (b) any Viacom Agreement if such amendment, modification, waiver or increase, taken as a whole, results in, or would reasonably be expected to result in, a material adverse effect on the ability of the Loan Parties, taken as a whole, to perform any of their material obligations under any Loan Document, (c) the Subordinated Debt Documents in a manner materially adverse to the interests of the Lenders or (d) the terms of the Convertible Preferred Stock in a manner materially adverse to the interests of the Lenders.

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SECTION 6.12. Fixed Charge Coverage Ratio. The Borrower will not permit the Fixed Charge Coverage Ratio for any period of four consecutive fiscal quarters ending (a) after March 31, 2009 but on or prior to January 3, 2010 to be less than 1.25 to 1.00 and (b) after January 3, 2010 to be less than 1.30 to 1.00.

SECTION 6.13. Leverage Ratio. The Borrower will not permit the Leverage Ratio to exceed at any time 2.75 to 1.00.

SECTION 6.14. Capital Expenditures. The Borrower will not permit Capital Expenditures for (a) the fiscal year ending December 31, 2009 to exceed $30,000,000 in the aggregate (such amount being referred to as the “2009 CapEx Amount”), (b) the fiscal year ending December 31, 2010 to exceed $40,000,000 in the aggregate and (c) the fiscal year ending December 31, 2011 to exceed $80,000,000 in the aggregate; provided that up to $10,000,000 of the 2009 CapEx Amount that has not been expended to make Capital Expenditures during the fiscal year ending December 31, 2009 may be carried over for expenditure in the fiscal year ending December 31, 2010.

SECTION 6.15. Deposit and Securities Accounts. The Borrower will not permit on any Business Day the fair market value on such Business Day of cash and cash equivalents held in deposit accounts and securities accounts that are subject to Account Control Agreements to be less than 95% of the fair market value on such Business Day of all Available Cash. The Borrower will not, and will not permit any Domestic Subsidiary to, establish any deposit account or securities account that is a concentration account unless such deposit account or securities account is subject to an Account Control Agreement.

ARTICLE VII

Events of Default

If any of the following events (“Events of Default”) shall occur:

(a) the Borrower shall fail to pay any principal of any Loan or any reimbursement obligation in respect of any LC Disbursement when and as the same shall become due and payable, whether at the due date thereof or at a date fixed for prepayment thereof or otherwise;

(b) the Borrower shall fail to pay any interest on any Loan or any fee payable under this Agreement, or shall have failed to make any deposit required to be made pursuant to Section 2.06(h)(iii), in each case when and as the same shall come due and payable or shall be required to be so made, and such failure shall continue unremedied for a period of five days, or any Loan Party shall fail to pay any other amount (other than an amount referred to in clause (a) of this Article) payable under this Agreement or any other Loan Document, when and as the same shall become due and payable, and such failure shall continue unremedied for a period of ten days;

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(c) any representation or warranty made or deemed made by or on behalf of the Borrower or any Subsidiary in or in connection with any Loan Document or any amendment or modification thereof or waiver thereunder, or in any report, certificate, financial statement or other document furnished in writing pursuant to or in connection with any Loan Document or any amendment or modification thereof or waiver thereunder, shall prove to have been incorrect in any material respect when made or deemed made;

(d) the Borrower shall fail to observe or perform any covenant, condition or agreement contained in Article VI or in Sections 5.01(i), 5.02, 5.04 (with respect to the existence of the Borrower), 5.11 (with respect to the Collateral and Guarantee Requirement being satisfied concerning any new Domestic Subsidiary or new Significant Foreign Subsidiary being formed or acquired) or 5.13;

(e) any Loan Party shall fail to observe or perform any covenant, condition or agreement contained in any Loan Document (other than those specified in clause (a), (b) or (d) of this Article), and such failure shall continue unremedied for a period of 30 days (or, in the case of Sections 5.01(f), 5.01(g) and 5.01(h), three Business Days) after written notice thereof from the Administrative Agent to the Borrower (which notice will be given at the request of any Lender);

(f) the Borrower or any Subsidiary shall fail to make any payment (whether of principal or interest and regardless of amount) in respect of any Material Indebtedness, when and as the same shall become due and payable after giving effect to any applicable grace periods provided for in the document governing such Material Indebtedness;

(g) any event or condition occurs that results in any Material Indebtedness becoming due prior to its scheduled maturity or that enables or permits (with or without the giving of notice, the lapse of time or both) the holder or holders of any Material Indebtedness or any trustee or agent on its or their behalf to cause any Material Indebtedness to become due, or to require the prepayment, repurchase, redemption or defeasance thereof, prior to its scheduled maturity; provided that this clause (g) shall not apply to secured Indebtedness that becomes due as a result of the voluntary sale or transfer of the property or assets securing such Indebtedness;

(h) an involuntary proceeding shall be commenced or an involuntary petition shall be filed seeking (i) liquidation, reorganization or other relief in respect of the Borrower or any Material Subsidiary or its debts, or of a substantial part of its assets, under any Federal, state or foreign bankruptcy, insolvency, receivership or similar law now or hereafter in effect or (ii) the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for the Borrower or any Material Subsidiary or for a substantial part of its assets, and, in any such case, such proceeding or petition shall continue undismissed for 60 days or an order or decree approving or ordering any of the foregoing shall be entered;

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(i) the Borrower or any Material Subsidiary shall (i) voluntarily commence any proceeding or file any petition seeking liquidation, reorganization or other relief under any Federal, state or foreign bankruptcy, insolvency, receivership or similar law now or hereafter in effect, (ii) consent to the institution of, or fail to contest in a timely and appropriate manner, any proceeding or petition described in clause (h) of this Article, (iii) apply for or consent to the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for the Borrower or any Material Subsidiary or for a substantial part of its assets, (iv) file an answer admitting the material allegations of a petition filed against it in any such proceeding, (v) make a general assignment for the benefit of creditors or (vi) take any action for the purpose of effecting any of the foregoing;

(j) the Borrower or any Material Subsidiary shall become unable, admit in writing its inability or fail generally to pay its debts as they become due;

(k) one or more judgments for the payment of money in an aggregate amount (net of any insurance proceeds the Borrower or any such Subsidiary receives or is reasonably likely to receive within 90 days of such judgment) in excess of $25,000,000 shall be rendered by a court or other authority having jurisdiction against the Borrower or any Subsidiary or any combination thereof and the same shall remain undischarged for a period of 60 consecutive days during which execution shall not be effectively stayed, or any action shall be legally taken by a judgment creditor to attach or levy upon any assets of the Borrower or any Subsidiary to enforce any such judgment;

(l) an ERISA Event shall have occurred that, in the opinion of the Required Lenders, when taken together with all other ERISA Events that have occurred, would reasonably be expected to result in a Material Adverse Effect;

(m) any Guarantee or Lien purported to be created under any Security Document shall cease to be, or shall be asserted by any Loan Party not to be, a valid Guarantee or a valid and perfected Lien, with the priority required by the applicable Security Document, except in the case of a Lien, as a result of the Administrative Agent’s failure to maintain possession of any stock certificates delivered to it under the Collateral Agreement; or

(n) a Change in Control shall occur;

then, and in every such event (other than an event with respect to the Borrower described in clause (h) or (i) of this Article), and at any time thereafter during (but only during) the continuance of such event, the Administrative Agent shall at the request of the Required Lenders or may with the Required Lenders’ written consent, by notice to the Borrower, take either or both of the following actions, at the same or different times: (i) terminate the Commitments, and thereupon the Commitments shall terminate immediately, and (ii) declare the Loans then outstanding to be due and payable in whole (or in part, in which case any principal not so declared to be due and payable may thereafter be declared to be due and payable), and thereupon the principal of the Loans so declared to

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be due and payable, together with accrued interest thereon and all fees (including fees referred to in Section 2.13(b) or 2.13(c)) and other obligations of the Borrower accrued hereunder, shall become due and payable immediately, without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower; and in case of any event with respect to the Borrower described in clause (h) or (i) of this Article, the Commitments shall automatically terminate and the principal of the Loans then outstanding, together with accrued interest thereon and all fees and other obligations of the Borrower accrued hereunder, shall automatically become due and payable, without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower.

ARTICLE VIII

The Agents

Each of the Lenders and the Issuing Banks hereby irrevocably appoints the entity named as Administrative Agent in the heading of this Agreement to serve as administrative agent and collateral agent hereunder and under the other Loan Documents, and authorizes such entity to take such actions on its behalf and to exercise such powers as are delegated to the Administrative Agent by the terms of the Loan Documents, together with such actions and powers as are reasonably incidental thereto. In addition, to the extent required under the laws of any jurisdiction other than the United States, each of the Lenders and the Issuing Banks hereby grants to the Administrative Agent any required powers of attorney to execute any Security Document governed by the laws of such jurisdiction on such Lender’s or Issuing Bank’s behalf.

Each of the Lenders and the Issuing Banks hereby irrevocably appoints the entity named as Issuing Banks Agent in the heading of this Agreement to serve as the issuing banks agent hereunder and under the other Loan Documents and authorizes such entity to take such actions and to exercise such powers as are delegated to the Issuing Banks Agent by the terms of the Loan Documents, together with such actions and powers as are reasonably incidental thereto.

The bank serving as the Administrative Agent or the Issuing Banks Agent hereunder shall have the same rights and powers in its capacity as a Lender or an Issuing Bank as any other Lender or Issuing Bank and may exercise the same as though it were not the Administrative Agent or the Issuing Banks Agent, and such bank and its Affiliates may accept deposits from, lend money to and generally engage in any kind of business with the Borrower or any Subsidiary or other Affiliate thereof as if it were not the Administrative Agent or the Issuing Banks Agent hereunder.

The Administrative Agent and the Issuing Banks Agent shall not have any duties or obligations except those expressly set forth in the Loan Documents. Without limiting the generality of the foregoing, (a) neither the Administrative Agent nor the Issuing Banks Agent shall be subject to any fiduciary or other implied duties, regardless of whether a Default has occurred and is continuing, (b) neither the Administrative Agent

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nor the Issuing Banks Agent shall have any duty to take any discretionary action or exercise any discretionary powers, except discretionary rights and powers expressly contemplated by the Loan Documents that the Administrative Agent is required to exercise in writing by the Required Lenders (or such other number or percentage of the Lenders as shall be necessary under the circumstances as provided in Section 9.02) or that the Issuing Banks Agent is required to exercise, and (c) except as expressly set forth in the Loan Documents, neither the Administrative Agent nor the Issuing Banks Agent shall have any duty to disclose, and shall not be liable for the failure to disclose, any information relating to the Borrower or any of the Subsidiaries that is communicated to or obtained by the entity serving as Administrative Agent, the Issuing Banks Agent or any of their Affiliates in any capacity. The Administrative Agent shall not be liable for any action taken or not taken by it with the consent or at the request of the Required Lenders (or such other number or percentage of the Lenders as shall be necessary under the circumstances as provided in Section 9.02) or in the absence of its own gross negligence or willful misconduct. The Issuing Banks Agent shall not be liable for any action taken or not taken by it with the consent or at the request of the Issuing Banks or in the absence of its own gross negligence or willful misconduct. Neither the Administrative Agent nor the Issuing Banks Agent shall be deemed to have knowledge of any Default unless and until written notice thereof is given to the Administrative Agent or the Issuing Banks Agent by the Borrower, a Lender or an Issuing Bank, and neither the Administrative Agent nor the Issuing Banks Agent shall be responsible for or have any duty to ascertain or inquire into (i) any statement, warranty or representation made in or in connection with any Loan Document, (ii) the contents of any certificate, report or other document delivered thereunder or in connection therewith, (iii) the performance or observance of any of the covenants, agreements or other terms or conditions set forth in any Loan Document, (iv) the validity, enforceability, effectiveness or genuineness of any Loan Document or any other agreement, instrument or document, or (v) the satisfaction of any condition set forth in Article IV or elsewhere in any Loan Document, other than to confirm receipt of items expressly required to be delivered to the Administrative Agent or the Issuing Banks Agent, as applicable. Without limiting the foregoing, the Administrative Agent shall not be responsible for or have any duty to ascertain or inquire into whether any Lender is at any time an Affiliated Assignee and, unless the Administrative Agent shall have received, pursuant to the covenants, if any, of such Lender set forth in the Assignment and Assumption pursuant to which such Lender shall have purchased and assumed any Loan or Commitment hereunder, prior written notice from any Lender that such Lender is an Affiliated Assignee, the Administrative Agent may deal with such Lender (including for purposes of determining the consent, approval, vote or other similar action of the Lenders or the Lenders of any Class), and shall not incur any liability for so doing, as if such Lender were not an Affiliated Assignee.

The Administrative Agent and the Issuing Banks Agent shall be entitled to rely upon, and shall not incur any liability for relying upon, any notice, request, certificate, consent, statement, instrument, document or other writing believed by it to be genuine and to have been signed or sent by the proper Person. Without limiting the foregoing, the Issuing Banks Agent shall not be responsible for or have any duty to ascertain or inquire into whether any Viacom Beneficiary Cash Collateral Release shall have occurred (or into the amount thereof), and may determine the existence of any

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Viacom LC Cash Collateral Excess solely on the basis of the notices provided to the Issuing Banks Agent by the Borrower pursuant to Section 5.02(e) (and shall incur no liability for any errors in such determination arising from the failure by the Borrower to deliver any such notice). The Administrative Agent and Issuing Banks Agent also may rely upon any statement made to it orally or by telephone and believed by it to be made by the proper Person, and shall not incur any liability for relying thereon. Each of the Administrative Agent and the Issuing Banks Agent may consult with legal counsel (who may be counsel for the Borrower), independent accountants and other experts selected by it, and shall not be liable for any action taken or not taken by it in accordance with the advice of any such counsel, accountants or experts.

Each of the Administrative Agent and the Issuing Banks Agent may perform any and all its duties and exercise its rights and powers by or through any one or more sub-agents appointed by it. The Administrative Agent, the Issuing Banks Agent and any such sub-agent may perform any and all its duties and exercise its rights and powers through their respective Related Parties. The exculpatory provisions of the preceding paragraphs shall apply to any such sub-agent and to the Related Parties of the Administrative Agent, the Issuing Banks Agent and any such sub-agent, and shall apply to their respective activities in connection with the syndication of the credit facilities provided for herein as well as activities as Administrative Agent or Issuing Banks Agent, as applicable.

Without limiting the foregoing, the Issuing Banks Agent may appoint any Issuing Bank as a sub-agent of the Issuing Banks Agent for the purpose of holding any LC Cash Collateral. Each Issuing Bank agrees that, notwithstanding any such appointment of an Issuing Bank as a sub-agent of the Issuing Banks Agent, the Issuing Banks Agent shall retain exclusive dominion and control, including the exclusive right of withdrawal, over the LC Cash Collateral Account (which term, for purposes of this paragraph and each other provision hereof where the context so requires (including Sections 2.06(h)(vi) and 2.06(h)(vii)), shall include any deposit or other account in which any such sub-agent holds any LC Cash Collateral) and the LC Cash Collateral (which term, for the avoidance of doubt, shall include any portion thereof held by any sub-agent of the Issuing Banks Agent), except to the extent such dominion and control shall have been delegated to such Issuing Bank as a sub-agent of the Issuing Banks Agent.

Subject to the appointment and acceptance of a successor to the Administrative Agent as provided in this paragraph, the Administrative Agent may resign at any time by notifying the Lenders, the Issuing Banks and the Borrower. Upon any such resignation, the Required Lenders shall have the right, with the Borrower’s consent (which consent shall not be unreasonably withheld or delayed), to appoint a successor. If no successor shall have been so appointed by the Required Lenders and shall have accepted such appointment within 30 days after the retiring Administrative Agent gives notice of its resignation, then the retiring Administrative Agent may, on behalf of the Lenders and the Issuing Banks, appoint a successor Administrative Agent which shall be a bank with an office in New York, New York, or an Affiliate of any such bank. Upon the acceptance of its appointment as Administrative Agent hereunder by a successor, such successor shall succeed to and become vested with all the rights, powers, privileges

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and duties of the retiring Administrative Agent, and the retiring Administrative Agent shall be discharged from its duties and obligations hereunder. The fees payable by the Borrower to a successor Administrative Agent shall be the same as those payable to its predecessor unless otherwise agreed between the Borrower and such successor. After the Administrative Agent’s resignation hereunder, the provisions of this Article and Section 9.03 shall continue in effect for the benefit of such retiring Administrative Agent, its sub-agents and their respective Related Parties in respect of any actions taken or omitted to be taken by any of them while it was acting as Administrative Agent.

Subject to the appointment and acceptance of a successor to the Issuing Banks Agent as provided in this paragraph, the Issuing Banks Agent may resign at any time by notifying the Administrative Agent, the Issuing Banks and the Borrower. Upon any such resignation, the Issuing Banks shall have the right, with the Borrower’s consent (which consent shall not be unreasonably withheld or delayed), to appoint a successor. If no successor shall have been so appointed by the Issuing Banks and shall have accepted such appointment within 30 days after the retiring Issuing Banks Agent gives notice of its resignation, then the retiring Issuing Banks Agent may, on behalf of the Issuing Banks, appoint a successor Issuing Banks Agent which shall be a bank with an office in New York, New York, or an Affiliate of any such bank. Upon the acceptance of its appointment as Issuing Banks Agent hereunder by a successor, such successor shall succeed to and become vested with all the rights, powers, privileges and duties of the retiring Issuing Banks Agent, and the retiring Issuing Banks Agent shall be discharged from its duties and obligations hereunder. After the Issuing Banks Agent’s resignation hereunder, the provisions of this Article and Section 9.03 shall continue in effect for the benefit of such retiring Issuing Banks Agent, its sub-agents and their respective Related Parties in respect of any actions taken or omitted to be taken by any of them while it was acting as Issuing Banks Agent.

Each Lender and Issuing Bank acknowledges that it has, independently and without reliance upon the Administrative Agent, the Issuing Banks Agent, any other Lender or any other Issuing Bank and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Lender and Issuing Bank also acknowledges that it will, independently and without reliance upon the Administrative Agent, the Issuing Banks Agent, any other Lender or any other Issuing Bank and based on such documents and information as it shall from time to time deem appropriate, continue to make its own decisions in taking or not taking action under or based upon this Agreement, any other Loan Document or related agreement or any document furnished hereunder or thereunder.

The banks (or Affiliates thereof) identified in this Agreement as a “documentation agent” or “syndication agent” shall not have any right, power, liability, responsibility or duty under this Agreement other than those applicable to all banks herein.

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ARTICLE IX

Miscellaneous

SECTION 9.01. Notices. Except in the case of notices and other communications expressly permitted to be given by telephone, all notices and other communications provided for herein shall be in writing and shall be delivered by hand or overnight courier service, mailed by certified or registered mail or sent by fax, as follows:

(a) if to the Borrower, to it at 1201 Elm Street, Suite 2100; Dallas, Texas 75270, Attention of Treasurer (Fax No. 214-854-3599) and if such notice is in respect of a Default or an Event of Default with a copy to the same address, Attention of General Counsel (Fax No. (214) 854-3677);

(b) if to the Administrative Agent, to JPMorgan Chase Bank, N.A., Loan and Agency Services Group, 1111 Fannin, 10th Floor, Houston, Texas 77002, Attention of Mr. Thai Pham (Fax No. (713) 750-2956), with a copy to JPMorgan Chase Bank, N.A., 270 Park Avenue, New York, New York 10017, Attention of Mr. Barry Bergman (Fax No. (212) 270-6637);

(c) if to the Issuing Banks Agent, to JPMorgan Chase Bank, N.A., Loan and Agency Services Group, 1111 Fannin, 10th Floor, Houston, Texas 77002, Attention of Mr. Thai Pham (Fax No. (713) 750-2956), with a copy to JPMorgan Chase Bank, N.A., 270 Park Avenue, New York, New York 10017, Attention of Mr. Barry Bergman (Fax No. (212) 270-6637);

(d) if to any Issuing Bank, to it at the address most recently specified by it in a notice delivered to the Administrative Agent and the Borrower; and

(e) if to any other Lender, to it at its address (or fax number) set forth in its Administrative Questionnaire.

Any party hereto may change its address or fax number for notices and other communications hereunder by notice to the other parties hereto. All notices and other communications given to any party hereto in accordance with the provisions of this Agreement shall be deemed to have been given on the date of receipt.

SECTION 9.02. Waivers; Amendments. (a) No failure or delay by the Administrative Agent, an Issuing Bank or any Lender in exercising any right or power hereunder or under any other Loan Document shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such a right or power, preclude any other or further exercise thereof or the exercise of any other right or power. The rights and remedies of the Administrative Agent, the Issuing Banks and the Lenders hereunder and under the other Loan Documents are cumulative and are not exclusive of any rights or remedies that they would otherwise have. No waiver of any provision of any Loan Document or consent to any departure by any Loan Party therefrom shall in any event be effective unless the same shall be permitted by paragraph (b) of this Section, and then such waiver

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or consent shall be effective only in the specific instance and for the purpose for which given. Without limiting the generality of the foregoing, the making of a Loan or issuance of a Letter of Credit shall not be construed as a waiver of any Default, regardless of whether the Administrative Agent, any Lender or the applicable Issuing Bank may have had notice or knowledge of such Default at the time.

(b) Neither this Agreement nor any other Loan Document nor any provision hereof or thereof may be waived, amended or modified except, in the case of this Agreement, pursuant to an agreement or agreements in writing entered into by the Borrower and the Required Lenders or, in the case of any other Loan Document, pursuant to an agreement or agreements in writing entered into by the Administrative Agent and the Loan Party or Loan Parties that are parties thereto, in each case with the consent of the Required Lenders; provided that no such agreement shall (i) increase the Commitment of any Lender without the written consent of such Lender, (ii) reduce the principal amount of any Loan or LC Disbursement or reduce the rate of interest thereon, or reduce any fees payable hereunder, without the written consent of each Lender affected thereby, (iii) postpone the maturity of any Loan, or any scheduled date of payment of the principal amount of any Term Loan under Section 2.11, or the required date of reimbursement of any LC Disbursement, or any date for the payment of any interest or fees payable hereunder, or reduce the amount of, waive or excuse any such payment, or postpone the scheduled date of expiration or reduction of any Commitment, without the written consent of each Lender affected thereby, (iv) change Section 2.19(b) or (c) in a manner that would alter the pro rata sharing of payments required thereby, without the written consent of each affected Lender, (v) change any of the provisions of this Section or the percentage set forth in the definition of “Required Lenders” or any other provision of any Loan Document specifying the number or percentage of Lenders (or Lenders of any Class) required to waive, amend or modify any rights thereunder or make any determination or grant any consent thereunder, without the written consent of each Lender (or each Lender of such Class, as the case may be), (vi) release any Subsidiary Loan Party from its Guarantee under the Collateral Agreement (except as expressly provided in the Collateral Agreement), or limit its liability in respect of such Guarantee, without the written consent of each Lender, (vii) release all or any substantial part of the Collateral from the Liens of the Security Documents, without the written consent of each Lender, or (viii) change any provisions of any Loan Document in a manner that by its terms adversely affects the rights in respect of payments due to Lenders holding Loans of any Class differently than those holding Loans of any other Class, without the written consent of Lenders holding a majority in interest of the outstanding Loans and unused Commitments of each affected Class; provided further that (a) no such agreement shall amend, modify or otherwise affect the rights or duties of the Administrative Agent, an Issuing Bank or the Swingline Lender without the prior written consent of the Administrative Agent, such Issuing Bank or the Swingline Lender, as the case may be, and (b) any waiver, amendment or modification of this Agreement that by its terms affects the rights or duties under this Agreement of one Class of Lenders (but not any other Class of Lenders) may be effected by an agreement or agreements in writing entered into by the Borrower and requisite percentage in interest of the affected Class of Lenders that would be required to consent thereto under this Section if such Class of Lenders were the only Class of Lenders hereunder at the time. Notwithstanding

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the foregoing, any provision of this Agreement may be amended by an agreement in writing entered into by the Borrower, the Required Lenders and the Administrative Agent (and, if their rights or obligations are affected thereby, the Issuing Banks and the Swingline Lender) if (i) by the terms of such agreement the Commitment of each Lender not consenting to the amendment provided for therein shall terminate upon the effectiveness of such amendment and (ii) at the time such amendment becomes effective, each Lender not consenting thereto receives payment (including pursuant to an assignment to a replacement Lender in accordance with Section 9.04) in full of the principal of and interest accrued on each Loan made by it and all other amounts owing to it or accrued for its account under this Agreement.

SECTION 9.02A. Concerning the Issuing Banks Agent. No waiver, amendment or other modification of this Agreement or any other Loan Document, or any provision hereof or thereof, shall amend, modify or otherwise affect the rights or duties of the Issuing Banks Agent without the prior written consent of the Issuing Banks Agent.

SECTION 9.02B. Concerning the Revolving Lenders. (a) No waiver, amendment or other modification of this Agreement shall postpone any scheduled date of payment of the principal amount of any Revolving Loan under Section 2.11, or reduce the amount of or waive or excuse any such payment, without the written consent of each Revolving Lender affected thereby. The Revolving Lenders acknowledge and agree that there is no scheduled date of reduction of any Revolving Commitment.

(b) Notwithstanding anything to the contrary in Article VII, in the event any Loans shall have been declared to be due and payable (in whole or in part) pursuant to Article VII, all the Revolving Commitments shall automatically terminate and the principal of all the Revolving Loans, together with all accrued interest thereon and all fees and other obligations of the Borrower accrued hereunder for the account of any Revolving Lender, in its capacity as such, shall automatically become due and payable, without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower.

(c) The Borrower shall not, without the prior written consent of the Revolving Lenders holding a majority in interest of the Revolving Loans, agree to any amendment or other modification of this Agreement that (i) amends the term “Tranche B Maturity Date” to refer to a date preceding August 20, 2011, or otherwise shortens the final stated maturity of the Tranche B Term Loans, (ii) amends Section 2.11(b) to increase, with respect to any date set forth in such Section, the aggregate principal amount of the Tranche B Term Loans payable on such date, or otherwise shortens the weighted average scheduled maturity of the Tranche B Term Loans outstanding on the Restatement Effective Date compared to the weighted average scheduled maturity of such Loans (determined on the basis of the scheduled repayments required to be made after the Restatement Effective Date pursuant to Section 2.11(b)) as of the Restatement Effective Date or (iii) amends or otherwise modifies the provisions of this Section.

SECTION 9.03. Expenses; Indemnity; Damage Waiver. (a) The Borrower shall pay (i) all reasonable out-of-pocket expenses incurred by the

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Administrative Agent, the Issuing Banks Agent and their Affiliates, including the reasonable fees, charges and disbursements of counsel, in connection with the syndication of the credit facilities provided for herein, the preparation and administration of the Loan Documents or any amendments, modifications or waivers of the provisions thereof (whether or not the transactions contemplated hereby or thereby shall be consummated), (ii) all reasonable out-of-pocket expenses incurred by the Issuing Banks in connection with the issuance, amendment, renewal or extension of any Letter of Credit or any demand for payment thereunder and (iii) all reasonable out-of-pocket expenses incurred by the Administrative Agent, the Issuing Banks Agent, any Issuing Bank or any Lender, including the reasonable fees, charges and disbursements of any counsel for the Administrative Agent, the Issuing Banks Agent, any Issuing Bank or any Lender, in connection with the enforcement or protection of its rights in connection with the Loan Documents, including its rights under this Section, or in connection with the Loans made or Letters of Credit issued hereunder, including all such reasonable out-of-pocket expenses incurred during any workout, restructuring or negotiations in respect of such Loans or Letters of Credit.

(b) The Borrower shall indemnify the Administrative Agent, the Issuing Banks Agent, each Issuing Bank and each Lender, and each Related Party of any of the foregoing Persons (each such Person being called an “Indemnitee”) against, and hold each Indemnitee harmless from, any and all losses, claims, damages, liabilities and related expenses, including the fees, charges and disbursements of any counsel for any Indemnitee, incurred by or asserted against any Indemnitee arising out of, in connection with, or as a result of (i) the execution or delivery of any Loan Document or any other agreement or instrument contemplated hereby, the performance by the parties to the Loan Documents of their obligations thereunder or the consummation of the Transactions or any other transactions contemplated hereby, (ii) any Loan, Letter of Credit or the use of the proceeds therefrom (including any refusal by an Issuing Bank to honor a demand for payment under a Letter of Credit if the documents presented in connection with such demand do not strictly comply with the terms of such Letter of Credit), (iii) any actual or alleged presence or release of Hazardous Materials on or from any property currently or formerly owned or operated by the Borrower or any of the Subsidiaries, or any Environmental Liability related in any way to the Borrower or any of the Subsidiaries, or (iv) any actual or prospective claim, litigation, investigation or proceeding relating to any of the foregoing, whether based on contract, tort or any other theory and regardless of whether any Indemnitee is a party thereto; provided that such indemnity shall not, as to any Indemnitee, be available to the extent that such losses, claims, damages, liabilities or related expenses are determined by a court of competent jurisdiction by final and nonappealable judgment to have resulted from the gross negligence, bad faith or willful misconduct of such Indemnitee.

(c) To the extent that the Borrower fails to pay any amount required to be paid by it to the Administrative Agent under paragraph (a) or (b) of this Section, each Lender severally agrees to pay to the Administrative Agent such Lender’s pro rata share (determined as of the time that the applicable unreimbursed expense or indemnity payment is sought) of such unpaid amount; provided that the unreimbursed expense or indemnified loss, claim, damage, liability or related expense, as the case may be, was

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incurred by or asserted against the Administrative Agent in its capacity as such. For purposes hereof, a Lender’s “pro rata share” shall be determined based upon its share of the sum of the outstanding Revolving Loans, outstanding Term Loans and unused Commitments at the time.

(d) To the extent that the Borrower fails to pay any amount required to be paid by it to the Issuing Banks Agent under paragraph (a) or (b) of this Section, each Issuing Bank severally agrees to pay to the Issuing Banks Agent such Issuing Bank’s pro rata share (determined as of the time that the applicable unreimbursed expense or indemnity payment is sought) of such unpaid amount; provided that the unreimbursed expense or indemnified loss, claim, damage, liability or related expense, as the case may be, was incurred by or asserted against the Issuing Banks Agent in its capacity as such. For purposes hereof, an Issuing Bank’s “pro rata share” shall be determined based upon its share of the sum of the aggregate LC Exposures at the time.

(e) To the extent permitted by applicable law, the Borrower shall not assert, and the Borrower hereby waives, any claim against any Indemnitee, on any theory of liability, for special, indirect, consequential or punitive damages (as opposed to direct or actual damages) arising out of, in connection with, or as a result of, this Agreement, any other Loan Document or any agreement or instrument contemplated hereby or thereby, the Transactions, any Loan, Letter of Credit or the use of the proceeds thereof.

(f) All amounts due under this Section shall be payable not later than 10 days after written demand therefor.

SECTION 9.04. Successors and Assigns. (a) The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns permitted hereby (including any Affiliate of an Issuing Bank that issues any Letter of Credit), except that the Borrower may not assign or otherwise transfer any of its rights or obligations hereunder without the prior written consent of each Lender and each Issuing Bank (and any attempted assignment or transfer by the Borrower without such consent shall be null and void). Nothing in this Agreement, expressed or implied, shall be construed to confer upon any Person (other than the parties hereto, their successors and assigns permitted hereby (including any Affiliate of an Issuing Bank that issues any Letter of Credit) and, to the extent expressly contemplated hereby, the Related Parties of each of the Administrative Agent, the Issuing Banks Agent, the Issuing Banks and the Lenders) any legal or equitable right, remedy or claim under or by reason of this Agreement.

(b) (i) Subject to the conditions set forth in paragraph (b)(ii) below, any Lender may assign to one or more assignees all or a portion of its rights and obligations under this Agreement (including all or a portion of its Commitment and the Loans at the time owing to it) with the prior written consent (such consent not to be unreasonably withheld) of:

(A) the Borrower; provided that no consent of the Borrower shall be required for an assignment to (1) a Lender, an Affiliate of a

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Lender or an Approved Fund or (2) if an Event of Default under clause (a), (b), (h) or (i) of Article VII has occurred and is continuing, any other assignee; and

(B) the Administrative Agent; provided that no consent of the Administrative Agent shall be required for an assignment to a Lender, an Affiliate of a Lender or an Approved Fund.

(ii) Assignments shall be subject to the following additional conditions:

(A) except in the case of an assignment to a Lender, an Affiliate of a Lender or an Approved Fund or an assignment of the entire remaining amount of the assigning Lender’s Commitment or Loans of any Class, the amount of the Commitment or Loans of the assigning Lender subject to each such assignment shall not be less than $1,000,000, unless each of the Borrower and the Administrative Agent otherwise consents; provided that no such consent of the Borrower shall be required if an Event of Default under clause (a), (b), (h) or (i) of Article VII has occurred and is continuing:

(B) each partial assignment shall be made as an assignment of a proportionate part of all the assigning Lender’s rights and obligations under this Agreement; provided that this clause shall not be construed to prohibit the assignment of a proportionate part of all the assigning Lender’s rights and obligations in respect of one Class of Commitments or Loans;

(C) the parties to each assignment shall execute and deliver to the Administrative Agent an Assignment and Assumption, together with a processing and recordation fee of $3,500; and

(D) the assignee, if it shall not be a Lender, shall deliver to the Administrative Agent an Administrative Questionnaire.

For the purposes of this Section 9.04(b), the term “Approved Fund” has the following meaning:

“Approved Fund” means any Person (other than a natural person) that is engaged in making, purchasing, holding or investing in bank loans and similar extensions of credit in the ordinary course of its business and that is administered or managed by (a) a Lender, (b) an Affiliate of a Lender or (c) an entity or an Affiliate of an entity that administers or manages a Lender.

(iii) Subject to acceptance and recording thereof pursuant to paragraph (d) of this Section, from and after the effective date specified in each Assignment and Assumption the assignee thereunder shall be a party hereto and, to the extent of the interest assigned by such Assignment and Assumption and, in the case of an Affiliated Assignee, subject to the agreements set forth therein, have the rights

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and obligations of a Lender under this Agreement, and the assigning Lender thereunder shall, to the extent of the interest assigned by such Assignment and Assumption, be released from its obligations under this Agreement (and, in the case of an Assignment and Assumption covering all of the assigning Lender’s rights and obligations under this Agreement, such Lender shall cease to be a party hereto but shall continue to be entitled to the benefits of Sections 2.16, 2.17, 2.18 and 9.03). Any assignment or transfer by a Lender of rights or obligations under this Agreement that does not comply with this paragraph shall be treated for purposes of this Agreement as a sale by such Lender of a participation in such rights and obligations in accordance with paragraph (e) of this Section.

(c) The Administrative Agent, acting for this purpose as an agent of the Borrower, shall maintain a copy of each Assignment and Assumption delivered to it and a register for the recordation of the names and addresses of the Lenders, and the Commitment of, and principal amount of the Loans owing to, each Lender pursuant to the terms hereof from time to time (the “Register”). The entries in the Register shall be conclusive, and the Borrower, the Administrative Agent, the Issuing Banks Agent, the Issuing Banks and the Lenders may treat each Person whose name is recorded in the Register pursuant to the terms hereof as a Lender hereunder for all purposes of this Agreement, notwithstanding notice to the contrary. The Register shall be available for inspection by the Borrower, the Issuing Banks Agent, the Issuing Banks and any Lender, at any reasonable time and from time to time upon reasonable prior notice.

(d) Upon its receipt of a duly completed Assignment and Assumption executed by an assigning Lender and an assignee, the assignee’s completed Administrative Questionnaire (unless the assignee shall already be a Lender hereunder), the processing and recordation fee referred to in paragraph (b) of this Section and any written consent to such assignment required by paragraph (b) of this Section, the Administrative Agent shall accept such Assignment and Assumption and record the information contained therein in the Register. No assignment shall be effective for purposes of this Agreement unless it has been recorded in the Register as provided in this paragraph.

(e) Any Lender may, without the consent of the Borrower, the Administrative Agent or the Issuing Banks, sell participations to one or more banks or other entities (a “Participant”) in all or a portion of such Lender’s rights and obligations under this Agreement (including all or a portion of its Commitment and the Loans owing to it); provided that (i) with respect to any participations sold after the Amendment Agreement Effective Date, such Participant has represented and warranted to such Lender that it is not, and for so long as it shall be a Participant will not become, an Affiliated Assignee, (ii) such Lender’s obligations under this Agreement shall remain unchanged, (iii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations and (iv) the Borrower, the Administrative Agent, the Issuing Banks Agent, the Issuing Banks and the other Lenders shall continue to deal solely and directly with such Lender in connection with such Lender’s rights and obligations under this Agreement. Any agreement or instrument pursuant to which a Lender sells such a participation shall provide that such Lender shall retain the sole right

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to enforce the Loan Documents and to approve any amendment, modification or waiver of any provision of the Loan Documents; provided that such agreement or instrument may provide that such Lender will not, without the consent of the Participant, agree to any amendment, modification or waiver described in the first proviso to Section 9.02(b) that affects such Participant. Subject to paragraph (f) of this Section, the Borrower agrees that each Participant shall be entitled to the benefits of Sections 2.16, 2.17 and 2.18 to the same extent as if it were a Lender and had acquired its interest by assignment pursuant to paragraph (b) of this Section. To the extent permitted by law, each Participant also shall be entitled to the benefits of Section 9.08 as though it were a Lender, provided such Participant agrees to be subject to Section 2.19(c) as though it were a Lender.

(f) A Participant shall not be entitled to receive any greater payment under Section 2.16 or 2.18 than the applicable Lender would have been entitled to receive with respect to the participation sold to such Participant, unless the sale of the participation to such Participant is made with the Borrower’s prior written consent. A Participant that would be a Foreign Lender if it were a Lender shall not be entitled to the benefits of Section 2.18 unless the Borrower is notified of the participation sold to such Participant and such Participant agrees, for the benefit of the Borrower, to comply with Section 2.18(e) as though it were a Lender.

(g) Any Lender may at any time pledge or assign a security interest in all or any portion of its rights under this Agreement to secure obligations of such Lender, including any pledge or assignment to secure obligations to a Federal Reserve Bank, and this Section shall not apply to any such pledge or assignment of a security interest; provided that no such pledge or assignment of a security interest shall release a Lender from any of its obligations hereunder or substitute any such pledgee or assignee for such Lender as a party hereto.

SECTION 9.05. Survival. All covenants, agreements, representations and warranties made by the Loan Parties in the Loan Documents and in the certificates or other instruments delivered in connection with or pursuant to this Agreement or any other Loan Document shall be considered to have been relied upon by the other parties hereto and shall survive the execution and delivery of the Loan Documents and the making of any Loans and issuance of any Letters of Credit, regardless of any investigation made by any such other party or on its behalf and notwithstanding that the Administrative Agent, the Issuing Banks Agent, any Issuing Bank or any Lender may have had notice or knowledge of any Default or incorrect representation or warranty at the time any credit is extended hereunder, and shall continue in full force and effect as long as the principal of or any accrued interest on any Loan or any fee or any other amount payable under this Agreement is outstanding and unpaid or any Letter of Credit is outstanding and so long as the Commitments have not expired or terminated. The provisions of Sections 2.16, 2.17, 2.18 and 9.03 and Article VIII shall survive and remain in full force and effect regardless of the consummation of the transactions contemplated hereby, the repayment of the Loans, the expiration or termination of the Letters of Credit and the Commitments or the termination of this Agreement or any provision hereof.

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SECTION 9.06. Counterparts; Integration; Effectiveness. This Agreement may be executed in counterparts (and by different parties hereto on different counterparts), each of which shall constitute an original, but all of which when taken together shall constitute a single contract. This Agreement, the other Loan Documents and any separate letter agreements with respect to fees or expense reimbursements payable to the Administrative Agent or any arranger of the credit facilities contemplated hereby constitute the entire contract among the parties relating to the subject matter hereof and supersede any and all previous agreements and understandings, oral or written, relating to the subject matter hereof. This Agreement shall become effective as provided in the Amendment Agreement, and thereafter shall be binding upon and inure to the benefit of the parties hereto and their successors and assigns.

SECTION 9.07. Severability. Any provision of this Agreement held to be invalid, illegal or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such invalidity, illegality or unenforceability without affecting the validity, legality and enforceability of the remaining provisions hereof; and the invalidity of a particular provision in a particular jurisdiction shall not invalidate such provision in any other jurisdiction.

SECTION 9.08. Right of Setoff. If an Event of Default shall have occurred and be continuing, each Lender and each of its Affiliates is hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other obligations at any time owing by such Lender or Affiliate to or for the credit or the account of the Borrower against any of and all the obligations of the Borrower now or hereafter existing under this Agreement held by such Lender, irrespective of whether or not such Lender shall have made any demand under this Agreement and although such obligations may be unmatured. The rights of each Lender under this Section are in addition to other rights and remedies (including other rights of setoff) which such Lender may have.

SECTION 9.09. Governing Law; Jurisdiction; Consent to Service of Process. (a) This Agreement shall be construed in accordance with and governed by the law of the State of New York.

(b) The Borrower hereby irrevocably and unconditionally submits, for itself and its property, to the nonexclusive jurisdiction of the Supreme Court of the State of New York sitting in New York County and of the United States District Court of the Southern District of New York, and any appellate court from any thereof, in any action or proceeding arising out of or relating to any Loan Document, or for recognition or enforcement of any judgment, and each of the parties hereto hereby irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may be heard and determined in such New York State or, to the extent permitted by law, in such Federal court. Each of the parties hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Nothing in this Agreement or any other Loan Document shall affect any right that the Administrative Agent, the Issuing

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Banks Agent, any Issuing Bank or any Lender may otherwise have to bring any action or proceeding relating to this Agreement or any other Loan Document against the Borrower or its properties in the courts of any jurisdiction.

(c) The Borrower hereby irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection which it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Agreement or any other Loan Document in any court referred to in paragraph (b) of this Section. Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court.

(d) Each party to this Agreement irrevocably consents to service of process in the manner provided for notices in Section 9.01, such service to be effective upon receipt. Nothing in this Agreement or any other Loan Document will affect the right of any party to this Agreement to serve process in any other manner permitted by law.

SECTION 9.10. WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN ANY LEGAL PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT (WHETHER BASED ON CONTRACT, TORT OR ANY OTHER THEORY). EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION.

SECTION 9.11. Headings. Article and Section headings and the Table of Contents used herein are for convenience of reference only, are not part of this Agreement and shall not affect the construction of, or be taken into consideration in interpreting, this Agreement.

SECTION 9.12. Confidentiality. Each of the Administrative Agent, the Issuing Banks Agent, the Issuing Banks and the Lenders agrees to maintain the confidentiality of the Information (as defined below), except that Information may be disclosed (a) to its and its Affiliates’ directors, officers, employees and agents, including accountants, legal counsel and other advisors (it being understood that the Persons to whom such disclosure is made will be informed of the confidential nature of such Information and instructed to keep such Information confidential), (b) to the extent requested by any regulatory authority, (c) to the extent required by applicable laws or regulations or by any subpoena or similar legal process (in which case such Person thereby required agrees to inform the Borrower prior to such disclosure), (d) to any other

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party to this Agreement, (e) in connection with the exercise of any remedies hereunder or any suit, action or proceeding relating to this Agreement or any other Loan Document or the enforcement of rights hereunder or thereunder, (f) subject to an agreement containing provisions substantially the same as those of this Section, to any assignee of or Participant in, or any prospective assignee of or Participant in, any of its rights or obligations under this Agreement, (g) with the prior written consent of the Borrower or (h) to the extent such Information becomes publicly available other than as a result of a breach of this Section. For the purposes of this Section, “Information” means all information received from the Borrower or any Subsidiary relating to the Borrower, the Subsidiaries or their businesses, other than any such information that is publicly available. Any Person required to maintain the confidentiality of Information as provided in this Section shall be considered to have complied with its obligation to do so if such Person has exercised the same degree of care to maintain the confidentiality of such Information as a commercially prudent Person would accord to its own confidential information.

SECTION 9.13. Interest Rate Limitation. Notwithstanding anything herein to the contrary, if at any time the interest rate applicable to any Loan, together with all fees, charges and other amounts which are treated as interest on such Loan under applicable law (collectively the “Charges”), shall exceed the maximum lawful rate (the “Maximum Rate”) which may be contracted for, charged, taken, received or reserved by the Lender holding such Loan in accordance with applicable law, the rate of interest payable in respect of such Loan hereunder, together with all Charges payable in respect thereof, shall be limited to the Maximum Rate and, to the extent lawful, the interest and Charges that would have been payable in respect of such Loan but were not payable as a result of the operation of this Section shall be cumulated and the interest and Charges payable to such Lender in respect of other Loans or periods shall be increased (but not above the Maximum Rate therefor) until such cumulated amount, together with interest thereon at the Federal Funds Effective Rate to the date of repayment, shall have been received by such Lender.

SECTION 9.14. Patriot Act. The Lenders hereby notify the Borrower that pursuant to the requirements of the USA PATRIOT Act (Title III of Pub. L. 107-56 (signed into law October 26, 2001)) (the “Patriot Act”), they may be required to obtain, verify and record information that identifies the Borrower, which information includes the name and address of the Borrower and other information that will allow each Lender to identify the Borrower in accordance with the Patriot Act. This notice is given in accordance with the requirements of the Patriot Act and is effective for each Lender.

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EXHIBIT B

TO AMENDMENT AGREEMENT

[FORM OF] ASSIGNMENT AND ASSUMPTION

This Assignment and Assumption (this “Assignment and Assumption”) is dated as of the Effective Date set forth below and is entered into by and between the Assignor (as defined below) and the Assignee (as defined below). Each capitalized term used but not defined herein shall have the meaning assigned to such term in the Credit Agreement dated as of August 20, 2004, as amended and restated as of April 2, 2009 and effective as of the Restatement Effective Date (as amended, supplemented or otherwise modified from time to time, the “Credit Agreement”), among Blockbuster Inc., a Delaware corporation (the “Borrower”), the Lenders party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent, and the other parties thereto, receipt of a copy of which is hereby acknowledged by the Assignee. Terms defined in the Credit Agreement are used herein with the same meanings. The Standard Terms and Conditions set forth in Annex I attached hereto are hereby agreed to and incorporated herein by reference and made a part of this Assignment and Assumption as if set forth herein in full.

For an agreed consideration, the Assignor hereby irrevocably sells and assigns to the Assignee, and the Assignee hereby irrevocably purchases and assumes from the Assignor, subject to and in accordance with the Standard Terms and Conditions and the Credit Agreement, as of the Effective Date inserted by the Administrative Agent as contemplated below, (a) all the Assignor’s rights and obligations in its capacity as a Lender under the Credit Agreement and any other documents or instruments delivered pursuant thereto to the extent related to the amount and percentage interest identified below of all of such Assignor’s outstanding rights and obligations under the facilities identified below, and (b) to the extent permitted to be assigned under applicable law, all claims, suits, causes of action and any other right of the Assignor (in its capacity as a Lender) against any Person, whether known or unknown, arising under or in connection with the Credit Agreement, any other documents or instruments delivered pursuant thereto or the loan transactions governed thereby or in any way based on or related to any of the foregoing, including contract claims, tort claims, statutory claims and all other claims at law or in equity related to the rights and obligations sold and assigned pursuant to clause (a) above (the rights and obligations sold and assigned pursuant to clauses (a) and (b) above being referred to herein collectively as the “Assigned Interest”). Such sale and assignment is without recourse to the Assignor and, except as expressly provided in this Assignment and Assumption, without representation or warranty by the Assignor.

In addition to the representations and warranties set forth in the Standard Terms and Conditions, the Assignee, unless it shall have identified itself below as an “Affiliated Assignee”, represents and warrants that, as of the Effective Date, it is not an Affiliated Assignee. The Assignee further agrees that, whether or not it is an Affiliated Assignee as of the Effective Date, it shall be bound by the agreements set forth in Section 1.2 of the Standard Terms and Conditions.

1. Name of Assignor:                                                                                                                       

2. Name of Assignee:                                                                                                                       

3. Assignee’s Address for Notices:                                                                                                  

4. Is Assignee an “Affiliated Assignee”:    Yes:  ¨    No:  ¨

5. Borrower: Blockbuster Inc.

6. Administrative Agent: JPMorgan Chase Bank, N.A., as Administrative Agent under the Credit Agreement.

7. Credit Agreement: Credit Agreement dated as of August 20, 2004, as amended and restated as of April 2, 2009 and effective as of the Restatement Effective Date (as amended, supplemented or otherwise modified from time to time, the “Credit Agreement”), among Blockbuster Inc., the Lenders party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent, and the other parties thereto.

8. Assigned Interest:

Facility Assigned	Aggregate Amount of Commitments/ Loans of all Lenders	Amount of Commitment/Loans Assigned	Percentage Assigned of Aggregate Amount of Commitments/Loans of all Lenders1
Revolving Loans/ Revolving Commitment:	$	$	%
Tranche A Term Loans:	$	$	%
Tranche B Term Loans:	$	$	%

Effective Date: [TO BE INSERTED BY THE ADMINISTRATIVE AGENT AND WHICH SHALL BE THE EFFECTIVE DATE OF RECORDATION OF TRANSFER IN THE REGISTER THEREFOR].

The Assignee, if not already a Lender, agrees to deliver to the Administrative Agent a completed Administrative Questionnaire in which the Assignee designates one or more credit contacts to whom all syndicate-level information (which may contain material non-public information about the Borrower, the Subsidiaries and its and their Related Parties and securities) will be made available and who may receive such information in accordance with the Assignee’s compliance procedures and applicable laws, including Federal and State securities laws.

¹ Set forth, to at least nine decimals, as a percentage of Commitments/Loans of all Lenders thereunder.

2

The terms set forth in this Assignment and Assumption are hereby agreed to:

[Name of Assignor], as Assignor

By:

Name:

Title:

[Name of Assignee], as Assignee

By:

Name:

Title:

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[The undersigned hereby consent to the within assignment:]²

[BLOCKBUSTER INC., as the Borrower,	[JPMORGAN CHASE BANK, N.A., as Administrative Agent,
by:	by:
Name:	Name:
Title:]	Title:]

² Consents to be included to the extent required by Section 9.04(b) of the Credit Agreement.

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STANDARD TERMS AND CONDITIONS FOR

ASSIGNMENT AND ASSUMPTION

1. Representations and Warranties and Agreements.

1.1 Assignor. The Assignor (a) represents and warrants that (i) it is the legal and beneficial owner of the Assigned Interest, (ii) the Assigned Interest is free and clear of any lien, encumbrance or other adverse claim and (iii) it has full power and authority, and has taken all action necessary, to execute and deliver this Assignment and Assumption and to consummate the transactions contemplated hereby; (b) assumes no responsibility with respect to (i) any statements, warranties or representations made in or in connection with the Credit Agreement or any other Loan Document, (ii) the execution, legality, validity, enforceability, genuineness, sufficiency or value of any Loan Document or any collateral thereunder, (iii) the financial condition of the Borrower, any of its Subsidiaries or Affiliates or any other Person obligated in respect of any Loan Document or (iv) the performance or observance by the Borrower, any of its Subsidiaries or Affiliates or any other Person obligated in respect of any Loan Document of any of their respective obligations under any Loan Document; and (c) acknowledges that: (i) the Assignee may possess material, non-public, confidential information concerning the Borrower and/or the Assigned Interest which may be material regarding the Borrower, its financial condition, results of operations, businesses, properties, assets, liabilities, management, projections, appraisals, plans and prospects (the “Confidential Information”), (ii) the Assignee may not have disclosed all such Confidential Information to the Assignor, (iii) the Confidential Information may be material to a determination of a fair value for the Assigned Interest and that value may be substantially different than the agreed consideration, (iv) the Assignor is experienced, sophisticated and knowledgeable in the trading of syndicated loans and other obligations of private and public companies and understand the disadvantage that may result from purchasing or selling the Assigned Interest without knowledge of the Confidential Information, (v) the Assignor believes, by reason of its business or financial experience or its own independent investigation, that it is capable of evaluating the merits and risks of the assignment and assumption of the Assigned Interest and the transactions contemplated thereby and of protecting its own interest in connection with the assignment and assumption of the Assigned Interest and the transactions contemplated thereby, (vi) Assignor has determined to assign its Assigned Interest notwithstanding its lack of knowledge of the Confidential Information and (vii) Assignor expressly releases the Assignee from any and all liabilities arising from its inability to review the Confidential Information and agrees to make no claim against the Assignee or any of its affiliates and its respective officers, employees, agents and controlling persons in respect of the assignment and assumption of the Assigned Interest and the transactions contemplated thereby based on the failure to disclose the Confidential Information. The Assignor further acknowledges that the Confidential Information may not be available to the Administrative Agent or the other Lenders.

1.2 Assignee. The Assignee (a) represents and warrants that (i) it has full power and authority, and has taken all action necessary, to execute and deliver this Assignment and Assumption and to consummate the transactions contemplated hereby and, if applicable, to become a Lender under the Credit Agreement, (ii) it satisfies the requirements, if any, specified in the Credit Agreement that are required to be satisfied by it in order to acquire the Assigned Interest and, if applicable, become a Lender thereunder, (iii) from and after the Effective Date, it

shall be a party to the Credit Agreement and, to the extent provided in this Assignment and Assumption, have the rights and obligations of a Lender under the Credit Agreement, (iv) it has received a copy of the Credit Agreement, together with copies of the most recent financial statements delivered pursuant to Section 5.01(a) or 5.01(b) of the Credit Agreement, and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Assignment and Assumption and to purchase the Assigned Interest on the basis of which it has made such analysis and decision independently and without reliance on the Administrative Agent or any other Lender, and (v) if it is a Foreign Lender, attached to this Assignment and Assumption is any documentation required to be delivered by it pursuant to the Section 2.18(e) of the Credit Agreement, duly completed and executed by the Assignee; and (b) agrees that (i) it will, independently and without reliance on the Administrative Agent, the Assignor or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Loan Documents and (ii) it will perform in accordance with their terms all of the obligations which by the terms of the Loan Documents are required to be performed by it as a Lender.

1.3 Concerning Affiliated Assignees. (a) The Assignee agrees that, if it shall have specified above that it is not an Affiliated Assignee as of the Effective Date, in the event it shall have become an Affiliated Assignee at any time after the Effective Date, the Assignee shall give written notice thereof to the Administrative Agent within three Business Days of becoming an Affiliated Assignee.

(b) If and for so long as the Assignee shall be an Affiliated Assignee, (i) in connection with any matter requiring the consent, approval, vote or other similar action of the Lenders, or the Lenders of any Class, the Assignee shall be deemed to have consented, approved, voted or have taken such action in respect of its Loans and Commitments in the same proportion to the consents, approvals or votes provided, or actions taken, by the Lenders (or, in the case of any consent, approval, vote or other similar actions of the Lenders of any Class, the Lenders of such Class) that, as of the time of such consent, approval, vote or other similar action, are not Affiliated Assignees (and any consent, approval, vote or other similar action by the Assignee that is inconsistent with this clause (i) shall be disregarded), (ii) the Lenders (or the Lenders of any Class), in determining whether to take any actions, and the Administrative Agent in carrying out actions that Lenders or Lenders of any Class may take under the Credit Agreement and the other Loan Documents, shall have no duties to the Assignee and no liability or responsibility for any consequences of such actions taken under the Credit Agreement and the other Loan Documents insofar as they may affect the interests of the Assignee, and (iii) the Assignee shall not have any right to (A) participate in any deliberations of the Lenders or the Lenders of any Class, unless so requested, with respect to any matter under the Credit Agreement and the other Loan Documents or (B) have access, unless so granted, to any information prepared for or related to such deliberations and made available solely to the Lenders or Lenders of any Class.

(c) The Assignee agrees that, if a proceeding under the Bankruptcy Code (as defined below) or any other Federal, state or foreign bankruptcy, insolvency, receivership or similar law shall be commenced by or against the Borrower or any Subsidiary prior to the time when the Loan Document Obligations (as defined in the Collateral Agreement) have been paid and discharged in full, the Assignee, if it shall be an Affiliated Assignee at the time of the

2

commencement thereof or shall become an Affiliated Assignee at any time thereafter prior to such payment and discharge, (i) shall promptly give notice to the Administrative Agent of any solicitation of the Assignee for a vote, or of the Assignee’s receipt of a ballot to vote, in or in connection with such proceeding and (ii) irrevocably authorizes and empowers the Administrative Agent to vote on behalf of the Assignee with respect to the Loan Document Obligations in any manner in the Administrative Agent’s sole discretion, unless the Administrative Agent instructs the Assignee to vote, in which case the Assignee shall vote with respect to the Loan Document Obligations as the Administrative Agent directs; provided that the Administrative Agent shall vote the Loan Document Obligations as directed by the Required Lenders. To give effect to the foregoing right of the Administrative Agent to vote on behalf of the Assignee, if it shall be an Affiliated Assignee at the time of the commencement of any such proceeding or shall become an Affiliated Assignee at any time thereafter prior to any such payment and discharge, with respect to the Loan Document Obligations set forth above, the Assignee hereby constitutes and appoints the Administrative Agent and any officer or agent of the Administrative Agent, with full power of substitution, as the Assignee’s true and lawful attorney-in-fact with full power and authority in the place of the Assignee and in the name of the Assignee or in its own name, to take any and all appropriate action and to execute any and all documents and instruments as, in the opinion of such attorney, may be necessary or desirable to accomplish the purposes hereof, which appointment as attorney is irrevocable and coupled with an interest; provided that the Administrative Agent shall not exercise the foregoing rights in such capacity until the commencement by or against the Borrower or any Subsidiary of a proceeding under the Bankruptcy Code or any other Federal, state or foreign bankruptcy, insolvency, receivership or similar law. For purposes of this paragraph, “Bankruptcy Code” means Title 11 of the United States Code entitled “Bankruptcy Code”, as now and hereinafter in effect, or any successor statute.

2. Payments. From and after the Effective Date, the Administrative Agent shall make all payments in respect of the Assigned Interest (including payments of principal, interest, fees and other amounts) to the Assignor for amounts which have accrued to but excluding the Effective Date and to the Assignee for amounts which have accrued from and after the Effective Date.

3. General Provisions.

3.1 From and after the Effective Date (a) the Assignee shall be a party to the Credit Agreement and, to the extent provided in this Assignment and Assumption, have the rights and obligations of a Lender under the Credit Agreement with the Commitments and Loans as set forth herein, and (b) the Assignor shall, to the extent of the Assigned Interest assigned pursuant to this Assignment and Assumption, be released from its obligations under the Credit Agreement (and, in the case this Assignment and Assumption covers all of the Assignor’s rights and obligations under the Credit Agreement, the Assignor shall cease to be a party to the Credit Agreement but shall continue to be entitled to the benefits of Sections 2.16, 2.17, 2.18 and 9.03 of the Credit Agreement).

3.2 This Assignment and Assumption shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. This Assignment and Assumption may be executed by one or more of the parties to this Assignment and Assumption

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on any number of separate counterparts (including by facsimile or other electronic transmission), and all of said counterparts taken together shall be deemed to constitute one and the same instrument. This Assignment and Assumption and the rights and obligations of the parties hereunder shall be construed in accordance with and governed by and interpreted under the laws of the State of New York.

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EX-21.1

Exhibit 21.1

Blockbuster Inc. Subsidiaries

Ardnasillagh Ltd.

Blockbuster Argentina, S.A.

Blockbuster Canada Co.

Blockbuster Canada Inc.

Blockbuster de Mexico, SA de CV

Blockbuster Digital Inc.

Blockbuster Distribution, Inc.

Blockbuster Entertainment Limited

Blockbuster Entertainment (Ireland) Limited

Blockbuster Global Services Inc.

Blockbuster Holdings Ireland

Blockbuster International Spain Inc.

Blockbuster Investments LLC

Blockbuster Italia, S.p.A.

Blockbuster NZ Limited

Blockbuster Procurement LP

Blockbuster UK Limited

Blockbuster Uruguay Ltda.

Blockbuster Video Danmark A/S

Blockbuster Video Espana S.L.

Blockbuster Video Italy, Inc.

Cityvision Limited

Direcorp, S.A. de D.V.

EntretenT a Domicilo, S. de R.L.

Movielink, LLC

Sercorp, S.A. de C.V.

Trading Zone Inc.

Xtra-Vision Limited

EX-23.1

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-30612, 333-39068, 333-103198, 333-119764, 333-119772, 333-120303 and 333-120304) of Blockbuster Inc. of our report dated April 6, 2009 relating to the financial statements and the effectiveness of internal control over financial reporting, which appears in this Form 10-K.

/s/ PricewaterhouseCoopers LLP

Dallas, Texas

April 6, 2009

EX-31.1

Exhibit 31.1

CERTIFICATION

I, James W. Keyes, certify that:

1. I have reviewed this Annual Report on Form 10-K of Blockbuster Inc.;

2. Based on my knowledge, this 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 report;

3. Based on my knowledge, the financial statements, and other financial information included in this 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 report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)), for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: April 6, 2009

/s/ James W. Keyes

James W. Keyes

Chairman of the Board and

Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Thomas M. Casey, certify that:

1. I have reviewed this Annual Report on Form 10-K of Blockbuster Inc.;

2. Based on my knowledge, this 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 report;

3. Based on my knowledge, the financial statements, and other financial information included in this 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 report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)), for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: April 6, 2009

/s/ Thomas M. Casey

Thomas M. Casey

Executive Vice President and

Chief Financial Officer

EX-32.1

Exhibit 32.1

Certification Pursuant to 18 U.S.C Section 1350,

as Adopted Pursuant to

Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Annual Report of Blockbuster Inc. (the “Company”) on Form 10-K for the period ended January 4, 2009 as filed with the Securities and Exchange Commission (the “Report”), I, James W. Keyes, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:

1. the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: April 6, 2009

/s/ James W. Keyes

James W. Keyes

Chairman of the Board and

Chief Executive Officer

EX-32.2

Exhibit 32.2

Certification Pursuant to 18 U.S.C Section 1350,

as Adopted Pursuant to

Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Annual Report of Blockbuster Inc. (the “Company”) on Form 10-K for the period ended January 4, 2009 as filed with the Securities and Exchange Commission (the “Report”), I, Thomas M. Casey, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:

3. the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

4. the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: April 6, 2009

/s/ Thomas M. Casey

Thomas M. Casey

Executive Vice President and

Chief Financial Officer